Deutsche Bank AG (DB) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

I'm Miabella, your Chorus Call operator.

Welcome and thank you for joining the First Quarter 2017 Analyst Conference Call of Deutsche Bank.

(Operator Instructions) I would now like to turn the conference over to John Andrews, Head of Investor Relations.

Please go ahead.

Operator, thank you very much.

And good afternoon, and welcome to all of you from here in Frankfurt.

Well, again, to our first quarter 2017 earnings call.

We're joined today by Marcus Schenck, Chief Financial Officer, who will take you through the analyst presentation which has been available on our external website www.db.com since this morning.

(Operator Instructions) Let me also provide the normal health warning, asking you to pay particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the investor presentation.

With that out of the way, let me hand it over to Marcus.

Thanks, John.

Good afternoon, good morning, welcome from my side.

Behind us was a quarter of progress.

We completed our capital raise, announced strategic steps to strengthen our German home base and better position the bank for future growth.

Although numbers might not at all -- might not all show this yet, we see momentum across the bank as we're overcoming the headwinds we faced in 2016.

Let me begin with a few general remarks.

The reported quarterly revenue decline was predominantly due to a negative swing of EUR 0.7 billion year-over-year based on our own credits, impacting both derivatives, DVA and Global Markets and own credit on issued debt in C&A, primarily driven by a narrowing in DB Credit spreads in the quarter, where spreads widened in the first quarter of last year.

However, with the resolution of the DoJ RMBS matter and the completed capital raise, we see our clients reengaging as confidence has been restored.

The early stages of that is evident in our Q1 results.

We continue to resolve major litigation matters, and progress is becoming more visible in our cost and FTE base.

As said, we completed our capital raise in April of 2017, resulting in a strong Core Tier 1 ratio, and the credit quality of our loan book remains good with provisions declining.

Today, we're still reporting our results, as we have told you, in the old divisional structure.

From Q2 onwards, our reported segments will shift to the 3 core divisions: CIB, the Corporate and Investment Bank; Private and Commercial Bank; and Asset Management, which we previously announced.

Let us now look at the group financial highlights of the first quarter in detail.

Revenues of EUR 7.3 billion are down compared to prior year's first quarter by EUR 700 million but up compared to the fourth quarter of 2016.

Noninterest expenses decreased 12% to EUR 6.3 billion for the quarter.

There were almost no restructuring and severance charges or impairments.

We resolved several litigation cases, as they were covered by existing provisions.

That led to an IBIT of EUR 0.9 billion and a net income of EUR 0.6 billion, an improvement to both prior year and quarter.

Risk-weighted assets and Core Tier 1 capital remains more or less flat at EUR 358 billion and EUR 42 billion, respectively; and fully loaded Core Tier 1 ratio was 11.9%, which translates into 12.7% on a phase-in basis.

Leverage ratio -- leverage exposure first, was EUR 1,369 billion, and the fully loaded leverage ratio was 3.4%.

Pro forma for the capital raise, the fully loaded Core Tier 1 ratio was 14.1% and 14.9% on a phase-in basis.

The pro forma fully loaded leverage ratio was 4% and 4.5% on a phase-in basis.

So let us now move to the net income bridge for the first quarter of 2017.

Year-over-year net income increased EUR 338 million.

The bridge starts with the revenue development in our businesses, excluding effects from DVA, valuation and timing and disposals.

We showed them separately this time since they have a very material effect on the reported numbers, in particular the accounting impact resulting from the substantial improvement in our own Credit spreads.

Global Markets revenues were up EUR 156 million in Q1 compared to the prior year quarter, excluding a DVA, CVA, FVA loss of EUR 384 million, largely from the narrowing of DB's own Credit spreads and changes in the German bail-in legislation.

CIB revenues were slightly down by EUR 38 million compared to prior year, driven by decline in GTB revenues caused by deliberate reshaping of the client, product and country footprints.

However, we saw positive momentum in debts and equity origination in the quarter.

PWCC revenues were up EUR 91 million year-over-year, excluding the impact from disposals of Hua Xia Bank and PCS, which we show separately on this chart.

Postbank revenues were down by EUR 89 million, mainly reflecting the absence of a one-off gain in the first quarter of last year.

Asset Management revenues were up by EUR 18 million year-over-year, largely driven by higher management fees in Active and Alternatives.

This excludes the disposal of Abbey Life and the Asset Management business in India.

NCOU revenues were down EUR 24 million year-over-year.

This is not a very telling number, however, since we successfully closed down the NCOU for year-end 2016.

However, for year-over-year comparison, it is obviously still relevant.

C&A was down EUR 141 million.

This excludes the V&T difference impact, which we showed separately.

What we hence have stripped out from the segments are nonoperating one-off effects which are driven by, first, Credit spread movements affecting DVA with EUR 421 million and V&T with EUR 360 million; and second, the disposal effects from Hua Xia, PCS, Abbey Life and the Indian Asset Management business.

These are shown in 3 separate bars.

Let me highlight once again that the desired reduction on our own Credit spreads has cost a swing in reported revenues year-over-year to the tune of EUR 0.7 billion.

Carving out these effects, you can see that the revenue contribution from our businesses in Q1 was actually EUR 7.7 billion.

A more detailed explanation is given on Chart 28 in the appendix.

Provision for Credit losses were EUR 172 million lower, driven by improved performance in Metals & Mining and in the Oil & Gas portfolios.

The adjusted cost base declines by EUR 296 million year-over-year, reflecting the rundown of the NCOU as well as cost management efforts across the bank and asset disposals.

Restructuring and severance expenses were EUR 256 million lower compared to prior year quarter and so are litigation expenses, with EUR 229 million below prior year's results.

Income tax and FX moments were both favorable.

And as shown here, this overall led to EUR 575 million of net income for the quarter.

At constant exchange rates, noninterest expenses, on the next page, decreased by EUR 823 million or 12% to EUR 6.3 billion year-over-year.

The majority of this decline came from lower restructuring and severance expenses and lower litigation charges.

Let's review adjusted costs at constant exchange rates on Page 6. First, compensation and benefits were slightly down as lower salary expense, reflecting FTE reductions, was offset by higher amortization of deferred retention awards.

Second, IT cost increased slightly year-over-year.

Higher depreciation for self-developed software was mostly offset by lower costs for external IT services.

Third, professional service fees were down EUR 129 million, mainly driven by lower business consulting cost and legal fees.

And then lastly, occupancy cost reflects and bank levy and deposit protection cost slightly increased by 2%.

Recall this is the full annual charge of the single resolution fund which gets booked in the first quarter.

In addition, other costs were down EUR 172 million, with approximately EUR 88 million attributable to the closure of the noncore unit.

Headcounts decreased by about 3,300 FTE versus prior year and around 1,570 compared to December of 2016, reflecting our ongoing restructuring.

The FTE reduction includes the internalization of about 1,900 heads in the last 12 months.

On litigation, we made further progress in resolving a number of matters without impact on P&L in the quarter.

We continued to resolve a number of legacy matters, such as the FX settlements of the Fed's and Brazilian's CADE investigations.

Common Equity Tier 1 capital, over to Page 8, increased slightly to EUR 42.5 billion at the end of March and EUR 50.7 billion pro forma for the capital raise.

When we then look at RWA on Page 9, those remained stable at EUR 358 billion, despite increased client activity.

In Global Markets, both debt market making volumes and client activity in Equity increased, leading to balance sheet growth but without material RWA implications.

RWA reduction from focused derisking measures, including hedging, trade unwinds and targeted asset reductions, continued, offsetting a largely methodology-driven EUR 5 billion increase in OpRisk.

As such, the Core Tier 1 ratio fully loaded was 11.9% and 14.1% pro forma for the capital raise, a very solid capital position.

The leverage exposure increased EUR 22 billion from business growth in Global Markets, reflected in higher SFT and Prime Finance, as client activity increased.

This brings us to a fully loaded leverage ratio of 3.4% and, again, pro forma for the capital raise of 4%.

We continued to maintain a well-diversified funding profile.

71% of our funding comes from more stable funding sources.

Our liquidity reserve is at EUR 242 billion, and the liquidity coverage ratio increased to 148%.

TLAC is at EUR 118 billion.

The next slide, Page 12, on interest rate sensitivity is a new one.

For our nontrading businesses, we estimate that the hypothetical 100 basis point parallel shift would likely produce an additional EUR 1.4 billion of NII in the first year and an additional EUR 300 million in the second year.

The split into euro and U.S. dollar shows that we obviously have much higher sensitivity on euro rates given the size of our euro portfolio volumes.

Overall, our sensitivity to interest rate increases is approximately 65% from short-term rates, i.e., below 3 months.

The driver for this is the fact that positions will get repriced in the first year are contributing to NII for the full year, while long-term positions maturing in the second year start to be replaced at higher rates.

With that, let me now move on to the segmental results.

As said, this is still in the old structure, old segmental structure.

Global Markets reported an IBIT of EUR 240 million for the quarter.

Revenues were impacted by CVA/DVA/FVA losses in Q1 of '17 compared to gains in Q1 of '16.

This resulted in a negative EUR 384 million swing.

Let me also remind you that the prior year quarter included a positive impact of around EUR 80 million from the bond tender offer in Q1 of 2016.

Excluding these 2 effects, revenues were 9% higher year-over-year, driven by improved performance in Debt Sales & Trading, partially offset by lower Equity Sales & Trading revenues.

In Q1 '17, the DVA impact alone was EUR 290 million.

This was driven by both a tightening of DB's credit spreads and the change reflecting the German bail-in law, which came into effect on January 1, 2017.

If you compare the Q1 results with Q4 of 2016, you see a very positive trend, which reflects us being on an upward trajectory and winning back market share.

In both debt and equities, we see a well over 50% increase in revenues.

Global Markets costs for the quarter decreased by 2% year-over-year, due to lower restructuring and severance charges and favorable FX.

Global Markets' risk-weighted assets were at EUR 162 billion.

This is EUR 6 billion lower year-over-year, mainly due to business derisking, partially offset by the transfer in of assets from the NCOU, higher FX and operational risk-weighted assets.

Quarter-over-quarter, RWA and Global Markets increased by EUR 4 billion, principally from the NCOU transfers.

With the capital raise, we now have greater flexibility to invest RWAs selectively.

And let's take a closer look at our Sales & Trading units.

In debt, first quarter revenues increased 11% compared to prior year.

Excluding the aforementioned bond tender, this number would be up to 14%.

Revenues in most businesses grew, as the market environment improved compared to a challenging prior year quarter.

A few comments on the specific business lines.

Revenues and FX declined, as low volatility impacted client flow.

However, we continued to see strong activity with corporate clients.

Revenues and core rates were significantly higher, with a solid performance across Europe and the Americas.

We also had a good quarter in Credits.

Revenues were higher with strong client activity in financing and solutions and in U.S. commercial real estate as well as improved performance in the flow businesses.

However, as a result of our business mix and the business parameter decisions we have taken, including in particular the downsizing of securitized trading, we believe we benefited less in this quarter from spreads tightening as our market-making inventories are smaller than those of U.S. peers.

Emerging Markets' revenues were flat across Latin America and CEEMEA.

Asia Pacific local markets revenues were significantly higher, with improved market conditions compared to a challenging prior year quarter.

Equity Sales & Trading revenues were 10% lower versus the prior year quarter.

Cash Equity revenues were higher, in part driven by significantly higher primary activity, most notably in the U.S. Equity Derivatives revenues were also higher, most notably here in EMEA compared to a challenging prior year quarter.

Prime Finance revenues were significantly lower, reflecting higher funding costs and, in particular, lower client balances.

However, we continued to see the return of client balances we had lost in September and October of last year.

Overall, we see positive momentum in the Equities platform.

Equities revenues are significantly higher than the final quarter of 2016.

This reflects the positive impact of the DoJ resolution and an increasingly positive sentiments towards DB amongst our clients.

Though client balances and funding costs are not at 2016 equivalent levels, as reflected in our year-over-year revenue trends, they continue to normalize.

Let's turn to the Corporate & Investment Banking segment.

First quarter, here IBIT grew 47% to EUR 462 million.

Revenues were flat year-over-year, with improved momentum in both debt and equity origination, offset by an anticipated 5% decline in Global Transaction Banking revenues, as initiatives to reshape business parameter take effect.

Provision for Credit losses are down substantially, driven by improved performance in the Metals & Mining and the Oil & Gas portfolios, which offset higher provisions in Shipping.

Noninterest expenses are 5% below prior year quarter, mainly driven by lower restructuring and severance as well as lower compensation cost as a result of FTE reductions.

Looking at the revenues across CIB.

Trade Finance & Cash Management corporates revenues for the quarter were down 4% compared to the prior year.

This was primarily in trade, where we have selectively reduced our clients, products and country footprints.

Institutional Cash and Securities services revenues declined by 8% year-over-year.

This is also a result of parameter reductions, though partially mitigated by improved margins in the U.S. Equity Origination is significantly up year-over-year, driven by a strong performance in the U.S. and EMEA.

Deutsche Bank has been an active participant in the resurgence of the IPO market.

Debt Origination revenues grew 33% year-over-year, as U.S. leverage financing and high-yield businesses saw record issuance volumes from the anticipation of U.S. rate rises.

Deutsche Bank has been a key player in the resurgence of the IPO markets, closing the Invitation Homes and the Snap transaction during Q1 of '17.

Advisory revenues were down 24% against a strong first quarter of last year; however, we do see the pipeline grow in the quarter, and we expect to see the positive impact of this during the remainder of the year.

As you are familiar, in particular on the Advisory side, the revenues reported in a quarter tend to be the outcome of work that was done in the prior quarters.

Let us now move to the PWCC clients -- PWCC segment where we see a solid operating performance.

Lower interest income was partially counterbalanced by increased credit and investment revenues, which is an evidence for the resilience of our business model.

PWCC is also fully on track with respect to the delivery of its strategic objectives, including the disciplined execution of the restructuring program and continued progress in digitization initiatives.

PWCC's number of employees declined by 510 compared to end of last year and by 1,630 compared to March last year.

Until today, 130 out of the announced 188 branch closures in Germany are completed.

Both developments are in line with our planned restructuring path.

Revenues were up 11% in Q1 of '17 compared to prior year, driven by several specific items.

In the current quarter, Wealth Management revenues benefited from gains of approximately EUR 175 million, related to successful workout activities in the Sal.

Oppenheim franchise, which more than offset the impact of foregone revenues after the disposal of the Private Client Service unit last year.

Revenues last year included a negative valuation impact of around EUR 120 million related to Hua Xia Bank and also included the dividend payments from the PCC shareholding.

Excluding these specific items, revenues remained stable year-over-year.

The continued negative impact from low interest rates was largely mitigated by growth in Credit and in investment products.

Noninterest expenses were down 4% compared to prior year, mainly driven by lower restructuring and severance charges.

Excluding restructuring, noninterest expenses remained almost stable.

Continued investment spend for digitalization and other initiatives was offset by positive impacts from the reduced cost base after the sale of the PCS unit and by the lower compensation expenses.

PWCC's invested assets increased by EUR 8 billion compared to Q4 of '16, with net inflows of EUR 3 billion in the quarter.

Inflows reflected successful deposit campaigns as well as the win back of mandates after outflows in the last quarters of -- in the last quarter of 2016 in particular.

Looking into PWCC's subsegments.

Revenues in the Private & Commercial Client businesses were down 5% compared to prior year, largely reflecting the absence of a dividend from PCC shareholding in Q1 '16.

Revenues in deposit products declined 18%, reflecting the low interest rate environment.

This was partially offset -- this was partially mitigated by higher credit product revenues and by higher investment and insurance product revenues.

Revenues in Wealth Management increased 27% year-over-year.

They benefited from the already mentioned gains related to workout activities in Sal.

Oppenheim, which offset the impact from the sale of the PCS units.

Excluding these effects, Wealth Management revenues remained stable, as improved fee income in Asia Pacific and Germany offset lower NII revenues.

Postbank reported an IBIT of EUR 81 million for the first quarter, which reflects stable client revenues and lower costs.

Revenues for the quarter are down 10% to EUR 771 million, largely reflecting the absence of a one-off gain in Q1 of last year.

However, client net revenues were stable, as growth in loan volumes and fee revenues offset the impact from low interest rates.

Noninterest expenses are 6% lower due to reduced headcount and other cost-saving measures.

Let's move on to Deutsche Asset Management, which reported an IBIT of EUR 181 million.

First quarter of 2017 saw a good turnaround, with EUR 5 billion net asset inflows across most businesses and regions.

This was coupled with higher average fee margin in Q1 '17 versus the first quarter of '16.

Asset Management reported revenues were down 12% compared to prior year, which includes the nonrepeating of the Abbey Life gross-up, gain on sale of Asset Management India and the write-up of HETA.

Excluding these one-off items, revenues were actually up 5% year-over-year led by higher management fees, reflecting favorable market conditions.

Again, including the Abbey gross-up, noninterest expenses were 19% lower at EUR 425 million in the first quarter, driven by lower restructuring and severance, Abbey disposal and lower operating costs.

Please allow me to spend this time a moment on C&A where we see material losses for the quarter.

The main driver were valuation and timing differences.

This quarter they add up to a loss of EUR 187 million compared to a gain of EUR 172 million last year.

The key item in this category is the previously mentioned own Credit spread on issued debt.

For the quarter, we recorded a negative effect of EUR 124 million, which reflects a EUR 307 million swing year-over-year.

Secondly, and as you have seen, we had unusually high levels of liquidity over the quarter, and we have reported the cost of funding that in the C&A segment.

Before we now go into your questions, a few words on outlook.

First, as we sit here, the revenue outlook is broadly better than it was a year ago, and that clearly has been reflected in market sentiment.

The macroeconomic outlook has improved, reflecting an expectation of accelerated economic growth and likely increases in interest rates.

Obviously, there is no certainty on this outlook and, in particular, there remains substantial geopolitical risk.

Keep in mind, over the course of the year that the disposals of Hua Xia, Abbey, our U.S. PCS as well as the Indian Asset Management will impact prior year comparisons.

Nonetheless, we expect growth from regained market share lost largely in the last 2 quarters of 2016.

As market confidence in Deutsche bank continues to improve, we also expect that our own Credit spreads would tighten and consequently lead to further DVA losses.

While that would represent potential accounting losses, it would obviously be a positive development in terms of DB's franchise and business.

We will remain focused on cost management, and we expect the adjusted cost base will further decline this year, despite higher expected compensation expenses.

Restructuring expenses this year are expected to be in line with prior guidance.

While litigation expenses are to some extent uncertain and anticipated to remain a burden in 2017, but below the 2016 levels.

In line with the revenue growth, we also expect RWA to increase over the course of the year.

However, Core Tier 1 ratio will remain above 13%.

The Credit quality of our loan book remains strong, and provisions are expected to remain moderate throughout the year.

With that, let me now hand back to John, who will, as usual, moderate the Q&A session.

Marcus, thank you.

Operator, we're ready for Q&A.

(Operator Instructions)

(Operator Instructions) The first question is from Fiona Swaffield of RBC.

Could I ask on Slide 12 on the interest rate sensitivity.

It was kind of a 2-part question.

Firstly, if I'm right, I think in the past when we've discussed rising rates you've given somewhat different figures over different periods.

I think I remember EUR 500 million, then EUR 1 billion and now obviously it's EUR 1.4 billion to EUR 1.7 billion.

Wondered if you could explain what's changed in your assumptions?

And then the second part of the question is, what do you assume on deposits, on deposit nature or because the way the deposits repriced in your 100 basis point scenario?

So on your first question, the difference is that we now include also the benefit we have on the capital of the bank, the EUR 60-odd billion, which was not included, which I think I had also highlighted in the context of the announcements when we announced our capital raise.

That's basically the difference.

We're now harmonizing this also with the -- what we're being asked from our regulators in terms of how they request interest rate sensitivity.

The deposit beta is nothing that we contemplate to disclose.

It's not a big swing factor for us quite frankly at this stage.

Is that because you're just modeling demand deposits?

Or -- I'm just trying to understand why it wouldn't be a swing factor when it is for other banks?

Largely, the answer to that is yes.

Next question is from the line of Jernej Omahen of Goldman Sachs.

So I have 2 questions.

The first one is on the waiver from the German Bank Separation Act.

And I think at the time of the capital increase there was an indication that Deutsche Bank expects this waiver to be forthcoming in the near future.

And I was just wondering whether that is still the case?

And if so, what time -- what timing were you thinking in regards to that?

And the second question is, I think this has been the first quarter in a long time where balance sheet grew.

So I think net-net of derivatives balance sheet is up, if I'm right, around EUR 38 billion quarter-on-quarter.

How much scope -- so first of all, how much of that balance sheet growth is down to some of the deposits returning to Deutsche and some of the Prime balances returning to Deutsche?

How much of it is due to increased activity on the asset side of the equation?

And finally, how much scope do you think there is for further balance sheet growth?

I think very helpfully you have given an indication as to what the Core Tier 1 ratio should not go below in terms of Tier 1 leverage.

How are you thinking about scope for further balance sheet growth?

First question on -- basically the question on integration of Postbank and whether the process stands applying for a waiver.

Our expectation is that this is something that where we should get more visibility during the -- basically during the next quarter or this quarter.

That would be my current expectation.

Obviously, things can always change; don't name me to that.

But all what I know I would say my best -- very best guess is it's during this quarter.

On your second question, I mean, the balance sheet has grown, I would say, largely for 2 reasons.

First of all, we continue to pileup cash to -- and liquidity to levels where, obviously, that creates cost, and we need to think through how to best manage this going forward.

And I think people should not make the assumption that an LCR of 148 is what we are exactly targeting medium term.

That's point 1. And point 2, we continue to see a recovery, in particular, of our prime brokerage balances.

We have, I would say, to date probably recovered about 50% of we had -- of what we had lost in this difficult period, September, October of last year.

And those are the, I would say, 2 key drivers of why leverage has gone up.

Is there more room to grow?

I mean, clearly we are north of regulatory requirements.

Now medium term, I would nonetheless like to highlight that we stick to our target of a 4.5% leverage ratio that's over the coming years we will hit.

But obviously during this year, there is still some flexibility, and it's also a position that can more easily be managed.

But right now, really our focus, also given that the capital position of the bank, is to invest into growth.

Next question is from the line of Magdalena Stoklosa of Morgan Stanley.

My first question is about costs, and I'm using the Slide #6.

And really could you help us think about the trajectory of the adjusted costs from here?

We know you're kind of bridged to EUR 22 billion in 2018 but a couple of moving parts.

So how shall we think about the headcount reduction from here?

We have seen the delivery in the first quarter.

Also things like the professional services, they seem to be quite an easy place to take the costs out, and we have -- and to a degree we have seen it again in the first quarter.

Anything you could tell us about the IT side of things and, of course, the level and the trajectory kind of over the next 18 months of your kind of reduced spend and incoming efficiencies?

And if anything that would allow us to kind of think in a more detail of how we move from here to that EUR 22 billion target by the end of '18 would be very helpful.

And I've got 1 more question after that.

So on cost, look, I mean, I'm not going to guide at a level off so IT costs will be at ex EUR 100 million.

And I think -- as evidenced in the first quarter, you should expect to see costs go down.

So when you -- relative to 2016, our clear ambition is to reduce the cost.

We will land below the -- I'm always talking adjusted cost base here just for the avoidance of doubt because there are obviously other cost items.

But the real cost of operations, we expect that to continue to go down.

Where are we going to land?

It will be -- I'd like to stick to it will be down.

I don't want to put out a specific number.

The levers that we have is we do see headcount coming down along the lines of the agreed restructuring program, which we're in the process of implementing.

So further branch closures, further headcount reductions, in particular in Germany, which is following an implementation path.

So that is not, "Hey, we have to figure out new measures." It's just executing on what has been achieved.

On the IT cost side, we -- whilst we do see the run-the-bank cost come down, I just have to give the health warning that there is still a substantial number that is being invested into further improvement of our processes, of our systems.

This is the theme that John raised in October of 2015, and we always said this is a 3- to 5-year journey.

So we continue to be a heavy investor into changes to our IT landscape.

So against that backdrop, the overall IT cost is likely not going to come down substantially in 2017.

And the other line items we -- such as -- as you alluded to professional services, as you can see in the first quarter, we definitely do our utmost to bring that down.

That always swings a little bit also with big projects.

The one item I would really like to highlight is that on the comp and benefit line there's going to be 2 effects.

On the one hand, we will benefit from lower headcount.

As you can see, that's now really for the first time ticking in.

But at the same time, be mindful of the fact that we've now started to accrue towards, I would say, normal variable compensation levels.

The bank last year -- and the people in the bank took a hit, it was the right decision.

But we also made it very clear that this was a one-time effect and the bank will and has to go back to a normalized compensation or a normal compensation routine on the back of it producing profits in 2017.

You had a second question?

Yes.

Yes, of course.

I actually wanted to follow-up on the -- exactly on the compensation side, which you've just explained.

My second one is a little bit of a follow-up from the -- of the question about growth.

When we -- when you talk about risk-weighted assets growth going forward, of course, there is a couple of divisions which are a kind of prime candidates for the utilization of that.

My question is really about the Global Markets and where you're likely to see that growth going.

Because, of course, we have seen very strong revenues coming through in debt recovery, particularly from the fourth quarter in -- on the equity side as well.

How do you see the balance of being able to generate revenues on the existing balance sheet versus the revenues you would like to generate on the increased commitment of risk-weighted assets?

So, look, I think we -- I think I said that in the context of our full year announcements that we had, in particular in the last quarter, in Q4 of last year.

We had lost about EUR 10 billion of productive risk-weighted assets, largely in the new CIB space, so Global Markets and old CIB put together.

And we said our clear ambition is to basically regrow and regain the business attributed to -- at least economically attributed to those EUR 10 billion.

Now obviously this doesn't happen overnight.

This is something that we're -- we contemplate to implement throughout the year.

I would still stick to that number.

If your question is, so tell me where exactly that's going to go, is that rates, is that Credit solutions, is it our loan business?

Honestly, the answer to that is these are all businesses that we like.

It will go to where we see the biggest return.

So there, I think we need to be agile and deploy the balance sheet in the most meaningful way.

So it's not that we determine now, okay, X billion will go to rates.

That we will be determining based on the business opportunities that present themselves.

But the recovery of about these EUR 10 billion, that's roughly what I think you should assume we're targeting for the year.

Next question is from the line of Kian Abouhossein off JPMorgan.

The first question is related to the discussion on the prospective in terms of Fixed Income guidance and Equities, which was mid-March, and clearly the numbers are lower than what we saw.

And I'm just trying to get an understanding of the trend through March and how the trend has developed in April.

And in that context, you mentioned that the underperformance is related to inventory, that the Americans have more inventory.

If you can just allude on that, how do you see that they have more inventory than you have?

And the second question is on PWCC.

If I strip out the one-off items, Oppenheim and restructuring release, I get to an RoE on allocated capital of about 3%.

I'm just wondering, if you can talk a little bit about how you see the improvement in this division, considering you've done most of your branch closures already?

Okay.

So on your first question, and I hope I will sort of comprehensively tackle that one.

So first, again, the fact -- I mean, fixed income -- on the Debt Sales & Trading side, we do see a year-over-year increase in revenues to the tune of 11%.

Be mindful of the fact that last year in March we had the EUR 80 million one-off benefits from the bonds tender that we did.

If you, in a way, took that out, then there's about a 14% increase.

When you actually compare with -- and I know this is maybe not perfectly accurate, but if you compare by the way with Q1 -- sorry, Q4 '16 numbers, it's up 2/3.

So obviously, much more substantial.

To us what is really relevant is that, and we looked at this, how has actually our market share evolved in that time period.

So when I look back into the first quarter of 2016, our market share on the Debt Sales & Trading side -- our revenue market share has historically ranged -- when we look sort of our -- at our 10 largest peers, has historically ranged somewhere between 11% and 15%.

And in Q1 of '16, which was not -- which was a quarter where we had seen quite a number of people also suffer, we think our market share was probably more at the upper end of that 11% to 15% range.

In the fourth quarter of '16, we actually dropped out of that range, i.e., we fall below the bottom end.

In fact, we think we were probably around 10%.

This first quarter we estimate that we are probably somewhere in the middle of the range, of that 11% to 15% range.

So we're not yet back to where we were in Q1 of '16, which was actually a higher than normal market share.

But we're back to quite a normal market share position, and we're substantially up over -- compared to where we were in the fourth quarter of '16.

Another comment I'd really like to make is that there is in particular one business segments where I think we've seen quite some growth in the markets, which is securitized trading, which is a segment where those that have the stake in that business actually benefited quite nicely.

It's a segment where we consciously in October of '15 took the decision we would gradually exit that business, and we did so, basically more or less completed with mid of last year.

And hence, we're not participating in the growth, in particular, in the U.S. that this segment is seen.

I mean, that's -- I think this is how we look at our Debt Sales & Trading business.

So in essence, we'd say we're probably in a way -- in the businesses that we're still operating in, we're probably moving with the pack.

On PWCC, your question on the return.

I think this one is one that we had intensely discussed in our roadshow.

PWCC, and combining that with Postbank, is largely going to be a cost gain.

So the means by which they will get to a north of 10% return is fully in our control.

We will take out cost, combine -- now I'm doing this from the top of my hat.

The 2 businesses, PWCC and Postbank, have a bit more than EUR 8.5 billion of cost.

We will -- Postbank and the Blue Bank or PWCC will take out until the end of 2018 further cost.

Don't forget, whilst the implementation of the cost-reduction program is now kicking in, the cost benefits you're only marginally seeing yet.

There is a lot more headcount coming out in the remainder of this year as a consequence of the branch closes.

I mean, the fact that the branches closed doesn't -- I mean, that means that a lot of people were off our P&L, say, in March of this year.

So you have not yet seen the economic benefits from that.

So this is all still yet to come.

And that's why -- if you want, I can walk you through the details here, how you get from the EUR 8.5 billion cost base to something which will probably be somewhere slightly above EUR 7 billion over a 3, 4-year journey.

And that is what's going to give us good returns in the new PCB segment.

Obviously, happy to go into more details there.

If you could, that would be very helpful.

I don't want to take too much time, but I think it would be of interest to most people.

Okay.

So when we look at the combined segments.

The combined segments have about EUR 8.5 billion of cost.

It has about EUR 10 billion in revenues.

It had EUR 10 billion in '16.

It had EUR 10 billion in '15.

This EUR 8.5 billion we had announced that there's an additional EUR 900 million of benefits that we see from combining the 2 segments.

And on top of that, there is additional cost savings that Postbank has on a stand-alone basis, which is about a couple of billion.

And then there is roughly another EUR 700 million of cost savings planned and still to be executed until the end of '18 in the PWCC segment.

When you then do the math, you see that our -- that the combined cost base is going to drop to something between EUR 7 billion, EUR 7.5 billion.

Now assuming that the revenues stay constant, so I'm not making the assumption that, although I'd be tempted to do, that over the next 4 years we are going to see a change in interest rates, but let's just assume we will be able to maintain the EUR 7 billion.

That then -- and then take into consideration that there's going to be a few hundred million of loan loss provisions, that gives you IBIT numbers for the segment which -- and then you can do the math, will show you that we can -- we would land somewhere north of 10% from a return point of view.

Does that help?

That's very helpful actually.

If I may just very briefly, progression in April considering that the run rate seems to have declined a lot on a year-on-year basis, can you just say something -- sorry, I'm know conferring to Global Markets?

Oh, yes.

I didn't comment on April.

Yes.

So, look, first message is April, generally speaking, is directionally always a bit of a weaker month when Easter is -- falls into that month and -- because it just has fewer business days and some people go on vacation.

We have seen April be a bit weaker than what April was last year.

But April last year, I think, was still benefiting a little bit from the announcement that the ECB had made in terms of QE.

And we see this a little bit this week, we think that people have been a bit cautious going into the French election.

We have seen some recovery then during the course of this week.

I mean, the election is still not decided, but I think it was an outcome where there was some relief felt in the market, let me put it this way.

So bottom line, April so far has been a bit weaker.

But we continue to see the same theme, namely a number of clients is telling us that they're reopening lines and reengaging on business.

Next question is from the line of Stuart Graham from Autonomous.

I have 2 brief questions.

The first is back on Jernej's question on deposit betas.

You said it's not a big swing factor.

So do I assume you don't expect deposit costs to rise as rates go up?

In other words, you're assuming a deposit beta of 0. Maybe I misunderstood.

The second question is, you talked last quarter about EUR 600 million of lost revenues in Global Markets over 2016 because of client fright.

How much of that has returned in Q1 do you think?

So I mean, the second question quite frankly, Stuart, is really a bit of an art.

Honestly speaking, I think we have largely not yet really seen in our revenues reflected materially return of clients' activity.

I mean, we see it more in some prime brokerage balances.

We see it in increased invested assets and wealth.

We see it in net new money in Asset Management.

We see it in the number of deals the corporate finance guys are working on.

We see it in the number of deals our structured credit guys are working on.

That's where we really see the return in business.

A lot of that has not yet really translated into revenues.

There are some businesses that react faster.

So of course, we have seen some improvement in revenues in the prime brokerage business.

I think actually relative to the fourth quarter of '16 we're up EUR 100 million in the quarter.

But I really would like to bring home the point that the recovery in business is not yet fully reflected from a revenue point of view in the results for the first quarter.

Your second question was, again, what's the deposit beta?

Was that your question?

Yes.

I mean, in fact you're talking about interest rates go up 100 basis points.

What do you assume your deposit costs go up by?

So be mindful of the fact -- I mean, we largely do the math here on the back of our site deposits where we -- we're not paying.

I mean, de facto what you have is there is a bit of a step change here in the analysis.

Given we're coming out of negative interest rate territory, the rise in interest rates, the first part will immediately go to us.

So that's a bit of an additional boost effect we have in the math here.

If you fast forward say 3 years from now, all else being equal and interest rates were higher, and we would show you the same analysis.

The numbers should mathematically be a little bit smaller because we would no longer benefit from the first effect, where today we would, technically say, have to charge a deposit 20, 30 basis points, which we're not doing.

So that -- yes, that the -- that drives this analysis here quite a bit.

I guess I get the point that when you go from minus 40 to 0 you don't have to pay anything.

But once you go above 0, I would imagine there's quite a lot of your depositors who've gone to site because they're not getting anything on a time deposits.

And once they start getting something on the time deposit, they will go from the site into time.

So suddenly you have to start paying.

I just wonder if you take account of that in your calculations?

Yes.

So -- okay.

Thanks for clarifying that.

Yes, that is considered in the calculation.

But also here be mindful of the fact given we're coming out of negative territory that's probably -- as you said, in our view, when you move into slight positive territory, that's not yet being passed on to clients.

Next question is from the line of Al Alevizakos of HSBC.

My first question is regarding the outlook that you gave on the CET1 capital.

You said that basically you expected to remain above 13%.

And I just want to clarify, because your pro forma is actually above 14%.

There is a EUR 5 billion gap between those 2 figures.

So I'm wondering whether you got something in mind like extreme RWA inflation in the short term?

Or whether there is some kind of unknown in terms of litigation that you may be expecting, as I can see also that the contingent liabilities have not really moved down in the quarter.

And then, my second question is basically regarding the IT costs that we already kind of covered.

I understand you say that the IT costs are actually going to be remain elevated because you invest a lot.

But I would like to understand like on your figure on Slide 6 how much of that would you say is actually invested for improvement?

And how much would you say is just as a maintenance for the existing legacy systems?

And the question is, well, it's like, why don't you -- why are you not able to capitalize more of the invested IT costs?

Okay.

So, look, we're not targeting 13%.

What I am telling you is we'll be north of 13%.

How much we'll be north of 13% will, quite frankly, to some extent also depend on how much of this excess relative to our own target the 13% capital can we meaningfully deploy throughout the year.

We would expect -- I was already alluding to this EUR 10 billion lost productive risk-weighted assets from the fourth quarter of last year.

We would expect to see an increase in productive risk-weighted assets during the year by deploying some of this excess capital that we have.

So don't really -- when we guide you towards we're targeting 13%, our outlook is we're going to be north of 13%.

That doesn't mean we'll be at 13%.

So that should not be misunderstood.

On the IT cost, quite frankly, I'm not the biggest fan of capitalizing IT cost because you're just mortgaging the future.

I actually do see in our numbers come through in the outer years higher software amortization charges.

I mean, ultimately, we have to consistently apply accounting here, which is what we're doing.

So the bank has several years ago determined how -- what can be capitalized and what can't.

We haven't changed anything there, but the problem with really capitalizing IT cost it makes the current situation look nice, and you just mortgage the future.

Personally, I'm not a big fan of that.

And I think the policy we're applying is good policy.

We are really still spending substantial amount of money for changing the bank.

I mean, from a cash point of view last year, we had something like EUR 2.5 billion.

So some of that got capitalized, but still the P&L hit was north of EUR 2 billion, just in terms of the change the bank budgets that the bank has.

This is nothing where, again, fast forward 3, 4 years, we think are levels where we should be at.

But as long as we are in the process of changing the bank and improving in particular the back-office infrastructure of this bank, we expect to have that burden.

But obviously in the outer years -- and I know at this stage no one is focused on that, but we absolutely at some stage will bring down that change to bank volume.

Capital question.

You've also disclosed EUR 5 billion of operational risk because of model changes.

Does this include all the recent fines that you had to pay in the quarters?

Or would you expect a jump in the next 3 quarters?

So no, it does not reflect the fines in the last quarter.

In fact, this -- these are model changes which we have seen coming for several quarters.

So that was not a surprise to us.

Also please be mindful of the fact that, yes, we did resolve a number of further items this quarter.

But I'd like really to point you towards our litigation line which is showing that we didn't record any negative entry there, which tells you that the items that we resolved we were properly provisioned for that.

And we do record the OpRisk charge when we book the provision.

So the OpRisk consequences of the fines, this that you have seen year-to-date, had already been reflected in the past.

Next question is from the line of Andy Stimpson of Bank of America Merrill Lynch.

Just on the interest sensitivity slide again, it's -- as Jernej was saying, it's gone up to -- from EUR 1 billion up to EUR 1.4 billion.

But I noticed that the net interest income this quarter actually fell by EUR 0.5 billion quarter-on-quarter.

So I'm just wondering what the near-term outlook is on net interest income assuming no rate changes.

And I see the footnote on Slide 12 shows that the net interest income sensitivity versus unchanged rate.

So I'm just wanting to know if there is no rate changes for another year or 2 in Europe, then where the net interest income is going to?

Clearly, that's the number we need to add the EUR 1.4 billion to rather than just using the 2016 level.

And then on the -- second point on the IT.

At the 2015 Investor Day, you gave some really helpful metrics on things like how much of the IT infrastructure is on our systems, how much in-system reconciliation there were as well.

And I think it'll be really helpful if you could give us an update on those metrics.

And even if you don't have those to hand now, maybe in the future, just because from the outside it's quite difficult for us to see how much progress is being made in the underlying number because it's a big mixture.

Yes, it's just hard to judge if there is progress or -- if you've already made the progress and then when those savings turn up.

Yes.

Okay.

So Page 12 indeed does not take into account in the way the impact from -- you move forward a year and had you -- had interest rates not changed, and indeed as you rightfully point out, our NII would've come down.

To give you sort of some indication for the stable businesses for -- currently if you -- if nothing changes to interest rates and you go forward a year, that has a burden of about a couple of hundred million for the bank as a whole.

So that's -- I think that needs to be highlighted.

Then please also let me highlight one item so that nothing really gets confused because you mentioned EUR 1 billion, which is the number that we -- that both John and I have pointed people towards in the context of the roadshow that both of us did after the announcement of the capital raise.

Here we were alluding to the impact that we would see from what the implied rate movements that we are seeing in the markets would have for us.

And we've always said we're seeing for 2, 3 years out the market expectation of an increase to the tune of around 70 to 80 basis points.

Here on Chart 12, we're showing the impact of 100 basis points move.

This is how you can actually square the EUR 1 billion and the EUR 1.4 billion.

And I think that was probably your question on NII, if I'm not mistaken.

And then on the IT systems, forgive me, but I don't have these numbers here at my fingertips.

I'm looking to John, and he took notes, and he will come back to you.

But I also take that if there is an interest in -- amongst you guys in getting an update on where do we stand on those metrics, we will provide those then when we show half year results.

Sure.

That will be helpful, I think.

(Operator Instructions) Next question is from the line of Andrew Coombs of Citi.

A couple of questions, one on capital again and then one on CIB.

On capital, just a confirmation, your presentation and your report do seem to suggest slightly different things.

No, I don't want to be pedantic, but on Slide 23 you talk about above 13% at year-end; but on Page 19 of your report, you talk about approximately 13% at the year-end.

So should we be thinking approximately 13%?

Or by north of 13% you mean quite a bit north of 13%, i.e., more similar to where you are today?

And perhaps also within that capital flow during the course of a year, could you just provide a bit more color on how much of the EUR 2 billion capital benefit from divestments in the IPO you budget on coming through this year versus next year?

And similarly, the restructuring charge that you've guided to, I think you said 70% over the course of '17 and '18.

But how does that split out?

So that will be the first question on capital.

Second question on CIB.

You've had an uptick in your Prime revenues in line with [GTB].

When I look at trade, cash management, loan products, it's another quarter where you've seen relatively weaker revenues.

You attribute that [direct] to specific client and countries.

I'm just wondering is that process now done?

Or they're more exits to come from here?

So okay.

First question, Core Tier 1 ratio.

It's above 13%.

And as I said, how much above will depend on how much capital we'll manage to redeploy, and we'll find out during the rest of the year.

On the benefits from the disposals, the disposals we said on Asset Management we're going to execute on that during the next 24 months.

And we said the other disposals we will execute during the next 18 months.

Inevitably, that will lead to the vast majority of those capital benefits kicking in next year and not in 2017.

Now we've started a number of processes on disposals, and I'm actually optimistic that some of those we can get to closure in '17.

I would still say the lion's share of this additional EUR 2 billion benefit I would expect actually for next year.

By the way, that's one further reason why how much we're going to land above 13% I can't tell you because we'll also see how we're doing on those disposals.

On GTB, the process is not fully completed; but I would say to the extent it has an impact on our revenue position this is -- I would say we're largely done.

But really be mindful we've exited basically Latin America, with the exception of our Brazilian footprints.

We have in our corresponding banking business off-boarded hundreds of clients that are categorized as high-risk clients.

That -- other banks have been quite frankly through the same process earlier.

That comes with a reduction in revenues, but it also substantially has lowered the risk position of the bank.

And we are in GTB now actually going back into a mode of growing our activities.

We have one of the leading franchises in our -- in Trade Finance.

We see good opportunities to grow back in this business.

And we have a fantastic cash management platform, which in some markets, when I look into some of the APAC markets, is still really underutilized.

As an example, in Japan, we have sort of a high 2-digit million contribution there.

And this is a market where we do see quite a lot of business opportunities for this business.

So I'm optimistic medium term for this business, and the impact from the parameter reduction, I would say we're largely through, although not everything has yet fully been executed; but those that have more material impact, I would say there we're done.

We have no further questions.

I hand back to John Andrews for closing remarks.

Great.

Operator, thank you.

And thank you, everyone, for dialing in today.

Obviously, for any follow-up, you're free to contact the IR team.

Otherwise, we wish you the rest of a good day.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones.

Thank you for joining, and have a pleasant day.

Goodbye.