Deutsche Bank AG (DB) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

I'm Mia, your Chorus Call operator.

Welcome, and thank you for joining the Second Quarter 2018 Fixed Income Conference Call of Deutsche Bank.

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

Please go ahead.

Thank you, Mia, and good afternoon, or good morning, everybody.

On behalf of Deutsche Bank, welcome to our quarterly fixed income investor call to discuss our second quarter 2018 results.

As usual, our CFO, James von Moltke; and our Group Treasurer, Dixit Joshi, will run through the presentation.

Also available for the Q&A session that will follow the prepared remarks is Jonathan Blake, Global Head of Issuance.

You should have access to the presentation on the Creditor Information section of the Deutsche Bank Investor Relations website.

Please be reminded of the cautionary statements regarding forward-looking statements at the end of this presentation.

With that, let me hand over to James.

Thank you, James, and welcome to you all.

Let me start by updating you on the delivery of our strategy.

Our fundamental objective is sustainably to generate organic capital over time.

And our conservative balance sheet provides the support we need to adjust our franchise and to grow within our targeted client and product franchise where it makes economic sense to do so.

This, over time, should help us improve our credit standing and lower our funding costs.

In the second quarter, we've made progress executing on our strategic objectives.

In the Corporate & Investment Bank, we are optimizing our resources.

This includes reshaping our Equities business and reducing our U.S. Rates activities.

And in the second quarter, we cut leverage exposure faster than our internal targets.

In PCB, we've completed the legal merger of our German retail and commercial banking entities, which has enhanced our financial flexibility.

We're now starting to extract and even looking to accelerate our targeted synergies.

And at a group level, our cost reduction plans are running in line with our internal targets.

And we have reduced headcount by 1,700 in the quarter.

Let us turn to a summary of our second quarter results on Slide 3, which demonstrate the resilience of the franchise despite some of the idiosyncratic pressures we faced.

Reported revenues were flat year-on-year.

Noninterest expenses increased by 1%, driven by our higher restructuring and severance as we executed on our strategic objectives.

These effects were partially offset by a decline in adjusted costs and FX translation benefits.

Profit before tax was EUR 711 million.

Our tax rate was elevated, reflecting the nontax deductibility of certain expenses.

As a result, we generated EUR 400 million of net income in the quarter.

And tangible book value per share increased to EUR 25.91, up 1% compared to the prior quarter despite paying EUR 519 million of AT1 coupons and dividends.

Slide 4 looks at the development of some key financials during the first half of the year.

Our revenues were down by EUR 400 million versus the first 6 months of 2017 but increased on an FX adjusted basis.

I want to point out that our performance in the first half of this year was flattered by several one-off items totaling EUR 495 million.

Revenues in CIB were impacted by lower business volumes and ongoing perimeter reduction initiatives.

In PCB, revenues were essentially flat as we continued the recent trend of growing loans to offset the impact of the persistently low rate environment.

Lower performance in management fees were a key driver in Asset Management.

We were encouraged by our quarter-on-quarter revenue growth in Origination & Advisory, transaction banking and Asset Management.

But we know that the overall franchise is capable of delivering higher revenues in the future.

In the first half of the year, noninterest expenses were up year-on-year, mostly reflecting higher restructuring and severance as we took measures to reshape CIB.

Adjusted costs were down by EUR 50 million, but increased by approximately EUR 300 million on an FX adjusted basis.

This increase was mainly driven by higher compensation and benefits as we look to more evenly paced accruals for variable compensation.

In addition, we faced higher bank levies, IT costs, investments in merger-related costs in PCB as well as DWS IPO-related expenses.

These effects were partially offset by our actions to reduce costs in other areas.

Litigation was a small cost in the first half of this year compared to a provision release in 2017.

Credit loss provision showed a slight improvement and remained at very low levels.

As a result, profit before tax was lower than in the first 6 months of 2017.

Progress towards our near-term financial targets is shown on Slide 5. Although the targets may not seem very ambitious, we believe that this is realistic in the short term and puts us on the right path to further improve returns in the coming years.

With a return on tangible equity of 1.8% in the first half of 2018, we obviously have work to do to improve profitability and returns in the coming quarters.

With the annual bank levies already recognized in the first half of the year, we are on track to meet our EUR 23 billion adjusted cost target and are working towards a further EUR 1 billion reduction for 2019.

To reach our cost objective for this year, we will have to reduce adjusted costs quarter-on-quarter in the third and fourth quarters from the second quarter level.

Achieving our cost targets relies, among other things, on a significant headcount reduction to below 93,000 at the end of 2018 and well below 90,000 in 2019.

We're confident that we can achieve this, given the headcount reductions completed in the second quarter.

And we will execute on these targets while maintaining our common Tier 1 ratio above 13%.

As I said earlier, you can see that we have been consistently conservative in managing our balance sheet on Slide 6. This provides an extremely solid basis to adjust our franchise and grow earnings.

Our common equity capital is about EUR 11 billion above our current regulatory requirement.

We have total loss-absorbing capacity of EUR 119 billion, well above both our new MREL and our 2019 TLAC requirements.

We believe this provides a comfortable cushion for our depositors and counterparties.

Our credit as well as market risks are low and also amongst the lowest of our global peers, which is testament both to our strong underwriting standards and our prudent approach to trading.

With one of the lowest loan-to-deposit ratios of all European banks and ample liquidity, we are well positioned to support our clients and capture future growth opportunities.

With that, let me hand over to Dixit.

Thank you, James.

Let us start by looking at our leverage ratio on Slide 8. On a fully loaded basis, our ratio increased by 28 basis points to 4%.

This was driven by an EUR 85 billion reduction in leverage exposure or EUR 114 billion on an FX-neutral basis.

We saw reductions in cash of EUR 24 billion and pending settlements of EUR 4 billion, broadly offset by the impact of FX translation.

The decline in business assets was materially all in Equities and FIC, principally Prime Finance globally and Rates concentrated in the U.S. as we execute on our strategic objectives.

Product-wise reductions were mostly in secured funding transactions, which were down by about EUR 45 billion sequentially, lower trading inventory of EUR 15 billion and derivatives of EUR 10 billion.

For the remainder of 2018, we expect group as well as CIB leverage exposure to be broadly flat with further reductions in Equities and targeted business redeployment, notably in FIC.

On a phased-in basis, the leverage ratio stood at 4.2%.

Turning now to our Common Equity Tier 1 ratio on Slide 9. We ended the second quarter with a CET1 ratio of 13.7%, 38 basis points above the prior quarter as we reduced credit and market risk-weighted assets in CIB.

Adjusted for FX, credit risk-weighted assets declined by approximately EUR 8 billion in the quarter.

Roughly half of the decline comes from process enhancements and the rest from reduced business utilization, including a small contribution from the deleveraging of our low-risk balance sheet in Prime Finance and U.S. Rates.

As discussed in previous quarters, we have been anticipating additional regulatory charges, the timing of which appears to be extending.

As a consequence, our current expectation is that the impact of regulatory changes on the CET1 ratio within the year should be less than we previously thought and perhaps no more than 20 basis points.

We will continue to manage to a CET1 ratio of greater than 13%.

Slide 10 provides an update of our total loss-absorbing capacity as reflected in TLAC and the new MREL requirement.

In line with our prior guidance, our TLAC stack reduced by EUR 5 billion in the quarter to EUR 119 billion.

The reduction was driven by plain-vanilla senior instruments rolling below the recognition threshold of 12 months remaining maturity.

Last month, we received a letter from BaFin clarifying our minimum requirement for own funds and eligible liabilities, or MREL.

This requirement is in line the Single Resolution Board's MREL-setting methodology and is consistent with our prior expectations and our funding plans.

This might be new to some of you, so let me give you a bit more background.

First, what are total liabilities and own funds, or TLOF?

TLOF is a new balance sheet measure used by the SRB, principally comprising of IFRS liabilities, adjusted for derivatives netting and using total regulatory capital instead of IFRS equity.

For further details of the new measure and how the requirement was derived, I would like to point you to Slide 19 in the appendix.

Let me also highlight that our 9.14% requirement is effective immediately.

This is in contrast to some of our peers, where their MREL requirements are only phased-in and sometimes set for 2020 or 2021.

This reflects our strong position as we already fulfill the MREL requirement comprehensively today.

As of June, we had an MREL ratio of 10.8%, which translates into a surplus of EUR 18 billion.

Evidently, MREL requirements by the resolution authorities in Europe have been set on a higher standard than the FSB TLAC term sheet.

Nevertheless, we will continue to report our TLAC requirement, which based on leverage, stood at EUR 79 billion, and based on risk-weighted assets, stood at EUR 71 billion, resulting in a EUR 40 billion surplus.

We comfortably meet both our MREL and our TLAC requirements.

Turning to our funding plan now on Slide 11.

As a result of our accelerated deleveraging activities, we have revised down our 2018 funding plan to EUR 25 billion.

At the end of June, we have completed around 55% of our updated funding plan at an average spread of 56 basis points above Euribor.

After a very active first quarter, we slowed down the pace of our issuance activities during the second quarter, partially in reflection of the challenging markets.

Roughly 2/3 of the remaining EUR 11 billion we plan to issue in the second half of the year will be in more senior categories, including covered, structured or preferred instruments, with the remainder in non-preferred instruments.

As you can see, our funding plan for the year now no longer includes the issuance of either AT1 or Tier 2, given our lack of near-term requirements.

Let me give you a quick update on our available distributable items, or ADI position, which is used, amongst other things, to determine our ability to pay our AT1 coupons.

As a reminder, ADI is based on our German GAAP parent company financials, which are only calculated annually.

So it is not possible to give exact numbers at this stage.

That said, we remain very comfortable in our ability to pay AT1 coupons in the coming years.

Our payment capacity for 2017 was EUR 1.1 billion with an additional EUR 2.7 billion reserves under HGB.

This covers at a minimum about 3.5x the 2017 EUR 315 million annual coupon requirements.

While not directly comparable to the German GAAP reporting requirements, under IFRS, we have generated net income of EUR 481 million in the first 6 months of the year.

Starting next year, our AT1 payment capacity is also likely to increase on 2 regulatory changes.

First, the legal entity merger of our retail entities, which we still expect to have a positive impact on the absolute ADI level of the group.

A final determination for this will only happen at year-end.

But Postbank had reserves of approximately EUR 2 billion as of 2017.

Second, the potential harmonization on a European level regarding payment capacity.

The European Parliament has finalized their position on the review of the CRR.

This includes a paragraph on how reserves are treated in the ADI calculation.

The European Parliament will now enter into discussions with the council.

And we hope that these discussions will come to a close in early 2019.

And we continue to monitor this process closely for positive impacts on our ADI calculation.

Given CRR is a regulation, it would come into force immediately without requiring national implementation.

On another regulatory topic, the legislation in Germany that allows us to issue preferred plain-vanilla senior debt was effective on 21st of July of this year.

We plan to make use of this new funding instrument in the near term.

Let us turn to the next page to illustrate the creditor ranking and ratings of those instruments a bit better.

The previous legislative framework took a statutory approach, where the ranking was determined by the specific characteristics of the note, for example, plain-vanilla or structured.

The new legislation in Germany harmonizes the rules with other European countries.

It allows all German banks, including Deutsche Bank, to contractually designate the insolvency ranking for plain-vanilla notes.

In addition to non-preferred senior instruments, this allows us to issue preferred senior, which has a higher insolvency ranking and will obviously have a positive impact on our overall cost of funds.

On the right-hand side of the slide, you can see the different ratings of the senior bonds in the 2 categories.

The preferred instruments are assigned a 1 to 2 notch better rating, being in the A range at both Moody's and Fitch and BBB+ at S&P.

Moving on to Slide 13.

You can see our external funding profile as of the end of June.

Funding sources reduced by EUR 55 billion to EUR 948 billion as we reduced our leverage.

Lower secured funding activities of around EUR 40 billion, primarily in Equities, were the biggest driver of the reduction in the non-stable sources while we saw a seasonal decline in transaction banking deposits of around EUR 12 billion.

As a result, the proportion of total funding from the most stable sources increased to 77%.

Around 55% of our funding base is from retail and transaction banking deposits.

Slide 14 summarizes our key liquidity metrics.

Both our liquidity coverage ratio, LCR, and liquidity reserves remained stable versus the prior quarter.

The LCR stood at 147% and represents a EUR 77 billion surplus above the requirement of 100% while liquidity reserves remained at EUR 279 billion.

The mix of our liquidity reserves changed over the quarter as the proportion of securities increased relative to our cash holdings.

Although with only 27% of our liquidity reserves in securities, we remain very liquid.

This increase was partly driven by our ability to fully recognize the remainder of the Postbank security portfolio in our reserves after the completion of the legal entity merger.

Going forward, we see additional room to reduce liquidity reserves as we further optimize our balance sheet.

Before we move to the Q&A, let us look at a couple of special topics on the next 2 pages.

Slide 15 shows the progress we have made in reducing our nonstrategic assets in our Corporate & Investment Bank.

This portfolio includes assets that are not consistent with our strategy in CIB as well as the residual CIB assets from our non-core operations unit.

Running down these assets is one of management's priorities as we look to recycle our balance sheet into higher-return areas.

In the last 12 months, we decreased market and credit risk-weighted assets in the nonstrategic portfolio by approximately EUR 5 billion and cut leverage exposure by EUR 15 billion or more than 1/3 in each measure.

Leaving aside any sales or unwinds, we would expect about 1/3 of the current portfolio to roll off by the end of 2020.

We will look for ways to accelerate the wind-down of this portfolio where it is economically sensible for us to do so.

With revenues less credit provisions at a positive EUR 60 million in the first half of 2018, the portfolio has not had a significant impact on our financial performance.

Turning to Slide 16 to provide more details around our Level 3 assets.

For ease of reference, we present some of the data that is available in our interim reports.

We hold Level 3 assets because they are valuable in our business and valuable to our customers.

Of our EUR 22 billion of Level 3 assets at the end of quarter, the vast majority are generated by our core businesses with only EUR 1.4 billion of our nonstrategic portfolio within CIB are Level 3 assets.

A Level 3 accounting classification is not a measure of asset quality.

It signals there is at least one valuation parameter that cannot be directly observed in a liquid market.

Our Level 3 assets are revalued continuously both by our businesses and also through our independent valuation teams, who actively monitor the inputs into our models, compare these with the best available market data and assess the appropriateness of the valuation techniques.

Approximately 60% of our Level 3 assets are cash instruments, including loans and debt securities, some of which relate to less liquid markets, including in developing economies where trading volumes can be limited.

They are often backed by high-quality collateral or are hedged.

The remaining 40% or EUR 8 billion of our Level 3 assets are the positive mark-to-market of derivatives.

Derivative assets are classified as Level 3 even when a small percentage of the value is sensitive to movements in -- and an observable parameter.

This often means that many of the parameters required to price these instruments are observable and these observable inputs will often be the primary drivers of the reported present value.

Most of the derivative assets that we hold are collateralized and hedged, for example, through our EUR 6 billion of Level 3 derivative liabilities.

Finally, as you can see on the slide, our Level 3 asset portfolio is not static with considerable inflows and outflows taking place.

This turnover is an integral part of our business model as we support liquidity provisioning and risk intermediation on behalf of our clients.

With that, let me now hand back over to James Rivett to moderate the Q&A session.

Thank you, Dixit.

Mia, let's open up the lines for questions now.

(Operator Instructions) And the first question is from the line of Lee Street with Citigroup.

Firstly, just on your leverage ratio, did you give a time frame to meet your 4.5% leverage ratio?

And secondly, can you give a bridge -- or in terms of getting from 4% presently to 4.5%, how much do you think you'll do that by retained earnings, reducing leverage assets further and/or see any other AT1 issuance?

That would be the first question.

Secondly, I think you're now not intending to issue any capital instruments this year.

So in my numbers, you've got a bit of a shortfall in terms of AT1 versus your regulatory minimum on a fully loaded basis and also a bit of a shortfall in Tier 2 if you strip out the trust preferred securities, which probably won't count under the new CRL.

So my question is if your CET1 is to fall in the coming quarters, this could start to reduce your headroom to the MDA for your AT1 coupons.

So I was just wondering what you think the appropriate management buffer is from the -- management buffer is for the MDA?

That would be my second question.

And finally, just on Slide 12, I note you're now expecting EUR 4 billion of redemptions in AT1 and Tier 2 in 2018 versus EUR 2 billion at the first quarter.

Just any comments to what the difference would relate to, if you could.

Lee, thank you for joining the call.

Your point on the leverage ratio, if we could begin with that.

We are on a phased-in basis at 4.2% versus the fully loaded leverage ratio of 4% for the second quarter.

We have, as you can see in the numbers, done a significant amount of deleveraging in the second quarter as a result of the repositioning of our CIB businesses.

And so I think this does then lead to the second point, it does afford us greater flexibility than perhaps we were in the first quarter of last year with regard to capital instruments.

It is something that we will continue to reassess as we continue to drive further efficiencies in leverage.

But it's not something that we're contemplating having to need to address in the near term.

Okay.

And just on the -- is there a time frame for hitting 4.5%?

We have previously communicated that this would be a medium-term goal for us.

It's something that we have been working towards as you've seen through the progress and improvements of our leverage ratio.

It is something that we will continue to manage towards and work on both the numerator and the denominator, so we have flexibility on both fronts in trying to address that in the medium term.

Next question is from the line of Robert Smalley with UBS.

And thanks for doing the call accessible in U.S. hours as well.

Greatly appreciated.

Just a couple of quick questions, following up on Lee's point.

One, and I'm sorry I missed it, but I know in the past, you've put slides in on AT1 payment capacity.

You didn't include it this time.

Are there any material changes in that if you were to put that slide in again this time?

Robert, this is Dixit here.

Thanks for joining.

And we are very happy to do this in U.S. hours as well where possible.

We -- as you know, the ADI and ADI test applicable to AT1s is really an HGB measure.

And the HGB accounts are annually produced.

So that is something that we would typically only produce annually.

As we've reflected that the -- while it's not directly translatable looking at IFRS.

And as I mentioned, looking at IFRS profitability in the first 6 months of the year would then translate into a positive improvement for ADI as well.

Okay.

Good.

Understood.

Appreciate that.

Secondly, I know one of your competitors did an AT1 with a 7 1/2% coupon that's now trading about 6 3/4%.

I bring this up because in your slides, you're not contemplating that now, but it's price-dependent.

What kind of area makes sense to you, given your overall funding cost?

Is it around where recent levels are for the market?

Is it substantially tighter?

Could you give us a little bit of guidance there?

I will try and guide you as best as I could.

But I would broadly summarize it as we would be as -- we would be economic in our analysis in the first instance, and then of course, take into account all of the other regulatory measures that we would need to meet in making a determination prior to any issuance.

As we had mentioned in Q1 and previous quarters, we had a placeholder for capital instrument issuance.

But given the deleveraging that we have been able to undertake and the deleveraging has gone faster than we had expected in the second quarter in the CIB business, as a result of that, this will now afford us the ability to make an assessment somewhat later.

We already, at the same time, fully cover our 1.5% bucket.

So this is something that we will reassess in time.

And Robert, I would add one thing, which is obviously with the EU legislation coming down the pike, from our perspective, it probably make sense to wait until investors have certainty on how ADI will be treated in the future and potentially issue with that issue taken off the table.

That makes sense.

But then on the flip side of that, now that we've got clarity on the senior non-pref issue, you can go forward with that pretty much when you want to.

So this is Dixit.

So the legislation on senior preferred was effective as of 21st of July.

We very much look forward to getting engaged and opening up that market and certainly using that instrument as part of our toolkit.

It will result in a funding cost reduction and funding cost benefit to us.

So it's something that we look to use in the near term.

Next question is from the line of Alexander Latter with PGIM.

It's actually James Hyde using Alexander Latter's phone.

Yes.

My question may sound more like an equity question.

But now when I note that the rating agencies have taken your targets as rating downgrade triggers in the case of Moody's profit in 2018 IFRS or reported profits; and in the case of the other 2, effectively your 4% ROE target for 2019, you're not meeting them, being the downgrade triggers.

Now you've given us quite a lot of comfort with these earnings that with the cost management side, you are maybe more likely than we thought in meeting the 2018 Moody's target.

But the next one still seems a bit problematic in terms of revenues.

And I wonder if you can give some feel or color to this.

So let's take CIB.

You have EUR 3.5 billion underlying revenues or year-to-date or LTM, last 12 months, EUR 13.5 billion.

Now how much of that is in areas that are basically being cut back to an extent that you would expect them to fall markets being where they are now?

I know it's a difficult question but some color on that.

Similarly, the whole weakness in the PCB area, I'm just wondering if the sort of volume of the loss of revenues from the business interruption in the Postbank, [PGK] merger is going to be hundreds?

Or what kind of magnitude are we talking about?

So it's really now focusing on revenues, these questions.

Sure, James.

It's James von Moltke here.

First of all, I just want to clarify, we didn't read the rating agency commentary as saying that these are downgrade triggers so much as metrics that they are now monitoring closely in terms of the ongoing performance of the company and management's commitments and our ability to meet our target.

So we understand that the market is looking carefully at our ability to hit those milestones.

And as we communicated on Wednesday, we see near-term milestones as a way to rebuild sort of confidence in our forward trajectory.

So we're engaged in that discussion with creditors like yourselves and rating agencies as well as equity investors, of course.

I'd say, secondly, we need to manage this company to returns.

And so we've looked carefully at the businesses and the decisions that we made and announced earlier in the second quarter and focused on areas where we felt would be competitive in the long term that were core to our franchise and could deliver returns over time.

We've made some adjustments, as we said, in the perimeter.

And those adjustments will have an impact on revenues for sure.

But our expectations is and what we are working towards every day is that we stabilize the revenues, stabilize the franchise, grow from here.

Of course, there is an effect in the businesses specifically affected, and I'd say particularly U.S. Rates on an ongoing basis and in particular of the leverage that's been removed.

And there's some degree of halo effect that goes around the broader franchise.

But we're working to offset that, including through again greater focus on where we concentrate our resources and also, in some cases, where we've been able to put through pricing increases just to offset the declines.

So hopefully, that helps to answer your question.

But we are extremely focused on our -- that effort to stabilize and grow revenues from here towards the targets that we have set for ourselves both in '18 and going forward.

But I mean, would I be realistic in expecting sort of financial year or calendar year 2018 to be not EUR 13.5 billion, which is the last 12 months but something lower?

I mean, yes, you're cutting back costs.

But I mean, would that be realistic to look at a lower base for those revenues?

So we've given some guidance in our interim on our expectations.

And depending on the business, I think we are realistic that we would be flat to slightly down in a number of the businesses relative to 2017.

And again, that's what we're working towards.

We had, I think, a weak revenue performance in the second half of 2017.

So remember, when you look at a full year performance, it includes all 4 quarters.

We're encouraged frankly that we've seen sequential growth in a number of our businesses.

And that's -- we work to build on that going forward.

So again, our outlook is expressed in the interim.

And that's what we're working towards every day.

One item that I noticed, and remember I did not answer, is the PCB revenues.

There, we see -- there's been a lot of one-off items in PCB reflecting perimeter changes and what have you.

But what's encouraging to us is that the underlying position has been flat, where the business is working hard to offset the impact of interest rate declines, which we sometimes refer to as the deposit margins.

And so that's something that we intend to continue to build on.

And going forward, we'd expect to overcome those interest rate headwinds essentially as the rate-related headwinds fall away and see revenue growth in PCB as well.

And finally, and unrelated to that and maybe for Dixit, this EUR 40 billion stress liquidity, which has gone up from EUR 35-odd billion, I mean, is that -- do I take that as kind of a 2008 scenario with multi-notch downgrades, that one?

Or what is that scenario?

Sure.

The stress liquidity that we have is the internal measure, which goes alongside the external regulatory minimums that we need to meet, including LCR as you know it.

And so we're managing both internal stress measures as well as LCR by legal entity and at group level, and in some cases, by currency as well.

Partly as a result of our deleveraging, we have had this excess liquidity that we've created.

Over time, we will be seeking to redeploy the excess liquidity that we have.

The models that we run include, across a series of scenarios, a number of outcomes that simulate both market stress, the impact of downgrades, et cetera.

We feel quite comfortable with the modeling and behavioral assumptions that we use.

Versus the risk appetite that the board has set against those measures, we do have room to deploy liquidity.

And it's something that we will seek to manage down the best we can over the next few quarters.

Next question is from the line of (inaudible) with RBC.

My question is being asked in the context of your lower senior non-preferred funding plan and availability of the new senior preferred debt.

So how can you justify to your long-term investors, especially the larger holders, the issuance of this new class of debt at the time when some of those investors were sold the notes on the basis that these were ranked pari passu with other senior obligations?

Now I appreciate you may say that you're operating within the new regulatory guidelines, the new regime.

But you could have clearly maintained the plan for the issuance of senior non-preferred and, say, exchange some of the existing notes on favorable terms into the preferred senior, yes, which is now available under the new regulation.

I appreciate you could have done that before.

But now that it's available, yes, that exercise could have taken place.

So I just wanted to hear your thoughts on that, please.

Sure.

Happy to address that.

The legislative change that we've had is creation of, as you know, an entirely new instrument class, which hasn't existed before.

And the legislation that was passed at the beginning of last year simply ensured that the debt stack that we had was grandfathered into the new regime, i.e., pari passu with what you had.

And so any issuance that we do in that bucket as senior non-preferred will still be pari passu with the existing debt stack that we had.

As I've mentioned, it is very much our intention to issue senior preferred in the near term.

So that's very much on the table for us.

At the same time, we continue to do liability management across our entire debt stack.

And we'll reflect on any options that are available to us as we manage through that.

What is good is that we have enough flexibility, given both our TLAC as well as now our MREL surplus that we have, which affords us some of that flexibility in managing both the senior preferred and the senior non-preferred.

Has that answered your questions, Mr. (inaudible)?

Yes.

I mean, I was just asking whether -- I was just asking the follow-up question, whether you're -- whether the bank is ruling out any exchange or not ruling out any exchange.

As any good Treasurer would tell you, we wouldn't rule out any great ideas or economic suggestions.

But yes, that's not -- I wouldn't want to comment on that at this stage.

(Operator Instructions) We have a follow-up question from Lee Street from Citigroup.

So I think you already answered my first question on leverage before.

So I have 2 other ones actually quite quick.

The first one was just about headroom to the MDA.

So not asking about ADIs, but obviously you're a bit short on AT1 on a fully loaded basis versus 1.5% and also on a Tier 2 basis, if you strip out the old legacy Tier 1, so it should include just Tier 2. So my question is if your CET1 is to fall a bit further, that would start to reduce down the headroom to the MDA.

So do you have any thoughts or policy on what the appropriate management buffer is for the MDA in terms of risk-weighted asset purposes?

So any thoughts on that would be helpful.

And just secondly...

Lee, it's hard to understand you.

So just let us answer one at a time, I think, because we can't get your questions.

Got it.

The first question is what's your management buffer for AT1, please?

Lee, as you'd expect, we do manage to an internal risk appetite and include a management buffer in that regard.

On that glide path, we would be looking at legacy instrument runoff.

That's one of the reasons why we monitor, look and publish out both our fully loaded as well as our phased-in numbers.

And for most of these measures, we tend to look at the fully loaded as the measures that we manage to while we publish the phased-in number as well.

Our 13%-plus target for CET1 gives us the buffer that we require over the MDA.

But we do look at the MDA as well on a phased-in basis.

And we do look at the Tier 1 and Tier 2 bucket as well on a phased-in basis.

Okay.

All right.

And second question?

So second one was just about your maturities.

You guys have gone from EUR 2 billion to EUR 4 billion in terms of what you're expecting in 2018.

Is that just the -- are you looking at the U.S. dollar press there or any comments on why that's increased from the slide in the first quarter versus the second quarter?

Lee, the EUR 4 billion was referring to?

So if you go to Slide #12, I think -- no, Slide #11, 2018, you've got expected contractual maturities of EUR 4 billion for AT1 and Tier 2. And at the same slide at 1Q, you only had EUR 2 billion.

So I was just trying to understand the difference.

Yes.

The delta was the EUR 1 billion call that we had undertaken of legacy capital, which I think went through in May.

Okay.

Because that's just EUR 1 billion.

So it's gone from EUR 2 billion to EUR 4 billion?

It's in the rounding broadly.

But we can come back to you with the exact details with the [8%] EUR 1 billion issue.

(Operator Instructions) So we have no further questions.

I hand back to James Rivett.

Thank you, Mia, and thank you, everyone, for joining us.

You know where the IR team is if you need us.

Otherwise, we'll speak to you next quarter.

Take care.

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

Thank you for joining, and have a pleasant day.

Goodbye.