Deutsche Bank AG (DB) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

I'm Jasmine, your Chorus Call operator.

Welcome, and thank you for joining the Third 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, Jasmine, and good afternoon or good morning, everybody.

On behalf of Deutsche Bank, welcome to our quarterly fixed income investor call to discuss our third 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, our 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 with a brief summary of the comments made on last week's equity investor call.

The new management team has delivered quickly on the factors under our direct control, namely cost and workforce reductions as well as on continued balance sheet strength.

Our costs and our workforce are both down year-on-year as well as sequentially.

This sets us on a clear path to meet our near-term 2018 adjusted cost target of EUR 23 billion, and we're on track to be profitable this year for the first time since 2014.

We continue to manage our balance sheet conservatively and have further strengthened our CET1 ratio in the quarter.

While maintaining conservative underwriting standards and managing expenses, our focus must now shift to stabilizing and growing our revenues.

To support this goal, we will gradually redeploy some of our capital and excess liquidity over time.

However, we are committed to keeping our CET1 ratio above 13% and maintaining higher-than-average liquidity ratios as we complete our restructuring.

Let us turn to a summary of our third quarter results on Slide 3. We generated net income of EUR 229 million and income before income taxes, or IBIT, of EUR 506 million in the quarter on revenues of EUR 6.2 billion.

On a reported basis, revenues declined by 9% year-over-year or by 6%, excluding specific items, which are detailed on Slide 18 of the appendix.

The decline in revenues was principally driven by lower sales and trading revenues, mostly reflecting lower client volumes and continued muted volatility in European Rates.

Revenues were also impacted by the strategic actions we undertook in the second quarter of 2018 to reshape our footprint.

On a sequential basis, group revenues declined by 7%, but by only 3%, excluding specific items.

We believe this demonstrates the progress we have made in stabilizing our franchise.

Noninterest expenses of EUR 5.6 billion included restructuring and severance of EUR 103 million and litigation costs of EUR 14 million.

For the first 9 months of the year, we generated net income of EUR 750 million and IBIT of EUR 1.65 billion.

We made continued progress towards our near-term financial targets, as shown on Slide 4. This quarter, we have moved forward on 2 of the 3 targets that we set, namely on costs and employees.

In the first 9 months, our adjusted costs have declined by 1% or over EUR 100 million relative to the same period in 2017.

Stripping out significant cost headwinds that we have absorbed, adjusted costs declined by over EUR 600 million.

These headwinds included costs associated with the legal merger of our retail entities, the IPO process for DWS, higher bank levies as well as a more even phasing of variable compensation this year.

We are highly focused on controlling our fourth quarter costs, which will allow us to reach our EUR 23 billion adjusted cost target this year.

And there are several reasons why we believe we are well advanced towards our EUR 22 billion target in 2019.

First, we anticipate the elimination of both operating and transition costs associated with the announced disposals of our retail operations in Poland and Portugal.

The completion of the sale of our Polish operations remains on track for this quarter.

Second, we will also increase the synergy realization from the merger of our retail entities.

Third, we will see the full year benefit from the strategic reshaping and headcount reductions already executed in CIB, including from lower compensation expense.

And finally, the impact of measures identified as part of our Cost Catalyst program will flow through, including from further optimizing our external spend.

On headcount, in order to become more efficient, we reduced the workforce by 2,800 year-to-date.

We remain committed to reducing our workforce to below 93,000 employees at the end of the year.

With a return on tangible equity of 1.7% in the first 9 months of 2018, we obviously have some work to do to improve our sustainable profitability and to reach our target of 4% in 2019.

Parts of the improvement in returns will come from a redeployment of our financial resources, notably capital and liquidity, in order to responsibly grow our revenues.

While we are focused on our near-term targets, let me be clear on our longer-term profitability aspirations.

Generating higher sustainable profitability is in the interests of all of our stakeholders, including equity and debt investors, rating agencies, employees as well as counterparties and clients.

As we disclosed in the second quarter, we no longer believe that our EUR 21 billion adjusted cost target for 2021 is sufficient to support our objectives.

Our costs need to be lower than that.

Instead of absolute cost targets, we believe we should manage our business on a cost/income ratio basis as a key element of achieving our 10% ROTE ambition.

To reiterate as well, 10% ROTE remains an ambition we have built our planning around, and we believe we can achieve this objective in 2021.

However, we have consistently acknowledged that it requires a more supportive environment than we have today, especially in euro interest rates.

Slide 5 shows that in the third quarter, we, once again, managed the restructuring of the bank while preserving a conservative balance sheet.

We have further strengthened our CET1 ratio to 14%, and our Common Equity Tier 1 capital is about EUR 12 billion above our current regulatory requirement.

We have loss-absorbing capacity of EUR 118 billion, well above our MREL acquirement of EUR 99 billion, providing a significant cushion for our counterparties and depositors.

We are managing our risk levels conservatively.

Both our market and credit risk are running close to historically low levels and certainly rank among the lowest of our global peers.

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

Our excess liquidity protects our balance sheet, but now also provides an opportunity for prudent redeployment out of cash into securities to reduce the drag on our revenues.

Dixit will review liquidity in more detail, but from a strategic perspective, we have 2 opportunities.

First, we hold 73% or around EUR 200 billion of our liquidity reserves in cash.

Around half of this cash is placed with the ECB, earning a yield of negative 40 basis points.

Some of this cash can be reinvested to higher-yielding securities over time, creating positive returns without taking material credit or duration risk.

Second, we have a EUR 76 billion buffer above our 100% liquidity coverage ratio requirement.

As we improve our risk profile, including the rundown of the NCOU, and we have invested our liquidity -- in our liquidity reporting systems, we're now in a position to optimize our liquidity management responsibly over time.

With that, let me hand over to Dixit.

Thank you, James.

Let us look in more detail at our capital ratios on Slide 7. On a fully loaded basis, our CET1 ratio increased by about 20 basis points sequentially to 14% on lower risk-weighted assets.

Credit risk RWA declined in CIB partially due to a sale out of our nonstrategic shipping portfolio, while RWA from operational risk benefited from lower DB-specific and industry losses in our models.

As we have indicated in previous quarters, we expect headwinds to our CET1 ratio in the coming periods, but we will remain above our 13% target.

Approximately 20 basis points reduction are expected from the change in lease accounting standard IFRS 16, which becomes effective in the first quarter of 2019.

We also expect headwinds from pending supervisory assessments, including the targeted review of internal models, or TRIM, which may impact us between 20 to 40 basis points between now and the middle of 2019.

Our fully loaded leverage ratio remained unchanged at 4%, while on a phase-in basis, it stood at 4.2%.

Leverage exposure was down EUR 19 billion in the third quarter, but declined by close to EUR 100 billion versus the prior year, reflecting our strategic actions in the second quarter.

For the remainder of 2018, we expect group as well as CIB leverage exposure to remain around current levels, while we recycle leverage into higher return areas.

This excludes pending settlements, which tend to be seasonally lower at year-end.

Slide 8 provides an update of MREL, our binding loss-absorbing capacity requirement.

As MREL considers buffers that are not included in the TLAC calculation, such as the Pillar 2 requirement, MREL is structurally the more binding constraint for us.

As highlighted in our previous call, our 9.14% MREL requirement has been effective since last quarter.

We continue to operate with a comfortable surplus to our fully loaded MREL requirement.

Our MREL available for the third quarter is EUR 118 billion and sits EUR 19 billion above the regulatory requirement.

Both are broadly unchanged compared to the second quarter.

In July, the German law adopted the European directive that harmonized the creditor hierarchy.

This allows German banks to issue plain-vanilla senior debt in preferred format.

This new instrument ranks pari passu with uninsured deposits and unsecured counterparty claims, but is senior to nonpreferred debt.

We also include our inaugural benchmarks senior preferred note in our MREL stack, as it has been issued in an MREL-eligible format.

Turning to our funding plan on Slide 9. As a result of our deleveraging activities this year and our strong liquidity position, we have revised down our 2018 funding plan to between EUR 20 billion and EUR 22 billion.

Year-to-date, we have completed close to EUR 19 billion of our planned issuances at spreads 59 basis points above 3-months Euribor, with an average tenor of 6 years.

Our overall cost of funding compares favorably to average spreads in prior years.

We are currently in our planning process for the next year and intend to update you on our new funding plan in the fixed income call early February 2019.

Directionally, you can expect a more normalized funding plan, given the higher contractual maturities in 2019.

Our issuance strategy reflects different ratings agency-specific ratios, including Moody's Loss Given Failure or S&P's additional loss-absorbing capacity.

Therefore, we will remain an active issuer also in nonpreferred senior instruments.

Let us look at our funded balance sheet on Slide 10.

Compared to our IFRS balance sheet, we exclude approximately EUR 360 billion relating to netting agreements, cash collateral as well as spending settlement balances.

This is more comparable to a U.S. GAAP view.

Overall, we believe that we continue to run a conservative balance sheet.

Over EUR 200 billion is in cash and equivalents, with a further EUR 200 billion in securities.

Around EUR 40 billion of the securities are highly liquid, extremely low risk and held in our strategic liquidity reserve.

Of the rest, the majority are held at fair value in our CIB business.

Around EUR 70 billion are in the equities business, where they mainly hedge client derivatives and structured notes, and around EUR 50 billion are in our core rates business and are mainly government bonds.

Overall, the bank's low market risk levels speak for the low risk taken in the trading inventory.

Approximately 40% of our assets are loans, including EUR 137 billion of low risk German mortgages and EUR 126 billion of investment grade rated corporate loans.

Our loan-to-deposit ratio of 77% is very conservative and provides a significant liquidity cushion to the bank.

Our derivative assets of EUR 29 billion on a net basis are largely self-funding, given the similar level of offsetting derivatives liabilities.

More than half of the balance sheet is funded by stable and relatively low-cost deposits.

Including equity, long-term debt as well as deposits, more than 3/4 of the funded balance sheet comes from the most stable funding sources.

Slide 11 highlights our key liquidity metrics that remain highly robust.

The liquidity coverage ratio, or LCR, stood at 148% and represents a EUR 76 billion surplus above the 100% requirement.

Liquidity reserves decreased by EUR 11 billion to EUR 268 billion in the last quarter.

The decline was driven by lower wholesale funding and TLTRO maturities, which we do not refinance, given our already strong liquidity position.

In aggregate, the mix of our liquidity reserves has stayed unchanged over the quarter with 73% in cash.

Over the last 6 months, we actively reduced our cash position by EUR 28 billion.

As James mentioned earlier, we see additional room to optimize liquidity reserves over time in a risk-controlled manner as we further streamline our balance sheet.

When doing this, we will also take into account various factors, such as internal stress test requirements, LCR as well as ratings agency and entity-specific requirements.

To summarize, we are executing on those things which we can control.

We made good progress towards our 2018 and 2019 cost targets.

We continue to manage our balance sheet conservatively, but see some opportunities for redeployment as we progress in our restructuring and as the rate cycle normalizes.

We believe execution on our near-term targets will help regain market and rating agency comfort in our ability to generate sustainable profits.

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

Thank you, Dixit.

Operator, should we go ahead and open the lines?

(Operator Instructions) The first question comes from the line of Corinne Cunningham of Autonomous.

A couple of technical ones really.

First one is if there's any news on timing of the ADI rule changes.

Anything you've got there would be interesting.

And the second one, just if you can give us an update on your plans to redeem or not the residual prefs that you've got in your capital structure.

So perhaps it would also be helpful if you could let us know how much of those old-style bonds are given credit under the grandfathering rules.

Corinne, this is Dixit here.

Very happy to take those 2. On timing of ADI, it's still very much our expectation that the proposed rule changes will go through in the first or second quarter of next year.

It's something that we're actively tracking.

Naturally, we would like to see what the final text looks like.

And once that's done, we'll be able to report back to the market.

Just a reminder that the proposed text does harmonize treatment of ADI across the European landscape.

And so it makes it much more of a level playing field.

Regarding the residual prefs or legacy AT1, those that are outstanding over time, we will look to replace those.

As you will see from the deck and the summary that we have, for a number of those, it's uneconomic right now to actually redeem those.

But it's something that we're actively monitoring.

A reminder that on a phase-in basis, those do qualify and are grandfathered.

And so we will be managing those quite carefully.

No comment on the proportion that counts at the moment?

All of it.

So all of the ones that we currently have are grandfathered and apply on a phase-in basis.

So you -- well, I mean if you've got room under the sliding scale, so the grandfathering comes down by 10% a year.

So the cap doesn't apply.

In other words, what you've got left outstanding is beneath the capped amount?

Yes.

So the 10% relates to, I think, around EUR 5 billion for 2018 versus an outstanding of EUR 3 billion for us.

So quite comfortable for us at the moment.

The next question comes from the line of Robert Smalley of UBS.

A couple of questions, one following up from Corinne.

You talked about that change in the ADI treatment of ADIs next year.

There is some question this year that you'll have sufficient ADIs for coupon payment.

Could you talk about that a little bit?

That's the first question.

Secondly, following up from the equity call.

You're very confident about not having a fourth quarter surprise.

Is that because you're already ahead on your restructuring charges?

Or are there other factors involved there?

And my third question has to do with the stock price.

You're currently -- your stock's currently trading under -- slightly under $9 now, certainly single digits.

When we see that in major companies, they often want to undertake dramatic actions to improve the stock price.

Could you give us some comfort that any action that you might undertake to improve the stock price wouldn't materially impact your credit quality?

Sure.

Robert, it's James.

I'll take the cost questions, and thanks for joining us.

Firstly, on ADI sufficiency, look, it's a year-end test, a sort of once-a-year test.

We monitor closely our distributable profits.

The first part of that calculation is obviously IFRS profitability.

So that is the first thing that we manage to, and then we also look at the reserves that are available above and beyond that.

In that context, as we've talked about on at least one of these calls before, we do have some levers at our disposal to make sure that we can increment those reserves, including, among other things, greater access to distributable reserves in our subsidiaries, given, among other things, the Postbank merger earlier this year.

So there are a number of actions that we make sure -- we take to make sure we retain distributable profit above and beyond, obviously, preserving profitability on IFRS and, ultimately, HGB.

In terms of the fourth quarter and our speaking to the targets, clearly, we've taken a lot of steps to realize efficiencies throughout the year.

And with the adjusted cost -- and I will remind you, again, it's an adjusted cost measure.

So restructuring and severance, for example, that we take in the fourth quarter would not influence that outcome.

But as I say on the adjusted cost measure, we have line of sight to the EUR 23 billion.

We are highly cognizant of a track record of unwelcome surprises in the fourth quarter.

We've done everything to ensure that, that doesn't repeat and, as I say, believe we're on a good track.

The stock price is something we're aware of and obviously follow every single day.

But we are regulated, and we'd like to see it improve, no doubt.

We think, again, all of our stakeholders are served by higher profitability, sustainable earnings and the resulting impact on the stock price.

We're a regulated bank.

We're also highly sensitive to our ratings.

And so to answer your question, I think very clearly, we would not take any actions that would jeopardize our ratings and, ultimately, the interests of our creditors.

That's very helpful.

Just to follow up on one point.

I know in the year-end pack, you've laid out ADIs and other things that are available in the past.

You haven't put what could possibly be available from Postbank.

Could you give us an area on that kind of number, and if any of those numbers -- any of those other numbers have changed through the year?

So on Postbank, the 340g reserves that come accessible, and based on Postbank, its own independent disclosure, would be a little over EUR 2 billion.

There are complexities in how one accesses those to make them distributable from the AG.

But that, hopefully, is helpful in giving you an order of magnitude of the additional flexibility that it provides.

The next question comes from the line of Lee Street of Citigroup.

A few for me.

Firstly, you talked about redeploying capital.

I was just wondering where you're intending to redeploy that capital as you look ahead.

Secondly, you mentioned for your 10% return ROTE target that you needed a more normalized rate environment for particularly in euro.

So I was just wondering, what level of rate rises you have effectively factored into that ROTE target?

Any comments you could give there would be really, really helpful.

And I suppose, finally, obviously, your spreads are relatively wide at current levels in cash and CDS.

And obviously, when you talk -- you've got a high level of capital.

You've talked about the conservative nature of your balance sheet.

So from your perspective, what is the market missing?

What's the missing point the market's missing, that will ultimately drive your spreads down a lot lower?

I'd love to get your perspectives on that.

That would be most helpful.

Sure.

Well, I'll start off.

It's James, and Dixit may want to add.

So as a starting point, our goal, what we're in business to do, is to deploy capital in support of our clients in our core businesses.

And that is where we will look to redeploy.

Remember, Dixit outlined some uncertainties that we faced in terms of the forward-looking capital that's available to us, and we've held a little bit more capital than necessarily we needed, if you like, above our target levels in anticipation of that.

As we get more visibility into those future events, we then gain more confidence in our ability to deploy capital to our client businesses.

And so that's where we're focused on.

In terms of rates, we build our planning every year on what I referred to as implied forward rates, essentially the market's view of forward rates in the currencies we operate in.

That means that we essentially see the market at a point in time as our -- as the forward curve that we build off of and reflect our expectations of the rate environment in planning.

That's been sufficiently supportive to underline or provide the foundation for the forward planning that I referred to, and it underlies our targets.

Year-on-year, I'll tell you, obviously, euro rates and the forward curve has declined slightly and typically single-digit basis points depending on where you were looking in the curve.

But of course, that changes.

The market's expectation changes every day, and we will participate in that as time lays out.

Lee, this is Dixit here.

On your question around spreads, we do think that given our strong liquidity and solvency situation that spreads are wider than where we would like them to be, especially on the nonpreferred.

But a few things that we have made developments on earlier this year.

One was the inaugural issue of our senior preferred.

This was a benchmark that we did not have available to us as a means to reduce funding costs.

We did the first issue.

We now also welcomed the introduction of a CDS on that preferred as well, which many of our counterparties who hedge risks would welcome.

And again, that would, hopefully, over time, lead to more normalization of both the nonpreferred and the preferred.

We have noted the tightening in spreads around the preferred since when we issued that.

But we do recognize that the nonpreferred currently trades wider than where we'd like.

To answer your question specifically, what actually needs to happen is really having a disciplined delivery on what we've promised and to continue to focus on execution.

The next question comes from the line of Stuart Graham of Autonomous Research.

I've got a couple of questions, both for Dixit, I think.

In the Q3 report, there were 2 or 3 references to higher funding costs.

In the past, I think this was a reference to changes you made in internal divisional allocations, but I think that's cycled through the P&L now.

So my question is, are you actually seeing higher funding costs?

Or is this still commentary around intergroup allocations?

That's the first question.

And then the second question is a broader funding market question.

We're seeing LIBOR CP, LIBOR/OIS move out again in cross-currency basis swaps as well.

In your view, is that just the usual year-end tightening?

Or are you observing anything more concerning in funding markets in general as the Fed keeps on raising rates?

Stuart, yes.

On the first, on funding cost, what I would like to put in context is really the overall aggregate funding that capital markets comprises as a percentage of our funded balance sheet.

And that's around, call it, circa 15%.

And then after 15%, we have roughly around 25% that rolls every year, which would actually attract the higher funding costs.

This year, as you've seen from the spreads that we outlined, we have issued quite early in the year, together with a combination of structured and other issuance led to a favorable outcome through the year.

But naturally, as the portfolio rolls over, over the years at higher funding spread, that does feed into our P&L.

It's not material, in that, again, with more than 50% of the balance sheet really deposit funded.

The actual sensitivity to external capital markets observable spreads is lower than one would expect.

On the second point, related to market funding, I would differentiate between sort of longer-term spreads and shorter-term sort of spot spreads.

So we have seen -- as a result of the turnover year-end, what I would consider as normal spread movement around LIBOR/OIS, for example, or cross-currency spreads, we certainly noticed that.

But I think it's useful to just cast your mind back to fourth quarter last year when we began to see some spread widening.

And then that peaked in the first quarter.

And partly, that was a result of BEAT and some of the behavior changes to funding markets as a result of BEAT.

The second was really corporate profit repatriation as a result of the tax changes in the U.S., combined with stock buybacks and really outflows from money market or money market proxies into Israeli equities or other markets.

We think that's dissipated.

We have seen spreads come back again off their peaks.

And it's not something that, when looking at this year-end, we're overly concerned about.

Can I just come back on the first question?

So if I understood you correctly, you're basically saying that the Fed's raising rates, so guess what, are unsecured.

The wholesale funding costs go up along with that.

It didn't sound like you're concerned in terms of your relative funding costs, I guess, if you think about sort of LIBOR submissions and where you'd stand in that 16 submitters or whatever it is.

Did I understand it correctly?

I think submission itself is, I would say, fairly different from actual sensitivity to the higher funding costs.

So submitted that just simply reflects transactions that we're engaged in, in a fairly independent way.

For the aggregate funding costs, again, we're redeploying many of those funds in businesses that are also then LIBOR-based.

So our sensitivity does get muted in that sense.

The next question comes from the line of Amit Goel of Barclays.

Just a question relating to the liquidity reserves.

Just wanted to get a better handle on the reserves held in cash with ECB, where you say that given the improvement in your risk profile and reporting systems, you can optimize this over time.

Just curious.

Basically, what are you thinking in terms of time frame?

And what kind of yield benefits are you thinking you can get on that EUR 100 billion or so of liquidity reserves?

Amit, we spent the last 2 years really restructuring our balance sheet, looking at our balance sheet at legal entity level, and really reducing both the complexity of the balance sheet, but also increasing the efficiency of our balance sheet.

And you would have seen that manifest itself in the IHC, for example, where we significantly delevered the balance sheet proactively in the tail end of last year.

Or you would have seen that in our CIB businesses this year, where in aggregate, we've taken leverage exposure down by about EUR 100 billion.

And so a combination of some of the balance sheet restructuring that we've done together, with improvements in data and controls on our end, does afford us the ability to start moving to a more normalized balance sheet stance.

I'd give you a fairly simple example of safe and sound deployment, which is clearly what we would be looking for, is simply moving a portion of cash into HQLA, which would be central bank-eligible low haircut, low risk-weighted assets liquid, would in the main not affect our internal risk metrics, nor would it affect greatly our LCR, but would allow us to earn an incremental pickup over cash.

So we're being judicious.

We understand where we are in the credit cycle and at an inflection point.

Much of what we're considering is in the safe and sound liquid bucket.

(Operator Instructions) And there are no further questions at this time.

Perfect.

Jasmine, thank you very much.

Thank you to all of you for joining the call.

You know where the Investor Relations team is if you want to get hold of us.

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

Thank you for joining, and have a pleasant day.

Goodbye.