Deutsche Bank AG (DB) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

I'm Haley, your Chorus Call operator.

Welcome, and thank you for joining the Q4 2018 Fixed Income 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, Haley.

Good afternoon or good morning to you all, and thanks for joining us today.

On our call, our CFO, James von Moltke, will speak first; then Dixit Joshi, our Treasurer, will take you through some of the fixed-income specific topics.

The presentation is available for download on our website, db.com.

After the question -- after the presentation, I'm sorry, we'll be happy to take your questions.

Before we get started, I'd like to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect.

I, therefore, ask you to take note of the precautionary warning on the forward-looking statements at the end of our materials.

With that, let me hand over to James.

Thank you, James, and welcome to you all.

I will discuss the progress we have made in 2018 as well as our priorities and targets for 2019 and beyond.

As shown on Slide 2, in 2018, we delivered on our promises.

We grew our reported pretax earnings and generated our first full year net profit since 2014.

Due to our disciplined resource management, we delivered on our cost, headcount and leverage-exposure reduction targets, and we made good progress on our strategic objectives while further investing in strengthening our controls and processes.

A key priority for us now is lowering our funding costs and improving our credit ratings.

We must not compromise on the strength of our capital, funding or liquidity, but we have to prove that we can generate long-term, sustainable profitability.

This, in part, will come from gradually redeploying some of our excess liquidity to help stabilize and grow our revenues.

While the headline revenue performance was disappointing in a tough fourth quarter for us and the industry, we're convinced that in 2018, we have laid the foundations for our growth agenda.

In 2018, we set and delivered against clear and credible targets as you can see on Slide 3. We committed to targets of reducing adjusted costs to EUR 23 billion and headcount to less than 93,000.

Through disciplined execution, we met both these objectives.

We reduced our adjusted costs by EUR 1.1 billion to EUR 22.8 billion, EUR 200 million below our target.

As we consistently said, we refuse to repeat Deutsche Bank's history of negative cost surprises in the fourth quarter.

With a 15% year-on-year reduction in the quarter, we are pleased to have achieved this.

On headcount, we ended the year with 91,700 staff, our lowest level since the acquisition of Postbank in 2010.

And even as we put more capital into our businesses, we maintained our Common Equity Tier 1 ratio well above 13%.

Turning to a summary of our full year results on Slide 4. Reported revenues of EUR 25.3 billion declined by 4% while we reduced noninterest expenses by 5% and kept loan loss provisions flat.

As a result, we grew our profit before tax by 8% to EUR 1.3 billion.

Net income was EUR 267 million, a significant improvement compared to the previous year.

Our CET1 ratio stands at 13.6%.

We also improved our leverage ratios to 4.3% on a phased-in basis and 4.1% fully loaded.

The liquidity coverage ratio was stable at 140%.

Liquidity reserves decreased by 7% as management took actions to improve our balance sheet efficiency.

As part of our liquidity redeployment strategy, which Dixit will discuss later, we have reduced the cash portion within our liquidity reserves by 17% during 2018.

Now let's turn to outlook for 2019 on Slide 5. This year is another step to reach our long-term return aspirations.

Our principal target for 2019 is to generate a return on tangible equity of more than 4%.

To reach this goal, we are now committed to reducing our adjusted costs to EUR 21.8 billion and our workforce to well below 90,000.

We're confident that we will also manage our risk-weighted assets and our existing capital to keep our CET1 ratio above 13%.

Slide 6 outlines the progress we have made in 2018 in reducing adjusted costs by EUR 1.1 billion.

Despite outperforming our targets in 2018, we are still committed to reducing adjusted costs by EUR 1 billion this year.

As a result, we now expect our adjusted costs in 2019 to be EUR 21.8 billion.

The measures executed in 2018 should deliver approximately EUR 500 million in annualized benefits.

We start with 6,000 fewer FTEs and benefit for the full year from a lower run rate.

To achieve the additional EUR 500 million of savings, we should benefit from our planned additional headcount reductions, synergies from our German retail merger and the completion of the sale of our Portuguese retail operations.

We will also benefit from management's ongoing efforts to reduce non-compensation costs, including further rationalizing vendor spending in our real estate footprint.

But let me also make clear that we are not taking short-term decisions that impact our long-term investments, especially in our technology and controls.

Beyond 2019, we're still committed to further reducing our costs and improving our cost-to-income ratio.

For 2019, our principal objective is to generate a return on tangible equity of greater than 4% as a step toward higher returns over time as we show on Slide 7. We expect more than half of the improvement in our returns to result from things mostly or fully within our control.

As discussed, these factors include reducing our adjusted costs to EUR 21.8 billion.

We also expect to benefit from measures to optimize our excess liquidity, which we conservatively estimate will add over EUR 300 million to revenues.

In addition, we've seen underlying growth in our stable businesses in 2018 and improvements in the drivers of growth, including loan and transaction volumes.

We expect this momentum to continue in 2019.

Our tax rate was abnormally high in 2018 and included several items which we would not expect to repeat this year.

At a more normal tax rate of 35%, a significantly greater proportion of pretax income falls to the bottom line, improving returns to shareholders.

But achieving this improved performance alone would leave us below our 2019 target.

To reach our return objective, our more market centers of businesses would need to see some revenue recovery.

We believe that these revenues are available to us, given our growth agenda and our leading positions in many of these businesses, but we need to capture them.

Clearly, a 4% ROTE requires better market conditions than we saw in the fourth quarter of 2018.

We've also planned conservatively for increases in provisions for credit losses and litigation in 2019 compared to last year.

But in these areas too, we will work hard to minimize the impact of these items.

And if the revenue environment does not improve as we expect, we will work to offset any weakness with further cost reductions.

With that, let me hand over to Dixit.

Thank you, James.

Let us look a bit closer at our balance sheet from several angles.

Slide 9 shows that we are well capitalized, have high liquidity and run with relatively low risk levels.

Our CET1 ratio at 13.6% is above our 13% target and our Common Equity Tier 1 capital is about EUR 6 billion above our current regulatory requirement.

We have loss-absorbing capacity of EUR 118 billion, EUR 21 billion above our MREL requirement.

This provides a significant cushion for our counterparties and our depositors.

We also continue to manage our market and our credit risk levels conservatively.

Our provisions for credit losses rank amongst the lowest of our global peers at 13 basis points of loans.

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

Slide 10 details our conservatively managed balance sheet.

Compared to our IFRS balance sheet, we exclude EUR 338 billion related to derivatives netting agreements, cash collateral as well as pending settlement balances.

This allows us a more comparable view to U.S. GAAP.

Over 1/4 of our $1 trillion funded balance sheet is in cash and highly liquid assets in our liquidity reserves.

A further 30% of our assets relate to our trading operations, which are funded by our trading liabilities and unsecured debt.

These assets are mostly highly liquid and are used to support our client business and include debt and equity securities of EUR 126 billion, with the majority held at fair value in our CIB business; reverse repos and securities borrowed of EUR 81 billion, which are collateralized and typically short-dated; brokerage receivables of EUR 31 billion, which also tend to be short-dated; and derivative assets, after applying netting, of EUR 29 billion.

Our trading assets also includes our EUR 15 billion nonstrategic portfolio.

A further 40% of our overall assets are in our high-quality loan portfolios.

More than 1/2 of the overall balance sheet is funded by stable and relatively low-cost deposits.

Including equity, long-term debt as well as deposits, almost 80% of our funded balance sheet comes from the most stable sources.

Turning to our loan book on Slide 11.

The composition of our loan book is well diversified and low risk.

Our -- for 2018, our provisions for credit losses were EUR 525 million, flat year-on-year and equivalent to 13 basis points of loans.

Around 2/3 of our EUR 405 billion portfolio in our Private & Commercial Bank.

Our Private & Commercial loans are low risk, recording provisions for credit losses in 2018 of 15 basis points.

This portfolio includes EUR 141 billion of low-risk German mortgages.

1/3 of our portfolio is within our Corporate & Investment Bank.

About 1/2 of CIB loans are in our Global Transaction Bank.

GTB loans are mainly in Trade Finance & Cash Management for predominantly investment-grade-rated counterparties.

Our leverage finance book is only 1% of our total loans and recorded negligible provisions for credit losses in 2018 and no provisions in the fourth quarter.

Slide 12 provides more details around our Level 3 assets, which stood at EUR 25 billion at year-end 2018.

A Level 3 accounting classification is not a measure of asset quality but signals there is at least 1 valuation parameter that cannot be directly observed in a liquid market.

Our Level 3 assets are revalued continuously both by our businesses but also through our independent valuation teams.

These assets are an integral part of our business model as we support liquidity provisioning and risk intermediation on behalf of our clients.

As you can see on the slide, the portfolio is not static with considerable inflows and outflows.

Approximately 2/3 of our Level 3 assets at year-end are securities and loans, often backed by high-quality collateral or hedged.

The remaining 1/3, or EUR 9 billion, is the positive market value of derivatives.

Most derivative assets we hold are collateralized and hedged, for example, through our Level 3 liabilities.

Turning to some details on our nonstrategic portfolio on Slide 13.

As I said earlier, our nonstrategic portfolio is around EUR 15 billion of our funded balance sheet.

In the last 12 months, we decreased market and credit risk-weighted assets in the nonstrategic portfolio by almost 1/3 to EUR 7 billion.

The decline was mainly driven by shipping portfolio sales.

We also reduced leverage exposure by almost 1/3 to EUR 25 billion, mainly by run-off and compression in the single-name CDS portfolio.

With revenues less provisions for credit losses at a positive EUR 30 million in 2018, the portfolio has not been a drag on our financial performance, but running down these assets is one of management's priorities as we look to recycle our balance sheet into higher return and core areas.

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

Slide 15 highlights that our key liquidity metrics remain highly robust.

Our liquidity coverage ratio stood at 140%, a decline of 7 percentage points over the quarter.

The decline was driven by an increase in business volumes, including commitments.

We grew commitments mainly in our global credit rating business during December, reflecting our strong client deal pipeline.

Nevertheless, our surplus above the 100% requirement represents a comfortable EUR 66 billion.

Liquidity reserves decreased by EUR 8 billion to EUR 259 billion in the last quarter.

The decline was driven by management action to reduce nonoperational deposits and to deploy cash mainly in CIB.

We reduced the cash portion of our liquidity reserves by EUR 12 billion in the fourth quarter to 71%.

We will continue to manage our liquidity prudently.

We see additional room to optimize liquidity over time in a risk-controlled manner as we show on Slide 16.

We began this process in the fourth quarter of 2018 and will accelerate this year.

First, we have begun to reduce our liquidity reserves by approximately EUR 20 billion in 2018.

We achieved this in several ways.

We reduced expensive wholesale liabilities; retired high-cost debt through tender offers and open market repurchases; and optimized our deposit base, particularly in our Transaction Banking business.

In 2019, we believe that we have up to EUR 30 billion of liquidity to deploy, including at a subsidiary level, which is not captured in our disclosed liquidity reserves.

We plan to use these resources to purchase higher-returning but still low-risk assets.

Second, we are working to change the composition of our liquidity reserves.

In 2018, we increased the proportion of our liquidity reserves in securities, helped by the merger for our German retail entities that gave us access to Postbank's securities portfolio.

But still, today, over 70% of our reserves are in cash, which places us at the higher end of our peer group.

This includes approximately EUR 100 billion at the ECB, costing us up to 40 basis points running.

Over time, we believe that we can reposition our liquidity reserves to a more equal balance of cash and securities, and this should allow us to reduce the drag from the impact of negative interest rates.

In aggregate, the reduction in liquidity reserves and the change in composition should add approximately EUR 300 million to our annualized revenues.

Moving now to capital.

We ended the year with a CET1 ratio of 13.6% as shown on Slide 17.

This represents a decline of 43 basis points from the prior quarter but remains well above our 13% target.

The decline in the CET1 ratio in the quarter was driven by a EUR 9 billion increase in risk-weighted assets, including EUR 7 billion of market risk RWA.

Market risk RWA increased, reflecting higher average Value at Risk and stressed VaR as well as a temporary increase in the incremental risk charge.

On the capital side, we increased our prudential valuation adjustment and increased the conservatism in our regulatory capital charge by EUR 400 million in the quarter.

This includes the effect from a recent EBA Q&A limiting the ability to offset PruVal against expected loss shortfall.

Looking forward to the first half of 2019, in line with our prior guidance from January, we incorporated approximately 20 basis points of decline in our CET1 ratio related to the change in lease accounting in accordance with IFRS 16.

This will be visible in our reported ratios in the first quarter.

The net impact of regulatory headwinds and pending model changes that I discussed last quarter is now expected to be at the lower end of the range at 20 basis points.

The impact and the timing of these adjustments, though, remains uncertain, but are still expected in the first half.

Outside of the regulatory items, we expect market risk RWA to decline from our December 2018 levels as the temporary factors I mentioned start to normalize in the first quarter.

Our current trajectory, which suggests market risk RWA to be approximately EUR 4 billion lower in the first quarter, which is equivalent to 15 basis points on our CET1 ratio.

All said, we are committed to maintaining our risk-weighted assets to maintain our CET1 ratio above 13%.

Specifically, we would not expect our risk-weighted assets to exceed EUR 355 billion, including the impact of IFRS 16.

We improved our leverage ratio on a phased-in basis to 4.3%.

While there is currently no regulatory leverage ratio requirement for European banks, we are working towards our 4.5% midterm target.

On a fully loaded basis, our leverage ratio improved by 8 basis points in the quarter to 4.1%.

The improvement reflects seasonally lower pending settlements.

In 2018, we improved our fully loaded leverage ratio by 30 basis points, reflecting the EUR 148 billion FX-neutral reduction in leverage exposure.

Slide 18 provides an update of MREL, our most-binding loss-absorbing capacity requirement.

We are one of the few banks that fulfill this MREL requirement today.

We operate with a comfortable surplus to our MREL requirement, which we meet fully with subordinated liabilities.

Our available MREL for the fourth quarter was stable at EUR 118 billion and is EUR 21 billion above our current regulatory requirement.

We expect the Single Resolution Board and the BaFin to set our updated MREL requirement in the second half of 2019.

The SRB recently issued its 2018 MREL policy.

This includes updates to Brexit considerations, subordination requirements and internal MREL.

Our current MREL includes around EUR 7 billion of debt issued under U.K. law without a billing clause, which would no longer be eligible for MREL after a Brexit.

Beyond this, we do not believe that the updated policy will have a material impact on our MREL surplus.

Turning to our issuance plan on Slide 19.

In 2018, we issued EUR 20 billion at an average spread of 60 basis points above EURIBOR.

This was at the low end of our plan, reflecting our excess liquidity and accelerated deleveraging in the year.

For this year, we plan to raise between EUR 20 billion and EUR 25 billion compared to contractual maturities of EUR 22 billion.

So far, we have issued a little over EUR 1 billion, primarily through covered bond issuance.

Our total issuance plan for this year includes EUR 5 billion to EUR 6 billion of covered bonds.

Our base case assumes covered bonds to replace collateralized TLTRO.

In the event that the ECB announces a TLTRO successor program, of course, we may reassess our issuance plan.

We also plan to issue EUR 6 billion to EUR 8 billion of structured or preferred senior instruments this year to take advantage of the lower funding costs, given our MREL surplus.

In terms of a preferred CDS contract, we expect that the relevant industry preparatory work will be completed by early March and that other banks should start quoting contracts soon thereafter.

Our plan assumes EUR 9 billion to EUR 11 billion of senior non-preferred issuance, similar to our 2018 issuance.

This modest requirement, coupled with our liquidity and MREL surpluses, allows us plenty of flexibility in terms of the timing of our issuances.

You will note, we do not plan any capital issuance in 2019.

This reflects the lack of any immediate requirement to issue.

However, we always monitor the market, particularly in light of the change in the ADI definition that's pending for attractive issuance opportunities.

Before moving to Q&A, let us take a look at our payment capacity for the CRR compliant on new style AT1 instruments.

The annual coupons on these instruments are next payable on the 30th of April.

As you know, our payment capacity is currently calculated based on the Deutsche Bank parent company results under German GAAP, or HGB.

2018 results are preliminary and are subject to change until we publish our annual report in March.

Our distributable HGB net income after consideration of dividend-blocking items is currently estimated to be at around EUR 1.1 billion.

Including the add back of interest paid in the prior year on our new style and legacy tier 1 instruments, our estimated AT1 payment capacity is around EUR 1.6 billion.

This payment capacity is almost 5x higher than the EUR 325 million coupon payments.

Given the comfortable headroom above our coupon payments, the management Board may decide to allocate up to EUR 500 million of our ADI to increase our general reserves.

Before any management decisions, our HGB reserves stand at approximately EUR 2.7 billion.

These reserves could be used to increase payment capacity or offset losses in our HGB accounts.

2018 is expected to be the last year of this calculation given the ADI harmonization on a European level under the pending CRR2 amendments.

This harmonization is currently in its final stages.

We expect the amendments to become law in the second quarter of this year.

From then on, the payment capacity of Deutsche Bank's new style AT1s should increase to include certain items, most importantly capital reserves.

These capital reserves for Deutsche Bank AG currently stand at EUR 42 billion.

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

Thank you, Dixit.

Haley, let's go ahead and open the line for questions.

(Operator Instructions) And the first question is from the line of [Alexander Latzer], PGIM.

It's actually James Hyde, PGIM.

Yes, I've got a couple of questions.

First of all, as you say, you will need some better capital markets tailwinds to reach the 4% ROTE, and that was also clear from the equity or main conference call.

The question arises about the rating agencies having now all anchored their rating decisions on whether they think they will make that.

And what we've struggled with understanding is what happens to an investment bank at OpCo level or counterparty level falls to BBB flat and that this sort of bail-in funding level is BB+ on average.

I mean, it's just we -- it's a bit difficult to compare to even Jefferies, which is, I think, the only example I know of, how they operated and they came back with something the size of Deutsche Bank.

So if you can give us expectations of how that could work out?

What sort of postings -- collateral postings you would need to do if the rating agencies do act?

That's the first question.

Secondly, just want to understand a bit more about the deposit movement.

So yes, looks good that EUR 553 billion that you show in this equivalent in Q3 went to EUR 565 billion, but I really want to understand what we would look at as real or customer deposits in that, and how much is interbank?

So I mean, how much of that would've been really wholesale funded?

That was provided in the Q3 slides but not yet in this.

I appreciate you have a full annual report to come, but what are the movements?

What is happening for the customer business, whether in GTB or PCB, or even maybe some of the -- and you could even count some of the Prime Brokerage kind of stuff in there.

If you can give us a feel for that because we -- I'm trying to -- really, you say you have one of the lowest loan-to-deposit ratios.

I mean, something we can generally only work out to a standard everyone else has at the full year with the accounts.

So I think last year, I would've calculated 84%, and most recently, 89% simple loan to deposit.

How would it really look?

And it's not really 77%.

So yes, that was my second question.

Sure, James.

Welcome to the call.

Thanks for your questions.

And just to clarify one thing, I wouldn't call this call -- the equity call, the main one in this, is somehow a secondary call.

I'd just say that the equity comes first and the fixed income call, which we think is very important, is second of the 2.

So on the rating agency outlook, as you could imagine, we're engaged in an active dialogue with the agencies.

We're acutely aware of where we rated today on a senior non-preferred basis, and we do view it as a critical objective of ours to put ourselves on an improving trajectory.

If I sort of summarize both the commentary that we've seen from the agencies publicly as well as, obviously, I'm not going to comment in detail, but our internal communications with them, I think what they're focused on is seeing us make progress in our repositioning, restructuring plans, much as we did in 2018.

So I think the focal point has been delivering on the promises in '18, demonstrating progress against that restructuring.

As I look forward, they, like others and like management, are focused now on growing revenues and, thereby, increasing the margin in the business and our internal capital generation.

So I think that in that case, rating agencies, creditors, equity holders are all aligned in us executing on that objective.

I don't think of anything in the rating agency dialogue as somehow hair trigger.

They just want to see us make steady progress against our goals.

I will say just as a sideline, not that we contemplate a downgrade, but naturally, our liquidity stresses are built in a way that makes -- to make sure the company is able to withstand such an event in stress.

So we are able to measure and estimate the potential outflows, but again, it's something that it is a critical management objective to avoid ever happening.

So let me leave it at that.

James, this is Dixit.

Yes, I'll tackle the second piece of that question related to both wholesale funding and deposits.

As you'd expect, as a large deposit-taking institution, we would have some volatility in our deposit numbers as a function of really client flows.

At the same time, we've worked to improve the efficiency of our deposit mix.

So in the fourth quarter, we're quite encouraged by the growth both in our PCB business not just in loans, as you've seen, but also on the deposit front, and also in GTB, where not only have we increased the deposit quantum but also changed the mix of efficiency within the loan portfolio.

On the second part of that question, really, related to wholesale funding, you would have seen the decline in cash, and this is really the active management of cash through 2018 and deploying it both into productive assets but also into retiring expensive liabilities.

And in that respect, we did pay down a chunk of wholesale funding through the course of last year, including in the fourth quarter.

This would have typically been expensive wholesale funding.

And in light of the liquidity surpluses that we've run, we'll continue to be dynamic around both of those components.

While I've got you, sorry, just to understand, yes, I mean, James said, obviously, that, yes, your liquidity reserves are scaled to maybe any risk of downgrade.

I mean, is the whole redeployments, which you have explained before and it's very interesting, of liquidity to greater efficiency, I mean, is it inevitably going to be a reduction in HQLA?

Or is it mostly a switch from nonyielding HQLA to yielding HQLA?

James, I think you've correctly described in that latter comment, which is that the one bucket that we are focused on, given that we have one of the largest percentages of cash as a proportion of our liquidity reserves compared to almost anyone in our peer group, is really defraying the cost of negative interest rates and so increasing the proportion of still HQLA, Central Bank-eligible, government-guaranteed or similar high-quality liquid assets in that portfolio.

And again, those would be in the very low yield pickup range given the secured nature of those assets, but that definitely is one part of the strategy, as you've seen, in the fourth quarter with the move to 71% from 73%.

You next question is from the line of Corinne Cunningham of Autonomous Research.

A quick one first, it's just about the ADI.

The ADI calculation, does that include the Postbank consolidation?

And if so, where would that have come through on the Slide 20?

And then I've got a couple on liquidity and MREL, but I don't know if you want to just tackle that ADI one first?

Yes, it does include the inclusion of the Postbank 330g reserves in -- on that slide.

Whereabouts would they have come through?

So the ADI calculation wouldn't be finalized up until the publication of for HGB-- our formal HGB accounts, which would be in middle- to late March.

The current expectation around ADI would be, in aggregate, around EUR 1.6 billion, and again, this is with the EUR 500 million interest add back.

And as I had mentioned that this might all be a moot point post May, once the expected CRR gets promulgated and is published in the Journal and allows use of capital reserves.

But it would be in the first line in the available distributable items line.

Okay.

So sounds like a bit less than you were expecting.

You were expecting more than EUR 2 billion to come through?

We brought up some of the Postbank reserves, not all of them.

But as you know, in the HGB accounts, there are a lot of moving items.

And so you just -- you can't expect a one-to-one relationship between the reserves that we brought up and the current calculation of ADI.

Okay.

And really to develop some of James' thoughts as well on HQLA, is it possible to split the 29% that you're holding in securities into Level 1, Level 2a and Level 2b?

We -- it would be fairly easy to do, but I think the nature of the assets that form a part of the liquidity reserves is quite regimented to an extent, i.e., in the definition from a regularly point of view.

And these typically would comprise, in the case of dollars, would be treasuries and agency debt, or in Europe, it would be government bond debt or debt sponsored by agencies guaranteed by government entities or highly collateralized covered bonds.

So it definitely would not be nowhere near sort of Level 2, level 3 assets.

Okay.

So staying Level 1?

Yes.

And you had a follow-on question MREL I heard as well.

I did, yes.

There's a couple of slides, so Slides 19 and 25, you said your MREL requirement won't be revised until the second half, but it looks like it's already been revised.

On Slide 25, it looks like it's come down a bit.

Is that just applying -- I think I'm on the right slide -- maybe it's not that one.

It just seems to have come down by something like EUR 7 billion using the percentage of balance sheet instead of RWAs.

Am I misreading something there?

So the -- we had received our MREL requirement last June.

And you will recall....

Slide 24.

Yes.

And you would have recalled at that time that we met the requirement on day 1 with the surplus that we had.

The actual requirements have not changed.

And you're right, we will get our new requirements in the second half of this year.

What we're rather -- the numbers changing is really a function of our balance sheet composition changing in the main, but what we will be watching are the new adjustments coming out of the SRB, including the subordination requirements, which, again, we think we'll comfortably meet given the EUR 21 billion surplus that we currently have.

And is there any intention to continue to cover 100% in subordinated and not to include any senior preferred even if the rules change that would allow you to do more of that?

Well, naturally, we'd welcome subordination requirements that are lower if it allows us to optimize our funding mix.

So we will have to await those rule changes to come through.

Okay.

And just on Slide 24, the bullets say, MREL has been calculated at EUR 104.5 billion.

And then 3 points below, it says, the requirement is EUR 97 billion.

I think that's what I'm not quite -- I'm not sure which is the binding figure out of those 2 and why they would be different?

Happy to come back to you.

The binding requirement would be the 9.14% of TLOF.

And that was the requirement that was transposed out of the RWA methodology when the requirements were put in place, but we're happy to drill into that subsequently.

The next question is from the line of Lee Smith of Citigroup.

Lee Street from Citi.

A couple of questions here, please.

Firstly, on Slide 7 you mentioned that if you couldn't achieve the market-sensitive, event-sensitive type of revenues then you'd look to cut costs further and to achieve the 4% ROTE target.

As far as my question is, if you're not getting those revenues come through, will there be time to cut the revenue -- to cut the costs to still actually achieve that target by the year-end?

That'd be my first question.

Do you want to take them in turn?

Sure, it's James.

I'll take the first the question, Lee.

Look, we've said before on these calls, we'd like to see a more flexible expense base and that's something that we are working to over time.

But as it relates to the commentary, yes, we do think there are areas where we could, at reasonably short notice, take down expenses.

Obviously, the first thing people think of is variable compensation.

In our case, as a CRD4 bank, that's a little bit less of a lever than one would perhaps like, but it's a lever.

We've also highlighted in our commentary that we are preserving the investments in our current plan.

And again, that's an area around which we have flexibility.

The third thing I'd highlight is that in our planning, we clearly have a number of initiatives underway to take down expenses, not just in '19 but in subsequent years.

So I think having done that work, we do have a sort of a list of items that we could potentially accelerate.

But naturally, as you point out, some of them end up with a longer lag time before they really impact.

But again, we do feel we've got some levers inside '19 to take mitigating action.

Okay, that makes sense.

And a couple of quick ones, please.

Do you have a target cost-to-income ratio you're looking towards for 2019, please?

We're still -- and this is our guidance come -- since June and then subsequently on the second and third quarter calls.

We are operating still in an absolute sort of expense target world and are -- we're seeking to transition from absolute expense targets to cost/income ratio targets.

Frankly, as our cost-to-income ratio normalizes, so what we've given back in June was a multiyear target of getting to below 70%, and that's something that we would plan to do ratably throughout this year and the subsequent years, but we're not giving a specific cost-to-income ratio for 2019.

Okay, that's clear.

And just 2 very quick ones.

On the pro forma ADIs, I think Dixit mentioned the EUR 42 billion of capital reserves.

Was that all -- with the entire amount coming to the ADIs?

Or is it just part of that amount?

So I think once the rule change goes through, what it does do away with is really this restrictive ADI calculation.

And so it is our understanding that the entirety of the EUR 42 billion of capital reserves would then be in scope for the calculation.

Okay.

And then just finally, and it's touching on what Corinne asked.

If -- currently, you've got a EUR 21 billion surplus over your MREL requirement, do you have a number in mind of what you're looking to keep in excess of the MREL requirement?

Or would that just be informed by the subordination requirements?

Less, as with any regulatory measure that we're demonstrating adherence to, we would typically have a management buffer internally.

And so there will be a portion of that, that we will retain for management purposes.

That said, we're not just managing to the regulatory guidelines here but we're also sensitive to our rating, and it's very much our intention to ensure that we protect and upgrade our rating from where we are as well.

So it's balancing those 2 considerations.

But suffice to say, the $21 billion does give us enough flexibility right now from where we are and especially with the advent of our senior preferred from last year being an additional tool to help lower our funding costs through the year.

(Operator Instructions) The next question is from the line of Stuart Graham of Autonomous Research.

I had a couple.

On TRIM, you said it was a minus 20 basis point impact.

Could you just confirm which portfolio that relates to because we seem to be hearing different things from different banks?

And is that everything on TRIM?

Or could there be more to come as more portfolios are put through the ECB review?

That's the first question.

The second question, you mentioned the investments you're making this year, and I think it was EUR 220 million last year.

Can you just remind us how much you've done to date and how much there is still to come, please, in the PCB business?

And then maybe a final question.

I think I understood on the press conference that Cerberus helped you with the Treasury portfolio reoptimization.

If so, what exactly did they do that you couldn't do yourself?

What help did they give you there?

Sure, Stuart.

It's James.

I'll take at least a crack at all 3 and Dixit can perhaps add.

So if I think about TRIM, the near-term impact that we're expecting -- and by the way, the 20 basis points, so what we've guided to is the low end of our earlier guidance of 20 to 40.

So that is an improvement relative to our third quarter expectations.

What is visible to us right now is TRIM for the retail and mid-cap business.

There are further TRIM inspections ongoing.

We've had a couple of at least draft indications of no movements for certain of our businesses.

But of course, the TRIM process continues and will continue for some time, so the final result for -- across all portfolios isn't yet kind of fully known to us.

In the PCB area, and I assume that you mean the commentary we've made about the integration of Postbank, I guess, what I'd offer is -- in summary is that we're on track against the plans that we've articulated to the market and also incidentally to regulators who've taken a keen interest in the integration plans.

As you know, it's a large and complex undertaking.

We've been at it for about 18 months and we've hit all of the milestones that we laid out.

The legal entity merger, obviously, which we've discussed; we've announced the combined management team of the -- of that new entity; we have a framework agreement with the workers council around job reductions; and as we've talked about on this call, we've made good progress in terms of integrating the overall balance sheet and liquidity into the firm-wide numbers.

To answer your question about our synergy commitments, we're on track and we're doing whatever we can to accelerate.

One area of acceleration I'd cite is the integration of the mortgage banks on both sides.

And in connection with that, we've, obviously, incurred some costs.

We talked about, when we first announced the merger, up to about EUR 1.9 billion of merger-related costs.

Right now, over the past 2 years, we've got about EUR 650 million of that total in, in our numbers.

In other words, in the rearview mirror, a little around 30%.

If we can bring the EUR 1.9 billion down, then perhaps a higher percentage of the total.

So we're working hard to both crystallize the benefits and also to manage the expense of what we think as costs to achieve within the overall Postbank integration plan.

The final item about Cerberus, the advisory arm of Cerberus has a number of very experienced treasury people in it, people that are from the industry, have executed on similar strategies within their former lives.

And so that's experience that we're leveraging both to validate the work that Dixit and his team are doing to provide, if you like, comparable views and to, in some ways, augment the team that we have working on this.

And we're very pleased both with the cooperation and, frankly, the progress that we've been making.

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

I had 2 questions.

One is a follow up on Corinne's, so let me take that first.

Just in terms of reinvestment of liquidity, when you had mentioned lower risk, higher yield, does this naturally push you into more investments -- government- and agency-type investments in peripheral countries?

And can we expect to see an increase of exposure there?

And then I'll ask the next one about funding after.

Yes, happy to run through that.

What is not lost on us is just where we've been in the credit cycle and especially this move from QE to QT.

And one part in us keeping our liquidity reserves largely in cash over the last 2 or 3 years was no doubt that the range of investable opportunities as well was quite slim.

So unless you went quite far down the credit curve or took on a significant amount of duration risk, there really wasn't yield pickup, and that's now started to change.

So this will be an over-time deployment.

The bucket that we're talking about, which is HQLA lower-risk assets, especially in the switch from cash into liquidity reserves, again, very high-quality government or government-like assets, which are liquid, monetizable, Central Bank-eligible, which would form a part of that portfolio.

It is a dynamic portfolio, and we will remain reactive to market conditions through the year.

Let me add to...

Okay, that's helpful -- I'm sorry, go ahead.

Let me add to what Dixit said.

It's entirely possible that we'd add a small amount of peripheral sovereigns in the portfolio, given that the yields that are available there of modest duration.

But if -- you have to take that in light of the fact that if -- that our disclosed exposure to, call it, the euro sovereigns in the peripheral countries is very small on a comparative basis.

So we don't think of it as a significant incremental risk.

In some ways, on a relative basis, we're sort of underweight in what are attractive-yielding assets.

Okay.

That's very helpful.

And then on funding, you'd mentioned, talking about lowering your funding costs.

In the past, you've done some -- a couple of tenders.

Tenders tend to have 2 benefits: one is taking out higher coupon debt; the second is, as a sign of strength.

And could you talk about how you evaluate the success of the past tenders you have?

Have they achieved both of those goals and should we look for more in the future?

Also, you've taken out debt within 5 years of its issuance in the past.

I know, in other jurisdictions, the regulators have not really allowed that.

So is that something that you've gotten permission to do?

How does that work?

Sure.

Happy to take that.

On the tender front, as you can imagine, we can't provide any specific forward guidance, given that this is very much a function of where spreads are and also where our liquidity is at that time.

But case in point was last November, we certainly were not pleased with where our spreads were, given the significant widening.

Notwithstanding the fact that itracks' financials over the year had widened significantly, we had widened much more.

We ran the surplus -- the liquidity surpluses that we had on any of those measures, TLAC, MREL, LCR as well as internal stress.

And at that -- and at that time it was certainly economic for us to undertake a tender at those spreads.

So it's definitely a tool in the toolkit.

We do monitor the market constantly and to the extent that we see an opportunity to do so, we will deploy cash via tender as well.

Sorry, Robert, and the second question you had was around debt within 5 years?

Right.

So you had tendered for some debt within 5 years of its issuance.

And in talking with some other banks in some other jurisdictions, they said that, that's a regulatory hurdle, if not a rule that that wouldn't happen.

So is that something that is permissible for you guys?

Did you have to go to the regulators for it?

Just if you could explain a little bit about how that happens.

Sure.

I suspect that relates to capital instruments, so AT1 and Tier 2, but certainly, not relevant for senior.

The consideration for senior within -- from a maturity perspective may be under 1 year, for example, and MREL eligibility or ineligibility under 1 year might be a factor, but certainly no 5-year criteria to play there.

On capital instruments, naturally, those would require regulatory dialogue and approval.

And there are no further questions at this time.

I hand back to James Rivett for closing comments.

Thank you, Haley, and thank you, everyone, for joining us, and we'll see you in 3 months.

Take care.

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

Thank you for joining and have a pleasant day.

Goodbye.