Deutsche Bank AG (DB) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

I am Jasmin, your Chorus Call operator.

Welcome, and thank you for joining the Q1 2019 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, Jasmin, and good afternoon or good morning, and thank you for all joining us today.

On the call as always, our CFO, James von Moltke, will speak first.

Then our Group Treasurer, Dixit Joshi, will take you through some Fixed Income-specific topics.

The slides to accompany their comments are available for download from the Creditor Information section of our website, db.com.

After the presentations, we'll be happy to take your questions.

But before we get started, I just have to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect.

Therefore, please take notice of the precautionary warning at the end of our materials.

With that, let me hand over to James.

Thank you, James, and welcome to you all.

Before diving into the results, a few words around our decision last week to terminate discussions with Commerzbank about a potential merger.

After thorough analysis, we concluded that a merger would not have created sufficient synergies to offset the execution risks, restructuring costs and capital requirements related to such an integration.

This is consistent with our commitment only to pursue options that we believe are in the best interest of our stakeholders, including equity and debt investors.

Our first quarter results show that we made further progress against our objectives.

We performed in line with our internal planning assumptions on a net income basis despite difficult conditions for our market-sensitive businesses.

We offset weaker revenues with lower costs and benefited from lower tax expenses.

The performance in our less market-sensitive businesses was solid, and several important leading indicators are positive.

These trends highlight the underlying strength of our franchise.

We remain well on track to reduce costs by EUR 1 billion this year to our recently lowered full year target of EUR 21.8 billion.

Our continued progress on costs shows that we are moving in the right direction.

We remain disciplined and focused in our execution.

At 13.7%, our CET1 ratio is consistent with our target and is a signal of strength and stability.

This solid capital position, together with our excess liquidity, gives us flexibility to exploit revenue opportunities as they arise and to invest in key areas.

While maintaining a resilient balance sheet, we are working to optimize our funding costs and improve our credit ratings.

As part of our balance sheet optimization measures, we have reduced our funding plan by EUR 5 billion for this year.

Let me turn to a summary of our first quarter results on Slide 3. Revenues of EUR 6.4 billion declined by 9% year-on-year on a reported basis but by 5% excluding the specific items detailed on Slide 26 of the presentation.

Noninterest expenses declined by 8% as we reduced adjusted costs by 7% to EUR 5.9 billion.

Provisions for credit losses were EUR 140 million or the equivalent of 13 basis points of loans.

Provisions remain low in an historical context and reflect the low-risk nature of our portfolios and our strong underwriting standards.

As a result, we generated a pretax profit of EUR 292 million and net income after noncontrolling interests of EUR 178 million.

Our CET1 ratio stands at 13.7%.

Liquidity reserves were EUR 260 billion, and the liquidity coverage ratio stood at 141%, both broadly stable versus year-end levels.

Let me go into more detail on revenues, excluding specific items on Slide 4. We're encouraged by the performance and the underlying trends in our less market-sensitive businesses.

In our Private & Commercial Bank, Global Transaction Bank and Management, together, revenues increased by 1%.

In PCB, revenues were stable as we grew volumes to offset the ongoing impact of negative interest rates.

We grew revenues in GTB, where we have the fundamentals in place to further increase revenues in the coming quarters.

In Asset Management, revenues declined year-on-year but grew compared to the fourth quarter, and we saw positive inflows.

In our more market-sensitive businesses, revenues declined by 16%.

But beneath the headline figures, the picture is more varied.

Origination & Advisory revenues declined in the quarter reflecting lower industry pools, but we increased our market share in many geographies and products.

Our Sales & Trading businesses were negatively impacted by the overall market conditions.

Additionally, in Sales & Trading, the year-on-year comparison was negatively impacted by approximately EUR 100 million from the perimeter adjustments we made last year in Equities and U.S. Rates.

In Fixed Income, revenues declined by 18%.

But within FIC, our Credit and FX businesses performed relatively well.

And in Equities, revenues declined by 18%, broadly in line with the overall market performance.

Turning to our progress on adjusted costs on Slide 5. In the first quarter, we reduced adjusted costs by EUR 400 million or 7% to EUR 5.9 billion.

Excluding the payment for the majority of our annual bank levies, which we record in the first quarter, adjusted costs were EUR 5.3 billion.

On this basis, we have reduced our adjusted costs in each of the last 5 quarters.

We made further progress towards our near-term financial targets this quarter, which you can see on Slide 6. Generating higher and more sustainable net income is important for all our stakeholders, including shareholders, debt investors and rating agencies.

Our main objective for 2019 remains to generate a posttax return on tangible equity of greater than 4% as a step towards higher returns over time.

As we highlighted in our full year results, improving our return on tangible equity to around 3% is based on things mostly or fully within our control.

These factors include executing on our cost-reduction plans, continued balance sheet efficiency, performance in our stable businesses and a more normal tax rate.

In the first quarter, these items are running in line with or slightly ahead of our internal targets.

But improved performance in these areas alone would leave us below our 4% return target.

To reach our objective, we also need to see a revenue recovery in our more market-sensitive businesses.

Market conditions and our performance in the first quarter were clearly not supportive for this recovery, but these revenues are available to us in better market conditions, given our leading positions in many of these businesses.

We just need to capture them.

To conclude, we are executing on our commitments and are focused on executing against our own plans.

We delivered against our 2018 cost-reduction plans and are well on track to reach our recently lowered 2019 targets.

We continue to manage our balance sheet conservatively, and we are making good progress on our control environment and our regulatory commitments.

With these foundations in place, we have begun to pivot towards controlled growth.

We are encouraged by this quarter's performance, which demonstrates that key drivers of growth are in place as we grew loans and deposits and saw higher assets under management with positive inflows.

This management team has executed on its promises, and we will continue to deliver on our commitments.

As we demonstrated in discontinuing discussions with Commerzbank, we will be disciplined as we work to improve our long-term organic capital generation.

With that, let me hand over to Dixit.

Thank you, James.

Starting first with a summary of our well-capitalized, highly liquid and low-risk balance sheet on Slide 8. At 13.7%, our common equity Tier 1 capital ratio is consistent with our greater than 13% target.

We have loss-absorbing capacity of EUR 123 billion, which is EUR 19 billion above our MREL requirement.

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

Our low loan-to-deposit ratio of 77% provides the opportunity to further support lending growth.

And our market risk and credit costs are amongst the lowest of our global peers.

The liquidity coverage ratio of 141% is EUR 68 billion above our regulatory requirement.

Given our high liquidity levels and investments in our systems, we are now in a position to optimize our balance sheet and liquidity.

We are on track to generate more than EUR 300 million of revenues for the full year from our optimization programs.

These programs are designed to adjust to changes in market dynamics, with our primary focus wherever possible on deploying resources into our client franchises.

This quarter, we have executed on around EUR 15 billion of measures in aggregate.

In the first quarter, we deployed approximately EUR 5 billion of our liquidity reserves into higher-yielding assets, including loans.

We intend to further deploy resources in the coming quarters with up to a further EUR 20 billion, depending on market and client opportunities.

This will in part include using liquidity in our subsidiaries, which will not affect our disclosed group-level liquidity reserves.

Liquidity reserves were, however, flat as we grew our deposits by a similar amount.

We are also working to reduce the cash component of our liquidity reserves and purchased approximately EUR 5 billion of high-quality liquid assets in the quarter.

We have also identified opportunities to optimize our liability profile, which is a capital-efficient deployment of our liquidity.

As a result, we have reduced our issuance plan for 2019 by EUR 5 billion.

In aggregate, we now expect to issue between EUR 15 billion and EUR 20 billion, as shown on Slide 9. With EUR 8 billion issued already in 2019, we have completed roughly half of our full year requirements.

The reduction in our plan comes mostly from lowering our preferred and structured note issuance.

We still expect to issue EUR 9 billion to EUR 11 billion in senior nonpreferred instruments this year.

Having already issued EUR 6 billion in this format, we are flexible now on timing regarding the remainder of the plan.

On TLTRO-III, we are waiting for specific details from the ECB, which I expected in June, and we'll then assess our potential participation.

Generally, we think a new TLTRO will be helpful for the industry to avoid a concentration of maturities in 2020 and more evenly spread them over a much longer timeframe.

Any participation may lower our covered bond issuances as we use some of the securities as ECB collateral instead of issuing directly into the capital markets.

Slide 10 highlights our key liquidity metrics.

Our liquidity coverage ratio stood at 141% with liquidity reserves at EUR 260 billion.

Over the last 12 months, we have reduced our liquidity reserves by approximately EUR 20 billion or 7%, including a EUR 40 billion reduction in cash as we allocate to higher-yielding, high-quality liquid assets.

In the first quarter, liquidity reserves were broadly flat as we funded EUR 10 billion of loan growth with new deposits.

The majority of these deposits were originated in our retail businesses and, given their long-term nature, provide high liquidity value.

For the remainder of the year, we expect to manage our liquidity ratios down prudently as we identify opportunities to deploy excess resources.

Turning to capital on Slide 11.

We ended the quarter with a CET1 ratio of 13.7%.

This represents an 18 basis point improvement from the prior quarter and comes despite absorbing a negative 16 basis point impact related to IFRS 16 lease accounting.

The increase in the CET1 ratio was driven by a net EUR 3 billion decline in risk-weighted assets.

As expected, market risk RWA declined by EUR 7 billion, reflecting the reversal of the temporary increase that we saw in the fourth quarter.

Excluding FX effects, growth in credit risk RWA of EUR 9 billion, which included the impact of IFRS 16, was offset by a EUR 6 billion reduction in operational risk RWA mainly driven by methodology refinements.

All else constant, our guidance for regulatory adjustments to our CET1 ratio is unchanged from our fourth quarter earnings call.

As noted, an 18 basis point benefit from an ECB-approved change to operational risk models is already incorporated in the first quarter results.

We see regulatory headwinds of approximately 40 basis points, which are not yet reflected in our capital ratios.

Approximately 20 basis points of this decline will occur in the second quarter as we have received feedback from the ECB on a recent asset quality review.

The remaining headwinds relate to the ongoing regulatory exams of internal models.

Here, the timing and the amounts are uncertain, but we currently expect a further 20 basis point impact within the next 2 quarters.

All said, we remain committed to managing our resources within a range consistent with our CET1 ratio target.

Our leverage ratio on a phased-in basis declined by 20 basis points in the quarter to 4.1% compared to our 4.5% midterm target.

On a fully loaded basis, our leverage ratio was 3.9%.

Excluding FX effects, the decline in the ratios reflects an increase of approximately EUR 57 billion in leverage exposure, reflecting seasonally higher pending settlements, increases in client activity in CIB as well as loan growth.

Let me also comment on the G-SIB indicators that we published today.

Mostly reflecting our active deleveraging in 2018 and our perimeter adjustments in CIB, 10 out of the 12 G-SIB indicators declined year-on-year.

As a result, we expect our 2021 G-SIB buffer requirement to reduce by 50 basis points to 1.5%, of course, subject to the final FSB assessment in November this year.

A reduction would not change our overall CET1 capital requirements or MDA levels as we would expect our domestic SIB requirement to remain unchanged at 2%.

That said, a lower G-SIB buffer would potentially lower our regulatory leverage ratio requirements.

Under CRR2 rules, the leverage ratio is calculated off the 3% base requirement plus 50% of the G-SIB add-on.

And on this basis, our leverage ratio requirement would be 3.75% from 2022.

But at this stage, our midterm 4.5% target remains unchanged.

Slide 12 provides an update of MREL, our most binding loss-absorbing capacity requirement.

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

Our available MREL in the first quarter was EUR 123 billion, which was a EUR 5 billion increase compared to year-end, reflecting our nonpreferred issuances.

Our MREL surplus stood at EUR 19 billion at the end of the quarter.

The slight decrease compared to the year-end level was driven by the seasonal increase in total liabilities and own funds.

The Single Resolution Board will review MREL targets of all banks in the second half of 2019.

We do not expect this review to have a material impact on our MREL position.

The next 2 slides cover AT1 payment capacity as well as credit default swaps.

On both topics, we expect positive developments in the near term.

These changes will be positive for us, our investors and our counterparties and will create a more level playing field for all German banks compared to other EU institutions.

Starting with the payment capacity on new-style AT1 securities or ADI on Slide 13.

Under the current rules, coupons of EUR 330 million will be paid tomorrow.

Our payment capacity of EUR 921 million is almost 3x higher than the required coupon payment.

Additionally, we have increased general- and trading-related reserves to EUR 4.7 billion, which could be used to increase our payment capacity even further.

The increase in the reserves reflects the benefits of the merger of Postbank and the Deutsche Bank legal entities.

It is the last time that we report this number based on these conservative German GAAP rules.

Starting next year, changes in European legislation related to CRR2 should materially increase our payment capacity and effectively remove ADI as a constraint going forward.

We expect the proposed new rules to be published in the official journal in June or July, with the new definition becoming effective 20 days thereafter.

Slide 14 shows the upcoming changes to credit default swaps on Deutsche Bank, including the introduction of a new senior preferred CDS.

After an amendment of the German bail-in law in 2017, the current CDS for DB references senior and nonpreferred instruments.

These instruments rank junior to counterparty claims in the creditor hierarchy and therefore overstate the risk to clients and counterparties.

A new CDS contract referencing our preferred senior instruments will be available for trading on 13th of May.

These changes will bring CDS contracts for Deutsche Bank and other German banks in line with EU and U.S. peers, where either opco or holdco structures of preferred senior CDS instruments are already available.

This will allow a more accurate reflection of the position in the capital stack for counterparties and clients and will lower the cost for hedging exposures with Deutsche Bank.

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

Thank you, Dixit.

Operator, let's open -- Jasmin, let's open the line for questions.

(Operator Instructions) The first question comes from the line of Samir Adatia of Citi.

This is Samir Adatia from Citibank.

So I've got 2 questions, firstly one on ratings and secondly on the MDA buffer.

So looking at the ratings, if 2 of the 3 main rating agencies having your negative outlook, what leeway do you think you have to avoid a downgrade and have you considered the impact of your nonpreferred senior having a high-yield rating?

And secondly, in terms of the MDA buffer, what is the ideal management MDA buffer you're looking to run?

Because when taking into account the 40 basis points regulatory headwinds you've guided for, pro forma, we calculate your MDA buffer to get to around 150 basis points, one of the lowest amongst the AT1 issuers amongst all European banks.

And are you concerned by this?

Yes.

Thank you for the question.

On ratings, one of the reasons why we tailored our issuance plan the way we have is clearly to ensure that we support our rating through the next few years.

And so as a -- in response to the liquidity excesses that we have currently, we have reduced our issuance plan by EUR 5 billion to EUR 15 billion to EUR 20 billion.

But all of that reduction really comes from covered bond issuance, reducing the amount of structured notes and senior issuance that we do as opposed to the senior nonpreferred.

And as you know, the senior nonpreferred both supports our regulatory metrics, MREL, TLAC in the main but then also Moody's LGF and S&P ALAC.

And so protecting the rating will continue to remain a key focus for us.

So on that, aside from the LGF and ALAC, which you highlight, obviously, there's a risk the underlying anchor ratings of this, as the BCA at Moody's or the Viability Rating at Fitch, that's a negative outlook as well.

And based on profitability of targets you have, there's a risk that could be downgraded.

What leeway do you think you have around combating that this year?

Looking at the latest rating agency notes, which you would have seen on Friday and through the weekend, the one thing that they do reflect on is our strong solvency and liquidity metrics.

And in fact, goes so far as to say that we have excesses that we would be comfortable deploying.

And so I think executing on the strategy for us is our primary focus through this year while ensuring that we maintain robust liquidity metrics that ensure we support our rating.

That's very clear.

And if you can kindly answer my question on the MDA buffer, please.

There certainly is potential over time to reduce our P2R.

It's not lost on us that we do have a higher P2R than most of our peer group.

We're not concerned in the main with the 150 basis point buffer given, as you've seen from the slides, we run a pretty conservative and a low-risk profile and so can flex the balance sheet and can manage resources as required.

Next question comes from the line of Paul Fenner of Societe Generale.

Can you hear me?

Yes.

These are all AT1 related in that they're all kind of related in scope.

The first question is -- I think it's not going to be lost on you that you're one of the highest-yielding certainly of the big G-SIBs.

And so there's an element of concern around coupon skip.

I know you're still paying dividends.

I just wanted to get a sense of what comfort you can give AT1 holders or potential new investors that a coupon skip would save you so little money that it's just not something that you would even consider willingly and that the regulator would be very unlikely to force you into.

Can you just give us a little bit of color about how you feel around the AT1 skip?

The second question is, you may have mentioned this in the past, so forgive me, I can't quite remember.

You've got 4.5% leverage targets, including leverage product like AT1.

What is the CET1 component of that?

And how do you see the relationship between one or the other?

I mean I guess you kind of get berated by the equity market for not having enough CET1 as well as not having enough total Tier 1. And so I'd love to know -- just get a sense of how you see that relationship between total Tier 1 and CET1 leverage ratio.

And then the third question is where your thoughts are around potential AT1 issuance to help you in just that thorny issue of the total Tier 1 leverage ratio.

Paul, thank you for those.

So I'll -- assuming I remember all of the questions correctly, let me start with them in reverse order.

So regarding likely AT1 issuance, as you can imagine, we wouldn't specifically comment on any contemplated transactions.

But what I would say is that as we've demonstrated through last year, we have a number of tools -- and I think this answers your second question as well, number of tools at our disposal to both manage the numerator and the denominator through time.

So last year, we had flexed the balance sheet, removing a significant amount of leverage primarily in our CIB businesses to create both capacity for growth and also to allow us to move up towards our 4.5% leverage target.

What you would have also seen in the first quarter is an increase of around EUR 22 billion in pending settlements, and the aggregate amount of pending settlements does move quarter-on-quarter.

For this quarter, it was in the region of EUR 40 billion.

This is a treatment that is different from our U.S. peers, for example, who are able to avail of settlement date accounting as opposed to trade date accounting.

And this should drop out post-2021.

So I think a combination of pendings dropping out, capital accretion through the next few quarters, together with always the possibility should we see interesting business opportunities to issue further AT1, are at our disposal.

Coming back to your first question, which is really comfort around the coupon, we'll be paying the EUR 330 million of coupon tomorrow.

And as we've seen from the payment capacity, the base payment capacity is at least 3x the coupon level.

You would have seen a EUR 2 billion increase on the ADI sheet, which is related to general reserves as a result of the Postbank merger being completed and movement of reserves up to group level.

But overriding all of this, I think, will be the CRR legislation, which we would expect will be published in June or July in the journal.

And that particular piece, the ADI piece, it's our expectation that, that will be effective 20 days after publication and would then allow not just reliance on the general and trading reserves but also on further capital reserves, which would be a multiple of the current reserves shown, so in effect, would make ADI for these purposes hopefully a nonissue going forward.

And sorry, the question about the relationship between your 4.5% total Tier 1 leverage target and CET1 leverage ratio?

We'd look to manage that quite dynamically.

We'd obviously look to our total Tier 1 ratio, including the Tier 1 bucket, and ensure that we manage that holistically.

But again, we've shown that we have the flex on both measures to be able to manage that.

The leverage ratio, of course, is not currently binding in Europe.

Our G-SIB score -- and we've just published that earlier today, as mentioned, our G-SIB score would indicate a 3.75% leverage requirement.

But we're quite comfortable continuing to manage to both a greater than a 13% CET1 as well as, in the medium term, a move towards a 4.5% leverage ratio target.

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

Question on LCR then going back to ratings and a little bit on some strategic developments.

On the LCR, you're down to about -- to 141%, and you talked a lot about optimizing that liquidity.

Global peers tend to be around 120%.

So is that extra 20% something that you're building into as a differentiator?

Or is it something that rating agencies and regulators are mandating?

And could we expect to see that come down over time is my first question.

Robert, a pleasure to do this call in U.S. time.

So LCR has come down by around 7 points in the last year, including a reduction of around 18% in the cash we hold.

And much of this was premeditated, i.e., intentionally wanting to deploy excesses that we have.

Now out of the liquidity deployment that we envisage for this year, a portion of that would arise in entities which would effectively have trapped liquidity.

And so the headline liquidity deployment number would not impact LCR on a one-for-one basis given that the trapped liquidity does not form currently part of our global surpluses that we reflect on.

So a combination of those would mean we'd guide towards lower LCR over time, but that would be a result of both franchise client developments together with market opportunities that we see.

Okay.

That's helpful.

On the ratings and picking up on a point earlier, reading the releases over the weekend, they still weren't unequivocal about ratings.

And in fact, I think some of them wandered a little bit, talking about the role of equity holders and optimism or pessimism on equity holders' part, which I think, by the way, was unwarranted.

Could you talk about -- just characterize your conversation with the rating agencies?

Had your ratings reaffirmed before the potential merger talks?

Have they just -- have those conversations kind of gone back to where they were before?

Are there any other kind of developments that they're looking at?

And can you isolate 2 or 3 things that we can look at from the outside as progress or signs of just continued stability with respect to your ratings?

So Robert, it's James here.

I'd say, so first of all, through the ordinary course as well as around the merger discussions, we obviously maintained a very active dialogue with the rating agencies across the board.

I would say, by and large, yes, it's just -- it reverts to the pre-March 17 dialogue.

The -- I would say the principal signal that they're looking for to begin to see forward momentum in the ratings, and I would emphasize forward momentum in the ratings, is success in the execution of the restructuring and plans that we've articulated and implemented over the last 12 months.

And I think they recognize that we've, as a management team, delivered on the measures that we defined in April of last year, whether it's related to balance sheet management, as Dixit has outlined, or the cost trajectory that we've been on, delivering against the restructuring actions that we took.

So I see those items in terms of the narrative as being on track.

Rather like our shareholders, I think the agencies and our creditors are watching our progress towards the 4% RoTE target for 2019 intently.

And hence, the messages in today's presentation and on Friday around our path to that 4% and that notwithstanding the difficult environment in the first quarter, we still see ourselves as on a path to the 4% and certainly with the 3% threshold in -- based on items that are wholly or partially within our power to control.

So it's an active dialogue focused on forward progress in the restructuring.

Very comfortable with the balance sheet in all of its aspects around risk, liquidity.

And I think it's about '19 being -- demonstrating that we're on a path towards sustainable profitability and capital generation.

Great.

And then one last one if I could in terms of client engagement.

Can you talk a little bit about the pipeline in terms of your investment banking and Advisory?

Also, can you just shed some light on the willingness of clients to engage in longer-term transactions, whether it's equity derivatives or others, where they're getting more comfortable with Deutsche Bank credit risk?

Have you seen any kind of improvement there or any kind of increasing business flow in the longer-term engagement?

Well, it's James here.

I'll go.

On the first question, we reported, as I -- as we mentioned, Origination & Advisory revenues down 5% year-on-year in what we see as about a 10% down revenue pool in the first quarter.

So we gained share, especially, by the way, in Advisory and also in debt capital markets.

So the first quarter performance was actually reasonably encouraging in a difficult market environment.

We don't comment really on the forward look as a matter of policy, so I don't want to go into the pipeline well.

But I'd say the trends have remained in place in corporate finance.

Robert, I'll take the second really around clients in the franchise around derivatives in particular.

I would say the 2 important criteria, I think, for our clients and counterparties there have really been the level of our CDS, and you've seen a material improvement in the level over the last few months.

And the second is really the cost of hedging exposure to Deutsche Bank given the current CDS references, the incorrect part of the capital structure and the cost that clients are incurring as a result.

And hence, the focus across the industry post the German bail-in law changes to get a senior preferred CDS contract launched, which would bring us in line with our peers who either have holdco, opco CDS already have senior preferred CDS at their disposal.

Looking at the significant spread currently between our senior preferred and our senior nonpreferred, that is a material welcome development when it goes live on the 13th of May.

Next question comes from the line of Corinne Cunningham of Autonomous.

I've got 3 actually.

First one, just relating to Slide 9. When you talk about optimization, I wasn't quite sure I fully understood exactly what's been going on behind the scenes.

And I suppose particularly, what have you done that wasn't obvious to you when you started off the year [head's] issuance program?

So for example, when you spoke to us in February, what's changed between February and March that has enabled you to knock EUR 5 billion off the issuance requirement?

Yes, happy to run through that.

The -- a number of things.

So to your question on the components of the liquidity deployment program, this includes a number of elements, including deployment of cash into securities.

And you'll see that quarter-on-quarter really reflected in the mix of cash in HQLA as part of our liquidity reserves.

A second component would be investing group-wide surpluses that we have into higher-yielding assets and loans.

And as I mentioned, some of this will be in entities where we already have resources that are trapped and usable.

The third would be what you've just referred to, which is reducing relatively expensive liabilities when compared to other opportunities.

Especially when looked at on a posttax RoTE basis, they're very capital-efficient.

And then the fourth, of course, is deployment into opportunities within our core businesses.

So for securities, in the first quarter, we had deployed an additional EUR 5 billion into securities.

The primary purpose of that portion of the program is to lower the drag from holding cash at central banks.

It is our current expectation to deploy an additional EUR 5 billion this year, but naturally, this depends on market developments.

The central deployment into high-quality assets and loans, there, we have -- we've deployed EUR 5 billion in Q1.

The target for the full year would be in the region of around EUR 25 billion.

The volume there, we will flex depending on growth opportunities in our core businesses but also when we look at liabilities, if we see opportunities to reduce liabilities.

So given our glide path and forecast for the remainder of the year, we feel quite comfortable reducing the plan down from EUR 20 billion to EUR 25 billion down to EUR 15 billion to EUR 20 billion.

Okay.

So essentially, it's the LCR that's taking the -- it's the flip side of having less issuance?

So LCR would -- having less issuance for sure would guide to a lower LCR.

But a number of components, as I mentioned, in the program, some which would affect group-wide LCR and some would not.

So as an example, deploying a dollar of liquidity in an entity which currently is not fungible and effectively trapped would not actually lead to a reduction in LCR but would lead to an increase in NII for the year.

I guess I'm just struggling to see, on the issuance side in particular, the difference given that you haven't changed your strategic plan, you're sticking with your -- with what you set out earlier.

Just not quite sure how I reconcile those 2 things.

Just you saying the same, nothing's really changing since February except you now need to issue a lot less.

I think inherently, the elements of this program will be quite dynamic quarter-on-quarter.

And at the back of our mind is usually the forecasting that we would do with our businesses through to the end of the year, which would drive our thinking around the program.

So I think you will see flex in this program quarter-on-quarter.

Okay.

The other 2 questions.

One, I guess this one needs a little bit more explanation, but when you talk about redeployment into loans, for example, does CLOs form part of that?

And what's your current appetite for CLOs?

And what are you seeing in terms of market conditions there?

In large part, the loans that we deploy into really reflect the business that we currently do across the client franchise that we have primarily in CIB.

In the main, these are asset-backed and low-risk-weight asset transactions that we would put capital into.

So somewhat different from what we would normally look at in the business, but we're specifically targeting a low-risk weight for those assets given this is a central deployment program that over time we would find the resources to push back into the business.

And then on conditions to CLOs and the kind of thing you're underwriting at the moment or buying?

To a limited extent, yes.

And so I would say asset-backed securities, CLOs as well as structured financings would all form a part of the program.

Sorry, and conditions in those, market conditions, the types of things you're buying?

Currently favorable.

Again, this is -- we would continually reassess the clearing levels for those transactions.

And one of the -- one criteria will be what's the benchmark here when reducing liabilities, as an example, and that's led to the EUR 5 billion reduction in the issuance plan as opposed to putting it to work in assets.

And then last question was just linked to the new preferred CDS when that comes through.

Do you have some kind of benchmark relationship between preferred and nonpreferred that you are expecting to see there?

It's a good question.

I know I have my view around that, but really, we would look to the market to set the pricing.

I mean clearly, an important reference point is the current spread for our preferred versus the nonpreferred, which currently that is spread of around

100 basis points.

And I'd hope we'd be tighter than that.

The next question comes from the line of James Hyde of PGIM.

I've got one fairly -- well, I hope a fairly simple one and then one again about ratings and maybe not so easy.

This matter of the AQR, asset quality review, an asset quality review reducing CET1 by 20 bps this quarter.

Just wanted to understand, is this basically something that involves a stage 3 impaired loan increase and something that -- and in consequence, a P&L hit through a impaired -- a loan impairment charge?

Or is this something to do with the banding, the asset quality banding in determining the risk-weighted assets?

That's the simpler one.

And then the second question is to do -- is on the ratings, and I understand you've tried to answer as much as you can.

But in the event of a downgrade, the bit that was difficult for us to calculate is to understand how much business you -- will become unviable for you to do out of the CIB.

So out of the EUR 12.4 billion last 12 months revenues in the CIB, what becomes undoable for you?

And out of the EUR 960 billion of leverage ratio denominator, what sort of -- what is business -- what relates to business you won't be able to do in the event of a downgrade?

I mean the easier one for us to calculate is your EUR 9 billion to EUR 10 billion remaining senior preferred issuance and next year's runoffs, the refi of that.

That, we can calculate or guess at.

But this is a harder one to see.

And I'm really looking at what -- not so much the -- what happens to the senior nonpreferred falling to BB+ area but more the counterparty rating following -- falling with all agencies to BBB.

I mean with Fitch, it's already there.

But I understand that certain trustee businesses and et cetera are not -- would not be available for you.

So if you can give me some -- any help on that, that would be very welcome.

So James, I'll take the AQR.

It's James.

And I'll start on the ratings discussion, and then Dixit can add to that.

First of all, no, it had nothing to do with the stage 3 loans.

It does not pass through P&L.

The AQR reviews have to do with your process for valuation of fair value assets and the focus on that process, the data and what have you.

The regulatory impact goes through essentially Pillar 2, so -- or sorry, Pillar 1. It's part of the regulatory capital calculation and a cap deduct as well as an impact on how we calculate the denominator.

So it just runs through as adjustments to the Pillar 1 calculation.

With respect to the ratings, look, we -- I think we've articulated on these calls that consistently -- management is working to execute on its strategy and do everything to ensure that there is no downward movement in the outlook or eventually in the ratings.

We continue to do that and, I think, demonstrate progress against it.

Obviously, we build into our stress and contingency planning assumptions about the impact.

I'm not going to go into that on this call.

But I can assure you the balance sheet is structured in a way to defend against that sort of event and, we think, defend the business as well in that eventuality.

But the point I want to underline is management is working to ensure that such an event does not happen and ensure that our clients aren't disrupted by such an event.

Okay.

That's fair enough.

Is it fair to say that where the rating agencies were almost sine qua non on saying you've got to reach the 4% target RoTE this year, are you reading a bit more flex on that now, I mean, from [what you're seeing]?

I have never seen it as a sine qua non, and that may be the interpretation that is behind your question.

I think they and, frankly, we see it as a useful benchmark so that we can demonstrate progress in execution -- executing against our plans.

And I think that the distinction we've made between things inside and those things that are not fully within our control is a distinction that they understand as well.

And I think they further understand that we think of 2019 as a milestone.

So we've not felt that it was a sine qua non at all so much as a benchmark against which we can all compare the progress that we're making.

And again, as I said in the prepared comments, we feel that the first quarter, notwithstanding the environment that we were in, demonstrated progress against those targets.

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

So really a nitty-gritty one.

You said there was another EUR 20 billion of liquidity measures to come for the full year, and I think you said EUR 5 billion of that would be in high-quality assets.

That leaves EUR 15 billion in loans.

But I also heard a figure of EUR 25 billion, but I'm guessing it's the EUR 10 billion in Q1 plus the EUR 15 billion for the rest of the year, gets you to that EUR 25 billion.

Maybe just confirm that's the correct math.

And then the second question was the EUR 5 billion that you purchased in first quarter.

I'm guessing that's around about EUR 50 million of income.

Maybe you could just comment on that.

And where does that show?

Is that in the FIC line?

Or where does that show in the P&L?

Stuart, yes, happy to take that, yes.

So the answer to the first is yes, those would all add up to the EUR 20 billion over the course of this year.

The EUR 5 billion in Q1 would be at an average -- you're almost spot on, at an average of around 125 basis points, which would naturally accrue through the course of this year.

And where does that show in the P&L?

Which line item does that show?

That would show up as a reduction in the funding costs allocated back to businesses through the course of this year and so would show up in the segmental P&L.

Does it -- is it going to be in GTB?

Is it going to be in FIC?

Is it a bit of everything?

It would be in a combination of those businesses.

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

I hand back to James Rivett for closing comments.

Thank you very much.

Thank you all for joining the call today.

You know where the IR team is if you have further questions.

And we look forward to speaking to you soon.

Bye.

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

Thank you for joining, and have a pleasant day.

Goodbye.