Deutsche Bank AG (DB) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

I'm Stuart, your Chorus Call operator.

Welcome, and thank you for joining the Q3 2019 Fixed Income Call of Deutsche Bank.

(Operator Instructions) I would now like to turn the conference over to Philip Teuchner, Investor Relations.

Please go ahead.

Thank you, Stuart, and good afternoon or good morning and thank you all for 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.

In the room for Q&A, we also have Jonathan Blake, our Global Head of Issuance and Securitization.

The slides that accompany the topics are available for download from our website under 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, Philip, and welcome from me.

I'll talk you through our third quarter results but also provide you an update on how we have progressed in executing our strategy.

This management team is absolutely focused on execution as we show on Slide 3. We feel comfortable that we have laid the foundations for a successful restructuring and improved business performance.

We're delivering on our near-term objectives, which sets us up to deliver on our long-term goals.

Overall, we can tell you we are on track.

The trends in the Core Bank, the performance in the Capital Release Unit, headcount, costs and capital are all running in line with or better than we'd planned.

First, we said we would refocus our strategy on 4 core businesses, which have strong competitive positions.

We also said we would grow revenues in our less market-sensitive areas.

And here, the underlying trends are encouraging with positive drivers.

Second, we continued to work to reduce costs.

We've reduced adjusted costs year-on-year, exiting the bank levy and transformation charges for the seventh quarter in a row.

And we're on track to hit our full year 2019 target.

Third, our Capital Release Unit is up and running and delivering.

We made significant progress in reducing risk-weighted assets and leverage exposure in the quarter.

We're confident of hitting our objectives for 2019 and beyond.

Finally, we told you that we would continue to manage our balance sheet conservatively.

In addition, our CET1 ratio was stable in the quarter and at the high end of our international peer group.

Let me now move to a summary of our group financial performance on Slide 4. Adjusting for specific items detailed on Slide 24 of the presentation, revenues were EUR 5.4 billion in the quarter, as I will detail on the coming slides.

Noninterest expenses were EUR 5.8 billion.

This includes EUR 234 million of restructuring and severance and just under EUR 200 million of transformation-related charges reported within our adjusted costs.

Transformation charges in the quarter consisted primarily of software impairments as we implement our technology transformation to help reduce costs in future periods.

As we laid out in July, these charges will be part of our results for several quarters.

Stripping out these charges, adjusted costs were EUR 5.2 billion, down 4% year-on-year.

Provision for credit losses of EUR 175 million remained within our target range and included a benefit of EUR 104 million.

This benefit reflected the net effect of our annual updates to forward-looking indicator element of our expected credit loss model and the regular quarterly update to the forward-looking macroeconomic variables.

Excluding these benefits, provisions for credit losses increased, reflecting lower recoveries and higher provisions taken on defaulted and impaired exposures.

Our net loss was EUR 832 million.

The negative tax rate includes EUR 380 million of deferred tax asset valuation adjustments that we anticipated and communicated to you when we launched our strategy in July.

We have redeployed some of our excess liquidity in the quarter, which led to reductions in our liquidity reserves and liquidity coverage ratio, but both remain at healthy levels.

Let us now look to the details of our revenue drivers, starting on Slide 5. On a reported basis, revenues declined by 15% year-on-year.

The headline revenue development includes several factors that negatively impact the reported trends.

If we adjust both the prior year and current year period for similar items, which are extraneous to the core businesses, we see only 1% year-on-year decline in revenues.

First, specific items, including debt valuation adjustments, as detailed on Slide 24 of the appendix.

Second, reported results were impacted by the Capital Release Unit.

The Capital Release Unit generated approximately EUR 500 million of positive revenues in the third quarter of 2018 compared to negative revenues of around EUR 100 million in the current quarter, excluding specific items.

Third, Corporate & Other revenues, including the impact of treasury items and valuation and timing differences, were positive EUR 54 million in the prior year period compared to negative EUR 76 million this quarter.

So adjusting for specific items, the Capital Release Unit and Corporate & Other, revenues in our core operating businesses declined by 1% or EUR 35 million year-on-year.

We view this as a resilient performance despite our far-reaching restructuring, the macroeconomic headwinds and additional interest rate pressures.

Now let me turn to the year-on-year revenue performance, excluding specific items, within our 4 core businesses on Slide 6. On this basis, Investment Bank revenues declined by 3%.

However, across the majority of our Investment Bank, revenues either grew or were stable.

We see this as a satisfactory result given the uncertainty around our strategy at the start of the quarter.

Our transformation did have an impact on the performance in the Investment Bank, although the trends were in line with our internal targets, and we believe that we are starting to put these issues behind us.

Origination & Advisory revenues grew strongly, with increases in both debt origination and M&A against a broader market that was flat.

Revenues also grew in our market-leading financing businesses.

As Dixit will discuss shortly, we continue to deploy the balance sheet in our lending franchises within the Investment Bank.

FX revenues were resilient in the face of further declines in market volatility.

The decline in revenues came from Rates and Emerging Markets' debt.

The management teams in both businesses have taken action to stabilize the franchises.

We are pleased with the early momentum that both showed at the end of the third quarter.

We are committed to maintaining robust broad-based Rates and Emerging Markets platforms.

Revenues were marginally up year-on-year in total across our more controllable, less market-sensitive businesses of Asset Management, the Corporate Bank and the Private Bank.

These businesses accounted for over 70% of core bank revenues.

In Asset Management, DWS showed its third sequential quarter of net inflows.

Revenues were flat, excluding the negative impact of lower interest rates on guarantees in certain retirement products.

In the Corporate Bank, we grew revenues 6%, with growth across our global transaction banking and commercial banking units.

And in the Private Bank, we offset most of the interest rate headwinds with solid growth in wealth management and our international business.

Let me now turn to the progress we have made on cost reductions on Slide 7. Stripping out transformation-related charges, our adjusted costs were EUR 5.2 billion in the quarter.

Excluding these charges and bank levies, we recorded our seventh consecutive quarter of year-on-year reductions.

Compared to the first quarter of 2018, we have reduced our quarterly adjusted costs by around EUR 450 million or EUR 1.8 billion on an annualized basis.

This quarter, we showed continued cost discipline with reductions in almost every category, except for planned investments in technology.

The reductions we have achieved in the first 9 months put us on track to deliver our full year target of EUR 21.5 billion.

We expect to reach this target despite absorbing almost EUR 300 million of FX translation headwinds this year.

And we remain committed to our longer-term target of a cost base of EUR 17 billion.

Turning to our progress in deleveraging in the Capital Release Unit on Slide 8. Our target is to reduce risk-weighted assets in the Capital Release Unit by EUR 20 billion in 2019 to EUR 52 billion.

We have just EUR 4 billion left to do in the fourth quarter to reach our target.

We reduced leverage exposure by EUR 73 billion in the quarter and by over EUR 100 billion year-to-date.

We are confident in reaching our full year target of reducing leverage exposure in the Capital Release Unit to around EUR 120 billion.

Our leverage target assumes that we close the transfer agreement with BNP Paribas for our Prime Finance and Electronic Equities platform in the third -- in the fourth quarter.

At the end of the third quarter, leverage exposure related to this transfer was EUR 40 billion.

Roughly half of this amount should reduce soon after the closing of the agreement.

The remainder related to client balances will transition over time.

Before I hand over to Dixit, let me highlight that our key balance sheet and risk metrics remain strong as you can see on Slide 9. We have been managing our balance sheet conservatively and we'll keep doing so.

Our Common Equity Tier 1 ratio was 13.4%, unchanged from last quarter.

The performance reflects the prudent way we manage our capital.

It also shows our determination to fund our transformation from our existing resources.

We are also focused on maintaining strong credit quality.

Provisions for credit losses are 15 basis points of loans year-to-date.

A low level, both historically and relative to peers.

That reflects our conservative underwriting standards, strong risk management and generally low-risk portfolios.

Our loan-to-deposit ratio was 74%, reflecting a strong and stable funding base supporting our high quality and growing loan portfolio.

Finally, our liquidity position was strong.

Our liquidity coverage ratio of 139% implies a surplus of EUR 59 billion.

We will continue to maintain a prudent level of liquidity reserves at all times.

With that, let me hand over to Dixit.

Thank you, James.

Let me start with an overview of our net balance sheet that remains robust on Slide 11.

[So] we net down the IFRS balance sheet for items like derivatives netting agreements, cash collateral as well as spending settlement balances.

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

Our net balance sheet declined by EUR 3 billion quarter-on-quarter or over EUR 20 billion, excluding FX effects, to slightly over EUR 1 trillion.

Our liquidity results represent around 1/4 of our net balance sheet.

We continue to reduce our trading assets and grew loans over the quarter.

The loan-to-deposit ratio increased by 1 percentage point, consistent with our continued balance sheet optimization, and we expect to increase this ratio over time.

On the liability side, deposits rose slightly to EUR 585 billion, mainly driven by the corporate bank.

Our long-term debt is down by EUR 6 billion on an FX-neutral basis as we reduced expensive sources of funding in line with our deleveraging.

Let me provide further details around our year-on-year loan growth on Slide 12.

A central part of our strategy is to reallocate resources towards our core businesses, including generating loan growth.

In total, we grew loans by 6%, excluding the impact of FX translation.

This lending was subject to our rigorous underwriting standards and fully consistent with the prudent liquidity deployment we signaled last year.

The 4% growth in our Corporate Bank was driven equally by growth in Commercial Banking in Germany as well as in Global Transaction Banking.

In GTB, growth was most notably in Trade Finance, where loans are typically short term, and to multinationals as well as to mid-cap corporates.

Lending in the Investment Bank grew 17%.

We grew in asset-backed lending, mainly with investment-grade rated new deals backed by a diversified range of assets, including corporate collateralized loan obligations as well as in autos and residential mortgages.

We also increased commercial real estate backed loans while continuing to apply conservative loan-to-value ratios and collateral protection.

The EUR 6 billion of growth in our Private Bank was mainly driven by Wealth Management, where loans are typically collateralized.

The growth in Corporate & Other reflects our initiatives within treasury to optimize and redeploy our liquidity reserves to support group profitability.

Within our central liquidity portfolio, we prudently invested into asset-backed securities, commercial real estate loans and equity margin loans.

These investments are in high-quality, relatively liquid assets with low loan-to-value ratios.

And finally, in line with our strategy, we reduced loans in the Capital Release Unit by 27% or EUR 2 billion.

Turning now to capital on Slide 13.

We are committed to maintaining our capital strength through our strategic transformation, and we are encouraged by the initial results.

In the quarter, our derisking efforts generated almost 45 basis points of capital, including approximately 20 basis points from lower operational risk, which we realized 1 quarter earlier than planned.

Excluding operational risk, derisking in the Capital Release Unit generated almost 25 basis points of capital, offset by around 15 basis points of growth in the Core Bank and about 5 basis points of regulatory headwinds associated with the targeted review of internal models we have previously discussed.

Together with the negative impact of our transformation on earnings, our Common Equity Tier 1 ratio was stable at 13.4%.

We reaffirm our target to manage our Common Equity Tier 1 ratio above 13% in the fourth quarter with the decline versus the third quarter driven by multiple factors, including transformation charges and updates to pension liabilities, including tax effects.

We remain committed to keeping our CET1 ratio above 12.5% at all times.

At this level, we will remain comfortably above our regulatory requirements and above our major European peers.

On Slide 14, we show our leverage ratio, which was stable at 3.9% in the quarter despite the headwind from foreign exchange translation.

On an exchange rate neutral basis, we reduced leverage exposure by EUR 39 billion, including EUR 77 billion of deleveraging in the Capital Release Unit.

This was partly offset by EUR 6 billion loan growth and a EUR 21 billion increase in trading assets.

In the fourth quarter, we expect our leverage ratio to be 4%, rising to 4.5% by the end of 2020.

Slide 15 highlights our key liquidity metrics, which remained solid over the quarter.

Our liquidity coverage ratio surplus decreased by EUR 7 billion, driven by loan growth in our core businesses, supplemented by lending in our central liquidity portfolio and the retirement of expensive long-term debt as part of our deleveraging actions.

These initiatives led to a reduction in the LCR to 139%.

Our liquidity coverage ratio surplus above the 100% requirement remains at a comfortable EUR 59 billion.

Liquidity reserves decreased slightly by EUR 3 billion.

Securities declined and cash within our reserves temporarily increased in the quarter, mainly reflecting deleveraging of our equities business in the Capital Release Unit.

We expect to decrease the cash component over time and have reduced it by over EUR 30 billion year-over-year driven by loan growth in our businesses, the central liquidity deployment and the reduced issuance plan.

Looking ahead, we intend to prudently manage down aggregate liquidity reserves to a level slightly above EUR 200 billion and target an LCR ratio of approximately 130%.

Moving on to our issuance activities on Slide 16.

By the end of the third quarter, we had issued EUR 10 billion with an additional EUR 2 billion of issuance completed in October, meaning that we are materially complete for our 2019 issuance requirements.

As a step in reducing our overall cost of funding, we plan to issue an inaugural tranche of our new structured covered bond during the fourth quarter, depending on market conditions.

This covered bond program optimally uses our available collateral of German retail mortgages that are not already part of our fund brief program and has a higher over-collateralization than the traditional fund brief.

At our fixed income investor call early next year, we will provide more details around our 2020 issuance plan, which, at this stage, we expect to be in line with our EUR 15 billion to EUR 20 billion range laid out last quarter.

We will monitor the market and maintain flexibility regarding prefunding our issuance plan for next year.

Overall, the net redemptions in 2020, including TLTRO-II maturities, will continue to lower our overall funding footprint, in line with our reduced balance sheet.

In addition, we will keep the windows for TLTRO-III participation in consideration as we optimize the cost of our overall funding stack.

Note that the participation windows extend from September 2019 for 7 quarters into 2021, meaning we have optionality regarding timing.

Before moving to the Q&A, let me give you an outlook on relevant aspects for bondholders on Slide 17.

As we execute on our transformation agenda, we will continue to manage our balance sheet conservatively.

In the Capital Release Unit, we have reduced leverage exposure by more than EUR 70 billion quarter-over-quarter.

In the fourth quarter, we expect to see a substantial benefit from our agreement with BNP Paribas relating to Prime Finance and Electronic Equities.

We will not compromise on our strong liquidity position but aim to continue rebalancing the composition of our liquidity reserves.

The reduction of our balance sheet also results in lower funding requirements.

This quarter, we already see the benefit from retiring some expensive liabilities.

We expect to receive new MREL requirements over the next weeks.

Today, we already maintain a healthy buffer of EUR 17 billion.

On a TLAC basis, the excess is even higher at EUR 40 billion.

The market expectations for forward interest rates present a headwind to our revenue aspirations for 2022 that we outlined in our July presentation.

However, we have identified a series of mitigants to offset these headwinds.

First, the perimeter adjustments we announced with the second quarter results increased revenues in the Core Bank.

Second, our businesses have begun more systematically pricing and charging for negative rates, and the Corporate Bank and Wealth Management unit are well advanced, working with clients on this.

Third, we continue to deploy excess liquidity, including through the loan growth you have seen.

And finally, the introduction of tiering by the ECB, which we had not assumed in July, should improve revenues by more than EUR 100 million per year.

So while the interest rate environment is challenging, it does not warrant a change in our 2022 revenue aspirations or return on tangible equity targets.

With that, let us move to your questions.

(Operator Instructions) First question is from Lee Street -- sorry, excuse me, Robert Smalley from UBS.

A couple of questions I had.

First, on Slide 16, when we look at 2020, we've got a big slug of TLTRO-II coming up.

You've mentioned that.

You mentioned the flexibility in the third program.

But when you look at that kind of number, are you looking to replace all of that with the new plan?

How does that fit in?

And could you talk about how you think about the interplay between TLTRO-III covered bonds and senior preferred debt?

That's my first question.

Second, wanted to talk just a little bit about DTAs.

It's more housekeeping.

You had taken a write-down on some in prior quarters.

Where do they reside?

Are they, for lack of a better word, portable?

Can you utilize them in different jurisdictions?

And is that -- will that drive any investment decision going forward?

And then third, if I could, I want to talk about some AT1s.

This is Dixit here.

Sure.

Good questions.

On TLTRO, we highlight that precisely because we will let some of that issuance run down through the course of the year -- and that's fully consistent with our deleveraging actions that we've commenced on.

So over the next 3 years, we should expect to see gradual rundown of issuance.

That said, given this is over 9 quarters, we will remain somewhat opportunistic through that period.

Some of the actions that we're taking, including now, related to really TLTR replacement in part.

The structured covered bond and potential early redemptions of TLTRO-II are actions that we would take to soak up liquidity through the period.

The second question that you had was really around senior debt -- senior preferred debt and covered bonds.

Both of those will remain key tools in our funding mix through the course of the next few years with an MREL surplus.

And we're expecting our MREL requirements for 2020 sometime in the next 6 to 8 weeks.

But with an MREL surplus of EUR 17 billion, a TLAC surplus of EUR 40 billion and with us comfortably meeting subordination requirements related to MREL, we're confident that we should see a greater proportion of covered bond and senior preferred debt issuance over time.

And just quickly, Robert, good day to you.

On the DTAs, in short, they are not portable.

So they need to be utilized based on earnings in the jurisdictions in which they have arisen.

As you've seen this year, we've taken significant valuation adjustments against our DTA, and so we feel ourselves to be in a much stronger position at this point in terms of our expectation of future utilizations.

Would that, in any way, have an influence on near-term investment given that the tax consequences of that and preference of one jurisdiction with -- that holds DTAs versus others?

Not really.

We obviously engage in tax planning in the ordinary course.

I wouldn't say that the existence of DTAs is necessarily proving to be a significant consideration in our strategic planning.

I'd say that our strategic planning happens to line up with where the DTAs at this point still exist.

Okay.

That's helpful.

And then finally, on the AT1s on the slide on Page 16, you've got contractual maturities.

But you do have a call on the 6.25% AT1s in April 30.

They're trading in an area that looks like the market doesn't anticipate that they'd be called.

I know these are things that you look at over time and you might not have gotten to it yet.

But given at least one other bank's experience when bonds were trading in that kind of area where the market had already acknowledged that they probably wouldn't be called, does that influence your decision at all?

And how are you thinking about this now in terms of any kind of pre-funding or not pre-funding this call?

Robert, we do -- we have been monitoring that security amongst all of our other AT1s, and we do note that it trades well below par.

With 6 months to go to the call date, it's somewhat premature to make a specific prediction.

But as we said before, we would look at the economics, the replacement value of the transaction, any upcoming regulatory changes at the time, in context, prior to making a call decision and try and manage that communication with the market as we've done in the past in a responsible manner.

Next question comes from the line of Lee Street from Citigroup.

I've got 3 questions please.

Just firstly on the strategy.

Just if DB can't achieve the revenue growth targets that you're setting yourself, to what extent do you think you'll be able to cut costs sufficiently to meet your return on tangible equity targets?

Or do you have other levers that you can pull to try and hit those targets?

Just secondly, in the S&P write-up from last week, they specifically said that in their RAC projection, they said it was partly based on DB returning to the AT1 market during 2020 to increase the amount of hybrids in the total adjusted capital calculation.

So just obviously, that's S&P's words, but any comments from you on that?

Should we assume you're going to be actively issuing AT1 next year based on that?

And then just finally, I know you mentioned on the call last week the potential that your G-SIB requirement might reduce.

Would you see that as being something material in terms of reducing the amount of a nonpreferred senior that you might have outstanding going forward in terms of hitting your MRO and TLTRO requirements?

Or are the rating considerations still more important there?

That would be my 3 questions please.

So I'll -- it's James.

I'll briefly cover the strategy question.

Look, we're in the midst of our annual planning cycle.

As Dixit indicated in his outlook commentary, we recognize some headwinds in the environment but have also been working on what the mitigants, what the offsets are.

And as we outlined, at this point, we don't see a reason to change our perspectives about the future.

As we -- as you'd expect in every planning cycle, we look at each and every part of the plan, the top line expenses, also resources and where we think we're headed from a CLP and other expenses perspective.

Of course, we will continue to look carefully at costs.

However, when we initially announced our restructuring back in July, we felt that the target to take out approximately 25% of our cost base to get to the EUR 17 billion that we outlined for 2022 is ambitious.

We'll always look carefully.

But as things stand, we are working hard to execute on the plan that we outlined at that time.

Lee, I'll take the second 2 questions.

On the first, on the AT1, we have indicated previously, we don't need, at this stage, any AT1 for next year.

As you know, we have a surplus in the Tier 1 bucket.

It's something naturally we'd want to watch closely and not preclude any actions.

But from a need perspective, we don't need to issue as we currently contemplate.

From a G-SIB perspective, with the reduction to 1.5%, that was largely a result of the last 2 or 3 years of restructuring simplification of the firm's reduction of our balance sheet, reduction in intercompany flows and all of the other G-SIB metrics that contribute to the score.

With the reduction to 1.5%, where this will bear most fruit will be in 2021 when the CRR requirements around leverage ratio come into effect.

And that would put us at a 3.75% minimum leverage ratio requirement.

And I mean, this would not affect really MREL, TLAC, nor senior nonpreferred and especially on the senior nonpreferred side, a number of other considerations we would be managing too, including rating agency considerations.

(Operator Instructions) Next question comes from the line of Daniel David from Autonomous.

I've got 2 questions on the ECB's recent liquidity stress test.

First, has the process led you to rethink any of your limits, reporting or systems and controls in the area?

And second, can you give us a sense of how your USD liquidity profile compares to your euro profile under the ECB's process?

Daniel, naturally, I'd be somewhat constrained in what I can say, given this would be a regulatory dialogue between ourselves and our regulators.

But to answer your first question on rethinking really limits and systems and data, this is an area where we've made significant investments over the last few years in our capabilities around whether it's modeling the way we treat liquidity within entities that are trapped, fungibility, visibility, and our general management and toolkit around liquidity significantly enhanced compared to a few years ago.

And that, no doubt, helps us whether directly in the stress test or otherwise.

We're quite comfortable with our currency profile, whether that's in euros or in dollars.

It's always been part of our internal requirements other than whether -- away from the stress test requirements or LCR requirements.

Our internal stress testing is of a much tighter level, and we're quite comfortable with where we are on both those accounts.

Next question comes from the line of Jakub Lichwa from RBC.

First question -- 2 questions, sorry.

First question around MREL surplus.

How much of that EUR 17 billion do you actually view as a surplus?

And how much of this do you use for rating agency's purposes, say, Moody's?

And second question is on Slide 20.

With regards to your dollar AT1, 7.5%, I have an impression it's issued under foreign law.

You are indicating that it's still eligible as AT1 capital post -- obviously, it's post 2022.

But is it eligible post mid-2025, please?

Sure.

On the first, on the MREL surplus, on the EUR 17 billion surplus, we do maintain our debt stack to meet a number of internal and external requirements, including not just our regulatory requirements, whether that's MREL, TLAC, but also the ratings agency criteria, as you correctly point out.

Given we meet much of the requirement with subordinated debt, that naturally works for both ratings agency criteria as well as the MREL surplus.

I think the change over the next few years for us will be to the extent we continue to meet, which is our current anticipation, continue to meet the requirement through the subordinated debt that we have.

We would have room to significantly uptick our senior issuance, whether that's covered bond or otherwise, over the next few years.

So issuance of senior nonpreferred, consistent with both currently.

On the second, on the AT1, this was issued under U.S. law, but it does meet the requirements as we understand.

There are no further questions at this time.

And I would like to hand back to Philip Teuchner for closing comments.

Please go ahead.

Thank you very much, Stuart, and 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.

Goodbye.

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

Thank you for joining, and have a pleasant day.

Goodbye.