Deutsche Bank AG (DB) 2020 Q1 法說會逐字稿

Ladies and gentlemen, welcome, and thank you for joining the Q1 2020 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, Stuart, and good afternoon or good morning and thank you all for joining us today.

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

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

The slides to accompany the topics are available for download from our website at 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 a look at the precautionary warning at the end of our materials.

With that, let me hand over to James.

Thank you, James, and welcome from me.

This is an extremely challenging and unprecedented time for all of us and none of us have full visibility on how the situation will develop.

But it is at times like this, that our bank can prove its resilience and its value to society and all our stakeholders.

Despite the turbulence, we have continued to execute on our transformation.

We're very happy with our performance in the quarter, and we outperformed our internal expectations for both revenues and costs, specifically in the core bank.

And we also made solid progress against our strategic priorities.

We are benefiting from our conservative balance sheet management, and this stability is enabling us to support our clients.

With the right strategy and with Germany as our home market, we believe that Deutsche Bank can strengthen its competitive position in these difficult times.

Slide 4 shows a summary of our financial performance in the quarter.

Group revenues were flat year-on-year at EUR 6.4 billion as growth in the core bank offset the wind down of the Capital Release Unit.

Noninterest expenses of EUR 5.6 billion included EUR 503 million of bank levies in the quarter as well as approximately EUR 190 million of restructuring and severance, litigation and transformation charges.

Provisions for credit losses increased to EUR 506 million or the equivalent of 44 basis points of loans on an annualized basis.

We generated a pretax profit of EUR 206 million with profit after tax of EUR 66 million.

Our results in the quarter were impacted both by our ongoing actions to implement our transformation as well as the initial impact of the COVID-19 pandemic, the most material of which we discuss on Slide 5.

In the first quarter, provisions for credit losses included approximately EUR 260 million of incremental provisions, which we will discuss shortly.

Our CET1 ratio was negatively impacted by around 40 basis points from COVID-19 factors.

The impacts on our CET1 ratio included net EUR 400 million of incremental prudent valuation deductions.

These deductions reflect the increased pricing dispersion and wider spreads, given the market volatility in the latter part of the quarter.

COVID-19 driven increases in risk-weighted assets of EUR 7 billion included a higher credit risk RWA due to ratings migrations and EUR 5 billion from drawdowns on credit facilities.

We would expect for credit risk RWA to return to more normal levels as clients replace the drawn facilities with cheaper long-term funding.

The movements in liquidity reserves and risk-weighted assets were well within the range of stress outcomes that we planned for.

And finally, Level 3 assets increased by EUR 4 billion in the quarter to EUR 28 billion.

The increase was driven by temporary factors, which we expect to normalize over time as Dixit will describe later.

Turning to provision for credit losses on Slide 6. Provisions were EUR 506 million or 44 basis points of loans in the first quarter.

Roughly half of the provisions related to COVID-19 impacts principally against stage 1 and stage 2 performing loans.

Most of the increase was driven by updates to macroeconomic variables, changes in credit ratings and segments particularly impacted by the crisis as well as the higher drawdowns.

We updated our approach this quarter, reflecting the ECB recommendation to moderate procyclicality.

Our forward-looking indicators now incorporate a 3-year averaging of macroeconomic forecasts.

Our forecasts were based on consensus estimates at the end of March.

Updating the assumptions to the current market views would have increased our provisions for credit losses by approximately EUR 100 million.

Our total Stage 3 provisions of EUR 276 million in the quarter included around EUR 30 million related to COVID-19.

Our Stage 3 provisions increased slightly and reflected a small number of specific events, consistent with our prior guidance.

Including the provisions taken in the first quarter, we ended this period with EUR 4.9 billion of total allowances for credit losses.

This amount includes EUR 4.3 billion of allowance for loan losses equivalent to 95 basis points of loans.

Slide 7 shows the progress we have made on revenues in our Core Bank.

In the Corporate bank, revenues were flat as we offset the pressures from the interest rate environment with loan growth and deposit repricing benefits.

We continue to actively reprice deposits in the first quarter and are on track to pass-through the negative rates -- interest rates to EUR 25 billion of deposits in 2020 as part of our 2022 targets.

Investment Bank revenues grew by 15%, up in both fixed income and origination and advisory.

The first quarter showed further stabilization and improvements in market share in our target markets.

In the Private Bank, revenues increased by 3%.

This growth was supported by the strong performance in Wealth Management, where we continue to benefit from strategic hiring in prior periods.

We grew loans and volumes to broadly offset the ongoing interest rate headwinds.

In Asset Management, growth in management fees was offset by interest rate-driven changes in the fair value of certain guaranteed funds.

Despite the market conditions at the end of the quarter, DWS has continued to grow assets in our core areas, most notably through our strategic partnerships and ESG funds.

We determined to not let the current environment disrupt our cost reduction plans.

Excluding transformation charges and bank levies, adjusted costs declined by 7% year-on-year to EUR 4.9 billion, as you can see on Slide 8. At the end of the first quarter, we have put 73% of our transformation charges behind us.

The progress we have made in the first quarter puts us on a good path to achieve or outperform against our EUR 19.5 billion target for 2020.

Slide 9 repeats the slide that we have shown you consistently.

We have been managing our balance sheet conservatively and intend to keep doing so through this period of volatility.

With a 12.8% CET1 ratio at quarter end, we are comfortably above our regulatory requirements, despite absorbing 30 basis points of regulatory headwinds at the start of the quarter.

This sound capital position gives us scope to continue to deploy resources to support clients in these challenging times.

As we disclosed on Sunday, we are dealing with a great deal of uncertainty around the CET1 ratio path from here.

We've, therefore, taken the deliberate decision to allow our CET1 ratio to dip modestly and temporarily below our target of at least 12.5%.

We believe that this is the right thing to do for all of our stakeholders, including our debt and equity investors.

Over time, as the temporary factors I referred to earlier normalize, we expect our CET1 ratio to return to the 12.5% level.

Our loss-absorbing capacity was EUR 18 billion above our most binding MREL constraint.

We are one of the few European G-SIBs that already comply with the fully loaded requirements.

We kept our strong liquidity position with reserves of EUR 205 billion and an LCR of 133%.

Our results also show that we continue to operate with low-risk levels.

We continue to manage our market risk exposure tightly.

Our value at risk on an average basis remains low at EUR 24 million.

And we are focused on maintaining strong credit quality.

I'm sure you've seen the rating actions S&P took last week on multiple European banks, including us, to reflect the potential impact from the coronavirus.

We appreciate that S&P recognizes our strong balance sheet.

This should be the key criteria, together with the continued execution of our transformation agenda to determine our forward ratings trajectory.

We will not deviate from our agenda, and we'll do everything in our power to maintain our current ratings and improve them over time.

Before I hand over to Dixit, let me conclude with a few remarks on our role on how we see us as well positioned in the current environment on Slide 10.

With our refocused strategy, we are now operating in businesses with market leading positions, providing industry-leading solutions.

Germany is our home market, where we generate approximately 40% of our revenues.

In the Corporate Bank, as the 'Hausbank' to nearly 1 million small and medium-sized companies in Germany, we are well positioned to help clients through the crisis.

In Investment Bank, for the first time since 2017, we've regained our position as the market leader in German Corporate finance year-to-date.

In the Private Bank and DWS, we're helping our private customers to navigate through turbulent conditions.

We are the leading retail bank with 19 million customers and a leading retail asset manager.

We also believe that Germany is relatively well positioned to manage through the macroeconomic turbulence.

The government has put in place a series of well-designed programs, which should provide support quickly to the broader economy.

We were pleased and proud to have contributed to this process, both in the design and implementation of the program.

And given the strong fiscal position, the German government is well positioned to take additional action if required.

The German consumer and corporate sectors are relatively well positioned to deal with this crisis.

Consumer debt levels are amongst the lowest in the eurozone and the developed world.

German's small and large corporate customers are also operating with the lowest debt levels of leverage -- lowest levels of leverage and the highest levels of liquidity in the last 30 years.

We feel fortunate to have Germany as a home market in volatile times.

With that, let me hand over to Dixit.

Thank you, James.

Let me start with a review of our net balance sheet on Slide 12.

This view excludes derivatives netting agreements, cash collateral and pending settlement balances from our IFRS balance sheet to make it more comparable to U.S. GAAP accounting standards.

We have transformed our balance sheet significantly over the last years.

This provides a robust foundation as we continue to execute on our transformation and manage through the challenging macroeconomic environment.

On the asset side, around 20% of our net balance sheet is in cash and government securities as part of our liquidity reserves.

Roughly half comprises our loan portfolio, which we will discuss shortly.

Trading assets account for roughly 1/4 of our balance sheet.

As our low-value at risk indicates, this is a conservatively managed book with tightly controlled risk limits and includes our secured financing activities with low credit risk as they are well collateralized.

On the liability side, trading liabilities increased over the quarter but account for less than 20% of our net balance sheet.

This increase largely reflects seasonal variations as well as increases due to recent volatility and does not reflect any material shift in our funding profile.

More than 80% of our balance sheet is funded by most stable sources.

Deposits now account for around 60% of our liabilities.

We have worked to improve the quality of our deposit base over time, which consists mainly of retail and corporate deposits.

Only 2% of the net balance sheet is from unsecured short-term wholesale funding.

Our overall funding base has proven to be very resilient and now allows us to actively support our clients in this challenging environment.

Let us now take a closer look at our loan portfolio on Slide 13.

Our loan books are well diversified across the businesses, customer segments and regions.

Around half of our total loan portfolio is in the private bank, mainly German mortgages with conservative loan-to-value ratios and low delinquency rates.

In Wealth Management, almost all our loans are secured typically by high-quality liquid stocks and bonds with conservative loan to values.

90% of our commitments in the Corporate and Investment Bank are to clients rated investment grade.

And from a regional perspective, our loan books are also well diversified.

Approximately half of our portfolios are in Germany with a further 20% in EMEA and the U.S.

The next slide gives you an overview of our exposure towards focus industries.

In commercial real estate, our exposure is predominantly first lien mortgage lending with an average 60% loan-to-value.

Our portfolio is diversified across a broad range of high quality properties, typically in gateway cities.

Our oil and gas exposures are focused on the investment-grade majors, and we have very modest exposure to noninvestment-grade exploration and production segments.

In retail, we have contained our exposure to strong global names with very limited exposure to nonfood retailers.

Within the airline space, our exposures are secured at conservative loan to values with the unsecured portfolios biased towards national flag carriers in developed markets.

And finally, our leisure portfolio is small and focused on large hospitality industry leaders with minimal exposure to cruise ships and tour operators.

In summary, we believe that our loan book portfolio is low-risk and well diversified.

And our risk profile is supported by our comprehensive stress testing framework and proactive risk management.

Slide 15 provides more details around our Level 3 assets, which stood at EUR 28 billion.

Level 3 assets increased by EUR 4 billion in the quarter.

The increase was driven by a reclassification of some inventory into Level 3 due to the increased dispersion in market pricing towards the end of the quarter.

This was mainly in relation to derivative transactions where the material components of the underlying risks are typically hedged.

We also saw higher carrying values on existing Level 3 derivative inventory, mainly driven by movements in interest rates.

These increases were largely offset by equivalent increases in Level 3 liabilities.

As conditions normalize, some of the market-related effects should reverse and therefore, reduce the current level of prudential valuation deductions and Level 3 assets.

That said, developments in the nearer term are difficult to predict and will depend on market dynamics.

Just to reiterate what we told you previously, a Level 3 classification is not an indicator of risk or asset quality, but an accounting indicator of valuation uncertainty due to lack of observability of at least 1 significant valuation parameter.

We have several safeguards in place to mitigate the valuation uncertainty, including prudential valuation adjustments of EUR 700 million and the exchange of collateral with derivative counterparties.

In addition, our Level 3 assets are revalued continuously both by our businesses and also through our independent valuation teams.

Let me now walk you through the development of our liquidity, capital and issuance metrics starting with liquidity on Slide 17.

We believe that our ability to manage and steer our liquidity through the quarter is a testament to the investments we have made in our data, governance and tools in recent years, and also to the stability of our funding given the reshaping of our balance sheet.

With signs of stress appearing in markets in early March, we implemented heightened governance and increased the frequency of our reporting, including on our committed facilities.

In the quarter, we deployed EUR 18 billion into supporting our existing clients' drawings on committed facilities, with a further $7 billion of new loans.

As a result, we ended the quarter with liquidity reserves of EUR 205 billion and a liquidity coverage ratio of 133%, both above our targets.

We remain committed to providing liquidity to support our clients.

To that end, we have earmarked EUR 20 billion of additional lending in the second quarter, including half of which is funded by KfW.

We are comfortable operating below our targets temporarily but will prudently maintain buffers above our regulatory thresholds.

As the market environment normalizes, we would expect to see our liquidity reserves and liquidity coverage ratio return closer to current levels.

Moving now to capital on Slide 18.

Our CET1 ratio was 12.8% at quarter end, down roughly 80 basis points from the prior quarter.

Approximately 30 basis points of the decline came from the impact of the new securitization framework we have discussed with you in previous calls.

In line with our stated strategy, we also continued to fund our business growth across our core businesses which consumed roughly 10 basis points of capital in the quarter.

Our CET1 ratio was impacted by around 40 basis points as a result of COVID-19, which James described earlier.

As noted, we would expect for the COVID-19 items to sustainably normalize over time as the macroeconomic situation stabilizes, and we will maintain ample buffers above our regulatory requirements which we will discuss on the next slide.

Our CET1 ratio at quarter end was approximately 240 basis points above our recently revised regulatory capital requirements.

The reduction in our CET1 ratio requirement reflects the recent ECB decision to implement CRD5 Article 104a with immediate effect.

This allows us to partially meet the Pillar 2 capital requirements with AT1 and Tier 2 capital.

In addition, several countries have lowered the countercyclical capital buffers as a reaction to the COVID-19 crisis.

These measures have resulted in a 114 basis point reduction of our CET1 ratio requirement, which now stands at 10.44%.

Our most binding capital requirement is now on the total capital ratio with a buffer of 155 basis points or the equivalent of EUR 5 billion of headroom in capital terms.

More importantly, we now have Tier 2 issuances available as a tool to improve the distance to our tightest regulatory capital requirement.

Our leverage ratio was 4% at quarter end as described on Slide 20.

The ratio declined 21 basis points in the quarter.

This decline was principally driven by COVID-19 related impacts, most notably, increased drawdowns on credit lines, as already discussed in the liquidity section, and higher net derivatives and trading exposures and an atypical increase in pending settlement balances of around EUR 20 billion, which came on top of the usual seasonal increase in pendings post the year-end low, which we do not include as COVID-19 related.

Other changes in the quarter reflect mostly seasonal balance sheet increase including a further rise of approximately $20 billion in pending settlement claims and other seasonal movements in our trading-related balances.

These other more seasonal effects were materially offset by the benefit to our leverage ratio from our USD 1.25 billion AT1 issuance that we completed in February.

At 4%, our reported leverage ratio is well above the requirement of 3% that is currently scheduled to be introduced by mid next year.

This is despite our ratio being burdened by around 20 basis points of temporary effects from pending settlement balances, which were reduced to near 0 with the introduction of CRR 2 next year and bring us in line with current treatment for U.S. and Swiss banks.

In addition, we have around 10 basis points drag in our ratio from the prime finance platform being transferred to BNP Paribas.

Our leverage ratio is already above the requirement of 3.75% which we so far expected to come into play from the start of 2022.

It is now likely to apply from January 2023 following the European Commission proposal earlier this week for a change to the regulation.

Excluding Central Bank cash from leverage exposure, also consistent with the European Commission's proposal, would, if implemented, increase our leverage ratio by approximately 20 basis points.

We continue to operate with a significant loss-absorbing capacity well above our requirements, as is shown on Slide 21.

At the end of the first quarter 2020, our loss-absorbing capacity was EUR 18 billion, above the minimum required eligible liabilities or MREL, our most binding constraint.

We have significant buffers and are among the few European global systemic important banks or G-SIBs that already comply with fully loaded MREL requirements.

Our buffer has reduced with the balance sheet expansion, which includes a seasonal increase in pending settlements and loan growth.

In addition, we saw a slight reduction in our eligible senior nonpreferred securities as certain maturities fell below 1 year.

We continue to operate with a comfortable surplus above our requirements and have sufficient headroom to absorb the upcoming regulatory and methodology changes, which will become effective in 2021.

These proposed changes include the switch from the Total Liabilities and Own Funds or TLOF to an RWA based calculation.

The surplus also gives us flexibility to reduce our issuance plan for this year, as will be discussed on the next slide.

During the first quarter, we issued EUR 5.6 billion, primarily euro and sterling senior nonpreferred issuances in January and U.S. dollar AT1 issue in February.

The issuance of AT1 was designed to support the call of a legacy Tier 1 instrument, the USD 800 million DB Contingent Capital Trust II.

We now expect to issue EUR 10 billion to EUR 15 billion in 2020, down from our previous EUR 15 billion to EUR 20 billion assumption.

The reduction is driven by 2 factors.

First, our senior nonpreferred issuance plan is informed by multiple constraints, including TLAC, MREL and rating considerations.

As our latest outlook has sufficient headroom across all of those, we intend to issue less senior nonpreferred than originally anticipated, while preserving a significant surplus over the TLAC and MREL requirements.

Second, we will make use of the various Central Bank facilities including TLTRO-III to raise part of our funding.

The majority of our remaining 2020 issuance is likely to come in senior preferred, structured or potentially covered bond issuance.

This reduced issuance requirement allows us to be flexible in terms of timing and market conditions.

We will continue to review our issuance needs and consider Tier 2 issuance to manage our MDA buffer in light of changes to Article 104a.

In conclusion, on Slide 23.

The improvements in our technology allow us to more accurately and effectively manage and allocate our resources, our balance sheet is low-risk and funded by highly stable sources.

We have excess liquidity, capital and MREL above our regulatory requirements and our refocused strategy, operating in businesses where we are market leading, has put us in a strong position to support our clients as they need it.

We will also continue to look for ways to further improve the efficiency of our balance sheet, and this includes ongoing progress on our deposit repricing programs as well as the optimization of our liquidity resources.

We will also continue to maintain adequate buffers above all regulatory requirements under which we operate.

In short, we believe that we are well positioned to deal with the current challenging environment.

With that, let us move to your questions.

(Operator Instructions) First question is from the line of Richard Thomas from Bank of America Securities Europe.

A couple of questions, 2, 3 questions for me, if I may.

Just on the liquidity reserves and they really are down quite a lot.

If you think a year ago, they were at EUR 260 million and now they're at EUR 205 million.

So there's been an awful lot of movement there.

Can you be a bit more specific about where we're heading in terms of the use of this important liquidity buffer?

And will we ever return to anything like the high levels that we've seen in 2019?

First question.

Second question, we hear you on lower issuance this year, potentially even lower now that ECB has made all these announcements just this afternoon.

Next year is a bumper year for senior nonpreferred redemptions, I should say.

There's EUR 18 billion.

I know some of that will be running out of the ratios this year.

But is it likely that you will have a big year for SNP issuance either later this year or actually next year?

And then finally, what are your thoughts on what you have to do or not to do to stay investment-grade at senior nonpreferred level?

Richard, thank you, and thank you for joining.

I'll take those in turn.

With regard to liquidity reserves and LCR, you'll recall that we've built up a significant surplus of liquidity from the end of '16 onwards.

As we've improved our capabilities, as we've announced the strategic restructuring of the firm last July and been executing on the restructuring that afforded us the flexibility to actually run with lower levels of liquidity reserves, but still with sufficient surpluses to all of our minimum criteria.

So whether it's -- the surpluses that we've had on MREL, the significant surpluses that we've had on TLAC, surpluses on our -- to our own risk appetite at an internal level or with LCR, where even through arguably what is one of the most severe crisis we've seen, we had a EUR 43 billion LCR surplus at the end of the first quarter.

So I think we've been quite deliberate in managing down excesses and we've done that through continued investments in our data, our technology, our governance and, of course, executing on the restructuring of the firm as well, which has tilted us to a much more stable funding base.

And all of those in aggregate, have helped us in really the lead up into March of this year.

To answer your question on, do we return to those high levels, I'd reiterate that our business has usual targets in the region of around -- an LCR of around 130% and liquidity reserves of around EUR 200 billion.

Given that this represents over EUR 40 billion of excess at these levels, we are comfortably set up to even absorb a second stress that is similar to the recent environment that we've had.

It is hard to say, of course, when this market environment will change and how long this environment will prevail, but we do intend to work closely with our clients to support them as Christian reiterated yesterday.

And throughout that, we'll continue executing on our business strategy as well.

And if necessary, we will operate below -- on a temporary basis below the stated targets, but of course, always above our minimum levels.

Regarding your question on issuance for next year, the first is, I'd say, we do not need to refinance the full EUR 18 billion of senior nonpreferred maturities next year.

Partly, that's because the EUR 18 billion really falls out of our MREL calculation during the course of this year.

As an example, EUR 8 billion already fell out during the first quarter, and the remainder will be derecognized during the course of this year.

So that's very much embedded into our planning into 2021.

And that partially drives the EUR 10 billion to EUR 15 billion revised outlook we've now given for funding for the year, which includes about EUR 3 billion to EUR 6 billion of senior nonpreferred funding.

We do intend to reduce that surplus through the course of this year.

I would point you to our 2022 maturities of EUR 8 billion, which I think would be a better guide for what normalized potential new issuance is likely to be.

On your third question, really around ratings, James?

I was going to add to whatever you had to say, but you go ahead.

So what I would say is that we've -- we're maintaining not only all of our regulatory criteria that we're managing to, but also naturally ratings agency constraints and I have been quite deliberate with our funding plans throughout to ensure that we've been robust.

You would have also noted the consultation that's out from Moody's around potential changes to the LGF.

I don't really want to preempt any outcomes from that, but that does also have the likelihood of some positive benefit for us on senior nonpreferred, but again, depends on the final outcome.

And what I was just going to add is, it's James.

The -- first of all, as you'd expect, we've had a very sort of engaged and frequent dialogue with the rating agencies as we have gone through this crisis, and the industry has gone through this crisis.

We intend to maintain that dialogue.

I think the answer to your question is if we simply execute on our strategic plans, we will deliver on the key element here of our rating stories, which is moving the company to sustainable profitability.

There is a comfort with our balance sheet, the risk management and other aspects of the rating story.

I think beyond that, if I were to look for a silver lining in the dark cloud that we're all sort of living through, it's that we hope that this crisis will give us an opportunity to demonstrate that the focused business model, the conservative balance sheet management that we've talked about, the risk management and risk appetite discipline that we have is pressure testing the company, and that will give investors as well as rating agencies, some kind of real-world proof of the company's resilience in an environment like this.

Hope that answers the 3 questions.

Next question comes from the line of Brajesh Kumar from Societe Generale.

I've got 2 questions, please.

First one is on your MDA hurdle.

I see that you have adjusted for Pillar 2 composition and countercyclical buffer.

But why would you not use capital conservation buffer relief while calculating this?

It seem that all of your Austrian peers today has exactly done that, but why do you shy away from doing that?

And my second question is on provisions.

What's your best estimate of the provisions would have been without any government guarantees?

And how much you think will be the percentage government guarantees loan will you end up having on your books?

So Brajesh, the line was a bit faint.

So if we haven't got the questions right, please do let us know.

I'll take the first and James will take the second.

On the first question, as you point out, we have taken into account the countercyclical buffer as well as the changes that arise from 104a and the ability to use AT1 and Tier 2 to fill our Pillar 2 requirement.

We've also noted the statements from the ECB that the capital conservation buffer might be used in the crisis.

But quite frankly, at this stage, that is not something that we have factored in or necessarily rely on.

So we do not see that the capital conservation buffer at this stage can be excluded from MDA.

On the government guarantee point, we -- as we said yesterday on the call, IFRS 9 provisioning made only a few adjustments to the typical kind of granular bottoms-up process, one of which was the -- that we considered for certain obligors in the most affected sectors where there was the possibility or likelihood of government support for those obligors.

That potential government support or the impact of that support in our ratings adjustments.

I would say it had a modest impact, frankly, on what the IFRS 9 reserve might otherwise have been.

So not the largest part of the sensitivities here.

But it is a factor that we think is appropriate to understanding the credit worthiness of the obligors in our book in this environment.

Okay.

And then what about that question on what percent of government guarantees loan, you think, will you end up having?

I'm sorry, it is hard to hear you.

It's faint -- the line.

I was just asking you what percent of government guarantee loans, you think, will you end up having on your books?

I see.

Look, the balances are growing.

I think probably -- it depends on which program I'll start with.

The KfW programs are divided by segment.

Some of them are essentially grants.

Some of them are 100% guaranteed.

Some of them are 80% KfW and 20% of the lending bank.

We think it's relatively considerable in the -- at least single digits potentially in the double-digit billions that we will be disbursing in these programs.

And that's I think part of -- as we talk about our -- the commitment to society to support those programs, those assets end up on our balance sheet, as we say, with a modest risk to us, although they obviously are leverage exposure for a period of time that's with us and is part of the increase in the balance sheet.

So they're essentially recorded as loans even though the risk piece of it is more modest.

Next question is from the line of James Hyde from PGIM.

Yes, I've got 2 questions.

One of them is Page 28 of the report and the paragraph a few pages after.

Stressed net liquidity position.

What does it mean when that's gone to negative?

Is that -- I mean is the swing of 36 billion minus, which is technically more than the decline in the HQLA.

So is that basically now assuming that there's greater derivative -- greater postings for downgrades that have to happen with a greater degree of collateral posting?

And how are we meant to read this swing to negative in that ratio?

That's the first question.

Secondly, I mean I don't know if you had a chance of the kind of disclosures that we get from U.K. banks.

But I mean, today, I wanted to ask about -- in terms of the Stage 1 and 2 or scenario ECL provisions, I mean there's 1 bank today, Lloyds, for instance.

It says, this is what the stock of provisions should be with a 10% probability if we get to a particularly or what they say is the worst outlook -- outcome they're looking for.

And that -- you can add the provisions that has to be added on for that.

Can we sort of have any indication of -- in terms of your worst scenario, how much more you have to increase the stock of provisions by, in that scenario?

Is there a sort of number we can sort of hang our hat on and -- to compare to preprovision profit, et cetera?

That's it.

James, this is Dixit, here.

Thank you for joining.

As I've said in our remarks, that we have been quite pleased with the way our liquidity, our modeling and our risk management is really functioned through what was an extraordinary stress period.

To begin with, internal stress measure or SNLP being an 8-week measure for an extreme stress, gave us a very clear and a fairly early indication of movements arguably faster than the regulatory stress test.

Second, we do think that the test is conservative in many ways.

For example, the way liquidity resources in branches and subsidiaries are treated, it essentially means we manage in normal times with fairly healthy buffers at the parent level.

And as you think about the number, important to realize that being an 8-week stress, it effectively now captures a second hypothetical 8-week systemic and idiosyncratic stress in addition to the one that we have just gone through, which you see manifesting in our numbers.

Also, the measure being conservative does not give any credit to future or current additional collateral mobilization from central banks nor does it include resources that are trapped or held at subsidiaries and branch level.

I must also say that when looking at the components of the model, our liquidity risk drivers that inform the model all performed far better than model, while committed facilities were roughly in line.

So all said and done, coming out in a reasonably good position at the end of the first quarter.

And James, it's James.

The ECL sensitivity or expected credit loss sensitivity is sort of an interesting science.

I don't want to go into sort of worst cases.

What I can assure you is that from the very earliest days of the crisis, our risk colleagues have been analyzing the portfolio against the scenarios and looking at downside scenarios and updating that analysis dynamically through the process.

But I will give you sort of -- if I think about the sensitivity of the expected credit loss to some of the variables, it tends not to be all that sensitive to individual variables.

And that's why, as we -- on yesterday's call, we talked a little bit about our outlook in terms of provisioning.

But to give you an example, if the eurozone GDP were 1% worse than our forecasts, the corporate and sovereign portfolio would move in ECL terms by about $35 million.

So these are not huge numbers.

Now ECL is a multifactor variable.

There are other portfolios.

And so there clearly are sensitivities here.

But in orders of magnitude, they're quite manageable as we look into the future.

Great.

Thanks.

Just to understand Dixit's answer.

Okay.

So if the stress liquidity -- net liquidity position.

I'm trying to think this through.

So if you had, let's say, a TLTRO tender date that came in this 8-week period.

I mean, does that mean you can just build up the -- that position could be improved because TLTRO is like 3 years and that just makes up for this liquidity?

Or am I -- I mean, is the use of that collateral for other Central Bank facilities already assumed in that calculation?

No, James, we don't assume reliance on Central Bank facilities.

But of course, those are available for use, especially given the expanded facilities that we've seen.

I'd also point out that we hadn't raised incremental funding to address the negative level, given we're quite comfortable with both our liquidity profile, the forecasting ability that we had, the commitment facilities, data improvements going to intraday in some cases that we had and so felt quite comfortable.

The other point I'd mention is that the point of the internal stress measure is to allow us to adequately position liquidity reserves prior to any crisis arising and not really to react in the middle of a crisis.

And so that's really what the measure has allowed us to do.

It's -- we've prepositioned adequate liquidity on the way in.

And over time, as client behavior normalizes and our balance sheet normalizes, we'd expect to restore SNLP back to previous levels or above risk appetite.

Next question is from the line of Robert Smalley from UBS Fixed Income.

A lot already been asked and answered.

A few questions on the asset quality side.

In terms of what we saw in the last quarter, I know you spoke about in the other call about a lack of deferrals among German clients, but one, on the trading side, did we see any issues with counterparty -- trading counterparties collateral calls or any other kind of restructuring of relationships there?

Were any structured note covenants breached, given the movement in the market?

That's one.

Two, on price of oil, when you're probably looking at this at first, we saw the big decrease in the price of oil.

Now we have a much lower for longer kind of scenario ahead of us.

How does that change how you're looking at your oil and gas exposure?

And then lastly, on commercial real estate.

Could you give us a little geographic breakdown?

Looking at Slide 14, and while I'm assuming German customers come under the mitigation programs that you outlined, I'm also thinking that a lot of your commercial real estate is outside of Germany in the states potentially, what are tenants saying at this point?

Are you restructuring relationships there?

And in the past, you've been a big lender to Las Vegas and Atlantic City, which have suffered a big drawdown in terms of tourism.

Could you address all of that?

Robert, so I'll do the first 2, and then James can take the third.

Very important for us when we started seeing some of the early signals of a stress.

And a stress model, as I mentioned earlier, gave us some of that indication and it gave us that indication towards the end of February, this helped us start prepositioning and taking management action that would allow us to accommodate some of the drawdowns that we were seeing or that we expected to see.

As part of our sort of health check on a daily basis is to really watch exactly what you've been saying, which is margin calls, whether that's clients posting margin to us, whether it's Deutsche Bank posting margin to other counterparties, the health of the clearing system more widely, together with flows of both collateral and cash between clients, ourselves, clearers and custodians.

And in spite of what was truly record volatility and movement, which naturally resulted in a higher volume of margin calls as well as a higher -- absolute magnitude of modern calls, the health of the financial system and including, from our perspective, was actually quite good.

There were hardly any major outages across the system in terms of fails, settlements, brakes, et cetera.

And so that's something that we monitor fairly, fairly closely.

In terms of covenants, structured notes, as you know, commodities is not a business that we have, and we had divested out of a while back.

I'm not aware of any sensitivity we've had through the period to really oil, in particular, related to liquidity.

But in aggregate, it is something that we monitor along all of the other margin calls that we have.

We're also in close contact with all of the CCPs and the clearing houses, given the significant percentage of the industry exposure that is now migrated to the CCPs over the years, and once again, I've seen no signs that would concern us certainly not even at the peak in March.

And so Robert, just to build on what Dixit just said about the margin calls and what have you, we were very pleased, gratified at the operational resilience that our organization showed in managing collateral disputes, calls, settlements and what have you.

And so in light of the circumstances, it was extremely smooth and credit to our people who manage those processes.

On oil and gas, as we said in our earlier remarks, our exposures there are quite manageable, skewed to the investment-grade and majors.

You may recall that we essentially exited oil and gas in the -- in North America a few years ago and sold those portfolios.

So our overall exposures there are much lower than, if you like, an industry -- a typical industry sort of portfolio would be at.

Commercial real estate, obviously, is a significant business for us, and we disclosed on Page 13 the -- in the slides, the exposure, that is sort of skewed towards what we -- sort of major city, high-end commercial real estate and as we point out, with relatively low loan to values.

The casino and gaming exposures are -- we do have some, but it is a much more modest level than it has been in previous years, a decade ago.

I hope that's helpful.

And just geographically, to give you a sense, the CRE portfolio is about 60% North America or U.S. and the balance, of course, rest of world, with a fairly significant portfolio in Europe and Germany.

Next call is from the line of Lee Street from Citi.

Three questions from me, please.

Firstly, just on the focused industries that you highlight on Slide 14.

I think that's just -- that's for your loan book.

Are there any sort of quantifiable exposures outside the loan book that you can give us a note -- just give us a context for those in regards in the investment bank or trading books, et cetera?

Secondly, on stage 2 loans, there was a sort of a decent uptick in those in the quarter.

Any comments on what drove the increase?

And just why the level of provisioning attached to the increase and Stage 2 didn't really seem to match the level of increase in the Stage 2 loans?

And just finally, does these or current period of market weakness, does that impact or harm your ability to achieve your, I guess, deleveraging goals for the noncore unit?

That would be my 3 questions.

Sure.

Lee, thanks for joining us.

So in terms of other exposures that are of a credit nature, of course, in the derivative books, counterparty credit is a feature something that's managed and hedged, and we feel very comfortable with.

In the trading books, we obviously have a large credit trading, both business.

Those are fair value books, and so go through rigorous price controls and monthly quarterly valuation processes including with our auditors.

And so those are essentially -- changes in those valuations are essentially recognized upfront.

So I think those are the areas of significant additional, if you like, credit exposure that's on our balance sheet.

On the Stage 2, there obviously is a migration of Stage 1 to Stage 2 that takes place based on Stage 2 triggers and associated reserving.

And there's also a migration into Stage 3 of elements of those reserve balances.

It's sort of a feature of IFRS 9 that the removal of obligors from Stage 2 into Stage 3 changes the reserving, and there's not a one-to-one then relationship between the Stage 2 reserves and the Stage 3 reserves in that flow.

So you can see some changes, ebbs and flows between those balances over time.

On the deleveraging, we -- obviously, we are looking at the market environment very carefully and working with through the CRU with both counterparties and clients to continue on our path and not be disruptive in that deleveraging.

We're actually quite comfortable that the market environment, at least based on what we're seeing today, won't disrupt that path.

We -- there was obviously a pause in March as people sort of adjusted to work-from-home and the changed circumstances.

But we have resumed auctions.

We've resumed our engagement with counterparties.

And actually, the pause gave us an opportunity to catch up on some of the operational processes around novation and what have you.

And so there's continued progress then on the deleveraging that comes between transactions or bargains that are agreed and the balance sheet recognition in the derivative book of the deleveraging.

So a lot of work underway.

It was anyway, our planning was sort of skewed to the second half.

And we think in some respects, the market can offer some opportunities in a derivatives book to accelerate not only to slow down deleveraging.

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

Few questions from me.

One is on market rate.

I noticed that you took a benefit of the ECB release.

So without quantifying what the impact would have been, can we get assurance that the back testing exceptions will be essentially ignored and essential -- pretending they never happened and we'll never have to make it back to the model even once the temporary period is finished?

And also, can you give us some comfort that you are using this time to reduce your market risk at the same time as opposed to making the most of this period when you're using the old models and running with higher number of exceptions on a daily basis?

So that's number one.

Number two will be on cost.

I appreciate you're doing a great job actually reducing the cost.

But if we took the situation a bit to extremes, would you -- I mean, obviously, you -- given the nature of the business that you have, there is some variable compensation there.

Is there some slack there, is there some flexibility that you have in your mind where you could actually reduce the cost, increase the pre-provision profit without impairing the franchise significantly?

And I mean by that, reducing it in a relatively quick way.

And finally, on the Stage 3 loans, I mean, I was kind of curious in thinking whether you could give us any comfort in -- well, in any way, where the loans would have been or where the provisions would have been, had there not been any government measures, so that's one, or maybe to ask differently, and this is more about mechanics.

Say you have a client which is facing problems, it's an existing client.

Obviously, you have now a client, you have access to KfW line.

Can you actually go and refinance the existing lines with KfW loan and effectively transfer the credit risk on to KfW?

So let me try to tackle those quickly.

So as we said yesterday, the change in the ECB treatment of the multiplier offset the impact of our outliers.

And while that the former may be temporary, obviously, it's for the ECB to judge whether that becomes permanent or whether it outlasts the period of time over which the outliers would create, if you like, inflation in our multiplier.

I would also add that we are in the process of updating our models and framework.

And there may be changes then to the market risk RWA that go with that, if you like, upgrade of our capabilities there.

So other movements.

And there's also, as you know, the averaging.

So one would expect market risk RWA to increase in Q2, reflecting the averaging impact, which is a 60-day impact and the March volatility, the April volatility feeding more fully into the RWA number.

On costs, as you'd expect, we are looking at all levers to manage our cost base in a way that helps us to offset the likely impact of this COVID environment both on revenues and loan loss provisions.

And that's something -- work has been underway on that for several weeks.

And management is committed to doing everything in our power to offset the pressure on the P&L coming from this environment and therefore, protect capital.

As it relates to Stage 3, I guess a couple of things.

The KfW program, there is a credit process that has to be entered into by the extending bank.

So it isn't without a credit assessment.

And naturally, with the 20% that we hold as an incentive to make sure we make good credit decisions, there's also an expectation that the corporates would use not just those facilities to manage their liquidity would also use existing bank facilities or other capabilities.

Ultimately, if borrowers get into difficulties, the outcomes would be similar in terms of workout of troubled loan exposures that we do in the ordinary course.

So we work with obligors in the ordinary course of these processes, and we would expect to do that in this instance as well.

I hope that helps with your questions, Jakub.

(Operator Instructions) The next question comes from the line of Tom Jenkins from Jefferies.

Most of my questions have been answered, certainly all the technical ones.

Just if I may, can I ask for a little progress report on the PFK merger, where you're at, what our timing expectancy should be on that?

And also what it means for debt issued out of the old PFK or Deutsche Postbank?

Tom, yes, sure, the merger remains on track for me.

All from a debt perspective, as would occur in a merger like this, issuances that are currently obligations of PFK, now whether that's senior preferred, preferred, depositors or any other obligations that the PFK entity has, would become obligations of DBAG.

And those would rank pari-passu with the respective elements of the credit hierarchy and DBAG.

So we see that as quite a smooth process into May.

Okay.

So then there's no confusion or contention around old PFK bonds, especially the deeply subordinated ones causing an issue in terms of their being Delaware law and complications around that as a transfer of obligor being a material fact.

That's not been an issue, is it?

Not something that we have -- it's not something that's hit our radar and certainly not our expectation that, that -- the transfer of obligations would not occur quite smoothly.

Next question is from the line of Daniel David from Autonomous.

Just a couple of quick ones.

Could you just comment on your Tier 2 issuance plans, given you've got a transitional shortfall that appear to be taking the full benefit of the Pillar 2 104a dilution?

And then secondly, just like -- to touch on LCR again.

Could you give us any color of what LCR looks like in dollars and euros, not just the high level number?

Daniel, yes.

So on the first on Tier 2, as you point out, we have now the flexibility to issue Tier 2 to the extent that we'd like to fill Pillar 2 requirement with either Tier 1 or Tier 2. I wouldn't say there's a transitional shortfall.

I mean, with a 240 basis point buffer at a CET1 level and 155 basis point buffer at the total capital level, that does leave us fairly well positioned with where we are today.

That said, we do have the flexibility now to consider Tier 2 issuance.

And naturally, as you'd expect, it's something that we will be discussing and considering through time.

From an LCR perspective, our most binding constraint on LCR is really LCR at a group level on an all currency, consolidated basis.

The currency comparisons become fairly tricky, especially given that one has the ability to switch, whether directly through the cross-currency market from one currency into another or tapping Central Bank facilities, for example, the ECB dollar facility, which would also be able to boost one currency over another.

So we do manage our liquidity internally by currency, and we have a number of internal risk metrics and risk appetite levels by currency.

And we do maintain a robust profile in all of the major currencies.

But from an LCR perspective, don't necessarily break that down externally.

I hope that's helpful.

There are no further questions at this time, and I would like to hand back to James Rivett for closing comments.

Please go ahead.

Thank you, Stuart, and thank you, everyone, for joining us today.

The Investor Relations team is available for your follow-up questions, just reach out.

Otherwise, stay healthy.

Ladies and gentlemen, the conference has now concluded.

You may disconnect your telephone.

Thank you for joining, and have a pleasant day.

Goodbye.