Deutsche Bank AG (DB) 2020 Q3 法說會逐字稿

Ladies and gentlemen, welcome, and thank you for joining the Q3 Fixed Income Call. (Operator Instructions) And I would now like to turn the conference over to James Rivett. Please go ahead.

Thank you, Haley. 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. We'll then be happy to take your questions.

The slides that accompany this presentation are available for download from our website, db.com.

But before I get started, I just want to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect. Therefore, please take note of the precautionary warning at the end of our materials.

With that, let me hand over to James.

Thank you, James, and welcome from me. Let me start with a summary of our third quarter financial performance compared to the prior year on Slide 3.

We're pleased with our performance in the quarter and in the first 9 months of the year despite the challenges that the COVID-19 pandemic has created. As Dixit will discuss later, our balance sheet remains conservative with strong capital and liquidity. We were profitable in the third quarter and in the first 9 months of the year, with results ahead of our internal plan.

In the third quarter, we generated a profit before tax of EUR 482 million, or EUR 826 million, excluding specific revenue and cost items detailed on Slide 39 of the appendix. Provision for credit losses of EUR 273 million returned to more normalized levels this period. The provision included EUR 71 million related to COVID-19 as a Stage 3 build was partly offset by releases in Stages 1 and 2. The releases were driven by the improved consensus macroeconomic outlook in the quarter, partly offset by a higher management overlay to account for uncertainties in the outlook.

Operating leverage was strong at 23% on a reported basis as revenues increased by 13%, while noninterest expenses declined by 10%.

Let me discuss the drivers of improved profitability, starting with revenues on Slide 4. A core objective of our transformation is to stabilize and then grow revenues. We've grown group revenues by approximately EUR 0.5 billion over the last 12 months. The increase has mostly been driven by the Investment Bank, where we have benefited from client reengagement around our refocused strategy and strong market conditions. We see a substantial part of the Investment Bank revenue performance to be sustainable. We see this in Core Bank revenues, which have increased to around EUR 24 billion over the past 12 months. This puts us close to the plan of EUR 24.5 billion that we described at the last investor deep dive as part of our path to the 8% return on tangible equity target in 2022. But we are not complacent. We will continue to work on measures to offset the interest rate headwinds and the further anticipated normalization of market conditions in Investment Banking.

Turning now to our progress on cost reductions on Slide 5. We have delivered 11 quarters of year-on-year reductions in adjusted costs, excluding transformation charges and bank levies. Excluding transformation charges and Prime Finance costs, adjusted costs were EUR 4.7 billion in the third quarter. This puts us well on track to meet our 2020 target. This would be a reduction of EUR 3.3 billion, almost 15% over the past 2 years.

The disciplined execution is becoming increasingly visible in our profitability, as you can see on Slide 6. A core objective of our transformation is to improve sustainable profitability. That means generating positive operating leverage by growing revenues and, at the same time, reducing costs. We've generated positive operating leverage for 4 quarters in a row at both the group and the core bank level. This operating leverage has driven significant improvements in Core Bank profitability. The improved Core Bank performance has increasingly offset the negative impact of the wind down of the capital Release Unit. Over time, more of the Core Bank's profitability should flow to the group's bottom line as we continue to progress on our transformation agenda and provisions for credit losses normalize.

All 4 of our core businesses generated positive operating leverage, as you can see on Slide 7. The operating improvements were driven by disciplined execution of our strategy, as each business seeks to increase its return on tangible equity. Both the Corporate Bank and the Private Bank have implemented measures to offset the interest rate headwinds. The Investment Bank benefited from a recovery in revenues, combined with ongoing cost reductions.

In Asset Management, DWS has shown its resilience with a rebound in revenues, driven in part by net asset inflows as well as ongoing cost reductions. This operating leverage was also not at the expense of resource discipline.

Over the last 12 months, risk-weighted assets were broadly flat or slightly down in each of our businesses. This discipline around risk-weighted assets is a key element of our commitment to conservative balance sheet management, which we discuss on Slide 8. As we execute on our transformation, we will continue to manage our balance sheet conservatively. We held our CET1 ratio broadly stable at 13.3%. Liquidity reserves increased to more than EUR 250 billion, with a liquidity coverage ratio at 151%. These metrics are comfortably above regulatory requirements.

Performance in our loan portfolio since the first quarter supports our guidance for the full year. We still expect provision for credit losses to be in a range of 35 to 45 basis points of loans. We reiterate this guidance despite the recent renewed uncertainties in the macroeconomic outlook. This compares favorably to our international peers, reflecting the high-quality nature of our loan portfolios and tight management of credit risk. It also reflects the fact that around 50% of our loan portfolio is in Germany.

Before handing over to Dixit, let me summarize the key points on Slide 9. It is now 5 quarters since we launched our strategic transformation. And for the fifth quarter in a row, we've delivered on or ahead of our financial targets and transformation agenda. The combination of higher revenues and lower costs is driving higher Core Bank profitability. This positions us well to deliver against our long-term targets.

With that, let me hand over to Dixit.

Thank you, James. Let me start with a summary of our net balance sheet on Slide 11.

Our resilient balance sheet has allowed us to manage through the pandemic while keeping our transformation on track. Liquidity reserves account for 25% of the net balance sheet. Our loan-to-deposit ratio at 75% provides significant room to prudently grow loan balances in coming periods. And our funding profile remains well diversified. The most stable sources were at 81% of our net balance sheet, or 85%, including TLTRO. Low-cost deposits are our main funding source contributing almost 60%, and we have steadily reduced our reliance on unsecured wholesale funding, which is now less than 2%. In addition, we have reduced our long-term debt by EUR 4 billion and replaced it with cheaper sources, including TLTRO-III.

Moving to liquidity on Slide 12. Both our reserves and the liquidity coverage ratio increased in the quarter. This is primarily a result of the excess liquidity in the financial system and reflects a trend that we have seen across the sector. Loans declined by EUR 9 billion, as clients continued repaying committed facilities that were drawn earlier this year. Core Bank deposits increased by EUR 3 billion, partially offset by EUR 1 billion lower wholesale funding deposits. Higher net derivatives margin received, methodology enhancements and further deleveraging in the Capital Release Unit also contributed to the increase in liquidity. As a result, we ended the quarter with liquidity reserves of EUR 253 billion and a liquidity coverage ratio of 151%.

The excess liquidity gives us the capacity to support our clients as and when demand for additional lending increases. Over time, and in response to customer demand, we do intend to prudently manage back our liquidity towards target levels.

Slide 13 provides you with some context around how we think about this year's growth in excess liquidity and visibility around how we have managed those costs. Liquidity reserves have increased by EUR 31 billion year-to-date. A large driver of this year-to-date increase is from TLTRO funding, consistent with our European peers. We've increased our net participation during the year by EUR 20 billion. Current funding rates are attractive, in line with the ECB's deposit rate facility.

In the first half of 2021, the funding rate will reduce to 50 basis points below the facility rate, subject to our achievement of the ECB's loan growth targets. This shows that while our liquidity levels have increased over the course of the year, we operate at significantly lower costs than in previous years. In addition, we are also working to improve the composition of our deposit base. While total deposits are only slightly up year-to-date, we have managed to reduce unsecured wholesale funding and nonoperating Corporate Bank current accounts while growing most stable retail deposits.

Management of our deposit base is important to optimize the funding mix of the bank but also to support revenues from charging client balances as we show on the next slide.

We continue to make substantial progress in passing through negative rates to our Corporate and Private Bank customers. This has not only allowed us to control volume growth but also helped to offset continued revenue headwinds from the lower interest rate environment. At the end of the third quarter, we are charging agreements in place for accounts with, in total, around EUR 75 billion of deposits, generating revenues of EUR 57 million. We currently expect these charging agreements to generate around EUR 200 million of revenues this year, well ahead of the target we originally set for 2022.

Looking ahead, given our progress to date, focus will increasingly shift towards smaller client balances. The trend of deposits in scope for deposit charging as well as the associated revenues is, therefore, expected to flatten in the coming quarters.

Looking now a bit closer at our capital ratios, starting on Slide 15. Our CET1 ratio was 13.3% at quarter end and increased by 2 basis points in the quarter. Progress in the Capital Release Unit, lower operational risk RWA and repayment of client credit facilities were broadly offset by movements in OCI and growth in co-bank RWA. The buffer above regulatory requirements for the CET1 ratio increased by 2 basis points to 285, as shown on Slide 16.

Our total capital ratio was 17.6% at quarter end, EUR 8.4 billion above our MDA minimum requirement. The buffer increased by 14 basis points in the quarter to 259 basis points. This increase was mainly driven by lower risk-weighted assets and our Tier 2 issuance settling in July.

Our leverage ratio was 4.4% at quarter end, an increase of 28 basis points, as shown on Slide 17. The increase reflected the exclusion of certain central bank balances from the leverage ratio denominator, following the implementation of the CRR quick fix. The change in definition was partly offset by growth in our businesses.

We continue to operate with a significant loss-absorbing capacity well above our requirements, as shown on Slide 18. At the end of the third quarter, our loss-absorbing capacity was EUR 17 billion above the minimum requirement for eligible liabilities or MREL, our most binding constraint. Given our significant buffer, we are well positioned to absorb several items impacting our loss-absorbing capacity in 2021. These include the derecognition of bonds issued under U.K. law, following Brexit, of EUR 4 billion; a reduction of EUR 4 billion in eligible liabilities as certain instruments fall below the 1-year maturity threshold; the switch from a TLOF-based to an RWA-based MREL requirement and a higher subordinated MREL requirement becoming applicable post changes in European law. We will partly offset these reductions by further new issuances, which we'll discuss on Slide 19.

Since our last call, we issued EUR 4.5 billion, including euro and U.S. dollar senior nonpreferred instruments in a TLAC-optimized format. This now takes our year-to-date issuance to close to EUR 14 billion and largely completes our 2020 requirements. We raised a further EUR 4 billion TLTRO-III funding in the quarter, offset by the repayment of EUR 5 billion of legacy Central Bank funding. This increased the tender of our Central Bank funding, while lowering the associated costs. We now have EUR 34 billion of TLTRO-III funding outstanding and expect to increase our participation to around EUR 40 billion, the maximum allowance.

In framing our issuance plans, we will, as always, be mindful of the larger contractual maturities next year, our MREL requirements, regulatory changes as well as continuing to meet ratings agency criteria. We are currently in the strategic planning process, which will also guide our resource needs.

As in prior years, we look forward to updating you at the next quarter's fixed income call regarding our 2021 issuance plans. We may consider prefunding some of our 2021 requirements in the fourth quarter of this year, depending on market conditions.

In conclusion, on Slide 20, our balance sheet remains low-risk and funded by highly stable sources. On the CET1 ratio, uncertainty remains regarding the economic environment, client behavior and regulatory actions. But given where we ended the third quarter, we are confident of maintaining the ratio well above our 2022 target of 12.5% in the near term.

You may have seen that Fitch has upgraded our additional Tier 1 instruments by one notch earlier this month. This upgrade reflected the higher capital levels and buffers above regulatory requirements. We're happy about this action in the current environment. We view this as an important signal that our stakeholders acknowledge the significant progress the bank has made over the last few years.

On liquidity, we expect to prudently manage down our excess liquidity towards our target levels over time, but given the attractive TLTRO conditions, we are under no time pressure.

As James outlined, we continue to expect provision for credit losses of 35 to 45 basis points of loans for the full year.

In summary, we will continue the disciplined execution that you have seen from this management team over the next -- over the last few years. Execution on our short-term objectives keeps us on the path to deliver our 2022 targets. These include a significant improvement in organic capital generation, with a target of post-tax return on tangible equity of 8%.

With that, let us move to your questions.

(Operator Instructions) And the first question comes from the line of Robert Smalley of UBS Fixed Income.

A couple of questions related. First, you have a slide on VAR on Page 30, and it was the -- one of the measures is elevated for the second and third quarter. Now that we have somewhat more normal trading conditions in the market, do you see that coming back down to the levels Q3, Q4 of 2019? That's my first question.

Second question, just kind of a follow-on to that, you guys have done great in trading the past couple of quarters. But on the net interest income side, been a bit squeezed from margin compression. As we have a more normalized trading environment, what are the plans to improve the net interest income side?

And third question, just on the provisions following up on a question on the equity call and looking at the larger disclosure on Page 29. It reads to me that you made a significant management judgment call on provisioning, given the economic environment and the probability of higher nonperformers down the road. Could you talk about your thinking and everything that went into that?

Sure, Robert, it's James. Thanks for joining. I'll go for the first and the third questions and then ask Dixit to comment on net interest income.

First of all, VAR. The trends you've seen have not been around more risk taking, but rather the market conditions and volatility. So while we have seen some normalization, and we would expect that normalization to continue, of course, it depends on market conditions from here.

Briefly, a comment on the hist-sim numbers that you see on the second of those 2 pages, and you will have read about in the earnings report disclosure, obviously, hist-sim different model reacts differently to the, and more sensitively, to volatility in the marketplace. But one thing I'd point out is, now that we've transitioned to the hist-sim models, we hedge to those models. But the history we show was still hedged to the Monte Carlo model. So that hist-sim history isn't the path we would have walked even in the market conditions had we been fully transitioned to those models.

As it relates to the provisions, you're correct, we did apply an overlay. As we did in the second quarter that we incremented or, in fact, is the new overlay with a rationale around continued uncertainty in the economic environment. And so as we were asked on Wednesday on the earlier call, we did, in a sense, not follow the models completely in terms of the release that we might have recognized based on changes in the expected credit loss, in turn, based on changes in the economic environment and the variables that we were looking at, precisely reflecting uncertainties in the market environment. And of course, in October to date, some of those uncertainties have materialized. We feel good that the actions that we took in the third quarter were prudent. And we feel good about our guidance, even in light of the recent changes and developments around the COVID pandemic.

Of course, there is uncertainty that lies ahead and into next year in the path of the economy, the path of the pandemic, but we feel really good about the decisions and judgments that we've made in the year-to-date and also the great work our risk team has done, having a very strong handle on the portfolio on a granular basis as well as on all of the modeling that, as you know, goes into expected credit loss.

Robert, this is Dixit here. James had touched on this briefly during the equity call, but largely driven by really an accounting difference rather than economic difference, quarter-on-quarter. Q2 reported NII that was artificially due, and this was due to one-off items as well as some of the impact of the short-term draws that you saw on committed facilities. But if you really look at the underlying economics in the business, especially for the Corporate Bank and the Private Bank, these were largely stable Q3 versus Q1 and versus Q2, with the accounting mismatch being held in C&O.

And to your question on really driving NII, I mean, a number of things as you've seen in the evolution of our balance sheet have come together, including interest rate charging, which has been driving NII at an outperformance rate, as you saw. We'd indicated at the Investor Deep Dive last year that we were anticipating around EUR 100 million of revenues in 2022, and we're well on track to more than double that during this year. Again, in the outlook that I provided, that charging trajectory will slow down from here on because we have tackled larger deposits in our deposit base. But again, we'll continue to roll out those charging initiatives.

The other is just balance sheet efficiency, including deposit efficiency. And that's a feature that you see through the course of this year, that the mix between operational and nonoperational deposits intentionally has been steered towards a higher proportion of operational deposits through the course of this year. And so a combination of those, in our mind, lead to the stable NII that you're seeing in spite of the interest rate headwinds that the businesses have been experiencing.

The next question is from Lee Street of Citigroup.

Three from me, please. Just on revenues. Obviously, you've had a really impressive growth in revenues and the Investment Bank you highlight has been the key driver. Can you just give us any indication of the EUR 8.8 billion of investment banking revenues that you generate so far this year. What proportion of that we might have to consider as more recurrent? And what proportion of that we should be thinking about as being more market sensitive? That would be really helpful.

Secondly, you mentioned a higher subordinated MREL requirement. Can you just give us your thinking around on how much higher that will be?

And finally, just any thoughts from yourself or any tangible indications on what else you need to do to see it -- or what you need to do to see a change in ratings outlook. You obviously referenced the change at fit on the AT1, but in terms of the actual overall outlook. What else do you think you need to do? That'd be my 3 questions.

So Lee, welcome, James. I'll start on the first and hand it over to Dixit.

It's always hard to tell, but you've heard perhaps our commentary on Wednesday that some significant proportion made half or more of the revenue improvement, we think, will be sustainable. And the basis for that is we obviously did have outperformance in -- particularly in FX and rates, the businesses that are particularly sensitive to volatility in the market environment. And naturally, you'd expect in a normalized environment, some of that to retrace.

At the same time, though, credit has actually had something of a headwind this year on the -- because of the COVID environment, so both market valuation impacts and flows in credit. And so we'd actually see some, I think, some benefit from that as the market environment normalizes. So those offsetting impacts are part of our thinking.

The other thing you'll recall is that in our FIC complex, there is a greater proportion of financing revenues. So call it accrual or interest carry that we earned so while -- and relative to peers. So when hopes that, that dampens the volatility a little bit, it does so on the upside and the downside, by and large. And those are all factors that go into our thinking around the sustainability.

And the last point to make is just the -- our view that the success of the implementation of our strategic change last year has really carried through into sort of better focus, better performance, better client engagement in both the FIC and also Origination & Advisory businesses. So that gives us some sense that the market share improvements are sustainable and even in a down wallet year, which a lot of us expect in 2021, we can retain some of the revenue improvement.

Lee, I'll take the question on subordinated MREL. The discussions with the SRB, as you know, have only recently started. We do expect our formal requirement to come through in the first quarter or the second quarter of next year. It is our expectation that the subordinated MREL requirement will become the more binding of our constraints compared to TLAC due to the legal and regulatory changes. And we think this will then drive need for senior nonpreferred issuance through the course of next year.

That said, our starting point is a good one, as you see with the surplus that we have, which we're more than comfortable will accommodate some of the regulatory changes that are coming down the pipe, as I indicated on the slide.

Now on the ratings side, look, our sense is that the strategic decisions we've made and the disciplined execution that we've shown now for the last 5 quarters and frankly, several years, thinking about the expense line, we're doing the right things to reposition the bank. And that should, over time, be recognized in improved ratings outlooks. When -- over what period of time and what events might catalyze the change is obviously in the thinking of the rating agencies, and I can't comment on that. But we do think that the focus that we've had, particularly on sustainable profitability and that aspect of the change in our performance over the last year addresses one of the key concerns that the rating agencies and other stakeholders have had around the company. So that's how I'd respond.

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

So I have a question that could partly relate to what you said. And another question more on revenue sustainability.

It seems to me that one of the things the rating agencies are likely to wait for is a more sort of clearer outcome of the impact of the current crisis, especially post second lockdown. So I wanted to understand, what exactly did drove the reduction in what you classify as Stage 2, fell from EUR 52 billion to EUR 41 billion in the quarter despite all the uncertainty and despite the fact that you actually had, unlike some peers, an increase in the forbearance -- COVID-related forbearance in the corporate side in the quarter?

Now I understand there may be a reason to take a lower ECL relating to Stage 2 with the outlook. But is the calculation of the Stage 2 exposures something that's sort of model-driven and do you ignore what's happening to forbearances? So I mean, clearly, here, you've got a management that's won a lot of credibility on pre-provisions delivery. I just hope, and I'm worried that you're not going to reiterate in too much confidence about the provision. So that's really what my question relates to.

Second question on that pre-provision delivery. Just wondering, you have basically a -- you had a 33% year-to-date up in the investment bank from, obviously, a low point last year, the most difficult times, and minus 10% on costs. I mean, how are you going to be able to manage bonus expectations in that situation, given the type of business that that's in?

James, thanks for the question. So I'll try to be brief. On Stage 2, what you saw was -- or the balance of Stage 2, what you saw was the reversal of what took place in the first quarter. And it was largely highly rated financial institutions and clearing houses where there had been a movement that was large enough to trigger a Stage 2 event in probability of default but against extremely low levels of probability of default. So the percentage move off very, very low level was enough to trigger Stage 2. And in a more normalized environment, that was reversed. So exactly as we expected. And we followed the models, which actually answers the second part of your question.

We are following what our risk teams are telling us in terms of their granular assessment of the portfolio, of the focus industries and the developments, also modulus portfolios on the retail side. And then on top of that, what the models are telling us, our guidance has followed that throughout the year and frankly, the developments in the portfolio and the economy have been within the range of our expectations.

There have been increases in forbearance and including on the corporate side, a number far, far fewer. When you see the movements, the number of obligors is, of course, small on the Corporate and Investment Banking side, but the larger share of the balance is large in -- on retail, very small imbalances. But it's as you'd expect, in the middle of sort of a credit cycle, including, for example, in portfolios like CRE, that when we restructure or give forbearance in some form like interest holidays, that shows up in that statistic. We think that's the right decision, both for our clients and for the specific projects, in many instances that this relates to. But in neither case does it represent a management team that's doing anything, other than following the facts as we travel through this crisis, the facts of the underlying portfolio that is.

On the operating leverage side, we've been working to do a number of things on the expense side of the equation and -- whether that's headcount reductions, noncompensation expenses. And so within the expense numbers, you actually see increases in our accruals for variable compensation relative to the expectations we had coming into the year. So we were mindful, James, of the sort of the need to compensate appropriately for performance, balancing a range of considerations, but one of which is franchise protection, franchise preservation, given the nature of our business.

(Operator Instructions) And the next question comes from the line of Jakub Lichwa of RBC.

Just wondering (inaudible) from me, I think it's tied a little bit to your previous comments, but the proportion of your revenues coming from the Investment Bank is obviously growing. How do rating agencies look at that. I mean, to what extent, I mean -- Moody's is mentioning that you have already had before relatively higher proportion of revenues coming from more volatile businesses. I understand that you are going to try and tell them that this is now more sustainable. But to what extent do they see that the plan as being executed when -- again, the revenues are coming, but they're not necessarily coming from where I think you thought that they would have? So yes, that will be it.

Yes. Thanks for the question, Jakub. Look, it's -- we're pleased that based on our performance, the client reengagement, we were able to participate in a very strong environment in Investment Banking. We wouldn't have wanted it to be the other way around. But equally, as we pointed out, it's in an environment of disciplined resource allocation, whether that's capital risk-weighted assets or also more expenses and the people engaged in that business. So I think the stakeholders you're referring to recognize that this is still very much in line with our strategy.

And it's also a question, the composition of the business over the past couple of years, as we've talked about a little bit, has moved to places where we're a leading player, and therefore, we think, have sustainable advantage. We are focused on client transactions, flow in the system and very prudent risk taking including underwriting and the lending book, and I think that's recognized.

And then in terms of business mix, more general, absolutely, we'd like to see the Corporate Bank and Private Bank grow from here and the business mix developed in line with our original communications in July and December last year. That said, they're performing in line with our plans, as we've pointed out, despite the very adverse environment, particularly on interest rates that they've faced. And as they execute on their strategies around both revenue preservation, revenue growth and then increasingly expense reductions, we do expect the pretax contribution from those businesses to increase, even as revenues are growing more slowly than perhaps the Investment Bank did in the past 12 months.

The next question is from Anke Reingen of RBC.

I just had a question regarding the ECB and various speculations or ideas of what that could potentially announce in December. And I have to admit, I'm a bit on my comfort zone. But from your point of view, what do you think would like bank and buying means for you as in terms of spread compression, accelerate lending or change in funding mix was a differentiate, I mean, issues? Yes, it would be great to just hear your view how this would impact you, if that would be announced?

I mean, there's certainly speculation around what the December announcements might be. But we did get a fairly good idea this week of the direction of travel, whether that's the expansion of Central Bank asset purchases, which will continue, and you saw EUR 120 billion between now and year-end.

Look, in a sense, it's not much different than the Central Bank expansion of balance sheet that we've already been seeing over the last few years. And the commensurate increase in liquidity around the euro system, which then finds its way onto bank balance sheets. And so we've been, as you can see, managing our balance sheet, in a manner that allows us to optimize, whether that's the disclosure we've given you today in terms of where -- what the cost of funding is for some of this excess liquidity. And as you see through the way we've managed our balance sheet through the year, it's been quite attractive, whether that's through tilting towards operational deposits, charging -- and through interest rate charging and the initiatives we have there, where we're running at 2x our target 2022 run rate or optimization of TLTRO. And so certainly, we'll need to continue to focus on those initiatives through the course of next year. But we feel comfortable that the initiatives are in train and that we have, as per our discussion earlier on NII, that we have been offsetting the drag from negative rates through a combination of these initiatives. I hope that's helpful, Anke.

Yes. But I guess, it would even be a positive, no? I mean, if spreads would further come down and you have more of a relief? Or should I not think about it that way?

We're always encouraged by our spreads coming down, Anke. But I would say that our reliance on capital market funding, as you see through our stable sources of funding, is actually quite small in -- relative to the net balance sheet that we have. And partly, that's because we've, over the years, tilted towards more stable deposit funding, we've reduced our reliance on wholesale funding and then we've also managed our capital market issuance plans in a manner that is funding-optimized and cost-optimized for us.

And our next question is from Corinne Cunningham of Autonomous.

A couple of quick ones, hopefully. Just wondered if you've got any steering on your RWA inflation going forward. I know that, I guess, the pressure has been a lot less this year than expected as some of the early corporate borrowings has been repaid. But I'm thinking particularly in terms of regulatory pressure, Basel IV, et cetera.

And the other question was just on the EBA paper last week on legacy paper. Do you think that's increasing the pressure or timing on need to redeem legacy securities for yourself?

Sure. Thanks for the question, Corinne. James. I'll take the first.

As I gave guidance on Wednesday of reg inflation, about 30 basis points this quarter, that represents -- I mean, 2 of the 3 drivers are on RWA. One is our expectations around TRIM, the other is the definition of default, which is an EBA item. Together, they probably represent about EUR 9 billion. So the EUR 6 billion on TRIM that we've advertised for a while and then additional RWA inflation from the EBA definition of default. And that's baked into that 30 basis points. There's some other denominator impacts that more or less net out.

Corinne, on the second question, I guess, you're speaking to the EBA paper, referring to infection risk across the capital stack. Yes, and look, we've been digesting that. We're quite comfortable given the implementation of the RRD into German law, which is proceeding and is underway right now and is in the legislative process. We expect this to come through in the fourth quarter of this year, and this will largely remove that infection risk of our legacy capital instruments. And so in that light, we're quite comfortable with the way we're positioned.

And even if it removes infection risk, there's still got features that would mean that they don't count for capital purposes. Does that mean you just think about them as funding? Or do you think there is still some residual pressure to redeem?

To the extent -- well, certainly, there's no pressure to redeem, as I said, necessarily in specific relation to the inflation risk once the legislation goes through in the fourth quarter. That said, the instruments do count as capital on a phase-in basis through the course of next year. And so as always, we're mindful of the replacement cost of those instruments, the capital treatment and capital benefit that they have for us through the course of the years. And in that respect, we'll make a determination on any actions related to those securities as we get closer to those decision points.

And there are no more questions at this time. I hand back to James Rivett for closing comments.

Thank you, Haley, and thank you all for joining us. You know where the Investor Relations team is, if you need us. Otherwise, just a quick reminder. We have our next Investor Deep Dive on Wednesday, the 9th of December, virtually, and we look forward to virtually seeing you all there. Be well.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.