Deutsche Bank AG (DB) 2022 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Deutsche Bank Q4 2022 Fixed Income Conference Call. (Operator Instructions)

I would now like to turn the conference over to Philip Teuchner. Please go ahead.

Good afternoon or good morning, and thank you all for joining us today. On the call, our Group Treasurer, Richard Stewart, will take us through some fixed income-specific topics. For the subsequent Q&A session, we also have our CFO, James von Moltke, with us to answer their questions.

The slides that accompany the topics are available for download from our website at db.com. After the presentation, we will be happy to take your questions.

Before we 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 Richard.

Thank you, Philip, and welcome from me. 3.5 years ago, we set ourselves some key financial goals for the end of 2022. Today, we'd like to talk to you through what we have achieved and to highlight how Deutsche Bank today is a fundamentally different bank.

Let me start with the five decisive actions we took as we launched our transformation strategy in 2019 on Slide 1.

Firstly, we created 4 client-centric divisions, which have delivered stable growth as promised. In 2022, these 4 businesses contributed to our best profits for 15 years.

These divisions complement each other and provide well-diversified earning streams.

We are now a better-balanced bank. We are particularly pleased with the Corporate and Private Banks together more than doubled their contribution since 2018, contributing just over 70% of the group's pretax profits in 2022.

Secondly, we exited businesses and activities which were not core to our strategy. We exited equities trading, transferred our Global Prime Finance business, refocused our rates business and downsized or disposed of other nonstrategic activities.

Our Capital Release Unit reduced leverage exposure from nonstrategic activities by 91% and risk-weighted assets by 83%, excluding RWAs from operational risk. This enabled us to redeploy capital into our core businesses.

Thirdly, we cut costs. Compared to the pretransformation level of 2018, we reduced our cost/income ratio by 18 percentage points. We achieved this while absorbing more than EUR 8 billion of transformation-related costs.

Fourthly, we committed to and invested in controls and technology to support growth.

Finally, we managed and freed up capital. The capital lease year played an important role here, contributing around 45 basis points on a net basis to our CET1 ratio.

Let me cover the impact of delivering the transformation plan has had on our profitability and financial stability on Slide 2.

We are pleased that all divisions delivered significant positive operating leverage on an annual basis since 2018. We intend to continue to deliver operating leverage for the Group on an annual basis going forward.

Our returns have improved every year since 2019. We have reduced noninterest expenses over the period. We will continue to be disciplined on costs, including working on additional measures to offset cost pressures in line with our 2025 target of a cost-to-income ratio below 62.5%.

Finally, our capital remains resilient. Since 2018, we absorbed around 270 basis points of capital headwinds from regulatory impacts on our transformation plan and ended the year at 13.4%, around 300 basis points above our regulatory requirements.

Let me now turn to our performance in 2022 on Slide 3.

Our achievements have positioned us to build and maintain a trajectory of sustainable growth, and this is reflected in our 2022 results. Revenues are above EUR 27 billion, well ahead of what we had planned in 2019 despite the business exits I mentioned. All 4 core businesses produced positive operating leverage compared to their pre-transformation levels.

In 2022, our reported post-tax return on tangible equity was above 9%, including a deferred tax valuation adjustment.

In terms of profitability, we delivered our highest profit since 2007 at EUR 5.6 billion before tax. Our cost/income ratio is 75% and significantly below the pre-transformation level of 93% in 2018.

Pre-provision profit for the Group was nearly EUR 7 billion in 2022.

We proved the resilience during the challenging environment for the past few years. This regained resilience was also recognized by the credit rating agencies.

Since 2021, we have received 4 upgrades of the 3 leading agencies, and we are confident to have further momentum.

We have maintained disciplined risk management and a strong balance sheet, as you can see on Slide 4.

In order to maintain this discipline going forward, we continue to invest in our people and risk management capabilities as well as controls and technology, which support timely and proactive risk management.

This enables us to manage risks dynamically within our frameworks and, most importantly, within our risk appetite. We continuously monitor emerging risks, run downside in our fees and stress tests and operate a comprehensive limit framework across all risk types.

In this way, we can respond proactively to changes in our operating environment, as you have seen us do in 2022 during the escalating war in Ukraine and the stress on European energy supplies.

Despite challenges throughout the year, our risk management approach helps us maintain strong risk and balance sheet metrics. Our provision for credit losses was 25 basis points of average loans for 2022, in line with our guidance provided back in March.

Let's us now dig a bit deeper in some treasury-related topics over the next slides. Slide 5 provides further details on the developments in our loan and deposit books over the quarter.

All figures in the commentary are adjusted for FX effects. Overall, the loans have declined by EUR 2 billion in the quarter.

Loans in the Corporate Bank have decreased by EUR 5 billion, driven by active portfolio management over year-end as well as EUR 2 billion of episodic effects.

In the Investment Bank, loan growth for the quarter has been EUR 4 billion driven by strong demand across FIC in high-quality structured lending, coupled with moderate growth in Origination & Advisory.

Given the macroeconomic environment, we remain very focused on managing the client demand in FIC within our risk appetite.

In the Private Bank, loans remained essentially flat. This year, we continue to expect moderate loan growth predominantly in the Corporate and Private Bank.

Moving to deposits, where our book grew by EUR 4 billion compared to the previous quarter. This growth has been driven mostly by targeted measures in the Corporate Bank as well as some episodic growth.

Deposits in the Private Bank have remained essentially flat. In 2023, we are focused on structurally increasing deposits in both the Corporate and Private Banks in line with our TLTRO repayment plans and business strategy.

Turning to Slide 6. I would like to provide an update of the interest rate tailwind we expect to see going forward.

In March 2022, we guided that interest rate tailwinds net of funding cost offsets would add approximately 1 percentage point to the revenue compound annual growth rate from 2021 to 2025. This figure has risen to approximately 1.5 percentage points from our 2022 landing point, based on rates and funding spreads as of the 20th of January. You can see the divisional CAGR's net of funding impacts on the right-hand side of the slide.

As we want to give you a consistent view across rate and funding cost impacts, these figures are based on the evolution of our planned liability stack rather than a purely static balance sheet but do not include the impacts of planned lending growth.

In 2023, we expect to see strong interest rate impacts due to the timing effects resulting from the rapid pace of interest rate rises. By 2025, the rollover of our hedge portfolios would have offset the reduction in this timing effect, resulting in a net interest income benefit being maintained. As noted at our third quarter call, the sequential tailwind from 2022 to 2023 is expected to be approximately EUR 1 billion for the full year.

Moving to Slide 7, highlighting the development of our key liquidity metrics. Throughout the fourth quarter, we have maintained our robust liquidity position. While our daily average liquidity coverage ratio during the quarter was at our target level of 130%, the increase of the spot LCR at year-end was driven by strong cash balances and positive FX impacts.

Compared to the third quarter, the liquidity coverage ratio increased by 6 percentage points to 142%. The surplus above minimum requirements increased by about EUR 4 billion to EUR 64 billion quarter-on-quarter, mainly driven by significantly lower net cash outflows. The stock of our high-quality liquid assets decreased by about EUR 8 billion during the fourth quarter due to our prepayment of TLTRO and a weaker U.S. dollar.

Net cash outflows also significantly decreased as a result of lower derivative outflows, credit facilities as well as our efforts to further optimize the deposit book. For this year, we remain committed to support business growth and continue to manage the LCR conservatively towards 130%.

The net stable funding ratio increased to 119%, which is within our target range. This represents a surplus of EUR 98 billion above the regulatory requirement. The available longer-term stable funding sources for the bank continues to be well diversified and are driven by a robust deposit franchise, which contributes about 2/3 to the group's stable funding sources. Over the course of 2023, we aim to maintain this funding mix with the remaining TLTRO being gradually replaced by cover bonds and deposit growth.

Turning to capital on Slide 8. Our common equity Tier 1 ratio came in at 13.4%, A 3 basis point increase compared to the previous quarter. FX translation effects contributed 2 basis points. 3 basis points of the increase came from capital supply changes, reflecting our strong organic capital generation from net income, largely offset by higher regulatory deductions for deferred tax assets, shareholder dividends and additional Tier 1 coupons. Credit risk-weighted assets led to a 7 basis point ratio increase versus the previous quarter as the impact of regulatory model changes was more than offset by tight risk management in our Core Bank. Market risk RWA increased leading to a 9 basis point ratio decline versus the previous quarter. The higher market risk resulted from higher sVaR levels, mainly driven by a change in the applicable stress window versus the prior quarter. Operational risk-weighted assets were essentially flat compared to the previous quarter.

Looking ahead, we expect our CET1 ratio to remain subject to volatility, principally due to regulatory model reviews and ECB audits. In 2022, amendments were made, in particular to models for our Mid Cap portfolio and our German retail portfolio.

Now we expect model changes for the wholesale portfolio to follow in phases. A first set was implemented in the fourth quarter of last year with an RWA impact of around EUR 2.5 billion.

The models for the larger portfolio of financial institutions and large corporates will follow over the course of this year. In addition, our market risk qualitative multiplier is currently being reviewed, from which we expect a decrease. We expect to be able to absorb model-related impacts via continued retention of earnings, but the timing of regulatory model decisions is likely to create CET1 ratio volatility. That said, we aim to end 2023 with a CET1 ratio of 200 basis points above our maximum distributable amount threshold expected to be 11.2%.

Our capital ratios remain well above regulatory requirements, as shown on Slide 9. The CET1 MDA buffer now stands at 288 basis points or EUR 10 billion of CET1 capital, down by 1 basis point quarter-on-quarter.

While the CET1 ratio increased by 3 basis points in the quarter, the distance to MDA decreased due to the higher countercyclical capital buffer setting in the U.K. of 4 basis points. Our buffer to the total capital requirement increased to 330 basis points, most notably from our EUR 1.25 billion AT1 issuance in November.

As of 1st of February, our CET1 ratio requirement has increased by approximately 60 basis points, including 11 basis points from a higher setting of Pillar 2 requirements by the ECB and approximately 50 basis points from the introduction of the German countercyclical buffer and the German systemic risk buffer for residential mortgages. This still leaves us with a comfortable pro forma buffer over the first quarter at CET1 requirement of approximately 230 basis points or EUR 8 billion of CET1 capital.

Moving to Slide 10. We ended the year with a leverage ratio of 4.6%, fully in line with our 2022 target of around 4.5% and an increase of 25 basis points versus the prior quarter. FX translation effects resulted in a 5 basis point leverage ratio increase, principally due to a weaker U.S. dollar. 11 basis points came from higher Tier 1 capital, reflecting higher CET1 capital and our AT1 issuance in November. Finally, 9 basis point increase came from a seasonal reduction in trading activities at year-end.

We continue to operate with significant loss-absorbing capacity well above all our requirements, as shown on Slide 11. The MREL surface as our most binding constraint has decreased by EUR 2 billion to EUR 18 billion over the quarter. This decrease was driven by lower regulatory capital and have rolled out rollout of eligible liabilities, partially offset by our lower MREL requirement due to the FX driven decline in risk-weighted assets. We are well prepared to absorb the approximately EUR 2 billion impact from known regulatory changes, mostly the higher German buffer requirements, which became effective on the 1st of February and a further approximately EUR 1 billion from new MREL requirements we expect to take effect sometime in the first half of 2023. Our loss-absorbing capacity buffer remains at a comfortable level even including these changes on a pro forma basis and continues to provide us with the flexibility to pause issuing new eligible liability instruments for approximately 1 year.

Moving now to our issuance plan on Slide 12. We closed the year with a total issuance volume of EUR 24 billion in 2022. Excluding EUR 4.3 billion of structured notes, which were not part of our original plan, this is in line with our previous guidance of ending the year at the upper end of our EUR 15 billion to EUR 20 billion range. During the fourth quarter of 2022, we issued EUR 4.8 billion in senior preferred, cover bonds and AT1 format, the latter supporting our balance sheet and lending franchise. Offsetting that, we prepaid EUR 11 billion of TLTRO in December and an additional EUR 5 billion in January, reducing our outstanding to EUR 29 billion. From this point forward, we expect to reduce our TLTRO outstanding by EUR 3 billion to EUR 4 billion per quarter through a combination of prepayments and the maturity profile of our remaining TLTRO tranches.

Turning now to 2023. We expect slightly lower requirements compared to 2022 and guide to a range of EUR 13 billion to EUR 18 billion, with a focus on senior nonpreferred and covered bonds. January was a very busy month for financial issuance in the capital markets with euro market issuance being up more than 50% compared to January 2022 levels.

We were also active and issued roughly EUR 4 billion in January split between covered bonds, senior preferred and senior nonpreferred issuance in the global capital markets. This equates to 30% of the lower end of our full year issuance plan. In addition, we issued our inaugural Panda bond following recent regulatory changes by PBOC and SAFE to facilitate foreign remittance of Panda bond proceeds. This will further boost our credentials as a leading foreign DCM house in China.

Furthermore, we published the final results of our dollar LIBOR consent solicitation on the 19th of January. As you have seen, our senior nonpreferred instrument met the requirements at the second meeting, and the coupon will be amended to reset over safer, whereas the AT1 security did not meet the requirements and continue to reference dollar eyeball swap rates. Whilst we are disappointed, we note that the reset does not occur until April 2025.

Before going to your questions, let me conclude with a summary on Slide 13. As the environment changes, so does our business mix, and the more favorable interest rate backdrop has created a strong step up for further revenue growth. So let me conclude with a few words on how we see 2023. With regards to revenues, we anticipate performance around the midpoint of a range between EUR 28 billion to EUR 29 billion, reflecting the impact of interest rates particularly in the Corporate Bank and Private Bank as well as robust organic business growth. This will be partly offset by some normalization in other businesses, natively FIC.

On the cost side, we remain focused on delivering positive operating leverage, a key driver as we work towards our 2025 goals. We anticipate inflationary pressures but also benefits from our cost efficiency measures. And for 2023, we expect to keep our noninterest expenses broadly flat in 2022.

Our risk management discipline, coupled with a more benign macroeconomic and credit environment in recent weeks, supports our provision for credit loss guidance of 25 to 30 basis points of average loans for 2023. Our current outlook would tend towards the lower end of that range, in other words, essentially flat to 2022. We started the year with a strong CET1 ratio to support growth and absorb the upcoming regulatory driven volatility.

With that, I will finish, and we look forward to your questions.

(Operator Instructions) And our first question is from the line of Lee Street from Citigroup.

I've got 3, please. Firstly, obviously, I'm sure you did get many questions on your upcoming call, (inaudible) Tier 2. I know in the past, you've stated you're going to take an economic approach to calls, but do you care to anything to your thoughts surrounding the potential call or not to have an ahead of time?

Secondly, on ratings, you mentioned sort of optimistic view for ratings this year. So do you expect further upgrade this year? And linked to that, do you have the specifics of rating target in mind, like getting your nonpreferred senior to being A-rated or I think similar to that.

And then finally, the point you just mentioned on the dollar additional Tier 1 and the consent which wasn't passed. Obviously, if you were not to call that bond, I suppose the question is what happens to the coupon is no further actions to take and will that just end up effectively fixing. That would be my 3 questions.

Thanks, Lee, and thanks for joining on a Friday afternoon. So I'll take the Tier 2 security question first. So regarding our, guess, that [1.5 billion in tier 2] security callable in May. As you rightly said, we continue to make decisions regarding the exercise of those call rates closer to the exercise date. And as usual, our decision balances the interest of all our key stakeholders and factoring in all relevant economic factors, including the useful distribution of the capital funding, rating agency metrics as well as the cost of the insurance versus alternatives. As you probably are sure aware, the core window of the securities is actually from 25th of March to 24th of April '23. We are monitoring this topic and the market closely. We'd note that the rally we've seen in our spreads over recent months obviously would didn't impact that decision. But as always, any call of a capital management is subject to regulatory approval.

In terms of, I think, ratings, which next question, Overall, we're happy with -- which we've actually -- we've had over the last years. We have 4 upgrades at the leading 3 rating agencies, but I feel there is more room, as I said in my prepared remarks. We feel that compared to peers we have an average store around and notch catch-up potential. But when we look at specific agencies, obviously, Moody's was -- second half of the last year, we had the upgrade there. But when I think about Fitch, their own positive outlook, that's confirmed in September last year. We therefore expect that positive outlook will get resolved at some point during 2023. Fitch in their last report stated that they expect further improvements in profitability together with maintaining a CET1 ratio above 12.5% and a leverage ratio above 4.5%. We think we've made good progress on all those factors. And so we're hopeful there. In addition, I guess, I think Fitch has flagged that any upgrade would require only a moderate impact from the economic downturn on the bank's capitalization. Turning to S&P. They currently have our ratings on a stable outlook. In the recent published commentaries, which will show on our IR website S&P appreciates the progress the bank has made throughout its transformation program. At the same time, the entry refers to the expectation of a supportive macroeconomic environment as a prerequisite to upgrade our ratings. But over the last few weeks and months, even the economic projections have improved significantly compared to a few months ago. So again, we remain optimistic there.

And then in terms of consensus station regarding the AT1, the -- absent any further action, the full back language takes effect, which will see as a deal of hole. And if that fails, a fix to the last available fixing. But obviously, we can think that exchange as well at some point. So I hope this answer your questions.

The next question is from the line of Soumya Sarkar from Barclays.

I had 2, please. First, you said you were looking to grow the deposits. Is the deposit growth target for '23 broadly similar to what you saw in '22? And how is the deposit development trending -- it's early for '23, but any comment on that? And if -- given that you have [tear and share] repayments, if the deposit development is not in line, are you looking at issuing more senior deferred bonds, for example? Or should still be more covered bonds? That would be my first question.

And second question would be, you mentioned that you had looking for year-end target of like at least 200 bps buffered for MDA. Is that kind of like a flow throughout the year? Or could we see the MDA buffer, given the CET1 volatility you pointed out, go below that 200 bps number as well?

Thank you very much for your questions. So I guess deposit growth, so deposit volumes, both on the Corporate Bank and the Private Bank in 2022 were very stable. And the -- what we are planning for this year is some time to campaigns in both our Corporate Bank and Private Bank. The Private Bank campaign in just started, so it's a little bit too early. But we are expecting overall deposit growth to be slightly above the full year '22 and steady throughout the year. So I think that is -- we're feeling pretty confident about our deposit outlook.

The -- in terms of TLTRO, there -- we repaid EUR 11 billion in Q4 and a further EUR 5 billion in January. And then in terms of the roll-off profile, we have sort of EUR 3 billion to EUR 4 billion or so quarter all the way out to, I guess, the end of the maturity of the [tranches] in sort of Q2, Q3 of 24%. And so we kind of feel very comfortable around that roll-off profile to kind of cliff-edge effects. And this is why -- and that roll-off profile will be funded through deposit growth or through our covered bond issuance plans. So that would be, I guess, the deposit question.

In terms of MDA, so we expect to see Q1 requirement of approximately 11.2% by the end of Q4 '23, reflecting already announced changes to the countercyclical buffers -- they are coming applicable throughout the year. We expect further ECB decisions related to internal credit risk model audits to conclude also during the year, some of likely CET1 ratio burden and others with some potential benefits. However, there is uncertainty on the ultimate timing and magnitude of those impacts. And consequently, we expect some CET1 ratio volatility during the year. But overall, we expect to see a CET1 ratio by year-end of 2023 by -- our MDA threshold.

The next question is from the line of Juliana Golub from GS.

I have 2, please. First, would it be fair to assume that in terms of capital instrument issuance, that would be skewed towards tier 2 issuance given that -- you have some amortization in your bullet towards -- to securities and that you're comfortably meeting your H1 requirements? And the second one would be, if you could please give us a flavor on the RWA development in 2023.

Thank you, Juliana, for joining. So in terms of capital issuance, so we are -- yes, as you rightly said, we have a -- we are a good place in both our Tier 2 and Tier 1, I guess, instruments -- right now. As ever, what we do is think about our own business growth opportunities. And so that does drive our decision as to which part of the capital stack to allocate to that business growth. So in terms of Tier 2 issuance and what our plans are in that space, again, that's the same we will be thinking about opportunistically as we do any other issuance. And in terms of the Tier 1, as you know, we kind of issued in November. And I think on our -- in terms of our issuance plans for this year, we expected somewhere between 0 issuance or up to EUR 2 billion or so. So again, kind of more opportunistic, but it is more about where the opportunities are within our franchises to deploy that capital and leverage.

It's James. I might take the RWA question. Look, we do expect growth from the businesses, and that's something we want to fund with our capital. We think that's moderate growth. So we've talked in the past about sort of low single-digit growth in the businesses as we just grow the franchise over time.

And then to Richard's earlier comments, we will have increases from model audits, where the magnitude, the timing is uncertain. We're tracking, obviously, upwards with all of that said, but that model uncertainty makes it hard, to be honest, to predict the year-end number on it. So we'll have to give you updates as the year goes by.

The next question is from the line of Robert Smalley, fixed income analyst.

Wanted to ask about the loan loss provision. You're going to hold it steady for 2023 versus last year. So fixing that, at that level as we go into a slowing economy, albeit less than maybe you originally thought, would that speak to more discretionary and general provisions and management overlays within that provision? At the same time on the call yesterday. I think the discussion was that credit issues may be more idiosyncratic in 2023, which may speak to more specific provisioning. So if you could walk me through how all of that ends up with the flat provision and your thinking behind that, I'd appreciate it.

Second part of the question is kind of the same. It seems that most of the credit issues, large credit issues that we're seeing over the past 12 to 18 months are not really the result of risk management as much as they are due diligence issues. Can you talk about your due diligence? You've avoided a lot of these issues, and how that's changed over the past 18, 24 months given what we've seen in losses around the financial system -- idiosyncratic loss, [segment]?

Sure, Robert, it's James. And thanks for joining. Thanks for your questions. Just looking at Olivier's commentary yesterday, the -- I guess, 1 important part is in the way that the IFRS 9 works, we're basically looking at '23 as a year in which more likely the provisioning we take will be Stage 3, so based on impairment events. In some respect, it's hard -- it's therefore very path-dependent. It's hard to guess which will -- which credits will deteriorate to be an impairment and when. But obviously, we take a view based on the portfolio, the risks we see, the environment and so on. And so the study is a forecast, but it's a -- it's an educated view based on everything that's going on there. I wouldn't at this point, expect that we'd be taking overlays. We are, as you know, reasonably -- I don't say reluctant. We think overlays are entirely appropriate when the result of the ratings, the models create an expected loss number that you -- or and a CLP that you think may understate the risks in the books, and therefore, a more prudent approach is needed. So we're not reticent to take overlays. But typically, we don't see a need for them. And so we would not build that into our forecasting.

Now if you ask yourself, well, what is essentially flat to this year -- to 2022? It's a level of credit loss provisions between, let's say -- or what is consistent with our guidance, [300 to 325] a quarter. And if you look at our history, that's actually a reasonably significant level of CLPs or -- and Stage 3, absent sort of a significant stress event. And so this current outlook, sort of a milder recessionary environment and slowdown, we think -- produces that type of outcome. And we don't think that's necessarily an overly optimistic way of looking at it. But to answer your question, not including overlays or events that could take place during this year, which is why we decided to keep a range even as we indicate our comfort today with the low end of the range.

Look, we -- on the due diligence side, one of the nice things is we talk about our underwriting standards, we talk about the quality of our risk organization. So in many respects, we rely on the -- on the ordinary course due diligence that we do in the second line, we rely on the quality of the relationships, understanding our clients and their needs in the first line. You're always learning over time and adapting your processes to what you learn and to the environment and looking at the value of collateral, the development of those markets. And hence, I don't want to say we're fixed in place, but we feel very confident in our processes and in the capabilities of our people in the due diligence. And it's one of the pillars we rely on as we think about the risk profile of the company. I hope that color helps, Robert.

The next question is from the line of Eli Dan from Morgan Stanley.

I'd like to ask questions on the old Deutsche Postbank CNS bond. Do you have any plans for these? And I'm wondering if you just look at them simply as cheap perpetual funding? Or -- and if there's any encouragement from your supervisors to get rid of them?

Thank you for the question. It's always an interesting one that we think about a lot ourselves. But to answer your question kind of best way is we think to ourselves that it's on a balance sheet, it's where see efficient for us on our balance sheet. And so that's why it's not seeing -- which is the regulators go -- I guess -- think or pressurizing us, I guess, to do anything about. Having said that, where we kind of feel that things are attractive for us to take action on because we're coming up to various exercise dates, then, of course, we do -- got to stay at that. But yes, so the answer is that we're not under any pressure to do it with those particular securities.

The next question is from the line of Corinne Cunningham from Autonomous.

I have a couple of questions, kind of related. One on refinancing costs. You've got something in your forecast on, I guess, how that flows into margin expectations. But the other one is on the LCR, and there's quite a big difference between the average during the quarter and then the year-end. And then when I try and tie it back to what you're saying about replacement of TLTRO funding, I'm finding it a bit difficult to tie it all up. If you look at the Q4 redemption in TLTRO, there's not really much of that -- was covered by the net increase in deposits and loans. We didn't really issue much in the way of covered bonds in Q4. And yet you had potentially what looked like quite a significant inflow of deposits over the quarter end. So can you just explain a bit about what's moving behind the LCR and maybe also give us what the average for Q3 was as well? So the average for Q4 was 130. What was the average in Q3?

Certainly. So I think the Q3 was -- from memory, just to -- sort of -- take questions sort of a bit of a random order, the Q3 was just above 130 on a daily averaging basis. In Q4, we were quite pleased with our steering. We're kind of running sort of daily averages, like you said, around the 130 for most of the quarter. There was a bit of a spike like at year-end, which is a bit just driven to seasonal factors, which kind of took us to the 142 in number and then starting again the -- in Q1, again, kind of back to a sort of the average of close to our target level. So I think that's -- yes, since the liquidity, I think, is working exactly how we're looking to target. In the fourth quarter, we have a very -- we do a very good job of optimizing our deposit book, so essentially just making it as -- ratio as efficient as we can, which allows the -- facilitate the repayment of the TLTRO. And as you know, the sort of TLTRO impact on the LCR depends on that capitalization. And so yes, of course, and it was only a bit above over EUR 20 billion support to the LCR versus around EUR 30 billion at the end of Q3. And that reduction in alliance was achieved without the LCR going down through deposit optimization and lower derivatives mark-to-market. So I hope that answers your question.

And then on the point about margins and your expectations. So what kind of cost of funding -- typical cost of funding are you factoring in there? Or is this entirely driven by paying more on deposits?

So we factoried a market-implied number in the numbers we showed in the deck as of 20th of Jan, so we might imply rates as well as market inquired issuance growth, and that's for -- for both deposits and for issuance.

Sorry to press on this, but do you -- are you forecasting just that spreads stay the same, that they perhaps improve in line with credit ratings?

So if I understand your question correctly, in terms of the -- in terms of our -- what we're assuming happens in terms of our spreads, is that what you kind of saying for issuance?

Yes, your wholesale funding spread, yes.

Yes, exactly. So we just take the -- so I guess what we just take is the current issuance spreads as, I think for this deck, the 20th of January. And then essentially, over time, we assume some sort of convergence to our peers given reduced rate wise to our peers, just we -- just bake that in because -- over the next few years, just because as we said earlier, around rating agencies, we do kind of thought those -- there is going to be an uplift. So at some point or we say hopeful there'll be uplift at some point. So in that sense, that's how we price the issuance.

The next question is from the line of Brajesh Kumar from Societe Generale.

My first question on issuance has already been answered. So I take this opportunity to hear from you -- your views in general on asset quality in FY '23? And related to that, how much is your direct and indirect exposure to Adani Group? The next one, I missed that bit when you talked about the LIBOR consent solicitation. So can you please repeat that? .

So Brajesh, it's James. I'll take the first question. So on specific clients, except in exceptional circumstances, we don't really comment. As yesterday, we do point to our general sort of conservative underwriting, collateralization and risk management when it applies to all situations. But we don't go into individual client names. The overall asset quality environment for 2023, is -- as I got into a little bit with Robert, we think there are -- and as Olivier talked about yesterday, there are obviously some watch portfolios that we're not complacent at all about the environment we're in. Recessions typically produce a credit cycle, rising rates produces some amount of stress with -- in borrowers that may be highly leveraged or where cash flow or asset characteristics are deteriorating. So it's something we watch very carefully. .

I'll say that -- so if there are watch portfolios, the ones that we point to -- for sure would be the commercial real estate market globally, some of the middle market, mid-cap enterprises that we lend to and, obviously, households that whether through inflation, energy costs or other reasons may come under pressure. In fairness, as we look at all of those sectors, though, the downside that we thought might emerge in '23 just doesn't appear to be emerging or -- and that's why I think you probably hear from us and our peers a more optimistic view about the credit environment than we might have expected 3 or 4 months ago.

Our portfolio quality overall has been quite stable. When you look at forward indicators, NPE has gone down. There's been stability more -- by and large, in our internal ratings and sort of Stage 2 events and those types of things. So as we looked at all those indicators, the portfolio looks stable to us. And as all of you talked about yesterday, we are -- we like the way we manage the portfolio in terms of diversification hedging, so risk diversification and management overall. And we'd like to think that stands us in good stead said regardless of the cycle we're in. But as the cycle appears to be milder right now than we might have expected that, we've come into the year with a higher degree of optimism.

And I guess, to answer your question, Brajesh, on the solicitation. So back in end of January, we have to see it on preferred FRN, which passed. And so that will then move to SOFR. I know we had an AT1 security as well, which didn't get the quorum. And so now, I guess, I mean, the options -- again, we haven't made any decision on any of these, but we rise up on fallback language or debt exchanges or calling the security itself. So that's what we're trying to say.

And just one quick clarification. In your issuance Slide 12, the footnote sales for 2023, this includes only senior preferred issuances. Does this mean EUR 1 billion to EUR 2 billion will be only senior preferred and no structure in that? That's how you should read it?

That's right. So this page doesn't include structured notes. Just add to that, that's because it's covered out of our investment banking franchise rather than traditionally it's been out of treasury.

The next question is from the line of Daniel David from Autonomous.

Just on the LIBOR consent. Just interested to hear if you consider detaching a fee to maybe get that over the line. And then I've just got 2 more. Just one on the MREL buffer. I know you've answered this or talked about this in previous quarters, so the MREL buffer kind of is impacted by LGF. But if I kind of think about that on an RWA basis, I think that 5% buffer is probably a bit bigger than what we kind of think is reasonable for MREL buffers. I'm just thinking is that EUR 18 billion, 5% reasonable to kind of stick around? Or could we see that coming down a bit? And then finally, just to maybe round off on funding. Just interested in your longer-term funding plans, is the ECB's MRO or LTRO factored in? And if not, why? Is it clearly -- is it a cost optimization point? Or is there any other pressure to move away completely from Central Bank funding and move towards the covered bond and deposit growth that you talked about?

Thank you for your -- thanks for your questions. So I guess the first one was around solicitation question. So -- and were -- fee to get something over the line. So we need to follow regulatory guidance to our value neutral transition. So that's what we were attempting to do. That didn't work. It's something we may consider further down the line, but no rush at this stage. So in terms of MREL, there's no assumed reliance on MREL or LTRO and currently, so in other words, the EUR 18 billion numbers, we're comfortable with right now. And just moving away from Central Bank funding currently is not economic to do so versus our base case funding plan, they press to do so and also no further operations earnouts, so we would not build a reliance on that in our future funding plans.

And going back to the to MREL, it will come down a bit already through the countercyclical buffer, and we disclosed a EUR 3 billion reduction on our pro forma basis on one of the slides.

The next question is from the line of James Hyde from PGIM Fixed Income.

So I've got 2 bigger picture questions and one very specific one, I'll start with that one. The EUR 4 billion leverage finance exposures was very comforting, but I just want to make sure. Does that include all the exposures in fair value books and trading books and in undrawn commitments? That's my first question.

Then the next 2 questions are about risk-weighted assets and capital allocation. So first of all, with this folding in of the CRU into the corporate center, is -- what's the outlook for the -- of risk RWAs? Do they run off? Or do they somehow -- is it something that you just wait for Basel III .1 or Basel IV, whatever you want to call it, to just read -- this, especially in light of what you said yesterday about the maybe Basel III.1 is looking a bit heavier than the [EUR 20 billion]. So I just wondered what's the outlook for that? Does it fall off before?

And then broader, one of the things that was mentioned about the Brussels proposals and the floors. And it was mentioned that some areas, you will have to allocate capital away from, I think, I even heard you say from German mortgages. So I'm just wondering what will that be? -- Would you be doing full securitizations? I mean how would you do this? Or does it also involve again, revisiting whether you stay in Spain and Italy?

So James, it's James. Thanks for joining as always, and glad to have you with us. I'll answer the second 2 questions. Look, we got to what we think is a floor on the op risk. Now you never know. It's -- in the models approach, there are sometimes little adjustments. But by and large, we think we've stabilized around where we are through to Basel, I'll use your language, III.1 in January of '25. We will move to that sort of new approach and therefore, the CRU, given that it's revenue-driven, the CRU will no longer attract uppers RWA, and we'll have to move to a new allocation system. So it's with us for the next couple of years and will be reported in the associated capital reported in C&O. And then I would expect from '25, there will be a change in the allocation methodology that we still need to decide on.

Around the floors, all of the events that are going on do change the capital that each part of the balance sheet attract. So whether it's floors, model adjustments, limitation, definition of default or countercyclical buffers let alone a sectoral buffer, there are things that we build into our methodologies, our internal allocations and then express themselves in both client pricing and in the returns that we earn from it. So yes, we do react to what's going on. I think those reactions are always a little bit evolutionary rather than revolutionary. And you have to understand that those client relationships, there's obviously ancillary business that comes from certain businesses, let's say, like LDCM. So it's never as simple as costs going up or capital charges going up and therefore, hurdle rates becoming more challenging, and so you're out. It's never quite as simple as that, but it obviously does affect our thinking of capital allocation. And it's live -- as we think about the path we're on, the further we diverge from what we think the economic capital requirements of certain businesses are, in a sense, the tougher it gets. So you talked about mortgages, we've been bringing up the capitalization through a number of these factors of what is one of the safest assets on our balance sheet, which is German mortgages. And that -- which is an ironic situation, but it does cause us to look at the overall profitability of the business.The EUR 4 billion I believe the answer is it's all in, James, in terms of the exposures.

So there are no further questions at this time, and I hand back to Philip Teuchner for closing comments.

Thank you, Natalie. And just to finish up, thank you all for joining us today. You know where the IR team is if you have any further questions, and we look forward to talking to you soon again. Goodbye.

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