Deutsche Bank AG (DB) 2024 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Q4 2024 fixed income conference call and live webcast. I'm Sergio, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to turn over to Philip Teuchner. Philip?

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 your 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. 2024 was a vital transition year for us. We have moved past a number of legacy items, absorbing as a series of non-operational costs, predominantly litigation matters, which have masked the underlying strength of our business. However, we are now set for a clean and significantly more profitable year in 2025 with the foundation now built for further improvements in the years beyond.

Let me discuss our operating momentum on slide 2. We increased 2024 pre-provision profit by 19% compared to 2023, if adjusted for three specific litigation items as well as the goodwill impairment in 2023. The specific litigation items in '24 comprised of post-take litigation matter, elevated provisions for Polish FX mortgages and the derecognition of the reimbursement asset for the RushRusChemAlliance litigation matter. Growth was driven by both revenue momentum and cost discipline.

Revenues grew by 4% year-on-year with around 75% coming from more predictable revenue streams. Adjusted costs decreased 1% year-on-year to EUR20.4 billion or EUR20.2 billion, excluding the preguided real estate measures at a UK bank that we trued-up in the fourth quarter. Excluding these items, we delivered four quarters of adjusted costs of around EUR5 billion, in line with our plan.

Let's now look at the momentum we have created in each of our businesses against the goals set in 2022 on slide 3. At our Investor Day in March 2022, we set ambitious objectives for 2025. With 12 months to go, our business growth-focused strategies are delivering strong results against these objectives.

The corporate bank remains at the core of the Deutsche Bank franchise since our transformation, and we have further enhanced its value proposition through a strengthened client franchise and investments in technology, supported by our global network. The division outperformed its revenue growth ambitions despite normalizing interest rates and delivered a return on tangible equity of 13% in 2024, 3 times its 2021 level.

The investment bank is outperforming its revenue growth target and delivered an RoTE of 9% in 2024, cementing its position as a leading investment bank. In fixed income & currencies, we have built strong market share and demonstrated sustained growth in financing, which is up 12% year-on-year in 2024. We achieved significant year-on-year growth of over 60% in O&A in 2024 through consumable market share increases and a growing fee pool.

The private bank continues to leverage its leading market position with net inflows of EUR29 billion, supporting noninterest revenue growth of 5% last year, in line with our strategy, where division grew in line with target since 2021. Asset management again grew assets under management in 2024 by EUR115 billion and surpassed EUR1 trillion for the first time reached by net inflows of EUR42 billion into passive investments.

Let me now turn to the question why we feel confident in reaching our 2025 revenue growth ambitions on slide 4. Since 2021, we have delivered a compound annual growth rate of 5.8%, in line with our upgraded target range. In 2025, we expect continued franchise momentum at our capital-light businesses to drive further growth supported by our investments, reaching the revenue CAGR to around 5.9% with a clear road map towards our 2025 target.

In the corporate bank, we expect revenues to grow by around 5.5% or EUR400 million largely from scaling of commissions and fee income, predominantly in trade finance and fee-based institutional business. Resilient net interest income will provide further support.

Investment bank revenues are expected to grow by around 8% as we see encouraging trends in the market, good levels of corporate activity and confidence, solid financing conditions and pent-up private equity demand.

In the private bank, we expect revenue growth of around EUR400 million or 4% driven by higher NII from continued business volume growth and the deposit hedge rollover. This will be further complemented by growing noninterest income, harvesting benefits from higher assets under management and growth in investment solutions.

Finally, we expect asset management to grow revenues by around EUR300 million or 12.5%. We expect the business to benefit from the growth in assets under management during 2024 and a strong equity market development this year, which should boost management fees in 2025. We furthermore expect continued growth in passive, including extractors and in alternatives. These drivers underlying our confidence in achieving our revenue goal of around EUR32 billion in 2025 before FX benefits. At year-end FX rates, we expect this number to be around EUR32.8 billion.

Let's now look at the path to our RoTE target on slide 5. We remain on a clear path to achieve our RoTE target of above 10% in 2025 driven by focused execution across all three delivery pillars of our Global Hausbank strategy.

As you saw, we have a business-by-business road map to grow revenues to around EUR32 billion in 2025, in line with our target compound annual growth rate of 5.5% to 6.5%. Operational efficiencies play a key role in keeping adjusted costs flat in 2025 and thereby reducing total noninterest expenses as nonoperating costs normalize.

Capital efficiencies have delivered cumulative RWA equivalent reductions of EUR24 billion, close to our end 2025 goal of EUR25 billion to EUR30 billion. In the fourth quarter alone, we delivered EUR2 billion of RWA equivalent reductions driven by data and process improvements. We are confident we will reach the upper end of our target range by year-end 2025 through further securitizations and data and process improvements. Delivery on these pillars gives us a clear path to an RoTE above 10% in 2025.

Firstly, the nonrepeat of significant litigation items in 2024 gives us a starting point of our adjusted RoTE above 7%. Reaching our EUR32 billion revenue target is expected to add more than 2 percentage points to our 2025 RoTE.

Secondly, we expect an additional contribution of around 60 basis points from the reduction in noninterest expenses. Together, this would bring us already to our targeted RoTE level. And finally, we expect a contribution of around 40 basis points from the reduction of provisions in 2025 towards more normalized levels, in line with our guidance with our third quarter results.

Let's now look a bit closer into some treasury-specific items over the next pages. As we said before, we remain well positioned to continue delivering strong net interest income over the coming year. So let me start with a review of our fourth quarter on slide 7.

NII across key banking book segments and other funding was strong at EUR3.3 billion, up sequentially and broadly flat from the prior year quarter. Compared to the third quarter, slightly higher deposit volumes, in particular, overnight deposits, offset the expected beta conversions in the corporate bank. Private Bank NII was up sequentially as we guided before, and FIC financing continued to grow its loan portfolio with a corresponding increase in quarterly revenues.

With that, let me turn to the full year NII trends and the outlook for 2025 on the next page. Given the stronger NII in the fourth quarter, we outperformed our prior 2024 full year guidance of EUR13.1 billion, reporting EUR13.3 billion across our key banking book segments and other funding. THis is about EUR100 million higher than 2023, reflecting the resilience of our NII even during the environment of falling rates and beta conversions.

For 2025, we expect NII yet again to increase to around EUR13.6 billion, a sequential increase of around EUR400 million. This is in line with our guidance provided last quarter but reflect of the outperformance in the fourth quarter. The key drivers are the rollover effect from our hedges supported by portfolio growth in private bank, corporate bank and FIC financing.

Let us now look a bit closer into the contribution of the long-term interest rate hedge portfolio on slide 9. Based on forward rates at year-end, we expect the net interest income from the hedge book to grow by several hundred million euros each year as we roll maturing hedges.

On the chart, for simplicity, we've included the average fixed rate for euro hedges maturing in each year as well as the current market implied replacement rate. The shaded area indicates the rollover benefit. And as we have discussed before, the majority of our hedges are 10-year swaps, which gives an indication of the volume to be replaced each year.

It is important to note that we also have roughly 10% of our hedges in other currencies, mostly in US dollar, which positively impacts the overall hedge income. The currency mix as well as hedges executed at higher rates indicate that the hedge income will increase more steadily than the simple rate differential.

With respect to 2025, that increased to around EUR300 million with more than 90% of the income locked in with existing positions. In current rate conditions, we are more sensitive to the long-term rate development and less sensitive to short-term movements in policy rates.

Moving now to the development in our loan deposit books on slide 10. All figures in the commentary are adjusted for FX effects. Overall, loans remained stable during the fourth quarter as lending activities remain subdued in some of our client segments.

Against these headwinds, our investment bank loan book strongly increased by EUR5 billion in 2024, supported by strategic initiatives to grow FIC financing. While we expect this trend in FIC to continue, we also see encouraging growth potential in wealth management.

Moving to deposits, where our well-diversified portfolio grew by EUR5 billion compared to the previous quarter, within that, we have seen substantial growth from general retail plans driven by our deposit campaigns. Based on this encouraging momentum, we see opportunities to further grow in this segment in 2025. In line with previous guidance, corporate bank deposits have reduced modestly during the fourth quarter. In the appendix, we provide further granularity around the quality of our loan and deposit portfolio.

On slide 11, we highlight the development of our key liquidity metrics. We manage our spot and liquidity coverage ratio at year-end to 131%, representing a surplus of both the regulatory minimum of EUR53 billion. With a daily average liquidity coverage ratio of [128%] during the quarter, we operated with a sound liquidity position at our targeted level.

The quarter end stock of EUR226 billion of HQLA, of which we hold about 95% in cash and Level 1 securities, slightly decreased quarter-over-quarter and was mainly driven by asset growth in the businesses. The surface reduction was mainly driven by an increase in net cash outflows. The net stable funding ratio at 121% reflects the strength of our funding base with more than two-thirds to group's stable funding sources coming from deposits. The surplus above regulatory requirements decreased to EUR110 billion.

Turning to capital on slide 12. Our fourth quarter common equity Tier 1 ratio came in at 13.8%. CET1 capital decrease primarily reflects the deduction of the EUR750 million share buyback from excess capital. RWA were lower adjusted for FX driven by market risk. The marginal increase in credit risk was driven by model changes largely offset by reductions from capital efficiency measures.

With respect to the CRR3 go-live effective on January 1, 2025, our pro forma CET1 ratio was 13.9%. However, the CRR3 go-live would also lead to around EUR5 billion of RWA-equivalent impact from operational risk in the first quarter. Hence, total impact of CRR3 is a CET1 ratio burden of around 15 basis points, consistent with prior guidance.

Our capital ratios remain well above regulatory requirements, as shown on slide 13. The CET1 MDA buffer now stands at 264 basis points or EUR9 billion of CET1 capital. While this is 2 basis points higher quarter-on-quarter reflecting the increase of our CET1 ratio, the buffer to total capital requirement increased by 44 basis points and now stands at 331 basis points. This increase was principally driven by our additional Tier 1 capital issuance in the fourth quarter.

Effective from January 1, 2025, our buffers over requirements are impacted by the CRR3 go-live and the increase in Pillar 2 requirements. On a pro forma basis, the buffer to our CET1 requirement at the start of 2025 was 250 basis points, above our target operational level of 200 basis points distance to MDA.

Moving to slide 14. At the end of the fourth quarter, our leverage ratio stood at 4.6%, flat sequentially as the benefit from additional to capital was offset by the CET1 deduction for the announced EUR750 million share buyback and FX effects. Following the 2024 [STRAP] assessment, our 2025 Pillar 2 requirement for leverage ratio remained unchanged.

We continue to operate with significant loss-absorbing capacity well above all requirements, as shown on slide 15. The MREL surplus, our most binding constraint, increased by EUR3 billion and now stands at EUR23 billion at the end of the quarter. The increase reflects higher MREL supply from new senior preferred and additional Tier 1 capital issuances, partially offset by increased MREL requirements from higher RWA. Our surface thus remains at a comfortable level, which continues to provide us with the flexibility to pause issuing new eligible liabilities insurance for at least one year.

Moving now to our issuance plan on slide 16. We finished 2024 with a total issuance volume of EUR18 billion, in line with our guidance of ending the year at year-end of EUR13 billion to EUR18 billion range. During the fourth quarter of 2024, the most notable deal was a EUR1.5 billion AT1 transaction, which attracts a little over EUR10 billion in total orders.

Turning now to 2025. We expect to issue between EUR15 billion and EUR20 billion, broadly in line with last year's plan. The composition is also similar to 2024 with a focus on senior nonpreferred bonds and capital instruments.

Senior preferred issuances will be primarily in nonbenchmark format. So far, we have already raised roughly EUR2 billion, predominantly via US dollar-denominated CD nonpreferred dual transaction issued on January 8. As you know, we have $4 billion worth in AT1 instruments callable in 2025 across three different securities.

We assess call decisions based on several factors, including capital demand, refinancing levels versus reset, FX effects impacting CET1 as well as market expectations. This can result in different decisions based on the features of each individual bond.

Our focus for the first quarter is on the two instruments, which we have a call in April 2025, both of which have a negative FX revaluation impact. Based upon current markets, the [7.5s] would reset to 9.204% and the [4.789s] at 8.788%. You can expect us to take a decision closer to the call date on April 30 this year, at the latest by end of March, shortly before the respective final notification dates for the two securities.

Regarding the third security with a current coupon of 6%, the reset coupon will be 8.974%. We will provide further information on this security closer to the call date.

Before going to your questions, let me conclude with a summary on slide 17. We believe we are on track to deliver increased revenues of EUR2 billion to achieve this year's revenue goal of around EUR32 billion, which translates to around EUR32.8 billion at year-end FX rates.

We remain committed to rigorous cost management, and we'll manage our cost base to a cost-income ratio of below 65% for 2025. Although this is higher than the level we were previously aiming for, we feel good the level of investment in 2025 positions us for incremental opportunities and higher returns over time while also further improving our controls environment.

We continue to expect an amelioration of provision for credit losses in 2025 as the transitory headwinds we call out subside. This should result in a run rate of around EUR350 million to EUR400 million of average quarterly provisions with further normalization expected in the following years.

We have made good progress on our issuance plan with around EUR2 billion issued in January. And we are committed to maintaining a buffer of around 200 basis points above our CET1 capital requirements, which we think balances the interest of both our bondholders and our shareholders.

Our full attention remains on delivering a post-tax RoTE of above 10% in 2025 driven by continued revenue momentum, cost control and balance sheet efficiency.

With that, let us turn to your questions.

(Operator Instructions) Lee Street, Citigroup.

I have three brief questions, please. Firstly, just on Tier 2 capital, you've obviously got a bit of a shortfall there, but you've got a bit extra AT1. What do you target as the level of Tier 2 you're looking to run with in the ordinary course of operations?

Secondly, yesterday, there was some reference mentioned to potentially dropping down a G-SIB bucket alongside other measures. Just particular, if you were to drop a G-SIB bucket does that matter because, I guess, you have a higher domestic requirements. Any thoughts there?

And then finally, thank you for the comments and clarity on the view of how you think about calls. I guess we can look at spread levels work out the impact. But you also referenced investor expectations. So if I may, what do you believe the investor expectations are for the bonds coming to call? That would be my three questions. Thank you.

Thanks, Lee. Thank you for joining. And happy Friday, I guess, last day of the month. So I guess, I'll take the Tier 2 capital piece. So the way we think about it, how we think about -- both the AT1 bucket and the Tier 2 bucket in combination, so -- and depending on kind of the needs of the balance sheet, any one particular point in time, then that sort of dictates kind of which bucket we kind of -- we have a preference for. So now we lean towards AT1, but that can change in the future as the balance sheet sort of changes.

In terms of the investor expectations, I guess, on the AT1 calls, so I guess what we're saying there is we're -- as you know, we've been talking about this for a few quarters now, and we're sort of still awaiting our ability to communicate clearly to you, guys, just because of waiting the sort of regulatory approval. But how we think about investor expectations is more, A, where things are pricing in the market and not to sort of disappoint our investors per se.

And so we are kind of cognizant where the market is currently trading. We're aware of certainly the feedback we receive from investors, and all of that is something we take into consideration in that overall application we made. And I think -- and maybe James wants to illuminate on the G-SIB buffers piece that he talked about yesterday.

Yeah. Thank you, Richard, and Lee, for the question. So Yeah, the G-SIB and domestic O-SII features in two ways. One is MDA for CET1 purposes and the same for leverage ratio. For CET1 purposes, you -- we reflect our O-SII setting, which is currently 2%, against the global G-SIB of 1.5%. As our overall scoring comes down in this -- our O-SII potentially could reset downwards. As you know, there's a European scoring that is applied, and then there's a domestic calibration that's applied to drive your O-SII level.

But at a point in time when G-SIB and O-SII diverge by, in this case, 100 basis points if we were to slip down from the 1.5% to 1% bucket, you might expect that the calibration would struggle to keep us at 2%, hence, my comment yesterday for CET1 purposes that there is at least a possibility in the coming years of a reduction in MDA from that particular driver.

I also have seen that there was new guidance issued late last year in terms of a proposed change in Europe to harmonize the domestic calibrations there, which I think sort of gives you an indication of direction of travel.

On the leverage ratio, there, the G-SIB has the impact. We -- our minimum requirements on leverage reflect the minimum 3%-plus half of the G-SIB amount, which currently at 1.5% means 75 basis points is added to our minimum leverage requirement. That could slip to 50 basis points if we were to go to the 1% G-SIB bucket. So with the full detail, I wanted to again clarify that comment from yesterday. Thanks for the question.

[Domenico Maggio], Jefferies.

Two for me. Are you thinking about moving away from the temporary write-down clause into standard contingent conversion clause? Clearly, I'm aware that this should be put up on both at AGM. And the second one, whether by doing that, you would have set some potential FX losses on calling the dollar AT1 coming up to maturity in 2025.

Thanks, Domenico. Thanks for joining the call. So in terms of temporary write-down clause, your first question. Yeah, we are looking into alternatives in this market. And so you're right, the contingent conversion into equity may allow debt accounting, which will be helpful.

But unfortunately, because we're a bit more challenging as a German issuer under German tax law as it would very likely lead to an imposition of withholding tax, which makes the structure uneconomical for us. But we are continuing to look at various alternative structures, which will allow us to kind of solve for the various constraints that we need to. And then in terms of whether that offset potential FX losses, that sort of structure -- at alternative structure would -- will benefit future issuance, but it would be able to do anything about existing securities.

Paul Fenner-Leitao, Societe Generale.

I've got three -- actually, I had four, but I won't be greedy. I've got three quick questions. The first is on Stage 2 loans. I noticed from the Excel that you're running at a Stage 2. It's quite a big jump from September to the end of December to EUR64 billion Stage 2. That's the highest it's been basically on this Excel, which is the highest it's been since 2022. Can you just explain what's going on there? Is this kind of a German macro problem? That would be -- some color on that would be great.

The second question is, I guess, there's a little bit of a philosophy here. But if I look at slide 3, and I look at your ROEs, RoTEs across the business, I mean, the outlier in terms of underperforming from a risk-return perspective, a volatility return perspective is the investment bank.

My question is, what's your internal cost of capital for that business? And do you think it gets there? I mean DB is not the only 1 in Europe that's suffering from this, but a little bit of color on that. And I know that you guys are under continuous strategic review. If that is getting rid of the IB at some stage something that you would look at?

And then the third question is back to this -- back to AT1 calls, I'm afraid. On slide 16, someone must have purposely put this comment in at the end, which is build specific approach for AT1 calls. I think it was Lee made the point that all of these calls are now in the money, potentially by a considerable amount, certainly maybe 20 basis points, maybe significantly more if you do something in dollars.

My understanding is that there is no limit to when you can make the call announcement on these bonds. I guess you're looking for some regulatory approval, but you might have got that last year. The market is super hungry for AT1. Dollars are a great market to go into. You could probably issue it somewhere around 400.

What are you waiting for? And the question is -- I guess, the additional question is, would it not make sense for you to say that you're going to call and then issue, and thus saving you maybe 10, 15 basis points? A little bit of color around AT1 calls would be great.

So Paul, it's James. I might jump in on the second question around the IB and the cost of capital. Look, strategically, no, under no circumstances. We view the investment bank to be a critical part of our company and and our offering. We talk about the Global Hausbank strategy. And for our clients, especially on the institutional and corporate side, but also in some respects in the wealth management businesses -- business rely on the capabilities of our investment bank, and we are a leading player in the marketplace. So we view it very much to be an integrated business in our overall offering.

To your point, post crisis, all of the investment banks had to struggle to rebuild kind of their profitability and capital utilization, reflecting the post-crisis regulation. And so we, like many, looked hard at the business, how you would transform it and restructure it to meet hurdle rates under the new requirements. And I'll say we've come a very long way in that regard.

On a blended basis, our investment bank, you will have seen 9% last year. We think it's well on its way to meeting and exceeding its cost of capital over time. And we're working on each of the business units within the investment bank and certainly those that are below what we would perceive our cost of capital to be to improve. And we think there are significant tools available now to do that, whether it's on the capital side or, frankly, costs and revenue generation. And so it is becoming more and more efficient in its resource utilization as we continue to develop it and build it under the leadership of Fabrizio, Ram and Mark. So we're pleased with that progress.

In terms of differential cost of capital, just inside our inner workings, we apply a firm-wide cost of capital across all businesses to look at exceeding hurdle rates for shareholder value add. But our expectations aren't limited to the cost of capital of the group. Obviously, many of our businesses operate in markets and product areas that should be well above the group's cost of capital. And so there's a differential that we think of as -- in terms of group hurdle rates and expectations in individual businesses. I hope that helps give you a sense of our thinking about all that.

So may I pick up the AT1 question. So I guess -- so thanks, Paul, for the question. The -- I guess there was on part of the observations you made. So one, I guess, around the deal-specific language, I mean that was something that we have mentioned in previous earnings calls. And it's much more flat than one of the things which you say that we're in the money on some of these calls coming due in 2025. One of the things we're at pains to sort of point out is this FX translation charge that we have as well. So that's something that we have to think about, not just the sort of the credit and rate market valuation of the call.

And so -- when you think about those, then we have security, which is callable in October. We'll make a decision on that guide a bit closer to the time that I'd like the CET1 impact from there, from the FX effects is relatively small currently.

And then we have two calls in June and April, as you know. The -- one is -- both are kind of in the money from what we can see in market levels today. You're correct on that. We obviously have quite attractive reset levels. One has different language in the sense it's a legacy LIBOR contract. So these things are things that we have to consider about what is -- makes economic sense for us based on sort of the criteria that we've explained a few times before.

And in terms of market opportunities to go, I agree with you, the market aprons. We were successful in issuing in November when there was a similar strong demand for AT1. Just the windows for these activities given the equity securities that vis-a-vis bodes both internal approvals from our Supervisory Boards versus disclosures versus regulators just means the windows isn't continuous for us. So those are some of the reasons for why these things are presented to account.

Richard, I'm happy to take the Stage 2 quick question. It's really sovereign downgrade. So there's a sort of a Tier 2 -- Stage 2 trigger that takes place when there are downgrades, including of sovereigns and sometimes clearing houses and the like and that type of things. So typically, when you see volatility in that for us, it has to do with that type of event. In this case, that is what happened to sovereign downgrades in the period that impacted Stage 2.

And to the kind of the way you phrased the question, it really isn't Germany sort of overall credit conditions. As we've said on yesterday's call, we are seeing very modest movements, and by the way, also in the disclosure materials, very modest movements in the German portfolio, which is not to say we're not watching it carefully but is to say it's not a driver of the Stage 2 movement.

Okay. Can I just come back on one additional question on the AT1 thing. It's a follow-up. Something that comes across with my conversations with investors and certainly other issuers, they perceive the FX loss is something that they just basically have to stomach, and it is unfair to have investors have to kind of second-guess on FX, i.e., it's something that you're supposed to be able to manage without that necessarily influencing their call decision. That's just a bit of feedback.

I think the way we kind of flagged out there is just as people ask what our thinking is around our call strategy given all the kind of constraints that we have to think about, as I mentioned earlier, what we're saying is it's something else that we have to think about as an input into that thinking.

Daniel David, Autonomous.

Congrats on the results. I've got three, a couple on AT1 and one on Tier 2. I just -- just following on maybe from that last question. I just wanted to focus on FX to start with. And look, we can debate whether investors should take it or it's your responsibility. What I'm interested in and observed is that the FX hits have got worse as a result of FX moves recently. So I guess, my question is with the call process, could you have hedged against that FX getting worse, I guess, maybe avoiding extra EUR100 million of hit? And is this something you considered ahead of time?

The second one on AT1 is just on the bucket and where you want to be longer term. So it's quite healthy at the moment, 3.2% and 85 bps of leverage. When I think back to what you said about the first AT1 last year, you set to manage our leverage ratio given internal amount. So how should we think about that bucket and also what you've done in the AT1 space?

And then just briefly on Tier 2. Clearly, we saw the reg impact, the change in Q3. And at the time, I think you said you don't want to fill it with new Tier 2 issuance. I just wondered if that's still the case. And if so, why don't you want to replenish that Tier 2 bucket.

Yeah. Thank you very much indeed, Dan, for those three questions. So I will go through the FX hit. So your hedging, yeah, it's something that we've thought about many times. I think the trade-off, unfortunately, is what around sort of an economic impact through capital, which is what the current situation will be versus hedging and generating mark-to-market P&L and consumer market risk RWA.

So -- and that's just the nature of IFRS accounting for this equity accounting that we have for this instrument, where the FX rate is set at inception. So those are the sort of choices from time to time we considered where hedging makes sense.

But you're right, yeah, since I guess the -- since the second half of last year, then the euro has weakened against the dollar. So that is a calculation then the FX effect has gone against us slightly since then. So that's the hedging question.

The other one is around the, I guess, the bucket and internal demand. So what -- I guess a couple of things there. So what you would see on the -- which kind of inputs are thinking around AT1 going forward is -- I guess in Q4, you would have seen on the CET1 side lower market risk RWA consumption. We expect that to normalize back through Q1 and going forward just given the robustness of the investment banking franchise.

And then similarly, in terms of our liability raising both in terms of the deposits, both in our corporate bank and private bank, then that obviously brings cash off the balance sheet, which is leverage-intensive as well. So those two dynamics means that there's an underlying need to have a decent weighting in that bucket. But as I kind of said at the outset, I do imagine that mix between AT1 and Tier 2 will change. But for what I can see through 2025, based on our current planning, then I think it's going to be based throughout 2024. Does that answer your questions? Or was there another question which I missed?

Just on the Tier 2 piece, right? So that reg change to the value that you recognized in the capital ratios, I think you made a comment that you don't want to replenish it via issuance. Was there a reason for not wanting to do that?

No. I think it's more just a trade-off, right? Like I say, I think just from what's the best instrument to achieve our objectives from a funding and liquidity and capital perspective based on what's in our balance sheet development and our growth and Tier 2, we don't think it's necessarily the best asset for 2025. But it might well be the better instruments beyond that.

Robert Smalley, Verition.

I'm sorry to beat a dead horse on the AT1s, but one or two questions. In terms of FX losses, what would be an acceptable FX loss for a call? How would you evaluate that? And you're in a position on that in pretty much all three.

Secondly, as you -- you have significant buffers across the board. As you bring down capital buffers, you have three calls this year in AT1s. Is it possible that you just call one, two, all three, none for cash as opposed to calling and refinancing?

And then I had a third completely unrelated question, but something I wanted to pick up on from the call yesterday on the Mittelstand opportunity that you have. You talked about making your operations domestically more efficient to address that.

But could you talk a little bit more about what you're doing in terms of penetration by product. A lot of these companies have long-standing relationships that you're going to have to compete with. And how are you doing that in terms of product and in terms of price?

Robert, and good to hear from you. Thanks for joining. So I guess the AT1 question, so I think how best I can answer it, and I think -- I recognize it's challenging for people who are looking at these products day by day and just looking to understand what's put into their models in terms of how we're thinking about these things.

Look, I think the way I think about the FX is more at a portfolio level in a single year. So the question becomes, going to acceptable levels, do we have a number in mind? No, but that's how we kind of think about it is that kind of overall portfolio number.

In terms of which, is there a one, two, three -- in terms of what we called, we do think about AI on a deal-specific basis. But I guess from a -- on a portfolio level, when it comes to capital and when it comes to, I guess, overall investor sentiment.

So I can't answer your question directly always as, I guess -- yeah, as transparently as you would like just because of these constraints to manage and operate and -- but the -- from what I can disclose on us at this time. But yeah, the way to think about it, I think, is that from a -- when I look at the portfolio of these three particular calls, given where things are right now, is that it's not unsociable number of capital that we'd have to be taking in 2025.

Do we have a target around that? No. But that portfolio, in fact, is something that we're thinking about. And then all the other factors that I've talked about on a deal-specific basis about where -- in terms of documentation in the moneyness and market expectations are things just kind of feed into the loop on that. So that's how I would answer your question, although that might be not as satisfying as you announced that you would like.

Robert, it's James. On the last question regarding the German Mittelstand, look, obviously, it is one of the signature strength of the German economy. And therefore, banking -- providing banking services and having the relationships with Mittelstand, obviously, super important for our bank and other banks in Germany, and it's a competitive market.

We probably deemphasized too much, that segment, now going back a couple of decades. And -- but we've been rebuilding our market position steadily over the years, and it does absolutely represent a focus for us strategically.

Where we are especially competitive in the Mittelstand is obviously where there are significant product demands that are international in nature or capital markets-oriented, so international cash management, trade finance, some of the investment banking products that I talked about earlier in response to the question, I think, from Paul around the investment bank. So that is where we have a differentiated market position. And absolutely, we wish to grow and thrive along with our clients in that marketplace.

I will say -- and I think the question yesterday came up, at least tangentially in connection with potential M&A activity here in our home market, and would it create an opportunity for us, I think the answer to that is yeah. But obviously, events are out of our control. But certainly, we intend to prosecute the opportunity and work with clients in the Mittelstand existing and new clients.

In terms of how to penetrate, look, pricing is interesting. I think one of the SVA challenges that we have is certain portfolios are, in fact, below hurdle, very competitive domestic market here. So credit extension is, in that way, expensive in the German market, but it is something that we look at carefully.

The way you interact with clients, and particularly the technology that you put to work in those -- in that client relationship and the connectivity and kind of the ease of use of access to the services to payments and what have you, is a significant competitive differentiator and it's one that we're seeking to leverage and invest in going forward. And so that is an important part of our thinking as well. I hope that helps in terms of color, Robert.

That color and Richard's color, very helpful. And I know you can't answer all of the questions with specifics. So I greatly appreciate it.

[Ibrahim Redi], Lazard.

Congratulations for the results. I first have a comment, maybe from an investor perspective, is that the expectation is absolutely that the three AT1s callable in 2025 should be called. And as credit investors, we would not understand that a couple of basis points of FX impact would affect the call decision. After that, I have like two questions.

Number one, on the call rationale, what you say is that you look at the FX loss at portfolio level in a single year. Can you give more clarity as what you mean, especially considering that you consider the economics of each transaction on a deal-by-deal basis? So is it, how to put it, a full cap stack economic rationale for the call? Or is it a deal-by deal, how do you reconciliate both?

Number two is regarding the leverage ratio. If you call the three deals this year, the excess Tier 1 drops to EUR5.5 billion from EUR10 billion. My question is, is there a target there, long term?

Thanks very much for the call and the questions. So well, setting out, I guess, the slight cost between deal-specific and portfolio -- I guess the questions which I get asked in as the format is, is what is the rationale and how to think about it from a modeling perspective as to the likelihood of call, non-call? And people would expect rational behavior with those decisions. And I think what we've been trying to do on this call, and I guess in previous calls, is just a sort of -- is to raise the things that we as a firm need to take under consideration.

So obviously, there's things which -- as people are aware of, whether it's credit spreads, interest rates, volatilities. Obviously, the FX losses is something that we think about, but also, there's other these kind of more qualitative impacts, which are around the investor expectations, as we're talking about. So obviously, you made your point clear at the start.

And what I was really saying about the portfolio effect is some of these deals have different FX losses, kind of wanted -- one of the things we do think about overall is the overall portfolio impact just because in this particular year, we have just a number of non-euro calls coming due this year. So that's kind of what I was trying to get to.

And in terms of targets, so we don't have a target for -- as we know, communicated external target for leverage ratio. What we do have is -- essentially, how we think about it is we like to internally think that we want to keep above 4.5%. And over time, which kind of grow our business and organic capital move towards 5%, which is also something which is sort of -- which informs kind of ratio these decisions. So over time, that's where we have an ambition to get to.

But for the next few quarters, it's going to be more sort of being at these sort of levels, notwithstanding the kind of the internal demand that we see, as I kind of mentioned earlier. So those are sort of factors in terms of how we think about the leverage ratio and the direction of travel over time, but we actually have a specific target.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Philip Teuchner for any closing remarks.

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

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye