Deutsche Bank AG (DB) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Q1 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, Dixit Joshi, 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'll be happy to take your questions. But 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 raw materials.

With that, let me hand over to Dixit.

Thank you, Philip, and welcome from me. We are mindful that the war in Ukraine has been devastating for millions of people and continues to bring a high degree of uncertainty to the world economy, to the market environment and to our clients. We condemn the Russian invasion of Ukraine in the strongest possible terms, and we support the German government and its allies in defending democracy and freedom.

We are not taking on any new business in Russia, nor with entities incorporated in Russia. We have been clear that we are in the process of winding down our operations, in line with our legal and regulatory obligations and accompany our clients in doing the same.

While this has the potential to impact our full-year results in our important measurement here, we believe we are on a good trajectory to reach our 2022 goals. We delivered group revenues of EUR 7.3 billion, an increase of 1% year-on-year, even compared with the strong quarter in the prior year. We saw revenue growth across all 4 core businesses, driven by business momentum, market share gains and investments that will support sustainable growth in 2022 and beyond.

This quarter, we generated a reported 8.1% return on tangible equity, up on the first quarter of last year, despite a 28% increase in annual bank levies, which are recognized in the first quarter. We also improved our efficiency. Post-tax profit was up 18% over a successful prior-year quarter, driven by positive operating leverage. This brings our cost/income ratio down to 73%, 4 percentage points lower compared to the prior year.

We are mindful that the current operating environment presents many challenges, including on the cost front, and we will continue to focus on cost discipline.

Finally, looking at our balance sheet, we are well equipped to navigate the current environment, thanks to our high-quality loan book and tight risk management. Our capital position remains strong, despite the impacts of the war in Ukraine, and facilitating business growth.

Now, let me take you through the progress on strategic priorities in our core businesses on Slide 2. In the Corporate Bank, business growth continued despite the more challenging market, as we diligently executed on our strategy.

We saw this reflected in loan growth, which alongside interest rate tailwinds, contributed to an increase in net interest income. This, coupled with cost discipline, helped us deliver operating leverage of 18% this quarter.

In the Investment Bank, strong client activity in FIC supported revenues with year-on-year growth across institutional and corporate clients. Advisory revenues were more than 80% higher year-on-year, partly offsetting lower revenues in equity and debt origination.

The Private Bank delivered its best quarter since we launched the transformation, with pretax profit up more than half year-on-year to EUR 419 million. It also captured net new business of EUR 13 billion across inflows into assets under management and loans.

Asset Management delivered revenue growth of 7% year-on-year, driven by higher management fees, despite the volatile market environment. At the same time, the business continued to invest in growth initiatives and platform transformation. The dynamics in all 4 core businesses provided a strong [step-up] point to deliver on our 2022 targets.

Next, let me give you an update on Russia on Slide 3. We believe the investments we made in future-proofing our business meant we were well prepared as we entered this period of uncertainty.

This means we were ready to deal with not only the direct impacts of the war in Ukraine, where we reduced our net loan exposure to Russia to below EUR 500 million by the end of this quarter, but also, the second order ones and our investments in controls are a testament to this.

As a result, we executed diligently on sanctions implementation without any major issues and manage the financial aspects of these sanctions. As it stands, we operate under a heightened alert status, and we are continuously adapting our controls to the evolving landscape.

Despite the uncertainties of the current situation, we have not seen any major disruptions to our businesses, even with all the added safeguards we have put in place. While it is too early to quantify the potential long-term impacts of the war, we believe our conservative balance sheet and transformed business model will help us face the challenges ahead.

Of course, we continue to be mindful of the broader environment and uncertainties that go well beyond the war, such as the supply chain issues that could further impact future economic growth.

A key driver of higher profitability is our delivery of positive operating leverage, which I will now cover on Slide 4. Starting with revenues. Group revenues increased by 1% year-on-year and the Core Bank contributed by generating revenues of EUR 7.3 billion, up 3% year-on-year. Excluding revenues in Corporate & Other and the Capital Release Unit, the average annual increase of revenues in the 4 operating divisions was 7%.

Revenues in the Corporate Bank were up 11% year-on-year, a second consecutive quarter of double-digit growth, driven by continued deposit repricing and business growth.

Investment Bank revenues grew 7% year-on-year, over a strong first quarter in 2021. A 15% increase in FIC revenues more than offset a 28% decline in Origination & Advisory.

In the Private Bank, continued strong business growth more than offset interest rate headwinds. And as a result, revenues were up 2% year-on-year.

Asset Management revenues rose 7% year-on-year, driven by a 13% rise in management fees, which reflects consecutive quarters of inflows and assets under management during last year. Assets under management increased by EUR 82 billion year-on-year to EUR 902 billion.

Moving now to costs. Noninterest expenses were down 4% year-on-year, despite an increase in bank levies of 28% or more than EUR 150 million, which was offset by lower transformation charges and the cessation of Prime Finance costs.

Adjusted costs, excluding bank levies, transformation charges and Prime Finance were also down 1% year-on-year, reflecting lower investment spending needs after the completion of IT projects and delivery of efficiency gains, again, in line with plan. Beyond these cost items, we faced higher-than-expected expenses, mainly in compensation costs.

Let us now look at topics that drive our revenue performance over the next slides. Slide 5 provides further details on the development in our loan and deposit books over the quarter. Loan growth across the bank has been EUR 5 billion or EUR 2 billion on an FX-adjusted basis.

As outlined in the previous quarter, this normalization in our growth rate was expected due to a partial reversal of short-term lending, which supported a strategic transaction over year-end in the Investment Bank. We expect the majority of this loan to be prepaid by the end of the second quarter.

Offsetting this, we saw continued strong momentum from mortgages and collateralized lending in our Private Bank, high client demand in corporate treasury services, as well as loan originations across FIC financing.

Despite the more challenging market conditions, we saw a strong performance of our deposit portfolio, given the market volatility during the quarter. Deposits were broadly stable compared to the previous quarter, when adjusting for FX, as a result of active balance sheet management. Furthermore, our momentum in repricing deposits has also continued, as shown on Slide 6.

At the end of the first quarter, we are charging agreements in place on a total of EUR 142 billion of deposits, generating quarterly revenues of EUR 139 million. Compared to the first quarter last year, we implemented additional agreements on EUR 47 billion of deposits.

Our annualized run rate now stands at EUR 557 million, an increase of EUR 149 million, compared to our full-year 2021 charging revenues, principally driven by ramp-up effects from last year, as well as the continued lowering of charging thresholds.

Looking ahead, current forward curves imply lower charging-specific revenues later this year, which will be more than offset, given our overall positive net interest income sensitivity.

Let me provide some detail on the evolution of our net interest margin on Slide 7. Looking back, the decline of net interest margin in the first half of 2020 was driven by the cut in U.S. rates. The margin has been broadly stable since then, above the level we initially anticipated, driven by increased balance sheet efficiency, deposit repricing and TLTRO income that helped offset ongoing deposit margin pressure.

Adjusting for TLTRO timing effects, NIM in the first quarter would have been at the prior-year level. From here, we expect NIM to rise due to the tailwinds from the rising rate environment.

Moving to Slide 8, highlighting the development of our key liquidity metrics. Despite the recent period of increased market volatility due to the war in Ukraine, our liquidity and funding levels remain robust and close to targeted levels. The stock of our high-quality liquid assets increased by about EUR 7 billion during the first quarter.

This is mainly due to new issuance activities and deposit inflows primarily from the Private Bank. The liquidity increase was partially deployed in further loan growth quarter-on-quarter, primarily in the Private and Corporate Bank. As a result, the liquidity coverage ratio slightly increased by 2 percentage points to 135%.

The surplus above minimum requirements increased by about EUR 3 billion quarter-on-quarter to EUR 55 billion. For the remainder of 2022, we remain committed to support the businesses while comfortably exceeding regulatory requirements. Going forward, we continue to steer the liquidity coverage ratio conservatively, towards 130%.

The net stable funding ratio of 121% at quarter end was broadly unchanged at the upper bound of our target range, comfortably above the 100% requirement. The longer-term funding sources for the bank remain well diversified and continue to benefit from a strong customer deposit base, which contributes about 2/3 to the group's available stable funding sources.

For the remainder of the year, we aim to maintain this funding mix, which will be supplemented by debt securities, issued in line with our issuance plan.

Turning to capital on Slide 9. Our Common Equity Tier 1 ratio decreased from 13.2% to 12.8% over the quarter or 41 basis points. This reflects a decline of around 8 basis points from higher RWA due to Core Bank business growth, partially offset by lower operational risk-weighted assets. ECB-mandated model adjustments related to small- and medium-sized enterprise lending led to a decrease of 20 basis points.

Strong organic capital generation during the quarter was offset by share repurchases, deductions for dividends, AT1 coupon payments and equity compensation, adding 4 basis points net. We estimate the impact of the war in Ukraine on our CET1 ratio at 17 basis points due to higher risk weights on our Russia-related exposures and higher prudent valuation reserves due to the increased dispersion of market prices.

CET1 capital now includes a capital [deduction] for common share dividends of EUR 354 million for 2022, in addition to the roughly EUR 400 million, which we already put aside last year to pay the proposed 2021 dividend of [$0.20] per share post the Annual General Meeting this May. We remain committed to support business growth through continued earnings retention and to finish the year with a CET1 ratio of 13% or higher.

However, what remains hard to predict at this point is the potential for further regulatory-driven RWA inflation over the remainder of the year. Our capital ratios remain well above regulatory requirements, as shown on Slide 10. Due to ECB-mandated model adjustments and as a result of the war in Ukraine, the distance of the CET1 capital requirement has decreased by 41 basis points over the quarter and now stands at 238 basis points or EUR 9 billion of regulatory capital.

We have successfully issued two Tier 2 capital instruments with a total volume of EUR 2.6 billion in the quarter, and a EUR 750 million AT1 capital instrument, which has settled on the fourth of April only and is therefore not included in the first quarter 2022 statutory capital.

With these issuances, we have better aligned our AT1 and Tier 2 capital structure to regulatory requirements. As a result, our total capital ratio distance to MDA is now 250 basis points on a pro forma basis, including the latest AT1 issuance.

Moving to Slide 11. Our fully-loaded leverage ratio was 4.6%, a decrease of 30 basis points over the quarter. Of the 30 basis points decrease, 16 basis points were driven by Tier 1 capital, which reduced as a result of the call of our EUR 1.75 billion AT1 instrument announced in January. Our EUR 750 million AT1 issuance that settled in early April, adds 6 basis points of our leverage ratio on a pro forma basis.

Leverage exposure, excluding FX effects, increased by EUR 28 billion quarter-on-quarter, following continued growth in our Core Bank, including loan growth. Our pro forma fully-loaded leverage ratio, including certain ECB cash balances, was 4.3%. With our reported leverage ratio of 4.6% at the end of the quarter, we have a buffer of 134 basis points over our leverage ratio requirement of 3.23%.

We continue to operate with a significant loss-absorbing capacity well above all our requirements, as shown on Slide 12. The MREL surplus is our most binding constraint, has increased by EUR 1 billion to EUR 15 billion over the quarter, mainly from the first-time inclusion of selected structured notes in senior preferred ranking that meet the MREL eligibility criteria.

This has more than offset higher RWA. We expect a reduction of the MREL surplus in the second quarter of 2022, given we will receive the next higher MREL requirement from the Single Resolution Board.

Our loss-absorbing capacity buffer remains at a comfortable level and continues to provide us with the flexibility to pause issuing new senior nonpreferred or senior preferred instruments for approximately 1 year.

Moving now to our issuance plan on Slide 13. In the first quarter, we issued a total of EUR 8 billion, mainly driven by 5 benchmark issuances, as well as larger structured issuances. Our last 2 benchmark transactions were EUR 1.5 billion Tier 2 and a EUR 750 million AT1 security. Both deals combined, saw an aggregate order book of over EUR 12 billion.

Together with the AT1 issuance in November last year, we have raised EUR 4.6 billion of new capital instruments to strengthen our balance sheet. Most of our requirements for 2022 are now satisfied. Also noteworthy, was our first green senior nonpreferred issuance over EUR 1.25 billion. This expands our ESG issuance footprint into a new debt class.

As you are aware, we have not called Postbank Funding Trust 1 and 3 despite their loss of recognition as regulatory capital. We continue to see these bonds as in expense of funding instruments for our balance sheet. We will continue to make decisions regarding the exercise of the issuer call right, depending on economic factors, while balancing the interest of our key stakeholders.

For the full year, our issuance plan remains between EUR 15 billion and EUR 20 billion. Despite the challenging market environment in this quarter, we've already completed over 50% of the lower end of our full-year issuance target.

Turning to the outlook on Slide 14. The current geopolitical outlook and macroeconomic environment brings a great deal of uncertainty to the financial markets and to our clients. However, strong revenue momentum in our core businesses continues to support our revenue guidance of EUR 26 billion to EUR 27 billion for 2022.

And in our view, our first quarter results built a strong foundation to achieve this. We remain highly focused on cost discipline and continue to work towards our targets, but the current environment remains challenging, and the visible cost pressures have intensified.

We remain disciplined in managing our risks, and we believe that near-term risk is contained. Our capital remains resilient as our organic capital generation was offset by distributions, while at the same time, we supported business growth and absorb regulatory changes and the impact of the war.

We remain confident in our year-end guidance of around 13%, consistent with our target of greater than 12.5%. Our strong first quarter also gives us flexibility on issuance for the remainder of the year.

With that, we look forward to your questions.

(Operator Instructions) Before we go to the first question, let me hand over to James for a couple of remarks.

Thank you, operator. Before we do the Q&A, I just wanted to make a brief statement. You will have seen the headlines to get today with regard to searches by the public prosecutor in our Frankfurt head office.

As you may have read from our statements, this is an investigative measure in connections with suspicious activity reported by the bank. Deutsche Bank is fully cooperating with the authorities.

Unfortunately, as this event is very recent and an ongoing investigation, we will be unable to say more on this matter on today's call. With that, we look forward to your questions.

Our first question is from the line of Robert Smalley from UBS.

Good morning, and thanks for doing the call. Couple of related questions on credit and credit quality. Could you talk about the leverage lending book?

When I look on Slide 26, I see that the notional hasn't changed that much, but when we're looking at provisioning, looking at risk, capital allocation to the book, could you talk about how you may be looking at that differently in a rising rate environment, particularly?

Secondly, on the call from the other day, there was a discussion of loan growth in Trade Finance. Could you talk about that? It's kind of the other end of the credit spectrum, but what are the opportunities there? And what does that do around RWAs and density, if anything different?

And then finally, trying to pull it together, as we look at the loan portfolio going forward, should we look at your loan portfolio as growing more barbelled with more leverage exposure and more low-risk Trade Finance and not as much in the middle? How do we dimension that across the credit spectrum?

Robert, thank you for joining the call. It's James here. Look, obviously, the growth year-on-year in the Investment Bank loan book was considerable. And so I think your question is entirely well-placed. One element of that growth is -- relates to an episodic transaction, which we called out in the Q4 earnings call that we expected to run off, and it did partially run off, but some of it was still on the books on March 31.

If you adjust for that, the growth is in the financing part of our business and is significant year-on-year, but relates to the essentially regrowing our structured finance portfolio in that Lending business.

Leveraged lending, that book has been relatively flat over time. We manage that book within quite disciplined risk appetite metrics and constraints. And actually, as you know, volumes, relatively speaking, were weaker in the first quarter than over recent quarters. So you would not have seen leveraged lending being a significant contributor to that loan growth, sequentially.

There -- on the Trade Finance part, that is obviously a business we think we have leading capabilities in and is a core part of our strategy, going forward, in the corporate book bank. Those are attractive assets, in terms of their characteristics, in a variety of ways, including their risk characteristics. And indeed, we do intend to grow our Trade Finance book.

The trends, as I mentioned on Wednesday, are encouraging in that regard, notably that a longer, more complicated supply chain increases the need for working capital, increases the length of the sort of inventory flows in the economy, which is something that needs to be financed.

I guess, the last point about barbells, we do think of our portfolio as a barbell, but the whole loan book. And you need to remember that a significant part of the loan book is in the retail banking part of the business, and within that, heavily weighted towards mortgages.

And so while the types of lending, you're talking about leverage lending or some of the structured finance, we think we do really well in and have a very good handle on the risks and a very solid risk performance over time in those activities. As you say, it is balanced by, in fact, a much larger, very low risk, highly secured book that we won within that total EUR 480 billion of loans. I hope that helps in terms of color, Robert, on your question.

Very much. Thanks a lot, and thanks for doing the call.

Thank you.

(Operator Instructions) The next question is from the line of Jakub Lichwa from Goldman Sachs.

I got a few questions. Thanks for doing the call, as always. So question number one, you have actually reduced, fairly recently, the Prime Broking business. Would you actually expect that to have any effect on reduction in your market risk?

And although -- would this [FIC] through, you would expect, or you'd saying into Pillar 2 assessment for the following year or no? That will be question number one.

If you don't mind, you can maybe, take one at the time. I got 4 in total.

You can go ahead and ask the questions, and then we'll take them one-by-one.

Okay. Sure. So the second one is resolution planning. Is there any date by which the authorities expect you to present or complete resolution planning? I think the expectations for banks, there is an indicative date of end of 2023.

I think, by which point, banks should remove any sort of -- the end of 2023, by which time, bank should remove any sort of, call it, impediments to the volatility or SPV-issued instruments and et cetera.

On the ratings, question number 3, you're on the positive outlook from Moody's. Clearly, the beneficiary there is here to rating. But sort of beyond Tier 2, obviously, your issuance, right now, at the senior nonpreferred level, calibrated to [LGF], in order to qualify for that 1 notch.

Do you expect to be defending that 1 notch, in case of an upgrade? Or are you happy with -- would you be happy with Baa2 rating at the senior nonpreferred level? And so would you think that you may reduce the stock of senior nonpreferred debt? And is it actually in our -- already in your funding plan? So that's number three.

And number four, on the [CMS], actually, sorry to ask, I know it's just a small security [book] or 2. But SRB seems to allow actually [STD] issued that in MREL as long as they do not pose operational issues in resolution. So can you confirm to us whether CMS poses issues in resolution planning, please?

Okay. Thanks for your questions. I'm going to take the first two. It's James, and then Dixit will take the second two. On Prime Brokerage, that is out of our balance sheet and P&L and our risk metrics now, essentially from the first of the year. It had tailed off towards the end of last year as we transferred client by client over to BNP Paribas.

But all of our metrics, liquidity metrics, market risk metrics, obviously, the leverage balance sheet and the balance sheet are clean, if you like, from an influence of Prime Finance at this point. The one thing, as you know, with any of the businesses that we exit, there can be operational risk, RWA, that stay with us. But beyond that, it's not part of our profile today.

On the Pillar 2 requirement, business model is one of the considerations of your Pillar 2 setting. I can't speak for the assessment and certainly, not publicly, but it does feed in naturally to the Pillar 2 assessment on business model.

On resolution planning, as you say, if you like, the measurement date is an [N23] assessment of your resolvability that the Single Resolution Board has to determine, in connection with, also, the national resolution regulators.

Look, this has been a build over many years. And as a firm, we're highly committed to building all of the capabilities across the full range and dimension of resolution capabilities, in order to achieve a positive assessment by the end of '23. For practical purposes, we feel that those capabilities have to be in place by the end of this year to prove their sustainability and -- over time.

So we're working towards really a '22 timeline to have all or practically all of the capabilities in place, hopefully, meeting the expectations of our resolution of authorities.

I'll take the last two. On ratings, at the current moment, we don't anticipate giving up the senior nonpreferred LGF uplift. Look, we've been encouraged by the upgrades that we've got from all 3 agencies in 2021. I would say, hard [won] to many quarters of consistent execution on our transformation plan. We're on the right track. We think there's positive momentum and positive ratings pressure, in respect of us, which is a good thing. But we don't plan to give up the uplift.

In terms of legacy Tier 1, you'll see in the appendix, we have a list of our capital instruments, it does not include the two items that add up to about EUR 600 million, two issuances that add up to about EUR 600 million in aggregate, i.e., a de minimis amount.

But we don't see those as an impediment resolution. We've done our thorough legal analysis there. And this is now simply those two instruments for us, are simply now cheap funding. And hence, we've kept those outstanding. Hope that's helpful.

The next question is from the line of Stefan [Suri] from Credit Suisse.

Thank you very much for the call. Yes. Three questions, if I may, on my side. The first one is, what has been the impact of rising rates on your other comprehensive income, if I may ask, this quarter? And how do you compare to peers?

The second question is probably a [broader] question regarding the ECB response to [European] Commission call for advice on the macro prudential framework and more specifically, on AT1, how to make AT1 securities more going, concern capital and make coupon payments more easier to consider. What's your thinking on that?

And lastly, what is your thinking, to come back to ratings, in terms of timeframe for rating the upgrade, especially at Moody's? Any insight you could share with us, would be much appreciated in this respect.

Sure, Stefan. Happy to run through that. In turn, the OCI front, yes, we have noted that peers have had reasonably large OCI losses in the first quarter as a result of the rate environment.

The impact for us was more measured. It was probably in the region of less than -- I would estimate, around EUR 300 million after some technical effects. Probably around in the region of 5 basis points of CET1. And within that, I would say, the specific element related to securities portfolios within our liquidity reserves, would probably be about EUR 50 million on the quarter.

And the reason we've seen a muted CET1 drawdown in the first quarter, even though we've had fairly large moves in interest rates is, we had de-risked portfolios coming into the close of last year, and that was as a result of our view that we'd entered 2022 and see higher volatility and a steeper curve and higher rates, again, with lots of uncertainty and uncertainty around timing as well. And that prudent risk management has helped put us in good stead.

On the ECB consultation, call for advice and on AT1. Look, something that we obviously are going to follow very closely and participate. And it is our view that to the extent that regulators look to review methodology, review the toolkit around capital, look at making it further risk-sensitive and efficient, we obviously encourage improvements to the framework.

Ultimately, there is, of course, in the domain of the legislators to decide what that framework looks like. I would think that this would be in the context of wider discussion around bank capital and the bank capital stack. You would have noted the comments out of the PRA, which we're also following reasonably closely. So I would say, look, it's something we'd follow.

The AT1 market currently, as you know, is fairly well-structured, well-understood. We've issued in full compliance with the guidelines around structuring of AT1 instruments. So investors are reasonably comfortable with the current market, that's not to say the marketplace can't be enhanced.

And then the third question that you had around ratings. Again, there's not a whole lot to say, given it's not really in our domain and timeline to control. But we're encouraged, we remain on positive outlook. We continue to execute on our transformation plan, which is one of the key criteria the ratings agencies have.

So we're going to continue doing what we've done now for many quarters. Run a prudent balance sheet, ensure that we communicate carefully and transparently with the capital market, try and minimize our issuance needs and continue to execute successfully with, again, as I said, with some upward pressure on our ratings from here. I hope that's helpful.

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

Maybe, I got one question, I suppose there's a couple of parts to it. So just thinking, [oil and gas] and all gets switched off to Germany and we get the type of GDP reduction that the Bundesbank's suggesting and then a potential recession. So do you do think Deutsche Bank in (inaudible) return on tangible equity target for the year?

Obviously, I appreciate that the German state probably comes in with some [capital] injections, KfW do some lending. But more worries that if it probably stops the required loan growth in your private clients and your corporate divisions, where you probably still get the cost pressure and you might not get as many rate rises coming through. So that's kind of question one.

And then linked to that, in that scenario, what levers do you actually have to pull to try and actually help you get back up or achieve that 8%? So basically, we're about economic risk and the risk that [imparability] to hit your 8% return on (inaudible) target? That would be my question.

Thanks, Lee. Appreciate the question. Look, as we've said now for 3 years, we have been doing everything to manage the company towards the financial targets that we set for 2022. Over that period of time, we've overcome a number of different challenges in the marketplace and -- or the market environment and the economic environment, and we've remained committed to doing that.

As we sort of disclosed on Wednesday, we continue to see a path to our targets for this year. No question that there's a scenario -- an adverse scenario that can take place, that would make it increasingly challenging to hit those targets. But as we sit here today, we don't see that scenario materializing. It's not our base case, and we've been working to create the levers necessary to retain the path.

In terms of this scenario, as I say, it's not our base case that takes place. It's -- we sort of agreed with the Bundesbank analysis, in terms of the severity of the impact on the German economy.

But as you say, the potential offsets, whether it's fiscal support from the German government for the economy, where we do believe that there is a political will and the resources to do that or other events that take place, it's, frankly, not easy to predict how these scenarios play out. But there's clearly a downside scenario that would put the -- more pressure on that target achievement.

The levers you might have, sort of, most scenarios and think you could call out?

Well, the levers are the ones that are in place. As I said on Wednesday, the -- to, I think, Stuart Graham's question, the ECL impact for us, even in that downside scenario, looks to be, in some sense, is surprisingly modest as we sit here today. And there's no [information] in our credit book that there's a deterioration so far as a result of these events.

The first lever, of course, is having a strong and well-underwritten credit book with the right degree of diversification, low concentration risks, credit protection, where it's applicable, and just managing the business carefully and within risk appetite. So in that sense, that lever is already pulled.

And then we're working on -- with respect to the rest of our income statement and balance sheet to manage towards the targets. So I think, as a management team, we're doing everything we can to remain on track and managing through this environment with the appropriate degree of caution, but also, cognizant that the -- you know that it's not our base case and that we remain on track against our objectives for the year.

(Operator Instructions) Our next question is from the line of Daniel David from Autonomous.

Just got a couple. On RWAs, I think you've guided to EUR 415 billion to EUR 420 billion in 2025. Now that there may be EUR 5 billion to EUR 10 billion of RWA inflation in 2022 due to the ECB model decisions on the SME book and the retail book, is the EUR 415 billion to EUR 420 billion still unchanged? Or is there anything else to say that?

And related to that, does the ECB model decision mean that the 10% RWA inflation guided to for Basel IV come down a bit? Or is there anything else that you could say on that?

And then finally, just on the [CMS] and again, I know it's been talked about and apologies for returning to the topic. I just -- I understand the German BRRD transposition has had an impact on the CMS and kind of infection risk that's been perhaps, talked to death.

But I just wanted to understand, does German BRRD mean that there is an infection risk for the Emerald layer? And I guess, with regard to your comments on de minimis, is that sentiment also shared by the regulator? Or should we read the [EFB] -- the expectations for banks is when they'll give that kind of sign off?

So David, on the RWA side, no change in our view for 2025. First of all, at least the first of these model adjustments was built into our planning. And then secondly, the effect of a lot of these model decisions is simply to raise the IRB RWA, ultimately, given that the -- over time -- and this is really the 2029 when the output floor becomes binding. All it does is really bring forward the -- or caused to converge slightly the IRB and the standardized approaches, so that the ultimate result of the output floor is less.

As we think about 2025, as I say, at this order of magnitude, it doesn't affect our capital planning.

Just on the BRRD and infection risk, again, in our view, just given the nature of our capital stack, we really don't have much exposure, even if you consider the 2 notes that we have, which, again, having done the legal work around those, we don't view our stack as having infection risk and certainly, not from an [MRO] point of view.

And just to touch upon the point on de minimis. Is that signed off by the regulator that it's not a problem? Or is that something that's yet to come?

So I think the BRRD is reasonably clear in our minds. And so having done the work around those nodes, and it's pretty clear to us that we don't have that infection risk. I can't comment on the regulatory view here, but from our perspective, we've managed our stack with that assessment in mind.

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

Yes, two questions. One on litigation risk, and I'm not asking about today's rate. I'm looking at -- you've had -- you have EUR 1.1 billion of litigation reserves, and then there is this figure that hasn't changed, about the EUR 1.7 billion of possible -- that you have this usual language about.

I'm just wondering -- I mean, although these are way below anything that was paid out in the DOJ RMBS business and so forth, I'm just wondering, beyond maybe, hitting 2022 target 8%, is this -- what would be your annual budget for topping this ARPU for sort of just operational risks that arise your expectations on that?

And Also, can you confirm that you are completely done with cum-ex with that Frankfurt little fine you had a couple of years back on that?

Then secondly, on credit risk. I'm just looking at -- about 40% coverage for all Stage 3s by all provisions, and -- which has not really changed that much for you over time. But I still don't understand how that works with calendar provisioning. Is it something that is going to be constantly deducted from CET1? Or just going to keep your Pillar 2 requirement higher? Yes, those are my two questions.

So James, it's James. If I understood second question correctly, I'll take both, but feel free to ask a follow-up. So on litigation risk, you noticed how relatively stable the provisions have been in the past recent quarters, both the balance sheet provision and the contingent liability or contingent risk that we see.

And that reflects really that there haven't been any major items, either it's flowing in or flowing out of our sort of litigation portfolio. By and large, that's a good thing. I think the degree of stability there is helpful. Although, as you know, from our disclosure, there are one or two matters that we would happily resolve and put behind us.

In terms of the ongoing, it's always hard to say. It's an awkward thing to talk about what is your "budget" for litigation matters. Our goal, and you've heard us talk a lot about investing in our control environment and our operational -- our nonfinancial risk management capabilities and what have you. The goal is obviously to conduct our business in the best possible way and so as to minimize the degree of litigation risk that we face. In our business, of course, that's never zero.

But if you're looking for a budget, it's considerably smaller than the worst of the years we've had and probably, towards the kind of the single-digit EUR 100 million and the low end of that, to the extent that we can again, benefit from the long-standing investments in nonfinancial risk management and also conduct in other aspect of our business.

Now, in terms of the deduction from CET1, if I understood the question correctly, I think it's really the ECL that you're thinking about, in this regard, that feeds into our regulatory capital.

That ebbs and flows, based on essentially, the book evolution and then also, the risk evolution, in particular, ratings, migration, model changes and assessment of the riskiness in the environment. So it's not a constant number for sure. Hopefully, I've understood your question correctly. If not, feel free to ask a follow-up.

No, it's -- thanks. No, it's to do with the calendar provision requirements for stale and nonperforming loans.

Sorry, I've got the question now. So the NPE -- yes, that we have been incrementing over time the capital impact of the nonperforming exposure backstop requirement that the ECB has communicated to the banks. So yes, that's built into it. To my knowledge, we're now fully built, I believe, in terms of the capital impact of the NPE backstop.

Right. Thank you, James.

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

Thank you. 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 your telephone. Thank you for joining, and have a pleasant day. Goodbye.