Deutsche Bank AG (DB) 2022 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Q3 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 new Group Treasurer, Richard Stewart, who will also remain in-charge of the Capital Release Unit 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 James to introduce our new Treasurer.

Thank you, Philip. It's with great pleasure that I want to introduce Richard Stewart, who took over the role as the Group Treasurer just a little over a month ago. Richard has gathered a breadth of experience in his more than 15 years with the bank, specifically from various risk roles and most recently as Head of the Capital Release Unit.

We believe that given his background and his contributions to the success of Deutsche Bank's transformation, Richard is highly qualified to succeed in his new role, a testament to the strong bench we have at Deutsche Bank. At the same time, we want to thank Dixit for his contributions during a critical time at the helm of the treasury team, and we wish him success in his new endeavors. Let me now hand over to Richard for his prepared remarks.

Thank you, James, and welcome from me. It's a pleasure to be discussing our third quarter and 9-month results with you today. We continue to operate in a difficult and uncertain environment. We are mindful that the economic impacts of the war in Ukraine and the energy crisis are yet to be fully seen. However, despite these challenges, we are progressing towards the completion of our transformation strategy.

Our efforts continue to be recognized by our stakeholders, as we saw the rating upgrade from Moody's earlier this month. We delivered our highest third quarter pretax profit since 2006 and our best 9-month results since 2011 as we work towards our 2022 financial goals.

Turning first to our performance. The positive trends we saw in the first half of the year continued in the third quarter. We delivered group revenues of EUR 20.9 billion in the first 9 months, an increase of 7% year-on-year. We also achieved revenue growth of 10% year-on-year across the 4 core businesses, driven by business volume growth, market share gains, improving interest rates and business investments.

Our cost/income ratio was 73% for the first 9 months, down from 82% in the prior year period. In the first 9 months of 2022, we generated an 8% return on tangible equity, in line with our target and up from 4.8% in the first 9 months of 2021. We also proved our resilience. We maintained strong risk management in this challenging business environment. Provision for credit losses was higher but contained at 24 basis points of average loans. We are well capitalized. We finished the third quarter with a Common Equity Tier 1 capital ratio of 13.3%.

Now let me take you through the progress in our core businesses on Slide 2. All 4 core businesses delivered strong post-tax return on tangible equity in the first 9 months. In the Corporate Bank, revenues are up 20% year-to-date, thanks to further improving interest rates and higher fee income, supported by volume growth in loans and deposits. Return on tangible equity was 11%, a 4 percentage point increase year-on-year.

In the Investment Bank, continued client engagement and strong risk management in our leading FIC franchise drove revenue growth of 8%, with particular strength in our macro trading businesses. The Investment Bank delivered a return on tangible equity of 12% despite lower origination and advisory activity as markets became more volatile.

The Private Bank boosted its return on tangible equity to 9.5% by delivering a more than threefold increase in pretax profit in the first 9 months.

Asset Management delivered revenue growth of 4% year-on-year, proving its resilience in a much tougher market environment.

Let me now spend some time talking to our risk management and balance sheet strength on Slide 3. As always, we remain extremely focused on disciplined risk management. We constantly monitor and manage risks through our early identification systems, multiple downside analyses and stress tests and selective limit reductions. We proactively responded to the escalating war in Ukraine and the broader European energy crisis via focused hedging and selectively reducing risk appetite in our focused portfolios.

Our underwriting standards remain robust even as we continue to support clients through these challenging times. Our approach and our resilient balance sheet mean we have seen limited impacts on our risk profile so far. Our key risk and balance sheet metrics have remained stable since the fourth quarter of 2021 before the start of the war in Ukraine. Our provision for credit losses increased to 24 basis points of average loans for the first 9 months compared to 8 basis points for the same period last year.

This is the normalization we expected following a less benign, macroeconomic environment compared to the previous year. Nonetheless, we still expect the full year provision to be in line with our overall earlier guidance at around 25 basis points. Overall, our credit portfolio quality is broadly stable. And despite the volatility we have seen, our market risk is managed within our appetite parameters and we have taken measures to protect us against tail risk.

Turning to Slide 4, which illustrates the improved profitability that we believe positions us well in pace for tougher macroeconomic outlook and more challenging credit environment. The Core Bank delivered a return on tangible equity of 10% in the first 9 months, up from 7.5% in 2021 and in line with our 2022 target of greater than 9%. As a result, Core bank preprovision profit rose 40% year-on-year to EUR 6.4 billion in the first 9 months. And preprovision profit is not only higher, but also better diversified across our franchise.

The contribution from our stable businesses has increased significantly. The Corporate Bank, Private Bank and Asset Management now account for over 60% of preprovision profits. And with the turn in the interest rate cycle, we expect the contributions from our Core Bank and Private Bank to remain sustainably strong in future periods.

Let's just 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. We have been successfully delivering on our strategy of growing our lending books as part of the overall growth in our stable businesses and to reduce surplus liquidity. With liquidity now around target levels, we're beginning to shift to a more balanced loan and deposit growth pattern in order to fund continued growth while maintaining sufficiently prudent liquidity levels.

Loan growth across the bank has been EUR 10 billion in the third quarter or EUR 2 billion on an FX-adjusted basis. We saw continued strong momentum from collateralized lending in our private bank and sustained client demand across our fixed franchise, while loans and origination and advisory remained flat. Given the current economic outlook, we are very focused on actively managing our risk profile, and ensuring a disciplined approach in underwriting new business, particularly in structured lending.

Deposits grew by EUR 10 billion compared to the previous quarter when adjusting for FX. This growth has been primarily driven by corporate clients holding higher cash reserves amidst a more challenging macro environment. We expect to see continued volatility in corporate deposits as economic uncertainties keep impacting our clients as well as muted growth in retail deposits due to inflationary pressures on consumers. At the same time, deposit margins have started to increase following recent interest rate hikes, a trend that based on current forward curves will continue.

Let me now provide some detail on the evolution of our net interest margin on Slide 6. As we flagged to you last quarter, our NIM trend continues to remain positive in line with rising interest rates. The NIM increase was driven both by euro and dollar rates with euro rates now starting to play a bigger role.

The NIM increase was also driven by approximately 5 basis points of positive one-offs. Most notably from the buyback of our senior nonpreferred debt offsetting the positive one-offs we flagged for the second quarter. Average interest-earning assets rose reflecting U.S. dollar strengthening and underlying loan growth. Interest rate tailwinds have increased since the second quarter, with benefits now significantly above EUR 3 billion in 2025 compared to our 2021 baseline. However, wider funding spreads will have an offsetting impact if they persist at these levels. The net impact remains materially better than the impact we flagged to you at the IDD back in March.

Let me now give you some additional details on net interest income sensitivity on Slide 7. Further increases in rates above current market implied levels will continue to add to the interest rate-driven tailwind. Over time, the largest impact will come from long-end rates as we roll over our hedge portfolios to higher levels, particularly in Europe. Currently, we see our deposit repricing lower than our beta assumptions, and this effect in part drives the higher sensitivity at the shorter end. Over time, we would expect betas to converge closer to our model assumptions.

Moving to Slide 8, highlighting the development of our key liquidity metrics. We have maintained our solid liquidity and funding position despite continued volatility in asset markets. The stock of our high-quality liquid assets increased by about EUR 20 billion during the third quarter. This is mainly due to continued deposit growth, primarily driven by the Corporate Bank and net new capital market issuances. This was partially offset by loan growth, particularly in Private Bank.

As a result, the liquidity coverage ratio increased by 3 percentage points to 136%. The surplus above minimum requirements increased by about EUR 9 billion quarter-on-quarter to EUR 60 billion. Our average daily liquidity coverage ratio over the past 3 months was at about 134% and underlying stability and proactive steering of the balance sheet in line with target levels. While we remain committed to support the business growth, we continue to manage the LCR conservatively towards 130% for the remainder of this year. The net stable funding ratio remains at 116%, which is within our target range.

The surplus of EUR 85 billion remains comfortably above the 100% requirement. The available longer-term stable funding sources for the bank remains well diversified and continue benefiting from a solid deposit franchise, which contributes about 2/3 of the group's stable funding sources. We aim to maintain this funding mix, which will be supplemented by the longer-dated capital market issuances in line with our issuance plan.

Turning to capital on Slide 9. Our Common Equity Tier 1 ratio ended at 13.3%, 37 basis points higher compared to the previous quarter. CET1 capital increased in the quarter, adding 13 basis points. Strong organic capital generation net of deductions for dividend and additional Tier 1 coupon payments added 24 basis points. This was offset by 9 basis points for slightly higher other deductions. The second element of driving the strong ratio were lower risk-weighted assets contributing around 24 basis points. Almost half of this is attributable to market risk, where we have seen very low VaR and sVaR levels early in the quarter, which picked up towards the end of the quarter with increased client activity.

The rest is attributable to credit risk and operational risk. In credit risk, the reduction is driven by modest growth in stable businesses, which is more than offset by tight risk management in the investment bank.

Our capital ratios remain well above regulatory requirements, as shown on Slide 10. In line with the CET1 capital ratio development in the quarter, the distance to the CET1 ratio capital requirement has increased by 36 basis points and now stands at 289 basis points or EUR 11 billion of CET1 capital. Our available AT1 and Tier 2 capital is at or slightly above the respective regulatory requirements, which brings our total capital ratio distance to MDA to 304 basis points. This provides us with a comfortable starting point as we manage through the coming quarters.

Moving to Slide 11. Our leverage ratio was 4.3%, unchanged over the quarter. Increased Tier 1 capital added 4 basis points, driven by strong third quarter earnings, net of deductions for dividends and AT1 coupons. 1 basis point came from essentially flat leverage exposure. For the quarter, FX translation effects led to a 3 basis point reduction in our Tier 1 leverage ratio. The corresponding effect year-to-date was a reduction of 9 basis points.

We continue to operate with a significant loss-absorbing capacity, well above all our requirements, as shown on Slide 12. The MREL surplus, as our most binding constraint, has increased by EUR 4 billion to EUR 19 billion over the quarter. The increase was driven by higher regulatory capital and new issuances of eligible liabilities, which were partly offset by 2 successful public tender offerings and further roll-downs during the quarter.

Our loss-absorbing capacity buffer remains at a comfortable level and continues to provide us with the flexibility to pause issuing new eligible liability instruments for approximately 1 year. This buffer also allows us to maintain the one notch uplift in our senior nonpreferred rating from Moody's based on their Loss-Given-Failure methodology over and above the improved baseline credit assessment following the most recent upgrade. We intend to maintain the LGF notch for the foreseeable future, certainly at the current rating level.

Moving now to our issuance plan on Slide 13. The quarter was characterized by ongoing challenging market conditions with high levels of interest rate and credit spread volatility. In this context, we are pleased to being largely complete in terms of 2022 issuers requirements. Since the last FI call at the end of July, we issued a total of EUR 4.7 billion, taking the year-to-date total to close to EUR 19 billion. I would note that this total was slightly inflated due to EUR 2.7 billion of structured notes, which were not part of the original funding plan.

This activity is being moved into the Investment Bank. Notable in the quarter were a dual tranche Pfandbrief issue along with a senior nonpreferred issuance in both euros and Sing dollars. The 5- and 10-year Pfandbrief issuances secured attractive funding levels for the bank and we further diversified our investor base through the inaugural Sing dollar issuance.

In August and September, we completed 2 public market tenders in euros, sterling and U.S. dollars for a total amount of EUR 2.1 billion. In the 2 transactions, we bought back EUR 1.1 billion in euros and sterling bonds and $1 billion bonds. The tenders tightened our credit spreads in all 3 currencies and supported our NIM by around 5 basis points, as mentioned earlier.

We continue to guide to roughly EUR 20 billion of issuance for full year 2022 and may consider some prefunding for 2023 in Q4, depending on market conditions.

Turning to the outlook on Slide 14. We believe our strong performance in the Core Bank in the past 9 months is a testament to the quality of our businesses and the strength of our franchise. Reflecting on this performance, we see upside to our 2022 revenue guidance of EUR 26 billion to EUR 27 billion, particularly given the trends we see in our stable businesses.

Business momentum in the past 9 months combined with improving operating leverage makes us even more confident in the delivery of our 2022 strategy and financial goals. We continue to adhere to strict risk management principles, particularly in this continued uncertain environment. We are very focused on managing our resilient balance sheet, and we confirm that we expect our provision for credit losses at around 25 basis points of average loans for the full year.

As I mentioned earlier, our credit ratings were upgraded by Moody's earlier this month. following the upgrades of the 3 big agencies in 2021. We expect this to have a positive impact on both our issuance spreads and business volumes, specifically in the Investment Bank and Corporate Bank over time. On the issuance side, we have almost completed our funding requirements for this year and remain flexible to prefund our requirements for next year. The funding plan for 2023 will be presented at the Q4 Fixed Income Call in early February.

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

(Operator Instructions) And our first question is from the line of Brajesh Kumar from Societe Generale.

Richard. This is Brajesh from SocGen. I've got 3 questions, if I may. First, in light of the changes to TLTRO, so do you intend to repay tranches earlier than expected? And how does this, in general, the ECB announcement affecting your funding plans? I mean, I know that we have numbers for FY '22, but we'll appreciate any color on your future plans.

Second one is more generic. I mean looking at yesterday's various ECB announcements, what is your general view on guidance? Expected impact on the rate guidance that you provided us? Anything you want to add? And finally, how are you looking at asset quality in FY '23? Are you seeing any kind of strain in your loan book? Would love to get your thoughts out here. I think that's it.

Thanks, Brajesh, and welcome, and thank you for joining. I think I'll take the first questions on TLTRO and then maybe I'll just hand over to James over this his overall thoughts on yesterday's announcement. So in terms of the changes TLTRO and the impact of our funding plan, the ECB announcement will not have an impact on our issuance plan as TLTROs, longer-dated tranches remain an economic source of term funding.

As we have noted repeatedly, TLTRO was an important source of financing support for the European economy and not an arbitrage opportunity. DB's funding plan was designed around a smooth amortization of reliance on TLTRO, and this profile remains unaffected by Thursday's decisions. We are reviewing the extent to which we prepaid the earliest tranches, but these would not be prepaid in full as these are also supporting client transactions which may not be beneficial to unwind early. James, perhaps you want to just talk about your overall thoughts.

Yes. Thank you, Richard. Look, I think the rate decision, by and large, was in line with market expectations, and therefore, it fits with the earlier outlook we provided for our rate sensitivity and the path of net interest income from here. Obviously, the market is still trying to find the right balance between their assessment of the dovishness or hawkishness of the central banks, and you've seen that a little bit yesterday and today since the announcement.

But for us, it's reasonably in line with our expectations. I have to say on the TLTRO decision, there we are deeply disappointed by the decision to have retrospectively amended the terms of a monetary policy instrument that has over $2 trillion of balances in it, to our mind, is a spectacularly large mulligan to have taken for themselves.

The banks entered into these instruments in good faith with the intention of supporting lending in the economy, that lending has been committed to clients. And I think most banks met the, if you like, the hurdles that were implicit in the instrument. And the banks are now harmed in 2 or 3 different ways going forward economically. First, there's the loss of the additional benefit from the original terms that will flow into earnings in the next several years that obviously would have supported profitability, organic capital generation and the ability of the banks to support the economy and what will undoubtedly be a difficult time.

I think secondly, when that funding went into the economy, it influenced asset spreads. And so we live with the asset spreads that were entered into at that point in time and that will be with us -- even as rates rise, that will be with us for some time. And lastly, and I think quite importantly, TLTRO was built into the ALM modeling of the banks, and therefore, the hedging that was done. And now I think certain banks could have potentially significant costs in addition, unwinding the hedging that was done.

And if you take a step back then from the economic costs, again, the implicit contract that existed around TLTRO and think about the path forward, the banks will have to now assess the reliability of long-term actions, long-term policy tools and how we take those up, how we hedge them, how we build them into our risk modeling in a way that wouldn't have been the case had they left those terms unchanged. So we have, I think, a strong reaction to that part of yesterday's announcement, Brajesh.

Okay. Super clear. And any views on asset quality in FY '23.

Yes. Thank you for the reminder. So on Wednesday, we sort of -- our guidance was -- look, we think the normalized rate of CLPs is in a range between 20 and 25 basis points for our portfolio. Looking to next year, I think at this point, again, it's very early to judge this, but I would expect us to be at the high end of that range, maybe a couple of basis points above it.

But still with a reasonably sanguine view of the portfolio quality we have and the sort of condition of households and corporates going into what we're obviously aware will be a more difficult economic environment. But again, it's part of our underwriting discipline that we try to build a portfolio that will withstand a market cycle. And our hope is that, that an expectation is that the portfolio will perform according to our modeling.

Okay. Very good. And just 1 last bit of clarification. I see that in your slides, you still have got EUR 3 billion to EUR 4 billion for AT1, Tier 2 versus year-to-date issuance of EUR 3 billion. So does this mean and you're kind of keeping the optionality open to come to an AT1 Tier 2 market, if it's the need be? I mean, should I read it like that?

I think that's a reasonable assumption. I think the -- as you say, we've successfully done our issuance plan for the year. But as, I guess, with all frequent issuers, we always look at things, whether it makes sense for us given sort of the opportunities you will see within the firm to grow our assets at attractive levels. So yes, there's a chance that we may look to do something in the coming quarters. .

The next question is from the line of Iuliana Golub from Goldman Sachs.

Three questions, please. First one on ratings. Do you expect any move from S&P to upgrade your ratings as a follow-up from the move from Moody's earlier in October.

Then 2 questions on capital. Given the increase in MDA in 2023, do you also intend to update your target CET1 ratio? The minimum 12.5% would look a bit out of sync if you have an MDA of around 11%. And then has there been any progress and the convergence between the ICAP and the regulatory reported ratios regimes? Or do you very much continue to manage the group to both regimes? And lastly, on Tier 2 could you please describe how you look at the economics of refinancing your Tier 2 debt? And maybe any indications around refi costs should be to the -- should we look at the refi cost to the recent level?

Thanks, Iuliana. The -- so I guess, taking your first question, which I think is around the S&P rating upgrade potential. So I'd say, first of all, we're very pleased with the upgrade from Moody's. That's the second from them within the last 14 months, which I think is a strong signal that our transformation is successful, and we're on the right track towards a sustainable, profitable bank.

In addition, as you know, Fitch confirmed our positive outlook in September. We know what is expected from us with -- from them to move that rating level, and we're focused on delivering. And then ultimately, we are hopeful that we will also see that something similar from S&P and they will recognize the progress the bank has made over the last couple of years.

So yes, I guess we're hopeful we kind of see the positive movement from the other rating agencies and we hope that will follow through with the S&P.

So Iuliana, it's James, on the capital questions. Firstly, yes, the 12.5% that we've operated under for the past several years has been a minimum that we wanted to maintain also in stress conditions given we were traveling through a period of restructuring and transformation.

But as we began to indicate at the Investor Deep Dive in March, our thinking is evolving towards maintaining a minimum gap to MDA and hence, the guidance to that we've given to 13 recently in recent quarters. And so it is certainly evolving, and we'd like to maintain a gap -- an appropriate gap, call it, 200 basis points to MDA as MDA develops. Next year, as you recall, the countercyclical buffer and the sectoral buffer become binding in February. And so that, of course, begins to enter into our thinking.

On the ICAP or economic capital measures, I will say, over the past several sort of quarters and years as we've seen the impact of model changes and methodology changes, rule changes and as that continues now through to 2025, we've observed in the past that our -- there's a divergence between our regulatory capital requirements and our economic capital requirements. The former continuing to increase while the latter we're managing relatively flat. Obviously, it grows somewhat as the balance sheet grows. But the capital intensity of our business on a relative basis hasn't been significantly fluctuating. So we clearly manage to it, and it's something we're always mindful of. And we are observing a trend of divergence between the 2 with the regulatory being the most binding.

And then maybe if I shall pick up your Tier 2 call structure. Yes, I think, I guess, how we think about these things is how we always think about all our calls, which is that we'll continue to make decisions regarding the exercise of an issue a call right close to the exercise date, balancing the interest of our stakeholders. Our approach is based on economic factors, including the usefulness of the instrument for capital funding rating agency metrics as well as the cost of the instrument versus alternatives. So that strategy remains consistent and we'll apply that to any upcoming calls which are coming.

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

Welcome to Richard. I had 2 questions, if I could. First, you said that you were still committed to the leverage ratio target of 4.5% by the end of 2022. Is that -- does it still imply that we'd see a tick up from the current 4.3%? And would that have additional AT1 issuance as part of the plan?

And my second question on your deposit development, you mentioned that you expect lower growth in retail deposits going ahead. And we can see that corporate deposits have increased. Is that a trend you expect to see to continue in '23? And how does that affect your margins going ahead as well?

Thanks, Soumya. So I guess taking your leverage ratio question first. We -- I guess -- as I guess maybe to start off with, obviously, AT1 is one tool in the tool kit that we can use to manage leverage if we so wished. But we -- as you said, we finished Q3 at 4.3%. We are confident of achieving a leverage ratio of around 4.5% for 2022.

And as I think I also said in earlier was that we have seen a 9 basis point drag year-to-date on our leverage ratio from FX effects as per -- and we might not fully compensate those FX effects through leverage exposure reductions immediately if we kind of felt that, that was going to have a negative impact on some of our business lines where you kind of see some profitable opportunities still. So overall, we still -- like I said, we're pretty confident of achieving that leverage ratio of around 4.5%. But just bear in mind that the FX effect as well.

And Soumya, it's James. On deposits, we've seen reasonably encouraging and steady growth in the deposit books over the past several quarters. And at least so far, no apparent moderation of that nor to be fair, an excessive competition for deposits in our markets. And so while one would expect this to begin to tail off as liquidity drains out of the system and the actions of the central banks, particularly QT, begin to take effect. And we haven't seen that impact so far.

Incidentally, the other item that would probably draw down deposits in the system is just household usage as they go through the impact of higher energy costs and what have you. So while all of that is sort of a change in dynamic that we would expect to see, we haven't -- it hasn't been visible so far and at this point hasn't fed into deposit pricing in a notable way.

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

A couple of follow-ups on the liquidity point. What type of collateral have you pledged behind TLTRO? And I wonder if you could guide us to what would your LCR look like if you were to redeem, let's say, the first opportunity in November?

Thanks, Corinne, and very nice to meet you. So it's a good question on kind of what collateral we pledge is we're kind of working through what we want to do there. But I'll say around 2/3 of our collateral is illiquid, and that supports our liquidity coverage ratio. This would have about a EUR 30 billion impact on our LCR, if that was we're to lose instantaneously.

But as you know, we kind of staggered the tranches out until -- up to 2024, so we're not going to be doing any prepayment immediately. But like I said earlier, I think we have a pretty well contained amortization profile, which we're managing to and making sure that we can continue to keep -- to fund those clients.

The next question is from the line of Lee Street from Citigroup.

Let me ask some questions. Three, please. I think on the results today, the guidance was for revenues in excess of EUR 28 billion next year. Any detail or thoughts on what rate assumptions underlie that? Secondly, as it relates to group risk-weighted assets, how should one be thinking about an evolving over the course of next year from current levels, is it higher or lower? Any guess around that would be helpful.

And finally, you've got a EUR 19 billion headroom to your MREL requirement presently. What's the minimum you might look to run out in terms of the hedging that, asking the question really, obviously, you did some buybacks, it seem to have quite a big impact on the margin. So just wondering, getting an idea of whether there could be more capacity for that included there, they will be my 3 questions.

Sure. Lee, it's James. I'll start on the first and probably part of the second, and Richard can take over on RWA and MREL, if he has other things to add on the RWA side. Look, the EUR 28 billion we guided to Christian went through, if you like, a walk thinking about the core businesses that we operate, essentially the run rate that they are exhibiting at this point in time and that we expect in Q4. So the step off that we have.

There is growth outside of interest rates, so volume-related growth that one would hope we can achieve in the businesses. But then there's also a support from interest rates. We would -- to your question, we look at the implied forward rates. We look at the curve basically that the market shows, and we plan off of that. So that's visible to you as it is to us. We think there's about $1.1 billion to $1.2 billion of upside in '23 relative to '22 from interest rates and that's just the impact of the curve on a static balance sheet.

But adjusting -- and interest rates by themselves will be much higher than that, but then we adjust out higher funding costs, non-repetition of some of the favorable factors that we had in 2022 and also the impact of TLTRO, which we spoke about earlier, which where the -- some of the benefits are rolling off. And compared to our early planning, we have a less favorable rate on that TLTRO. So the net of that was, call it, somewhere between $1 billion and $1.2 billion support for revenues next year.

So all things equal, the current run rates would deliver that along with interest rates. RWAs are sort of trending higher. We are working to support business growth, support clients with our balance sheet but we need to obviously calibrate the RWA that we can give the businesses to the capital plan and our goals going forward.

And there, again, I refer you to the Investor Day materials from March, where we -- our capital plan now accommodates 3 things. One is distributions to shareholders. The other is supporting the business growth, in other words, RWA. And the third is building the ratio over the next 2 years '23 and '24 towards the Basel III environment that we anticipate in '25.

So wanting to make sure essentially solve for a ratio on the 1st of January '25 that is still at the 13% after giving effect of the Basel III changes.

And then on the MREL side of things, like I say, we've got about buffer of around $19 billion or so. And that generally allows us the flexibility to pause issuing new senior nonpreferred or senior preferred instruments, which is for about a year, which is why we like holding the buffer. But also the subordinated part of MREL is also something that we want to ensure that we can target the Loss-Given-Failure ratios that Moody's set. So allows us just, as I said, that strong message that's around the rating as well to our investors.

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

Three questions. First, on asset quality. With respect to movement into stage 1, stage 2, stage 3, I'm assuming that Stage 3 will continue to be episodic. But could you give us an idea of where you see the trajectory of movement in Stage 1 -- from Stage 1 into Stage 2. And where that would -- if that changed, how would that -- what kind of concern would you have? And what kind of trajectory would cause you concern in terms of the change in movement through the categories? That's my first question.

Second question with respect to funding overall. U.S. peers have been struggling with their balance sheet size around their securities business given more customer facilitation. The business as usual balance sheet is a little bigger than you've got stress coming in there. So there's -- on the risk management side, so there's a greater need for liquidity. How does that play into your plans for issuance next year? And how do you look at that?

And then lastly, on the call the other day, was mentioned a couple of times that you think your spreads are too wide. I agree, particularly given recent upgrades and results besides doing liability management and calls like this, what else are you planning on doing to pull in your spreads?

Robert, thank you for joining again. And boy, those are tough questions. On asset quality, it's hard to tell you what level of deterioration we're comfortable with. I mean, obviously, it's a fact of life that there's some deterioration in a book. In general, in recent quarters, the sort of downgrade/upgrade relationship has been relatively stable, if I think about it in terms of the mix, the limits where we've seen upgrades versus downgrades based on our internal rating.

In a deteriorating macroeconomic environment, of course, that relationship will change somewhat but you'd prefer to see it be gradual than it accelerate pace. And as we mentioned on Wednesday, one of the things we're seeing at the moment is that those -- most of the forward-looking indicators haven't yet started demonstrating stress, including, for example, that upgrade/downgrade ratio.

So hard to give you a sense of what level of movement would begin to cause us concern. You're right that Stage 3 is on impairment events. So it will be always somewhat episodic. I wouldn't expect the run rate at this point to necessarily to change dramatically from where we've been over the last several quarters. So we'd like for it to remain within a range. Stage 1 and 2 depends on 2 things in particular, economic variables. There, we might see some more deterioration as we get closer into the recessionary environment.

And then at some point, you'd see it begin to pull out as those macroeconomic indicators look forward to recovery. But the other dynamic we've got is the portfolio parameters. And there, this quarter, you had this very interesting behavior that the general portfolio improvement that was taking place on PD and LGD variables, that fed into our Stage 1 and 2 results driving the unusually low outcome and actually offsetting much of the macroeconomic variable related deterioration.

On the impact -- so moving to your U.S. peers question, yes, it's an interesting change in the environment that the availability of, call it, a leveraged balance sheet may be becoming more constrained again. We've got a level of leverage that we think we're generally comfortable with. As Richard outlined, we're giving a lot of thought to how much leverage to run against our ratio targets and the available capital.

But going into the year-end, it's one feature that may impact the market that unlike the previous years, the U.S. banks may be less generous with their leverage balance sheet. Right now, I'll defer to Richard on whether we're really building that into issuance plans for next year. But we're waiting to see what the impact is over year-end.

Yes. Thanks, James. So I think there's a few things in there on your questions. So maybe I'll start with your spreads being -- or your [observations on] spreads being too wide, and we concur with that assessment. One of our strategic objectives is to align to have consistency across the rating agency spectrum.

We're obviously seeing that positive movement in Moody's and Fitch, we think, is going in the same direction. But I think there's sort of discrepancy with those 2 and S&P is one of the things holding us back a little bit. So we continue to work with S&P to make our case. But ultimately, we just have to keep following through on what we've been doing, which is just execution on that transformation, building organic capital, and that gives you the equity buffer and that will be positive for the debt stack.

So obviously, that's kind of what we have to do, but that's kind of the sort of levers that we're pulling, and I think just the strategy is working. And so we're seeing that kind of organic capital continues to be built. So I think I'll start with that. And therefore, I think we are seeing the same sort of effects that our U.S. peers are seeing in terms of client demand for the balance sheet.

And so we obviously manage that carefully. We do target our LCR of a target of 130% and that will continue to be our target, which we'll manage through this quarter and subsequent quarters. And I think we're doing a pretty good job of steering that. And I think we end up being quite balanced really in terms of that sort of incremental loan growth demand as well as being able to match that with stable funding.

So I think when you look at the issuance plan, I guess, it's on Slide 13 of the materials. And then you can see a pretty consistent picture for this year, next year in the outer years, but we're not looking to do anything outside on the issuance side. And as to your point, at these kind of levels, then -- it's something we have to be very mindful of in terms of where we want to be pursuing this issuance plan unless internally, we can generate returns to justify that.

That's great. I appreciate the thoroughness.

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