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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Commerzbank AG Conference Call. Please note that this call is being transmitted as well as recorded by audio webcast and will subsequently be made available for replay on the Internet. [Operator Instructions] Let me now turn the floor over to Stephan Engels.
Good morning, ladies and gentlemen. Welcome to our conference call on the results of the third quarter of 2019. Last week, we already had to prerelease key figures of Q3 as our results came in better than expected, especially when you factor in the negative exceptional item that has not been part of expectations. In that sense, I'm happy today to guide you through the [ force ] of the figures of the quarter that can be labeled with a robust performance in a challenging environment. Let's start with the highlights of the quarter. Q3 yet again shows that we executed on our strategy and delivered. The key drivers of the strategy move us in the right direction. This is a sound basis for the execution of Commerzbank 5.0, which uses proven building blocks of Commerzbank 4.0. We continue to grow in customers and assets to raise revenues and we continue increasing efficiency while maintaining a good risk profile and a solid capital base, exceeding all regulatory requirements. The growth achieved in Q3 fits to our plan and underpins the robust performance of our client businesses. In PSBC, we have added 141,000 net new customers and increased our loan and securities volume in Germany by EUR 4 billion. Given negative rates along the whole curve, we no longer target deposit growth. In Corporate Clients, we have increased our loan volumes with Mittelstand and large corporates by a further EUR 1 billion to EUR 89 billion in Q3. Adjusting for the TRIM effect, this growth comes with no additional RWA at segment level, reflecting our balanced approach to growth and capital. With Commerzbank 4.0, we have proven that we are action-oriented and deliver on our strategic initiatives. Examples are the speedy execution of the restructuring, the E&C sale digitalization and the transformation of our central functions with the establishment of our new Campus 2.0 setup. We are now tackling the implementation of Commerzbank 5.0. Let me highlight some of the concrete execution steps. Based on Campus 2.0, we have already set up our new delivery model. Last week, we have put out our tender offer for comdirect. We have started to approach the potentially interested parties in mBank, and there's good interest. And we are preparing the negotiations with the workers' representatives. Looking at the financials of the quarter. In Q3, we have reached a year-on-year better net result of EUR 294 million. It is based on an improved operating result of EUR 448 million, which reflects the robust performance of our business. The result is based on higher revenues, reduced costs and a lower risk result. The robust performance of the underlying businesses is visible in NII, up 2.7% year-on-year. Expenses are fully in line with our target of below EUR 6.8 billion for the full year. The risk result came in at EUR 114 million. This, again, is proof of our clean balance sheet and healthy risk profile. Our group NPL ratio is unchanged at 0.8%. In future, we will report the NPE ratio, which is used by the EBA for their Risk Dashboard. The NPE is comparable for all banks and thereby increases industry-wide transparency. Our ratio based on the NPE definition is currently around 1%. This is below the average in Germany and significantly below the European average. Our CET1 ratio stands at 12.8%, including an increase of EUR 3 billion in our credit RWA after the TRIM effect, growth and mitigating factors. Let me now go into some more detail on our financial results. Slide 2 shows our key financial figures at a glance, while Slide 3 highlights exceptional revenue items. As already pointed out in our prerelease, exceptional revenue items made in that contribution of EUR 13 million in Q3, nearly unchanged when compared with Q3 last year. While we have benefited from 103 million from the sale of ebase, this has been largely offset by hedging and valuation adjustment. While strongly negative in Q3, overall for the year, hedging and valuation adjustments have been neutral with a net effect of only minus EUR 3 million. Slide 4 gives an overview of our Q3 segment results. On the basis of our customer and asset growth, PSBC has offset margin pressure and shows overall increased underlying revenues year-on-year. This has led to an improved operating result, further supported by the ebase sale. Corporate Clients has also increased customer revenues but it did not benefit from legacy positions like Q3 last year. In combination with the lower risk results, the operating result has reached EUR 146 million. In others and consolidation, we have an operating result of minus EUR 13 million with the inclusion of the former [ SBI ] exposures, some volatility from valuation effect has been added, amounting to minus EUR 29 million this quarter. Nevertheless, we maintain our guidance for the operating result of others and consolidation of better than minus EUR 75 million per quarter also for Q4. Let's move to Slide 5 with the group results and take a closer look at the drivers for the improved operating results of EUR 448 million. Year-on-year, underlying revenues have increased by 2.3%. Net interest income is 2.7% higher based on growth of our customer businesses. The growth could more than offset the effect from the lower rate environment on the income from deposits. However, the impact from deposit rates is visible when comparing Q3 with the NII of Q2. The introduction of deposit tiering will bring at least some relief in future. Net commission income is on the same level as last year. PSBC and Corporate Clients both benefited from a strong September. The underlying fair value result of EUR 98 million increased significantly compared to a low Q2 and benefits from an improved Treasury performance as well as better contributions from Corporate Clients. The risk result of EUR 114 million as well as costs, including compulsory contribution of EUR 1.6 billion, are lower than last year. Together with the higher revenues, this has led to the improvement of the operating result to EUR 448 million. The discontinued EMC business contributed a small loss this quarter. As previously guided, for the full year, we expect a lower double-digit million negative operating result. Finally, a brief word on taxation and the net result. In Q3, our IFRS tax rate of 24% benefits from the low taxation of the ebase sales, leading to the net result of EUR 294 million. In Q4, we are updating our financial planning, taking into account the overall more difficult economic outlook, the right decisions of the ECB and the expected rate development. In the update, we will also review our tax inventory, which could result in a negative impact on our Q4 tax rate and the full year net result. Slide 6 provides you with an overview of the cost development. While we expect somewhat higher costs in Q4 than in Q3, we are well on track to meet our year-end target of less than EUR 6.8 billion. Looking at Q3, we managed group expenses to less than EUR 1.6 billion. This brings year-to-date expenses, including higher compulsory contributions, to EUR 5.1 billion, EUR 129 million or 2.5% lower than last year. As in the last quarters, we have prioritized our investments in digitalization and growth, which has allowed us to reduce investment spending and employ considerably fewer external suppliers. With Commerzbank 5.0, we will increase investment in targeted areas. The targeted investment will be made in our new Campus 2.0 setup, which allows for efficient delivery by the integrated business and IT teams better leveraging our internal resources. We have also continued our targeted cost management based on staff reductions of around 1,000 FTE in sourcing. This has largely offset the wage cost inflation reported in Other. Other additionally includes cost inflation for IT infrastructure, which we will tackle with our initiatives in Commerzbank 5.0. Let's move to the risk results on Slide 7. Real German GDP has contracted slightly in Q2 and did so probably also in Q3 with the service sector holding up significantly better than manufacturing. This points to weak external demand as the main reason for the weakness. In contrast, the ECB's monetary policy is still somewhat supporting domestic demand. Given the still low reading of sentiment indicators, there are no signs of a fast turnaround. We expect German GDP to grow by 0.4% in 2019 and 0.8% in 2020. Based on our prudent lending guidelines and risk discipline, our risk indicators have remained stable overall. We also continue to benefit from our healthy risk profile and low NPL ratio. This is reflected in our year-to-date numbers. PSBC's risk result is on the same level as last year, and Corporate Clients' risk result is around EUR 70 million higher, largely due to lower write-backs. Keeping in mind that Q4 tends to have an increased risk result as it effectively covers a longer period, we stick to our risk guidance of a result not below EUR 550 million for the full year. Let's continue with the operating segments and start with private and small business customers on the next 2 slides. In Q3, we have gained 141,000 net new customers in Germany, 30% more than Q2, bringing our active customer base to 11.2 million. Two-thirds of the new customers have been acquired in the brands-based business in a cost-efficient manner. This is proof of the effectiveness of our growth strategy with digital channels and our branch network. We will continue to grow our customer base, but even more important, we will focus on translating new and existing customer relationships into volume and revenue growth and, ultimately, improve profitability. Here, the main focus is on the loan and securities business. We have grown our loan book by more than net EUR 1 billion and the securities under management by EUR 3 billion. One-third of the increase is in securities -- is net new money. In the third quarter, we have lower inflows of deposits, reflecting the usual pattern of our summer season. The lower inflow limited negative effects from the bank for the bank stemming from market rates along the whole curve in negative territory. Going forward, we will closely monitor and manage deposit inflows via product and pricing measures. With the ongoing loan growth, our mortgage book is now close to EUR 80 billion, which we expect to exceed by year-end. So far, the 2019 new business volume growth has been nearly 13% stronger than in the previous year and with better margin. Margins on new mortgages continued to improve in the quarter. This is due to the pronounced drop in market rates during the quarter, which have, to a large extent, not been passed on to customers. In other words, Q3 has shown at least some rational behavior of the banking system in the mortgage market. At the same time, the effect of lower interest rates, driven by the ECB decisions, are directly visible in the revenues of the deposit business and private customer segments in the quarter. Having said that, overall growth also from mBank has led to an increase of underlying interest income by 4.5% year-on-year and has thus offset the impact from the rate environment. Commerz Real has successfully concluded the purchase of the so-called millennium portfolio in the House Invest Fund managed by Commerz Real, involving more than 350,000 square meters of rent space. This has not only directly contributed to revenues but also helps to provide our customers with investment options for their deposits. To briefly touch on Swiss franc mortgages. Following the European Court of Justice ruling from early October, too few binding verdicts have been issued by Polish courts to reliably determine if actual impact on legal proceedings regarding Swiss franc mortgage loans in Poland. Since credible estimations of the contingent liability arising from existing or future legal cases are not possible at the moment, mBank has to decide to book an additional provision of EUR 50 million as of Q3 for legal risk related to this FX mortgage loan portfolio. MBank will continue to closely follow development and take appropriate steps if needed. Even including the booking of these provisions, underlying revenues in mBank has grown EUR 33 million year-on-year, clearly demonstrating the strength of mBank's successful growth strategy. On our mBank sale, we have sent teasers to potential buyers inside as well as outside of Poland and have received very constructive feedback. With the overall positive development of the business, the operating result improved to EUR 315 million in the third quarter. Slide 10 and 11 provide an update of Corporate Clients. In Corporate Clients, we continue our growth strategy with a clear focus on our Mittelstand and International Corporate Clients. As mentioned in the Q2 call, we have focused our activities in the third quarter more on cross-sell and balancing loan growth with capital consumptions. Consequently, we have a targeted increase in corporate loan volumes by EUR 1 billion to EUR 89 billion, and we have increased our trade finance and capital markets business year-on-year. Following the seasonally slow summer months of July and August, September has seen very healthy capital markets business. This has contributed to the EUR 35 million increase in customer revenues year-on-year, in particular, with international corporates and financial institutions. Growth in Mittelstand has been largely offset by margin pressure and a further reduction in rates. The positive development in the customer revenue has been year-on-year, offset by a lack of contributions from legacy portfolios that are no longer on our books, also valuation effects, mainly from XBA, have reduced reported revenues. In summary, the robust client business and the low-risk result has led to the operating result of EUR 146 million in the quarter. Let me now continue with RWAs and Core Tier 1 capital on Slide 12. At the end of the quarter, our fully loaded core Tier 1 ratio stood at 12.8% compared to 12.9% at the end of last quarter. This is the result of EUR 3 billion higher RWA being largely balanced by capital built from retained earnings, partially offset by higher capital deduction. Looking more closely at risk-weighted assets. Operational and market risk RWA arms are slightly lower, while credit RWAs have increased by EUR 3 billion. This increase is after-effects from TRIM and active RWA management. As we have received the TRIMs just late in the quarter, there are still some technical discussions outstanding. After final clarification, there might be a further small adjustment either up or down. To expand on the impact of TRIM and the upcoming changes from Basel IV. With the still ongoing TRIM exercise part of the future Basel IV impact is effectively front-loaded. With the already initiated structural measures, such as the sale of EMC, the remaining Basel IV RWA inflation could well be less than 10%. This estimate is based on our current portfolio before future growth and our current assumptions for the final implementation of Basel IV in European law, and it includes the expected effect of the output floor. In other words, we feel well prepared for future impact of capital requirements. Let's now move to the merger with comdirect, which we have made our official offer at the end of October. As announced at our capital markets update, we intend to merge with comdirect via a squeezeout and immediate merger. Our offer of EUR 11.44, which includes an attractive premium of 25% to the underserved share price of comdirect, is running until December 6, 2019. Depending on the acceptance level of the offer, there are two scenarios: the proposed squeezeout and immediate merger or a statutory merger proceeding. From a comdirect shareholder perspective, accepting the offer should be attractive given the underserved share price of EUR 9.15 pre-announcement. We are trying to do a squeezeout if a statutory merger proceeding. In that case, the comdirect shareholder has no guaranteed minimum payment and will not receive cash. Instead, shareholders will be compensated in Commerzbank AG shares with the exchange ratio based on an independent appraise. Ladies and gentlemen, let me wrap up the third quarter of 2019. The third quarter is proof of the robustness of our customer's source business model. We have grown our revenues and continue to make progress in our cost management. Our risk result has been low, reflected in our clean balance sheet and good risk profile. We have a solid core Tier 1 ratio of 12.8%, including the effect from TRIM, and we have continued to accrue for a dividend in line with last year's payout ratio. Looking ahead, we continue to face headwinds from the ongoing competitive banking environment in Germany and the wider effect of the slower European and world economy. In addition, we are facing even lower rates due to the ECB actions. Commerzbank 5.0 is our answer to these challenges, based on our sober but realistic view we will execute our sell-side strategy towards long-term success, not claiming we have found a panacea or to say it with the words of our CEO, Martin Zielke, wishful thinking is not helpful. As already mentioned at our strategy update why we will continue our growth strategy, we do not expect higher underlying revenues in 2019 versus 2018 and its correspondingly lower net result. In our cost management, we continue to plan for costs of below EUR 6.8 billion in 2019. We continue to expect the risk result not below EUR 550 million for 2019. And we aim to maintain a dividend payout ratio at a level comparably to 2018. Finally, we target a ratio -- a core Tier 1 ratio of at least 12.75% by year-end. Thank you very much for your attention. And I'm now happy to take your questions.
[Operator Instructions] The first question for today comes from Britta Schmidt, who's calling from Autonomous Research.
My first question relates to TRIM. Can you give us a little bit more color on what the impact in basis points has been this quarter? And I guess a lot of that has been offset with RW management actions. Perhaps you can also give us an indication as to what these relate to? My second question will be on deposit tiering. Can you give us any guidance on the expected impact there? And then maybe just a comment on the Q4 tax impact. Would I be right in assuming that these relate to primarily deferred taxes carryforwards and that a higher tax charge is definitely not going to impact the CET1 ratio?
Yes. I start in reverse order. Your assumptions on the impacts of the Q4 tax rate are correct. As usual, once the MYP or the new plan is completed and you have the tax planning completed, you need to review DTAs. And on the general environment, I think we're prudently expecting that it might be something different than just a flat 0, like it has been the previous years. And again, it is cash and capital neutral. Deposit tiering, and that also depends a little bit on management, but there should be a positive effect. And in that sense, we don't have good numbers so far. But I would definitely expect a little bit less than the negative effect that will also, to a certain extent, still creep into Q4. But I would say somewhere in the middle 2-digit number -- million number should be probably a good assumption. TRIM, the growth, as I said before, we have received the letter extremely late. And in that sense, there is still some ongoing technical discussions. Currently, the gross impact is somewhere between EUR 4 billion and EUR 5 billion. And in that sense, there might be some minor smaller adjustments still in Q4, either up or down, but it depends on the discussions which we still have. You need to keep in mind that, as I said before, based on our current assumptions for the implementation of Basel IV and with the measures like selling EMC, which mitigate the effect, we could well have an impact of less than 10% RWA inflation. And what TRIM does or TRIM in Q3 did is, it is kind of front-loading some of this impact. So if you want to calculate a little bit top-down or outside-in, if you prudently take 10% RWA inflation as the basis, deduct the booked impact in Q3 of somewhere between EUR 4 billion and EUR 5 billion and the remaining impact then based on our Q3 ratio of 12.8% would be around, let's call it, 90 basis points for the total Basel IV exercise, and as we have said before, including the floor impact.
The next question comes from Benjamin Goy calling from Deutsche Bank.
Two questions from my side. First, on your guidance. You have changed part of the guidance recently and then prerelease. So just wondering about the visibility and kind of the sequence of events that happened here. And the second question is corporate center on the guidance. So despite some negative one-offs or [ XEA ] effect, another good quarter from corporate center. Anything structurally you see changing here? Or is it still the old guidance?
Yes, on what happened between the Capital Markets Day and now, I think what we have seen, as I said before, an extremely strong September. That was, in that sense, a positive after 2 slow months in July and August. So I think that explains some of them -- the movement -- sorry, I was still on corporate center. I wasn't on the guidance then, so sorry. So on the guidance, it is more the strong September that kind of looked a lot better than we expected. I think that's something that we have seen in other markets as well. On corporate center, the guidance remains completely unchanged. And as always, others and consolidation most likely is burdened by all kinds of year-end bookings. And we continue to expect a good contribution from Treasury but maybe not in the full extent that we have seen in Q3.
The next question comes from Johannes Thormann calling from HSBC.
Johannes from HSBC. Two questions. First Of all, looking at your full year risk guidance of more than EUR 560 million, this implies that Q4 level of loan loss provision should be above the Q2 levels. Have you seen any larger defaults in October already? What are the other drivers for the underlying assumptions for this guidance? And secondly, could you give us an update on your current deposit pricing in retail as well as in the corporate banking?
On the full year risk guidance of not below EUR 550 million, you keep -- you need to keep in mind that the Q4 risk-wise kind of have 5.5 months rather than the usual 3 months if you compare it with Q2. So in that sense, you just simply need to expect that, that might be just more by the longer time spend. Other than that, there are no specific issues, no single cases that we currently see on the horizon. But again, keep in mind that, if even from today, there's almost another 4 months to go until the quarter's finished. On deposit pricing, we have been very active in deposit pricing Corporate Clients for quite a while, and this is ongoing. So for a good part of the portfolio, we just repriced according to what the rates are currently doing. We are also reviewing the limits that we are having had so far, free of any charges. That is an ongoing exercise. The same is starting in private clients, and we have -- that we have approached quite a number of customers already and starting to agree -- measure us there. And that, I think is also definitely needed, given that the negative interest rates kind of having left, as I said before, if you compare Q3 with Q2 NII and PSBC have left their marks there. So I expect, together with the deposit tiering effects, some mitigation of the impact throughout Q4 and the following quarters.
Okay. Have you approached only the corporate customers in PSBC, or also you're going down to single retail customers and in which product categories?
Single retail customer has a connotation of that we are approaching everybody. That's definitely not the case. We are starting obviously from top and working our way down, so we are approaching private client customers, basically volume-based, so that we have, as per action, the best possible result. And from today's perspective, there is no intention to really drive that down to the single small retail customer.
The next question for today comes from Tobias Lukesch, who's calling from Kepler Cheuvreux.
Tobias Lukesch, Kepler Cheuvreux. Three questions from my side as well, please. Again, on the DTA impairment that you guided for Q4, could you be a bit more precise how significant that tax effect will be based on your current planning as of today? And secondly, on the PSBC segment, looking at the divisions, I was wondering, looking at private customers, why revenues were down almost 5% quarter-on-quarter. And thirdly, on the comdirect integration, you highlighted a synergy potential of EUR 150 million. Now the share price of comdirect rose a lot. You might have some negotiations with minority shareholders on that side. Can you -- as of today, can you give us a sense of a expected downside that you are calculating currently?
Tobias, on DTA, if it would be possible really to have the effect layered down, we would have booked it in Q3. But since the, let's say, the miracles of IFRS tax accounting are multifold, so to speak, I think we need to wait until we have detailed numbers in the tax planning throughout Q4. So sorry that I can't give you any real hard guidance. PSBC revenue development is mostly driven by NII. That is a mix of, a, the usual, let's call it, summer quarter; b, obviously, the interest from the interest rate environment from the ECB decisions; and thirdly, there are certain negative one-offs in there given that we have booked prepayment charges and other stuff in Q3. So you shouldn't take the NII development and just roll it forward. It has some negative components. On comdirect, I think, for a lot of reasons, I would stick to what I've been saying in the speech. The offer is out until December 6, 2019. And if we are not successful with that offer, there has been a clear guidance on what the alternative is, and I would refrain from commenting any more on that process.
Next up, we have Jeremy Sigee, who's calling from Exane BNP Paribas.
Just 2 detailed questions, please. One is following up on the PSBC revenues following on from the previous question. The comments, Real revenues on Slide 9 stepped up quite a bit. And I wasn't totally clear whether some of that is ongoing, reflecting the portfolio acquisition you talked about, or whether that's all the large transaction that you referred to on that slide. So is there any ongoing increase in that step-up in Commerz Real revenues? That's my first question. And then the second question was just picking up on the mBank legal provisions. You mentioned a top-up in the quarter. I just wondered if you could remind us what the total stock of legal provisions is with the mBank on the Swiss franc mortgage case.
Sorry, I didn't press the button -- on Commerz Real, the Q3 performance is clearly driven by this bigger millennium portfolio transaction, which I've mentioned that were probably EUR 50 million of net provision income in that case. So in that sense, it's not really recurring, but it's part of the business. So it happens, hopefully, every now and then. So -- but it doesn't define a new performance level that consistently will go on. On the Swiss franc portfolio, as I've said so far, it is hard to really judge whether the European court decision makes a real legal difference. What remains to be seen whether we have more customers going to court. That definitely will impact legal cost in the sense that you need more people and more lawyers. Well, this way, we have basically topped the provision. In simple terms, we have doubled the existing provision button more with a view on probably more action and not necessarily any real guidance in the sense of that we expect different loss levels or anything like it.
Okay. And to be clear, the top-up provision, I think you said it went through the revenue line, and mBank has not gone through costs. Is that correct?
It's gone through the revenue line. Yes, correct.
The next question for today comes from Daniele Brupbacher, who's calling from UBS.
You mentioned RWA management. I was just wondering whether you see significant additional potential on that front going forward. And then, sorry, just coming back again to that 10% RWA inflation. I guess this is based on Ba IV rules and such as the rules. Would you see a possibility that the actual local implementation changes that number again? And if so, I guess, you probably won't quantify it, but if you could tell us which areas are still somewhat uncertain in your view? And then just a confirmation that I got that right. So the 10% you said that would be excluding the EUR 4 billion to EUR 5 billion TRIM this quarter. So -- and that then translates after the EUR 4 billion to EUR 5 billion to the 90 bps so just wanted to clarify that. And then, sorry, just very lastly. I mean, obviously, ROTE was 4.4% this quarter. The 2023 target is at about 4%. So in a way, one could argue that it doesn't look too ambitious. And at the same time, you were talking about volume growth, pricing measures, somewhat more rational behavior in the market, cost measures, et cetera. I was just wondering I'm sure these targets are conservative for 2023, but are you basically assuming that all the positive things coming through, like volume growth and what have you, would basically be compensated by the headwinds. And if we talk about the headwinds, is this really more driven by front book margins beating the back book margins? Or is it significant hedging positions that are running off? Would be just interesting to hear your views there.
Okay. I think I need to reserve about 15 minutes for the answer now, but let me try to work. And you -- if I miss something, you need to remind -- let me try to work here through your questions. RWA management. At the end of the day, RWA management is always something where you need to keep a certain balance between revenue and RWAs because most -- RWAs don't just leave the system without leaving one mark or the other on the revenue line. So I would say, in the day-to-day management, yes, you can do [ always ] something. And as you can see, for Q3, obviously, we're prepared so that we have certain things ready to go to compensate the impact. Looking forward a little bit on Commerzbank 5.0, one of the big issues around or one of the big results with the mBank sale will be, indeed, that we will have a lot of RWA leaving our system and having a hugely positive capital impact. The 10% RWA inflation out of Basel IV. Yes, it is based on the current set of assumptions that we have all been trading around for quite a while now. Yes, we see some political movement. My impression is that, on the European level, I would currently be more expecting, if anything, a slightly positive adjustment or change to our assumptions rather than a negative one. So that I think was one question. The second question is the 10% assumption, and effectively, I said it's going to be less than 10%, so to speak, based on the Q2 RWAs, which means that the EUR 4 billion to EUR 5 billion RWA charge from Q3 from the TRIM exercise already cover part of the less than 10% RWA inflation, which means that we are already kind of working that burden off. And as we -- as I've said before, we have started doing this by restructuring the balance sheet, selling EMC and other stuff quite a while ago. The ROTE of 4.4% in Q3, indeed, is above the 4%. But again, our target for 2023 is also above 4%. In that sense, the guidance forward, obviously, as sober, as realistic, as conservative as it might be, include certain assumptions, not only on interest rates, where we have assumed that the rates will be flat as around the levels which we have seen at the beginning of Q3 rather than the levels that we are currently seeing, which have even slightly improved. Secondly, it's based on the general macroeconomic outlook, and also the mBank sale will kind of increase our capital ratio, which then has an impact on our ROTE. So in that sense, there is headwinds in the conservative rate assumptions in there. Yes, there's growth and other stuff to mitigate this stuff, but the assumption, as I said, is above 4% in 2023.
The next question comes from Riccardo Rovere calling from Mediobanca.
Just to get one second back to the questions on RWA. When you mentioned 90 basis points from Basel IV, if I understand it correctly, this is related to the RWA inflation of the 10% net over the EUR 4 billion to EUR 5 billion that you have already accounted for in Q3 due to TRIM. Is that a correct way of understanding your statements? The second question I have is on TLTRO III. The bank has never used the TLTRO II, was wondered whether you -- whether the bank is changing its mind just to have some relief on the cost of funding? And then when you were mentioning deposits repricing in Corporates for corporations, not clear to me whether you are starting applying negative rates to those clients? Or are you just lowering as much as you can the cost of these deposits?
On RWA, what you said is correct. The 90 basis point is, let's call it, from today's perspective, so includes the EUR 4 billion to EUR 5 billion, which we have seen. TLTRO III, I think the early TLTROs were things where there was kind of a difficult-to-judge reputational effect, I think, that has become less with TLTRO III, but it's still something that you need to keep in mind is one part of it. Second part, if I look, for example, at our possibilities around covered bonds, it is hard to really find out whether TLTRO has a financial benefit or not, so it is something that we still review, but it didn't look like something that is immensely attractive in our current situation. Deposit -- negative deposit pricing in Corporates. Just to confirm, we have been pricing corporate deposits negative already for quite a while throughout the bench. And what we are now discussing is that we have established certain freeholds or limits, where we didn't apply the negative pricing because it was funds that reflect customer activity like payment services, collateral requirements and other stuff. So we're reviewing this path, and we are obviously also repricing everything above this threshold according to the market rates.
The next question comes from Anke Reingen calling from RBC.
I just had 2 follow-up questions. First, sorry, coming back on the less than 10% RWA inflation. Does that make any assumption on nestled discretions? Or is this poor application of the rules? And then secondly, I was wondering if there's any update in terms of timing -- of the time line in terms of the mBank sale but also in terms of the focus and discussions with the union on headcount reduction and costs are coming down?
The positive assumption -- the RWA assumption reflects the current set of discussions that we, I think, all share. And as I said before, there is a certain feeling that on the European level, there is some political, at least, movement that might, if anything, probably lead to a better result rather than a worse result, but it reflects the situation as we know it. On the mBank sale, as I've said, we have sent out the teasers. I don't want to go in too much detail here on the process. But it should be a speedy process. And in that sense, we will follow our time line there. I'm not really prepared to give you any detail there right now. The same applies basically for the negotiations with the Workers' Council, which we don't want to have on the public level, so we'll manage this. And I think if you look back over the last years, we have so far had a very, let's say, it's constructive way of dealing with each other there in the last years. In general, I may remind you on what we said on the Capital Markets Day that our aim is to have the FTE reductions completed by the end of 2022 so that we have positive -- the full positive add effect in 2023. And then I think everything else is more for the update with the annual press conference early next year.
The next question comes from Izabel Dobreva, who's calling from Morgan Stanley.
My first question is on the German private customers business. If we look at the disclosure, it looks like the NII contracted quite a bit sequentially. And I was wondering, could you give us some color on the moving parts and, specifically, what you're seeing in terms of [indiscernible] and how much would be negative one-offs you mentioned. For example, if we look at the German system trends in mortgages, it looks like the front book yields fell quite a lot in the quarter. So could you comment if there is any read across to be made to your business and what trends you're seeing in the competitive environment? And then secondly, I had a question on provisions and the credit cycle in Corporates. Beyond this year and the pickup in provisions, which you mentioned in Q4, could you comment on your outlook for 2020? And I know you mentioned that the default ratios are stable. But do you think it's possible we see any increase in provisions related to IFRS 9 accounting as you update the macro assumptions in the models?
PSBC NII, as I said before, the drag in Q3 is a reflection of, a, the typical summer quarter being a bit slow, mainly the interest rate environment as well as some one-offs on prepayments and other stuff. I would think that at least 1/3 is related to the prepayment stuff. And that's why we -- you need to keep that in mind if you want to model going forward. Front book, back book margins. We have, as I said, seen stable development on the interest rate we've quoted to customers, which then led to margins going up basically because the funding got cheaper. From a complete balance sheet point of view of the bank, you need to keep in mind that this only really becomes a P&L item if we really reprice the deposit base, which is what we are doing currently, and you can also assume that part of the good Treasury performance, at least on bank level, kind of compensates for what has been happening on the interest rate side. Provisions of Corporate Clients. I would -- with 2020 views, I would stick to the procedure that we do that on the press conference early February. But just to give you one hint. The way we have calibrated our IFRS models, the macro changes as such do not have an impact on IFRS risk result, and I wouldn't expect that to happen too soon.
The last question for today comes from Nicholas Herman calling from Citigroup.
Three questions, if I may. Sorry to flog a dead horse, but just to come back to the Basel IV guidance. That's very helpful. Just to understand, of the remaining 10%, how much of that is really input flow, and how much of that roughly is output flow and, therefore, be saved in from 2023, as the rules currently stand. My second question is on repricing of deposits. In round numbers, what you -- as far as what you can tell us, what proportion of Corporate Client deposits have you passed negative rates on to? And would you have to also give an indication roughly what proportion of the PSBC deposit pool that you see the option to pass on negative rates to you were talking about passing on negative rates from -- starting with large customers and then working your way down, and that would be helpful. And then just finally, just a clarification on your rate sensitivity. That's increased this quarter versus what you provided in Q2. Is that just growth of deposits? Or is it due to a mismatch in the effect of the recent rate cuts versus deposit tierings and so on? That would be helpful.
So I'll start out with Basel IV. I think at that stage, Nicholas, I would refrain from digging into more and more detail, so Basel IV is a bit out. But as I said, from what we see right now, that is the inflation that we expect. And as I said before, it includes the input flow. And on -- I don't have the number really available on how much of the Corporate Clients' deposits effectively are covered in volume by agreements, but in general, you can assume that it is almost covering all the customers. It depends then on how much of the flow is really still below the hurdle that we have set. And as I've said before, that was the home that we are reviewing. On PSBC, it's pretty simple. The current view would be probably like something almost no -- even of the bigger volumes are really subject to broad and wide agreements on negative rates. We are approaching it, as I said before, with the big customers and the big volumes. And on the one hand side, we obviously want to get the negative pricing into the deposit base. On the other hand, you need to do it in a fashion where you still need to watch your liquidity mention if you could of thresholds and other stuff so that you have not unintended collateral results. So from that point of view, I'd say the potential that we have there is quite reasonable or even big, but it needs to be managed very careful because I think that is completely new territory in trying to understand how customers react to this and also how the market deals with this because, if we start to have bigger movements, that is something that we need to manage properly. On the...
Let me stop you there. Are we talking -- because you said actually quite decent potential. So is that like 40%, 50% of deposits there? That's a bit more -- that has more than I would thought.
I won't give you any -- yes, you can push as much as you want. I won't give you any numbers on that, sorry. On the sensitivity, it's basically more deposits since the last update. And the impact since the interest rate environment grew from minus 40 to minus 50. The impact from the first tranche from getting back to 0 basically is bigger. And we have -- as you know, we have applied a certain beta on everything above the 0 line because we do not expect at all -- if we would get back into positive territory, we would expect that some of the positive territory will probably flow back to customers. In that sense, since the whole thing has moved down a bit, the minus 50 part has been gotten in relative terms or the part which has no beta has gotten bigger, and the part with beta has gotten smaller, but in total, the mechanics are the same.Thank you very much for our little lively discussion here. Looking forward to see you all soon, and wish you a happy day. Thank you.