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Ladies and gentlemen, thank you for standing by. I'm Mia, your Chorus Call operator. Welcome, and thank you for joining the Fourth Quarter 2017 Fixed Income Conference Call of Deutsche Bank. [Operator Instructions] I would now like to turn the conference over to James Rivett, Investor Relations. Please go ahead.
Thank you, Mia, and good afternoon or good morning, everybody. On behalf of Deutsche Bank, welcome to our fixed income investor call to discuss the fourth quarter and full year 2017 results. As usual, our CFO, James von Moltke; and our Group Treasurer, Dixit Joshi, will run through the presentation. Also available for the Q&A session that will follow the prepared remarks is Jonathan Blake, Global Head of Issuance. You should have access to the presentation on the Creditor Information section of the Deutsche Bank Investor Relations website. Please be minded of the cautionary statements regarding forward-looking statements at the end of the presentation. With that, let me hand over to James.
Thank you, James, and welcome from my side, too. Let me start with some high-level observations on Slide 2. 2017 was a very challenging year in many respects for us and the industry. We're a long way from generating acceptable levels of sustained profitability and returns. Our credit ratings are too low, and our funding costs remain too high. And both are a key focus area for management and the team this year. Positively, however, we did report our first pretax profit since 2014, and we would have reported positive net income if not for the DTA write-down we took in the fourth quarter as a result of the passage of U.S. tax reform. We have now resolved our most significant litigation matters and continuing our restructuring efforts with adjusted costs, down by over EUR 0.5 billion versus 2016. Once again, our conservative underwriting and the low-risk nature of our portfolios was evident in our low credit provisions. We also made progress on our key strategic initiatives, including the creation of the new Corporate & Investment Bank as an integrated organization to allow more seamless delivery of transaction banking, advisory and capital markets activities to our core clients; the legal merger of Postbank and Deutsche Bank's domestic private and commercial bank, which we still expect to be finalized in the second quarter of 2018; and in Asset Management, we've largely completed the legal and operational preparation for the planned partial flotation of DWS. We will execute this transaction in the earliest available window, subject to market conditions and final regulatory approvals.We also continue to invest both in remediating deficiencies in our controls and compliance function and positioning our core businesses to capture future growth opportunity. The accelerated investments include spending in our digital capabilities and advisory offerings in PCB, critical hiring in corporate finance and technology to drive greater automation and efficiency across the bank. It is the strength of our balance sheet that has allowed us to invest in the franchise. Our liquidity reserves account for well over 1/4 of our total funded balance sheet. Over 70% of our balance sheet is funded from the most stable sources, and our fully loaded CET1 ratio is among the highest in the industry.Let us now look at the fourth quarter and full year results on Slide 3. In 2017, we reported a net loss of approximately EUR 500 million, which included the DTA revaluation of EUR 1.4 billion following the U.S. tax reform. Income before taxes, or EBIT, improved to EUR 1.3 billion on a reported basis compared to losses in 2016 and 2015. While reported revenues for the year declined by 12%, noninterest expenses declined by 16%, and provisions for credit losses declined by over 60%. Our fully loaded CET1 ratio increased slightly while our leverage ratio was broadly flat versus the prior quarter.Our reported revenue performance included several major nonoperational items that masked the underlying revenue trend, as shown on Slide 4. Excluding DVA, movements in our own credit spreads and the impact of disposals, revenues declined by EUR 1.3 billion or 5%. The decline was driven by a EUR 2.2 billion or 13% fall in the Corporate & Investment Bank, which suffered from low volumes and volatility in trading; adjustments in the transaction banking perimeter; as well as the impact of higher, liquidity-driven funding costs. Revenues in our retail unit, PCB, were flat as we offset the revenue pressure from the persistently low interest rate environment with loan growth and higher fee income. Revenues in Asset Management rose slightly. And the overall group performance benefited from the absence of negative revenues in the noncore unit, which was successfully [ wound ] down in 2016.Taking a deeper look at our noninterest expenses on Slide 5. Excluding the impact of foreign exchange movement, total noninterest expenses of EUR 24.6 billion declined by 14% or EUR 4.1 billion, driven by several factors. Litigation expenses were EUR 2.2 billion lower. Impairments and policyholder benefits and claims fell by EUR 1.6 billion, and adjusted costs fell by nearly EUR 500 million. The decline in adjusted costs came as our restructuring efforts allowed us to reduce non-compensation expenses, partially offset by higher compensation charges. The increase in compensation costs versus last year reflected our decision to return to a more normalized compensation structure compared with severely restricted compensation awards in 2016 as well as an adjustment to the deferral terms to better match competitive practices and improve our future cost flexibility. Before handing over to Dixit, let me reiterate our outlook on Slide 6. We now expect our adjusted costs in 2018 to be approximately EUR 23 billion, which reflects our original EUR 22 billion target plus approximately EUR 900 million of costs related to delayed and suspended business sales. While these sales will impact costs, they are expected to be slightly positive for the group EBIT as we retain the associated revenues. Approximately EUR 300 million of these costs relates to transactions that have either been signed or expected to sign and closed within the year and should therefore impact our 9 -- 2019 results. We expect to see credit costs in 2018 closer to our historically normal levels rather than the EUR 500 million recorded in 2017. In terms of restructuring, we are very focused on achieving our cost savings while delivering restructuring expense below current guidance over time. But currently, we expect restructuring expense in 2018 to be broadly in line with 2017 levels.Litigation expenses in 2017 were unexpectedly low, even though we continued to build additional provisions throughout the year, given the success we had in resolving a number of matters below our estimated provisions. With the caveat that forecasting litigation expenses is difficult to do with precision, we would expect litigation in 2018 to be meaningfully higher than 2017 but well below the elevated levels seen over the past number of years. That said, over time, we expect that litigation will continue to decrease, reflecting not only the resolution of legacy matters but also the impact of our multiyear investments in our control and compliance functions. Turning to the broader outlook for 2018. We are optimistic about the year up ahead. Global economic backdrop is clearly strengthening, which is driving an acceleration of client engagement. The expectation of eventual interest rate normalization in the Eurozone bodes well for our future revenues, given the interest rate sensitivity of our balance sheet. Notwithstanding the current prospects of an improvement in the operating environment, we will continue to manage our risk levels and balance sheet conservatively. But the revenue weakness of last year underscored that we are not cutting costs fast enough and are challenged in our goal of achieving positive operating leverage. So we are going to be even more aggressive on cost management. With that, let me hand over to Dixit.
Thank you, James, and welcome to you all. Let us begin with our common equity Tier 1 capital and risk-weighted assets on Slide 8. We ended the fourth quarter with a fully loaded CET1 ratio of 14%, slightly higher than the prior quarter. And based on the current CRD4 rules, our fully loaded total capital ratio of 18.4% is more than 300 basis points above our mandated SREP level. CET1 capital of EUR 48.4 billion declined by EUR 700 million as the reported IFRS net loss of EUR 2.2 billion in the fourth quarter was partially offset by the reversal of accruals of unrecognized profits in the first 3 quarters of 2017, as mandated by ECB policies. RWA declined by EUR 11 billion to EUR 344 billion as business-related RWA growth in CIB was offset by declines in operational and market risk-weighted assets. Looking forward, our guidance that we will manage the bank towards a CET1 ratio comfortably above 13% is unchanged. However, there are a number of items that impacted our CET1 ratio on January 1 of this year. First, the impact of IFRS 9, which is detailed in a slide in the appendix, will reduce our CET1 ratio by approximately 8 basis points in our first quarter results. Additionally, new ECB guidance on the capital treatment of irrevocable payment commitments to the Single Resolution Fund and deposit protection schemes, we estimate reduced our CET1 by approximately 10 basis points. So our reported 14% fourth quarter CET1 ratio dropped to approximately 13.8% on the first day of 2018. A further 10 basis point impact will arise from the payment of AT1 coupons in the second quarter for which no accrual was reflected in the year-end 2017 CET1 because of the reported full year loss. We're also carefully assessing the impact from some ongoing regulatory developments, for example, around the treatment of guaranteed funds, which could result in further reductions to our CET1 ratio in the first half of 2018 by as much as an estimated 40 basis points. These factors will obviously be in some way offset by the benefit from the expected partial flotation of our Asset Management business. Lastly, let me clarify the fact that no common equity dividend accrual was included in the year-end 2017 CET1 capital ratio as a mechanical consequence of having reported a full year loss. The management board has not yet made a determination in regards to a recommendation for a payment of a common equity dividend for 2017. Turning to Page 9. Our fully loaded leverage ratio was 3.8% at year-end, broadly flat to the prior quarter. Leverage exposure decreased by EUR 25 billion on a reported basis and EUR 15 billion excluding FX movements in the quarter as cash and business growth in CIB more than offset the seasonal declines in pending settlements. I would note that if we excluded Central Bank cash from our leverage calculation, as U.K. peers do, and if we were to account for pending settlements under IFRS settlement date accounting, our fully loaded leverage ratio would be approximately 80 basis points higher. Moving now to our key liquidity metrics on Slide 10. As we guided to in previous quarters, our liquidity coverage ratio, LCR, declined slightly from the highs recorded during the first half of 2017. Still, our LCR of 140% represents a EUR 74 billion surplus above the 2018 requirement of 100%. Liquidity reserves of EUR 280 billion were broadly flat versus the prior quarter, although the cash component increased by EUR 20 billion, reflecting an increase in retail deposits and higher repo activity in the quarter.Both our LCR and liquidity reserve metrics remain very comfortable, which allows us further flexibility as we allow -- as we adjust our balance sheet and restructure the bank. Turning now to our funding profile on Slide 11. Our funded balance sheet was broadly flat compared to the third quarter of 2017 and remains a little over EUR 1 trillion. The proportion of total funding from the most stable sources stood at 72%. Slightly more than half of our total funding comes from retail and transaction banking deposits, 14% from our long-term debt and capital markets activities and a further 6% from equity capital. With this, let us move to our funding plan for the current year on Slide 12. In 2017, we completed our EUR 25 billion issuance plan, with the average spread 71 basis points above Euribor, almost half our average 2016 issuance spread levels. Our 2018 funding plan range of EUR 25 billion to EUR 30 billion includes EUR 2 billion to EUR 3 billion of covered bond issuance and a further EUR 1 billion to EUR 2 billion in capital instruments. Taking advantage of the benign market environment and the further recovery in our own credit spreads, we have so far in 2018 issued more than EUR 6 billion. To preempt a likely question, we expect the legislation in Germany to be passed to allow us to issue senior preferred debt in the second half of the year. Let us turn now to loss -- total loss-absorbing capacity, or TLAC, on Slide 13. Our overall TLAC was EUR 122 billion, broadly unchanged from the prior quarter. Our TLAC equates to 36% of our risk-weighted assets and 9% of our leverage exposure, representing a very comfortable EUR 39 billion surplus above our most constraining 2019 requirement. Finally, let us look at a preliminary estimate of our payment capacity for the annual coupons on our CRR-compliant or new-style AT1 instruments. The annual coupons on these instruments are next payable on 30th April 2018. As you know, our payment capacity is calculated based on the Deutsche Bank parent company results under German GAAP, or HGB, so not directly comparable to our consolidated group IFRS financial statements. These results are preliminary and are subject to change until we publish our annual reports in March. Despite the full year loss on an IFRS basis, our HGB net income is estimated to be positive at around EUR 500 million. The difference between the IFRS and HGB results is principally driven by the treatment of dividends and profit pooling from subsidiaries, which contribute to the parent company results but are eliminated in consolidation of the group IFRS financials. Including the add-back of interest paid in prior year on our new-style and legacy Tier 1 instruments, our estimated AT1 payment capacity is around EUR 1.2 billion, broadly in line with the previous year levels. This payment capacity is nearly 4x higher than the EUR 320 million coupon payments due on the AT1 instruments. In addition, as you can see at the bottom of the slide, we expect to increase our HGB reserves, which could be used to increase payment capacity or offset losses in our HGB accounts by EUR 300 million to EUR 2.7 billion. Looking forward, we expect the Postbank legal entity merger to further strengthen our ADI once the new structure is in place. With that, let me now hand back over to James Rivett to moderate the Q&A session.
Thank you, Dixit. Mia, let's go ahead and open the lines for questions.
[Operator Instructions] And the first question is from the line of Corinne Cunningham with Autonomous.
Could I just explore that chart that's on Slide 14 in a bit more detail? I know you mentioned that it's due to dividends and profit pooling. Can you give a bit more explanation perhaps as to specifically what's going on there and whether or not this is linked to the revaluation of Asset Management subsidiaries? And in particular, what -- I'd say what would need to happen before you could release some of these general reserves? Is it purely at your discretion if you need to release those?
James von Moltke here. Well, 2 things. Yes, there are a number of different items that flow through into the HGB account. I guess at the highest level, one thing to point out is that the DTA revaluation that we talked about, having a big impact on the IFRS account, had a more modest impact on HGB. So that can give you some color as to the 500 that you see at the top of the table. There were a number of internal reorganizations that took place during the year as we prepared, among other things, for the Asset Management IPO, and they had a small contribution to the HGB accounts. But I wouldn't call them a highly material part of the development of the HGB accounts during the year. And then lastly, on the general banking reserves, yes, the general reserves are essentially at management's discretion, and that represents sort of freely available reserves.
And could I ask another question on the leverage? I know this question was asked on the equity call, but I have to say I couldn't quite follow the answer. So to get from 3.8% leverage to 4.5%, which is your target, do you assume that you do that purely through retained earnings or, in other words, through equity? Or is there an element of fresh AT1 issuance that you assume?
I'll answer the first part, and Dixit may want to add. I think it's a mixture of retained earnings over time and then the efficiency of our balance sheet in terms of use of leverage exposures. So I think there's work we can do, both on the numerator and the denominator side.
Corinne, I'll add to that. As we mentioned in our remarks, we do have the capacity this year and in subsequent years to issue some capital instruments. Whether that's to fill the 1.5% risk-weighted asset regulatory requirement, that certainly will help also in the glide path to our 4.5% leverage ratio target. So at some point during the phaseout period of legacy instruments, we would expect, all else being equal, to issue new capital instruments.
And the next question is from the line of Lee Street with Citigroup.
Just firstly on risk-weighted assets, we're obviously seeing some of the other banks give a bit more color on the impact of Basel IV announcement. Just from where you stand, what are the key stumbling blocks to you giving more guidance on the potential impact of Basel IV? And when would you expect to be able to actually give more guidance on the potential impact on Deutsche Bank? And secondly, I note the increase in the contingent liabilities that's shown on the slide at the back of the deck. I guess I was just a little bit surprised to see that coming through from the Postbank takeover litigation. Are you just able to give -- just outline sort of what's the issue there and what's actually happening there? Just curious if there's a bit more information. That'd be my questions.
So on -- it's James here. On Basel III, I don't want to commit to a time line to providing more guidance on the impact on us. And the reason is the degree of uncertainty that lies ahead -- not to mention, frankly, the long time line. And if I think about uncertainty, the first thing that needs to happen is there will be a quantitive impact study that will inform legislation at the EU level. And we think that should take as much as 2 years to be finalized. There's a lot of work, as there always has been, in prior rule revisions to really go through at a granular level the data and the calculations that are called for, which, of course, is work that we've been doing for some time. But you tend to find improvements and mitigations the deeper you get into that analysis. And then thirdly, there are some mitigants that you can put in place for the existing business, whether that's around netting sets or collateral agreements and the like, so adjustments to the existing business. And finally, over time, there can be adjustments to the business we, in fact, conduct. Where we allocate our capital will be informed ultimately by a view over time to the Basel III framework becoming fully implemented. So the short version of that is that there are a lot of uncertainties, and it takes time. So knowing the full impact of all the elements of the rule changes that are coming at us is just hard to do to be meaningful to you. As it relates to the contingent liabilities, you're right. There's -- there was an increase versus the prior quarter, and that represents litigation that we're subject to that -- and based on it being in contingent liabilities, where we see less-than-probable likelihood of an outflow, but where we clearly have to record in the methodology that drives the contingent liabilities the fact that claims have been lodged against us. And so that's really the driver, as you assume. Whether that results in an outflow ultimately clearly depends on the legal path and the outcome of the court's decision. But the fact that it remains a contingent liability speaks to our expectations there about the outcome.
Any specific dates that we should be aware of where we might get more color or detail on that? Is there anything available on that?
On the contingent liabilities?
Yes. On the specific Postbank merger.
Yes. It depends on the -- on really the court's calendar. And we were actually expecting a decision this week, today, in fact, based on the original calendar that had been set. But based on some recent motions, that's been pushed back by several months. So as you can tell, it's out of our control entirely, and we'll await the court's decision.
Next question is from the line of Robert Smalley with UBS.
Thanks for taking the call, and thanks for doing it in U.S. time as well. Greatly appreciate it. A couple of questions, one on the regulatory side and then on the capital side. Following up from the call last week, CEO, John Cryan, said that the bank is clearly too complex for comfort in the eyes of many, and we need to remedy this. It sounds -- that sounds more like some real structural change to the bank, some of the businesses that you might be doing beyond simply mitigating RWA growth. Could you talk about that? What kind of regulatory guidance or pressure you've gotten to reduce complexity in the bank? And given that some of the U.S. competitors are about to go into an environment with less regulation, does that widen the gap competitively or limit your target opportunity set?
Thanks, Robert, and appreciate your joining the call. It's James again. It's a very broad question. Admittedly responding to John's comments last week, complexity takes on many forms in our business, and it can be the types of activities that we're in or the breadth of activities. And it can also be, in a given business, the nature of the transactions that we do from highly bespoke and tailored to clients' specific needs or more commoditized and standardized. And of course, you can manage complexity down both by the decisions that you make to exit certain businesses. A number of the transactions that we, in fact, announced in 2017 do exactly that. They take us out of businesses that were relatively small, in some cases, quite complex and manual, and they are sort of subject to operational and sometimes fiduciary risks. So represent, I think, a good example of how we can take actions to reduce the complexity in terms of the business scope of the company. If I think about complexity around transactions, there are lots of examples I can give there, but I think the highly bespoke, long-dated derivative transactions are much harder to do in today's world, more costly from a capital perspective. And to the extent that they need to be supported and with very bespoke financial and risk processes, they create a degree of complexity in the eyes of the regulators that's undesirable. And so those are examples of what we mean by the complexity that leads to then regulatory scrutiny. What specific actions we'll take around that, it's too early to tell. But as John says, it's evolution rather than revolution. Many of the -- we've already taken actions along the lines that I just described, around both the scope of our businesses and the complexity of the businesses that we remain in.
Okay, that's helpful. A couple of questions on capital. I think based on the slide and the answer to Corinne's comments, in this EUR 1 billion to EUR 2 billion that's listed on Page 12, should we assume that that's much more skewed to AT1 than it is to Tier 2?
This is Dixit here. We would be flexible in our approach as we look at the glide path between now and the roll-off of legacy instruments. Partly, the function -- partly, we would look at the economics of comparable instruments that we would issue. We would look at some of the structural elements of the items that we have on the book that we would or could call. We would look at the TLAC efficiency as well as any bail-in considerations as we make that determination. It is not lost on us that, in absolute terms, the credit markets -- notwithstanding the movement in the last few days, that credit markets have been strong in January and through last year. We have accelerated our issuance plan in response to the conditions and investor appetite that we saw in January. You would have seen that we had issued in the region of EUR 6 billion, which is about 20% of the targeted EUR 35 billion for this year in January. So we will remain opportunistic.
Right, okay. And then finally, on Page 14, and thank you for this. This explains a lot. What we've really seen, for 2015, '16 and '17, the AT1 payment capacity has stayed roughly the same. Where, as a creditor, you can get more comfort is the addition to general reserves. Going forward, can we expect that to be -- the general reserves to continue to get a contribution? Or are you looking for more cushion on the AT1 payment capacity out of the HGB results? How does that mix look?
Sure. In general, the best way to enhance and grow the capacity is obviously to be as profitable as we can. So we do have a focus on driving the top of that funnel. But as we do that, to your question, we think it's prudent in the HGB accounting world to grow the general reserves and create buffers and flexibility for management to manage those accounts. So without wanting to give projections about what we would do with the general reserves, as we've done this year, we do feel it's prudent to grow those reserves, creating future flexibility.
[Operator Instructions] And the next question is from the line of Natacha Blackman with Societe Generale.
I have a question on Slide 13. Could you explain why you're looking to do so much [indiscernible] senior this year, just given the much lower maturities in 2018 and also given the prospects for preferred senior issuance, which would be much cheaper for you to do? Sorry, that's not Slide 13. That's the funding slide, 12.
This is Dixit here. Yes, so we're looking forward to the legislation being implemented in Germany, which would allow the creation of the senior preferred class. It is our expectation that, that happens in the second half of this year. When that does take place, you should fully well expect us to be issuing some senior preferred. The excess TLAC that we have does afford us the flexibility to issue senior preferred at that time. In terms of the overall stack, we should remember that we have about EUR 16 billion of contractual maturities in 2018. And so that doesn't count any behavioral or noncontractual redemptions that might occur on top of that. And so the funding plan of around EUR 25 billion to EUR 35 billion is not that dissimilar, quite frankly, to what we've done in previous years.
I see that, but your maturities last year were also -- your contractual maturities were also much higher. So from kind of looking at your slide, it seemed to match it up more, and now it seems to be a lot higher. So I'm just wondering what's driving that. And then I would just also like to ask about your senior structured and preferred bucket. How much of that would be -- in your ideal world, would be the -- just the senior preferreds?
I wouldn't want to make a call on that right now. I think what we'd like to do is see the legislation enacted and make the call when -- depending on market conditions at the time.
And the next question is from the line of Alexander Latter with PGIM.
It's actually James Hyde borrowing Alex Latter's line or James Hyde from PGIM. Yes, the question I have was sparked by James' mention of evolution, not revolution that John mentioned -- that John Cryan mentioned a few days ago, and by the reference at the beginning of this presentation that management is committed to even improving the ratings and doing something about costs. Well, I'm just wondering about evolution, not revolution, on the ratings. Do you think in -- whatever evolution is, is going to require something as substantial as some kind of Investor Day sometime in the first half? Because I'm not sure if the rating agencies' patience is -- stretches much beyond the second quarter results. That's my question.
Yes. I don't want to commit to an Investor Day. I think it is worth doing in the fullness of time when we believe our messages are fully formed. So I wouldn't want to commit to a time line there. I will say, with respect to the rating agencies, we're obviously in a dialogue with them frequently, if not continuously. But as we think about the evolution that you referred to, obviously, we're mindful about our rating position and ensuring that the actions that we take are oriented to creating the sustainable profitability that I think that creditors are looking for. As we've talked about, the balance sheet is highly capitalized, highly liquid. And our view is that if -- as we show the path to sustainable profitability and higher margins, we will be showing a creditor-friendly and rating-friendly profile.
There are no further questions. I hand back to James.
Great, Mia. Thank you, and thank you, everyone, for dialing in today. If you have follow-up questions, please, as always, feel free to contact the IR team. Otherwise, have a great rest of your day.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.