Q1 2020 Earnings Call - Fixed Income

The percent.

Our results also show that we continue to operate with low risk levels.

We continue to manage our market risk exposure tightly.

Our value at risk on an average basis remains low at 24 million euros.

And we are focused on maintaining strong credit quality.

I'm sure you've seen the rating actions S&P took last week on multiple European banks, including us to reflect the potential impact from the Corona virus.

We appreciate that S&P recognizes our strong balance sheet.

There should be the key criteria together with the continued execution of our transformation agenda to determine our forward.

Ratings trajectory.

We will not deviate from our agenda and we'll do everything in our power to maintain our current ratings and in.

Prove them over time.

Before I hand over to the exit let me conclude with a few remarks on our role on.

Now, we see us is well positioned in the current environment on slide 10.

With our refocused strategy, we are now operating in businesses with market, leading positions providing industry leading position.

Solutions.

Germany, as our Homo market, where we generate approximately 40% of our revenues.

In the corporate bank as the house bank to nearly 1 million small and medium sized companies and.

Jeremy we are well positioned to help clients through the crisis.

In investment banking for the first time since 2017, we've regained our position as the market leader in German corporate finance year to date.

In the private bank and Dws, we're helping our private customers to navigate through turbot conditions.

We have a leading.

Retail bank with 19 million customers and the leading retail asset manager.

We also believe the Germany is relatively well positioned to manage through the macroeconomic like turbulence.

The government has put in place a series of well design programs, which should provide support quickly to the broader economy.

We were pleased and proud to have contributed to this process both in the design and implementation of the.

Programs.

Given the strong fiscal position the German government is well positioned to take additional action if required.

The German consumer and corporate sectors are relatively well position to deal with this crisis.

Consumer debt levels are amongst the lowest in the eurozone and the developed world.

German small and large corporate customers are also operating with a lowest staff levels of leverage lowest levels of leveraging the highest levels of liquidity in the last 30 years.

We feel fortunate to have Germany, as a home market in volatile times.

With that let me hand over to the exit.

Thank you James Let me start with a review of our net balance sheet on slide 12.

This view excludes derivatives, netting agreements cash collateral and pending settlement balances from our FRS balance sheet to make it more comparable to us GAAP accounting standards.

We have transformed our balance sheet significantly over the last years. This provides a robust foundation as we continue to execute on our transformation and managed through the challenging macroeconomic environment.

On the asset side around 20% of our net balance sheet is in cash and governments.

Securities as part of our liquidity reserves.

Roughly half comprises our loan portfolio, which we will discuss shortly.

Trading assets account for roughly a quarter of our balance sheet.

As our low value at risk indicates this is a conservatively manageable what tightly controlled risk limits and includes our secured financing activities with low credit risk as they are welcome.

Thats realized.

On the liability side trading liabilities increased over the quarter I would account for less than 20% of our net balance sheet.

This increase largely reflects seasonal variations as well as increases due to recent volatility and does not reflect any material shift in our funding profile.

More than 80% of our balance sheet is funded by most stable sources.

Deposits now account for around 60% of our liabilities.

We have worked to improve the quality of our deposit base over time, which consist mainly of retail and corporate deposits.

Only 2% of the net balance sheet is from unsecured short term wholesale funding.

Overall funding base has proven to be very resilient and now allows us to actively support our clients in this challenging environment.

Let us now take a closer look at our loan portfolio on slide 13.

Ill on books are well diversified across the businesses customer segments and regions.

Around half of our total loan loan portfolio is in the private bank, mainly German mortgages with conservative loan to value ratios and low delinquency rates.

In wealth management, almost all our loans are secured typically by high quality liquid stocks and bonds with conservative loan to values.

90% of our commitments in the corporate and investment bank our to clients rated investment grade.

And from a regional perspective, our loan books are also well diversified approximately half our portfolios are in Germany with a further 20% in EMEA and the use.

The next slide gives you an overview of our exposure towards focus industries.

In commercial real estate, our exposure is predominantly first lien mortgage lending with an average 60% loan to value.

Our portfolio is diversified across a broad range of high quality properties typically in gateway cities.

Our oil and gas exposures are focused on the investment grade majors, and we have very modest exposure to non investment grade exploration and production segments.

In retail we have contained our exposure to strong global names with very limited exposure to non food retailers.

Within the airline space, our exposures are secured at conservative loan to values with the unsecured portfolios biased towards national flag carriers in developed markets.

And finally, our leisure portfolio is small and focused on large hospitality industry leaders with minimal exposure to cruise ships and two operators.

In summary, we believed that our loan portfolio is low risk and well diversified.

And our risk profile is supported by our comprehensive stress testing framework and proactive risk management.

Slide 15 provides more details around our level three assets, which stood at 28 billion euros.

Level three assets increased by 4 billion euros in the quarter.

The increase was driven by reclassification of some inventory into level three due to the increased dispersion in market pricing towards the end of the quarter.

This was mainly in relation to derivative transactions, where the material components of the underlying risk are typically hedged.

We also saw higher carrying values on existing level three derivative inventory, mainly driven by movements in interest rates.

These increases were largely offset by equivalent increases in levels the liabilities.

As conditions normalize some of them market related effects should reverse and therefore reduce the current level of prudential valuation deductions and level three assets.

That said developments in the near term are difficult to predict and will depend on market dynamics.

Just to reiterate what we told you previously a level three classification is not an indicator of risk or asset quality, but an accounting indicator of valuation uncertainty due to lack of observe ability of at least one significant valuation parameter.

We have several safeguards in place to mitigate the valuation uncertainty, including Prudential valuation adjustments of 700 million euros.

And the exchange of collateral the derivative counterparties.

In addition, our level three assets are revalued continuously both bio businesses and also through our independent valuation teams.

Let me now walk you through the development of our liquidity capital and issuance metrics, starting with liquidity on slide 17.

We believe that our ability to manage and steel our liquidity through the quarter.

As a testament to the investments we've made in our data governance and tools in recent years and also to the stability of our funding given the reshaping of our balance sheet.

With signs of stress appearing in markets in early March we implemented heightened governance and increase the frequency of our reporting including on our committed facilities.

In the quarter, when deploying 18 billion euros into supporting our existing clients drawings on committed facilities with a further 7 billion of new loans.

As a result, we ended the quarter with liquidity reserves of 205 billion euros, and a liquidity coverage ratio of 133% both above our targets.

We remain committed to providing liquidity to support our clients.

To that end, we've earmarked 20 billion euros of additional lending in the second quarter, including half of which is funded by KFW.

We are comfortable operating below our target is temporarily but we'll prudently maintain buffers above our regulatory thresholds.

As the market environment normalizes, we would expect to see our liquidity reserves and liquidity coverage ratio return closer to current levels.

Moving now to capital on Slide 18.

Our cetone ratio was 12.8% at quarter end down roughly 80 basis points from the prior quarter.

Approximately 30 basis points of the decline came from the impact of the new securitization framework, we have discussed with you in previous calls.

In line with our stated strategy. We also continued to fund our business growth across our core businesses, which consume roughly 10 basis points of capital in the quarter.

Our cetone ratio was impacted by around 40 basis points as a result of covert 19 with James described earlier.

As noted we would expect for the covered 19 items to sustainably normalize over time as the macroeconomic situation stabilizes and we will maintain ample buffers above our regulatory requirements, which we will discuss on the next slide.

Our cetone ratio at quarter end was approximately 240 basis points above our recently revised regulatory capital requirements.

The reduction in our Cetone ratio requirement reflects the recent DCB decision to implement CRD five article one or foray with immediate effect.

This allows us to partially meet the pillar two capital requirements with 81 and tier two capital.

In addition, several countries have lowered the counter cyclical capital buffers as a reaction to the cover 19 cases.

These measures have resulted in a 114 basis point reduction of our Cetone ratio requirement, which now stands at 10.44%.

Our most binding capital requirement is now on the total capital ratio with about 455 basis points or the equivalent of 5 billion euros of headroom in capital towns.

More importantly, we now have tier two issuances available as a tool to improve the distance to our tightest regulatory capital requirement.

Our leverage ratio was 4% at quarter end as described on slide 20.

The ratio declined 21 basis points in the quarter.

This decline was principally driven by covert 19 related impacts most notably.

Increased drawdowns of credit lines as already discussed in the liquidity section and higher net derivatives and training exposures.

And an atypical increasing pending settlement balances of around 20 billion euros, which came on top of the usual seasonal increase in Pendings post a year and low which we do not include as covered 19 related.

Other changes in the quarter reflect mostly seasonal balance sheet increase including a further rise of approximately 20 billion in pending settlement flames and other seasonal movements in our trading related balances.

These other more seasonal effects will materially offset by the benefit to our leverage ratio from our 1.25 billion US dollar 81 issuance that we completed in February.

At 4% our reported leverage ratio is well above the requirement of 3% that is currently scheduled to be introduced by mid next year.

This is despite our ratio being burdened by around 20 basis points of temporary effects from pending settlement balances, which will reduce the near zero with the introduction of CRR to next year and bring us in line with current treatment for us and Swiss banks.

In addition, we have around 10 basis points dragging our ratio from the Prime finance platform being transferred to BNP Paribas.

Our leverage ratio is all already about the requirement of 3.75%, which we so far are expected to come into play from the start of 2022.

It is now likely to apply from January 2023, following the European Commission proposal earlier this week for a change to the regulation.

Excluding central bank cash from leverage exposure also consistent with the European commissions proposal.

I would if implemented increase our leverage ratio by approximately 20 basis points.

We continue to operate with a significant loss absorbing capacity well above our requirements as is shown on slide 21.

At the end of the first quarter 2020.

Our loss absorbing capacity was 18 billion euros above the minimum required eligible liabilities or emerald, our most binding constraint.

We have significant buffers and among the few European global Systemically important banks are G sibs that already comply with fully loaded emerald requirements.

Our buffer has reduced with the balance sheet expansion, which includes a seasonal increase in pending settlements and loan growth.

In addition, we saw a slight reduction in our eligible senior non preferred securities as certain maturities fell below one year.

We continue to operate with a comfortable surplus above our requirements and have sufficient headroom to absorb the upcoming regulatory and methodology changes, which will become effective in 2021.

These proposed changes include the switch from the total liabilities and on funds are tail off.

To an R.W.A. based calculation.

The surplus also gives us flexibility to reduce our issuance planned for this year as will be discussed on the next slide.

During the first quarter, we should 5.6 billion euros, primarily euro and Sterling senior non preferred issuances in January.

And the U.S dollar 81 issue in February.

The issuance of 81 was designed to support the call have a legacy tier one instrument the 800 million US dollar DB contingent capital Trust too.

We now expect to issue 10 to 15 billion euros in Twentytwenty down from our previous 15 to 20 billion assumption.

The reduction is driven by two factors first our senior non preferred issuance plan is informed by multiple constrains, including Tillack ml and rating considerations.

As our latest outlook has sufficient headroom across all of those we intend to issue less senior non preferred than originally anticipated while preserving a significant surplus over the t. lack and emerald requirements.

Second.

We will make use of the various central bank facilities, including TLD Aro three to raise part of our funding.

The majority of our remaining Twentytwenty issuance is likely to come in senior preferred structured or potentially covered bond issuance.

This reduced issuance requirement.

Allows us to be flexible in terms of timing and market conditions.

We will continue to review our issuance needs and consider tier two issuance to manage our MD a buffer in light of changes so article wonderful rate.

In conclusion on slide 23.

The improvements in our technology allow us to more accurately and effectively manage and allocate our resources.

Our balance sheet is low risk and funded by highly stable sources.

We have excess liquidity capital in Emerald above our regulatory requirements.

And our refocused strategy operating in businesses, where we are market, leading has put us in a strong position to support our clients as they needed.

We will also continue to look for ways to further improve the efficiency of our balance sheet and this includes ongoing progress on our deposit repricing programs as well as the optimization of our liquidity resources.

We will also continue to maintain adequate buffers above all regulatory requirements under which we operate.

In short we believe that we are well positioned to deal with the current challenging environment with that let us move to your question.

Ladies and gentlemen at this time, we'll begin the question and answer session.

Anyone who wish to ask question, we press star followed by one on the Touchtone telephone.

Just to remove yourself from the question Q you may per star followed by too.

Using speaker equipment today, please lifter handset before making your selection.

Anyone who has a question prostar bounded by one at this time.

One moment for the first question.

First question is from the liner Richard Thomas from Bank of America Securities Europe. Please go ahead.

Yes, thank you very much for the cool.

With questions to three questions for me if I if I may.

Just on the liquidity reserves, they really are down quite a lot. If you think a year ago. There were 260 in either at 200 insights that is being an awful lot of movement. There can you be a bit more specific about where we're heading in terms of the use of this important liquidity buffer.

And we will we ever return to anything like the high levels that we've seen in 2019 first question second question.

Here are you on lower issuance.

This year.

Potentially even low in either the CBS made all these announcements just this afternoon.

[music].

Next year is a bump per year for senior non preferred redemptions I should say this 18 billion and there's some of that will be running out of the ratios this year, but.

Is it likely that you will have a big.

Yes, SMP issuance and.

I'd later this year or actually next year and then finally, what are your thoughts on what you have to do or not to do.

To stay investment grade.

Seen on preferred level. Thanks.

Richard High Thank you and thank you for for joining I'll take those.

Turn.

With regard to liquidity reserves.

And LCR, you'll recall that we've built up a significant surplus of liquidity from the end of 16 onwards.

As we've improved our capabilities as we announced the strategic restructuring of the from last July and been executing on the restructuring that afforded us the flexibility to actually run.

Lower levels of liquidity reserves, but still with sufficient surpluses to all of our minimum criteria. So whether it's the surpluses that we've had on Emerald a significant surpluses that we've had on t. lag.

Surplus is on our auto on risk appetite at an internal level.

Or you know with LCR, where even through arguably what is one of the most severe cases, we've seen we had a 43 billion euro LCR surplus at the end of the first quarter. So I think we've been quite deliberate in managing down excesses and we've done that through continued investments in our day.

Our technology, our governance and of course executing on the restructuring of the form as well, which as tilted us to a much more stable funding base and all of those in aggregate have helped us in really the lead up into March of this year.

To answer your question on do we return to to those high levels I'd reiterate that in our business as usual targets in the region off around an LCR of around 130%.

And our liquidity reserves of around 200 billion.

Given that this represents over 40 billion of excess at these levels. We are comfortably set up to even absorbed the second stress that is similar to the recent environment that we've had.

It is hard to say of course, when this market environment, what will change and how long this environment will prevail, but we do intend to work closely with our clients to support them as Christian reiterated yesterday.

Throughout that will continue executing on our business strategy as well.

And if necessary, we will operate below on a temporary basis below the stated targets, but of course always above our minimum minimum levels.

Regarding.

So your question on on issuance for next year into the first is I'd say, we do not need to refinance the full $18 billion of senior non preferred maturities next year.

Partly that's big because the 18 billion really falls out of our MLL calculation. During the course of this year as an example, 8 billion already fell out during the first quarter and the remainder will be derecognized. During the course of this year. So that's very much embedded into our planning into 2021.

And that partially drives the 10 to 15 billion Euro revised outlook. We've now given for funding for the year, which includes about three to 6 billion of senior non preferred funding.

We do intend to reduce that surplus to the cause of this year.

I would point you to our 2022 maturities of 8 billion euros, which I think would be a better guide for what normalized potential new issuance.

Is likely to be.

On.

On your third question really around around ratings.

James.

I was going to add to whatever you had to save advance you go ahead, so what I would say that weve, where we're maintaining not only in all of our regulatory criteria that we're managing to but also naturally ratings agency constraints.

Have been quite deliberate with our funding plans throughout.

To ensure that we've been we've been robust.

You would have also noted the consultation that's out from Moody's around potential changes to the Lgf I don't really want to preempt any outcomes from that.

But that does also have the likelihood of some positive benefit for us on senior non preferred but again depends on that on the final outcome.

And when I was just going out is James the first of all as you'd expect we've had a very sort of engaged in frequent dialogue with the rating agencies is we have gone through this crisis and and the industry has gone through this crisis.

We intend to maintain that dialogue.

I think the.

The answer your question is if we simply execute on our strategic plans.

We will deliver on the key element here of our reading stories, which is moving the company to sustainable profitability.

There is a comfort with our balance sheet the risk management.

And other aspects of the rating story.

I think beyond that if I were to look for a silver lining in the dark cloud that we're all sort of living through.

Third.

We hope that this crisis will give us an opportunity to demonstrate that the focused business model. The conservative balance sheet management that we've talked about the risk management in risk appetite discipline that we have.

You know is pressure testing the company and that will give investors as well as rating agencies from some kind of real world proof of of the company's resilience in an environment like this.

Thank you Jay I hope that answers there three question that's great. Thank you very much.

Next question comes from the line of browsers Kumar from societies that are out. Please go ahead.

Hi, good bottom or locomotives.

We'll go up Turkey questions.

We'll use on the on India harder I see that you had adjusted for the appear to completion on pharmaceutical bottle.

Why do you will do not use our tactical universal bottom line.

Oh, I assume that little bit Austin MPS stood at exactly when that.

What are you saying to me.

Same question is on multiple regions, what's your best estimate for the Korean so would I be dealt and the government guarantees.

No hormones, we think all will be the positive government guaranteed loans. All you end up having on your books. Thank you.

So British high.

The line was a bit fame. So if we if we haven't got the questions I'm pleased to please let us know I'll take the first and James will take the second.

Youre on the on the first question as you pointed out we have taken into account the countercyclical buffer.

As well as the changes that arise from one or for a and the ability to use 81 in tier two to fill our pillar two requirement. We have also noted the statements from the CB that the capital conservation buffer might be used in the in the crisis.

But quite frankly at this stage that is not something.

That we have that we affected in or necessarily rely on so we do not see that their capital conservation buffer.

At this stage can be excluded from MD.

On the on the government guarantee point, we as we said yesterday on the call Airfares nine provisioning.

Made only.

A few adjustments to the typical kind of granular bottoms up process, one of which was the that.

We considered for certain Obligors in.

The most affected sectors, where there was the possibility or likelihood of government support for those obligors.

That potential government support or the impact of that support in our ratings adjustments.

We see it had a modest impact frankly on on what the I referenced nine reserve might otherwise have been.

So so not a the largest part of the sensitivities here.

But it is a factor that we think is appropriate to two understanding the credit worthiness of of of the.

The obligors in our book in this environment.

Okay, and then what about that take action on what percent of Goldman going against the equal between the heavy.

I'm sorry, it is hard to understand to hear you its fainted the line.

Oh, you're starting or what percent of for government guaranteed loans you take all we do end up having on your books.

Oh, I see and look read the balances are growing I think.

Probably depends on which program, let's start with the KFW programs are divided by segment. Some of them are essentially grants some of them are 100% guaranteed some of them are 80% KFW and 20% the lending bank.

We think it's it's relatively considerable in in the at least single digits potentially in the in a double digit billions that we will be disbursing in these programs.

And that's I think part of as we talk about our.

The commitment to society to support those programs.

Those assets end up our on our balance sheet as we say with within a modest risk.

To us although they obviously are.

You know leverage exposure and for a period of time that with us and as part of the increase in the balance sheets are there essentially recorded as loans.

Even though the risk piece of it is more modest.

Great. Thank you.

Next question is from the line of James hide from P.G. I am.

Please go ahead.

Hi, Thanks for doing the coal.

Got to correct.

One of them.

Page 28 of the report the on the.

And the paragraph you pay disaster.

Greg let no liquidity position.

What does it mean, when that's going to negative.

Is that.

The swing or.

Or 36 billion minus which is great we more than the decline in the HQ alike.

So is that basically now assuming that the greater derivative Greg postings go down grade that have happened, Greg the degree of collateral posting and.

So on the how how meant to read.

Swing to negative in that ratio not first question.

Secondly.

I mean, I've done a council the kind of disclosures that we get from UK bank, but I think today I want to talk about.

In terms of late stage, one and two scenario.

Provision.

I mean, there's there's one bank today Lloyd Quinn.

Hi, This is walk the talk of provision to be with a 10% pulled reality, if we get to a particularly what they each day the worked outlook that outcome, they're looking for and that you can add the provisions that are to be added on pull that.

Can we Hello Hello.

Any indication or well in terms of your worst scenario, how much more you have to increase docket provision bye.

In that scenario so number we can.

Yeah and go had gone.

And then compared to pre provision profit et cetera.

That's it.

James side this is big city.

Thank you for joining.

As I said in our remarks that we have been quite pleased with the way our liquidity, our modeling and our risk management as really function through what was an extraordinary stress period.

To begin with internal stress measure with an LP.

Being in big an eight week measure.

On an extreme stress gave us a very clear and a fairly early indication of movements.

Arguably faster than the regulatory stress test.

Second we do think that the test is conservative.

In many ways for example, the way liquidity resources in branches and subsidiaries are treated it essentially means we manage in normal times with fairly healthy buffers.

At the parent level.

And as you think about the number important to realize that.

Being an eight week stress it effectively now captures a second.

Hypothetical eight week systemic and idiosyncratic stress.

In addition to the one that we have just gone through which you see manifesting in our numbers.

You know also the measure being conservative does not.

Give.

Any credit to future or color on additional collateral mobilization from central banks.

Nor does it include resources that are trapped all held at subsidiaries and branch level.

You know I must also say that.

When looking at the components of the model.

Our liquidity risk drivers that inform the model all performed far better than model while committed facilities.

Roughly in line, so all said and done coming out in a reasonably good position at the end of the first quarter.

And James its James the.

These CL sensitivity, our expected credit loss sensitivity as sort of an interesting science.

I don't want to go into sort of worse cases.

I would I can assure you is that from from the very earliest days of the crisis, our risk colleagues have been analyzing the their portfolio against the scenarios and looking at downside scenarios.

And and updating that analysis dynamically through the process.

But I will give you sort of if I think about these sensitivity of the expected credit loss to some of the variable.

It it tends not to be all that sensitive to individual variables and thats.

Why as Weve on yesterday's call talked a little bit about.

Our outlook in terms of provisioning.

To give you an example.

The eurozone GDP were 1% worse than our forecasts.

The the corporate and sovereign portfolio would would move in L. terms by about 35 million.

So.

These are not huge numbers now E. C. O is a multi factor variable there are other portfolios and so there there are clearly our sensitivities here.

But in orders of magnitude.

There there are quite manageable as we look into the to the future.

Great. Thanks.

I'll just understanding Tulsa.

Okay. So.

You bet liquidity net liquidity position.

I'm trying to think so if you had.

Let's say hey appeal chiaro.

And tend to date that came can claim in this eight week period.

I mean, if it does that mean you can just build up read that position could be improved because he LTR rose like three years and that just makes up poulos liquidity or am I am I'm all.

He is the use of that collateral or other central bank facilities already assumed in that calculation.

No James we we don't assume reliance on central bank facilities, but of course, you know those are available for use, especially given the expanded facilities that we've seen.

I'd also point out that we had andres incremental funding.

To address the negative level, given we're quite comfortable with both our liquidity profile.

The forecasting ability that we had.

The commitment facilities data improvements going to intra day in some cases that we had and so fell quite comfortable.

The other the other point I'd mention.

Is that the point of the tenant stress measure is to allow us to adequately positioned liquidity reserves prior to any crisis or rising and not really to react in the middle of a crisis and so that's really what the measure has allowed us to do it with prepositioned adequate liquidity on the way in and overtime.

As client behavior normalizes in our balance sheet normalizes.

We'd expect to restore SNL feedback to previous levels are above risk appetite.

Great. Thanks, Thanks, James Thanks, James.

Next question is from the line of Robert Smalley from UBI S. Fixed income. Please go ahead.

Hi, Thanks, a lot already been asked and answered.

Few questions on the asset quality side.

In terms of what we saw in the last quarter I know you spoke about.

In the other call by the lack of deferrals, among German clients, but one on the trading side.

We see any issues with counter party trading counterparties.

Collateral calls.

Or any other kind of restructuring of relationships there.

Or any a structured no covenants reached given the movement in the market.

That's one.

Two on price of oil.

When you are probably looking at this at first.

We saw the big decrease in the price of oil now we have a much lower for longer kind of scenario ahead of us.

How does that change how you're looking at your your oil and gas exposure and then lastly on commercial real estate.

Could you give us a little geographic breakdown I'm looking at it.

Slide 14, and while I am assuming German customers come under the mitigation programs that you outlined.

I'm also thinking that a lot of your commercial real estate is outside of Germany in the states potentially what yeah.

What are tenants, saying at this point are you restructuring relationships there and in the past you've been a big lender to Las Vegas and Atlantic City.

Which have.

Suffered yeah.

Big drawdown in terms of tourism could you address all of that.

Robert I sure I'll do the first two and then James can take the third you know you know very important for US you know when we started seeing some of the early signals of a stress and you know stress model as I mentioned earlier, you know gave us some of that indication and give us that indication towards the end of February.

This helped us.

Start Prepositioning and taking management action that would allow us to accommodate some of the drawdowns that we were seeing or that we expected to see.

As part of our sort of health check on a daily basis is to really watch exactly what you've been saying, which is margin calls in a whether that's clients posting margin to us where they.

Georgia Bank posting margin to other counterparties.

The health of the clearing system more widely together with flows of both collateral and cash between clients ourselves a clear as and custodians and you know in spite of.

What was truly record volatility and movement.

Which naturally resulted in higher volume of margin calls as well as a higher absolute magnitude of margin calls.

The health of the financial system, and including from our perspective was actually quite good you know there were hardly.

Hardly any.

Major outages across the system.

In terms of fails settlements breaks et cetera, and so that's something that we monitor fairly fairly closely.

In terms of.

Governance structured notes you know as you know commodities is not a business that we happened to you know we had divested out of a while back I'm not aware of any sensitivity. We've had you know through the period.

You know two to really oil in particular related to liquidity, but.

In aggregate any something that we monitor along all of the other margin calls that we have.

We're also in close contact with all of the Ccps and the clearing houses given the the signal the significant percentage of the industry exposure that has now migrated to the ccps over the years.

And once again, you know I've seen no signs.

That would concern us essentially not not even at the peak in March.

And so Robert just to build on what to fix it just said about the the margin calls and what have you. We were very pleased gratified at the operational resilience that that organization showed in managing collaterals feuds called settlements and what have you and so in light as.

The answer is it was it was extremely smooth.

And credit to our people who manages processes.

On oil and gas and as we said in our our earlier remarks, you know our.

Exposures, there are quite manageable skewed to the high investment grade and majors you may recall that we essentially exited oil and gas in the in North America.

A few years ago and sold those portfolios. So our our overall exposures. There are are much lower than then if you like in an industry typically industry.

Sort of portfolio would would be at commercial real estate, obviously is a significant business for us and we disclose on page 13.

On the in the slides the the exposure.

That is sort of skewed towards what we could sort of major city high end commercial real estate.

And as we point out with relatively low loan to values, the casino and gaming gaming.

Exposures are we do have some but it is a much more modest levels in it than it has been in a in pre in previous years a decade ago.

I hope that's helpful and just geographically.

To give you a sense the the CRD portfolio is about 60% North America or U.S.

And ER and the balance of course rest of world with a with a fairly significant portfolio in Europe and Germany.

That's that's very helpful Dixit, James James Thanks for doing the call.

Oh pleasure.

[noise], let's call it from the line of leased Street from Citi. Please go ahead.

Hello, Good afternoon, and thanks, Anna Nicole you well.

Three questions for me please.

So just on the focus industries that are not on them on slide 14, I think that's just that's where your loan book are there any cells consol exposures outside of lung, but you can give us a nice to see if the context today regarding the investment bank will trading books et cetera.

Secondly.

On stage two lines data that was a source decent uptick canary in the quarter any comments on what drove the increase in just why be led to the provisioning.

Attached to the increase in space to Didnt really seem.

To match the level of increasing their for stage two lines.

And just finally.

Does the current period of market weakness does not impact or yeah or harm your ability to achieve fuel.

Deleveraging goals for the non core units.

Three questions. Thank you.

Sure highly Jim Thanks for joining us so in terms of other exposures that are of a credit nature of course and the derivative books.

Counterparty credit is is a feature something that's managed in hedged and we feel very comfortable with envy the at the trading books.

We obviously have a large credit trading both.

Business.

Those are fair value books, and so go through rigorous price controls and and you know monthly quarterly valuation processes, including with our auditors and so those are essentially recognized or changes in those valuations are essentially recognized upfront. So.

I think those are the areas of of significant additional if you like credit exposure.

Thats on our balance sheet.

On the stage to they're they're obviously as a migration of stage one to stage two that takes place based on stage two triggers and associated reserving and there's also a migration into stage three of of elements of those reserve balances it sort of a feature of I first nine.

That's a you know the removal of of Obligors from stage two into stage three or you know changes the reserving and there's not a one to one then relationship between between the staged to reserves in the stage three reserves in that.

But in that.

In that flows so you can see some.

Some changes ebbs and flows between those balances overtime.

On the de leveraging we obviously, you're looking at the market environment very carefully and working with our through the C are you.

With both Counterparties and clients are to continue on our path and not be disrupted and that deleveraging.

We're actually quite comfortable that that the market environment at least based on what we're seeing today wont.

Disrupt that that path.

We there was obviously out.

Pause in March as people sort of adjusted to work from home and.

And the changed circumstances.

But we have resumed our auctions and we have resumed our engagement with with Counterparties.

And actually the pause gave us an opportunity to catch up on some of the operational processes around novation and what have you.

And so there is continued progress then on the de leveraging that comes between transactions are bargains, but are agreed to end the the balance sheet recognition in the derivative book of the of the deleveraging.

So a lot of work underway a it was anyway in our planning was sort of skewed to the second half and if we think in some respects the market can offer some some opportunities in a derivatives book to accelerate to not only to slow down de leveraging.

Okay, all right. Thank you aren't.

Thank you.

[noise] next question assuming line of Jacobi lease from RBC. Please go ahead.

Hi, there a few questions from me.

One is on the market right as I noted that you took the benefit of the immediately.

So without quantifying what the impact and then it can we get assurance that to the back testing exceptions will be essentially ignored and.

The model.