Q2 2020 Deutsche Bank AG Earnings Call (Fixed Income Investor)
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Ladies and gentlemen, welcome and thank you for trying in Q2 fixed income call throughout today's recorded presentation. All participants will be in listen only mode. The presentation will be followed by question answer session. If he would like to ask a question. You May proceed starts on the buy one on your touched on telephone. Please press star keys publicized hero operators.
I would now like to trying to conference over to sort of twice now. Please go ahead.
Thanks.
Good afternoon, everyone and thanks, you're also joining us today on the call. That's always on C of O Simsmart Jeremy speak for.
Our group trends around 600, <unk> were taken through some fixed income specific topics.
And the room for sure anywhere else in something like October have tougher skunk unsecured fundraising I'm drugs like perhaps of group capital management.
Slots accompanied the topic.
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After the presentation.
So take your questions.
[noise] I'm just to remind you of the presentation may contain forward looking statements, which might not develop and currently expect.
Yeah, sorry, please take note of the precaution I was born in the end of our materials with that let me answer about some James.
Thank you Phil and welcome from me.
Let me start with a summary of our financial performance in the second quarter on slide three.
Revenues of 6.3 billion euros increased by 1% as growth in the core bank offset the I quit exit from equities trading.
Non interest expenses of 5.4 billion euros included an additional 116 million euros of bank levies.
We ended the second quarter last year, as well as 445 million euros, a restructuring and severance litigation and transformation charges.
Non interest expenses in the prior year period included 1 billion euros of goodwill impairments and 350 million euros of transformation charges.
Provision for credit losses was 761 million euros or the equivalent of 69 basis points of loans on an annualized basis.
We generated a pretax profit of 158 million euros or 419 million euros on an adjusted basis, excluding items detailed on slide 39 of the appendix.
As Dick's It will discuss later our liquidity position was strong as both reserves and LCR rebounded from first quarter levels.
Slide four update the chart. We showed you last quarter was the management estimates of the most material impacts of the cobot 19 pandemic.
Compared to the first quarter results in the second quarter saw a more rapid normalization of some of these impacts than we initially anticipated.
In particular capital and liquidity reserves.
Incremental provisions for credit losses related to covert 19 were approximately 410 million euros, which I will discuss shortly.
There was a positive impact is approximately 12 basis points on our C. E T. One ratio from Cobot 19.
Increases in market risk RW way, reflecting higher market volatility and higher credit risk RW way for ratings migrations were more than offset by several impacts.
These included the repayment of credit facilities, lower derivative exposures and the reversal of most of the increase in prudent valuation adjustments recorded in the first quarter.
The repayment of credit committed credit facilities and reduced client demand for lending increased liquidity reserves by 12 billion euros.
And finally level three assets of 25 billion euros decreased by 2 billion.
The decline reflected the partial reversal of the first quarter migration of assets into level, three which had resulted from the greater focus dispersion and Mike market pricing at the end of the first quarter as well as reduced balance sheet count carrying values.
Looking forward the path of the pandemic remains uncertain, but we see the developments in the quarter as positive.
Our strategy is focused on improving sustainable profitability by generating positive operating leverage through a reduction of costs and growth in revenues.
As shown on slide five operating leverage has been positive for three quarters in a row for both group and core bank driving significant improvements in core bank profitability.
Over the last 12 months core bank adjusted profit before taxes grown by 18% to 3.1 billion euros.
Core bank profitability has enabled us to absorb the cost of de risking in the CR, you, where the reduction of risk weighted assets is running as we anticipated.
As we make further progress with the wind down of the CR you the underlying performance at the core bank should become more visible in our group results.
You can see that on slide six.
Core Bank revenues were 23.7 billion euros over the last 12 months.
At the Investor Deep dive, we showed a 2022 revenue plan of 24.5 billion euros, consistent with an 8% return on tangible equity target.
This implies an annual revenue growth rate of around 2% from current levels and compares to the 5% growth that we've reported in the core bank in the last 12 months.
With the client momentum that we've created and the changes we've made to our business model. We're confident of achieving these plans even when market current market dynamics normalize.
Slide seven shows some of the key revenue drivers.
The corporate bank operates in an attractive market. Despite the challenges of the current interest rate environment.
We've demonstrated that we can largely offset these headwinds with repricing and volume growth.
We've grown corporate cash transactions by 8% and loans by 1% over the last 12 months.
The corporate bank has also been essential into supporting corporates, including in Germany.
Combining all the German government programs, we have being the most active bank in this space.
The investment bank, our strategy is to focus on our core strength.
Overall revenues and fixed income and currencies grew by 39% year on year with FIC trading excluding financing and specific items up by more than 75%.
We achieved this performance with broadly stable levels of R&D way, excluding regulatory inflation.
This demonstrates efficient resource utilization and has enabled by a combination of prudent risk management and higher quality client flow.
In the private bank, we're focused on offsetting the pressure from negative interest rates with volume growth.
In the second quarter, the private bank captured 5 billion euros of net inflows in investment products and 3 billion euros of net new client loans.
Unsurprisingly, new consumer loans and investment products declined during the lockdown.
With the reopening towards the end of the second quarter, we're now seeing a rebound in volumes in some areas even tracking above last year.
In asset management, we're building on the momentum that dws has generated.
Inflows were 9 billion euros in the quarter.
Assets under management increased by 45 billion in the quarter and 24 billion over the last 12 months.
Asset management also implemented further decisive cost measures in direct response to the cobot 19 environment.
We remain determined not to let the current environment deal with disrupt our cost reduction plans.
We've now reduced adjusted cost excluding transformation charges in bank levies for the 10th consecutive quarter as you can see on slide eight.
Year on year adjusted cost declined by 8% to 4.9 billion euros.
Further progress we've made in the second quarter puts us on a good path to achieve or outperform against our 19.5 billion euro target for 2020.
Turning to provision for credit losses on slide nine.
Provisions were 761 million euros in the quarter.
As I, just mentioned a little over half or 410 million euros of these provisions related to covert 19 impacts.
Approximately half of the Cobot 19 provisions are again stage one in stage two credits with the remainder against stage three loans.
Stages, one and two provisions reflect the weaker macroeconomic outlook relative to March 30 Onest.
A management overlay to account for uncertainties in the outlook as well as downgrades to credit client credit ratings.
Consistent with our guidance stage three provisions increased in the quarter and were mostly in the investment bank.
Including the provisions taken in the first quarter. We ended the period with 4.9 billion euros of allowance for loan losses equivalent to 112 basis points of loans.
As a reminder, we feel this level of provisioning is inline with our peers on a risk adjusted basis calibrated to the relative exposure to consumer credit lending.
Let's turn to the broader macroeconomic outlook on slide 10.
We continue to expect a robust recovery in some major economies started the in the second half of this year, although it will take longer to return to the pre KOVA GDP levels than initially anticipated.
The EU stimulus package should support the economic recovery in Europe, including in our home market, Germany, beginning in 2021.
We're happy to have a leadership position in Europe strongest economy, which is proving its resilience.
Germany came into the prices with low levels of debt.
This fiscal conservatism has allowed the government to take aggressive and decisive action in response.
Germany benefits from a combination of an effective social security system, one of the largest loan and guarantee programs worldwide and 130 billion studios in started to the stimulus packages.
Economists, therefore expect Germany December last and to recover quicker than most many other common countries.
This economic stability comes together with low levels of household and corporate debt.
Historically stable housing market as well as good levels of corporate liquidity relative to other leading economies.
Therefore, German companies and consumers are in a relatively better position to whether the current environment.
All of this contributes to the resilience of our German loan book, which accounts for about half of our total loan portfolio.
But of course, uncertainties will persist for the time being being.
We must not be complacent and have to continue to execute on our transformation agenda.
Let me summarize our progress on page 11.
Looking back on the first year of our transformation, we're on track with or even ahead of the objectives that we set ourselves.
Our new strategy is paying off the momentum we have within the core bank more than offset the wind down of the capital release unit elevated provisions for credit losses from a pandemic and transformation impacts.
We therefore, our confidence that we will reach our 2022 targets and show a clear path with being profitable in the second quarter and in the first half of the year.
By now over three quarters of our expected transformation charges are already behind us.
And we have she achieved this with both capital and liquidity being stronger than our internal plans at the end of the second quarter.
This positions us well to continue supporting our clients through conditions, which remain challenging.
We also continue to work on our technology, including the partnership with Google, which aims to improve offerings to clients and infrastructure efficiency.
And finally, we shaped our sustainability strategy and issued our first green bond.
With that let me hand over to Dixon.
Thank you James.
As we execute on our transformation, we will continue to balance manage our balance sheet conservatively.
Slide 13 repeat this slide that we have shown you before you can clearly see the impact of covert 19 in our Q1 financial.
Results in the second quarter, so more rapid normalization of some of these impacts than we originally expected and in particular capital and liquidity reserves.
As we announced last week, we ended the quarter, what they see one ratio of 13.8%.
This reflects lower loan balances driven by higher than expected repayments of credit facilities by clients.
As we initially drawn in reaction to covert 19.
In bought these facilities have been refinance debt capital markets instruments.
Why loans declined in the second quarter Thats still up by 8 billion euros since year end 2019.
I would also absorbing capacity was 19 billion euros above our most binding ml constrained.
Stable versus the prior quarter.
We have one of the few European Gcis that already comply with the fully loaded requirements.
According to your reserves increased significantly over the quarter to 232 billion euros.
I was solid capital and liquidity position gives us scope to continue to deploy resources to support clients through challenging conditions.
We're also focused on maintaining strong credit quality.
Provisions for credit losses of 761 million euros in the quarter, a consistent with our previous guidance and our full year outflow.
This reflects our conservative underwriting standards and the low risk nature of our loan book.
As we have communicated before our exposure to credit cards and other unsecured consumer lending is low relative to all international fields.
Let's now look at our net balance sheet on slide 14.
This view excludes derivative spending netting netting agreements cash collateral and pending settlement balances from our IRS balance sheet to make it more compatible to utilize GAAP accounting standards.
We had structurally changed our balance sheet and created a more stable and efficient base that has allowed us to manage through recent events, while keeping our transformation on track.
According to the results accounted for roughly a quarter felt the net balance sheet.
Our loan to deposit ratio declined slightly and at 77%. It provides significant through the conservative definitively grow loans in coming periods.
Funding from most stable sources represent 81% of all net balance sheet or 85%, including TLC Arrow.
Looking now will be close at our capital ratios, starting with slide 15.
I will see one ratio of 13.3% at quarter end increased by 42 basis points sequentially.
This includes and approximately 12 basis points increase from cope with 19 effects as James discussed earlier.
Approximately 11 basis points of the ratio increase came from regulators changes associated with the CRL quick fix.
These changes included the application of the revised Sn Isa form factor as well as the first on application of the IRS nine transitional approach.
Excluding cope with 19 NCR quick fix impacts we saw approximately 13 basis points of improvement from continued de risking in the capital release unit.
Additionally, the coal banks generated seven basis points.
Principally reflecting lower risk weighted assets in the investment bank and corporate bank.
The Buffalo above that you make requirements for the CP one ratio increased by 44 to 283 basis points as shown on slide 16.
The total capital ratio was 17 in hospice end at quarter end.
Yes, we have increased our buffa by 90 basis points in the quarter to 245 basis points.
Including that tier two issuance from late June which only settled in July the buffer increases to around 260 basis points on a pro forma basis.
This translates into an equivalent of 9 billion euros headroom in capital films.
Despite the challenging market conditions for much of this year, we have successfully issued around 3 billion euros of tier one tier two instruments to optimize our capital position and to increase our distance to M&A.
This serves us well to support clients for the coming periods.
Our leverage ratio was 4.2% at quarter end, an increase of 20 basis points as shown on slide 17.
Approximately 16 basis points of the improvement in from the change to a net treatment of pending settlement payables and receivables.
This change follows the implementation of the CR, a quick fix and wasn't acceleration of a previously agreed rule change that would ordinarily have taken effect only from June 2021.
This approach now aligns European banks with long established practice at us banks and Swiss fields.
Foreign exchange translation and tier one capital movements contributed approximately five basis points.
Excluding central bank cash from leverage exposure consistent with the flexibility provided by the Sciarra quick fix.
Would if implemented further increase our leverage ratio by approximately 20 basis points to 4.4%.
Our leverage ratio is already well above the requirement of 3.75%, which we expect to apply from January 2020 feet.
Both liquidity results and liquidity coverage ratio, increasing the quarter as you can see on slide 18.
The increase reflected higher cash balances a trend that we have seen across the sector.
No declined by 17 billion euros as clients began to repay credit facilities that were drawn into first quarter.
Customer deposits increased by 9 billion euros across the corporate and private bank offset by 3 billion euros lower wholesale funding deposits.
We also participated in central Bank.
And open market operation, including TLC our fleet.
As a result, we ended the quarter, but the quality reserves of 232 billion euros and the liquidity coverage ratio of 144%, both well above our targets.
Over time, we look prudently manage back towards our target levels, although given the unprecedented events in the first half of the year.
We feel comfortable operating with a temporary excess.
Slide 19 shows the substantial progress that we have made in passing through negative interest rates below existing corporate and high net worth customers.
At the end of the second quarter, we had charging agreements in place for around 60 billion euros of deposits generating revenues of 45 million euros in the quarter.
That is already ahead of our full year goal and is on track to contribute well over 100 million of revenues on an annual basis.
The positive revenue development is predominantly driven by higher deposit retention.
Looking ahead, as though implementation focus will increasingly shift towards clients with smaller balances the trend of deposits in scope for deposit charging as well as the associated revenues is expected to flatten in the coming quarters.
In our private bank in German we've changed our pricing policy and now also negative interest rates to new accounts above 100000 euros as announced last quarter.
Our key priority however.
Remains to actively engaged with or without customers and advise on liquidity solutions and alternative investment products to help clients offset the negative interest rate environment.
We continue to operate with a significant loss absorbing capacity well above all requirements as shown on slide 20.
At the end of the second quarter.
A loss absorbing capacity was 19 billion euros above the minimum required eligible liabilities or and rail almost binding constraint.
In 2021, we expect a few changes to affect our loss absorbing capacity, including.
Derecognition of bonds issued on the UK low following Brexit.
The switch from a pilaf based to an R.W.A. based ammo declined.
A highest subordinated ml requirement, becoming applicable those changes in European low at the end of this year.
We will see reductions in eligible liabilities in the second half of this year from outstanding senior non preferred issuances falling below the one year maturity threshold, which had not fully offset by new issuances.
Nevertheless, given our significant buffa, we're well positioned to absorb these regulatory changes.
Slide 21 shows our updated issuance plan.
We reaffirm our previous guidance of an issuance plan between 10, and 15 billion euros in aggregate, but if amended the composition from the previous quarter.
During the second quarter, we should see point 7 billion euros, taking our year to date issuance to close to 10 billion euros.
Of note during the quarter, we should euro and US dollar tier two and our inaugural Green senior preferred bond.
The tier two issuances put us in a comfortable position as the increased our buffer above regulatory requirements by further 50 basis points.
Phenol view of Green bond issuance marks an important step in our sustainability strategy.
And for the spark of our target of at least 200 billion euros of sustainable financing and clean investment products by 2025.
In terms of the rest of the the majority of our way issuance is likely to be in senior and lumpy foot format.
Given our strong liquidity position and modest requirements.
We will be flexible in terms of timing.
Looking further into the future we believed that our balance sheet composition requires less market funding that in the boss and we can manage with lower issue with volumes.
For example, we don't need to refinance the 17 billion euros or senior nonprofit instruments maturing in 2021.
As part of a low funding strategy, we raised 30 billion euros through the CBS TLC our loyalty program.
We may increase I will take up towards the maximum capacity of approximately 40 billion euros in future rounds.
In conclusion on slide 22.
We have successfully navigated the initial impacts of the cobot 19 pandemic.
Our balance sheet remains low risk and funded by highly stable sources.
The improvements we've made to the composition of our balance sheet combined with the investments in our technology allow us to more accurately and effectively manage our resources.
The progress we have made in these areas is also reflected in the positive outcomes of recent regulatory steps just as including seek up.
On the Cetone ratio a lot of uncertainty remains regarding the economic environment.
Behavior and potential regulatory actions.
That said given where we ended the second quarter. We currently see significant room to continue supporting clients, while maintaining the ratio above our twentytwenty do target of 12.5%.
We expect to prudently manage down our liquidity buffers towards our target levels over time.
And consistent with our previous guidance, we expect provision for credit losses of 35 to 45 basis points of loans for the full year.
In summary, we will continue the disciplined execution that you have seen from this management team over the last few years.
Consistent delivery on our transformation Bob is also a critical factor for the ratings agencies.
All agencies, the majority of which have published longer ratings reports in July acknowledge our progress.
Recent example is the removal from negative watch by Fitch.
Execution on our short term objectives keeps us on the path to deliver our 2022 targets.
These include a significant improvement in organic capital generation.
With a target of post tax return on tangible equity of 8%.
At the same time, we're focused on maintaining a strong cc, one ratio and improving the leverage ratio over time.
With that let us move to your question.
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One moment for the first question please.
The first question comes on line of Christine Hygiene Luzu with Barclays.
Unfortunately.
Their line has disconnected solo beginning with Robert Smalley with <unk>. Please go ahead.
Hi.
Good morning, and good afternoon, and thanks for doing the call.
A couple of questions.
First.
If we could touch on slide 28 in the appendix.
And this is a.
An uptake from that.
The deep dive on risk, but when we look at these risk mitigation numbers.
The clear boxes could you talk about.
Commercial real estate exposure there.
And.
How youre thinking in general about commercial real estate, given what's going on into.
Please.
And how that ties in at all with your overall commercial real estate outstanding.
Thats My first question second question.
We're just seeing a lot of government programs coming in in Germany.
How are you looking.
Through that and trying to make sure that one once we get to the other side. If some of that we don't have clip like experience in terms of credit quality.
And then finally on on funding.
Number one.
You just mentioned that that 17 number is is probably not going to be as large if you give us some kind of area for 2021 in terms of senior nonprofit funding is it similar to what we're seeing this year number one number two.
You did a tier two deal in US dollars, you paid up a pretty high coupon for it.
Does this lead you to.
Think about doing more issuance in euro Sterling and other currencies. Thanks.
Well I think this is this is fixed at the I will kick off with sort of the the let the questions and then James will jump in on the deprive on.
On the on the 2021 maturities that we have as I said in my prepared remarks.
17 billion that we have.
Actually does rolled all through the cause of the next six months. If you think about the first six months of next year is already.
Secondly, deducted from our ml calculations already and reflected in the surplus of 19 billion that we had a Furthermore between now in December the rest of the 17 rolls out of our Embratel calculation and so very much being factored into our insurance plan and requirements for for next year as I've said you as a result of the deleveraging.
Our balance sheet and the move to a much more stable funding base and the data reliance on deposit funding that does afford us more flexibility in senior non preferred issuance and on balance compared to year Skyedge II C. We have a lower reliance on capital markets issuance.
In fact.
That does play a part as well in our revised issuance plan or the mix of the issuance trend between now and year end.
Which as you see from a senior non preferred perspective has a range of up to another 3 billion as to 4 billion of issuance between now and year end.
That reflect some prefunding of.
Commitments that we might have for next year and so all in all year over being appropriately conservative when we look at a funding plan, but in summary, the 19 billion surplus and then Ral affords us a lot of flexibility.
On the second point, what you've seen as you know you have seen us.
Let's see side the currency mix to the extent.
We see pockets on the of Investor demand and yes, I agree with you to the extent of gaming pricing lends itself to opportunities, it's something that we will be considering.
As we stand right now we've done around 3 billion of issuance in capital instruments in in the first half of the year.
Which affords us a lot of flexibility around timing going forward I hope thats helpful.
Yes, probably to James on year on the first two questions on risk mitigation. So the CRT portfolio is now at about 30 billion.
Euros. It if you look at the slide that we provide you refer to slide 28, it does skew to the non investment grade in those buckets, but I couldn't give you the details of how much in each bucket.
To be honest our outlook for that segment is sort of unchanged to our earlier discussions that we've been watching it extremely carefully given you know the impact of of the pandemic on commercial real estate.
I think the starting point for US was a strong one given that as we came into the crisis loan to values were at around 60% in the portfolio and while of course, there's been an impact only.
You know the cash flowing of the projects and the valuations of commercial real estate.
We continue to think the portfolio is resilient and to date, there being very few defaults.
So we're watching it extremely carefully as you can imagine we've also by the way seen some secondary liquidity develop in that market and where we haven't we've executed that the valuations have been pretty much in line with our views and marks so so again, it's trended in line with our our original.
Outlooks.
On the government programs. It's also very good question. It's something we're look we're watching carefully because of the fear that there is a cliff effect.
Now a couple of things I'd say first of all the while the the legislative Moratoria are rolling off there've been a number of actions that the industry is done on a voluntary basis. So if I think about households.
They are getting support from the government and the banking industry is continuing to support them and to date, we havent seen sort of a cliff effect, although naturally that can still lie ahead.
In terms of the future you know our sense is the key dot Conf W. program. As an example is still open in Germany and actually we've been surprised if anything at the at the lesser take up than we might have expected. So our assumption is that some of the liquidity dumb.
And has been simply pushed into major quarters.
But there there is still support for for the corporate balance sheet out there and of course, some of the Doe fiscal and monetary supported in Europe.
Is coming later than than is the case in the states. The the recovery package that the EU agreed on is only starts on the first of January 21 and of course fiscal support is ramping up with asset purchases. So so as we sit here today, we don't see that cliff effect, but it's something we're very watchful around.
So.
That's very helpful. Thanks, very much appreciate it and appreciate the call.
Thank you Robert Thank you for joining.
The next question comes line of Christie.
Barclays. Please go ahead.
Hi, everyone, sorry about that I disconnected and my last question. Thanks. So another chunk. So I have three hall question.
Distressed liquidity position.
Alan.
What is that in your quarterly report and I know, it's obviously in the third quarter that was that was negative.
But it seems to bounce back quite nicely in the second quarter, you referred to build to suit urbanization economic environment, you will see the 13 countermeasures that you've deployed on sort of methodology that I'd be curious actually some of that look like.
If you could just explain pellets as much as you've taken on your side Q2. Please.
The second question.
And also absorbing capacity you, obviously still have a strong some royalty bus or anything but.
Slide 20, you all sizing up some headwinds, which takes at windstream alcohol subordination of climates exclusion Pandora et cetera can you elaborate in all around those expected changes and how it affects your softened.
And then my second question I was curious since.
Nine assumptions I was reading the quarterly and you have a table showing.
Available forward looking information and I noticed the unemployment rate, Germany tabling. Thank you for person will navigate in each of the three years showing showed on the table, obviously, Jeremy you referred to lessen the recovery quicker than the condominium sales price.
How should we anticipate the point in the context of your provisioning so far.
So you actually.
Okay.
And if so is it big driver to the lower than pay TV.
So any color would be helpful. And then my Hoff question is just on capital I don't recall, if you've ever disclose your trim impact quantified. It. If you know is that a figure you you have to share with us with potential headwinds in each to 21 team.
Because the Hell out I'll take sort of one two and maybe.
For and leave out first line.
For James So just on SLP as you as you rightfully pointed out in the SNL fee was negative at the end of Q1 for the obvious reasons around loan drawdowns.
And reduce liquidity at the time, we have been pleased with the way our liquidity modeling and the way I will management assumption through the stress did and thereafter as we mentioned.
A quarter ago.
This internal stress measure for us gave us a much more clear.
And an early indicator of movements spend the regulatory stress this world.
We tend to think of the SLP thats as a conservative test in a variety of ways. For example to your point in countermeasures. It does not include any potential to mobilize collateral and then finance that with central banks.
And so during the second quarter, we've looked at executing on low cost measures.
That will improve the metric without compromising on any of the conservative stones that we've taken and these measures included mobilizing some collateral accessing TLC auto three and also some pride initiatives, which we target targeted deposit optimization initiatives, which didn't effect liquidity directly.
But improve the contractual term profile of our liquidity portfolio.
And as a result of all of these including some normalization of conditions in in the client business. We've seen no SNL SLP improved by around 43 billion in the quarter.
And roughly speaking that 43 billion can be broken down into about 27 billion of improvement as a result of increased liquidity.
Around 11 billion as a result of deposit optimization.
And about 4 billion on other methodology enhancements so in summary.
I'm pleased to say that.
Please with the performance, we're very comfortable with our liquidity position and it's a good jump off you know as we entered the second half of the year, where they are some uncertainties.
Through that period.
The second question around a lot of embraced as I've mentioned with the 19 billion euros surplus and not meeting to rely on any grandfathering.
We are well set to manage against some of the regulatory items that might arise.
There's a number of then that will come round and that we factored into our forward planning.
For the first quarter of 2021.
Firstly between now and the end of this year, we affected in fully the rolled off of much of the 17 of all of the 17 billion of senior non prefer that falls under the one year window next year.
And then you have regulatory changes, which coming into first would be the switch from a peel off base to A.R.W.A. based methodology, which we expect to be around four to 6 billion euros of is that.
We expect the subordination requirement to increase the net inline with the direction from the SRB.
Secondly, Brexit and de recognition.
Oh.
S&P umbrella eligible liabilities are non eligible liabilities.
Would impact our ratio as well.
And then thirdly, we will be taking active management decisions to reduce the outstanding stack of capital market instrument that we had which will also reduce the amount surplus but again the starting point of 19 billion gives us tremendous flexibility as we enter that period and then on your last question.
The trimming back, which we were previously anticipating it in 2021, which might pose some downside for the fourth quarter of this year.
Estimated in the region of around 6 billion euros of RWD impact.
And then its briefly on the macroeconomic forecast youre right that 4.1%, we've talked about the averaging that weve deployed as a methodology to drive the IRS nine provisioning and the macroeconomic variable that is captured in that three year average for German unemployment in the Bloomberg consensus.
As of June Thirtyth is 4.1% it actually has a high point in that three year period of 4.4% in Q4, this year and so thats essentially in the past that's built into the modeling now.
Question is two things one is the sensitivity of the portfolio and obviously, Germany unemployment is one of the the variables that we're sensitive too. So we're clearly watching it carefully.
As to the the scenario itself.
One thing when each remember is just the German.
You know social structure, including the availability of could soundbites. So the a pre existing program that enabled furloughing workers. So one of the features we think in the German economy, that's that is.
Will lead to greater resilience and then ultimately last unemployment.
Is this idea that workers will be.
Our jobs are being supported by the government in an interim period until they return now obviously, there's some risk to that outcome, but again it remains a reasonable central case, even with.
The recent economic data out of Germany.
Thank you.
The next question comes Lastly Street with Citigroup. Please go ahead.
Hello, Good afternoon.
Three questions from me plays and you only slightly sure you need about 2% product revenue growth to hit you will touch going off the entire Im just wondering can you give us color by each division what Rick can you guys just thinking about produced prior to entering corporate investment bank asset management et cetera, just or any thoughts around to be really helpful.
Secondly, just on stage two currencies around 52 billion year right.
How should we think about.
Proportion can we read if they expect to translate from stage two into stage three.
Nothing really helpful to understand and then just fundamentally as shown in slide. So obviously it looks like you'll taking a bigger proportion is provisions within stage three relative to stages, one two thats compared to other banks just any thoughts around what I had some why or why that might be different.
So it's a bank has to take some of the other banks so that the my three questions. Thank you.
So leave again, thanks for joining.
I would refer you to the the Investor deep dive materials from December 10 that was are we gave some sense of what we thought the business each for each of the four businesses. The path was to the 2022 ROTC targets now of course, we live in a dynamic world and.
And that is.
Pads will be different overtime no doubt.
And I would say what we've seen in the last 12 months is a a relative outperformance against our expectations of course in investment banking.
And then and a more difficult path for corporate bank and private bank naturally given the rate environment and asset management by and large is performing reasonably in line with with our expectations. Although there was of course, a dip in market values in March through the end of May.
But it's sort of recovered to where where we were thinking.
So there may be sort of shifts and what the pattern looks like but but overall, we still are confident as we meant mentioned as that we have a good path to the 24 and a half in a relatively modest sort of growth now over the two and a half years remaining.
Admitting of course that we've probably seen a you know and over indexing of the revenue environment investment bank in the first half of this year.
And and the headwinds from interest rates will persist.
In terms of stage two im not sure to the second part of your quite question.
Exactly what you mean by the private comparison to peers on stage three composition stage two.
You've seen there was a significant increase in near doubling of that bucket for us in over the year to date.
Now interestingly as we said enough in the first quarter calls what you have there is some actually very sort of strong credits, but where there's been racing movements that has caused us to downgrades them between buckets.
So relative still relatively low expectations are probabilities of default.
In those names hence the the.
The significant accretion stage, two buckets and and not as large an increase in that in the provisioning.
As to the you know the likely movement between the buckets. That's of course, the major question that we all face.
Stage three.
No.
Moving to the stage three depend on those stage three events essentially defaults or a recognition that debt obligations are unable to pay.
We do have a baseline expectation built into our forward guidance.
And of course, the path of that is going to be a critical driver of of the CLP is going forward.
All right and that makes it so just on the from the previous it just looks to me like.
Thanks for taking a bit more stage, one and two provisioning relative to stage three way at a bit more coming through in stage three provisions relative to stages, one and two in the quarter that was just to understand if it is I think behind I see yeah, well look we had some we had some stage three events unrelated to that we would call out and sort of idiosyncratic unrelated to covert.
Good.
Not clear to me that that necessarily continues into future periods. So if you sort of subtract the 200 odd million.
From.
That we say as stage three and there was coded related you had 300 million that wasn't.
While somewhat consistent with recent quarters, I think that that would probably be be high relative to our current expectations for the balance of the year.
Okay.
Perfect. Thank you very much so you're going.
Thank you.
The next question comes line of Tom Jenkins with Jefferies. Please go ahead.
Okay.
Yes, Hello, Thank you very much chance.
As James Rivets not on the line. This time I definitely on T. Smith of Deutsche Postbank bonds, but im just set up for the question.
This I'm on slide 20 come back to that one if you'd be kind.
You mentioned the exclusion of Boeing just under UK loyal following Brexit.
Tony 2021.
No shares the price.
But.
I've been through pretty much every single liquid tradable bond in that in that sector and.
And I haven't been able to find.
UK low bond.
So in one that doesn't have.
Or foreign Obama doesn't have German subordination provisions with Jim resolution provisions.
Without asking you to specific license because I know, that's probably not what you want to have you got any idea of the quantum of bonds.
We'll become excluded post 21 and is there a.
Schedule, a sliding scale if you like of the exclusion is up until that maturity in a certain period of time or KOL data or that something if you could give you. Some some color on that would be great.
Sure.
Happy too.
And.
So from our CFO to enroll perspective, we we we have about 5 billion.
A bump that we would look to redeem recognize in in January of next year.
Again, very comfortable with that as you can tell it's very much baked into our.
I'll take both in funding requirements and our forward view on the mill.
So we're not just looking through the 19 billion surplus, but it's really how that evolves over the next few few periods.
I would have given you the license, but it will leave that to Jonathan to do subsequently.
If that's something that we would like to do it is something that we can manage quite comfortably.
We also have tools at our disposal, which you know we wouldn't.
Really trigger right now for example, consent solicitation don't Lsds exchange offer et cetera, just given the surplus that we have.
Starting position, we have we wouldn't see a need to do that right now so yes, we're factoring it in and we're managing towards that were cognizant of both the regulatory items like this as well as the roll off of.
Bonds that Phil on the one year and it's managing all of those.
Okay Thats helpful. You enter this great. It's about 5 billion is it mostly in the.
More entirely in the senior non preferred stock or to the senior preferred that you can including your so the emerald qualification rather than anything.
Specifically subordinated.
No senior nonperforming.
Fair enough and then just in connection with that very quickly.
Obviously seeing UK low bonds.
Excluded posts John 21.
I assume and I will assume sort of means but I assume the therefore, we can take a similar.
Stance on non you bones post 2022.
As per sort of sorry pushed it doesn't 21 as you sort of previous if you're going to.
Came in on Delaware loan yield little or no.
So with your own subordinated guarantee that sort of thing does that get excluded post 2000.
21 in its entirety business attempts turnkey vessel in any different way shape or form.
No. This is much more this is specific comment that related to really Brexit and indeed, the recognition related to Brexit I see the 5 billion is really.
UK loss Pacific.
But all of the all other.
Legal framework still and issues around those still stand is that correct that's right.
Thanks appreciate it have a lovely offering.
Thank you for during.
As a reminder, she would like to ask your question at this time. Please press star followed by one.
The next question from the line of Jackup, let <unk> with RBC. Please go ahead.
Hi, thanks for getting to call.
A question about that and be a supply I noticed you adjusted.
You mentioned I think in the Q on called other than reduction on the.
LNG.
Jeff and I think they are thinking of delaying it you're doing you turn on that as published in June I have you already included in that advice expectations now.
So that will be one.
And the second on the stage to are you able to calling on.
You did say that did that rating downgrade dry.
At this time entities bucket, but are you able to comment.
So debating get Q2 stage two I wanted to told the default sign issue at some stage London staged.
Okay.
Okay. Thank you.
So Jeff so on on LG on Lgf, we have noted that Moody's timeline timeline has been has been pushed out.
It is our view that the consultation.
Has envisaged and really our core things our expectation of consolidation as you see.
It has the likelihood of having some upside impact.
Some upside positive impact for us.
Well, let's not forget that very much a forward looking measure.
Not necessarily a point in time measure. So it is something that we watch closely as you know from previous calls.
Were very sensitive to.
Our ratings and so protecting the rating remains important including Lgf in previous quarters Weve message that we've continued to issue partly to ensure that we maintain ratings agency idea that will be no different whether with the current LG requirements or any potential improvements that we get from lgf.
Well.
Dig up on stage to actually we put in the slide on this in our our risk deep dive from June 18th find 20. So.
I guess two two ways to Triangulated. The triggers are an increase in lifetime, probably of default or rating downgrade.
Transfer to workout forbearance measures 30 days past due or watch list inclusion so theres a theres a range of stage two triggers and actually we watch the trends of those things as well as obviously the event itself.
So, it's something where we were watching carefully.
The.
One of the interesting things I think of the presentation in this.
Our slide that was referred to earlier.
Is the the range of the PD bucket that that is that is in each of them, which is hopeful also each of the.
The pds that correspond to each of the ratings buckets.
I think also gives you a sense and.
Have you know what that looks like.
Okay.
Okay.
The next question from the line of James hired with PJM. Please go ahead.
Hi, Dan Hi, Dave.
My question, that's really a pull up to date is going to the question.
Yes.
What is probably a drop in the ocean compared with UK and European banks 16 billion of Moratoria and forbearance measures just want no.
16 billion one for one included.
In the 52 billion states because.
No they're not because the the there's the specifically the moratorium guidance is written that if there is no.
If the obligors or prior to the onset of co bed was was performing you would not include the.
The availing themselves of a moratorium as being a staging driver.
And now that the show, but there's other obviously other movements in the portfolio that better cobot related that would would have led to the stage two but but the moratoria are not themselves.
Drivers.
There are certain instances, where we give forbearance so the voluntary forbearance measures that we.
We provide can obviously influence.
Staging.
No I mean, the key question all anything less than what we will start to get taxes.
Actively your full year provision guidance.
Well in the half to 2 billion, which is.
So really not much for a crisis and on time Cinco front.
With that the.
The moratoria and prepared right.
The that took effect.
Make that go above 2 billion given the fact that you'll pre provision portability is not much above that.
I wouldn't I look I don't think thats. So the total of 16, which is an interesting sort of it's an addition of three unlike things.
I don't think as being being especially meaningful as a guide to that.
I think the.
The driver is simply what stage you know what stage three events take place that would cause us to.
That would.
No.
Result in incremental provisioning relative to the stage two provisions against the stage same credits that we currently hold.
And then what happens in the migration into and out of.
And then of course macroeconomic variables as the as the outlook moves around either improves or deteriorates that will influence what we referred to as the forward looking indicators. So the provisions that we take.
In principally in stage two.
Around that is driven by the change in outlook.
Thanks, and finally, yes 32 billion of CRT.
Yeah, I mean is.
Is it a meaningful proportional Thats stakes too.
There's a there's a.
I mean, I'm not going to slows the amount that is in stage two it's as I said earlier there is it's a portfolio. We're watching carefully there have been a number of in the measures that we've taken whether it's you know.
You know offering lender concessions to the sponsors.
That would certainly follow that portfolio would certainly phone for list, where we have taken such measures.
By and large I'd also add the we've seen very I think constructed sponsor behavior in that portfolio. So were lenders have been providing you know.
Restructurings or forbearance, often it's been associated with with incremental equity provided by the sponsors.
So it is absolutely a portfolio that that you know.
Certain amount will be in stage, two and some in stage three and.
And needs to be monitor carefully.
Great. Thank you very much heavier greatly.
Thanks, James Thanks for joining.
At this time there are no further questions I have Mike Tyson at the closing comment.
Yes.
Thank you very much among and thanks, everyone for joining the call today, you know Ravi I Rtms Im sure further questions and we look from a term talking to your soon goodbye.
Ladies and gentlemen, the conference now concluded then you may disconnect. Your telephone. Thank you for joining and have a pleasant goodbye.
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With that let me have Dawson James.
Thank you Philip welcome for me.
Let me start with a summary of our financial performance in the second quarter on slide three.
Revenues of 6.3 billion euros increased by 1% as growth in the core bank offset the I quit exit from equities trading.
Non interest expenses of 5.4 billion euros included an additional 160 million euros or bank levies compared to the second quarter last year as well as 445 million euros, a restructuring and severance litigation and transformation charges.
Non interest expenses in the prior year period included 1 billion euros of goodwill impairments and 350 million euros of transformation charges.
Provision for credit losses was 761 million euros or the equivalent of 69 basis points of loans on an annualized basis.
We generated a pretax profit of 158 million euros or 419 million euros on an adjusted basis, excluding items detailed on slide 39 of the appendix.
As Dick's It will discuss later our liquidity position was strong as both reserves an LCR rebounded from first quarter levels.
Slide four update the chart. We showed you last quarter with the management estimates of the most material impacts of the cobot 19 Pandemics.
Compared to the first quarter results in the second quarter saw a more rapid normalization of some of these impacts than we initially anticipated.
In particular capital and liquidity reserves.
Incremental provisions for credit losses related to covert 19 were approximately 410 million euros, which I will discuss shortly.
There was a positive impact of approximately 12 basis points on our CE tier one ratio from cobot 19.
Increases in market risk RW way, reflecting higher market volatility and higher credit risk RW away from ratings migrations are more than offset by several impacts.
These included the repayment of credit facilities, lower derivative exposures and the reversal of most of the increase in prudent valuation adjustments recorded in the first quarter.
The repayment of credit committed credit facilities and reduced client demand for lending increased liquidity reserves by 12 billion euros.
And finally level three assets of 25 billion euros decreased by 2 billion.
The decline reflected the partial reversal of the first quarter migration of assets into level, three which had resulted from the greater risk dispersion and Mike market pricing at the end of the first quarter as well as reduced balance sheet county carrying values.
Looking forward the path of the pandemic remains uncertain, but we see the development in the quarter as positive.
Our strategy is focused on improving sustainable profitability by generating positive operating leverage through a reduction of costs and growth in revenues.
As shown on slide five operating leverage has been positive for three quarters in a row for both group and core bank driving significant improvements in core bank profitability.
Over the last 12 months core bank adjusted profit before taxes growing by 18% to 3.1 billion euros.
Core bank profitability has enabled us to absorb the cost of de risking in the CR, you, where the reduction of risk weighted assets is running as we anticipated.
As we make further progress with the wind down of the CR you the underlying performance of the core bank should become more visible in our group results.
You can see that on slide six.
Core Bank revenues were 23.7 billion euros over the last 12 months.
At the Investor Deep dive, we showed a 2022 revenue plan of 24.5 billion euros, consistent with an 8% return on tangible equity target.
This implies an annual revenue growth rate of around 2% from current levels and compares to the 5% growth that we have reported in the core bank in the last 12 months.
With the client momentum that we've created and the changes we've made to our business model. We're confident of achieving these plans even when market current market dynamics normalize.
Slide seven shows some of the key revenue drivers.
The corporate bank operates an attractive market. Despite the challenges of the current interest rate environment.
We've demonstrated that we can largely offset these headwinds with repricing and volume growth.
We've grown corporate cash transactions by 8% loans by 1% over the last 12 months.
The corporate bank has also been essential into supporting corporates, including in Germany.
Combining all the German government programs, we have being the most active bank in this space.
The investment bank, our strategy is to focus on our core strength.
Overall revenues in fixed income and currencies grew by 39% year on year with FIC trading excluding financing and specific items up by more than 75%.
We achieved this performance with broadly stable levels of our WSA, excluding regulatory inflation.
Demonstrate sufficient resource utilization and has enabled by a combination of prudent risk management and higher quality client flow.
In the private bank, we're focused on offsetting the pressure from negative interest rates with volume growth.
The second quarter, the private bank captured 5 billion euros of net inflows in investment products and 3 billion euros of net new client loans.
Unsurprisingly, new consumer loans and investment products declined during the lock down.
With the reopening towards the end of the second quarter, we're now seeing a rebound in volumes in some areas even tracking above last year.
And asset management, we're building on the momentum that dws has generated.
Inflows were 9 billion euros in the quarter.
Assets under management increased by 45 billion in the quarter and 24 billion over the last 12 months.
Asset management also implemented further decisive cost measures in direct response to the cobot 19 environment.
We remain determined not to let the current environment dealer disrupt our cost reduction plans.
We've now reduced adjusted cost excluding transformation charges in bank levies for the 10th consecutive quarter as you can see on slide eight.
Year on year adjusted cost declined by 8% to 4.9 billion euros.
Further progress we've made in the second quarter puts us on a good path to achieve or outperform against our 19.5 billion euro target for 22 ready.
Turning to provision for credit losses on slide nine.
Provisions were 761 million euros in the quarter as I just mentioned a little over half were 410 million euros of these provisions related to covert 19 impacts.
Approximately half of the Cobot 19 provisions are again stage one in stage two credits with the remainder against stage three loans.
Steve just wanted to provisions reflect the weaker macroeconomic outlook relative to March 30 Onest.
A management overlay to account for uncertainties in the outlook as well as downgrades to credit tightening credit ratings.
Consistent with our guidance stage three provisions increased in the quarter and were mostly in the investment bank.
Including the provisions taken in the first quarter. We ended the period with 4.9 billion euros of allowance for loan losses equivalent to 112 basis points with loans.
As a reminder, we feel this level of provisioning is inline with our peers on a risk adjusted basis calibrated to the relative exposure to consumer credit lending.
Let's turn to the broader macroeconomic outlook on slide 10.
We continue to expect a robust recovery in some major economies started in the second half of this year.
Although it will take longer to return to the pre KOVA GDP levels than initially anticipated.
The EU stimulus package should support the economic recovery in Europe, including in our home market, Germany, beginning in 2021.
We're happy to have a leadership position in Europe strongest economy, which is proving its resilience.
Germany came in into the prices with low levels of debt.
This fiscal conservatism of allowed the governments to take aggressive and decisive action in response.
Germany benefits from a combination of an effective social security system, one of the largest loan and guarantee programs worldwide and 130 billion studios in started to the stimulus packages.
Economists, therefore expect Germany discover less and to recover quicker than most many other common countries.
This economic stability come together with low levels of household and corporate debt historically stable housing market as well as good levels of corporate liquidity relative to other leading economies.
Therefore, German companies in consumers are in a relatively better position to whether the current environment.
All of this contributes to the resilience of our German loan book, which accounts for about half of our total loan portfolio.
But of course, uncertainties persist for the time be being.
We must not be complacent have to continue to execute on our transformation agenda.
Let me summarize our progress on page 11.
Looking back on the first year of our transformation, we're on track with or even ahead of the objectives that we set ourselves.
Our new strategy is paying off the momentum we have within the core bank more than offset the wind down of the capital to release unit elevated provisions for credit losses from the pandemic and transformation impacts.
We therefore, our confidence that we will reach our 2022 targets and show a clear path with being profitable in the second quarter and in the first half of the year.
By now over three quarters of our expected transformation charges are already behind us.
And we have she achieved this with both capital and liquidity being stronger than our internal plans at the end of the second quarter.
This positions us well to continue supporting our clients through conditions, which remain challenging.
We also continued to work on our technology, including the partnership with Google, which aims to improve offerings to clients and infrastructure efficiency.
And finally, we shaped our sustainability strategy and issued our first green bond.
With that let me hand over to fix it.
Thank you James.
As we execute on our transformation, we will continue to balance manage our balance sheet conservatively.
Slide 13 repeat the slide that we have shown you before you can clearly see the impact of covert 19 in our Q1 financial.
Results in the second quarter, so more rapid normalization of some of these impacts than we originally expected.
In particular capital and liquidity with us.
As we announced last week, we ended the quarter, what they see one ratio of 13.8%.
This reflects lower loan balances driven by higher than expected repayments of credit facilities by clients that we initially drawn in reaction to covert 19.
In bought these facilities have been refinance debt capital markets instruments.
Why those declined in the second quarter Thats still up by 8 billion euros since year end to the 19.
I would also absorbing capacity was 19 billion euros above our most binding unbroken stayed.
Stable versus the prior quarter.
We have one of the few European GCIB that already comply with the fully loaded requirements.
According to use of increased significantly over the quarter to 232 billion euros.
I was solid capital and liquidity position gives us spoke to continue to deploy resources to support clients through challenging conditions.
We're also focused on maintaining strong credit quality.
Provisions for credit losses of 761 million euros in the quarter, a consistent with our previous guidance and I will form the outflow.
This reflects our conservative underwriting standards and the low risk nature of our local.
As we've communicated before our exposure to credit cards and other unsecured consumer lending is low relative to all international fields.
Let us now look at our net balance sheet on slide 14.
This view excludes derivative spending netted netting agreements cash collateral and pending settlement balances from our FRS balance sheet to make it more compatible to you as GAAP accounting standards.
We had structurally changed our balance sheet and created a more stable and efficient base that has allowed us to manage through recent events, while keeping our transformation on track.
According to those accounts for roughly a quarter felt that net balance sheet.
Our loan to deposit ratio declined slightly and at 77%. It provides significant rule to conservative definitively goals in coming periods.
Funding for most stable sources represents 81% of all net balance sheet or 85%, including TLC Arrow.
Looking now a bit close at our capital ratios starting on slide 15.
I would see one ratio of 13.3% at quarter end increased by 42 basis points sequentially.
This includes and approximately 12 basis points increase from coal with 19 effects as James discussed earlier.
Approximately 11 basis points of the ratio increase came from regulatory changes associated with the CRL quick phase.
These changes included the application of the revised semi support sector.
As well as the first application of the IRS nine transitional approach.
Excluding cope with 19 NCR quick fix impacts we saw approximately 13 basis points of improvement from continued de risking in the capital release unit.
Additionally, the coal banks generated seven basis points.
Principally reflecting lower risk weighted assets in the investment bank and corporate bank.
The Buffalo above that you make requirements for the CP one ratio increased by 44 to 283 basis points as shown on slide 16.
The total capital ratio was 17 in office end at quarter end.
We have increased our buffa by 90 basis points in the quarter to 245 basis points.
Including the tier two issuance from late June which only separately in July the buffer increases to around 260 basis points on a pro forma basis.
This translates into an equivalent of 9 billion euros headroom in capital films.
Despite the challenging market conditions for much of this year, we have successfully issued around 3 billion euros of tier one tier two instruments to optimize our capital position and to increase our distance to MBJ.
Served us well to support clients for the coming periods.
Our leverage ratio was 4.2% at quarter end, an increase of 20 basis points as shown on slide 17.
Approximately 16 basis points of the improvement in from the change to a net treatment of pending settlement payables and receivables.
This change follows the implementation of the CR, a quick fix and Wasnt acceleration of a previously agreed rule change that would ordinarily have taken effect only from June 2021.
This approach now aligns European banks with long established practice at us banks and Swiss fits.
Foreign exchange translation and tier one capital movements contributed approximately five basis points.
Excluding central bank cash from leverage exposure consistent with the flexibility provided by the Seattle quick fix.
I would if implemented further increase our leverage ratio by approximately 20 basis points to 4.4%.
Our leverage ratio is already well above the requirement of 3.75%, which we expect to apply from January 2020 feet.
Both liquidity.
And liquidity coverage ratio increase in the quarter as you can see on slide 18.
The increase reflected higher cash balances a trend that we have seen across the sector.
Loans declined by 17 billion euros as clients began to repay credit facilities that were drawn into first quarter.
Customer deposits increased by 9 billion euros across the corporate and private bank offset by 3 billion euros lower wholesale funding deposits.
We also participated in central Bank open market operations, including TLC our fleet.
As a result, we ended the quarter, but they put it is up 232 billion euros, and a liquidity coverage ratio, 144%, both well above our targets.
Over time, we look prudently manage back towards our target levels, although given the unprecedented events in the first off of the.
We feel comfortable operating with a temporary excess.
Slide 19 shows a substantial progress that we have made in passing through negative interest rates, so existing corporate and high net worth customers.
At the end of the second quarter, we had charging agreements in place for around 60 billion euros of deposits generating revenues of 45 million euros in the quarter.
That is already ahead of our full year goal and is on track to contribute well over 100 million of revenues on an annual basis.
The positive revenue development is predominantly driven by higher deposit retention.
Looking ahead, as though implementation focus will increasingly shift towards clients with smaller balances that trend of deposits in scope of deposit charging as well as the associated revenues is expected to flatten in the coming quarters.
In our private banking German we've changed our pricing policy and now also negative interest rates to new accounts above 100000 euros as announced last quarter.
Our key priority, however remains to actively engaged with or without customers and advise on liquidity solutions and alternative investment products to help clients offset the negative interest rate environment.
We continue to operate with a significant loss absorbing capacity well above all requirements as shown on slide 20.
At the end of the second quarter.
A loss absorbing capacity was 19 billion euros above the minimum required eligible liabilities or MRL almost binding constraint.
In 221, we expect a few changes to affect our loss absorbing capacity, including.
The Derecognition of bond issued on the UK low following Brexit.
The switch from a field based to an R.W. Baird based mode Ocwen.
A highest subordinated ml requirement, becoming applicable those changes in European low at the end of this year.
And we will see reductions in eligible liabilities in the second half of this year from outstanding senior nonprofit issuances falling below the one year maturity special which are not fully offset by new issuances.
Nevertheless, given our significant buffer we are well positioned to absorb these regulatory changes.
Slide 21 shows our updated issuance plan.
We reaffirm our previous guidance of an issuance plan between 10, and 15 billion euros in aggregate, but have amended the composition from the previous quarter.
During the second quarter, we should see point 7 billion euros, taking our year to date issuance to close to 10 billion euros.
Of note during the quarter, we should euro and US dollar tier two and our inaugural Green senior per foot bond.
The tier two issuances put us in a comfortable position at the increased our buffer above regulatory requirement by further 50 basis points.
The Navio Green bond issuance marks an important step in our sustainability strategy unfold as part of our target of at least 200 billion euros of sustainable financing and clean investment products by 2025.
In terms of the rest of the the majority of away issuance is likely to be in senior and lumpy foot format.
Given our strong liquidity position and modest requirements.
We will be flexible in terms of timing.
Looking further into the future we believed that our balance sheet composition requires less market funding that in the boss and we can manage with lower issue with volumes.
Although we don't need to refinance the 17 billion euros of senior nonprofit instruments maturing and 20 to 21.
As part of overall funding strategy, we raised 30 billion euros through the CBS TLC our loyalty program.
We may increase I will take up towards the maximum capacity of approximately 40 billion euros in future routes.
In conclusion on slide 22.
We have successfully navigated the initial impacts of the cobot 19 bendavid.
Our balance sheet remains low risk and funded by highly stable sources.
Improvements, we've made to the composition of our balance sheet combined with the investments in our technology allow us to more accurately and effectively manage our resources.
The progress we've made in these areas. He is also reflected in the positive outcomes of recent regulatory steps success, including seek up.
On the Cetone ratio a lot of uncertainty remains regarding the economic environment slide behavior and potential regulatory actions.
That said given where we ended the second quarter. We currently see significant room to continue supporting clients, while maintaining the ratio above our twentytwenty to target of 12.5%.
We expect to prudently managed down all the liquidity buffers towards our target levels over time.
And consistent with our previous guidance, we expect provision for credit losses of 35 to 45 basis points of loans for the full year.
In summary, we will continue the disciplined execution that you have seen from this management team over the last few years.
Consistent delivery on our transformation thought he is also a critical factor for the ratings agencies.
All agencies the majority of we get published longer ratings reports in July acknowledge our progress.
A recent example is the removal from negative watch by Fitch.
Execution on our short term objectives keeps us on the BOP to deliver our twentytwenty two targets.
These include a significant improvement in organic capital generation with a target of post tax return on tangible equity of 8%.
At the same time, we've focused on maintaining a strong cc, one ratio and improving leverage ratio overtime.
With that let us move to your question.
Ladies and gentlemen at this time, we will begin the question answer session anyone who wishes to ask a question. It May press star followed by one under touched on telephone.
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One moment for the first question please.
The first question comes on line of Christie Ju with Barclays.
Unfortunately.
Your line is being disconnected, so I'm going with Robert Smalley would you. Please go ahead.
Hi.
Good morning, and good afternoon, and thanks for doing the call.
Couple of questions.
First if we could touch on slide 28 in the appendix.
And this is a.
An update from that.
From the deep dive on risk but.
When we look at these risk mitigation numbers in the clear boxes could you talk about.
Commercial real estate exposure there.
And.
How you're thinking in general about commercial real estate, given what's going on into.
Please.
And how that ties in at all with your overall commercial real estate outstanding.
That's my first question second question.
We're just seeing a lot of government programs coming in and Germany.
How are you looking.
Through that and trying to make sure that one once we get to the other side of some of that we don't have clip like experienced in terms of credit quality.
And then finally on on funding.
Number one.
I mentioned that that 17 number is is probably not going to be as large if you give us some kind of area for 2021 in terms of senior non prep funding is it similar to what we're seeing this year number one number two.
You did a tier two deal in US dollars you paid a pretty high coupon for it.
Does this leads you to.
I think about doing more issuance in euro sterling and other currencies.
Thanks.
Okay, I think that visibility I will kick off with sort of the the latter questions and then James will jump in on the deprive on.
On the on the 2021 maturities that we have as I said in my prepared remarks.
The 17 billion that we have.
Actually does rolled off through the cause of the next six months. If you think about the first six months of next year is already effectively deducted from our Emerald calculations already and reflected in the surplus of 19 billion that we had a Furthermore between now and December the rest of this 17 rolls out of our Embratel.
Calculation and so very much being factored into our issue as planned and requirements for for next year as I've said you as a result of the deleveraging of our balance sheet and the move to a much more stable funding base and the data reliance on deposit funding.
It does afford us more flexibility and senior not liquid issuance in on balance compared to just try as you've seen data we have a lower realized on capital markets issuance.
I think Bob.
That does play a thought as well in our revised issuance plan or the mix of issuance plan between now and year end.
Which as you see from a senior non preferred perspective, you as a range of up to another 3 billion to 4 billion of issuance between now and year end.
That reflects some prefunding of.
Commitment that we might have for next year and so all in all year loading appropriately conservative.
When we look at a funding plan, but in summary, the 19 billion surplus of them route affords us.
A lot of flexibility.
The second point, what you've seen as you know you have seen us diversify the currency mix to the extent.
So we see pockets only of investor demand and yes, I agree with you to the extend that again.
Pricing lends itself to opportunities, it's something that we will be considering.
As we stand right now we have done around 3 billion of issuance in capital instruments in the first off of the year, which affords us a lot of flexibility around timing going forward I hope thats helpful.
Yes, Providence James on your on the first two questions on risk mitigation. So the CRD portfolio is now at about 30 billion.
Euros.
If you look at the slide that we provide you refer to slide 28, it does skew to the non investment grade in those buckets, but I couldn't give you the details of how much in each bucket.
To be honest our outlook for that segment is sort of unchanged to our earlier discussions yet we've been watching it extremely carefully given.
The impact of of the pandemic on commercial real estate.
I think the starting point for US was a strong one given that as we came into the crisis loan to values were at around 60% in the portfolio and while of course, there's been an impact on the.
You know the cash flowing of the projects and the valuations of commercial real estate.
We continue to think the portfolio is resilient and to date there have been very few defaults.
So we're watching it extremely carefully as you can imagine we've also by the way seen some secondary liquidity developed in that market and where we have and we've executed that the valuations have been pretty much in line with our views and marks so so again, it's trended in mind with our our original.
Outlooks.
On the government programs. It's also very good question at something where look we're watching carefully because of the fear that there is a cliff effect.
Now a couple of things I'd say first of all the while the the legislative Moratoria are rolling off there've been a number of actions that the industry is done on a voluntary base. So if I think about households.
They're getting support from the government and the banking industry is continuing to support them and to date, we havent seen sort of a cliff effect, although nationally that can still lie ahead.
In terms of the future you know our senses the keyed up DFW program. As an example is still open in Germany, and actually we have been surprised if anything at the at the lesser take up than we might have expected. So our assumption is that some of the liquidity demand.
And has been simply pushed into later quarters.
But there there is still support for for the corporate balance sheet out there and of course some of the both fiscal and monetary supported in Europe.
Is coming later than than is the case in the states. The the recovery package that the EU agreed on is only starts on the first of January 21 and of course fiscal support is ramping up with asset purchases. So so as we sit here today, we don't see that cliff effect, but it's something we're very watchful around.
[music].
That's very helpful. Thanks, very much appreciate it and appreciate the call.
Thank you Robert Thank you for joining.
The next question comes line of Christie.
Barclays. Please go ahead.
Hi, everyone, sorry about that I disconnected in my.
A question. Thanks, so another chunk so I have three no question.
Distressed liquidity position.
Alan.
But in your quarterly report to sell between so this quarter that was the negative.
But it seems to bounce back quite nicely in the second quarter, you referred to you all to soon.
[music].
But you also said to countermeasures that you've deployed on sort of methodology.
Curious actually some of those look like.
Can you just explain pellet Siemens you've taken on your side to Tim Please.
Second question is on loss absorbing capacity you will get you still have a strong and royalty costs are they buying things but.
On slide 20, you all sizing up some headwinds which takes.
Hi, subordination the climate exclusion Pandora et cetera can you elaborate in all around.
I was expecting changes and how it affects yield losses.
And then my second question I was curious on your line.
Nine assumptions I was reading the quarterly and you have a table showing.
Forward looking information and I noticed the unemployment rate, Germany, and this table win.
Open on average over each of the three years showing showed on table, obviously, Jeremy you aside to lessen recovery quick Kevin.
Joining me from still hi.
How should we anticipate the point in the context of your provisioning so far.
How are you actually needed Miss.
Paul.
And if so is it.
Big driver to the lower than periodic surveys.
Oh, so any color or not.
And then my Hoff question is just one topic. So I don't recall, if you've ever disclosed trim impact quantified. It taking though is that a figure you you have to share with us with potential headwinds.
Your next question into one.
Because they are out I'll take sort of one two and maybe.
For and leave out first line.
Okay. So just on SLP as you you rightfully pointed out due to SNL fee was negative at the end of Q1 for the obvious reasons around loan drawdowns.
And with use liquidity at the time, we have been pleased with the way our liquidity modeling and the way our management assumption through the stress did and thereafter as we mentioned.
A quarter ago.
Its internal stress measure for us gave us a much more clear.
And an early indicator of movements spend the regulatory stress this world.
We tend to think of the Sanofi test as a conservative test in a variety of ways. For example, you appointed countermeasures. It does not include any potential to mobilize collateral and then finance that with central banks.
And so during the second quarter, we've looked at executing on low cost measures.
That would improve the metric without compromising on any of the conservative stance that we've taken.
And these measures included mobilizing some collateral accessing TLC auto three and also some find initiatives, which would target targeted deposit optimization initiatives, which didnt impact liquidity directly but improved the contractual term profile of our liquidity portfolio.
And as a result of all of these including some normalization of conditions.
In the time business, we see no SNL SLP improved by around 43 billion it in the quarter.
And roughly speaking that 43 billion can be broken down into about 27 billion of improvement as the result of increased liquidity.
Levin baked in as a result of deposit optimization.
And the run 4 billion on other methodology enhancements so in summary.
I'm pleased to say that we're pleased with the performance, we're very comfortable with our liquidity position.
It's a good jump ball so as we entered the second off of where they are some uncertainties.
Through through that period.
The second question around embraced as I'd mentioned with the 19 billion euro surplus and not meeting to rely on any grandfathering.
We are well set to manage against some of the regulatory items that might arise.
The number of them that will welcome rounded that we factored into our fourth planning.
For the first quarter of 2021.
Firstly between now and the end of this year, we affected in fully the rolled off of much of the 17 of all of the 17 billion of senior non prefer that falls under the one year window next year.
And then you have regulatory changes, which coming and the first would be the switch from a peel off base to A.R.W. A's based methodology, which we expect to be around four to 6 billion euros of it that.
We expect the subordination requirement to increase and that's in line with the direction from the SRB.
Secondly, Brexit and de recognition.
Off.
Then PML eligible liabilities on non eligible liabilities.
Impact our ratio as well.
And then thirdly, we will be taking active management decision to reduce the outstanding Sacco capital market instruments that we had which will also reduce the amount surplus but again the starting point of 19 billion gives us tremendous flexibility as we enter that period and then on your last question.
The trimming back, which we were previously anticipating it into a 21, which might pose some downside for the fourth quarter of this year.
Automated in the region off around 6 billion euros of R.W. Baird impact.
And then its briefly on the macroeconomic forecast youre right that 4.1%, we've talked about the averaging that weve deployed as a methodology to drive the IRS nine provisioning and the macroeconomic variable that is captured in that three year average for German unemployment in the Bloomberg consensus.
As of June Thirtyth is 4.1% it actually has a high point in that three year period of 4.4% in Q4, this year and so thats essentially the path thats built into the modeling now. Your question is two things one is the sensitivity of the portfolio and obviously in Germany unemployment is.
One of the the variables that we're sensitive too so we're clearly watching it carefully.
As to the the scenario itself.
One thing we need to remember is just the German.
You know social structure, including the availability of puts out by so the a pre existing program that enabled furloughing workers. So one of the feature is we think in the German economy, that's that is.
Will lead to greater resilience and then ultimately last unemployment.
Is this idea that workers will be.
Their jobs are being supported by the government in an interim period until they return now obviously, there's some risk to that outcome, but again it remains a reasonable central case, even with.
The recent economic data out of Germany.
Thank you.
The next question comes Langley Street with Citigroup. Please go ahead.
Hello, Good afternoon.
Three questions from me plates and you on your Slide you show you need about 2% product revenue growth to hit you will touch going off the entire Im just wondering can you give us color by each division what revenue guidance, you're thinking about introducing part time to incorporate investment bank asset management et cetera, just or any thoughts around to be really helpful.
Secondly, just on stage two currencies around 52 billion euros.
How should we think about.
Proportion can we read if they expect to translate from stage two into stage three.
That's really helpful to understand and then just finally shown you slide till we see it looks that you'll taking a bigger proportion of provisions within states three relative to say he's one two thats compared to other banks just any thoughts around why the had some why why that might be different with two it's a banker.
To sum up the other banks so that the my three questions. Thank you.
So leave again, thanks for joining.
I would refer you to the the Investor deep dive materials from December 10 that was are we gave some sense of what we thought the business each for each of the four businesses. The path was to the 2022 ROTC targets.
Now of course, we live in a dynamic world and.
And that is.
They're pads will be different overtime no doubt.
I would say what we've seen in the last 12 months is a a relative outperformance against our expectations of course and investment banking.
And then and a more difficult path for corporate bank in private bank naturally given the rate environment and asset management by and large is performing reasonably in line with with our expectations. Although there was of course, a dip in market values in March through the end of May.
But it's sort of recovered to where where we were thinking.
So there may be a sort of shifts and what the pattern looks like but but overall, we still are confident as we mentioned mentioned as that we have a good path to the 24 and a half in a relatively modest sort of growth now over the two and a half years remaining.
Admitting of course that we've probably seen a you know and over indexing of the revenue environment investment bank in the first half of this year.
And and the headwinds from interest rates will persist.
In terms of stage two im not sure to the second part of your quick question.
Exactly what you mean by the by the comparison to appears on stage three composition stage two.
As you've seen there was a significant increase a near doubling of that bucket for us and over the year to date.
Now interestingly as we said enough in the first quarter calls what you have there is some actually very strong credits, but where theres been racing movements that has caused us to downgrade them between buckets.
So relative still relatively low expectations are probabilities of default.
In those names hence the the.
The significant accretion stage, two buckets and and not as large an increase in the in the provisioning.
As to the you know the the likely movement between the buckets. That's of course, the major question that we all face.
Stage three.
You know.
Moving to the stage three depend on those stage three events essentially defaults or a recognition that that obligors are unable to pay.
We do have a baseline expectation built into our forward guidance.
And of course, the path of that is going to be a critical driver of of the CLP is going forward.
All right that makes sense I just on the from the previous it just looks to me like.
Thanks for taking a bit more stage, one and two provisioning relative to the stage three way at a bit more coming through in stage three provisions relative to stages on into in the quarter that was just to understand the for those I think behind I see yeah, well look we had some we had some stage three events unrelated to that we would call out in sort of idiosyncratic unrelated to covert.
Good.
Not clear to me that that necessarily continues into future periods. So if you sort of subtract the 200 odd million.
From.
That we say as stage three in there was cobot related you had 300 million that wasn't.
While somewhat consistent with recent quarters, I think that that would probably be high relative to our current expectations for the balance the year.
Okay.
Perfect. Thank you very much so your Collins.
Thank you.
The next question comes final Tom Jenkins with Jefferies. Please go ahead.
Okay.
Yes, Hello, Thank you very much chance.
As James Rivets not on the line. This time I definitely on T. Smith of Deutsche Postbank bonds, but instead I could a question.
This I'm on slide 20 come back to that one if you'd be kind.
You mentioned the exclusion of of bone just on the UK loyal following Brexit.
Tony Twentytwenty one.
No shares to price.
But.
I've been through pretty much every single liquid tradable bottomed in that in that sector and.
And I haven't been able to find a UK low bond of note setting one that doesn't have.
Were far and Obama doesn't have German subordination provisions will Jim resolution provisions.
Without asking you to specific license because I know thats, probably not what you want to have you got any idea of the quantum of bonds.
We'll become excluded post to 21 and is there a.
Schedule, a sliding scale if you like of the exclusion is up until that maturity in a certain period of time or KOL data all that something if you could give me some some color on that would be great.
Sure.
Happy too.
And.
So from a full Emerald perspective, we really we have about 5 billion.
Bonds that we would look to redeem recognize in in January of next year.
You know very comfortable with that as you can tell it's very much.
Into our.
Type off and funding requirements and our forward view on on and rail. So we're not just looking through the 19 billion surplus, but it's really how that evolves over the next few few periods.
I would have given you the license, but it will leave that to Jonathan to do subsequently.
If thats something that we would like to do it is something that we can manage quite comfortably. We also have tools at our disposal, which you know we wouldn't.
Really trigger right now for example of consent solicitation join LSV. It's off exchange offers et cetera, just given this this uplift that we have.
And the starting position we have we wouldn't see a need to do that right. Now so yes, we're factoring it in and we're managing towards that were cognizant of both the regulatory items like this as well as the roll off of.
Was that fall on the one year and it's managing all of those.
Okay Thats helpful. Yes, that's great and so that 5 billion is it mostly in the.
More entirely in the senior in non preferred stock or to the senior preferred that you can including your so the emerald qualification rather than anything.
Specifically subordinated.
No seats ended October.
Fair enough and then just in connection with that very quickly.
Obviously seeing UK low bonds.
Excluded post John 21.
I assume and I assume sort of means but I assume the therefore, we can take a similar.
Stance on non you bones.
Just 2020.
As per sort of sorry pushed it doesn't 21 as.
You sort of previous if you're going to.
Came in on Delaware, low and New York Little or no.
Along with new alone subordinated guarantee that sort of thing does that get excluded post 2000.
21 in its entirety, there's no attempt to try to keep vessel in any different way shape or form.
No. This is much more this is specific comments related to really Brexit and Indonesia Derecognition relates to Brexit I see the 5 billion is really.
UK lost specific.
Yes, but all of the all other.
Legal framework stove and issues around those still stand is that correct that's right.
Perfect. Thanks appreciate it have a lovely offering.
Thank you for joining.
As a reminder.
A question at this time, please press star followed by one.
The next question from the line of Jessica Lynch.
RBC. Please go ahead.
Hi, Thanks for doing to call.
My question is about.
Yes supply I noticed you adjusted.
You mentioned I think in the Q on called pardon the interruption on.
LNG.
Jeff and I think they are thinking of delaying it you're doing you turn on it as published in June I have you already included in good advice expectations now.
So that will be one.
And the second stage to are you able to calling on.
You did say that does that rating downgrade dry.
At this time entities bucket, but are you able to common.
Sorry, debating get queue at this stage two I won't even told the default sign it gets you at some stage London staged.
Okay.
Okay. Thank you.
So Jeff so on on LG on Lgf, we have noted that Moody's timeline timeline has been has been pushed out.
It is our view that the consultation.
Envisaged and with our core things our expectation of consolidation has received.
It has the likelihood of having some upside impact.
Some upside positive impact for us.
Let's not forget thats very much a forward looking measure.
Not necessarily a point in time measure.
It's something that we watch closely as you know from previous calls.
Were very sensitive to.
Our ratings and so protecting the rating remains important and including Lgf in previous quarters Weve message that we've continued to issue Buckley to ensure that we maintain ratings agency idea that will be no different whether with the current LG of requirements or any potential improvements that we get from lgf.
Well.
Dig up on stage to actually we put in the slide on this in our our risk deep dive from June 18th find 20. So.
I guess two two ways to triangulate did the triggers are an increase in lifetime, probably of default or a rating downgrade.
Transfer to workout forbearance measures 30 days past due or watch list inclusion. So there's a there's a range of stage two triggers and actually we watch the trends of those things as well as obviously the event itself.
So, it's something where we were watching carefully.
The.
One of the interesting things I think of the presentation in this.
Our slide that was referred to earlier.
Is the the range of the PD bucket that that is that is in each of them, which is hopeful also each of the.
The pds that correspond to each of the Racing's buckets. I think also gives you a sense and.
Of of what that looks like.
Okay.
The next question from the line of James hired with PJM. Please go ahead.
Hi, James High Dick I have a question that's really a pull up to date.
The question.
Yes.
What is probably a drop in the ocean compared with UK and.
In banks.
<unk> billion of Moratoria.
On the forbearance measure it just won't know Ali 16 billion one for one included in the 52 billion state.
No they're not because the the there's the specifically the moratorium guidance is written that if there is no.
If the obligor or prior to the onset of co bed was was performing.
You would not include the.
The availing themselves of a moratorium as being a staging driver.
And now that the show, but there's other obviously other movements in the portfolio that better covert related that would would have led to the stage two.
But the moratoria are not themselves.
Drivers.
There are certain instances, where we give forbearance so the voluntary forbearance measures that we.
We provide can obviously influence.
Staging.
No I wouldn't the key question it always unless they won't be was kind of get taxi.
Effectively.
Your full year provision guidance.
Well in the half to 2 billion, which is.
So really not much for a crisis and on top of Cinco from.
Whether the.
The moratoria there.
It would be that took effect.
Make that go above 2 billion, given the fact that you'll pre provision.
Not much above that.
I wouldn't look I don't think thats. So the total of 16, which is an interesting sort of it's an addition of three unlike things.
I don't think as being being especially meaningful as a guide to that I think the.
The driver is simply what stage.
What stage three events take place that would cause us to.
That would.
Result in incremental provisioning relative to the stage two provisions against the stage same credits that we currently hold.
And then what happens in the migration into and out of.
And then of course macroeconomic variables as the as the outlook moves around either improves or deteriorates that will influence what we referred to as the forward looking indicators. So the provisions that we take.
In principally in stage two.
Around that is driven by the change in outlook.
Thanks, and finally.
$32 billion CRT.
Yes, I mean is.
Is it a meaningful proportional set the stage.
There's a there's a.
I am not get exposed the amount that is in stage two it's as I said earlier there is it's a portfolio. We're watching carefully there have been a number of in the measures that we've taken whether it's you know.
You know offering lender concessions to the sponsors.
That would certainly follow that portfolio would certainly phone for list, where we have taken such measures.
By and large I'd also add the we've seen very I think constructed sponsor behavior in that portfolio. So were lenders have been providing.
Restructurings or forbearance, often it's been associated with with incremental equity provided by the sponsors.
So it is absolutely a portfolio that that that you know.
A certain amount will be in stage, two and some in stage, three and and needs to be monitor carefully.
Great. Thank you very much penetrate weekend.
Thanks, James Thanks for joining.
At this time there are no further questions I have Mike Tyson for closing comments.
Yes.
Thank you very much among on thank you off from joining the call today, you know Revvy iops payments, which are further questions I'm going to from a term talking to your soon goodbye.