Q4 2020 Deutsche Bank AG Earnings Call (Fixed Income)
[music].
And ladies and gentlemen, welcome and thank you for joining the Q4 fixed income call.
Throughout today's recorded presentation, all participants will be in a listen only mode.
The presentation will be followed by a question and answer session.
We're trying to ask a question you made crystal and a five one you touched on the telephone. Please press the star key followed by zero for operator assistance.
And I would now like to turn the conference over to Philip Toy and our Investor Relations and go ahead.
Thank you Haley and good afternoon, and good morning, and thank you on for joining us today on the call as always on.
And CFO James from Merck and will speak first.
And then our group Treasurer and takes adjusted it will take you through from fixed income specific topics for Q&A and we offer them Jonathan Blake aren't global net of issue on from securitization and drought Flybe and head of group capital management with us.
Slides that accompany the topics are available for download from our website at <unk> com.
After the presentation, we'll be happy to take your questions, but before we get started and just want to remind you that the presentation may contain forward looking statements, which may not develop as we currently expect.
Therefore on please take note of the precautionary warning at the end of our materials with that let me handle on for James.
Thank you Philip and welcome from me on.
Performance in the fourth quarter and and the full year shows the progress we've made and executing on our strategy.
We were profitable on a pre and post tax basis, and the fourth quarter and the full year on a group level the.
The improved profitability and the core bank offset the continuing transformation effects higher provisions for credit losses, and continued derisking and the capital release unit.
We've demonstrated execution discipline as we hit all of our key targets and milestones in 2020 and over the last 18 months. Despite the challenges of COVID-19.
Our diversified loan book and disciplined risk framework helps us to maneuver during uncertain times.
We remain disciplined on capital.
And while we grow our businesses.
And any by now we have put aside any doubts that we can self fund our trades and transformation.
Let us look at a summary of our financial performance compared to the prior year on slide four.
Operating leverage was strong and the fourth quarter at 23% on a reported basis as revenues increased by 2% and noninterest expenses declined by 21%.
Adjusting for specific revenue and cost items operating leverage was 12%.
On this basis, we grew revenues by 4% and reduced our costs by 8%.
We generated a profit before tax of 175 million euros or $621 million, excluding transformation charges restructuring and severance and specific revenue items.
For the full year, we generated a pretax profit of 1 billion euros.
Provisions for credit losses was $1 8 billion euros and the full year in line with our expectations at 41 basis points of average loans.
Our improved results are supported by growing revenues under our refocused business model as you can see on slide five.
We've increased creased group revenues by 800 million euros in 2020 as growth and our core businesses more than offset the exit from equities trading.
Core bank revenues have increased by 6% to $24 2 billion euros. This.
And this puts us close to the plan of $24 4 billion euros that we laid out at the investor deep dive as part of our path to the 8% return on tangible equity target in 2022.
This growth is principally come from our refocused investment bank, which was able to capitalize on favorite favorable market conditions and to develop deliver on the strategic transformation of our fixed income business.
The corporate bank and private bank successfully offset headwinds primarily lower interest rates to keep revenues essentially stable year on year and.
And we would expect underlying growth to feed through to the top line as interest rate headwinds soften and consistent with the forward curve.
Asset management was slightly lower due to the non recurrence of certain performance fees and 2020 and.
In summary, all of our businesses executed on our strategic objectives.
Slide six shows the progress, we've made and reducing adjusted costs.
Excluding transformation charges and bank levies and we've reduced adjusted costs year on year for 12 consecutive quarters.
And 2020, we reduced adjusted costs, excluding transformation charges and expenses eligible for reimbursement related to prime finance by 9%.
On this basis and excluding bank levies, our fourth quarter run rate puts us on a good path to our 2022 target of $16 7 billion euros.
This run rate also leaves room for targeted investments and 2021 as we highlighted to you in December.
That is now moving to slide seven to discuss our provisions for credit losses.
Consistent with our prior guidance provisions for credit losses remained at more normalized levels in the fourth quarter <unk>.
Provisions were 251 million euros, and the quarter equivalent to 23 basis points of loans on an annualized basis.
The decline for the fourth quarter is driven by releases and COVID-19 related stage, one and two provisions, reflecting positive changes and consensus macroeconomic outlook since the third quarter.
Stage, three provisions declined by 14% and the quarter, but remain more elevated and the private bank and the investment bank.
We retained the management overlay, we established and the third quarter, given continued uncertainties and the macroeconomic outlook.
Including the provisions taken in the fourth quarter. We ended the period with an allowance for loan losses of $4 8 billion euros equivalent to 111 basis points of loans.
Our plans assume provisions for credit losses will decline this year compared to 2020, but will remain elevated compared to pre COVID-19 levels.
Our disciplined execution is increasingly visible in our results as you can see on slide eight.
The next phase of our transformation is to further improve sustainable profitability by growing revenues and at the same time reducing costs.
We've generated positive double digit operating leverage in 2020 at both group and core bank levels.
The operating leverage has driven significant improvements and core bank profitability.
Adjusted for transformation charges specific revenue items goodwill impairments as well as restructuring and severance pretax profit and the core bank is up 52% in 2020 to $4 2 billion euros.
Over time more of the core bank profitability should flow to the group's bottom line as we continue to make progress on our transformation agenda and provisions for credit losses normalized.
The strength of our balance sheet at year end, which we discussed on slide nine also positions us well to further grow our businesses.
Our common equity tier one ratio was at 13, 6% essentially flat year on year.
Liquidity reserves and liquidity coverage ratio were both above prior year levels.
It will go into more detail later.
As a result, we can deploy our capital and liquidity strength to support clients and what is still and uncertain environment.
Finally, as we explained both in December and on our risk deep dive and June last year, we have benefited from our high quality loan book and a disciplined credit risk framework that enabled us to deliver within our guidance on provisions for credit losses.
Our transformation is fully on track and our performance in 2020. It gives us good visibility towards our 2022 targets with that let me hand over to Dixit.
Yes.
And 2020, which positions us well for 2021 on slide 11.
We continue to optimize our balance sheet, including the rollout of deposit charging on.
And on capital, we have increased the buffer above regulatory capital requirements to 10 billion euros, reflecting the tier two issuance earlier this month.
We are pleased with the way capital markets are reacting to our transformation our spreads have tightened significantly in 2020 outperforming peers.
For example, our senior non preferred debt tightened euro on year by roughly 40.
40 basis points compared to 2019 and has outperformed peers that on 30 basis points on average across our main refinancing currencies euros and U S dollars.
Positive development and the flexibility of our balance sheet allowed us to pre fund around 5 billion euros of our 2021 requirements.
In addition, we saw positive actions for ratings agencies. This includes the recent outlook revision from Fitch and Moody's to positive and stable respectively. Overall these developments support our commitment to deliver sustainable profitability, while we continued to invest in our technology, including our modeling.
Our infrastructure and controls.
Slide 12 shows a summary of the net balance sheet, which excludes due to pending netting agreements cash collateral as well as pending settlements.
Liquidity reserves continue to account for about a quarter of the net balance sheet.
Our loan to deposit ratio at 76% provides significant room to prudently grow loan balances in coming periods.
And on our funding profile remains well diversified.
The most stable funding sources with 82% of our net balance sheet or 87%, including TLC Arrow.
Low cost deposits on our main funding source contributing almost 60%.
And we have steadily reduced our reliance on unsecured wholesale funding, which is now less than 1% of net liabilities.
Moving to liquidity on slide 13.
You can see that we've made progress and managing down excess liquidity over the quarter.
This is primarily driven by a reduction and corporate bank deposits, reflecting our targeted initiatives to proactively manage liabilities.
Partially offset by a modest increase and private bank deposits.
Loans remained flat and the quarter, but excluding FX effects, we saw ongoing loan growth primarily in the private bank.
Overall, we ended the year with liquidity reserves of 243 billion euros and and.
Liquidity coverage ratio of 145%.
On a year on year basis liquidity reserves increased 21 billion euros predominantly driven by model enhancements and low cost <unk> funding, which we will discuss on the next slide.
As we execute on our transformation continued improvements sales technology and models can drive changes total liquidity metrics.
In 2020, those changes resulted in increases and liquidity with no incremental associated costs.
Total announcements of course can also reduce liquidity and our liquidity levels allow us to navigate comfortably and external or internal changes.
Overtime, we intend to prudently manage our liquidity towards targeted levels.
Slide 14 provides further context on the lower cost and the improved quality of our funding sources.
Funding costs are and will remain attractive for loan growth following the ecb's updated <unk> III sales.
In 2020, we accrued at a funding rate in line with the ECB deposit rate facility, having achieved sufficient certainty of meeting the growth required in the March 19, due March 21 observation window.
As we accrued and the third quarter and a more conservative rate.
Accounting for the uncertainty of fully achieving the loan growth requirement. We have reflected an additional 45 million euros and revenues in the fourth quarter related to meeting this requirement.
Subject to our achievement of the Ecb's additional loan growth targets.
We would expect a further 50 basis points reduction and the cost of the facility for the period from June <unk> to June 'twenty and 'twenty one.
And this would result in additional revenues of around 120 million euros, and the first quarter, reflecting the catch up although we're conservative because of being in 2020.
In addition, we continued making progress improving the composition of our deposit base.
We actively worked to reduce unsecured wholesale funding and non operating corporate bank deposits, while growing most stable retail deposits.
All of these initiatives have resulted and continuing lower cost of funding.
Turning to capital on Slide 15.
Our CET one ratio was 13, 6% at the end of 2020 above the guidance of 13% that we provided at the investor deep dive.
Approximately 20 basis points came from lower risk weighted assets, notably faster than anticipated reductions and the capital release unit and slightly lower deployment and the core bank.
A further 20 basis points of the outperformance came from a series of numerator benefits, including higher than expected net income and higher than expected benefits from regulatory changes relating to software intangibles and other items.
The balance of 30 basis points came from delays and regulatory inflation.
Instantly the targeted review of internal models, which we expected to conclude in the fourth quarter.
4 billion euros of RWD inflation related to trim is now expected to occur in the first quarter of 2021, which increases our full year regulatory inflation assumption to approximately 20 billion euros.
Nearly all of this <unk> inflation is expected to occur in the first half of 'twenty and 'twenty, one equivalent to approximately 80 basis points of CET one capital.
This takes our pro forma CET, one ratio to approximately 12, 8%.
With this inflation behind us and the first half of the year, we expect to see much more moderate impact from regulatory items and the second half of 'twenty, one and for the full year 2022.
As shown on slide 16, we ended 2020 with a 13, 6% CET one ratio.
316 basis points buffer over the CET, one requirement, which is an increase of 31 basis points versus September.
The distance to the total capital requirement is up 17 basis points on a reported basis and up 48 basis points on a pro forma basis, including our January 2021 tier two issuance.
Post our successful tier two issuance, we now have 308 basis points or 10 billion euros of capital headroom over the total capital requirement.
This puts us and are comfortable starting point to absorb the upcoming RW inflation that we discussed.
Moving to slide 17.
Our leverage ratio improved by 24 basis points to four 7%, reflecting the positive regulatory driven and other capital effects I described before.
Our pro forma leverage ratio, including ECB balances was four 3%.
This puts us well on track to meet our leverage ratio target of four and 5% by year end 2022, including a further 10 basis points from finalizing the transfer of our Prime Finance business later this year.
We continue to operate with a significant loss absorbing capacity well above above our requirements.
And on slide 18.
At the end of the fourth quarter, our loss absorbing capacity was 21 billion above the minimum requirement for eligible liabilities on enbrel, our most binding constraint.
In preparation for the long known regulatory changes applicable in 2021, we have held materials buffers for some time now.
These changes include a reduction of Enbrel capacity as a result of Brexit.
Higher MLR requirements expected to be set by the SRP and the first half of 2021 and the impact from regulatory <unk> inflation on MRO.
Our enbrel headroom will thus normalized to a more reasonable level of approximately 5 billion euros and the first half of 2021.
This is still well above our regulatory requirements, which we are always fully met without meeting a transition period.
Moving now to our issuance plan on slide 19.
And 2020, we issued 18 and a half billion euros compared to our revised plan of 10% to 15 billion euros.
This includes roughly 5 billion euros of senior non preferred issuance and the fourth quarter of 2022, partially and pre fund our plans for this year given strong market conditions. We saw then.
We also raised a further three and a half billion euros of funding from the ECB sales ARLP program and December.
Offset by the repayment of 3 billion euros of legacy Central Bank funding.
We expect to use these funds to optimize the repayment schedule of our central bank funding, while lowering the associated costs.
For 2021, we plan to issue between 15, and 20 billion euros and aggregate compared to maturities of $22 billion and we have already issued roughly one 5 billion this year.
Roughly half of this requirement is comprised of capital instruments and senior non preferred to manage our MDA buffers as well as Enbrel and rating agency requirements.
Our well balanced maturity profile for 'twenty, two and beyond means we expect to be able to continue to reduce our capital markets footprint and future years.
This plan assumes that the Moodys request for comment on the loss given failure methodology will be implemented as currently drafted.
Before we sum up let me also say a few words on infection risk.
Infection. This refers to the risk that legacy capital instruments and <unk>.
New style capital instruments, due to various criteria, notably ranking and coupon payment conditions.
Such infection and risk and new style capital instruments being derecognize.
We do not see this as an issue for our four legacy capital instruments as Germany has implemented BRL <unk>, two and December of last year, which legally changes the ranking of these issues to be senior to new styles capital.
In addition, our instruments only contain so called dividend pushes which are allowed in this regard.
As such infection risk is not effective for us we're deciding on whether to call. These instruments.
As in the past therefore, our KOL decisions will be rather taken based on economic factors.
In conclusion on slide 20.
Our balance sheet remains low risk and well funded by highly stable sources.
Our solid capital ratio allows us to navigate through the operating environment, which may remain volatile.
The rating agencies have begun to acknowledge our transformation progress evidenced by outflow provisions from both Moody's and Fitch.
We will continue to constructively engage with the ratings agencies throughout 2021.
Our plans assume provisions for credit losses will decline slightly this year compared to 2020, but will remain elevated compared to pre COVID-19 periods.
We expect to prudently manage down our excess liquidity towards our target levels over time, but given the attractive TLC Aro conditions, we are under no time pressure to do so.
As a result, we feel well positioned to work towards our 8% return on tangible equity target in 2022.
With that let us move on to your questions.
And ladies and gentlemen at this time, we will begin the question and answer session and then one who wishes to ask a question.
And a five one.
And that takes time to anybody.
Can you wish true medium fell from the question queue, you May press star and <unk>.
Thank you ISIL BK equipment today, please take the handset before making your collection.
And when you ask the question maybe for Scott and one at this time.
And when amendment for that question.
Yes.
And the first question is from the line of Christy Hygiene and HIV bucket. Please go ahead.
Hello, everyone. Thanks, again for the call I have <unk>.
First one is on the Enbrel dysplasia.
And as CEO forecast and given the increase in and buy requirements and the reduction and this separately and that.
Neil will now be around five seven and Youre right. It seems a little bit in terms of cash.
Why should we be comfortable with given the articulate.
Tim on experience and then maybe just as a follow up what would actually happen and it did go below the net requirements and in 2021 day the.
And the second question is on the Moody's kidney failure methodology and revisions and.
Which obviously on that was mostly on issuance plans I'm interested actually and you could just remind me first of all what day.
And as revisions.
And happy would've affected you and then perhaps as a follow up what would actually happen if the loss given failure and methodology is implemented.
<unk> said that any change TNT on insurance.
And then finally, just a quick one on the provision taken in 'twenty and 'twenty and then the the biggest year on year increase came and the investment bank and I was just curious that should if he could comment and just a little bit more detail.
Sub segments within the investment bank.
Patients and as provisions related to thank you.
Christy Hi, this is Victor I'll take the first two and James.
The third.
On the on the MLP fund, we are comfortable with this lower cushion and we've been flagging for some time and these are no regulatory items and known downside and debt.
Was fully baked into.
Issuance plan as well as our balance sheet slide thoughts for this year and subsequently.
And as an example, many of the issuances that we have.
Coming up from maturity. This year are already deducted from the Enbrel and calculation I appropriately conservative.
And as should be the case. So one is that this is part and parcel of the planning.
And the timelines were well known to us throughout.
And when thinking about the surplus it is important and remember that we were one of the first banks and.
Europe to receive a fully loaded a binding and the.
Requirement.
We've exceeded from the time that we received the binding requirement.
One of the questions that you had was also on.
What happens should one actually.
Go through the through the Specialness was a limit.
That would require the <unk> to assess.
Any institution specific context within appropriate period of time.
To be able to address address the issue so to that extent, we have the capital market debt, we would we would seek to death.
So we're comfortable with the 5 billion euros, given we've absorbed much of the downside that we had been expecting now for some time.
And on on Moody's Lgs.
And the methodology changes will flag.
The request for comment last March I think.
And the comment period had completed and around May of last year before Moody's had delayed the implementation.
What is announced in December that the request for comment will be reissued and the second quarter.
And.
And it's our expectation that we will see and implementation of the new methodology sometime thereafter, so we would hope that by the beginning of the third quarter that we would have sufficient clarity around Moody's lgs.
Let's say that as you know we've managed to a series of criteria, including ratings agency criteria from the last couple of years and protecting our rating has been important to us and reflected and our issuance plan and will remain important for us going forward.
And on the provisions for loan losses, and the investment bank.
As you would imagine.
They arose from what we have.
Referred to as the focus industries, so commercial real estate aviation measure oil and gas.
And as examples.
And while those sectors are not out of the woods.
And we certainly see and as we referred to yesterday sort of and outlook that is cautiously optimistic on those sectors, but they have represented the lion's share of the of the IV provisions and the year I think the other thing that one needs to remember also and Ibs or why why would it happen.
At the early stage of a credit cycle and the IB be one of the reasons for that is structured credit and our world.
So our.
<unk> is probably a little bit more responsive in that sense.
But but interestingly I think the loss history and structured credit.
It gives us some sort of confidence and also looking to the future around the portfolio and if.
And if you like the the early part and the cycle at which those <unk> and recognized and the investment bank.
Thank you.
And next question is from the line of Carina coming again over 29.
Please go ahead.
Good afternoon, and thanks fragrance.
And from on the legacy and.
And then maybe some questions about CMC on line.
And on the legacy bonds.
And so it sounds like you're saying that day.
And would qualify and <unk>.
And even if they don't quantify capital and.
If I understood that correctly.
And the legacy debt.
Alright, and special purpose vehicles, which would mean that day.
Our disqualified from capital.
And so just wanted to and.
And I understand and cash.
And from that.
And then on sales here right so you've gone from.
And 34.
And.
The 37 and half and any suggest it could go high schools.
And if you've got 90 and Scott on how high that could come and then also I wasn't fully following what you were saying in terms of what's already booked.
Still to come.
On the period.
And if you could give me from.
Sure.
Maybe you can just repeat.
And a bit of an explanation as to what's being booked.
On TNT on May benefit thank you.
Sure I'll take those into and so the first on on.
<unk> was much more around the comment was much more to give clarity given the chatter around infection risks that we're not subject to infection risk on.
On our stack.
And hence one of the factors and also remaining comfortable with the surplus after absorbing the regulatory downside.
That would not qualify.
For MRO.
But.
Naturally qualify for Lgs again factoring in all of those considerations, we would make decisions at the appropriate time.
When looking at the.
Relative capital efficiency of those instruments.
On TLC row, we ended the year at about 38 billion.
Euro tap of the facility and we're likely to go up by call. It three to 4 billion through the course of the year.
Starting with the <unk> facility that we'd be able to avail.
Sales of.
On the.
And the last question, if I understood it correctly and was it around revenue recognition and catch up.
Yeah, Yeah, yeah. So.
I'll try and simplify the best as I can but given we have sort of six quarters and we have three separate loan criteria to manage together with accruals and catch ups, it's rather complicated picture and so I'll try to simplify it as best as I can and then if not we can take that offline as well.
The first is that in the third quarter, we had accrued for TLC CRO at a negative 17 basis points, which is the three year average of 50 basis points and the first year zero and the second and then zero in the third.
And the fourth quarter, we did reach accounting certainty that we would meet the loan growth target and this was a loan growth target between March 19, and March 21, and this allowed us to accrue for CLC CRO as a minus 50 basis points instrument for the fourth quarter, but also then required to catch up to.
And 50 basis points for the third quarter. So in total we accrue of just over $40 million in the fourth quarter for this.
For the full year of 2020, we accrued in the region of approximately 85 million euros across all <unk> instruments, including <unk> two from the first half of the yellow.
So in 2021, our effective rate will vary in each quarter based on similar criteria and the first quarter.
As we reach accounting certainty on the second growth targets up until March 'twenty, one and this will allow us to accrue the 100 basis points for the first quarter and the catch up for the second half of last year as well and so all the and we expect to book around 125 million euros in the first quarter and the <unk>.
Quarter will accrue at a 100 basis points and.
The continuing benefit from meeting that first or second growth condition.
And then and the third quarter will revert back to 50 basis points, because we will not buy then have accounting certainty as to the most recent growth condition, which gets measured at the end of December 21.
And then finally in the fourth quarter as we achieved that certainty. We will then the true 100 basis points for the quarter, but also as a catch up for the third quarter. So I hope that offer some clarity around plc, and CRO and record revenue recognition, but if not we can happy to take that offline.
And that's Mexicana and <unk>.
And Philip Kaplan.
They understand it and then thank you.
The next question is from Lake Street.
Please go ahead.
Hi, good afternoon, and thanks for taking my questions I've got two please just on.
The $5 billion.
Capital distribution to shareholders.
And what's the timing and that you thought installed and.
I'm, just thinking around that and it's obviously, it's about 150 basis points of capital being spent on the mining side I was trying to look that should all be thinking on the banks can be running around 14% common equity tier one of the <unk> 22 to keep your 12 and a half at minimum just any thoughts around that would be helpful. And then secondly, obviously big focus on the.
Return on tangible equity target no.
More work and assumption is that probably relatively limited execution risk on the cost getting us within your control so on.
Barbara and thinking related risks.
And I'll get to the extent and I guess, it's all on the revenues or are there any other areas or regions that you might call out that'd be my two questions. Thank you.
Sure. Thanks Lee.
James So quickly on dividends, we would essentially build into that full payout over over time.
And we're obviously mindful of the need to to adhere to our CET one ratio targets.
And maintain a small buffer above them.
As being sort of a constraint on the on the dividend or other distribution sort of pattern.
But we do see a very clear path to that.
Two the $5 billion returned over several years subject of course to profitability.
Regulatory approval and all of the things that go into that.
On the 8% ROE T E.
It's it's the whole package, obviously, we work.
Very hard on everything within our control costs, notably.
On the risk side, obviously, continuing the risk discipline underwriting our credit book to manage to a CRP outcome that would be in line with on or perhaps even better than we laid out to investors and December and as you're saying revenues is the hardest one to predict because it depends on the market environment.
And and a number of other considerations, but again in December and yesterday, we discuss it as well we feel that executing on the strategies and the businesses have laid out.
And the wind down of the CR U puts us on a good path towards that.
On the revenue number that feeds into our 8% model.
Okay.
And then just a quick follow up on the first one could you.
Your current guidance as a token of hopes and see what your kind of targets of total Hudson could you and could you just scenario and the next.
Yes, but you might be lowering that 12 to health and so I'll go and do you think youre going to be stuck with you, we'll stick with that for some time.
I think over that timeframe.
I I mean, I think it's extremely unlikely that we would we would think differently about that about that threshold and over that timeframe.
Is it break day thank.
Thank you.
As a reminder, if you wish to ask a question. Please press star and one on your telephone keypad.
And the next question is from the line of Robert Smalley from UBS fixed income.
Please go ahead.
Hi, Thanks, very much and thanks for joining the call.
Couple of topics first on the loan loss provision and second on issuance first on the loan loss provision, we had our CFO and this day.
<unk> last week.
Something along the lines of.
The impact of ongoing stimulus could not only end up delaying peak losses, but deflating peak losses.
Is this something that you would ascribe to and if so how are you looking at that in terms of your modeling how does it work through to two experienced with stage one stage two and stage three particularly given the release that we've seen in stage one.
On on.
On issuance just a couple of follow ups really.
The 2021 plan you've already done tier two are you optimize your pillar two optimized now for tier two and you'd more lean to cube.
81 for that issuance and.
And in terms of timing given the <unk> inflation that you talked about as well as potential increases in interest rates do you want to pull some of your funding forward into the first half of the year.
Given what's going on with the balance sheet and rates. Thank you.
So Robert it's James I'll take the first I would agree with that statement.
I think the both the fiscal and monetary support.
And my opinion and will fall.
Sure have lessened the impact of this credit cycle in terms of delinquencies and ultimately.
And the charges the banks take.
And in a number of ways. One is it's supported demand and the economy and the second it's provided liquidity and also access to the capital markets for for corporates.
It supported the household sector as well and I think just kept the economy moving over the bridge that was the very sharp, but are also relatively short downturn, so very unusual pattern relative to two other cycles.
Yeah.
How do we go into these staging sorry, Nick So just one other piece of that the staging is interesting.
We are looking at the forbearance impact and.
Other flags that that have arisen on.
Our ratings migration and that Hasnt taken place because of that support.
And I would say Robert it is it does not have that big an impact and surprisingly small impact on our <unk> nine provisioning.
Okay Robert.
Take the second two questions on tier two and and <unk>.
Note.
We've outlined $2 billion to $3 billion of potential issuance. This year that already includes the $1 billion on a quarter.
As of the tier two issue that we did in January so we retain flexibility through the course of the year.
Looking at our legacy Roelof exposures.
Looking at ensuring that we maintain.
Our buffers above minimum regulatory requirements and also ensure that we continue to make progress towards our leverage ratio targets. So we have some flexibility and but we wanted to give you transparency as always we have a placeholder for that issuance and we've already commenced on some of that issuance already in terms of pulling the issuance and.
The H, one and I think this year, we're kind of already put issuance and the last year, if I may and with pre funding of around $5 billion in the fourth quarter.
Of last year.
We tend to flex the issuance plan and timing around market conditions.
Left to be seen what the rest of the looks like.
I would say on balance generally, yes, we do tend to do more towards the earlier parts of the.
But I would say yoga and that's dependent on market conditions.
Yes.
Thanks, very much and thanks for doing the call.
And there are no other questions any time, I hand back and a clip.
Net for closing comments.
Before Philip closes, it's James I did want to conclude as we mentioned yesterday.
James Rivett will be moving to another leadership role within finance and.
And he will be replaced or succeeded as head of IR by you on a pattern issues with us on the call today.
And as you know is an 11 year veteran of our debt capital markets business and I hope, you'll all see our continued commitment to the credit investor dialogue.
And the selection of <unk> for this role I Hope Youll also all join us and congratulating James and thanking him for the hard work he's done for DB over over the last several years as head of our IR team and before that as head of fixed income Investor Relations as you all know.
He has an impressive set of achievements and his and his various roles and has built up a large following out there.
And so please reach out to him and for those of you don't know you on that please get to know her over to you from.
Thank you and.
Just to finish up thank you all for joining US today, you know where the IR team and if you have further questions and we look forward to talking to you from and again goodbye.
Yeah.
And ladies and gentlemen, the conference has now concluded and you may disconnect your telephones. Thank.
Thank you for joining and present day Goodbye.
[music].
[music].
[music].
[music].
Good afternoon.
Good morning, and thank you on for joining us today on the call as always on.
If all jumped from March onwards speak from.
And then our group Treasurer and takes adjusted you would take it through from fixed income and specific topics for Q&A. We are from China from Blake, our global net of issue on from securitization and draw a flyby and head of group capital management with us.
The slides that accompany the topics are available for download from our website at TV com.
After the presentation, we'll be happy to take your questions, but before we get started and just want to remind you that the presentation may contain forward looking statements.
Which may not develop as we currently expect.
Therefore, and please take note of the precautionary warning at the end of our materials with that let me hand back to James.
Thank you Philip and welcome from me.
Performance in the fourth quarter and and the full year shows the progress we've made and executing on our strategy.
We were profitable on a pre and post tax basis, and the fourth quarter and the full year on a group level.
The improved profitability and the core bank offset the continuing transformation effects higher provisions for credit losses, and continued derisking and the capital release unit.
We've demonstrated execution discipline as we hit all of our key targets and milestones in 'twenty and 'twenty and over the last 18 months. Despite the challenges of COVID-19.
Our diversified loan book and disciplined risk framework helps us to maneuver during uncertain times.
We remain disciplined on capital and while we grow our businesses.
And any by now we have put aside any doubts that we can self fund our trains and transformation.
Let us look and a summary of our financial performance compared to the prior year on slide four.
Operating leverage was strong and the fourth quarter at 23% on a reported basis as revenues increased by 2% and noninterest expenses declined by 21% adjust.
Adjusting for specific revenue and cost items operating leverage was 12%.
On this basis, we grew revenues by 4% and reduced our costs by 8%.
We generated a profit before tax of 175 million euros or $621 million, excluding transformation charges restructuring and severance and specific revenue items.
For the full year, we generated a pretax profit of 1 billion euros.
Provisions for credit losses was $1 8 billion euros and the full year in line with our expectations at 41 basis points of average loans.
Our improved results are supported by growing revenues and of our refocused business model as you can see on slide five.
We've increased creased group revenues by 800 million euros in 2020 as growth and our core businesses more than offset the exit from equities trading.
Core bank revenues have increased by 6% to $24 2 billion euros.
And this puts us close to the plan of $24 4 billion euros that we laid out at the investor deep dive as part of our path to the 8% return on tangible equity target in 2022.
This growth is principally come from our refocused investment bank, which was able to capitalize on favorite favorable market conditions and to develop deliver on the strategic transformation of our fixed income business.
The corporate bank and private bank successfully offset headwinds primarily lower interest rates to keep revenue was essentially stable year on year, and we would expect underlying growth to feed through to the top line as interest rate headwinds soften and consistent with the forward curve.
Asset management was slightly lower due to the non recurrence of certain performance fees and 2020 and.
In summary, all of our businesses executed on our strategic objectives.
Slide six shows the progress we have made and reducing adjusted costs.
Excluding transformation charges and bank levies and we've reduced adjusted costs year on year for 12 consecutive quarters and.
And 2020, we reduced adjusted costs, excluding transformation charges and expenses eligible for reimbursement related to prime finance by 9%.
On this basis and excluding bank levies, our fourth quarter run rate puts us on a good path to our 2022 target of $16 7 billion euros.
This run rate also leaves room for targeted investments in 'twenty and 'twenty one as we highlighted to you in December.
So that is now moving to slide seven to discuss our provisions for credit losses.
Consistent with our prior guidance provisions for credit losses remained at more normalized levels and the fourth quarter.
Provisions were 251 million euros, and the quarter equivalent to 23 basis points of loans on an annualized basis.
The decline for the fourth quarter is driven by releases and COVID-19 related stage, one and two provisions.
<unk> positive changes and consensus macroeconomic outlook since the third quarter.
Stage, three provisions declined by 14% and the quarter, but remain more elevated and the private bank and the investment bank.
And we retained the management overlay, we established and the third quarter, given continued uncertainties and the macroeconomic outlook.
Including the provisions taken in the fourth quarter. We ended the period with an allowance for loan losses of $4 8 billion euros equivalent to 111 basis points of loans.
Our plans assume provisions for credit losses will decline this year compared to 2020, but will remain elevated compared to pre COVID-19 levels.
Our disciplined execution is increasingly visible in our results as you can see on slide eight.
The next phase of our transformation is to further improve sustainable profitability by growing revenues and at the same time reducing costs we.
And we've generated positive double digit operating leverage in 2020 at both group and core bank levels.
The operating leverage has driven significant improvements and core bank profitability.
Adjusted for transformation charges specific revenue items goodwill impairments as well as restructuring and severance.
Pre tax profit and the core bank is up 52% and 2020 to $4 2 billion euros.
Over time more of the core bank profitability should flow to the group's bottom line as we continue to make progress on our transformation agenda and provisions for credit losses normalized.
The strength of our balance sheet at year end, which we discussed on slide nine also positions us well to further grow our businesses.
Our common equity tier one ratio was at 13, 6% essentially flat year on year.
Liquidity reserves and liquidity coverage ratio were both above prior year levels Dixit will go into more detail later.
As a result, we can deploy our capital and liquidity strength to support clients and what is still and uncertain environment.
Finally, as we explained both in December and on our risk deep dive and June last year, we have benefited from our high quality loan book and a disciplined credit risk framework that enabled us to deliver within our guidance on provisions for credit losses.
Our transformation is fully on track and our performance in 2020. It gives us good visibility towards our 2022 targets with that let me hand over to Dixit.
And 2020, which positions us well for 2021 on slide 11.
We continue to optimize our balance sheet, including the rollout of deposit charging on.
And on capital, we have increased the buffer above regulatory capital requirements to 10 billion euros, reflecting the tier two issuance earlier this month.
We are pleased with the way capital markets are reacting to our transformation our spreads have tightened significantly in 2020 outperforming peers.
For example, our senior non preferred debt items euro and yet, they're roughly 40 basis points compared to 2019 and has outperformed peers bad on 30 basis points on average across our main refinancing currencies euros and U S dollars.
This positive development and the flexibility of our balance sheet allowed us to pre fund around 5 billion euros of our 2021 requirements in.
In addition, we saw positive actions for ratings agencies. This includes the recent outlook revisions from Fitch and Moody's to positive and stable respectively.
Overall these developments support our commitment to deliver sustainable profitability, while we continue to invest and our technology, including our modeling our infrastructure and controls.
Slide 12 shows a summary of the net balance sheet, which excludes due to pending netting agreements cash collateral as well as pending settlements.
Liquidity reserves continue to account for about a quarter of the net balance sheet.
Our loan to deposit ratio at 76% provides significant room to prudently grow loan balances in coming periods and.
And I'll funding profile remains well diversified and.
And most stable funding sources were 82% of on net balance sheet or 87%, including TLC Arrow.
Low cost deposits on our main funding source contributing almost 60%.
And we have steadily reduced our reliance on unsecured wholesale funding, which is now less than 1% of net liabilities.
Moving to liquidity on slide 13.
You can see that we've made progress and managing down excess liquidity over the quarter.
And this is primarily driven by a reduction and corporate bank deposits, reflecting our targeted initiatives to proactively manage liabilities.
Partially offset by a modest increase and private bank deposits.
Loans remained flat and the quarter, but excluding FX effects, we saw ongoing loan growth primarily in the private bank.
Overall, we ended the year with liquidity reserves of 243 billion euros, and a liquidity coverage ratio on 445%.
On a year on year basis liquidity reserves increased 21 billion euros predominantly driven by model enhancements and low cost TLC are all funding, which we will discuss on the next slide.
As we execute on our transformation continued improvements to our technology and models can drive changes total liquidity metrics in 2020, those changes resulted in increases and liquidity with no incremental associated costs.
And announcements of course can also reduce liquidity and our liquidity levels allow us to navigate comfortably and external or internal changes.
Over time, we intend to prudently manage our liquidity towards targeted levels.
Slide 14.
Provides further context on the lower cost and the improved quality of our funding sources funding.
<unk> and will remain attractive for loan growth following the Ecb's updated <unk> III sales.
In 2020, we accrued at a funding rate in line with the ECB deposit rate facility, having achieved sufficient certainty of meeting the growth required in the March 19, due March 21 observation window.
As we accrued and the third quarter and a more conservative rate.
Accounting for the uncertainty of fully achieving the loan growth requirement. We have reflected an additional 45 million euros and revenues in the fourth quarter related to meeting this requirement.
Subject to our achievement of the Ecb's additional loan growth targets we.
We would expect a further 50 basis points reduction and the cost of the facility for the period from June 20 to June 2021.
This would result in additional revenues of around 120 million euros, and the first quarter, reflecting the catch up although we're conservative a couple of things in 2020.
In addition, we continued making progress improving the composition of our deposit base.
We actively worked to reduce unsecured wholesale funding and non operating corporate bank deposits, while going most stable retail deposits.
All of these initiatives have resulted and continuing lower cost of funding.
Turning to capital on Slide 15.
Our CET one ratio was 13, 6% at the end of 2020 above the guidance of 13% that we provided at the investor deep dive.
Approximately 20 basis points came from lower risk weighted assets, notably faster than anticipated reductions and the capital release unit and slightly lower deployment and the core bank.
A further 20 basis points of the outperformance came from a series of numerator benefits, including higher than expected net income and higher than expected benefits from regulatory changes relating to software intangibles and other items.
The balance of 20 basis points came from delays and regulatory inflation, principally the targeted review of internal models, which we expected to conclude in the fourth quarter.
4 billion euros of RW inflation related to trim is now expected to occur in the first quarter of 2021, which increases our full year regulatory inflation assumption to approximately 20 billion euros.
Nearly all of this <unk> inflation is expected to occur and the first half of 'twenty and 'twenty, one equivalent to approximately 80 basis points of CET one capital.
This takes our pro forma CET, one ratio to approximately 12, 8%.
With this inflation behind us and the first half of the year, we expect to see much more moderate impact from regulatory items and the second half of 'twenty, one and for the full year 2022.
As shown on slide 16.
We ended 2020 with a 13, 6% CET one ratio.
316 basis points buffer over the CET, one requirement, which is an increase of 31 basis points versus September.
The distance to the total capital requirement is up 17 basis points on a reported basis and up 48 basis points on a pro forma basis, including our January 2021 tier two issuance.
Post our successful tier two issuance, we now have 308 basis points or 10 billion euros of capital headroom over the total capital requirement.
This puts us and are comfortable starting point to absorb the upcoming RW inflation that we discussed.
Moving to slide 17.
Our leverage ratio improved by 24 basis points to four 7%, reflecting the positive regulatory driven and other capital effects I described before.
Our pro forma leverage ratio, including ECB balances was four 3%.
And this puts us well on track to meet our leverage ratio target of four and 5% by year end 2022, including a further 10 basis points from finalizing the transfer of our Prime Finance business later this year.
We continue to operate with a significant loss absorbing capacity well above our requirements as shown on slide 18.
At the end of the fourth quarter, our loss absorbing capacity was 21 billion above the minimum requirement for eligible liabilities of Enbrel, our most binding constraint.
In preparation for the long known regulatory changes applicable in 2021, we have held and materials buffers for some time now.
These changes include a reduction of our Enbrel capacity as a result of Brexit.
A higher MLR requirement expected to be set by the SRP and the first half of 2021 and the impact from regulatory <unk> inflation on Enbrel.
Our enbrel headroom will that normalize to a more reasonable level of approximately 5 billion euros and the first half of 2021.
This is still well above our regulatory requirements, which we are always fully met without meeting a transition period.
Moving now to our issuance plan on slide 19.
In 2020, we issued 18 and a half billion euros.
Net to our revised plan of 10 to 15 billion euros.
This includes roughly 5 billion euros of senior non preferred issuance in the fourth quarter of 2020.
Partially pre fund our plans for this year given strong market conditions. We saw then.
We also raised a further three and a half billion euros of funding from the ECB <unk> program and December.
Offset by the repayment of 3 billion euros of legacy Central Bank funding.
We expect to use these funds to optimize the repayment schedule of our central bank funding, while lowering the associated costs.
For 2021, we plan to issue between 15, and 20 billion euros and aggregate compared to maturities of $22 billion and we have already issued roughly one 5 billion euros. This year.
Roughly half of this requirement is comprised of capital instruments and senior non preferred to manage our MDA buffers as well as Enbrel and rating agency requirements.
Our well balanced maturity profile for 'twenty, two and beyond means we expect to be able to continue to reduce our capital markets footprint and future years.
This plan assumes that the Moodys request for comment on the loss given failure methodology will be implemented as currently drafted.
Before we sum up let me also say a few words on infection risk.
Infection risk refers to the risk that legacy capital instruments in fact, new style capital instruments due to various criteria, notably ranking and coupon payment conditions.
Such infection and risk and new style capital instruments being day recognized.
We do not see this as an issue for our four legacy capital instruments as Germany has implemented BRL <unk>, two and December of last year, which legally changes the ranking of these issues to be senior to new styles capital.
In addition, our instruments only contain so called dividend pushes which are allowed in this regard.
As such infection risk is not a factor for us when deciding on whether to call. These instruments.
As in the past therefore, our KOL decisions will be rather taken based on economic factors.
In conclusion on slide 20.
Our balance sheet remains low risk and well funded by highly stable sources.
Solid capital ratio allows us to navigate through the operating environment, which may remain volatile.
The rating agencies have begun to acknowledge our transformation progress evidenced by outlook revisions from both Moody's and Fitch.
We will continue to constructively engage with the ratings agencies throughout 2021.
Our plans assume provisions for credit losses will decline slightly this year compared to 2020, but will remain elevated compared to pre COVID-19 periods.
We expect to prudently manage down our excess liquidity towards our target levels over time, but given the attractive TLC arrow conditions, we are under no time pressure to do so.
As a result, we feel well positioned to work towards our 8% return on tangible equity target in 2022.
With that let us move on to your questions.
And ladies and gentlemen at this time, we will begin the question and answer session and then when he wishes to ask a question.
Followed by one on that Thats turned to anybody.
If you wish to remove yourself from the question queue, you May press star and a bite you.
Thank you Peter.
And equipment today, please take the handset before making your collection.
And when you ask a question maybe for Scott and it by one epic strength.
And when amendment for that question.
Yes.
And the first question is from a line of Christy Hygiene, Joe Buckley. Please go ahead.
Hello, everyone. Thanks, again for the call I have sweet and sour.
First one is on the Enbrel dysplasia.
Do you see your forecast given the increase in EBITDA requirements and the reduction separately and that.
Neil will now be around 5 billion you're right.
A little bit in terms of Cushing why should we be comfortable with given the articulating volatility might experience and then maybe just as a follow up what would actually happen and it did go below their requirements and in 2021 day.
The second question is on the Moody's given failure methodology musicians and.
Switch, obviously on Belgium on issuance plans and I'm interested actually if you could just remind me first of all what day.
And revisions and.
And hobby would've affected you and then perhaps as a follow up what would actually happen SD lost kidney failure and methodology.
And fifth as Ralph said, if there's any change TNT on insurance needs.
And with that and then finally, just a quick one on the provision taken in 'twenty and 'twenty and then the the biggest year on year increase came and the investment Bank I was just curious that should if he could comment and just give us a bit more detail.
Sub segments within the investment bank plays those provisions and commissions from agency. Thank you.
Christy Hi. This is this is Victor I'll take the first two and James.
The third.
On the on the MRO front, we are comfortable with this lower push it and we've been flagging for some time and these are no regulatory items and known downside and that was.
Fully baked into.
Issuance plan as well as all of our balance sheet slide thoughts for this year and subsequently.
And as an example, many of the issuances that we have.
And coming up for maturity history are already deducted from the Enbrel and calculated I appropriately conservative.
And as should be the case. So one is that this is part and parcel of the planning and.
And the timelines were well known to us throughout.
And we're thinking about the surplus it is important to remember that we were one of the first banks and <unk>.
Europe to receive a fully loaded a binding enbrel requirement.
Which we've exceeded from the time that we received the binding requirement.
One is the question that you had was also on.
And what happens should one actually.
Go through the through the threshold up to the limit.
That would require the ESRB and to assess.
Institution specific context within appropriate period of time.
To be able to address address the issue so to that extent, we have the capital market debt, we would we would seek to tap.
So we're comfortable with the 5 billion euros, given we've absorbed much of the downside that we had been expecting now for some time.
On on Moody's Lgs.
And the methodology changes will flag.
The request for comment last March I think.
And the comment period had completed and around May of last year before Moody's has delayed the implementation.
What is announced in December that the request for comment will be reissued and the second quarter.
And.
It's our expectation that we will see and implementation of the new methodologies and sub debt thereafter.
So we would hope that by the beginning of the third quarter and we would have sufficient clarity.
Moody's Lgs and.
And I say, though as you know we've managed through a series of criteria, including ratings agency criteria from the last couple of years and protecting our rating has been important to us and reflected in our issuance plan and will remain important for us going forward.
And on the provisions for loan losses, and the investment bank.
It did as you'd imagine.
They arose from what we've referred to as the focus industries, So commercial real estate aviation leisure oil and gas as examples.
And while those sectors are not out of the woods, we certainly see and as we referred to yesterday sort of and outlook that is cautiously optimistic on those sectors, but they have.
<unk> represented the lion's share of the of the IV provisions and the year I think the other thing that one needs to remember also and Ibs or why why would it happen.
At the and the early stage of a credit cycle in the IB and one of the reasons for that is structured credit and in our world.
So our portfolio is probably a little bit more responsive in that sense.
But but interestingly I think the last history and and structured credit.
It gives us some sort of confidence and also looking to the future around the portfolio.
Portfolio and.
And if you like the the early part and the cycle at which those <unk> are recognized and the investment bank.
Thank you.
And next question is from the line of Carina coming again almost 29.
Please go ahead.
Good afternoon, and thanks fragrance and Coke.
And finally on the legacy.
And then maybe some questions about CLC on line.
And on the legacy bonds and.
So it sounds like you're saying that day.
And would you quantify as.
And Rodney when you state that Quantifies.
And if I understood that correctly.
And the legacy debt.
The innovation.
Special purpose vehicles, which would mean that they are disqualified from capital.
And so just wanted to check and plan.
I understand and flow.
All indications from Barnes and.
And then on sales here right.
And so you've gone from.
And 30.
For the day.
37, and half and you suggested this could go clients such as <unk> and <unk>.
If you've got 19 scar on her.
And that could go on and then also I wasn't fully following what you were saying in terms of what's already booked.
What's still to come on.
Period, Zachman 18 from if you could give us.
And Sir.
Maybe just repeat and.
A bit of an explanation as to what's being run on TNT on may benefit from Q.
Corey and sure I'll take those into and so the first on on.
<unk> was much more around the comment was much more to give clarity given the chatter around infection risks that we're not subject to infection risk on.
On our stack and hence one of the factors and also remaining comfortable with the surplus after absorbing the regulatory downside.
And there would not qualify.
For Enbrel.
But.
Naturally qualify for Lgs again factoring in all of those considerations, we would make decisions at the appropriate time.
When looking at the.
The relative capital efficiency of those instruments.
On TLC row, we ended the year at about a 38 billion.
Euro tap of the facility and we're likely to go up by call. It three to 4 billion through the course of the year.
Starting with the March facility that we'd be able to avail.
Ourselves off.
On the.
And the last question, if I understood it correctly and was it around revenue recognition and catch up.
Yeah, Yeah, yeah. So on.
I'll try and simplify it as best as I can but given we have sort of six quarters and we have three separate loan criteria to vantage and together with accruals and catch ups, it's rather complicated picture and so I'll try to simplify it as best as I can and then if not we can take that offline as well.
The first is that in the third quarter, we had accrued for TLC CRO at a negative 17 basis points, which is the three year average of 50 basis points and the first year zero and the second and then zero in the third.
And the fourth quarter, we did reach accounting certainty that we would meet the loan growth target and this was a loan growth target between March 19, and March 21, and this allowed us to accrue with TLC Arrow as a minus 50 basis points instrument for the fourth quarter, but also then required to catch up to.
And 50 basis points for the third quarter. So in total we approved just over $40 million in the fourth quarter for this.
For the full year 2020, we accrued in the region of approximately 85 million euros across all <unk> instruments, including <unk> two from the first half of the yellow.
So in 2021, our effective rate will vary in each quarter based on similar criteria and the first quarter.
And as we reach accounting certainty on the second growth target.
Up until March 'twenty, one and this will allow us to accrue the 100 basis points for the first quarter and the catch up for the second half of last year as well and so all in we expect to book around 125 million euros, and the first quarter and.
And the second quarter will accrue at a 100 basis points as.
Is the continuing benefit from meeting that first.
And growth condition and.
And then and the third quarter will revert back to 50 basis points, because we will not buy then have accounting certainty as to the most recent growth condition, which gets measured at the end of December 'twenty one.
And then finally in the fourth quarter as we achieved that certainty. We will then accrue a 100 basis points for the quarter, but also as a catch up for the third quarter. So I hope that offer some clarity around <unk> and record and our revenue recognition, but if not we can happy to take that offline.
And that's much Karen.
And Philip juggling.
Do you understand it and then thank you.
The next question is from New Street.
Please go ahead.
Hello, Good afternoon, and thanks for taking my questions.
Please just on the.
<unk> 5 billion cash.
Distributions to shareholders.
And what's the timing of that you've got installed and <unk>.
I'm, just thinking around that and obviously, it's about 150 basis points of capital.
And I was trying to look at it should all be thinking and the banks can be running around 14% common equity tier one and all 22 to keep your $12 minimum and just any thoughts around that would be helpful and then.
Obviously big focus on the 8%.
Return on Patrick could you talk and.
Manuel and assumption is probably relatively limited execution risk on the cost given that with and Youll controls on.
And that can really do.
And not hitting that target to the extent that I guess, it's all on the revenues or are there any other areas or regions that you might call out that'd be my two questions. Thank you.
Sure. Thanks Lee.
James So quickly on dividends, we would essentially build into that full payout over and over time.
And we're obviously mindful of the need to to adhere to our CET one ratio targets.
And maintain a small buffer above them.
As being sort of the the constraint on the on the dividend or other distribution sort of pattern.
But we do see a very clear path to that to.
The five 5 billion return over several years subject of course to profitability.
Regulatory approval and all of the things that go into that.
On the 8% <unk>.
It's it's the whole package, obviously, we work.
Very hard on everything within our control costs, notably.
On the risk side, obviously, continuing the risk discipline underwriting our credit book to manage to a CRP outcome that would be in line with on or perhaps even better than we laid out to investors and December.
And as you're saying revenues is the hardest one to predict because it depends on the market environment and.
And a number of other considerations, but again in December and yesterday, we discussed as well, we feel that executing on the strategies and the businesses have laid out.
And the wind down of the CR U puts us on a good path towards that.
The revenue number that feeds into our 8% model.
Okay.
And then just a quick follow up on the first one could you.
And then your current guidance as a token of health and what you're kind of targets of total Hudson could you and could you just scenario and the next two years, what you might be lowering that 12 and help them do you think youre going to be stuck with you, we'll stick with that for some time.
I think over that timeframe.
I I mean, I think it's extremely unlikely that we would we would think differently about that about that threshold and over that timeframe.
Is it break day thank.
Thank you.
As a reminder, if you wish to ask a question. Please press star and one on your telephone keypad.
And the next question is from the line of Robert Smalley from UBS fixed income.
Please go ahead.
Hi, Thanks, very much and thanks for joining the call.
Couple of topics first on the loan loss provision and second on issuance first on the loan loss provision, we had a CFO and mistakes last week say something along the lines of.
And the impact of ongoing stimulus could not only end up delaying peak losses, but deflating peak losses.
Is this something that you would ascribe to and if so how are you looking at that in terms of your modeling how does it work through to to the experience with stage one stage, two and stage III, particularly given the release that we've seen in stage one.
On on.
On issuance just a couple of follow ups really.
The 2021 plan you've already done tier two are you optimize your pillar two optimized now for tier two and you had more lean to.
81 for that issuance and.
And in terms of timing given the <unk> inflation that you talked about as well as potential increases in interest rates do you want to pull some of your funding forward into the first half of the year.
Given what's going on with the balance sheet and rates. Thank you.
So Robert it's James I'll take the first I would agree with that statement.
I think the both the fiscal and monetary support.
And my opinion, and we will for sure have lessened the impact of this credit cycle in terms of delinquencies and ultimately.
The charges the banks take.
And in a number of ways. One is it's supported demand and the economy and the second it's provided liquidity and also access to the capital markets for for corporates.
It's supported the household sector as well and I think just kept the economy moving over the bridge that was the very sharp, but are also relatively short downturn, so very unusual pattern relative to two other cycles.
How do we go into these staging sorry, Nick So just one other piece of that the staging is interesting.
We are looking at the forbearance impact and.
Other flags that that have arisen on.
Our ratings migration that hasnt taken place because of that support.
And I would say Robert it is it does not have that big an impact and surprisingly small impact on our <unk> nine provisioning.
Okay Robert.
Take the second two questions on tier two and and <unk>.
No.
We've outlined $2 3 billion of potential issuance. This year that already includes the $1 billion on a quarter.
As of the tier two issue that we did in January so we retain flexibility through the course of the year.
Looking at our legacy Roelof exposures.
Looking at ensuring that we maintain.
And our buffers above minimum regulatory requirements and also ensure that we continue to make progress towards our leverage ratio targets. So we have some flexibility and but we wanted to give you transparency as always we have a placeholder for debt issuance and we've already commenced on some of that issuance already in terms of pulling the issuance and.
And so each one I think this year, we're kind of already put issuance and the last year, if I may and with pre funding of around $5 billion in the fourth quarter.
Of last year.
We tend to flex the issuance plan and timing around market conditions.
Left to be seen what the rest of the looks like.
I would say on balance generally, yes, we do tend to do more towards the earlier parts of the.
But I would say, okay, and that's dependent on market conditions.
Sure.
Thanks, very much and thanks for doing the call.
And narrow now my questions any time I hand back to you for any closing.
Closing comment.
Before Philip closes, it's James I did want to conclude as we mentioned yesterday.
James Rivett will be moving to another leadership role within finance.
And he will be replaced or succeeded as head of IR by you on Apache and issues with us on the call today.
And as you know is an 11 year veteran of our debt capital markets business and I hope, you'll all see our continued commitment to the credit investor dialogue and the selection of your Ana for this role I Hope you'll also all join us in and congratulating James and thanking him for the hard work he's done for DB over over the last several.
All years as head of our IR team and before that as head of fixed income Investor Relations as you all know he.
He has an impressive set of achievements and.
And his various roles and has built up a large following up there.
So please reach out to him and for those of you don't know you on that please get to know her over to you Phil.
Thank you and just to finish up thank you all for joining US today, you know where the IR team and if you have further questions and we look forward to talking to you from again goodbye.