Q1 2022 Deutsche Bank AG Earnings Call (Fixed Income)
[music].
Ladies and gentlemen, thank you for standing by.
Welcome and thank you for joining Q1 2022 fixed income conference 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.
If you would like to ask a question you May press star followed by one on your telephone.
Please press the stocky fluff by zero for operator assistance.
I would now like to turn the conference over to Philip Choyce now. Please go ahead.
Okay.
Good afternoon, or good morning, and thank you all for joining us today.
On the call our group Treasurer Dixit Joshi will take us through some fixed income specific topics.
For the subsequent Q&A session. We also have one CFO James from working with Us to answer your questions.
The slides that accompany the topics are available for download from our website DB com.
After the presentation, we will be happy to take your questions, but before we get started I just want to remind you that the presentation may contain forward looking statements, which may not develop as we currently expect.
Therefore, please take note of the precautionary warning at the end of our materials.
With that let me hand over to Dixit.
Thank you Philip and welcome from me.
We are mindful that the war in Ukraine has been devastating for millions of people and continues to bring a high degree of uncertainty to the world economy to the market environment and to our clients.
We condemn the Russian invasion of Ukraine in the strongest possible terms and we support the German government and its allies and defending democracy and freedom.
We're not taking on any new business in Russia, nor with entities incorporated industrial.
We have been clear that we are in the process of winding down our operations in line with our legal and regulatory obligations and our company our clients and doing the same.
While this has the potential to impact our full year results in our important measurement here. We believe we are on a good trajectory to reach our 2022 goals.
We delivered group revenues of $7 3 billion euros and increase of 1% year on year, even compared with a strong quarter in the prior year.
We saw revenue growth across all four core businesses driven by business momentum market share gains and investments that will support sustainable growth in 2022 and beyond.
This quarter, we generated a reported eight 1% return on tangible equity.
Upon the first quarter of last year, Despite a 28% increase in annual bank levies, which are recognized in the first quarter.
We also improved our efficiency post tax profit was up 18% over a successful prior year quarter driven by positive operating leverage.
This brings our cost income ratio down to 73% four percentage points lower compared to the prior year.
We are mindful that the current operating environment presents many challenges, including on the cost front and we will continue to focus on cost discipline.
Finally, looking at our balance sheet, we are well equipped to navigate the current environment. Thanks to our high quality loan book and tight risk management.
Our capital position remains strong despite the impacts of the war in Ukraine, and facilitating business growth.
Now let me take you through the progress on strategic priorities in our core businesses on slide two.
In the corporate bank business growth continued despite the more challenging market as we diligently executed on our strategy.
We sold this reflected in loan growth, which alongside interest rate tailwind contributed to an increase in net interest income this coupled with cost discipline helped us deliver operating leverage of 18% this quarter.
And the investment bank strong client activity in FIC supported revenues with year on year growth across institutional and corporate clients.
Advisory revenues were more than 80% higher year on year, partly offsetting lower revenues in equity and debt origination.
The private bank delivered its best quarter since we launched the transformation with pretax profit up more than half year on year to 419 billion euros.
It also captured net new business of 13 billion euros across inflows into assets under management and loans.
Asset management delivered revenue growth of 7% year on year, driven by higher management fees, despite the volatile market environment.
At the same time, the business continued to invest in growth initiatives and platform transformation.
The dynamics in all four core businesses provided a strong step off point to deliver on our 2022 targets.
Next let me give you an update on Russia on slide three.
We believe the investments we made in future proofing, our business meant we were well prepared as we entered this period of uncertainty.
This means we were ready to deal with not only the direct impacts of the war in Ukraine, where we reduced our net loan exposure to Russia to below 500 million euros by the end of this quarter, but also the second order ones and our investments in controls are a testament to this.
As a result, we executed diligently on sanctions implementation without any major issues and manage the financial aspects of the sanctions.
As it stands we operate under a heightened alert status and we are continuously adapting our controls to the evolving landscape.
Despite the uncertainties of the current situation, we have not seen any major disruptions to our businesses even with all the added safeguards we have put in place.
While it is too early to quantify the potential long term impacts of the wall. We believe our conservative balance sheet and transformed business model will help us face the challenges ahead.
Of course, we continue to be mindful of the broader environment and uncertainties that go well beyond the war such as the supply chain issues that could further impact future economic growth.
A key driver of higher profitability is our delivery of positive operating leverage which I will now cover on slide four.
Starting with revenues group revenues increased by 1% year on year.
And the core bank contributed by generating revenues of $7 3 billion.
Up 3% year on year.
Excluding revenues in corporate and other in the capital release unit. The average annual increase of revenues in the four operating divisions was 7%.
Revenues in the corporate bank was up 11% year on year.
Second consecutive quarter of double digit growth driven by continued deposit repricing and business growth.
Investment Bank revenues grew 7% year on year over a strong first quarter in 2021.
A 15% increase in <unk> revenues more than offset a 28% decline in origination and advisory.
In the private bank continued strong business growth more than offset interest rate headwinds and as a result revenues were up 2% year on year.
Asset management revenues rose, 7% year on year, driven by a 13% rise in management fees, which reflects consecutive quarters of inflows in assets under management during last year.
Assets under management increased by 82 billion euros year on year to 902 billion euros.
Moving now to costs.
Noninterest expenses were down 4% year on year, Despite an increase in bank levies of 28% or more than 150 million euros.
Which was offset by lower transformation charges and the cessation of prime finance costs.
Adjusted costs, excluding bank levies transformation charges in Prime Finance will also down 1% year on year, reflecting lower investment spending needs. After the completion of it projects and delivery of efficiency gains again in line with plan.
Beyond these cost items, we faced higher than expected expenses, mainly in compensation costs.
Let us now look at topics that drive our revenue performance over the next slides.
Slide five provides further details on the development in our loan and deposit books over the quarter.
Loan growth across the bank has been 5 billion euros or 2 billion euros on a FX adjusted basis as outlined in the previous quarter. This normalization in our growth rate was expected due to a partial reversal of short term lending, which supported a strategic transaction over a year and in the investment bank we expect.
The majority of this loan to be prepaid by the end of the second quarter.
Offsetting this we saw continued strong momentum from mortgages and collateralized lending in our private bank hikes.
High client demand in corporate Treasury services, as well as loan originations across FIC financing.
Despite the more challenging market conditions, we saw a strong performance of our deposit portfolio given the market volatility during the quarter.
Deposits were broadly stable compared to the previous quarter when adjusting for FX as a result of active balance sheet management.
Furthermore, our momentum in repricing deposits has also continued as shown on slide six.
At the end of the first quarter, we are charging agreements in place on a total of 142 billion of deposits generated quarterly revenues of 139 million euros.
Compared to the first quarter last year, we implemented additional agreements on 47 billion of deposits.
Our annualized run rate now stands at 557 million euros.
An increase of 149 million euros compared to our full year 2021 charging revenues.
Principally driven by ramp up effects from last year as well as the continued lowering of charging thresholds.
Looking ahead current forward curves imply lower charging specific revenues later, this year, which will be more than offset given our overall positive net interest income sensitivity.
Let me provide some detail on the evolution of our net interest margin on slide seven.
Looking back the decline of net interest margin in the first half of 2020 was driven by the cut in U S rates.
The margin has been broadly stable since then.
Above the level, we initially anticipated driven by increased balance sheet efficiency deposit repricing and <unk> income that helped offset ongoing deposit margin pressure.
Adjusting for <unk> timing effects.
NIM in the first quarter would have been at the prior year level.
From here, we expect NIM to rise due to the tailwind from the rising rate environment.
Moving to slide eight highlighting the development of our key liquidity metrics disc.
Despite the recent period of increased market volatility due to the war in Ukraine, our liquidity and funding levels remain robust and close to targeted levels.
The stock of our high quality liquid assets increased by about 7 billion euros. During the first quarter. This is mainly due to new issuance activities and deposit inflows primarily from the private bank.
The liquidity increase was partially deployed in further loan growth quarter on quarter, primarily in the private and corporate bank.
As a result, the liquidity coverage ratio slightly increased by two percentage points to 135%.
The surplus above minimum requirements increased by about 3 billion quarter on quarter to 55 billion euros.
For the remainder of 2022, we remain committed to support the businesses, while comfortably exceeding regulatory requirements going forward, we continue to steer the liquidity coverage ratio conservatively towards 130%.
The net stable funding ratio of 121% at quarter end was broadly unchanged at the upper bound of our target range comfortably.
Comfortably above 100% requirement.
So longer term funding sources for the bank remain well diversified and continue to benefit from a strong customer deposit base, which contributes about two thirds to the group's available stable funding sources.
For the remainder of the year, we aim to maintain this funding mix, which will be supplemented by debt securities issued in line with our issuance plan.
Turning to capital on slide nine.
Our common equity tier one ratio decreased from 13, 2% to 12, 8% over the quarter or 41 basis points.
This reflects a decline of around eight basis points from higher <unk> due to colebank business growth, partially offset by lower operational risk weighted assets.
ECB mandated model adjustments related to small and medium sized enterprise lending led to a decrease of 20 basis points.
Strong organic capital generation during the quarter was offset by share repurchases deductions for dividends 81, coupon payments and equity compensation, adding four basis points net.
We estimate the impact of the war in Ukraine on our CET, one ratio of 17 basis points.
Due to higher risk weights on our Russia related exposures and higher prudent valuation reserves due to the increased dispersion of market prices.
CET one capital now includes a capital deduction for common share dividends of 354 million for 2022. In addition to the roughly 400 million euros, which will already put aside last year to pay the proposed 2021 dividend of <unk> 20 per share post the <unk>.
Annual General meeting this man.
We remain committed to support business growth through continued earnings retention and finished the year with a CET one ratio of 13%, Ohio.
However, what remains hard to predict at this point is the potential for further regulatory driven <unk> inflation over the remainder of the year.
Our capital ratios remain well above regulatory requirements as shown on slide 10.
Due to ECB mandated model adjustments and as a result of the war in Ukraine. The distance of the CET. One capital requirement has decreased by 41 basis points over the quarter and now stands at 238 basis points.
<unk> 9 billion euros of regulatory capital.
We have successfully issued two tier two capital instruments with a total volume of $2 6 billion euros in the quarter.
And a 750 million euros 81 capital instrument, which has settled on the fourth of April only and is therefore not included in the first quarter 2022 statutory capital.
With these issuances, we are better aligned our 81 and tier two capital structure to regulatory requirements.
As a result, our total capital ratio distance to MDA is now 250 basis points on a pro forma basis.
Including the latest 81 issuance move.
Moving to slide 11.
Our fully loaded leverage ratio was four 6% a decrease of 30 basis points over the quarter.
The 30 basis points decreased 16 basis points were driven by tier one capital, which reduced as a result of the call of our $1 75 billion 81.
<unk> announced in January .
Our 750 million euros 81 issuance that settled in early April .
<unk> six basis points to our leverage ratio on a pro forma basis.
Leverage exposure, excluding FX effects increased by 28 billion quarter on quarter. Following continued growth in our core bank, including loan growth.
Our pro forma fully loaded leverage ratio, including certain ECB cash balances was four 3%.
With our reported leverage ratio of four 6% at the end of the quarter, we have a buffer of 134 basis points over our leverage ratio requirement of three 3%.
We continue to operate with a significant loss absorbing capacity well above all our requirements as shown on slide 12.
The umbrella surplus is our most binding constraint has increased by 1 billion to $15 billion over the quarter, mainly from the first time inclusion of selected structured notes in senior preferred ranking that meet the enbrel eligibility criteria.
This is more than offset higher R. W.
We expect a reduction of the umbrella surplus in the second quarter of 2022, given we will receive the next higher MLR requirement from the single resolution Board.
Our loss absorbing capacity buffer remains at a comfortable level and continues to provide us with the flexibility to pause issuing new senior non preferred.
Our senior preferred instruments for approximately one year move.
Moving now to our issuance plan on slide 13 in the first quarter, we issued a total of 8 billion euros.
Mainly driven by five benchmark issuances as well as largest structured issuances.
Our last two benchmark transactions weigh $1 5 billion euros tier two and a 750 million euros 81 security.
Both deals combined saw an aggregate order book of over 12 billion euros.
Together with the 81 issuance in November last year, we have raised $4 $6 billion of new capital instruments to strengthen our balance sheet.
Most of our requirements for 2022 ill now satisfied.
Also noteworthy was our first green senior non preferred issuance over $1 5 billion euros. This expands our ESG issuance footprint into a new debt Clos.
As you are aware, we have not called Postbank funding Trust, one and three despite the loss of recognition as regulatory capital. We continue to see these bonds as inexpensive funding instruments fall balance sheet.
We will continue to make decisions regarding the exercise of the issue of coal right, depending on economic factors, while balancing the interest of our key stakeholders.
For the full year, our issuance plan remains between 15 and 20 billion euros.
Despite the challenging market environment in this quarter.
We have already completed over 50% of the low end of our full year issuance target.
Turning to the outlook on slide 14.
The current geopolitical outlook and macro economic environment brings a great deal of uncertainty to the financial markets and to our clients.
However, strong revenue momentum in our core businesses continues to support our revenue guidance of 26 to 27 billion for 2022 and in our view our first quarter results built a strong foundation to achieve this.
We remain highly focused on cost discipline and continue to work towards our targets, but the current environment remains challenging and the visible cost pressures have intensified.
We remain disciplined in managing our risks and we believe that near term risk is contained.
Our capital remains resilient as our organic capital generation was offset by distributions while at the same time, we supported business growth and absorb regulatory changes and the impact of the war.
We remain confident in our year end guidance of around 13% consistent with our target of greater than 12.5%.
Our strong first quarter also gives us flexibility on issuance for the remainder of the year.
With that we look forward to your questions.
Ladies and gentlemen at this time the taking the question answer session.
Anyone wishing to ask a question maybe for Stefan.
Some telephone.
If you wish to remove yourself from the question queue. You May press star followed by two.
We're using speaker equipment today, please lift the handset before making a selection.
The one who has a question.
Mr. <unk> at this time.
Before we go to the first question and let me hand over to James for a couple of remarks.
Thank you operator before we go to Q&A I just wanted to make a brief statement.
We have seen the headlines to get today with regard to searches by the public prosecutor in our Frankfurt head office as you may have read from our statements. This is an investigative measure in connections with suspicious activity reported by the bank.
Deutsche Bank is fully cooperating with the authorities. Unfortunately as this event is very recent and an ongoing investigation.
Unable to say more on this matter on today's call.
We certainly look forward to your questions.
Our first question is from the line of Robert Smalley from UBS. Please go ahead.
Hi, good morning, and thanks for doing the call.
Couple of related questions on credit and credit quality.
Could you talk about the leverage lending book when I look on slide 26, I see that.
<unk> hasnt changed that much but.
When we're looking at provisioning.
Looking at risk capital capital allocation to the book could you could you talk about how you may be looking at that differently in a rising rate environment, particularly secondly.
On the.
On the call from the other day, there was a discussion of loan growth in trade finance could.
Could you talk about that kind of at the other end of the credit spectrum.
But what are the opportunities there and what does that do around our <unk> and density if anything different and then finally trying to pull it together.
As we look at at the loan portfolio going forward.
Should we look at your loan portfolio is growing more bar belled with more leverage exposure and more.
Low risk trade finance and not as much in the middle.
How do we dimension that across the credit spectrum.
Thanks.
Hi, Robert Thank you for joining the call it's James here.
Obviously the growth year on year in the investment Bank loan book was considerable.
And so I think your question is.
Is entirely well placed.
One element of that growth is relates to an episodic transaction, which we called out in the Q4 earnings call that we expected to run off and it did partially run off but but some of it was still on the books at on March 31.
If you adjust for that the growth is in the financing part of our business.
And a significant year on year.
That relates to the essentially re growing our structured finance portfolio in that lending business.
Leverage lending that book has been relatively flat over time, we manage that book within.
Quite disciplined risk appetite metrics and constraints.
Actually as you know volumes relatively speaking were weaker in the first quarter.
And then over over recent quarters.
So you would not have seen leverage lending being a significant contributor to that to that loan growth sequentially.
They're on the trade finance part that is obviously a business. We think we have leading capabilities in and is a core part of our strategy going forward in the corporate bank.
Those are attractive assets in terms of their characteristics and a variety of way in ways, including their risk characteristics.
<unk>.
We do intend to grow our trade finance book.
Trends as I mentioned on Wednesday are encouraging in that regard.
Notably that a longer and more complicated supply chain increases the need for working capital increases.
The length.
Sort of inventory flows in the in the economy, which is something that needs to be financed.
I guess, the last point about bar bells.
We do think of our portfolio as a bar bell.
But the whole loan book and you need to remember that a significant part of the loan book is in the is in the retail banking part of the business.
And within that heavily weighted towards mortgages.
And so while the types of lending you are talking about leveraged lending or some of the structured finance.
We think we do really well in and have a very good handle on the risks and.
And a very solid risk performance over time in those activities as you say it is it is balanced by in fact, a much larger very low risk highly secured book that we run within that totaled 480 billion.
Loans I hope that helps in terms of color Robert on your question.
Very much thanks, a lot and thanks for doing the call.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone.
The next question is from the line of Jacob <unk> from Goldman Sachs. Please go ahead.
Hi, there.
Few questions. Thanks for doing the call.
Sure.
So question number one.
You have actually had used currently to complete a prime broking business.
Or would you actually expect.
To have any effect on the reduction in your market.
And although.
Would this be through you would expect or are you seeing into pillar two.
Assessments for the following year or.
No that will be.
Number one if you don't mind Nathan.
Maybe take one at a time.
In total.
You can go ahead and ask the questions and then we'll take them one by one.
Okay sure so the second one.
Plenty.
Is there any date by which they.
Alrighty.
Thank you to present their complete resolution planning.
Patients for bank.
There is the indicative day end.
End of 2023.
I think by which point bank should remove any sort of dose.
At the end of 2023.
And banks should there be any sort of dose.
I'll call. It impediments there is all of the year.
Yeah.
SPD issued instrument.
Et cetera.
On the ratings question number three you are on the positive outlook.
For Moody's clearly the beneficiary there.
But sort of beyond tier two obviously your issuance right now the senior non preferred levels calibrated.
So lgs.
Harder to qualify for that one notch.
Do you expect to be defending that one knowledge.
Great.
Are you happy with <unk> would you be happy with me that relate to writing.
Our level and so would you think that you may reduce.
The stock loss non preferred debt.
And it is actually in your R&D and your funding plans for that number three and number four.
CMS actually sorry to us I know, it's a small security buck or two.
But.
It seems to allow actually SPV issued debt in enbrel as long as they do not oppose operational issues and the resolution. So can you confirm to ask whether CMS poses eases in the resolution planning fleet.
Thank you.
Okay. Thanks for your questions I'm going to take the first two it's James and then Dixit will take the second two on.
On prime brokerage that is out of our of our balance sheet and P&L and our risk metrics.
Now.
Essentially from the first of the year is it tailed off towards the end of last year as we transferred.
By client over to BNP Powerbar.
But all of our metrics liquidity metrics market risk metrics, obviously, the leverage balance sheet and the balance sheet are our clean if you like from.
And influence.
<unk> finance.
At this point.
One thing is as you know with any of the businesses that we exit there can be operational risks are to be way that stay with us.
But beyond that it is.
It's not part of our of our profile today.
On the pillar two requirement business model is one of the considerations.
Pillar two setting.
I can't speak for the assessments.
And I'm certainly not publicly.
But it does she did naturally to the pillar two assessment on business model.
On resolution planning as you say if you like the measurement date is in 2003 assessment of your resolve ability that the single resolution board has too.
Determine in connection with also the national resolution regulators.
Look this has been a build over many years and as a firm we are highly committed to.
<unk> building all of the capabilities.
Across the full range and dimension of resolution capabilities in order to achieve a positive assessment by the end of 'twenty three for practical purposes, we feel that those those capabilities have to be in place by the end of this year to prove their sustainability.
And over time, so we're working towards really a <unk>.
92 timeline to have all or practically all of the capabilities in place hopefully meeting the expectations of our resolution.
<unk>.
So I'll take the last.
Last two one on ratings and the current moment, we don't anticipate giving up the senior non preferred lgs uplift.
We've been encouraged by the upgrades that we've got from all three agencies.
In 2021.
Say hard won through many quarters of consistent execution on our transformation plan.
On the right track, we think thats positive momentum.
Positive ratings pressure.
In respect of US, which is a good thing.
But we.
We don't plan to give up the uplift.
In terms of legacy tier one youll see in the appendix, we have a list of.
Our capital instruments. It does not include the two.
The two items that add up to about 600 million two issuances that add up to about $600 million in agri.
Thank you good I E.
And this amount.
But we don't see those as an impediment to resolution we've done it's our legal analysis there.
And this is now simply those two instruments for US is simply now cheap funding.
We've kept those outstanding hope that's helpful.
Okay. Thank you.
Yeah.
The next question is from the line of Stefan <unk> from Credit Suisse. Please go ahead.
Thank you very much for the call three questions. If I may on my side. So just wondering what is the again.
Or why isn't the rates on your comprehensive income. So I may ask this question, how do you compare to peers.
Second question is probably a.
Broader question regarding the ECB responds to European Commission called for advice on the macro Prudential framework and more specifically on Q1 hour to make <unk> securities going concern capital in.
Coupon payments more.
Yes.
What's your what's your thinking on that.
Lastly.
What do you need to come back to <unk> in terms of timeframe portfolio upgrade, especially at Moody's.
Syed you could share with us would be much appreciate even with respect. Thank you.
Sure Stefan happy to run through that.
John .
Front, yes, we have noted that peers have had.
Reasonably large OCI losses in the first quarter as a result of the rate environment.
<unk> for us.
Was more measured.
Separately in the region of less than I would estimate around 300 million euros. After some technical effects probably.
Already in the region of five basis points of CET, one and within that I would say the specific element related to securities portfolios within our liquidity reserves.
<unk> been about $50 million.
On the quarter and the reason.
We have seen a muted.
One drill down in the first quarter, even though we've had fairly large moves in interest rates as we had.
List portfolios coming into the close of last year.
And that was as a result of our view that we enter 2022 and see higher volatility and a steeper curve and higher rates again with lots of uncertainty and uncertainty around timing as well.
Thats prudent risk management has helped put us in.
In good stead.
On the ECB.
Consultation hopefully advice and an 81.
Something that we obviously are going to follow very closely and participate and it is our view that to the extent that regulators look to review methodology, we view the toolkit around capital.
Look at making it further risk sensitive <unk>.
Efficient.
We obviously encourage improvements to the framework.
Ultimately it is of course in the domain of the legislators to decide what the framework looks like.
I would think that this would be in the context of <unk>.
The discussion around bank capital in the bank capital stack.
You would have noted the comments out of the PRA, which would also following.
Reasonably closely so.
I would say look it's something would follow the 81 market currently as you know is fairly well structured well understood.
We've issued in full compliance with.
The.
The guidelines around structuring of 81 instruments, so investors are reasonably comfortable.
The target market thats not to say the marketplace can be enhanced.
And then the third question that you had around ratings again, no not a whole lot to say given it's not really.
Our domain and timeline to control, but we're encouraged.
We remain on positive outlook, we continue to execute on our transformation plan, which is one of the key criteria. The ratings agencies have so we're going to continue doing what we've done now for many quarters run a prudent balance sheet.
Or that we communicate.
Carefully and transparently with the capital markets to try and minimize our issuance needs.
And continue to execute successfully with again as I said with some upward pressure on our ratings from here.
I hope Thats helpful.
Thank you. Thank you very much.
Yes.
The next question is from the line of Lee Street from Citigroup. Please go ahead.
Good afternoon, and thank you for taking my question I've got one question, but a couple of parts to it.
Just just thinking.
<unk> gas in August , which supposed to Germany, and we get that type of GDP reduction the bundesbank, suggesting and then potential recession recession.
Do you still think Deutsche Bank.
Return on tangible equity target for the year.
Obviously appreciate the gems like probably comes in with some capital injection W. Dawson blending, but so does my worry is probably stops through quality loan growth and your private clients and corporate divisions, when you're probably still get the cost pressure and you might not get as many.
Reg projects coming through.
That's question, one and then linked to that in that scenario.
<unk> do you actually have to pull to try and actually help you.
Get back couple achieved eight seven months. So basically you went about.
He comes with risks and the risks.
<unk>, 8% retirement contract do you target that would be my question. Thank you.
Thanks Lee I appreciate the question look as we've said now for four three.
Three years.
We have been doing everything to manage the company towards the financial targets that we set for 2022.
Over that period of time, we've overcome a number of different challenges in the marketplace.
And are the market environment and the economic environment.
And we remain committed to doing that.
As we disclosed on Wednesday, we continue to see a path to our targets for this year.
No question that there is a scenario an adverse scenario that can take place that would make it increasingly challenging.
To hit those targets.
But as we sit here today, we don't see that scenario materializing, it's not our base case.
And we've been working to create the levers necessary to attain the path.
In terms of this scenario as I say, it's not our base case.
It takes place.
It's sort.
Sort of agreement with the Bundesbank analysis in terms of the severity of the impact on the.
On the German economy, but as you say.
The potential offsets whether it's fiscal support from the German government for the economy.
We do believe that there is political will and the resources to do that.
Or other events that take place.
Frankly, not easy to predict how these these scenarios play out.
But there is clearly.
<unk> scenario that would put the.
More pressure on that on that target achievement.
And then also leave as you might have different scenario.
Sure.
Well the levers are the ones that are in place.
I said on Wednesday.
I think Stuart Grahams question.
The ECL impact for us.
Even in that downside scenario looks to be in some sense, it's surprisingly modest as we sit here today.
And there is no information in our credit book that.
That there is.
Generation, so far as a result of these events.
The first lever of course is having a strong and well underwritten credit book with the right degree of diversification.
Low concentration risks.
Credit protection, where it's.
The applicable.
And just managing the business carefully and within risk appetite. So in that sense that that lever is has already pulled.
And then we're working on with respect to the rest of our income statement and balance sheet to manage towards the targets.
So I think as a management team we're doing everything we can to remain on track.
And managing through this environment with the appropriate degree of caution.
But also cognizant that the.
Then it is not our base case and that we remain on track against our objectives for the year.
Alright fair enough. Thank you very much for the first one.
Sure.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star followed by one on your telephone.
Our next question is from the line of David from Autonomous. Please go ahead.
Hi.
Good afternoon, Thanks, Nicole and taking my questions I just got a couple.
On <unk> I think you've guided to 415 420 billion in 2025.
Now that that maybe five to 10 billion entrepreneurial inflation in 2022 G to the FTP model decisions on the SME book in the retail book.
Is the $4 15 to 420 is still unchanged or is there anything else to say that.
Unrelated to that.
<unk> model decision.
10% <unk> inflation guidance for Basel, four come down a bit.
Anything else you could say.
And.
Then finally, just on the CMS and again.
I know it's been talked about.
Turning to the topic.
<unk>.
I understand the gentleman BRD transposition Haas has an impact on the CMS and kind of infection risk.
So perhaps talk to that.
I just wanted to understand this <unk> mean that there isn't infection risk for the ml layer.
And I guess with regard to your comments on de Minimis.
Sentiment also shed by the regulator or should we read that.
The expectations for banks since we don't give that kind of final. Thanks.
So David on the <unk> side, no change in our views for 2025.
First of all.
At least the first.
These model adjustments was built into our planning.
And then secondly.
The effect of a lot of these model decisions is simply to raise the IRB <unk> ultimately given that the.
Over time and this is really the 2029 when the when the output floor becomes binding.
All it does is really bringing forward.
Sure.
Or caused to converge slightly the IRB and the standardized approaches.
So that the ultimate result of fee of the output floor is less.
As we think about 2025.
I say this order of magnitude it doesn't affect our capital planning.
I just don't.
On the PR Rd and infection risk again.
One just given the nature of our capital stack, we really don't have much exposure, even if you consider the two notes that we have which again having done the legal work around those.
We don't view.
Our stack is having infection risk and certainly not from an ROE point of view.
Thanks.
To touch on the point on de Minimis.
Is that signed off by the regulator that is another problem or is that something that's yet to come.
So I think the.
<unk> reasonably clear in our minds and so having done the work around those notes.
And it's pretty clear to us that we don't have that infection risk.
I can't comment on the regulatory review here, but from our perspective, we've managed that was stacked with that assessment in mind.
Understood. Thank you.
The next question is from the line of James Hyde, and Pgi and fixed income. Please go ahead.
Oh good afternoon.
Yes, two questions one on litigation risk or not I'm not asking about today's.
Right.
Okay.
I'm looking at.
<unk> had $1 1 billion of litigation reserves and then there is this figure that hasnt changed.
The $1 7 billion of.
Possible.
Now that you have the usual language about.
I'm just wondering I mean, although these are way too low you know anything that was paid out in the.
<unk> business and so forth.
I'm just wanted to.
Beyond that maybe hitting 2022 targets, 8% is this.
What would be your annual budget for topping up for sort of just.
Operational risks that arise your expectations on that.
And also.
Also can you confirm that you are completely done with.
Cum ex.
With that Frank.
It will find you had a couple of years back.
On that.
Then secondly on credit risk.
I'm just looking at him.
About 40% coverage all for all stage III Bye bye all positions.
Which is not really changed that much for us over time, but.
Still don't understand how that works with calendar provisioning.
<unk>.
Is it something that's going to be constantly deducted from CET, one or just going to keep your pillar two.
Requirement.
Higher yes, theres a lot two questions. Thanks.
Hey, James It's James.
If I understood. Your second question correctly I'll take both.
Free to ask a follow up so on litigation risks you would notice how relatively stable the provisions have been in the past recent quarters, both the balance sheet provision and the contingent liability or contingent risks that we see in.
And that reflects really that there haven't been any major items.
Either.
It's flowing in or flowing out of our sort of litigation portfolio.
By and large that's a good thing I think the degree of stability there is helpful.
Although as you know from our disclosure there one or two matters that we.
Good.
Happy to resolve and put behind us.
In terms of the ongoing it's always hard to say, it's an awkward thing to talk about what is your quote unquote budget for litigation matters.
Our goal and you've heard us talk a lot about investing in our control environment and our operational our nonfinancial risk management capabilities and what have you.
Goal is obviously to conduct our business in the best possible way and so as to minimize the degree of litigation risks that we face.
In our business of course, that's never zero.
But.
If you if you are looking for a budget.
Considerably smaller than the worst of the years.
We've had in probably towards the.
Kind of the single digit 100 millions.
On the low end of that.
To the extent that we can.
Again benefit from the from the long standing investments in non financial risk management and also conduct another other aspects of our.
<unk> of our business.
In terms of the deduction from CET one.
<unk>.
If I understood. The question correctly I think it's really the ECL that youre that youre thinking about in this regard that feeds into our regulatory capital.
That ebbs and flows based on essentially the book.
Evolution and then also the the risk evolution in particular.
Ratings migration.
Model changes and adjustment to the riskiness of the environment. So.
It's not a constant number.
Sure sure.
Understood. Your question correctly, if not feel free to ask a follow up.
No.
No. It has to do with the calendar provisioning requirements for scale.
<unk>.
Nonperforming loans.
Sorry, I understand the question now.
The NPA, yes that we have been incrementally over time.
The capital impact of the nonperforming exposure backstop requirement that the ECB is communicated to the banks. So yes, that's built into it.
My knowledge, we're now fully built I believe in terms of the capital impact of the NPL backstop.
Alright, Thank you very much James.
Okay.
So there are no further questions at this time I would like to hand back to Philip tighten up for closing comments.
Thank you.
And just to finish up thank you all for joining us today.
If you have any further questions Andrew.
And we look forward to talking to you soon again good Brian .
Ladies and gentlemen, the conference has now concluded and you may disconnect. Your telephone. Thank you for joining and have a pleasant day goodbye.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Sure.
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Yes.
Okay.
Alright.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
[music].
[music].
[music].