Q2 2022 Deutsche Bank AG Earnings Call (Fixed Income)
Ladies and gentlemen, thank you for standing by welcome and thank you for joining the Q2 2022 fixed income conference call throughout today's recorded presentation, all participants will be in a listen only mode.
<unk> will be followed by a question and answer session. If you'd like to ask a question you May press star followed by one on your Touchtone telephone please.
Please press the star key followed by zero for operator assistance, but now like to turn the conference over to Philip <unk> Investor Relations. Please go ahead.
Good afternoon, or good morning, and thank you all for joining us today on the call our group Treasurer Dixit gesture will take us through some fixed income specific topics.
And the subsequent Q&A session. We also have our CFO Sam from market 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'll be happy to take your questions, but before we get to static I'm 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 handover predicted.
Thank you Philip and welcome from me.
It is a pleasure to be discussing our second quarter and first half 2022 results with you today.
Since the end of the first quarter conditions for the global economy, and the macro environment have become more challenging.
The pressures will impact our 2022 cost income ratio target.
We are continuing to work towards a return on tangible equity targets for both the group and the co bank, even though the path ahead of us is more challenging.
Nonetheless, despite an unprecedented operating environment, we are transforming our bank and once again have proven our resilience.
We delivered group revenues of 14 billion euros for the first half of 2022 and.
An increase of 4% year on year.
We generated an 8% return on tangible equity up from six 5% in the first six months of 2021.
We also improved our profitability and efficiency.
First half post tax profit of $2 4 billion euros was up 31% year on year driven by positive operating leverage.
Our cost income ratio was 73% for the first six months five percentage points lower than the comparable period last year.
Finally, we continue to adhere to prudent risk management principles and processes.
Provision for credit losses was 22 basis points of average loans in the first six months, including a management overlay, reflecting elevated market uncertainty.
Oh capital position remained stable with finished the second quarter up compared to the first quarter with a common equity tier one capital ratio of 13%.
Moving to slide two in 2020 as the pandemic caught the market by surprise, we went through all our balance sheet to explain why we felt we were well positioned to navigate through that environment.
And while the current crisis presents different challenges and Marianne Knowns, what has not changed is our loan book, which is low risk and well diversified nor have we changed our approach to risk management.
On the items, we can control, we've always managed our balance sheet conservatively and intend to continue to do so through this period of volatility.
And that's the outlook evolves, we monitored the development of macroeconomic forecast and we'll update our allowances based on what we see in the environment and in our portfolios.
Moving to slide three you can see that the momentum across our businesses, especially in the past six months supports the delivery of our 2022 plans at the divisional level.
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 interest income. This led to a 10% return on tangible equity.
In the investment bank, our leading FIC franchise saw strong client activity with growth across both institutional and corporate clients, which marked the highest first half FIC revenues in 10 years.
Despite the unfavorable environment for origination and advisory activities M&A revenues was 65% higher year on year.
All in the investment bank delivered a return on tangible equity of 14%.
The private bank has strong half year results with a return on tangible equity above 9%.
Asset management delivered revenue growth of 6% 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 and delivered a 22% return on tangible equity.
Looking back at the progress of the core bank since the start of the transformation, we've improved profitability significantly.
First half profit before tax of $3 7 billion euros more than doubled compared to the same period in 2020.
Moving to slide four.
We are encouraged by the performance in our core bank, which delivered a 10% return on tangible equity in the first half up from nine 3% in 2021.
On a pre provision basis, we made significant progress on our profitability as we diligently executed on our plans to make our divisions more focused profitable and efficient.
While we benefited from market volatility. This also created some offsetting effects visible through our corporate and other line.
We are especially pleased to see the improvements in our stable businesses with corporate bank private bank and asset management, increasing their pre provision profit contribution to 60%, while our investment bank continues to perform driven by our FIC franchise.
We expect many of these trends to remain in place and to be beneficiaries of interest rate hikes in the coming years.
Overall with a core bank pre provision profit of $4 3 billion euros in the first half the improved operating margins create a stronger protection from a tougher macroeconomic outlook.
Moving to slide five to take you through our journey to deliver improved operating margins.
In 2019, we introduced a new strategy, which included focused investments in our core businesses, particularly into technology and controls.
This plan and these investments helped us to significantly increase our return on tangible equity from bringing in negative territory, just two years ago to 8%.
However, the macroeconomic environment changed materially, resulting in headwinds, which impacted some of our planned cost reductions most notably from inflation higher compensation and foreign exchange, which are likely to stay with us for the balance of the year.
And while the recent market volatility has been favorable for some of our businesses. We also saw offsets via the larger than expected drag from valuation and timing differences in CMO.
Reflecting these items and using a conservative approach achieving our cost income ratio for this year is no longer realistic without sacrificing long term potential.
Therefore, we have amended our cost income ratio guidance for this year to the mid to low seventies.
However, we are executing on our plans and considering the uncertain environment. We will work on additional measures to ease the pressures we are facing.
Let us now look at topics that drive our revenue performance over the next slides.
Slide six provides further details on the development in our loan and deposit books over the quarter.
Loan growth across the bank has been 12 billion euros or 5 billion euros on an FX adjusted basis.
In line with prior quarters, we saw continued strong momentum from mortgages and collateralized lending in our private bank high client demand in corporate bank as well as loan originations across our fixed financing and trading businesses.
Loans in our leveraged debt business have remained flat quarter on quarter.
Deposits grew by 1 billion euros compared to the previous quarter, when adjusting for FX and given the macroeconomic environment, we expect the slower growth rate to continue.
Deposit margins have started rising in line with the improved interest rate environment.
Let me now provide some detail on the evolution of our net interest margin on slide seven.
As we flagged to you last quarter. Our NIM has started to rise in large part due to the more favorable interest rate environment.
The NIM increase was driven predominantly by short term U S. Dollar interest rate rises in the first half of 2022.
But it was also supported by higher longer term euro rates that benefited the deposit books as we rollover hedge portfolios.
The NIM increase was also driven by approximately six basis points in positive one off effects as it still includes a two basis point effect from the minus 1% T. L. T R O bonus right.
Average interest, earning assets were up modestly, reflecting U S dollar strengthening and underlying loan growth offset by lower average cash balances.
Looking to 2025, we now expect the revenue benefit from interest rate curves relative to 2021 to be significantly higher than the 2 billion euros, we previously guided for.
Even accounting for increased issuance cost implied by current credit spreads the environment is more favorable than the outlook. We shared with you at the March investor Deep dive.
Normalizing for the one off effects just mentioned, we expect NIM will continue to rise due to the favorable interest rate environment.
Let me now give you some additional details on net interest income sensitivity on slide eight.
Further increases in rates above current market implied levels will continue to add to the interest rate driven tailwind Oh.
Over time, the largest impact is from long end rates as we roll over our hedge portfolios to higher levels, particularly in euro.
However in the shorter term rises in non euro rates will also provide a tailwind.
The interest rate tailwind, we had guided at roughly 600 million euros for 2022 at the Investor deep dive.
Now stands at over 700 million euros, albeit with partial offset due to higher issuance costs moving to slide nine highlighting the development of our key liquidity metrics.
Despite the increased market volatility, our liquidity and funding metrics remained robust and aligned with target levels.
The stock of our high quality liquid assets decreased by about 6 billion euros. During the second quarter. This is mainly due to continued loan growth.
The deployment of liquidity was partially offset by further deposit inflows, particularly driven by growth in the private bank Germany.
As a result, the liquidity coverage ratio slightly decreased by two percentage points to 133%.
The surplus above minimum requirements decreased by about 4 billion quarter on quarter to 51 billion euros.
In line with previous quarters, our daily average LCR over the past three months was at about 131% and underlines our proactive steering of the balance sheet towards target levels.
While we remain committed to support the businesses, we continue to manage the LCR conservatively towards 130% for the remainder of 2022.
The net stable funding ratio decreased to 116%, which is within our target range and with a surplus of 83 billion euros comfortably above the 100% requirement. The decline is mainly driven by loan growth as well as the roll down of T. L. T. R O three.
Given current economics, we expect to repay our T. L. T. R O funding at contractual maturity dates, but continue to manage the maturity profile in order to avoid cliff effects.
The 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 10.
Our common equity tier one ratio ended 14 basis points higher compared to the previous quarter at 13% in line with our previous full year 2022 guidance.
This ratio increase principally reflects higher CET, one capital from strong organic capital generation during the quarter.
Net of deductions for dividend and additional tier one coupon payments and losses and other comprehensive income.
CET one capital now includes a capital deduction for common share dividends of 450 million euros for 2022.
A three basis points drag on our CET one ratio came from FX translation effects, reflecting the significant euro weakening over the quarter.
Risk weighted assets net of FX were marginally down compared to last quarter.
Market risk <unk> increased principally from an increase in the quantitative vol. As far multiplier. This increase was more than offset by a reduction in credit and operational risk <unk>.
Our capital ratios remain well above regulatory requirements as shown on slide 11.
In line with the CET, one ratio development in the quarter the distance the CET one ratio capital requirement has increased by 14 basis points and now stands at 253 basis points or 9 billion euros of regulatory capital.
Our available 81, and tier two capital is at or slightly above the respective regulatory requirements, which brings our total capital ratio distance to MDA to 261 basis points.
This provides us with a comfortable starting point as we manage through the coming quarters.
Moving to slide 12.
Our leverage ratio, including ECB cash was four 3% our like for like increase of five basis points over the quarter.
Higher tier one capital from strong quarterly earnings and the recognition of our 750 million euros 81 issuance, which settled in early April added 10 basis points sell ratio. This was partially offset by a negative three basis point impact from FX translation effects, reflecting the significant euro weakening in the quarter.
And a two basis point reduction from higher leverage exposure, including core bank growth.
With our reported leverage ratio of four 3% at the end of the quarter, we have a buffer of 131 basis points over our leverage ratio requirement of 3%.
We continue to operate with a significant loss absorbing capacity well above our requirements as shown on slide 13.
The umbrella surplus as our most binding constraint has remained stable at 15 billion euros over the quarter increases in available Enbrel from new issuances will offset by the expected and previously advised increase in Enbrel requirements, which we received in May.
Our loss absorbing capacity buffer remains at a comfortable level and continues to provide us with the flexibility to pause issuing senior non preferred or senior preferred instruments for approximately one year.
Moving now to our issuance plan on slide 14.
The quarter was characterized by challenging market conditions in general with high levels of interest rate and credit spread volatility.
In this context, we are pleased to have completed roughly three quarters of our issuance plan year to date.
In the second quarter, we issued a total of 4 billion euros spread cost preferred non preferred and covered issuances.
During July we issued a further $1 $3 billion senior non preferred taking our year to date total to just over 14 billion euros.
For the full year, our issuance plan remains between 15 and 20 billion euros, although we are likely to end the year closer to the upper end.
Having completed a significant portion of our issuance plan for the year provides us flexibility in timing of new issuances and also helps to manage our overall cost of funding.
You may have seen that we announced in up to $1 billion tender offer for four dollar denominated senior non preferred securities yesterday.
We do not expect the need to replace the repurchase securities and senior non preferred format, but may consider senior preferred issuances, depending upon liquidity needs.
The public tender offer is designed to proactively manage our debt maturity profile and to provide liquidity to bond investors. We have received several questions regarding our approach to calling capital securities in general.
And in particular regarding a tier two deal that was issued prior to 2007 June 2019.
The requirement for tier two instruments to include Bailing language was introduced with the change to article 63 of the CR in June 2019.
The instrument under discussion was issued in 2013 and already included Balan language meeting the CRA requirements.
The instrument will does continue to be eligible as tier two regulatory capital beyond June 28, 2025, and until it is legal maturity.
Further requirements for bailing language as provided for in article 55 of the B R. R. D are not applicable given the instrument was issued before the date of transposition of the BRL D into German law on January the first 2015.
This has been confirmed by recent guidance from the SRP.
Turning to the outlook on slide 15.
The strong performance in the core Bank is testament to the quality of our businesses and the strength of the franchise. Despite the challenges ahead. Therefore, we can confirm our revenue guidance of 26 to 27 billion euros for 2022 however.
However, the current environment and uncertainty are unprecedented and we see pressures, including on expenses and credit costs.
We remain committed to our cost measures and we will continue to execute on our 2022 plan.
Consistent with our previous guidance, our provision for credit losses remains at around 25 basis points of average loans, including the currently expected impact of the war in Ukraine.
Slowing growth in our core markets and other dislocations, we remain confident.
Confidence in our full year, CET, one ratio target of greater than 12.5% or.
On the issuance side, we are happy having issued a substantial amount of our plan already in the first half of the year, which protects us to some degree against higher funding costs.
In addition.
We had some positive news from the rating agency side in the quarter with scope upgrading our ratings while D. B R. S. Morningstar raised the outlook to positive and encouraging signal, especially in the current environment.
We will remain in close dialogue with our ratings agencies as we feel we still have potential catch up on a relative basis.
With that we look forward to your questions.
Ladies and gentlemen at this time, we will begin the question and answer session anyone who wishes to ask a question May press star followed by one on their touch tone telephone.
If you wish to remove yourself from the question queue. You May Press Star followed by two you are using speaker equipment today. Please lift the handset before making your selections anyone who has a question you May press star followed by one at this time.
Before we go to the first question, let me hand over to James for a couple of remarks. Please go ahead James.
I think that was from prior.
Prior call instruction shows how over the Q&A right away Okay.
The first question is from the line of Richard Thomas from Bank of America. Please go ahead.
For the call.
I've got three cheeky questions. If I may the first one is about.
The problems with my favorite coupon the fourth spot 296%.
Uh huh.
Actually I remember discussing with the team before.
And what you've said today in the call is consistent with what they're they've said to me in the past about the bail in language.
I have to say I've always thought that language was a bit weedy a bit weak to satisfy the CR the virology.
So in the context of this language not being let's say of the strongest in my view, what's your current thinking would it be better in a perfect World. If you just called it next year.
Second question, if I may and you did refer to a little bit about this.
What's your outlook in terms of the racing evolution do you expect something could happen to your ratings as early as this year.
And then finally this tender offer announced last night.
What is that all about why are you doing that now.
You've given the generic things about liquidity and so on but why why that tender offer now and why those bonds. Thank you very much.
Richard Thank you for the questions and thank you for joining I'm happy to address.
Each of those.
You're right to point out on the 4% to 96% tier two it's one of the reasons why we wanted to address it in our prepared remarks, just given some of the incoming questions that we had had and I think we're fairly clear and I'd like to just outline.
Thinking and the current treatment of those instruments.
I had highlighted in the prepared remarks.
The BR R D requirements for.
For Palin language are not applicable to this instrument to be clear and the reason for that is the P. R. R. D was transposed into German law I think around January of 2015, whereas this particular instrument was issued in 2013 and so that's fairly clear and has also been confirmed.
By recent guidance from the from the SRP.
And then separately, but related regarding the CR or requirements.
All our DB Investor Relations homepage, we publish the prospectus supplement which contains the bail in language in the contractual provisions this.
The Sierra doesn't provide further requirements on any additional bail in language. So.
Don't mind, it's fairly clear that the payment language included in the documentation.
Does meet all of their requirements.
On your second question regarding call as you know we wouldn't specifically comment.
On any upcoming call decision, but it is something that we'll continue to assess of course.
At every moment in time looking at the regulatory treatment of the regulatory capital treatment at this moment in time, we don't envisage any action on this phone and again, that's something that we will reevaluate to town.
On the second point.
Around credit ratings.
Where we are.
Confident that the progress we continue making on our transformation that you heard about from James and Christian on Wednesday, and specifically the progress around the sustained improvement of the improvement in our profitability that over time that this gets reflected in our ratings. The form of course now is significantly different.
Two a few years ago, you know whether thats the way, we run our balance sheet the quality of the assets on the balance sheet, our liability profile and the improvements that we've made there to build the firm towards greater deposit funding the drive towards higher NIM greater NII and all of that then translating into.
Capital accretion as well as capital return.
So the phone was just completely different from a few years ago.
We do recognize of course that the macroeconomic environment is is fairly uncertain right now and that is a factor.
And in that light, the fact that Moody's and Fitch have both maintained the outlook.
In spite of this macro environment that we're living through in my mind indicates continued upward pressure on our our ratings.
Also dimension the outlook revision by Drs Morningstar from stable to positive as well as the rating upgrades by scope in the second quarter.
It all shows you that there is potential for positive ratings actions even in this macroeconomic environment.
Environment.
And then on the third.
The third point on the tender I would say it's really.
Business as usual, it's something that you've seen us do.
Few times before looking at the market environment, we tended for certain dollar senior non preferred securities as we optimize our maturity profile of maturity structure. We're also taking advantage of strong liquidity and Enbrel surpluses that we have as you see.
In the deck as at the end of the second quarter, we had <unk> of over 200 billion euros, an LCR of 133%.
And enbrel surplus in the region of around 15 billion. So all of this affords us some flexibility in managing our liability profile, but also quite frankly, the spread widening that we saw.
Led us to believe that it is actually a opportune time to launch a transaction like this.
We haven't done anything in euros.
We don't have anything planned today in Europe , but that doesn't preclude us again from reacting to market conditions.
We see them.
Hope that's helpful. Richard.
Great. Thank you very much.
Next question is from the line of Jackie <unk> from Morgan Stanley . Please go ahead.
Hi, Yeah, thanks for the call.
I have two questions. The first one is again on the 14 namesakes I must admit I am Aloha, particularly agree with <unk> comments on the on the.
Great.
And one thing.
Perhaps on Solana can you you talked about the move.
Okay.
With me on this but I didn't know if that also refers to <unk>.
June turned training, Paul gallant and sunbathing Playbooks that means something published.
It talks about.
The strength of the contractual recognition on Mariner and Rebecca and thank you.
Flip to that is well.
In some cases robust enough to be able to.
To be written down.
No.
<unk>.
So that's the first question is you know some kind of gone through that playbook guidance.
And the second question is a broader question on <unk>.
I think the FTP it seemed like a fruitful centrifugal.
Former fund I was just wondering if you know what the intentions might be if you are thoughtful Miami condo boom trucks terminal supervises about what to do with those funds.
Hum.
Possibly in the future.
Could give us any color about how you're thinking about that as frankly.
Okay.
Jackie Hi.
Yeah on the on the first point I think it's towards fairly clear that we've been through the documentation. We've ensured that it has the respective bailing language and important again as I was commenting on really looking at compliance with both the BRD.
As well as the Cri and were fairly clear that it includes the necessary bailing language.
I haven't heard anything to the contrary.
Again to the Investor Relations team is on hand, if we wanted to discuss that a bit further but.
That certainly is the case for US you know.
On the other instruments.
No there really other than the economics.
That will drive coal decision, there really isn't any quite frankly supervisory other push for us to call a tender at this stage.
As you know I always retain optionality to call instruments, depending on the economics to the bank.
But that's certainly not the case today, they represent fairly cheap funding for us.
And so at this moment in time in our instruments that will remain outstanding for us.
Okay, great. Thank you and sorry, just one follow up on the on the 14th and I mean, I guess sustainable number of banks, who have very similar language to that.
Ballrooms chairman.
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Phone calls to make then in that way.
Ex Ciara and compliance so.
It may be that sustained belts and braces.
Again, I guess the thing that's happening in the market is developing over time and I guess that they would not look at each individual gone does everything would say you'd probably recall any specific guidance from them.
Hum.
Possibly influence how you're looking at some of these legacy <unk> CMO.
Sitting with.
Right.
I'm from Crazy phone kind of contractual.
Yes.
Sure.
Yes, Jackie we've seen we've seen that as well and you know I can't comment specifically on what other banks have done, but you know I would point to.
They are regional distinctions. So for example in our case.
And when it went into German law might be different dates wise and grandfathering wise compared to other countries within the eurozone. So from our perspective, while we can't speak to other banks. What we do know is that our bond was issued before 2015. The BRD then came into effect in 2015.
The instruments and the necessary bailing language.
Yeah, Yeah, I guess I guess, the other instruments and then really focus on the T language Danielle.
Would potentially be grandfathered.
These banks are actually in a very Prudential amendment, they can say accent.
Instruments would not.
T D.
Written down and he says.
Taking all the practical.
Equally as important context, as well and actually changing them.
I understand you can't comment on that at that time.
Alright, well. Thank you thanks very much for that.
Thank you Jack.
Next question is from the line of Lee Street from Citigroup. Please go ahead.
Good afternoon, Thanks to Nicole Thanks for taking my questions. A couple for me. Please firstly just a simple one on the on the total attendees said last night, you said that you wouldn't have to replace it but you might Apache third senior does that mean, you don't really show any more non preferred senior this year or just no more non preferred senior in dollars.
First question and then and.
So more strategic ones I guess.
Yes.
Is it conceivable that you could see yourself involved in leading in.
Large scale M&A.
Any point in the next six to 12 months, so and all.
Is your current share price may be an impediment to that and then.
So on the other side of that yet.
On special question is is it not quite attractive at the same time introduce share buybacks given the shafts for us.
Around that.
The constraints that would be my questions. Thank you very much.
Lee Hi, and thanks for joining I'll take the first and then James will likely address the second second to.
The dollar tender look it's a it's 1 billion.
It is a $1 billion that we target through the standard and we have an issuance plan for this year of 15 to 20 and as I said, it's more likely that we get to the 20, you know we're done with around $14 billion on the year so to be honest the $1 billion is quite frankly, neither here or there and the scope of our affiliations plan regarding.
<unk>.
Replacement and so on we don't tend to think of it as like for like replacement. We would look at the liquidity of those respective lives the spreads that theyre trading at.
The type of Investor feedback that we received what we see in the marketplace.
And then separately would continue with our issuance plan, including potentially pre fund.
Future future years.
Issuance into this year like we've done in previous years. So.
Would expect in a combination of issuance in the remainder of the year, but quite frankly, it does depend on the spread environment that we see again, having completed 14 billion already that puts us in a.
I would say in an opportunistic position for the remainder of the to be reactive to conditions.
And Lee it's James on the second two questions look Christian and I have made public comments that we we see the logic of the M&A from.
Instead of an industrial logic perspective and strategic value.
But we can't comment and don't really have.
A sense of what form it'll take when it'll take place.
And I think again, we've been consistent on the efforts of the past several years have been.
Helpful. I think in preparing Deutsche bank to be a participant in that.
Whenever it does start to take place as you say kind of large scale.
The share price, obviously has a big impact on the terms of trade and so it's something we'd like to see improve its one of the ways that we can be prepared in addition to fixing our it our control environment and the other improvements that we've been working so hard on so.
It's all part of.
A process that hopefully lead to.
Two good strategic moves in time.
On share buybacks generally we provided back at the Investor deep dive.
I'm reasonably clear guidance on our capital distribution plans and absolutely share buybacks play play a role in that.
As you recall, we bought back about 300 this year.
And over over time, we'd like to continue to do that we see the corporate finance value of buybacks is one element of our distribution plan.
And and that's something that we intend to to continue over time.
Alright, that's helpful. Thank you both.
Thank you Lee.
Winder, if you'd like to ask a question. Please press star followed by one on your Touchtone telephone.
The next question is from the line of Robert Smalley from UBS fixed income. Please go ahead.
Hi.
Good afternoon, and thanks for doing the call a couple of questions.
First on the loan loss provision you fix it you mentioned 25 basis points going forward at.
At the same time, we continue to hear.
Potential for very negative economic news.
Germany.
Maybe you could just talk a little bit about where you are coming up with 25 basis points and.
What you're looking for that might potentially change that.
Number one.
Number two.
On page 25.
This slide is a discussion on deposit repricing.
You were very successful in charging for deposits in a negative rate environment now we're moving into positive rate environment, that's going to fall away. How are you managing that and what are some of the puts and takes on that and impacts on the NIM.
And then finally on.
On the tender.
Yes.
To sum it up.
And I just wanted to see if I'm characterizing this correctly.
You are not particularly happy where your spreads are because they don't reflect.
The fundamental progress of the bank.
You have several issues that are trading significantly below par, which you may or may not have needs for.
You can tender for them.
The difference to par, which is a benefit.
But take some <unk>.
Some excess debt out of the system and hopefully there will be a positive spread impact.
You have done this before I believe in 2019 and 2018.
What are the circumstances about the same as they are now and have I characterized it correctly and is there anything more than that.
So Robert it's James Thanks for your questions I'll take the first then dixit will take the second two so look the outlook what we have booked so far this year and the 25 basis point outlook for the full year reflects management's best estimate.
Of that charge the credit costs for 2022 based on everything we see sort of at the moment.
<unk>.
Including a management overlay, we've taken actually in both the first and the second quarters recognizing that the economic environment was deteriorating. So so you should think of the 25 basis points is what we would expect.
In the status quo, including a deterioration in the back half of the year.
It reflects very strong credit going into this environment.
And that's absolutely what we see in the portfolio.
We did provide a scenario as disclosure on a scenario and in order for that scenario were to take place you'd have to have seen sort of a full cut off of gas supplies to Germany, and a rapidly deteriorating environment.
Quickly on the heels of that and that is simply not what we see.
So is there a scenario to help investors sort of gauge the sensitivity.
But it's not what we see today.
The 25 basis point outlook would sort of suggest we're gonna books.
Over 300 per quarter for the next two quarters and given the run rates and sort of what we've seen in recent months and quarters in the portfolio.
We think actually that would be a reasonably conservative level of DLP to book in the balance of the year again, given everything we see as of today.
Rob Hi, this is <unk> on the second two.
On deposit charging you're right look we've had.
Had a good result, including on an annualized rate basis this year.
Through both the corporate bank and the private bank and the initiatives to add launched around charging over the last few years of.
That of course, you know dissipates now with with higher rates and going through the zero bound.
As we go through the zero bound in euros, they will tend to be some anomalies in terms of pricing in terms of NIM compression, but margins can expand.
As rates go as rates go through through zero.
One on the tender I think your.
Characterization is is a fair one.
Look we would be reactive to where we saw a combination of much higher spreads than we think is fair are warranted.
All where we thought there wasn't adequate liquidity away, we received investor feedback.
And so again, we want to be as opportunistic as we can around it as you said 2016 18 20.
Looked at the significant widening in spreads.
We thought that.
In dollars compared to euros that we were perhaps wider.
We thought we should be and so this over time should also lead in.
Act as a catalyst for some spread tightening as well on our toes.
Yeah.
That's great. Thanks, a lot for your answers appreciate it.
Thank you Rob.
The next question is from the line of Daniel David from Autonomous. Please go ahead.
Good afternoon, and thanks for taking my calls.
My questions I have three.
The first one is just on the regulatory headwinds I think theres been talk of.
10 bps from multiple reviews in H T, but more focused on 2023 is there any risk of further.
The headwinds from all the reviews in 'twenty, three or capital headwinds that we should be watching out for.
The second one is just on the loan book growth.
Which we've seen in Q2.
There's some FX impact, but did the 4 billion of lumpy exposure dropouts.
You could give us some guidance as to whether the lending can be attributed to some CRE actual leverage financial ability really helpful. And then finally, just a bit more of a broad question I think we're seeing some noise in the German press. Thanks.
Show that some of the macro pain.
At the moment.
Either via bank taxes or Srs.
Alright.
Just interested to hear your views on whether you think that's likely in Germany or something.
Concerned about going forward. Thanks.
Sure Daniel Hi, I'll take the first two and James will do the last regulatory headwinds. That's right. We saw 10 basis points. We think that's 10 basis points between now and the end of the year likely in Q3 for 'twenty three I think thats.
It's a little too early to provide an outlook there.
There's always some risk as you know and we do have model reviews and regulatory items from time to time, they do shift between the quarters and to the extent we have some transparency we're trying to provide that as early as we can like we've done in previous in previous quarters.
Regarding regarding the loan book we saw.
In the region of $12 billion of growth on a reported basis.
Ex FX and some hedge accounting effects that was probably in the region of around 8 billion euros.
Within that.
As you pointed out one of the episodic items.
In the region of around three 4 billion that did actually drop out.
But our investment bank grew on an ex FX basis loans by about $2 billion.
That was really across all of the major lending businesses that we had.
In the leveraged debt capital markets businesses loans were fairly flat.
And we would expect loan growth over the next two quarters and the IP to stabilize perhaps slightly higher in the second half of 'twenty two.
And the corporate bank, we saw about a $1 billion of loan growth again, excluding FX and this was predominantly in trade finance.
As well as well as in lending and the private bank grew loans, primarily in mortgages and.
In the international private Bank, we grew about 4 billion ex FX. So what youre seeing is really loan growth on an ex FX ex FX basis at a pace that <unk> seen in previous quarters.
That's what we're planning for for the next two quarters as well.
So Daniel I'll take the last question about macro pained look I.
I guess the first thing is that some of these actions around Europe .
<unk> have been sort of characterized it as sort of excise taxes or windfall profit taxes and my own view is that with the German banking sector is struggling to earn its cost of capital.
We're not yet in fact, we're far away from a point, where you know.
There's a social argument.
To take excess profits out of out of one industry sector and try to redistribute the value two to ease the social pain.
We understand the social pain, we feel I think very strong obligation, especially in our home markets.
But all around the world to be.
Positive part of society, specifically as as our communities address some of the challenges around I think the best policy response, frankly is to let the banking sector do what it's what it is here for to intermediate lend.
Lending into the economy to support clients.
As we go through a difficult time potentially.
And certainly that's our goal to do if you like in the ordinary course without without the need for other risks redistributive policies.
Thank you Blake.
Next question is from the line of Jeremy <unk> from BNP Paribas Exane. Please go ahead.
Hi, there thank you.
On the <unk>.
Benefit from rising rates I'll note that she used slightly different language I think James I mean equity called the other day talked about high twos benefit.
<unk> had significantly higher than two.
Kind of assuming you mean, the same thing rather than VIX, it being more cautious about issuance costs.
But I thought I'd, just let you comment on that and then secondly.
The carryover from the other day you previously when it was one 5 billion benefit you gave divisional splits and it was roughly split 50 50 between the corporate bank and the private bank and so I just wanted to check if the larger amount roughly double that now is still a 50 50 split between the two or whether the benefits is more skewed to one or other <unk>.
Thank you.
Sure Jeremy Hi, Yeah, let me try and address that in.
We are consistent with what James has said and you know what we'd indicated at the IGD in March now in March.
Remember, we estimated about a billion and a half euros from interest rate tailwind.
2025, as you said roughly.
Half and half between CV and PV with a smaller contribution from from the investment Bank.
Since then of course, the interest rate environments become.
Much more supportive to future revenues.
Again, we see that significantly above 2 billion euros.
In 2025, but at the same time, we also see increased funding cost as a result of current market spreads that we're seeing.
And the point, we wanted to make was even when youre looking at just the wall interest rate tailwind less the.
Increased funding cost minus plc arrow effects, which are of course contractually that drops away before you get to 2025, what we're seeing is still supportive of revenues in 2025, and we think that Delta between March and now on a net basis adjusting for all of these effects.
Is in the region to a rounded 1 billion euros.
Hope that's helpful and on your second question around the <unk>.
Business mix.
It's tilted slightly now in the high or higher rate environment. It still looks slightly now towards the PV.
As opposed to the corporate bank hope that's helpful.
Very helpful. Thank you very much.
Next question is from the line of James Hyde from P. G. I am fixed income. Please go ahead.
Oh, hi, Thanks for doing this call.
I was I wanted to take a Robert Smoothies question.
On the scenario.
Gas shut off scenario de facto.
Hum.
One that was 20 bps impact that you see on the downside scenario.
Is that how top down.
Through all the how bottom up is that I mean was this.
Sort of.
Economists put together a top down view did you get feedback from the.
Relationship offices on the credit people working with the <unk>.
Big Corporates in Germany.
So.
Almost too little for that scenario and I think you probably have that feeling from other questions.
On the on the call on Wednesday, and then related to that.
Even if it doesn't get through gas shut off but.
You have some.
Production interruptions et cetera.
Do you see.
Proceeds fatality impacts already from this coming winter on the risk weighted assets from.
From even.
From any of the even the mildest scenario.
That's it.
Sure.
I'll take the question.
It's actually both top down and bottom up that we did a lot of work over.
A considerable period of time.
So there are three elements of the analysis, one is shocking the macroeconomic variables, which we did.
That tend that drive.
Stage, one and two provisions.
And we should have built that into our view the.
The next thing we did was a sort of a broader base.
Like.
Ratings downgrades analysis in the industry sectors that we would judge to be most.
Vulnerable and that was sort of top down.
And then a bottoms up view is what we took four to take an estimate of what the stage III impairments would be over time and there to your question. We went in to those industry sectors looked for potentially vulnerable areas and and in essence took a a representative.
Ample of potential defaults, there and that was quite granular work.
So we feel very comfortable with that scenario analysis as I say, both top down and bottoms up.
We were encouraged as well with the with the output of that analysis.
And as you may have heard from the comments that Christian offered on Wednesday, as we talk to clients we're seeing.
Our corporate.
Sector going into a period of uncertainty.
Reasonably well prepared in terms of the liquidity the order books, they have and the actions that they're taking to protect themselves from this scenario as it as it develops.
So we feel we feel good about that work and we also feel good about what we're seeing.
In the credit book.
If you like in preparation.
The other thing to think here about this scenario is not binary.
The way that one might think time.
And the.
The remedial actions that can be taken in the economy and the society.
Help and and so it's very path dependent in terms of how severe that scenario might become.
Terms of pro cyclicality, not really yet there was some to do with.
The war that we began to see in Q1 and into Q2, but relatively modest certainly if if the downside scenario started to manifest.
Manifest itself you would see some of the pro cyclical impact in capital, including the <unk> impact from from downgrades.
We've already had some whether its prudent valuation or additional valuation adjustments.
As one example in market risk <unk> increases as another example.
I have flown into the capital calculation as we speak.
Generally we would we would expect those to eventually normalize and revert.
Exactly how that plays out the timing is never certain but but we saw a similar pro cyclical effect in the Covid crisis, and then and then the release of that of that capital.
Also draws of.
Liquidity facilities was another element that tended to increase the balance sheet and the associated risk weighted assets over time, so we haven't seen that yet and its of course scenario in paas dependent.
Thank you very much.
Thank you James.
There are no further questions at this time and I would like to hand back to Philip <unk> for closing comments. Please go ahead.
Thank you and just to finish up thank you all for joining us today.
Oxy move if you have any further questions and we look forward to talking to you soon again goodbye.
Ladies and gentlemen, the conference has now concluded and you may disconnect. Your telephone. Thank you for joining and have a pleasant day goodbye.
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