Q2 2023 Deutsche Bank Aktiengesellschaft Fixed Income Call
Ladies and Gentlemen, thank you for standing by. Welcome and thank you for joining the Deutsche Bank Q2 2023 Fixed Income Conference Call. Throughout a 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 touch-down telephone. Please press the star key followed by zero for operator assistance.
And I would now like to turn the conference over to Philipp Teuschner. Please go ahead.
Good afternoon and good morning and thank you all for joining us today. On the call, our group treasurer, Richard Stewart, will take us through some fixed income-specific topics.
For the subsequent Q&A session, we also have our CFO James from Moltke with us to answer your questions.
The slides that accompany the topics are available for download from our website at db.com.
After the presentation we will be happy to take your questions.
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 Richard.
Thank you, Philip, and welcome from me.
It's a pleasure to be discussing our second quarter and first half results with you today.
These results provide a good perspective of the progress we are making towards our objectives.
We have strong growth momentum and our well-balanced business mix resulted in revenue growth of well above 7% on a compound basis for the last 12 months versus 2021.
This performance puts us well on track to deliver revenue growth above our 2025 target.
Strong revenue growth combined with ongoing cost discipline led to a 2% improvement in the cost income ratio to 73% in the first six months compared to 2022.
despite significantly higher non-operating expenses in the second quarter, which we would not expect to repeat in the same magnitude in the coming periods.
Our post-tax return on tangible equity for the first half of the year was 6.8% and would have been above 9%, excluding non-operating costs, and with bank levies apportioned equally across the year.
Very close to our 2025 target of above 10%.
Our capital position has remained strong and our CET1 ratio of 13.8% positions us well for capital distributions, investments and the implementation of regulatory changes.
In short, our performance in the period reaffirms our confidence in reaching our 2025 targets.
reaffirms our confidence in reaching our 2025 targets.
In the second quarter we also had good news for the racing agencies with two upgrades and a positive output change.
We are very pleased about this external recognition of our strategic progress and balance of business with other relating aspects.
Let's just look at the drivers of the sustained revenue growth on slide 2.
Over the past two years we have seen steady growth in first half revenues.
We see ourselves well on track to deliver above the midpoint of our full year guidance of 28 to 29 billion euros.
We achieved this despite significant shifts in the operational environment over the past 24 months, as a strong post-COVID recovery in 2021 gave way to inflationary headwinds and economic uncertainties driven by the war in Ukraine.
We maintained our growth trajectory in a changing environment and delivered strong revenue growth in our corporate and private banks, which took full advantage of rising interest rates and a new client mandate.
We expect that momentum to continue into the second half of 2023.
This, together with a stable contribution from the Investment Bank's financing business, more than offset normalising conditions in our more market-sensitive businesses.
As we anticipate some normalisation of interest rates, we aim to further complement our earnings mix. We are making investments in capital-like businesses including origination and advisory and wealth punishment.
together with technology-enabled high return businesses in the cover bank.
Finally, across all businesses, we continue to make progress towards our sustainability targets. We added ESG financing and investment volumes of 17 billion euros in the second quarter.
bringing our cumulative total to 254 billion euros since January 2020.
Before we move to some balance sheet related topics, let's just turn to provision for credit losses on slide 3.
The vision for credit losses in the second quarter was €401 million, equivalent to 33 base points of average loans, slightly up compared to the previous quarter, reflecting a broader impact of the macro environment.
Stages 1 and 2 provisions were 63 million euros, driven by portfolio and rating movements, especially in an investment bank.
Stage 3 provisions of 338 million euros were broadly spread across our businesses and slightly lower compared to the previous quarter, partly reflecting a non-recurrence of provisions relating to a small number of idiosyncratic events in the International Private Bank.
Overall, there are currently no signs of persistent deterioration in the environment.
However, we observed a softening of some German mid-cap sectors, including automotive, and continued weakness in commercial estate.
All year we continue to expect provisions to land within our guidance range of 25 to 30 basis points of average loans, albeit at the upper end of that range.
Looking at the first six months, provisions were in line with our expectations if we exclude the non-recurring events in the International Private Bank we had in the first quarter.
For the second half of the year, we expect a usual quarterly run rate of about 150 million euros in the private bank.
while provisions of the corporate bank and investment bank taken together are expected to remain in line with the first half of the year.
Slide 4 provides further details on the development in our loan and deposit books over the quarter.
All figures in the commentary are adjusted for FX effects.
The loans have declined by 5 billion euros in the quarter.
The development in the core bank was the main driver of the changes at group level.
loans in the core bank have decreased by 5 billion euros due to reduced client demand and continued balance sheet discipline in anticipation of regulatory RWA inflation.
Opportunity measures executed already in the fourth quarter of 2022 contribute further to the 9% year-on-year decline in the corporate bank loan book.
Lend growth for the private bank and investment bank has been flat during the quarter, driven by low client demand across products.
For the remainder of the year, we expect the music trend to continue.
For deposits, client engagement and sentiment have improved in the second quarter, resulting in a moderate increase of 2 billion euros.
corporate bank deposits have shown a stable to improving trend with 2 billion growth following enhanced client activity and a normalization in pricing competition.
Porsets in the private bank remained essentially flat.
Inflows from our SONAs campaign of around 3 billion euros have largely been offset by continued inflation pressure, ongoing pricing competition and an accounting classification change of 2 billion euros.
In the second half of the year we expect modest deposit growth taking us towards a 600 billion year age level.
Moving to the net interest margin development on slide 5.
The net interest margin in the private bank and core bank remain strong in the second quarter as deposit betas remain below our model assumptions in both divisions.
We expect margins to begin to decline from this point, but that the tailwind from interest rates for 2023 will be larger than the €900 million we guided at the start of the year.
The net interest margin at the group level increased to 151 basis points as the accounting effects we noted in the first quarter partially reversed.
As we noted at the time, these effects are held in our Corporate and Other divisions and are offset on interest revenues and do not affect the group's total revenues.
Average interest earning assets decline quarter on quarter driven by lower average cash balances.
Moving to slide 6, highlighting the development of our key liquidity metrics.
The liquidity coverage ratio at quarter end decreased to 137%.
This reflects a gradual normalisation for the liquidity levels seen over the last two quarters and is in line with our guidance to return to a target LCR of about 130% over time.
Throughout the quarter we mean to stable liquidity position with a daily average LCR at 134%.
We maintained a robust level of available high-quality liquidity reserves with a vast majority of total HQLA held in cash or Level 1 securities.
The movement in the LCR surface above the regulatory minimum to €55 billion was driven by TLTRO repayments as well as a small increase in net cash outflows.
In the second half of the year we will continue to manage the LCR structurally towards our target level.
Next, stable funding ratio at QN4 remained broadly flat at 119% versus the prior period within our targeted range.
This represents a surface of about €97 billion above the regulatory requirement.
The available longer-term stable funding sources for the bank remain well diversified and are supported by a robust domestic deposit franchise which continues contributing about two-thirds of the group's stable funding sources.
We aim to maintain this funding mix over the course of 2023 with manageable TLTRO repayments of about €4 billion per quarter.
The repayment of about 3 billion euros of TRTRO during the quarter brings our cumulative payment to about 23 billion euros.
into capital on slide 7
Our common equity tier 1 ratio was 13.8% at the end of the second quarter, 15 basis points above the prior period.
Organic capital generation contributed 16 basic points to the increase, reflecting our strong net income, which was offset mainly by higher regulatory deductions for common equity dividends and 821 coupons.
This weighted asset remained broadly flat this quarter at 359 billion euros.
We saw an increase in credit risk out of the way due to a higher share of equity investments in guaranteed funds in asset management, with growth in lending commitments offset by securitisation.
The decrease in market risk RWA was driven by a reduction in our quantitative multiplier at all.
In the second half of the year we expect approximately 70 basis points of headwinds from various items we have discussed with you before, notably impacts from model and methodology changes, share buybacks and the numerous acquisitions.
Capital ratios remain well above regulatory requirements as shown on slide 8.
The CET1 MGA buffer now stands at 262 basis points, or 9 billion euros of CET1 capital.
This increase of 11 basis points compared to the prior quarter reflects a 15 basis points higher CO2-1 capital ratio which was partially offset by a 3 basis points impact from higher counter-cyclical capital buffer settings in the Netherlands, Ireland, France and Sweden. Our buffer to the total capital requirement remained materially unchanged.
The impact from FX, adjusted increase in leverage exposure, was not material.
We continue to operate with a significant loss absorbing capacity, well above all our requirements as shown on slide 10.
The M-Rail surface, as our most binding constraint, decreased by 7 billion euros to 12 billion euros over the quarter.
This includes a reduction of €4 billion due to the higher NREL requirement and general prior permissions, becoming subject to deduction as mentioned in our first quarter 2023 Fixed Income Investic talking.
We have consciously reduced our buffer to improve balance sheet efficiency.
Actions taken include the successful execution of a €1 billion senior non-preferred tender offer in May 2023.
and their decision to not replace 2 billion euros of MREL eligible instruments falling below the one year maturity threshold with new issuances.
Our loss-absorbing capacity buffer continues to provide us with the flexibility to pause issuing new eligible liability instruments for approximately one year.
Moving now to our issuance plan on slide 11.
confirm our guidance to issue 12 to 15 billion euros to meet 2023 requirements.
Year to date we have already issued 11 billion euros or roughly 80% of the midpoint of the full year target.
We issued a €1 billion fan brief, a €500 million senior preferred and a $1.25 billion senior non-preferred note and were otherwise active in product placements and retail-targeted issuances. Residual issuance activity for 2023 remains focused on cover bonds and senior preferred notes. Regarding the eyeball transition, we have completed the migration of our US dollar live or exposure with the exception of three so-called tough legacy capital securities.
For these notes we have informed the bondholders about the fallback provisions which encompasses a dealer pole and, if unsuccessful, usage of the last available fixing.
The next upcoming resets occur in 2025 and 2027. Before going to your questions, let me conclude with a summary on slide 12.
First half revenues above 15 billion euros. We believe that revenues above the midpoint of our guidance range of 28 to 29 billion euros for the full year 2023 are achievable.
The interest rate environment remains favorable, supporting strong revenues in PB and CB, and the market now expects interest rates to remain higher for longer than earlier in the year. In addition to this, features in our stable businesses remain below our model assumptions. Working together these effects will mean that the rate tailwind will be higher than the
is materially above the 900 million euros we had guided to you previously for 2023.
Adjusted costs for the full year 2023 are still expected to be essentially flat compared to 2022, benefiting from strict cost management, lower single resolution fund charges for the current year, as well as a potential restitution payment from the National Resolution Fund.
Vision for credit losses is now expected at the upper end of our guidance range on 25 to 30 basis points of average loans reflecting the current macro backdrop and lower loan balances than initially anticipated.
Our capital guidance is unchanged. Our second quarter CET1 ratio of 13.8% allows us to absorb roughly 70 base points of headwinds in the second half, reflecting the impact from model changes, share buybacks and a new misacquisition.
We recognize the positive rating actions in the second quarter from S&P, Fitch and DBRS, which brings us closer to our PA group.
As mentioned, on the prior slides we have completed 80% of our issuance plan for the year and plan to issue primarily in more senior instruments during the remainder of the year.
With that, let us turn 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 2.
If you are using speaker equipment today, please lift the handset before making your selections. So anyone who has a question may press star followed by 1 at this time.
And we have the first question from Lee Street with City Group. Please go ahead.
Hello, good afternoon both and thanks for taking my questions. I have three for you coming back to the point she has mentioned. So on the rating entries, obviously you've had some positive rating actions as you mentioned. Based on your latest discussions with them and obviously you're still on positive S&P, do you think you've got scope for more upgrades or more positive activity from them over the coming years?
a buffer on your buffer, that's my question there. And then finally, as it relates to the Li-Ball and the H1s that you've essentially announced that the coupons would fix if the Dilipol failed.
have you had confirmation that's not an incentive for a deed? How should we think about that? Being an incentive to redeem is obviously a fixed coupon. You know, it implies a credit spread that would move around as a function of what rates do. That would be my three questions. Thank you.
Thanks Lee and I guess welcome everyone for joining on a Friday afternoon for the last weekend in July . And so we'll sort of see if I can get through these questions relatively quickly so we can break for the weekend. But starting with your questions Lee, I guess the first one around the racing agencies.
So I'd say we've been very happy with the rating trajectory since we embarked on our transformation strategy back in 2019. On the back of the profitability improvements, strict risk management, continued balance sheet strength, we've seen the rating agencies upgrade our ratings twice in recent times.
and in the second quarter, as you said, we made significant progress with two upgrades and a positive outlook change. I'd say we're working hard towards an upgrade with S&P. We feel our ratings with the other agencies are now appropriately positioned for where we are right now.
And regarding the economic environment, we don't see pressure to our own ratings for a sharp deterioration on a macroeconomic level could have implications for the banking sector as a whole. Risk management continues to be a strength at Deutsche Bank and continues to be a focus across all.
the different risk types and so we don't believe our ratings are going to be impacted to the downside.
When it comes to LCR and the right level, good question. I think how we think about it internally is, we're starting point is our own internal stress testing and risk management frameworks. So obviously we know our own portfolios, our own
historical outflow numbers with our clients, we know our products, we know our geographies and so that whole stress testing framework that we have essentially in the buffer we kind of we need to hold for those is kind of what really what informs the LCR.
And so that's kind of where, how we think about it. And then we kind of think a little bit about our peers as well as a sort of just a sort of level set a little bit. You come to notice that the US banks typically have lower LCRs, sort of in the 110, 115 kind of area. Some European banks a little bit higher, but given our business mix.
I think we're pretty comfortable with 130 being the right target over time.
And I guess the last question I guess on the incentive to redeem on those those securities In our opinion reliance on the last available fixing does not constitute an incentive to redeem as This relates solely to the interest rate aspect of the coupon whereas the spread
and the recently published EBA Monitoring Report on Own Funds and MREL also do not suggest any concerns with relying on existing fallback provisions. So that's kind of how I'd respond to that question. So hopefully that answers your question. All right, that's very helpful. Thank you very much. The next question is from the line of Robert Smalley from...
In provision for credit losses, you pushed it up your expectations to the upper end of the range. It looks like it's primarily in this quarter coming from the corporate bank and the investment bank. Could you put some detail on that? And is that where you see the provisioning?
continuing to increase or stay at these levels through the end of the year. Seems like it's come down in the private bank, so any color there would be appreciated. Secondly, just on Germany, ISO, ICAT.
Lots of indicators of sentiment have grown very soft around the economy. I know that you run a global business, but at the same time, could you talk about the impact of that on the balance sheet and the income statement? And then third, just in general.
Could you talk about capital generation, how it came out this quarter, how you're seeing it for the rest of the year, and what you think the right run rate is for Deutsche Bank? Thank you.
Robert, hi, it's James. I'll start on the first two and Richard may I want to add on the third. So you're right there was a shift in the quarter so it was a normalization for us of PB.
closer to what we'd expect to be a run rate sort of in and around 150 per quarter. And as we look at the forward-looking credit indicators, that seems like a pretty solid view for the back half of the year.
And our guidance for the rest of the year, which would be around 250, sorry, 350 per quarter, would suggest that the CB and IV taken together are more or less in line with Q2. Now, CB was a little bit elevated relative to what we'd expect in a, in sort of...
a general run rate to be. And that was driven by what we mentioned was some softness in mid-caps in Germany. So between the two of them, we'd expect it to be more or less where it was perhaps a little bit better.
in Q3 and Q4 than it was in Q2. I think it's important to note that we're not seeing a broad-based deterioration in our book or based on the leading indicators, but we're obviously traveling at a level higher than where we've been in the recent past.
And again, that all feeds into our guidance of in around 30 basis points for the year.
There has been obviously some data from Germany around the economy that we've been in a relatively speaking a stagnant economy now for three quarters.
If I step back to where we were last year, that isn't bad given some of the challenges that Germany faced a year ago around the energy market situation.
What we would say is that I think it's sort of sectoral driven. There clearly are areas of the German economy that are recessionary. There are others that are doing a little bit better. And at least for now we see Germany muddling through. Our house view is about a half a percentage point of growth for the year.
And that would represent really the balance of parts of the economies that is growing, that are growing, and those that are shrinking.
We do see order books, you know, talking to clients, you know, weakening in some areas. But again, we see that offset in some instance by exports and investment driven growth. And in our other areas like the service sector, you know, recovery from still from COVID. So,
Short version of that is mixed picture. On capital generation, you've seen us step into, call it 25 basis points per quarter, a sort of ballpark. I don't want to give sort of forward looking view on earnings necessarily, but the earnings tends to translate right now into.
that kind of ballpark or a little bit better. And we think that is teeing us up well for the capital build around some of the items we've called out and also the capital distribution strategy that we've laid out very clearly for investors.
And we think that is teeing us up well for the capital build around some of the items we've called out and also the capital distribution strategy that we've laid out, I think, very clearly for investors. Richard, anything to add?
They call it 70 base points of, I guess, headwinds, if you like, from models, share repurchases, the numerous acquisition between now and the end of the year. That's sort of an end. You throw in the... Tell me years later A
the earnings generation and the business growth. It's kind of trade-offs that we'll have to think about kind of from a CET1 ratio perspective. We're still pretty comfortable with it being at least above 200 base points to our NDA by the end of the year.
That's great. Thanks for the detail. Appreciate it and appreciate the call. Pleasure. The next question is from the line of Daniel David from Autonomous. Please go ahead.
Good afternoon, congrats on the results and thanks for taking my questions. I'm just interested if you can provide a guide for the impact of the ECB's decision on minimum reserves yesterday. Any detail would be great. And the second one is just a bit more broadly, just with regard to what's happening in the US.
So if I guess I think that US banks generally seem to be well capitalized and if the Fed's saying that you now need 20% more capital under Basel 4, I realize it doesn't have any impact on yourselves. But do you worry that investors and maybe counterparties think that European banks now need to hold a bit more capital? And I realize you talked about 70 basis points increase in requirements.
with what they came out with. I guess we don't necessarily see it particularly helpful to change a bank's risk profile in this unexpected kind of way. I think in terms of just back of envelope calculations, in terms of our minimum reserve requirement holdings...
And then in terms of kind of implications, it's probably a bit too early to sort of take form of view on that, but we'd note that other central banks, it has to take a different approach regarding renumeration of deposits and how they think about the effect on the monetary transmission mechanism. On the U.S. capital situation, you know, look, the NPR came out yesterday...
solution for the industry and is reflective of some of the characteristics of the European economy and European banking system.
that the United States will go down a different path and perhaps, I mean on some levels, a more stringent application of the Basel III final framework is obviously a decision the United States can make and reflects the current environment in the U.S.
I don't know that the comparison of capital between the two systems is as easy to do as it appears on the surface. So I wouldn't just conclude that if the USGSIBs have to go up by whatever it was, 16% in the QIS that...
capital regime in Europe that in my judgment are more stringent than the United States. And that's particularly true, I think, on deductions from the numerator and in some cases interpretation of RWA.
So I would not just take the view that the, you know, if you like one upmanship on the two sides of the Atlantic is the appropriate response. I think, first of all, each side needs to do what makes sense for their marketplace. And before you get to conclusions like that, you really have to do an apples-to-apples comparison between capitalization of banks on both sides.
Thanks, I appreciate the thoughts.
Thanks, I appreciate the thoughts. Thanks, Daniel.
The next question is from the line of Stéphane Suchet from Point72. Please go ahead. Thank you very much for the call and for taking my questions. Two questions if I may. Coming back to your point about CRE and German MECAPs softening, would it be possible to have some data points around stage 2 or cost of freeze for German MECAPs?
Siwing mentioned that German MECAP were in much better shape from a liquidity standpoint. Could you give us some other pointers to basically to understand better why it's just a softening and not an outright deterioration? Thank you very much. Yeah, hard to go too far, Stefan, beyond the disclosure.
I would say that there was a handful of events in the quarter, particularly in the corporate bank that showed us it was more than we would normally see, sort of five, six events. And we're still supporters of existing information Kelly and Michael.
There wasn't necessarily a pattern to those events, although we call out automotive as an area where we are seeing some more weakness. And again, that's why we wouldn't, we don't see it as pervasive. The stage two is just...
is really reflective of ratings changes. So as you see, you know, more.
strains in the economy, strains in a supply chain like an automotive, you see that affecting certain players and then reflected in our ratings doesn't necessarily mean that there's a wave of defaults coming. So that's why we've used the word softening rather than...
than a more dramatic language. Hope that helps give you a little bit of color about how we're thinking of it.
you know, more dramatic language. Hope that helps give you a little bit of color about how we're thinking of it. Absolutely, thank you very much. Thank you, Stefan.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star and 1 on your telephone. The next question is from the line of Andrew Lim from SOGJIN. Please go ahead.
Hi, thanks for taking my questions and apologies for gatecrashing the fixed income call. So the first question, I think James you said that you'd be able to disclose the estimated impact on NII from the ECB's decision yesterday not to pay interest on bank reserves.
So I don't know if you can outline that. And then secondly, I think earlier today when we talked about capital, you talked about the Basel III impact to come for Deutsche Bank and then separately the output floor impact. And then you talked about a potential 15 to 20 billion benefit. I didn't quite catch the detail of that.
The number that Richard cited, a little over 200 million on a per annum basis based on our current reserve level, you know, is sort of call it 5.5.
by, you know, multiplied by the 3.75, 5.85 billion euros at 3 and 3 quarters would get you there, which means in the back end of the year, we would think, you know, it's sort of call it 60 million for the last four months of the year. As Richard mentioned, you know, we're disappointed by that result on a number of levels.
And it also I would say we don't see a monetary policy benefit or an obvious you know argument from a monetary policy perspective, so you know we're disappointed in somewhat surprised by the by the decision. On Basel III,
We've got sort of moving parts, but our most recent guidance, I think, was $25 to $30 billion of increment on the 1st of January , 25.
That probably still holds. It moves around actually only because, you know, with, or not only, but the principal movement in our forecasts has to do with op risk, which is largely driven by revenues.
still hold, it moves around actually only because, you know, with, or not only, but the principal movement in our forecast has to do with op risk, which is largely driven by revenues, but assume the high end of that range.
As we mentioned in April , we've been working to offset, actually sort of, I guess related, but also to support our capital light shift in the business model. Identify offsets of 15 to 20 billion over the same period of time, really to the end of 25.
And that's a variety of different measures. Some of it's just optimization in the detail of our calculations. Some of it is balance sheet movements in the client business, notably less mortgage originations than in the past. And some
reductions in trade finance lending that is sub-hurdled, so sort of more disciplined balance sheet extension.
And then also building on the securitization programs that we have going further into securitizing risk from the balance sheet. So number of initiatives of that nature that add up to that 15 to 20 billion. And then.
And Tussle, thank you very much. Oh, and sorry, I don't see for the output floor. As we've talked about on Wednesday, and we sort of went back and looked to make sure that our guidance was the same, we would think about 30 billion of a day one impact in understands.
of the output floor in 29 when it becomes biting the 72 and a half. And we'd initially guided around 10% of the then RWA. When we put out that guidance, our RWA was about 320. So that all sort of aligns with, that hasn't changed meaningfully.
Although, you know, that's a number that is really pre-mitigation, and we've been focused on the implementation of this first
Thank you very much for joining and have a pleasant day. Goodbye.