Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Good morning, and welcome to the May 26, 2020, presentation by Deutsche Bank. Presenting this morning is Mr. Christian Sewing, Chief Executive Officer, Deutsche Bank. Mr. Sewing, please begin.

Thank you very much, Rob, and good morning or good afternoon to everybody. And first and foremost, I hope you and your families are all safe and well. It is my big pleasure to welcome you to our 10th annual Global Financial Services conference. And of course, and very obviously, the format of this year's event is different. But even as a virtual conference, it is still a truly global event. Attendance this year is roughly 30% higher than in 2019. We are very pleased to welcome 650 attendees from 29 countries, and that includes 128 companies with a combined market value of more than $2 trillion. And these companies will interact with investors who manage actually over $7.5 trillion of assets. We clearly see, in these times, people want to interact on a global basis, and hence, conferences like ours are still on high demand. We are delighted to have you all attending, and it is my big pleasure to open this conference and provide you with an update on Deutsche Bank's transformation, in particular, against the impact of COVID-19. In this regard, and first of all, how do I personally assess the COVID situation? The impact on global economies is unprecedented. And despite the ongoing market recovery we are seeing and which we have seen over the last 7 to 8 weeks, we still have to expect a continued phase of high volatility as the real economic consequences are still uncertain. Yes, markets repriced, but in my personal view, the underlying assumption for this recovery are a bit too optimistic. The second- and third-order effects have not been fully priced in at this stage. The intervention of central banks and regulators has stabilized the market. They reacted swift and absolutely to the point. But we, at Deutsche Bank, certainly do not underestimate the severity of the challenge facing the global economy or also the banking industry. And hence, it is of utmost importance to run a business with a stable foundation and a market-leading position. And this was exactly what we aspire to achieve with our transformation in July last year. This strategy aligns us well with the current environment. Reaching our targets depends on delivering against our key objective, and in this regard, we have outperformed our internal expectations in the first 3 out of 6 transformation quarters. The progress we have made is also allowing the underlying strengths of our businesses to show through. We are actually regaining market share in our core businesses and starting to grow profits in the core bank as we have seen in the first quarter. And yes, having Germany as our home market is also a source of advantage. The swift and decisive actions that the German government has recently taken, together with the already strong fiscal position in the public and private sectors, mean that our home economy is well positioned to address the crisis. And hence, the combination of a strong home market and our conservative balance sheet positions us well to support clients through these difficult times. Let me briefly discuss these themes, starting with our strategic positioning on Slide 2 of the presentation. In July last year, we laid out our vision for the transformation of Deutsche Bank, repositioning this bank around what it has stood for the better part of our 150-year history: a leading German bank with strong European roots and a global network serving, in particular, our corporate and institutional client base. Our transformation is built around 5 key decisions. First, to exit business activities in areas where we were simply not among the leaders. And this included the tough decision to exit from institutional equities trading while we continue to invest in our research and equity capital markets capabilities. Second, to create 4 core businesses with market-leading positions that are aligned to the needs of our clients, and together, these comprise our core bank. Third, to set ourselves even more ambitious cost goals, including a target of reducing costs by 25% from 2018 to 2022. Fourth, to continue to invest in technology and controls despite the reductions in our overall cost base. In my view, technology and digitization is the new currency. It is the basis for future revenue generation and cost reductions. And finally, to set up a dedicated capital release unit to wind down assets not included in our core bank and use the capital we free up from this process to fund our transformation with our own resources and bring us back in a position for distributions to shareholders. In executing on all 5 of these decisions, we are running in line with, or in many cases, actually ahead of our internal expectations. And let me turn first to the core bank. The combination of this solid strategy and the ongoing delivery against our targets is increasingly visible in our financial performance as you can see on Slide 3. Group revenues were flat year-on-year, but actually with a 7% growth in the core bank fully offsetting the exit from equities trading in the Capital Release Unit, and that only 3 quarters into the transformation. Revenue growth in the core bank was, in particular, driven by improved client engagement. In this regard, we were able to increase earnings with our 50 top trade finance clients worldwide by 30% while our 100 largest institutional clients registered an increase of more than 40%. And these are just 2 small examples that our client franchise is fully intact. Revenues, combined with our relentless focus on costs, drove then the growth in profits in the core bank in the first quarter. Core bank adjusted pretax profit increased by 32% year-on-year as lower costs and higher core bank revenues more than offset the higher provision for credit losses and the drag from the Capital Release Unit. The core bank even generated preprovision net revenue of EUR 1.8 billion before bank levies in the first quarter. And next to a good revenue performance, we achieved this as we delivered against our cost targets again in the first quarter, as you can see on the next slide. Ladies and gentlemen, we are determined to not let the current environment disrupt the execution of our cost reduction plans. Excluding transformation charges and bank levies, adjusted costs declined by 7% year-on-year to EUR 4.9 billion, our ninth quarter in a row of reductions. At the end of the first quarter, we have now put 73% of our transformation-related effects behind us. In this regard, we currently have more than 70 Core Transformation Initiatives across 20 major themes in flight overseen and managed by Fabrizio Campelli, the Chief Transformation Officer. Progress is managed and monitored tightly. We have not missed 1 cost goal in the last 2 years. The progress we have made in the first quarter and the projects underway put us on a good path to achieve or even outperform our EUR 19.5 billion target for 2020 and then to EUR 17 billion by 2022. And we have to continue. And in this regard, we decided to lift the restructuring suspension to progress on our cost efforts. And yes, I'm aware that this is an uncertainty, in particular, for a lot of our employees. Overall, we reduced 18,000 FTE and we are aware that in times like these it is even more painful. And while we have to resume the restructuring talks, we do not stop strategic IT investments due to COVID-19. These are essential to hit our long-term cost goals. For example, we just completed the highly complex merger of DB's entire retail operations in Germany with DBAG Group, a huge IT project, but delivering cost reductions over the next 2 years. Also to show responsible and entrepreneurial leadership, the Management Board and Global Management Committee have decided to forgo 1 month of fixed base salary. This demonstrates also the strong culture and ethics of our firm. Our refocused core bank operates now in 4 strong and profitable business, all of which offer significant opportunities to improve returns to shareholders over time, as you can see on Slide 5. In the current environment, focusing on our core strengths serves us well. We find that in time of stress, clients are turning to the strong leading players. Within the Corporate Bank, we enjoy an excellent market position, leveraging our global network in more than 145 countries. We help our corporate clients manage their daily banking needs. We are the market leader in clearing, the #1 clearer of euros and #1 non-U.S. clearer of dollars. We are also a large player in payments where we are the incumbent payments provider for many of Silicon Valley largest technology companies. And in Germany, all DAX 30 companies are our clients and we are the house bank to around 900,000 small- and medium-sized companies. And the current crisis appears to be helping our leadership position. Around 1/3 of the recent line inquiries into our corona help desk have come from nonclients. Across the Investment Bank, 80% of our revenues come now from business where we have a top 5 market position, and this should reduce volatility in the top line. We are a global leader in fixed income and maintained our top 5 global FIC ranking during turbulent markets in the first quarter of 2020. We're a leader in the debt financing across leveraged finance, investment rate, asset-backed securities and commercial real estate. And we will continue to have one of the top FX business in the world ranked third globally and #1 in FX derivatives. And we will continue to be a trusted adviser to our corporate and financial sponsor clients in origination and advisory. Since the beginning of March, our Investment Bank has raised nearly EUR 340 billion in debt capital by processing 200 transactions. In the Private Bank, we are the market leader in Germany with 19 million clients across Deutsche Bank and Postbank brands. We are also the leading digital bank with 11 million clients on our digital retail platform. And during the recent lockdown period, log-ins to our Deutsche Bank-branded German apps were running at peaks of more than 2 million per day. In Wealth Management, we are the market leader in Germany with approximately EUR 200 billion of assets under management. And finally, with more than EUR 700 billion of assets under management, DWS is the market leader in Germany and one of the leading asset management franchises in Europe. And each of our business is delivering against the strategic objectives we laid out at our Investor Deep Dive in December 2019. The summary of those objectives is shown on Slide 6. In the Corporate Bank, we are fully focused on growing volumes to offset the pressure from the interest rate environment. In addition, we have since the end of 2019, started to pass-through negative interest rates to clients and this puts us on a good track to pass-through negative interest rates to EUR 25 billion of deposits in 2020 as part of our overall 2022 targets. In the Investment Bank, our focus is on stabilizing and growing revenues while continuing to reduce costs without sacrificing our front office capabilities. Investment Bank revenues increased by 18% in the first quarter with further stabilization and improvement in market share in our target segments, and this includes a 30% year-on-year revenue growth from corporate customers which we identified as a focus area in our strategy. And we recorded the highest market share in our European and German debt capital market franchises since 2017. In the Investment Bank, the positive momentum has continued in April and May, particular in our fixed income and currency business. We reduced adjusted costs in the Investment Bank by 15% as we now benefit from head count reductions in prior periods and lower infrastructure costs. In the Private Bank, we are focused on offsetting the negative interest rate with growth in volumes and fee income while improving efficiency. Private Bank revenues excluding specific items increased by 3% year-on-year in the first quarter with a strong performance in Wealth Management where strategic hiring in prior periods has started to pay off. The adjusted costs excluding transformation charges in the Private Bank declined by 2% as we generated EUR 70 million of synergy benefits from the merger of our German operations, and progress in this first quarter puts us on track to achieve the EUR 200 million of merger-related cost synergy benefits in Germany that we expect this year. In Asset Management, one of DWS' main priorities is growing assets in its focus areas while improving the cost/income ratio and attracted EUR 25 billion of net inflows last year. And despite the market conditions at the end of the quarter, we saw inflows through the strategic partnerships and into ESG funds. Reflecting our ongoing cost initiatives, the Asset Management cost/income ratio declined by 4 percentage points year-on-year. Slide 7 shows how diversified we are from a regional perspective, which, in my view, is especially important and stabilizing in times of crisis. While we make the majority of our revenues obviously in the EMEA region, our global geographical presence is a vital part of our client offering. Of our top 100 European institutional clients, 98 do business with us in the U.S. and 94 transact with us in Asia. In the U.S., we have refocused on the areas where we have a competitive advantage domestically or where we can support our global clients. And here we are, a market leader in credit trading and FX in the investment bank with focused corporate banking, wealth management and asset management product set. We are very focused on growing our operations in Asia, most notably in the Corporate Bank as we continue to benefit from the long-term growth in trade flows. This focus is increasingly important in a world of dislocated supply chains where clients actually value our global approach combined with our local knowledge. We generate approximately 1/4 of our revenues from the broader EMEA region ex Germany with a broad and deep product range especially in Investment and Corporate Banking. And Germany is our home market where we generate 40% of our revenues which we show in more detail on the following slide. In the Corporate Bank, we are the house bank to nearly 900,000 small- and medium-sized companies in Germany. And here, too, we are well positioned to help clients through this crisis. We have worked closely with the German government to design support programs and then played a leading role in rolling them out. To date, we have processed around 6,500 applications under the German government's KfW program with a volume of around EUR 5 billion. And as I said before, 1/3 of the requests related to the corona crisis come from companies that were not previously our clients. And in my experience, clients don't forget the banks who stand by them, in particular, in the tough times. In the Investment Bank, we have, for the first time since 2017, regained our position as the market leader in German Corporate Finance. This proves that our clients view us as a trusted adviser, in particular, in challenging times. In the Private Bank and DWS, we are helping our clients navigate through turbulent conditions. Even during lockdown, we kept around 1,100 DB and Postbank branches open for our clients in Germany. We also believe that Germany is relatively well positioned to deal with the current crisis. Why? Thanks to the strong and decisive actions of the government, the German support programs of around EUR 730 billion amounting to around 22% of total GDP are the highest of any major country. Working in particular with us, there are now a series of well-designed programs, which provide support quickly to the broader economy. And given the strong fiscal position, the German government is well positioned to take additional action if needed or if required. The German consumer and corporate sectors are relatively well positioned to deal with the crisis. Consumer debt levels are amongst the lowest in the Eurozone and the overall developed world. German small and large corporate customers are also operating with the lowest levels of leverage and highest levels of liquidity in the last 30 years. We feel fortunate to have Germany as a home market in volatile times. And Slide 9 repeats a chart that we have shown consistently but -- which is more important than ever before. We have been managing our balance sheet conservatively and intend to keep doing so through this period of turbulence. With a 12.8% core Tier 1 ratio at quarter end, we are at the higher end of peer ratios and sit comfortably above our regulatory requirements. The sound capital position gives us scope to continue to deploy resources to support clients in these conditions. We kept our liquidity position strong at EUR 205 billion, again comfortably above regulatory requirements. And our funding position has rarely been stronger than today. We continue to fund our balance sheet through stable sources, predominantly our low-cost deposit base. Our results also show that we continue to operate with low-risk levels. We continue to manage our market risk exposure tightly. Our average value at risk of EUR 24 million remains low versus our global peers. And we are focused on maintaining strong credit quality given our conservative loan book, which we discussed on Slide 10. As you will be aware, Deutsche Bank has always been an excellent credit risk manager, reflecting the low-risk nature of our assets, especially in our home country. And it's also a testament to our strong underwriting standards. As I noted earlier, German corporate and consumer debt is among the lowest of all leading nations. Our loan books are well diversified across our businesses, client segments and also regions. Around half of our total loan portfolio is in the Private Bank, mainly German mortgages with conservative loan-to-value ratios and low delinquency ratios. In Wealth Management, almost all our loans are secured typically by high-quality liquid stocks and bonds with conservative loan-to-values. And in the Corporate and Investment Bank, 90% of our commitments are to clients' rated investment grade. Exposure to more affected COVID industries and sectors such as retail, tourism or travel, oil and gas are roughly 10% of DB's loan book and they are geared to strong global names or well-collateralized transactions. And also in commercial real estate, our portfolio is diversified across a broad range of high quality properties typically in gateway cities. So from a risk perspective, we feel well positioned to navigate the current environment. Provisions for credit losses did increase in the first quarter to 44 basis points of loans, as you can see on Slide 11. And roughly half of this increase related to COVID-19 impact principally, and that's important, against performing loans. Looking forward, we do expect provisions to be higher, most notably in the second quarter given the macroeconomic outlook partly offset by the benefits of the German support programs. That said, we expect our provisions to remain at the low end of our peer group in part because our exposure to unsecured consumer finance, including credit card debt, is significantly lower than most of our international peers. As we noted with our first quarter results, provisions for credit losses are forecasted to be in a range between 35 and 45 basis points of loans in 2020. Our portfolios have clearly proven to be more resilient than many of our peers through both observed periods of stress like the last financial crisis and in regulatory stresses in both the U.S. and Europe. We also believe that we are currently well reserved relative to the low-risk nature of our loan portfolios. Our EUR 4.3 billion of allowances for loan losses equates to 95 basis points of loans. And this is a similar level of provisioning relative to our peers when adjusted for our limited exposure to credit cards and other forms of unsecured consumer lending. And beyond credit risk, we are continuing to invest in improving our broader control environment. We have almost tripled the budget and head count allocated to nonfinancial risk functions since 2013 to strengthen our risk frameworks and enhance controls. Our cumulative cash investment in technology across risk, antifinancial crime and compliance in the last 3 years have amounted to around EUR 900 million, just a small examples that these investments allow us to screen all our 28 million clients daily for sanction issues, and we can now complete 15 billion daily trade revaluations. We believe that our investments have also been recognized by the positive outcomes in recent regulatory stress tests such as CCAR and the ECB liquidity stress test. Despite our overall group cost reduction targets, we remain committed to maintaining IT investments in our control functions. So while we know this is an ongoing commitment, we believe that we are making steady and consistent progress. While the current environment makes the near-term outlook more challenging, we continue to work towards our 2022 targets, principally our goal of an 8% return on tangible equity. And this improvement in turn will be driven by 3 factors. First, we are working to stabilize and grow our revenues in our core businesses. As I outlined earlier, we are very happy with the momentum that is building. Second, we are confident in our ability to reach or outperform our cost reduction targets. And finally, we will do this without compromising the strength of our balance sheet, and our solid capital, liquidity reserves and well-diversified high-quality loan portfolio all give us confidence that we can achieve that. We believe that our strategy and execution sets us up well for the industry trends that we see emerging. We can actually emerge relatively stronger in the post-COVID-19 era. First, the bank's size and market position will now become even more important as a competitive differentiator. And this means that in future it will become even more important for us to focus and build on our strengths. Wherever we do business, we have to occupy one of the top spots. We are one of the world's leading banks among the leading banks for corporates in Europe and the leading bank for private clients in Germany, and right now, that is an advantage. Second, we expect cost pressures will intensify. In this phase of upheaval, we have to make our bank even more strong proof as the second and third round effects of this pandemic become clearer. And this current situation may create lasting opportunities to save costs based on our experience during lockdown, be that with lower real estate costs or travel expenses. And third, if the world becomes more digital, technology will be a key factor in making us more efficient, but also providing a better service to our clients and drive revenues. The operational resilience we showed during lockdown and increased client traffic through our online channels in recent weeks are a solid basis for that. We remain committed to spending a total of EUR 13 billion on IT from 2019 to 2022. And finally, as I very much look forward to discussing with Larry Fink in our session tomorrow, we see sustainability and ESG as another megatrend. Sustainability may be overshadowed by the COVID-19 crisis currently, but I have no doubt it will come back into focus with even more intensity. And that is why we continue to work in this area, and we are proud of the progress we have made here. Last week, we announced a target of EUR 200 billion in business volume that is sustainable financing and investment products by 2025. And we will continue resolutely towards this objective. It is in times like these that our bank can prove its resilience, its experience and its value to society and all our stakeholders. Thank you very much for your attendance, and I look very much forward to talking to many of you in the upcoming sessions. With that, I wish you a great conference, and I hand back to Rob, our operator.

Thank you. And that concludes today's presentation. You may disconnect.