Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

All right. Good morning, everybody, and thank you very much for joining us. I'm very pleased to welcome James von Moltke, Deutsche Bank's CFO. James, thank you very much for making the time to be with us today. I'd like to focus on the strategic challenges that face the sector. And clearly, there's a lot going on underway in terms of what Deutsche Bank is doing. But I wondered if I could perhaps start with an update on the current environment across your key markets in consumer and corporate.

Sure. Rohith. Thank you, by the way, for hosting me this morning. I'm delighted to be with you in this virtual format. Look, we are, in a way, fortunate. The spread of our business, and I'll just talk about it from the perspective of the loan book, is 50% in Germany, more or less, about 10% in Asia and 20% in the U.S. And so relatively speaking, the mix of our business is towards some of the economies that are doing, on a relative basis, reasonably well in this sort of COVID recovery period. Now of course, a lot depends on the shape of the recovery from here. We've, of course, gone through the, if you like, the sharp V that we all expected into -- Q2 into Q3. And now the interesting question is the slope of the recovery from here. I think we all now expect that we won't recover the level of GDP that we left at the beginning of 2020, perhaps until at the end of '21 or into '22, and naturally, that has an impact on our business. If I break it down by businesses, though, I have to say we are seeing encouraging signs. If I start with the private bank, for example, whether it's in the investment product area or in mortgages, we've now recovered to a level above where we were last year in terms of production at this time. And so we're encouraged by that recovery. Consumer lending has been a little bit slower to come back, but we are seeing a recovery in there as well relative to Q2. In the Corporate Bank, and that's the second of the businesses that we have that is particularly impacted by interest rates, we're also seeing some encouraging signs, whether it's commercial lending in Germany, the level of transactions or transaction volume that we're seeing in our payments business that is up in the high single digits year-on-year. Those are encouraging signs of momentum. And then, of course, as you've seen, we've had -- the industry has had, I think, a strong year across a range of investment banking product areas, which we've, of course, participated in as well. You've seen very strong first half performance in our investment bank, and it's been very encouraging to us. And equally, the asset management business regained sort of inflows in the second quarter at about EUR 9 billion. And a total of EUR 45 billion increase in assets under management in the second quarter. All of those things are encouraging signs in the business, notwithstanding the very unusual environment we've been in. I don't, of course, diminish the challenges. As you said at the outset, interest rates represent a significant challenge for our industry. But what we're doing is very -- in a very focused way, working to offset and overcome that particular challenge.

And I guess M&A is coming to a sharp focus in the sector over the recent days and weeks. Just -- do the regulators' comments about the potential use for that will change your views on that at all? And then, I guess, on a couple of specifics, how are you thinking about Commerzbank in this environment? And perhaps, prospects for your non-German European businesses?

Well, listen, I'll -- as always, avoid being specific about M&A commentary. We've been, I think, pretty consistent in our public statements on this, which is, one, we do expect consolidation to pick up in Europe. The European banking market is more fragmented. That's particularly true in Germany. And we think that the industrial logic of bank mergers, the need to achieve greater scale, at least among the larger banks, is appropriate or valid industrial logic. Of course, for Deutsche Bank, we've been very focused on executing on our own strategy, and we think that strategy would prepare us to engage in merger activity when the time comes and the right opportunities arise. So we're expecting this wave, but we're also working hard to prepare on our side. Again, I don't want to go into specifics, but I guess 2 things to say. One is domestic M&A in Germany. As you saw with our decision last year, frankly, present some challenges because of the specific structure of the German market. And so as I say, we took the view last year that executing on our own strategy was the most value-enhancing strategy for our shareholders. And we think that the last 12 months or 18 months have proven that to be true. And then there are going to be, from time to time, more opportunistic situations that we pursue. We're very focused, again, on executing the strategies in our core businesses. But within those businesses, there may be again, more opportunistic ways to grow or accelerate the execution of those strategies. And so from time to time, we'll likely have a look at smaller opportunities.

So I mean, you mentioned your strategy, and there's clearly a lot of work underway there. Just wondering in terms of sort of execution, particularly coming through this year, how has COVID impacted your ability to execute that transformation in this environment? And achieve your longer-term goals? And I think you are still reiterating your headcount targets for the year-end despite the slowdown that there was in execution of that in the first half of the year.

Sure. Rohith, we've been very focused on, if you like, not allowing the COVID environment to set us back in terms of our restructuring, the transformation of the company. And so very deliberately, we've maintained the focus. We've been executing with real discipline across the company on the transformation actions, the milestones that we'd set out for ourselves. My colleague, Fabrizio Campelli, who runs our transformation office, talked about it much earlier this year, how we sort of divided -- we articulated our overall transformation strategy into as many as 60 or 70 sets of deliverables, and we're tracking very focused -- in a very focused way on executing those things. One piece of evidence for that is, of course, our cost trajectory, where last year, in 2019, we took out EUR 1.2 billion of costs and achieved our targets for that year. This year, we had a target of removing another EUR 2 billion of expenses from our cost base against the target of EUR 19.5 billion, and we're well on track to doing that. In an odd way, the COVID environment has, if anything, sharpened the execution focus. And I think we demonstrated that in Q2 with a series of announcements and actions that we've taken as a management team. So we're very proud on the basis or our ability to keep that process on track. You mentioned the headcount part of the puzzle. We don't have a specific target for the end of this year. When we announced our restructuring back in July of last year, we set out a target of 74,000 full-time equivalents for the end of 2022. That, of course, implies a glide path. And I'd be lying if I didn't say that the last couple of quarters have probably set us back a little bit against that glide path. That means though that we've got to work harder to regain the glide path. And of course, as you'd expect, that's been an area of focus for us over the last several weeks and months. The hiatus in voluntary separations that we announced that we would do early in the COVID environment really was only for 6 weeks. We think it was appropriate. I think today, the larger challenge, frankly, is lower levels of attrition in the business and across the company. As you'd expect, the COVID environment has caused people to be a little bit less mobile. And we're seeing that in our attrition statistics. And that, of course, means that we need to work a little harder. It may be, frankly, a little bit more expensive in terms of restructuring and severance charges for us to get to our goals in '22. But as I say, we remain just as focused on execution as we were prior to the COVID pandemic.

So continuing, I guess, on the cost theme. You've talked in the past about looking for ways and to accelerate the cost reduction. I wonder if you could just expand a little bit on that in terms of what sort of areas you're looking at and how significant that could be.

Well, I'll start with the sort of more obvious ones that I think everybody is seeing, which is less travel, entertainment that we're obviously seeing in our numbers this year. And as we look forward to 2021, of course, we'd like to continue to carry some of that benefit forward based on changes in behavior and the amount which our people travel, the amount of usage of telecommunications, both for internal and for client-facing interactions. I think the second area of real focus for us would be occupancy, so our real estate footprint. When we announced our strategy a year and a little bit ago, there was a relative rent reduction, but we said that over the period to 2022, a sort of a double lease period associated with 2 major properties that we'll go into in the next couple of years, one in New York and one in London. As we look more carefully at our real estate portfolio, and frankly, sort of revise some of our assumptions and become more aggressive about how we want to use the space given what we're learning now about the way the workforce will choose to engage and choose to work every day, we think there's some opportunity to actually bring occupancy down as well. And it goes beyond those lines, but those are areas of real focus at the moment.

And I guess another significant part of the transformation program is the capital release Unit. I guess progress there perhaps in the first half of the year was a bit slower than might have been expected, so just wondering what your expectations are for the full year. Do you think you'll be able to execute the plans as intended by the end of the year. So is that on track? And what that means in terms of sort of RWA reduction, leverage capital and any impact on earnings?

Sure. Look, we remain very focused on delivering our RWA target of of EUR 38 billion in the Capital Release Unit. As you say, the first half was a little bit slower against that glide path, but underlying progress was actually quite encouraging. And when I say underlying, it meant that the derisking actions that we executed, so positions that we exited during the first half, represented about EUR 5 billion of RWA relief. And that was offset, though, by some increases and about EUR 2 billion in, if you like, market risk RWA principally and some small amount of credit risk RWA that came with the change in the environment. So the net number that you saw was a little bit lower than what we actioned during the first half. Now I think that's temporary. And so we will catch that up at some point in time as markets normalize. But we remain focused on, again, that year-end target, which means we need to work a little bit harder. We are progressing in that deleveraging exercise, derisking in the CRU, I think, in a very encouraging way. We have ongoing auctions across the various books that we have in CRU. Typically, in small size that you don't really see in the marketplace, but with very engaged counterparties, who've grown used to the sort of supply that we put out there. And we've been, actually on the whole, very pleased with the results of that. So short version is, we remain on track. You see a little less of it because of these dynamics, but we're very focused on that capital release. I will say one other thing, Rohith, just going back to the Q2 results. We did say at that time that we were behind our leverage exposure glide path in the CRU, which we think will recapture next year, including with the transfer of the Prime Finance business to BNP Paribas. But I would add that we've taken that down by about 60% since we announced the restructuring are almost EUR 170 billion in leverage exposure. So we've made really good progress, and we've indicated that we expect to take about 10 to 15 additional off the balance sheet and leverage exposure over the next couple of quarters. So we think, again, continued very solid progress in Capital Release Unit.

And another key area of the transformation was investing in the control environment. Can you talk about how that's progressing and what the current areas are you focused on?

Well, I think really well. I mean, we've -- I think the external sort of visibility that you might have is the resources that we've put to work there. So in the past several years, we've essentially tripled the resource, whether that's expressed in euro terms or in full-time equivalent terms. And in the case of anti-money laundering or AFC, anti-financial crime, actually quadrupled the resources. So we think we're investing, and we're doing so visibly. Now of course, we need to see the benefits of that in terms of an improved control environment. And we do sort of every day see the improvements in our surveillance capabilities and our reporting capabilities also across policy and technology. So we are executing on a multiyear plan and are pleased with the progress that we're seeing. Now of course, some of that is hard to see tangibly on the outside. But I think the measures you see, if you like, in terms of regulatory events, that speak a little bit to the control environment, by and large, they've been in the right direction in the past year or 2 with the SREP decision late last year on the part of the ECB, I think express confidence in the direction the company was taking and also the CCAR pass in June, obviously, was a result we were working hard to achieve with the Federal Reserve. It's impossible to align those up necessarily one by one, but I think evidence of forward movement as we address improvements in the control environment.

Okay. And if we could then move on to revenues, again, a key area of focus. Obviously, investment banking was strong across the industry in the first half of the year. How much do you think that was a pull forward of future revenues? Or are you anticipating ongoing structural change in the industry?

Well, listen, we did, as I said right at the outset, we saw real momentum in our businesses in the investment bank. And that's, in part, of course, are participating in a more favorable environment in the first half of this year. It's, I think, in part, delivered by the improved focus that we have since announcing our restructuring. So our businesses in investment bank are much more focused in terms of the clients, the client perimeter, who we do business with and also the product capabilities. So we think that the restructuring last year actually positioned us better to participate in the improved environment. Now if I look forward a little bit, the third quarter has seen some of the momentum carry through from the first half, which is encouraging. Even as the market sort of as you've seen in terms of volatility and perhaps bid-ask spreads has begun to normalize. That said, as you saw, with some of the guidance that our competitors gave last week, the investment banking revenue environment has continued strong. I think if I put us on a relative basis to that guidance, kind of if you take the average, I think we'd be probably at this point, at least in line with or ahead of what our peers have guided so far. And so that's encouraging. Again, for us, part of it's our own rates. And the franchise improvement that we've seen, which we're obviously hopeful will carry forward into future periods even as the market environment normalizes. As to your question, Rohith, about pull forward, always hard to tell. Of course, some of the financing activity won't be repeated at the record levels that you've seen in recent months. But equally, the benefits of volatility in bid-ask spreads doesn't necessarily tell you that the future will be demonstrably worse. And actually, some of the corporate activity is a reflection of corporates adapting their strategies and their capital structures to the changed environment.

And more broadly across the business, the investor deep dive last December flagged your ambition to grow revenues. Clearly, interest rates are a challenge and have become more challenging so far this year. So can you talk about the progress that you've made so far in terms of offsetting some of those headwinds and being able to grow the revenues? And then also, how you might tackle the emerging increased headwinds in terms of interest rates?

Yes. I agree with you, Rohith. It's a critical part of the story and the path for us, no question. I think over the past year or so, I think we've put a lot of the concerns that investors originally had to rest. I think we made the strategy decisions that were the right ones for the company. We've executed against our cost path over time. We have demonstrated an ability to manage capital to or above the levels that we've laid out at the time. And we're continuing to manage credit, I think, carefully in a very difficult environment. So with all of those sort of investor factors, obviously, ones that we've been working hard on, revenues, of course, becomes a critical part of the path from here towards our goals for 2022, which was a return on tangible common equity of 8%. Now as you say, there's no question that the environment has been more difficult than we might have expected a year ago, July. And in particular, the interest rate environment has been a challenge. And so as you say, in Investor Day last year, the business is articulated for each of the businesses, strategies to begin really growing revenues to get on the front foot with clients and within our franchise. And it's been gratifying to see this year how the businesses have remained intensely focused on those strategies. So to throw out a few examples, we talked a lot about deposit repricing in the corporate bank and the private bank, we've been executing on that, and we intend to continue executing on that. Corporate Bank articulated strategies around Asia growth, fintech growth, the payments strategies. And we've made, I think, real progress executing on those strategies. In the private bank, of course, the investment product area is a key growth opportunity. But even so, it doesn't take that much revenue growth in the private bank to deliver on its returns objective because a bigger part of the story was perhaps expenses. Nevertheless, working very hard to execute on their strategies, as you've also seen. The investment banking question, as you say, is pull-forward in market environment in the next couple of years. But to my point about the franchise focus, we're very encouraged with the momentum. And then asset management is continuing to execute, and frankly, is performing in line with our expectations at this point for the year. So if I put all that together, I do see it as execution on track with or ahead of our expectations despite the fact that the environment has changed and clearly, interest rates have represented a challenge. We talked in the second quarter earnings about the last 12-month revenue level, and that was at EUR 23.7 billion of revenues in the 12 months to June 30, 2020, and in the core bank. Now we have negative revenues for the time being in the Capital Release Unit. But I think that, that EUR 23.7 billion number, we think, was an important number in terms of defining the gap between where we are today and our aspirations for 2022. And so we're continuing to work intensely on formulating the strategies to get there and on executing them.