Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Good morning, and welcome to the UBS European Conference 2021. My name is Daniele Brupbacher. I've been a banks analyst with UBS for almost 19 years. I would like to introduce you to our next speaker today, James von Moltke. James joined Deutsche Bank as CFO a bit more than 4 years ago, summer 2017. So James, welcome. Thank you for being here in person, which is great.

Daniele, delighted to be here. Thank you for hosting me today.

Thank you. So you presented at our European conference, I remember very well, 3 years ago in 2018. And I remember our fireside chat, the discussions we had. We had many more people in the room, but fewer online. Now it's the other way around. A lot of things have changed also for Deutsche Bank. And back then, we talked about market share losses. We talked about vicious debt equity circle, litigation, capital, noncore. This year, we talk about Deutsche regaining market share. We talk about the strong balance sheet. We talk about rating upgrades. We talk about real alpha in cost and revenue management and capital returns eventually. So my questions will be along these lines. And I wanted to really kick off briefly on the third quarter results. Just to hear you talk a little bit about the key messages, key achievements you've had so far this year.

Sure. Thank you, Daniele, and delighted to be with you, as I say. It's been a journey since 3 years ago when we last did a chat like this. And it's been one of executing on the strategic repositioning of the company that we announced in July '19. But -- so a little bit after that conversation, but one that's been sort of, I think, executed well over the last several years and, as you say, has put us in a very different position today than we were at the time. In terms of where the businesses are and the momentum, it's been quite gratifying to see that on a, if you like, a more stable platform with a level of client reengagement that I think is continuing to improve, our businesses are performing well. They're performing with driver growth, which I think is critical. So drivers here are net new loans, net new assets and just business volume growth that's present in the businesses. That's been helped, as you say, and there is a virtuous circle that we've been working to create over the years from ratings upgrades. We had the third of 3 in the last several months yesterday from S&P. That's certainly part of the story that's helping to lift the businesses and, I think, will in the future. And the other feature that we've had over the past several years that's been a headwind we've talked a lot about has been interest rates. And that interest rate environment is beginning to ameliorate, not just in the forward curves that have improved a little, but also, remember, we invest our deposits against the duration of the deposits. And so when we talk about interest rate headwinds, it's the reinvestment of our deposits at higher rates in the past that have run off now, those investments. We can now reinvest at slightly higher rates than in the recent past. And so it goes from being a burden on our revenues, if you like, on a year-on-year basis to being a help in the revenues. So we're seeing that development in all the businesses, and we're quite encouraged by the drivers.

Great. Well, we'll talk about some of these topics you mentioned a bit in more detail later. Let's start with the top line. Let's start with the revenue walk. Christian Sewing talked about at the Q3 results, it's really about the divisional 2022 revenue targets. I'd be interested to hear your thoughts around that, what the drivers are in that context for the businesses, again, a bit in more detail, particularly for Private Bank and the Corporate Bank? And also, you mentioned already the interest rates, how important is that in those 2 -- specifically in these 2 divisions that were useful?

Yes, happy to go through that. Look, we called for a revenue base next year. So next year is an important year for us around achievement of targets that we laid out back in 2019, which were an 8% RoTE and a 70% efficiency ratio. The revenues that feed into those targets, we called for, last December at a Capital Markets Day of 24.4 billion. And what Christian was walking to was management's confidence at this point that revenues next year will be at or higher than -- likely higher than 25 billion. And so what is it that's going on that drives that revenue growth? Well, if I start with Asset Management, which was maybe the easiest of the 4 businesses to explain, the higher level of assets under management is driving a higher current run rate of revenues in the business from management fees than we thought was possible a year ago. And so that run rate is EUR 200 million or EUR 300 million per year ahead of our planning in December of last year. The Investment Bank, of course, has outperformed in very strong markets over the past 18 months. And while we're encouraged by that performance, we think there's an underlying market share improvement and resilience that the Investment Bank is showing. Of course, there's some degree of normalization against the very high levels of revenues that we've achieved in the past 12 months, if you like. Again, we'd like to -- we think that's got some underlying strength to it, but there'll be a reduction next year relative to the current run rate. And then as you point out, the Corporate Bank and the Private Bank are the areas where investors are waiting to see sustainable revenue growth, sustainable profit growth come through. And the reason that's been a long time coming and not that visible on the top line is the very point I made a moment ago about interest rates. If you look at 2021 and compare it to 2022, just to keep revenues flat, we've had to increase the underlying revenue performance by 700 million. So that interest rate headwind we talk about is about 700 million year-on-year this year. Next year, we anticipated that it would fall by about half based on interest rate curves that we cut, say, a year ago. Now that half has diminished to as little as 1/4 or less. So maybe 150 million of interest rate headwind next year compared to 700 million this year. So that means that the underlying growth in those 2 businesses that we see there based on the drivers, based on loans, based on assets under management, based on higher transaction volumes in the businesses, that growth can now show through and will start to show through as it did in the third quarter, but increasingly in the quarters to come. And so that's a big driver, as I say, of the -- of what will be the top line, the visible top line performance now reflecting the underlying performance that we've seen for the past couple of years.

That sounds very positive. If we now try to make the link to the cost line in that sense. I think it was with Q2 results you shifted a bit away from an absolute cost target more into a cost/income ratio ambition. If you could briefly talk about that move and also what drove that. I think you mentioned volume effects and some of the one-offs, if you could just detail that a little bit.

Sure, happy to. Look, we thought long and hard about it. For the past several years, so '18, '19 and '20, we managed to and achieved absolute cost targets. And actually, we laid out a planned number even for '21 in absolute terms. But as our transformation has progressed, the concern is you're starting to make poor decisions for the businesses if you're managing to an absolute cost targets. Because a lot of the investments that you make should be based on the marginal -- or the marginal benefit to the cost/income ratio, to the operating leverage, which those investments can produce. And so we thought it had come time to change that targeting language. Now at the time we made that switch, it was not really a change in the underlying cost base that we'd be talking about. So 25 billion of cost at a 70% ratio would imply all in about 17.5 billion of costs next year. That was consistent with what we'd already begun to signal earlier this year, reflecting some costs that you're referring to that we've characterized as uncontrollable. And they are uncontrollable. The specific items that we saw coming in, that we indicated we would not offset with investment reductions or other offsets, relate to the Single Resolution Fund. The European banks are still paying into a resolution fund at higher levels than was originally anticipated. So while we made assumptions of a declining assessment, the reality is that assessment has remained at a high level and, in fact, is increasing. We decided that wasn't controllable. We needed to make long-term franchise decisions rather than near-term decisions to offset that pressure. There was a second one. Together, they amounted to about EUR 400 million relative to our planning. The second item was deposit insurance, where the assessments, again, had increased in Germany, reflecting a bankruptcy that took place.

Yes. If we can stay with costs for a minute. I think it was also in September when you announced additional transformation charges, the ones you just mentioned. And just sort of how should we think about the future cost run rate also, then beyond 2020, to what additional benefits are probably going to show up from costs going away or some other benefits coming through? And probably in this context as well, cost flexibility is an important discussion we are having with investors also for Deutsche, what happens if revenues go down? What's your -- how do you think about cost flexibility in general for the group?

Yes. Well, there's a lot to talk about, obviously. And so I mean, the general statement is, we are working hard on our costs. We're trying to execute measures that bring down our sustainable cost base. And, by the way, one of the -- as you alluded to, we announced a higher level of transformation-related effects in September, and we're working to book as much of that as possible this year. We're working hard to clear the decks in '21 of transformation and also other costs ahead of what is a measurement year. Next year, we've got targets to meet, and we're very focused on doing that. But as I mentioned, there were some items that were uncontrollable in our cost base coming through. There's also inflationary impacts that are coming through, some of which have to do with better performance on the revenue line. So variable compensation is an example there, asset servicing costs in the asset management businesses. And what we're trying to do is offset those. Incidentally, also, additional control investments that we need to make. Those things are pushing up our expense base. And what we're trying to do is come up with new measures that we implement that can then offset those. That's a battle, but we took some, I think, decisive action, particularly, around our technology estate, over the course of this year, which resulted in some charges in the third quarter, that were taken to try to offset those pressures. Longer term, Daniele, as you say, we do think there is some structural benefits that we're building in to the run rate after '22. So very often, and I've been nervous about this as a CFO, a cost-reduction plan would give investors the impression that we're squeezing the company to the point where investments in the franchise for the future aren't being made that then leave you at a competitive disadvantage at some point. We're trying to avoid that. We're trying to balance the cost savings and the investments in a way that our franchise enhancing over time. And those franchise enhancements can be on the revenue side, so client-facing technologies and also people that drive revenue in the future, but they can also be benefit -- that drive benefits in the cost base. And I think there's a lot built-in at the moment to the run rate that will fall away over time. A great example, just to be brief, is we're making a significant investment in the technology that supports our retail business in Germany, merging 2 banks, Postbank and the Deutsche Bank branded business. That's an enormous investment this year and next year, but that investment will result in significant cost benefits in '23 as not just the investment cost rolls off, but also the duplicative platform, and we should also be driving some, I think, revenue upside from better client-facing capabilities that we've invested in.

Okay. Interesting. Switching gears to the recent rating upgrades, and I think it's quite topical. S&P upgraded Deutsche yesterday. And we had Moody's and Fitch before, recently in the third quarter, I think. Can you talk about what it really means for the business? I mean I remember you lost business because of the downgrade a few years back. What does it mean now? Can you quantify that? Do you have a feeling for what it means in the various businesses and will be so proud?

Yes. No briefly, look, the -- yesterday's upgrade from S&P was one that we've been waiting for, for some time. Very important to us from a business perspective because being A-rated in the senior preferred or the counterparty credit rating for a bank like ours is important. There are counterparties that simply can't do business with you or on an uncleared basis, unless you have those ratings. They will come back. As you say, when we lost that rating, the impact on revenues to us was in the triple-digit millions of lost revenues. And so we expect that to come back. Some of it actually has probably been bleeding into the revenues for some time as people do their own credit work on Deutsche Bank, but some of it will come back now sort of switching on. And it's counterparties in the FIC business. It's corporate treasurers and our Corporate Bank that can do more cash management with us. And to some degree, there's a Wealth Management client segment that can be rating-sensitive as well. So we think in all of those 3 areas, there's benefits that will accrue in the near term to us.

Great. And I mean we talked about revenues costs. Let's go through the P&L risk costs. And I think you started the year saying it should be below 2020. In 2020, I think it was 40 basis points, and it was 25, then it was 15 and now it's low 15. And I mean that's driven by external and internal things. If you could just talk about your expectation for the remaining quarter because it still implies a relatively high level in the fourth quarter. And then probably beyond going into 2022, is that back to normal? What is normal? How do you see that trajectory going?

Yes. No, so look, the credit environment remains very benign. So we've seen this very unusual credit cycle with the pandemic. I won't go into that and what it's meant. But this year, credit conditions have been very good. You've also had some releases of sort of management overlays, forward-looking sort of IFRS 9 provisions and also recovery. So it's been very benign, as you say, running at, I think, 10% -- 10 basis points in the third quarter, 8 -- or 7 or 8 basis points for the year-to-date. We've called for a little bit less than 15 basis points for the year. And as you rightly point out, it means that credit loss provisions would probably be 250-ish million in the fourth quarter, having run at 250 million for the first 9 months of the year. And that's just a function of no longer repeating the release of those management overlays forward-looking reserves under IFRS 9 and some of the recoveries and is a path towards more normalization. Next year, Daniele, I would still expect the credit provisions to run below a normalized level. So if we would call for normalized credit provisions in and around 25 basis points, if you kind of just split the difference between 15 and 25, somewhere in the middle, you'd probably be in our best guess for next year, again, looking at the environment and what we can see today.

Do you have any specific pressure points from a regional point of view? Or is it government support? When you look at the book, where do you have the biggest uncertainties? Or is it China? Or is it the supply chain...?

Well, earlier in the year, we were looking carefully at aviation and commercial real estate. Those were -- they are 2 pockets that we were worried would begin to see stresses in the back half of the year. That hasn't panned out at all. In fact, both have -- particularly, aviation at this point, are showing strength, and the commercial real estate downside really hasn't materialized that we were looking as a possibility. And by the way, it was that possibility that fed the higher guidance that we had and we've walked down during the year. As you say, as we finish 2021, there's more concern in areas like China, China real estate and whether there are stresses that might emerge there. I think it's too early to tell for sure, but we're not seeing stresses in the banking book in China, even in real estate. Now that's maybe our book. We have, I think, a relatively manageable well-underwritten credit book in China generally, also in real estate in China. Very strong sponsors, good loan-to-value levels. So it's not somewhere -- it's somewhere we're watching carefully, but it's not an expectation we have that there'll be significant CLPs around that.

And if we stay briefly with the credit topic on just loan book, growth has been good in certain areas. There is a discussion around corporate loan growth demand in Europe. What have you seen there from a company-specific point of view? Are you...?

It's -- yes, we're more optimistic, Daniele. I know there was some differentiation among the banks in the third quarter in terms of where they were going in loan growth. We had about 11 billion in total of loan growth across the franchise just in the third quarter, which was encouraging. There's a steady loan growth pattern that we see in the Private Bank weighted towards mortgages. There is -- in the Investment Bank, we still believe there is the ability to put lending to work, financing clients at good spreads and within our risk appetite. That may not persist for that much longer. But certainly, we think we see those opportunities today. And then the Corporate Bank, as you rightly asked about, we did see good growth in the third quarter in our trade finance book. It was about 3 billion just in the quarter in trade finance, having been flat or even down since the pandemic-induced bubble. I think that's -- it's too early to say that's a trend. I call that green shoots for now. But we do see the possibility just looking at client activity and kind of what's going on in the supply chain world and that there's [ legs ] to a trade finance growth story.

Okay. Let's talk about capital returns, and you did make quite specific statements already at the last year, at the Investor IDD. And I think you put out the 5 billion number. There wasn't really a time horizon attached to it. If you could just elaborate around your recent thinking, dividends, buybacks, when -- what is the process you're going through? What's the outlook on that?

Yes. Look, it's very important to us, Daniele. When we announced our restructuring or transformation in July of '19, we laid out one of our objectives was managing capital carefully through this transformation period, dealing with the impact of reg inflation. And we've nearly finished that period of time. So if we finish 2021 at the CET1 ratio that we've called for, which is 13%, we really have finished that period of pressure on the ratio, absorbed about 150 basis points of regulatory inflation, maybe 80 basis points of capital relevant transformation charges, and we've been able to fund all of that with organic capital generation in our Corporate Bank and the deleveraging that we did in the capital release unit as well as some benefits on operational risk RWA. So we're really pleased with that picture. It positions us now to begin that capital return of 5 billion with, I think, a significant sort of, I'd call it, first installment next year, so to be decided in time, including at the AGM. We're not far enough into that work, Daniele, at this point, to really be able to talk about the size and the mix of that capital return. My hope is that we'll advance that discussion both internally and in terms of our planning, capital planning, with our Supervisory Board and as appropriate with the regulators so that when we tell the market where we're -- what that will look like, we have a -- we'll have a very clear path and plan. But as I sit here today, I'm optimistic that we're well on track. And of course, we were always, as you say, vague about the endpoint. But in fairness, if our planning horizon was 5 years, then that horizon is shortening as time goes by. And we feel quite confident.

And generically, dividend versus share buyback, how do you look at that discussion, also bearing in mind things like share price levels, valuation levels, like advantages, disadvantages?

Look, generically, I think, there should be a mix. I think management should be able to set a dividend rate and a dividend policy that signals its views about the future, its views about growth opportunities and the sustainable path going forward. But we're not blind to the corporate finance math that share repurchases, especially valued where we are today, are quite powerful in terms of the leverage they provide to earnings per share and book value per share. So I think it needs to be a mix. What that mix is, is really too early to say.

Okay. And again, on that topic, the 8% RoTE obviously, is an important target for you. I think the market is a little bit more skeptical for the known reasons, I guess. But how important is the 8% for the 5 -- the 8% for the 5 billion? Is there buffer built in? Can you...?

Well, again, the first installment will be essentially based on where we finished this year. So I feel very comfortable that, frankly, first of all, the 8% is absolutely what we've been working towards building the foundations, kind of the building blocks and executing towards. But I think, in a way, you've got to separate the transformation aspect of where Deutsche Bank will be next year from the 8%. The transformation sets us up not just to achieve the 8% next year but for ongoing performance in the years beyond. And with this changed capital regime that we'll be in, from capital preservation to organic capital generation, reinvestment of that capital in the businesses and the distributions, I feel very comfortable about that path. And at the margin, it will be influenced by the RoTE, of course. But at the margin, I feel comfortable with it, even if there's a slight miss to the 8%.

And just if we stay briefly with the topic, you mentioned 150 basis points. There has been reg inflation, RWA inflation. What else is to come, if you could just share that with us? Over which time horizons and how relevant it is?

Yes. Well, look, one uncertainty, apart from just getting this wave of reg inflation behind us, so TRIM and the other changes, the rule changes have taken place, there was uncertainty until we had letters and had finished the work. So that uncertainty is now behind us. The next uncertainty was the Basel III final framework. Now that we have a legislative proposal, we can see what that proposal at least would indicate for us. So more visibility to the future. It -- while there are a lot of things in that proposal that we welcome, so I think good proposals that lessen the burden, the impact on the European banks. For us, it's still a relatively sizable impact. It's at the, if you like, optimistic end of the assumptions that we had laid out. Those assumptions were for a 25 billion increase in risk-weighted assets initially in '24, associated principally with FRTB, the fundamental review of the trading book, that's moved out to '25, which is helpful. And then the next wave, which is the output floor related capital increases, that's actually now pushed out to '29 and '30. And it has some at least temporary improvements in it, so that improves, I think, the output floor impact ceteris paribus. So if nothing else changes about the composition of our business, how we conducted and so on, it would result in another, say, 35 billion fully reflected in 2030. But there's a lot that can change over the next 8 or 9 years. So we feel that the Basel III framework now is giving us more certainty of the capital path and, to your question, underscores, if you like, a greater degree of confidence we have in what we can deliver to shareholders going forward, meeting our promises.

So I have probably 2 questions left. One is more around, you announced the restructuring, the new strategy, new divisions, let's say, 2.5 years ago. So we are probably a bit like midterm, halfway through. How do you perceive the mood internally? I mean I see ratios like commitments, staff turnover, all going into the right direction. How do you see these topics on the talent side, retention, being able to hire the right people, employee mood, ability to compensate?

Yes. Yes, it's very powerful, Daniele. I started talking in June of '18 about a virtuous circle that came with better performance, a better platform, client retention -- or sorry, employee engagement and retention, which translates into customer engagement and further into new revenue opportunities for the company or revenue growth fed by ratings improvements. And I think all of those things are happening. As you see, the internal measures that we have of things like employee engagement has been very encouraging. They clearly support the strategic direction. They're supportive of the execution that, I think, we've delivered. And it is translating into the customer engagement and improvements that we'd hoped for. So the short answer, Daniele, is that the platform feels transformed today in terms of what we can do and also, by the way, our ability to retain and attract talent to Deutsche Bank.

Great. Let's probably finish off with the upcoming Investor Day. If you can just -- it's on March 10, I believe, next year. You announced it. What are you going to talk about? I mean you obviously can't disclose too much, but what is your -- what do you think is going to be important to the market, to the -- to our sell-side analysts, the topics you will focus on that..?

Sure. No, that's a very fair question. A lot of work to do from now until March 10, but we look forward to that engagement with our investors. So I think, first of all, we have to cover what's been achieved with the transformation with a bit of a retrospective, but not spend too much time on that, talk about the targets in '22 and how we're positioned against those targets, but spend most of our time talking about how the transformation of Deutsche Bank is going to deliver benefits in the future in this period of time, let's say, '23 to '25. How is it that we've repositioned the company for performance and financial as well as strategic delivery? And what do we think about that repositioning? I think we've got to tell a story in other words, that goes beyond the recovery of Deutsche Bank into '22 and the achievement of the targets. Those targets can't be the endpoint for the company. They have to be sort of a staging ground to something beyond. And so really, we're focused on telling that story and a lot of work to do to underpin it.

Great. Thank you. Thanks for this sneak preview. I think we have to stop here, unfortunately. I would like to thank you for being here in person. Congratulations on what you have achieved with the company, with your employees, with the whole firm. Thanks for being here in person. I enjoyed this a lot, and I hope to welcome you again next year.

Thank you, Daniele. No, as you said, we're halfway through -- a little bit better than halfway through. But compared to when we last sat on the stage together 3 years ago, a lot of distance traveled. But we're equally humble about the work that still lies ahead, not just in the next sort of 5 quarters, but in the years to come thereafter. So thank you for hosting me today.

Thank you. Thank you, James.