Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Okay. great. Look, good afternoon -- no, good morning. Good morning, everybody. And it's my pleasure once again to welcome James von Moltke, President and Chief Financial Officer of Deutsche Bank to our conference. Thank you, James, for joining.

Chris, it's a pleasure to be here. As I said last year, this is always a -- punctuates the developments at Deutsche Bank. And also a memorable conference we have gathered very successful in the last few days.

It's been great so far, and it's good to have you back here again and sort of -- probably sort of half [ tick ] you from Madrid at the beginning of June next year. So look, the same format as other discussions. James and I have a few questions to run through here on stage. We have 35 minutes in total, probably with about 10 minutes or so before the end, I'll turn to the audience to see if we have any questions from the group. Please do your best to sort of grab my attention, and we'll try and come to you as quickly as we can. Let's start with revenues. Thinking about revenue diversification, in Q1, we saw stronger-than-expected performance in the Corporate Bank and the Private Bank. Could you elaborate on the process regarding building out that more predictable recurring stream of revenues within the business mix and how durable we should expect those revenues to be heading into '24, '25? Is it too early to call sort of peak NII in those businesses?

Yes, Chris. It's a good place to start, lots to talk about there. I'll try to be as brief as I can. So first of all, I think the first quarter performance, and we see that same sort of development in the second quarter, as we talked about it back in January, February, it's evidence of how far we have come through the transformation. So as we talk about the transformation since 2019, a lot of it was about building the resilience, the sustainable profitability of the company, the business mix shifting towards what we've thought of as stable or more stable businesses and somewhat away from the Investment Bank. And you've certainly seen that in the performance. So the share of revenues of pretax profit now that are comprised or contributed by the Private Bank, the Corporate Bank and Asset Management are quite a lot higher. I think that was one of the things that investors were looking for. In fact, in Q1, the Investment Bank was around 1/3 of the total. So that progress is there. Chris, as you say, part of it is driven by the change in the interest rate environment. Of course, the last 12 months have been dramatic in terms of that change. And naturally, that's benefited our Corporate Bank and Private Bank businesses. And in a sense, the Investment Bank has gone from, what I call, over-earning in the environment that we had, say, in '20 to '22, to a normalized, I think, still quite good and strong performance. So that has helped the mix shift in the businesses. We do think we're making the investments to continue that progress over time. And so you're seeing investments that we're making actually across the businesses, but perhaps less visible because it gets less attention in the press, but investments in our Corporate Bank business, investments in our Private Bank business, a strategy we're pursuing and investments in DWS, our asset management business. And so we're quite sort of comfortable and confident about the future revenue trajectory that we're building across those businesses. To your point about peak interest rates, we do believe that we passed the peak in Q1, driven -- and I want to be very clear here, we think there will remain a tailwind for the industry as we've gone from a negative and very adverse interest rate environment to a much more supportive and over time, I think, normalized interest rate environment. And so that's a good thing. But the peak is defined by what we call beta. So the amount of retention, if you like, of the incremental interest rate increases that the banks have kept versus passing on to clients. And as you've heard about from us and our competitors, that's been much more favorable over the past several quarters, 3 or 4 quarters than our models would have suggested. We do expect that, that dynamic will shift over time. And we've consistently expected that to happen. It continues to be more slow than we'd anticipated. So this -- while I think there is competition for liquidity, competition for liabilities, the progress, if you like, of convergence towards what the models would tell us that we need to pass on is -- remains slower. So that peak, while there is a downdraft in the next several quarters that we'd expect, it's actually coming in more mild than we would have expected to this point. So in short, you're seeing, I think, continued progress in terms of this underlying development for us around steady revenue growth, I think, more constructive tailwinds in the environment. And a mix shift towards the more stable businesses that we've been working on now for several years.

And you mentioned in the answer to -- that answer, the 30% or so of revenues in the Investment Bank, what is your current outlook for -- and you've already seen a degree of normalization there for the revenue trajectory within IB? How much further normalization could there be to come? And what are your latest expectations, whether it's sort of already in Q2 or through the subsequent quarters on the shape and the timing of the recovery in advisory?

Yes, really also a fascinating question. So well, let me start, Chris -- I'm sure others have talked about their sense of what the environment looks like. I mean to me, the banking environment today is actually mixed. I think on the negative side, the equation you have a slow economic growth, probably a recession coming, there'll be some impact, of course, on credit costs that comes with that. How severe that will be, we don't know, both the economic environment and interest rates, so refinancing costs that will take place. And you see in the investment banking business, particularly, you see a trailing off of volatility that has helped the macro businesses at the current moment. So a couple of items that are a drag on the sector. On the positive side, and this has surprised us this year to the upside, you have the continued benefit from interest rates. And as I just said, beta coming still slower than we anticipated. You have actually asset markets that have maintained relatively strong levels, and that benefits us in a couple of our businesses, including Asset Management. And you have a -- I think, an overall environment that is where you haven't seen as dramatic an impact, for example, of the very rapid increase of rates. Now we could say LDI and the turbulence in March are a sign that there's been an impact in terms of market confidence from the interest rate environment. But I would still be on the side of the equation that, that says that that's been more moderate or modest in terms of impact than you might have expected for a move that is far as we are last year. So that's how I'd characterize the environment. Incidentally, by the way, in the stable business, asset growth is also influenced by the general environment and for loans essentially. Now the Investment Bank, we are -- we came into the year expecting at some point, there'd be a trailing off of the very strong macro product environment that we had, especially last year. It was just a record year for the industry in macro products, and we expected that to trail off. And the question was how quickly would the micro, so things like -- well, credit in particular, but also financing transactions, leverage the capital market transactions, M&A equity begin to come back. And is there a bit of a sort of a trough in between those 2 things. We are seeing the trail off in the macro, but actually still quite encouraging activity despite all the things we've been through debt ceiling and what have you. But compared to this outstanding, especially Q1, Q2 for us last year, we're naturally going to have a step back. And I'd estimate that to be in a range between, say, down 15% to 20% in our FIC product area. What we call origination and advisory, so corporate finance advice underwriting businesses, we think we're starting to find the floor, which is encouraging. So you've started to see at least Q4 to Q1 a sequential stabilization. And as I think some of our peers have talked about a beginning of -- to see more activity. April, by the way, was extremely quiet. So I think it sort of was carryover from turbulence in March. But we've seen it started to pick up. And so I certainly believe that we'll start to sequential increases in the pool -- in the sort of the wallet and activity generally. How quickly that comes back, how robust that environment is will depend. But we certainly see that as encouraging. So if I pull that all together for the quarter, I would say Investment Bank, so O&A, by the way, we think is probably flat to up this year relative to Q2 last year. In part, by the way, because of the nonrepetition of leverage that capital markets sort of positions that started in the second quarter of last year. And that produces, I think, for Investment Bank generally is sort of down 50%, maybe a little worse than that quarter for us. But with some dynamics that continue to support, I think, a reasonably favorable outlook for us, just a shift in the business mix in the Investment Bank.

And on costs, the progress in Q1 on cost was clearly quite encouraging, obviously, helped by lower SRF but in one way or another, essentially, the exact opposite of what we saw in Q1 2022. How do you see the rest of the year developing in terms of trying to meet that flat cost target versus 2022 while also sort of encompassing the new restructuring charge and restructuring charges that you announced in Q1, how would those feed into accelerating the strategy and ambitions that you have and you maybe give a bit more color on just specifically what those restructuring...

Lots of moving parts on it. Well, look, let me start with just the overall statement that our focus on costs remains very intense. I mean it's something that we know we need to deliver on, and we're continually working to find new measures, execute on those measures and maintain the discipline, while, of course, preserving this balance that we've talked about for the last couple of years, around the needed investments in controls technology and what have you. So that's the balance we're trying to strike. As you say, our guidance has been, and we'll reaffirm that, that we're working to keep our expenses essentially flat at the top level in '23 relative to '22. In that, there are a number of moving parts. I think most importantly, our operating -- what I'll call our operating expenses, so take SRF out for a second, what we've called adjusted costs. We've been talking about a range of monthly expense of EUR 1.6 billion to EUR 1.65 billion. And that produces sort of EUR 4.9 billion a quarter, essentially flat to the fourth quarter. And as you say, that's something that we achieved in Q1. We're working to achieve in Q2. We think we're in line with that, even though FX by the way, relative to Q1, has pushed us up a little bit in the range. I'm just weakening euro again. So lots of moving parts, but working to keep that as flat as possible. On the rest, what I'll call nonoperating expenses. As you say, Q1 SRF assessment was a bit better than we had assumed and better than last year. That's helpful towards our overall full year guidance. What is a feature now and we'll be reporting in Q2 is higher nonoperating expenses than we might have anticipated when we started the year. As you say, that's partly with restructuring and severance that we've -- has been a deliberate decision. I'll come to the -- what we're trying to do with that higher restructuring severance. But in this quarter, I would expect total noninterest expense -- total nonoperating expenses to be in a range around EUR 600 million to EUR 700 million of which the restructuring and severance would be somewhere around EUR 250 million to EUR 300 million. The balance reflects a litigation quarter that has been unusually adverse and you've seen some of the reports and the announcement. So we've had some adverse surprises, I don't think it's representative of a normal quarter, and we can go into it a little bit. But that's driving nonoperating expenses higher in Q2, not something we'd expect to see repeating in the balance of the year. There are those some offsets that have helped us towards the full year guidance. You mentioned SRF is one, and there are others that are on our radar screen that we think will help continue the path towards the guidance for the full year. Excluding, by the way, Numis which is -- which we'll talk about a little bit in July but should close in the fourth quarter.

And that's a very helpful overview on cost for this year. But if we think about the medium term, frankly, consensus has a tough time believing the 62.5% cost-to-income ratio is sort of there on the revenue figures, I think, but not there on cost. I think what do you think is missing, I guess, in that consensus build? Or what can you give us in terms of color that would put a bit more confidence into that view that you can get down to a 62.5% efficiency target?

Well, look, the basic model that we laid out in March of last year and we're continuing, I think, to show evidence of is creating operating leverage by growing our top line and keeping the expenses essentially stable over time. What changed since March of '22, interestingly, the revenue environment is considerably better than we thought at that time. And that, of course, is partly driven by the interest rate environment, as we've talked, that's given us increasing tailwinds on the NII side and that will carry through to 2025. And of course, is quite visible and estimable for us. But we're also obviously working on building the noninterest revenue base in the businesses in the ways that I described. So if we thought about a compound annual growth rate at the time between 3.5% and 4.5%, we're running to date quite a lot higher than that, it's been sort of 7%, 6%, 5%, depending on the quarterly comparison. And a lot of those kind of drivers and tailwinds are very much in place. Now expenses, we had a step-up last year because we made some decisions about, as I mentioned, technology controls relative to what we were looking at initially, but we think that's been more than compensated for by the increased revenue view. So it means we need to be laser-focused on expenses over the next several years, execute on the things that we've been working on. You mentioned the restructuring severance. So there, as I say, we upped our guidance for the full year to about EUR 500 million, recognizing that we -- in essence, we needed to do more to offset the impact of inflation, some of the investments we wanted to make and the environment, but overall, preserve this model of generating operating leverage. And so we've taken a number of actions where restructuring our mortgage platform, especially in Germany, we did a reduction in force. We've completed now the sort of exit from our Russia tech center and working on a variety of other steps here in order to execute on a sort of a gross cost saving over that 4-year period now of EUR 2.5 billion rather than the EUR 2 billion that we talked about in March of '22. So that's the work we've been doing. And my colleague, Rebecca Short, now has even more sort of oversight and control of our cost base based on some management changes we made in April. And I'm thrilled to have her ever sort of stronger as a partner in this expense journey. But that should give you some sense of what we're trying to do and how it helps to deliver that overall model of operating leverage.

Okay. If we try and wrap the sort of revenue and cost comments you've made together into a profitability topic, one of the numbers I thought was much remarkable in the first quarter was ex the SRF costs, you delivered 10% return on tangible equity. It's tempting to ask why didn't you upgrade the targets with Q1 results. But maybe the other side of the question is, could you speak a little bit about the things we should be watching to explain some of that quarter-to-quarter volatility that we're inevitably going to see through the year -- through any year?

Well, let me start by saying, hopefully, less volatility over time in the businesses. So when we talked about this mix shift, and actually, it was in '21, I think, at this conference, and I started talking about us seeing a range of revenue performance on a monthly basis in the Investment Bank that was becoming more consistent over time. And that's -- in the range that I gave at the time was EUR 2 billion to EUR 2.5 billion per quarter of revenues in the Investment Bank. Obviously, there's some seasonality and there can be outliers in either direction, but that was basically the core of what we were seeing in the Investment Bank, and that's something that we're continuing to see and deliver on. But unlike the past, you have the other businesses really performing. So you have the Private Bank at something approaching that same level, well over EUR 2 billion, you have the Corporate Bank performing around EUR 1.9 billion level of revenue. So that gives us, I think, more and more confidence in terms of what we're doing. Sorry, there was another element of what you...

No, it's really just -- you did so well in the first quarter. There's always these volatile points quarter-to-quarter, trying to stay on top of what those moving parts are. I mean we've already talked a little bit about what to look through the rest of the year. But I sort of get sense...

Yes, why not upgrade the target [ and so ] which is nice. I should have -- nice way to put the question. Well, look, we were obviously encouraged by what we saw in Q1. As you say, if you -- you can either -- the SRF assessment is sort of an irritant because it's -- the accounting says you've got to take it all in the first quarter and we've struggled to estimate what it would be. And so -- but leave it aside, you can either spread it over the 4 quarters, you could take it out entirely. But what you saw in terms of underlying performance for the company ex that, was better than a 10% RoTE and well below a 70% cost income ratio. And essentially, for us, that was demonstrating that all the work we've done over those 4 years was delivering against the goal that we set for ourselves. As you say, we need to continue that. Why not up the targets? I guess, 2 things. One is we still need to go through a period of time now working out some of the uncertainties in the environment. So rates, recession, those things. And we still have work to do on completing transformation steps that we've been working on, whether that's technology or controls and other things. So still some work to do. But good underlying momentum, and that's something that you're going to continue to see, we think, in the quarters ahead, given the way the mix is shift -- shifted. I think the second thing is, it's a little early to start going after that. What you did see from us in Q1 was some statements and some indications of work we're doing to try to accelerate our path towards the goals we've set for '25, hopefully exceed those goals but also build on that momentum for beyond '25. And so we've been hard at work with initiatives, steps, actions on the expense side, on the capital side and on the business growth side to try to continue building that engine of earnings growth and business performance. So we're feeling really good about it, but it's probably a little bit early to talk more about what to see, and we need to work through the remainder of this year and into '24, some of the things that are still -- we're chopping wood still.

So my final question before it turns to the audience, going down is around capital distribution. One of the questions I received a lot in the immediate aftermath of the numerous announcements was why didn't Deutsche Bank just do a bigger buyback. And I'm sure you have the same question. So maybe if you could help us understand how you think about the prioritization of capital use in terms of organic, inorganic distribution. And then we've also seen the specific dividend targets you gave previously since then, earnings expectations for yourselves and for many European banks have gone up a lot. And other banks have or some of your peers have taken up their distribution targets [ from ] the distribution ambitions. So maybe just comments on how you think about distribution on a go-forward.

Well, look, Chris, we're very -- obviously very aware that investors want to be rewarded, especially having been through a journey with us. So -- it's, believe me, not far from our mind that this is an important piece of what we're doing. I guess the first part of the answer is the core work we're doing is increasing the sustainable profitability of the company. The RoTE generation, the capital generation, which over time, will support, I think, much larger distributions. While we're doing that, we've been focused on executing on a distribution path that we've laid out, I think, reasonably clearly last March. And that, again, is front and center for us. If you ask about the order of operations, then I think it's generating the capital. First, regrettably remains a capital build to support, I'll call it reg inflation. So whether it's model adjustments or preparing for Basel III, at the end of the day, that has to be the first -- the priority in terms of how we think about capital planning. After that, absolutely delivering for investors on the promises that we've made around distribution. As you've seen with the efforts around share repurchase is also something that we take very seriously and want to work on and deliver. And then we also need to balance all of that with business growth and investing in the future. And hence, Numis, by the way, hence, organic business growth, an important part of how we think of capital planning, but also in these instances where opportunities present themselves that we think are going to drive real value for our business franchise, for our shareholders, we are open to inorganic steps. You can always ask whether that capital could have come out in a distribution as you've heard me say, I don't think of them as entirely fungible, this idea of capital applied to an inorganic move versus distributions. But either way, we think we've struck a good balance in terms of investing in the future. And we think the Numis acquisition will really support the earnings and capital generation over time creating an attractive profile for resi.

Very clear. Okay. I think this is a point at which we wanted to come to the audience and see if there are any questions. I wanted you to put your hand in the air. Right down here at the front, we have a question.

Probably it's not very significant, but have you benefited from the Credit Suisse Bank in terms of hiring and creating new positions and less competition.

Yes. I'd say we have. It's always hard to measure these things, but we've been focused on sort of client acquisition on hiring some bankers, as you've seen, there's been some press on it in a targeted way. And so we think there are benefits for us. We're a natural home for clients seeking to diversify their relationships, especially in wealth management. Obviously, Investment Banking but within Investment Banking, again, corporate finance origination advisory for us. And then thirdly, also in Corporate Bank, you shouldn't disregard that Credit Suisse is a major service provider in the DACH region and Switzerland. So we see benefits to measure, and it will take some time, but benefits for us.

Going back to Credit Suisse, you found yourself among the banks that were particularly targeted especially in the debt markets. I guess maybe there's some false perceptions. But how do you intend to address that issue that whenever there's market upheaval, the securities from Deutsche Bank found themselves under pressure?

Yes. Look, I think just continued delivery. I mean it is our goal, believe me, going through an environment like March to be in a place where it just never comes into consideration that you might be vulnerable. So very present for us. Frankly, what's gratifying is after the market took a look quite quickly, and by the way, without us necessarily having to speak for ourselves, the market saw that we didn't have the vulnerabilities that the market was concerned about, whether it was interest rate risk or its ability to deposits and on, these all things the market was looking at. I think executing on our strategy, building sustainable profitability, but then also risk management is key. One thing that's been quite present for us is -- well, first of all, we would like to think we have a good -- we've built a good track record on risk management and that, that track record is visible to all of you. And hence, investors take that into account in their thinking. What I think March showed and in a way the other events over the last several years, I mean, we've been through COVID, we've been through the Russian war, we've been through Archegos, we've been now through this, and each of those crises tested a different vector, if you like, of risk or dimension of risks that banks have and banks need to manage. And it means that you need to run a bank at all times prudently, you need to manage those risks that you're both -- by the way, nonfinancial and financial risks really carefully because you never know which is going to be tested at -- in any given sort of market environment. And again, I think we showed that in -- not just in March, by the way, but over the years. And so again, after going through that experience, what was gratifying for us is market took a look and based on knowledge that investors have and the disclosures we have out there, people concluded Deutsche Bank should be okay. First prize is the market never taking a look.

Halfway down in the middle.

I was just wondering with the economic backdrop, have you seen anything change on the consumer side of things, either from a function of higher rates or how they're thinking about their savings?

We have. So -- well, actually, let me start on one thing, which is going back to March a little bit, stability of the deposit base. So one of the things that I think investors looked at was how stable is the deposit base. In our case, about EUR 600 billion, I think, a very good split between retail and corporate deposits, very stable insurance, all those good things that lead to a stable funding base anchored by the deposits. German retail is obviously an important part for us. We have seen in the segment sort of really 2 dynamics. One is in the sort of the lower income household segment, this run out, this inflation impact on household savings, the runoff of sort of excess savings coming out of COVID, that's present and has continued. And then you are also seeing more competition for deposits on pricing in the German market. As I said earlier, I don't think that competition for deposits on pricing is outside of the norm at this point and arguably a little bit inside of the norm of what our models would tell us. But there's a competitive marketplace now. And so investor -- depositors are getting new money offerings that naturally will shift a little bit between the providers and the market back. So those 2 dynamics are present. We're doing okay, by the way. So we've had some deposit campaigns. We're protecting our deposit base, but it's a little bit today sort of running to stand still in that environment, and that's not unexpected for us.

Maybe just on the regulatory side, with all the turbulence we've seen in the U.S. and here with Credit Suisse, have you had any conversations with the supervisors or with the regulators as to any adjustments you might need to see on liquidity or funding metrics or anything at all?

Yes. Well, look, going back to the times in March, any one of you -- any crisis environment like the one we live through is one where you're very intensively involved with your supervisors. And I think in a positive way, they have a very clear understanding of which bank is going through. They can see how well you're faring, not just in terms of the balances and liquidity, but also, are you in control of your shop? Do you have your -- have the data? Do you understand where things are? So in a sense, it's sort of a bonding experience that we go through these together with them. But they're also through all of that, they're getting some good insight into what's working in terms of the models, the liquidity drivers, how different customer segments behave and what have you. So it's a good real-world test. To start with what we do internally, every time we go through one of these experiences, we step back and look at that data set that's provided and challenged our internal liquidity stress test models, are they accurate? Are they conservative enough? What do we do? So we're going through that process naturally. And it tells us something about the various sources of liquidity that are out there and client behavior. When you then switch to the regulatory metrics, my -- I don't have the -- there's -- that there [ is need for ] or that at least speaking for the European regulators if there's a concern based on how fair. I just don't think that's the case. I don't think there's evidence to support that they did. So I don't see the need as they're not thinking too hard about that, but you never know. You never know what happens. As I've said in some calls and what have you, one problem I think we have as an industry and Credit Suisse, unfortunately, started to undermine confidence in the things that we talk about which are CET1 ratios, principally as the measure of solvency and LCR principally is the measure of liquidity resilience. And what the world doesn't really see is just how conservative those measures are today. And therefore, how well capitalized, how liquid the banks are and resilient in their ability to deal with stress. So my own view is these are good tools. They're well functioning, they're appropriately conservative. And as we test them, we always learn. Just not to go on for too long, but if I go back to COVID, what was really fascinating is there was 1 liquidity driver that went close -- I won't say to it's MAX, but started to go towards at MAX, and that was draws on unfunded liquidity facilities. Because that was the behavior that was happening at the time. Every corporate was drawing on their funding to make sure that they were okay. So there was a test of that liquidity driver, but we never kind of went through the peak of it. But we also saw that pretty much everything else was pretty stable. So you saw an overall LCR that was tested, but only in respect of one of the drivers. Meaning all the other buffers for every other form of liquidity outflow or stress, what was essentially unused and that's kind of interesting. And we saw something similar now in March that there was only a handful of the liquidity risk drivers that were really being showing any kind of indications of stress. And so the overall benefits is pretty solid.

Okay. So the clock is telling us were basically at time, but just 1 quick final question to finish with. Looking ahead, what gives you cause to be optimistic? What gives you cause for concern? How do you strike the balance between the 2 in the end?

Well, look, [ have ] to be on the concern side, as I mentioned about the risk management, we just have to make sure that there are no vectors that are -- have been. So asset quality is one. We've talked about commercial real estate, where we've done through another effort to stress test our portfolio and do all of that work. So Mission 1 is make sure we are well protected on those risk factors. Incidentally, completing this work on reg remediation, very high -- and control improvements, very high on our agenda. So still work to do there. But then also building for the future and is making sure that our businesses are performing in a way that has real momentum, value for our clients, gaining market share in some areas where we think we can. And so building that franchise for the future while it's secondary to the risk management is front and center for us and is undergirds some of the optimism that we have in answer to your earlier questions.

Perfect. James, once again, thank you so much for joining us...

Thank you.