Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Excellent. So good morning, everyone. My name is Máté Nemes, I'm a financial analyst at UBS. It is my pleasure to welcome James von Moltke, Chief Financial Officer of Deutsche Bank, with us. James, thank you for joining us.

Máté, thank you for having me this morning. Good morning to all.

So James, it's only fitting, I think, to start perhaps with a quick recap of Q3 results. We are a couple of weeks after the results day. I was wondering if you could walk us through perhaps the key highlights, the positives and also the negatives of your Q3 results, where are you in the process. And I think you also updated your guidance for the last quarter. If you could just give us a sense what has changed and what do you expect in the remainder of the year?

Sure. Happy to. So I think, if I take a big step back, what we're seeing in '23 is the value of the work we've done over the past 4 years to put our 4 businesses on a sustainable footing and work hard on expenses as well. So you've seen through the first 9 months of the year, about a 6% top line growth. That was pretty consistent with that in the third quarter and expenses growing about 2% if you look at the operating expense base. So we're pleased with that overall development. And it's across the 4 businesses, especially driven by growth in the deposit-rich businesses of the Private Bank and the Corporate Bank. So they are benefiting, obviously, from the interest rate environment. We think the other 2 businesses, the Investment Bank and Asset Management are actually sort of trading well in what has been mixed at best financial market environment. And again, you saw that a little bit year-on-year. And those businesses are down, but we think performing well in the market environment. Credit has remained relatively stable over the course of the year. We're on track to guidance that we've given at the beginning of the year, 25 to 30 basis points of average loans. We think we'll be at the high end, maybe 29, 30 basis points for the full year. And in terms of our outlook, we continue to see it sort of slightly elevated but steady. On the cost side, we're continuing to work hard to sort of executing our cost plans. We've announced a total sort of target over the next several years, really through '25 and perhaps a little bit beyond of EUR 2.5 billion of cost takeout, essentially offsetting investments and also inflation. And we're tracking against that. And so you're seeing that incrementally show up in the cost base and the run rate. That's something that we're working to continue for the balance of the year, essentially driving operating leverage by growing revenues and keeping expenses essentially flat, as flat as possible. The big highlight from our Q3 results was capital. We've been going through a period of needing to build capital for what we call reg inflation, so changes in models, rules, methodologies that over the last several years has been a significant headwind for us, in addition to some of the restructuring and transformation charges we've been taking up over the last few years. And we sort of broke free a little bit from that in the third quarter. In fairness, if I'm honest, surprising ourselves by some of the model results, as we've had some -- a model that was approved or a couple of models approved by the ECB that now puts most of that inflation behind us. But also how quickly and effectively we've been able to look at some optimization steps inside our -- the complex capital calculation. So at a 13.9% CET1 ratio, common equity Tier 1 ratio, we've sort of reached a point where we're not sort of climbing the hill anymore on capital. It means that our distribution paths are well within reach at this point with the goals that we set for the market. In fact, as we said, we think we can probably accelerate and expand the distribution path. So overall, I think the shape of Q3 in the first 9 months was quite encouraging. As you said, we provided some guidance. We're on track to do about EUR 29 billion of revenues this year, which we think is encouraging. We're working, as I say, to keep expenses essentially flat. I mentioned the credit guidance. And the one other thing that I -- that we talked about on the third quarter call was some unusual items that are going to come into the fourth quarter for us. One is an impairment of the goodwill that we take on in the Numis transaction, which is about EUR 250 million. Like we had last year, we think we will revalue deferred tax asset attributes up, which we'd estimate at this point is about EUR 500 million. We talked about restructuring and severance, and I'll come back to some of the drivers perhaps a little bit later. But that number, we now estimate between EUR 300 million and EUR 350 million, so higher than we guided before. And then there is still some uncertainty over whether we will be successful in recognizing the restitution of a resolution fund payment that stems from the early part of the last decade and that we've been in discussions to have sort of restored to the banking industry. And that -- there's still some uncertainty around that item. So 3, 4 items that will be moving around our fourth quarter results, but we think, depending on how they will fall, net to the positive. So still some work to do in the fourth quarter on those things.

I wanted to pick up on one of the topics you mentioned, which is capital. You mentioned that this was the biggest positive. And I think you mentioned or you announced that you see another EUR 3 billion additional capital relief until 2025. So you have currently an EUR 8 billion distribution envelope or distribution target, and on top of that, you found another EUR 3 billion relief. Could you give us some sense how should we think about the EUR 3 billion in terms of distributions, allocations? What part of that could be coming back to shareholders on top of the EUR 8 billion? And then what happens with the remainder, where do you see investment opportunities?

So it's a great question and a real driver at the moment of sort of investors' assessments of banks, given that we're -- as an industry, we've put ourselves in an excess capital position after a lot of hard work building on things like Basel III. So for us, I mentioned the model piece where we just -- we're surprised to the upside and some of the work we're doing on optimization. The third element of what we sort of discovered in the third quarter was that our estimates of the Basel III, the final framework for Basel III, a big portion of which goes live on the 1st of January 2025, at least based on the current legislative discussions that our estimates have been too conservative. So we've been estimating between EUR 25 billion and EUR 30 billion of risk-weighted assets to come on, on that date, and we now think it's closer to EUR 15 billion. So the combination of model improvements, optimization and a raised target on optimization -- earlier, we were thinking sort of EUR 15 billion to EUR 20 billion and you now think it's maybe EUR 10 billion higher than that. And the Basel III, as you say, translates into about EUR 3 billion of capital better than we were expecting. So if I take you back to the commitment we've made on distributions, and this is at an Investor Day back in March of last year, we talked about EUR 8 billion of capital coming out in respect of the years '21 to '25, meaning paid in the years '22 to '26 and that, that cumulative distribution will be EUR 8 billion. It was based on a very clear ramp on dividends, 50% up a year, which we've now done the second installment of this year at EUR 0.30. So we've sort of advertised that next year would be EUR 0.45. And so far, a repurchase history, 300 last year, 450 this year, that's been tracking that 50% increase. And if you just do the maths on that, if we continue that for a couple more years, we would at least achieve the EUR 8 billion. And then to your question of the EUR 3 billion, how much more would come out in distributions and how much would be reinvested in the business. Honest truth, it's too early to say. Because, first of all, we're in discussions with the ECB on what are our -- at least initial repurchase next year would be how we'd size that and get it approved. So we'd intend to announce that with fourth quarter earnings on the 1st of February. But it's -- and the point is it's against that trajectory that when we talk about accelerate and expand, what we mean is, would we do more earlier on this trajectory I just outlined? And would we result in something larger than EUR 8 billion? And I think on both of that, we're reasonably confident that we can deliver more than we originally promised while still investing in the businesses. And I know this is a debate we have investors a lot is, the value of distributions today versus investments in the business, which we think can drive enhanced distributions and improved returns over time. It's always a balance. And we recognize that at least at the moment, the balance that investors are looking for is more distributions. And so that's certainly informing our thinking. To your point, we do see investment opportunity. Right now, loan growth has been sluggish this past sort of 4 or 5 quarters. We think it's going to accelerate going into '24. And certainly, we would want to do that to grow our businesses, support clients. And from time to time, as we saw with the Numis transaction, there are opportunities to acquire. But as I say, there's a balance to be drawn, and we've listened to investors' perspectives. And so you'd expect a significant amount of the extra -- of the EUR 3 billion we found to come out as distributions.

That's great. So as you mentioned, I think distribution is -- it's clearly one aspect of bank analysis or bank assessment, which is very topical these days. The other one is certainly NII. So I wanted to discuss that with you. If you could give us a sense of NII and net interest margin development for the group and also perhaps the individual business, the Corporate Bank and also the Private Bank. What shall we expect going into next year? And also, if you could perhaps give us a sense how deposit pass-through rate and the replication portfolio interact. And then, what is the path from here?

Yes. Well, it's a fascinating environment we're in. I mean it's been sort of a -- if you're a lover of interest rate risk models, this has been the most fascinating environment to live through. To give you a sense of the sort of opportunity that presented itself in '23, we assumed coming into the year that our -- that the uplift from interest rates and perhaps some sort of retention of interest rate movements, known as the beta, so the percentage that's passed through to clients would offer perhaps EUR 1 billion of incremental revenues. The models said EUR 900 million. In the end, it was EUR 2 billion. So there was a -- the actual rate pass and the pass-through outcome versus what the models would have told was worth about EUR 1 billion in revenues, which is -- now as you know, Máté, you're referring to -- there's been a pretty sort of spirited discussion between the industry and investors and analysts sort of how much of that pass-through piece will retrace and how big is it and how quickly will it retrace. And to be honest, it's been hard to give concrete answers to that, because the reality is the models have just proven wrong so far. So why would we rely on that going forward. As we're looking at it now, we do see a continued sort of convergence with the models, what we'd expect in terms of pass through. And if that happens, we would be looking at retracing about EUR 500 million of the -- I'll call it, the benefit this year that arose. And maybe a little bit more in treasury, but in the businesses, EUR 500 million. What's going to happen though over the next 1 year or 2 years, as you say, is the replicating portfolio. So the longer-term hedges of the deposit books will start to assert themselves. So after a little bit of a dip in '24, in '25 and beyond, we would expect to see that value begin to show up and -- or not expect to see. We've now hedged the books in order to produce revenues that would then start to grow again in the interest rate side. So while I think people have been focused on the dip rather than that the industry is now at a more healthy, sustainable interest rate environment that's supportive of the businesses, that shows up in margin terms. I think with healthy margins in the Corporate Bank and the Private Bank, they will contract next year and you will see more of that in the Corporate Bank than Private Bank, but generally in an environment that is much healthier for the businesses and for the value of the deposit books, if you like.

Makes a lot of sense. Shifting gears a little bit. I think over the last couple of quarters, you've been quite excited about non-NII revenues and opportunities for non-NII revenue growth. Could you share some of the details around that? Again, in the Private Bank and in the Corporate Bank, where is this growth coming from? And also, I think if I just think back to Q2 and Q3 earnings calls, you've been expecting a clear pickup or recovery in O&A revenues. Is that materializing? And what is the opportunity there? Is that wallet share growth? Is it doing business with a larger client base? How do you think about that?

Máté, we think we're very well positioned for recovery in non-interest revenue. And so while the focus over the past year, 1.5 years has been on the interest rate piece of the revenue growth story and a little bit on what we might retrace next year, we think the industry is poised for a resurgence of non-interest revenues. This year has been relatively speaking, a weak year for non-interest revenues, driven by another number of things. There's sort of volumes in the marketplace and the financial market environment that I spoke about earlier. So what do we see taking place next year? We think we are positioned for revenue growth next year. We started to talk about a ballpark of EUR 30 billion next year, where non-interest revenues offset the pressure that I described on the interest revenue side. As Deutsche Bank is -- we have a lot of sources of non-interest revenues. If I think about the business, the Corporate Bank has custody business, Trust and Agency services, fees that are driven by volumes in the payments business and the Trade Finance business. All of which have been, frankly, relatively slow this year, but where we see sort of drivers of growth. By the way, some of which is not market related, but just winning new client contracts and new business. So we feel really good about the prospects there. The Private Bank has non-interest revenue sources, particularly in investment products and the sales of insurance products. We have been generating new assets under management this year, which you don't see in the revenue line because the AUM is down based on markets on a year-on-year comparison, but you would expect to start to see pickup now [ in -- if ] markets are flat to up. So I think some good momentum underlying there. And actually, there were some changes in the conditions, for example, for fee and commission recognition and insurance products that were a dampener this year that will grow over next year. And then to your point, the last piece, that's a big generator of -- by the way, Asset Management similar inflows and it's growing over market declines last year and in the third quarter. Then you get to the Investment Bank, and there we see a real opportunity for growth, in part because as you say, the origination and advisory business, which for us is the Corporate Bank -- Corporate Finance product suite. That's been going through now 7 quarters and counting of a real sort of backup in market activities. We are seeing it begin to come back. So we'd expect, for example, Q4 to be higher than Q3 in revenue terms. And we think that, that momentum will continue into next year. And of course, now we'll consolidate the Numis revenues as well, giving us a further lift into next year. So we see significant upside in that area. Now to some degree, it's driven -- it will depend on the wallet recovery. And we also think we've positioned not just with the Numis transaction, but also by hiring bankers in the origination advisory space, we've positioned to pick up some market share, which we think of as relatively natural for us given our lending footprint, our client footprint and where activity is taking place. So just to bring it all together, we look at all those sources of revenues in the market development and feel quite good about the momentum into next year on non-interest revenues.

Excellent. It sounds like quite broad-based. Another topic that I wanted to discuss with you is related to the Private Bank. There has been quite some media coverage recently related to changes in the Private Bank related to Postbank migration. Could you just give us an update where the service remediation is at? How do you progress with that? And what does that mean to cost or revenues?

Well, Máté, if I may take one step back quickly. Our Private Bank has been through a huge transformation over the past several years. To take one piece of it, by the way, I'll focus on Germany, but we've been investing in the Wealth Management business now for pretty consistently over several years. It's a global platform. It's a great business, and it's set to grow as well as sort of markets recover and client confidence recovers. But the Germany platform is, of course, a huge business for us. And we've been sort of making pretty considerable investments to transform that over the past few years, in particular, the integration of the Postbank sort of franchise from a legal entity perspective, a business perspective, product perspective and recently, technology perspective. And it's been a gigantic amount of work to do it. You could argue that it's a decade overdue to do it, but we've now tackled it. As you would say, as a result of the final phase of the technology integration, we found ourselves with an operational backlog really in July and August that we've been working down since then, have actually made a lot of progress now as we sit here early November. Most of the processes that had fallen out of our service level commitments are back within service level and well over 2/3 of the backlog items are now worked through. And as we said on the third quarter call, we will complete this remediation by the end of the year. It's something we're obviously unhappy took place. I mean, it was obviously an underestimation of the operational issues that were going to rise post that final conversion that we regret, and we regret sort of dislocation for clients. But in the grand scheme of things, the period of time to remediation and where we are now, I think, has been short, and we obviously have to manage to make good where there's been customer harm. In terms of financial impact, it was modest in the third quarter on expenses, single digits, maybe more like EUR 30 million, EUR 35 million spent on remediation in the fourth quarter. And there's a temporary credit loss provision piece of this just again, as you get a backlog, the collections processes slow down, shouldn't change ultimately the loss profile of the portfolio. So I expect that to come back. And we'll work to kind of to close off the tail of the expenses next year. And really, I think Claudio de Sanctis and his team are focused on sort of pivoting from the negative experience over the past few months with that Postbank client base to a strategy execution for Postbank and the German retail platform, which is driven by great product capabilities, more digitalization of our service offering, positioning both brands in a differentiated way; the Deutsche Bank brand more aspirational investment, product driven; the Postbank brand, everyday banking. You may have seen that we announced an amendment to our contract with Deutsche Post, I think now a couple of weeks ago. Just to give you a moment of background, we provide postal services in the Postbank branch network. And that was based on a contractual commitment. Now with this restructuring of the agreement, we have the ability to sort of reduce our Postbank branch network over the next 3 years by about 250 branches. That will save us some money and I think help us refocus the franchise. It is a driver of some of the increased restructuring and severance that we talked about earlier. So EUR 150 million out of the incremental restructuring severance is related to that item. And another piece of the incremental is just, as we talked about in the third quarter call, accelerating a reduction in force into this year that we've been working on for a while, so more severance for that. But overall, we think that of these efforts with Postbank and generally in the Private Bank are positioning us to be -- really demonstrate to investors a transformed sort of retail platform over the next 2 or 3 years.

Excellent. Thank you for the update. Just conscious of time, I wanted to give the opportunity also for the audience to perhaps ask any questions. I could go on for a significantly longer time. But if we have any questions in the audience, happy to pass it on. If not, let me ask you perhaps about the Investment Bank. I can't really let you go without asking you perhaps a quick update on how the revenue environment has evolved quarter-to-date. What do you see in terms of the trading businesses or capital markets businesses and also equally, how is the origination advisory pipeline shaping up?

Yes. It's always a tough question in the fourth quarter because the environment, as we get -- as our clients get ready for year-end, and the confidence in corporate activity can be mixed. It's always hard to predict. Right now, I think we're on track for a pretty good fourth quarter, pretty much in line with what the consensus suggests at the moment. But with -- I have to say the October environment was mixed. In particular, what would look like a recovery in leveraged capital and debt capital markets and M&A stalled a little bit given the geopolitical uncertainties that were out there. There's been some volatility in financial markets. But as it hasn't been a strong environment, I would say. I would say it's a mix, but not a bad environment on the fixed income and currency side. So for a fourth quarter, we're actually reasonably encouraged, but there's still a lot of the quarter left to go.

Excellent. Well, on this upbeat note, James, I wanted to thank you for your time.

Thank you, Máté.

And thank you for watching.

Thank you.