Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q2 2024 Fixed Income Conference Call and Live Webcast. I'm Mohid, the chorus call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Philip Teuchner, Investor Relations. Please go ahead.

Good afternoon or good morning, and thank you all for joining us today. On the call, our Group Treasurer, Richard Stewart, will take us through some fixed income-specific topics. For the subsequent Q&A session, we also have our CFO, James von Moltke with us to answer your questions. The slides that accompany the topics are available for download from our website at db.com. After the presentation, we will be happy to take your questions. Before we get started, I just want to remind you that the presentation may contain forward-looking statements, which may not develop as we currently expect. Therefore, please take note of the precautionary warning at the end of our materials. With that, let me hand over to Richard.

Thank you, Philip, and welcome from me. After another quarter where we made progress across the businesses on our strategic initiatives, we are clearly on track to hit our financial targets. Our progress continues to be recognized by rating agencies this quarter, either through rating affirmations or by Morningstar DBRS changing our rating outlook to positive in June. Let me discuss some of the drivers of our first half results on Slide 1. Pre-provision profit was up 17% year-on-year to EUR 4.7 billion, excluding the impact of the Postbank takeover litigation provision. We also demonstrated positive operating leverage, a core element of our strategy execution. We grew revenues in our core businesses by 3% year-on-year, while group revenues were up 2% on a reported basis. We saw strong growth in commissions and fee income of 12%, which demonstrates clearly that our strategy to grow our capital-light businesses is working. And we continue to deliver better-than-expected NII performance in our banking books, which provides additional comfort to our revenue path for 2024 and in the years thereafter. We reduced our adjusted costs by 2% to EUR 10.1 billion year-on-year. We continue to deliver savings through our operational efficiency program. Now let's look at the franchise achievements across our businesses on Slide 2. In the first half year, the Corporate Bank delivered a 16% increase in incremental deals won with multinational clients compared to the prior year period. Our successes with our clients were also awarded with a series of high-profile awards. The Investment Bank made significant advances across the franchise. Origination and Advisory increased its global market share to 2.6% in the first half year, a gain of more than 70 basis points over the full year 2023. Fixed income and currencies revenues were up 3% year-on-year, supported by a 7% increase in financing revenues even compared to a strong prior year period. The Private Bank also continued to build momentum with EUR 19 billion of net inflows in the first 6 months, supporting growth in assets under management of EUR 34 billion. And in Asset Management, we grew AUMs by EUR 37 billion to EUR 933 billion in the first half year. Now let me turn to our strategic objectives on Slide 3. We continue to make progress across all 3 pillars of our Global Hausbank strategy. Starting with revenue growth, we have delivered a compound annual growth rate of 5.7% since 2021. This underscores the benefit of a well diversified and complementary business mix. Stable NII in our banking book segments were supported by strong noninterest revenues following investments in our growth initiatives. Looking at the drivers behind commissions and fee income strength in the first 6 months, we saw growth mainly in our capital-light businesses. We will continue to build on these developments. And with business volumes growing, we are confident that our revenue trajectory will remain strong in the second half of the year. While the impact from the expected NII normalization will be lower than initially anticipated, we expect full year NII in our banking book segments to be broadly stable to the prior year level. We will see continued commissions and fee income growth, mainly in Origination and Advisory, Corporate Bank and Asset Management. This puts revenues of EUR 30 billion clearly in sight. We continue to deliver on our EUR 2.5 billion operational efficiency program. Having completed measures we've delivered were expected gross savings of EUR 1.5 billion, 60% of our target with around EUR 1.2 billion in savings already realized. This gives us firm confidence that we are on track to deliver on our commitment on a quarterly run rate on adjusted cost of around EUR 5 billion in 2024, and that we will further reduce this run rate to close to EUR 4.9 billion by the end of the year to meet our noninterest expense objective of around EUR 20 billion for 2025. On capital efficiency, we achieved a benefit equal to a EUR 4 billion RWA reduction in the second quarter through data and process improvements. As a result, cumulative RWA reductions from capital efficiency measures have already reached EUR 19 billion. Let's now turn to provision for credit losses on Slide 4. Provision for credit losses in the second quarter was EUR 476 million, equivalent to 40 basis points of average loans. The sequential increase in stage 1 and 2 provisions to EUR 35 million was mainly driven by the net effect of overlays and model enhancements, which were partly mitigated by quarter-on-quarter portfolio movements. Stage 3 provisions remained at an elevated level, but reduced slightly to EUR 441 million. The decrease was mainly driven by the Private Bank, while provisions in the Investment Bank remained stable and were largely related to commercial real estate exposures. Provisions in the Corporate Bank increased, which was driven by 2 larger impairment events. Looking ahead to the second half of the year, we're now seeing some stabilization in the broader U.S. CRE sector, the U.S. office remains broadly unchanged. Overall, this should lead to lower provisions compared to the first half, but our U.S. office CRE portfolios will continue to be impacted. We also continue to conservatively manage our loan book with lower growth rates, including active management of [indiscernible] concentration risks through well-established comprehensive hedging programs. Reflecting on these items and considering developments in the first half of the year, we revised our full year guidance for provision for credit losses to be slightly above 30 basis points of average loans. Moving now to the development in our loan and deposit books over the quarter on Slide 5. All figures in the commentary are adjusted for FX effects. Overall, loans have remained stable during the second quarter. Within that, we have seen encouraging momentum in key strategic growth areas such as FIC financing and wealth management, but also a net reduction in mortgage products in line with the strategy. For the remainder of the year, we expect these broader trends in our loan book to continue. Our high-quality deposit book increased by EUR 5 billion compared to the last quarter. Balances in the private bank grew by EUR 3 billion, mainly driven by growth in fixed term deposits in our Private Banking and Wealth Management segment. Corporate Bank deposits increased by EUR 2 billion in the quarter or EUR 10 million year-to-date, which was materially supported by growth from certain client accommodation activities that are temporary and expected to normalize in the fourth quarter. In the appendix, we provide further granularity around the quality of our loan and deposit portfolio. Let's just now have a look at our net interest income on Slide 6. NII was essentially flat across all of our key banking book segments at EUR 3.4 billion, slightly above prior expectations. Corporate Bank NII is stable sequentially with higher deposit volumes and low margin expansion, offsetting the expected BC conversions. As in the prior quarter, the Private Bank continues to benefit from a slow pace of BC conversions and ongoing hedge rollover, while our FIC financing business continues to deliver stable results. Our base case is that our quarterly NII run rate will remain broadly stable, and we reiterate that we expect to improve on our earlier guidance for the full year banking book NII. The group number reflecting accounting effects decreased by approximately EUR 100 million compared to the previous quarter to EUR 3 billion. This effect is offset by an increase in noninterest revenues and there's no overall revenue impact to the group. Moving to Slide 7, highlighting the development of our key liquidity metrics. With a daily average liquidity coverage ratio of 131% during the quarter, we operated with a sound liquidity position at our targeted level. The quarter end stock of EUR 221 billion of HQLA, of which about 95% are held in cash and Level 1 securities was essentially flat compared to last quarter. Quarter-over-quarter, our spot liquidity coverage ratio was also unchanged at 136%, representing a surplus above the regulatory minimum of EUR 58 billion. The net stable funding ratio at 122% reflects the stability of our funding base and corresponds to a surplus of EUR 110 billion above the regulatory requirement. The available longer-term stable funding sources for the bank remain well diversified and are mainly supported by a strong deposit franchise, which continues contributing more than 2/3 of the group's stable funding sources. We aim to maintain this funding mix going forward. Turning to capital on Slide 8. With 13.5%, our second quarter common equity Tier 1 ratio was up slightly compared to the previous quarter, CET1 capital improved slightly, reflecting lower regulatory capital deduction items and strong net income for the quarter, largely offset by the Postbank takeover litigation provision. Risk-weighted assets increased from business growth, together with higher operational risk ROA, including the impact of the Postbank takeover litigation provision, mostly offset by reductions from strong delivery of capital efficiency measures. Our capital ratios remain well above regulatory requirements, as shown on Slide 9. the CET1 MDA buffer now stands at 231 basis points or EUR 8 billion of CET1 capital. This is broadly unchanged to the prior quarter as the impact from the higher CET1 capital ratio was largely offset by higher countercyclical capital buffer settings, notably in the Netherlands, Ireland and Belgium. The buffer to the total capital requirement increased by 38 basis points, driven primarily by our AT1 issuance and now stands at 275 basis points. Moving to Slide 10. At the end of the second quarter, our leverage ratio was 4.6%, 13 basis points higher compared to the previous quarter. 12 basis points of the increase was driven by higher Tier 1 capital due to the additional Tier 1 capital issuance in June. We continue to operate with a significant loss-absorbing capacity well above all requirements as shown on Slide 11. The MREL surface, our most binding constraint increased by EUR 1 billion, now stands at EUR 17 billion at the end of the quarter. We had to absorb a slightly higher binding MREL requirement from the SRB in the second quarter. Higher RWA and higher countercyclical capital buffer requirements added to higher MREL demand. This was more than offset by higher MREL supply from the issuance of AT1 and other eligible liability instruments. Our surplus thus remains at a comfortable level, which continues to provide us with the flexibility to pause issuing new eligible liability issuance for approximately 1 year. Moving now to our issuance plan on Slide 12. We stick to the guidance to issue EUR 13 million to EUR 18 billion to meet our 2024 funding requirements. Year-to-date, we have issued EUR 13 billion, equal to the low end of our 2024 plan. After a very constructive first quarter, we continue to take advantage of the favorable market conditions and issued more than EUR 5 billion in the second quarter. We issued a EUR 1.5 billion AT1 note in June, which improved the leverage ratio by 12 basis points, as already mentioned. Further highlights includes our inaugural EUR 500 million social bond in senior nonpreferred format, our third and fourth Panda Bond comprising GBP 6 billion in total as well as a multi-tranche Japanese yen transaction. The social bond refinanced assets in the areas of affordable housing and access to essential services and further expands our ESG funding footprint. The residual funding activity for the year remains focused on senior nonpreferred and senior preferred notes, both in benchmark format as well as private placements and retail targeted issuance. Many of you have asked for our intentions regarding potential calls of AT1 instruments in 2025. So let me outline how we think about this. We look at the cost of refinancing versus extending the instruments. And here, the refinancing spread versus the reset spread is a key input as well as any additional carry costs we would incur. Furthermore, we think about any other financial impact from the call, such as the FX revaluation impact when calling at an FX rate which differs from that of the issue date. As always, we will take all relevant aspects into consideration. To be clear, we have not yet made a decision. And as you know, cause of capital instruments require regulatory approval. Therefore, we can expect you to take a decision closer to the core date. Before going to your questions, let me conclude with a summary on Slide 13. The performance in the second quarter and first half of the year demonstrate the successful execution of our strategy. We remain confident that our businesses have strong momentum and our position for further growth. And so our full year guidance for revenues and adjusted costs has not changed, respectively, at EUR 30 billion and around EUR 20 billion. Provision for credit losses for the year are now expected to come in slightly above 30 basis points of average loans. Regarding issuance activities for the year, we are well advanced, which provides flexibility regarding timing of new issues. Overall, our full focus remains on the execution of our strategy and the progress made in 2024 positions as well to achieve our 2025 targets. With that, let's just turn to your questions.

[Operator Instructions] And the first question comes from Lee Street from Citi.

I have three, please. Firstly, you mentioned the FX revaluation impact when calling AT1 securities not issued in euros. And aside from not calling, is there anything you can do to actually mitigate or avoid that impact? Secondly, on the slightly increased loan loss guidance for the year to just about 30 basis points. Is there any broader read across? I know there was a couple of specific clients in the quarter. Was there any broader read across the book at large? That's my second question. And then finally, I remember a few years ago, the comment made about being an industrial logic for banking consolidation in Europe. And obviously, with your restructuring successfully completed and lots of excess capital forecast we made. Would you consider using your excess capital for M&A as opposed to shareholder return? And if yes, under what conditions? That would be my three questions.

Thank you, Lee, and thank you for joining. Maybe I'll take the AT1 question and maybe I'll let James take the CRP and the M&A question. So AT1 FX revaluation perhaps on what we can do about it. So our AT1 securities, which have a temporary write-down feature are accounted as equity under IFRS. Meaning the AT1 FX is frozen at the time of issuance and any FX impact is realized upon any termination, for example, a call a buyback or at maturity. Under the current structure, there is no natural instruments to hedge that economic risk as well as the accounting risk, which means we have a choice to make between quarterly P&L volatility and RWA impact or we mitigate that with the cost of -- or reeliminate that, but at the cost of FX revaluation upon semination. And I'd just note that any impact is taken through capital rather than through the P&L line. And we made a decision when we issued this to avoid that P&L volatility intra-quarter for the life that just comes with that colic risk that we talked about in terms of the revaluation impact. We recognize that different AT1 structures, for example, with an equity conversion rather than the write-down or an industry alternative and allow for debt accounting under IFRS. This would have [indiscernible] issue as the security would be accounted for as if you like, a normal bond. But I'd note that, that requires a few changes in particular shareholder approval, a switch if we were to pursue that further, would have a certain lead time. And I guess in terms of the rationale behind the Ace we did in euros in early June. So one is -- the market was pretty conducive for your AT1s across the street, but also for our own name in the first half of the year. So there was an element of opportunities and given the sort of the demand we're seeing in the depth of the market. But the primary reason is just to manage our leverage ratio of given what we're seeing in terms of into demand. And you should sit in that vein rather than any intent to sort of derisk the calls we have to in June 2025. So hopefully that answers your question, and maybe I'll pass it on to James for the CLP response.

Thank you, and Lee, thanks for the question. Look, no read across really. We've -- our guidance was initially 25 to 30 basis points. Incidentally, there's a bit of a denominator effect as well. We'd assumed more loan growth in our original guidance than we've seen. So we thought we'd be closer to EUR 500 billion on average than sort of EUR 480 billion. But leave that aside, we see -- look, there have been a handful of events in the first half of the year that have taken us above what we think is a pretty stable run rate of credit loss provisioning in the portfolio. So above -- call it a run rate in the businesses of around EUR 250 per quarter, we've been running at a little bit above now EUR 100 million or so on commercial real estate. And then the first half, we had a couple of larger corporate credits that defaulted as well as the overlay action that we also disclosed in the second quarter. And so we strip those things away, the last 2. The first half was relatively in line with our expected sort of EUR 350 million run rate. Now we continue to see -- well, our expectation is that the second half will revert to that type of level, which is why, at this point, we've moved the guidance up a bit. But it really our expectations for the second half are more or less unchanged. And what's driven us up in the first half are either as I say, corporate positions that are hedged in CLOs. So our net exposure has been much smaller than the gross amount that's reflected in the CLPs and the overlay that I described. So the read across is stuff happens and that's mostly in the rearview mirror. Obviously, we're watching credit carefully in the German books in credit commercial real estate. But by and large, our outlook remains that the second half should see improvement on the first. And then in consolidation in Europe, look, I mean, it's been on the come for a very long time. And I think from our perspective, remains that way. There have been a series of barriers. But for us, we've mostly focused on the need to put DB into a much stronger position in terms of our internal controls, our technology, our capabilities before we would consider that. So there's more homework as we referred to it to do. And the barriers to consolidation such as they are, you can think about the fair value gap, for example, that are on the balance sheet today in Europe, remain in place. So short answer is we remain focused on delivering the objectives that we've laid out, the commitments we've made to shareholders, and we'll see how the world evolves much further down the road.

And the next question comes from Daniel David from Autonomous.

Congratulations. I have 3. The first one is just on AT1 and just go to some of the points that you made to lead just a second ago. So should we think about the AT1 you printed as refinancing the 7.5%. I know that's got a higher reset and also got a lower FX impact on the call date. So I guess that leaves the 4.789%. And I guess my question would be, would you consider any more AT1 this year as the market was willing and open. And would you consider an LME alongside, which is something we've seen some of your peers conduct? The second one is just on leverage finance. And clearly, we've seen the headlines. I'm just interested in just any update you've got on leveraged finance, but also kind of the interaction with the [ Philip Teuchner ] add-on. So I guess what I'm thinking is could we see potentially more provisioning but being offset by a change in your capital requirements as a result of that to add on dropping away? Anything you could say that would be great. And then finally, just on MREL. There's been a bit of talk with regard to subordinated MREL requirements linked to the CMDI package. I know that you've always maintained quite a high subordination percentage in your MREL, so you kind of fill your MREL with fully subordinated debt. I guess, irrespective of what the regulators decide to do, is there a scenario where you would lower the amount of subordinated MREL you target why filling your MREL requirement with more senior preferred. Just interested to hear your views on that.

Thank you, Daniel. So again, maybe I'll take the AT1 questions, the MREL questions then, and I'll pass on to James to give a bit more color on leverage lending. So I guess around how to think about the issuance. So the -- I'll delink the call strategy for next year and the issue is my first statement. So as I kind of said in my earlier remarks, the AT1, we kind of did in June is really to solve for ensuring we have. We can meet the incremental demand that we need and the capacity we need to take advantage of the opportunities we see in our business. And so we shouldn't be seen as linked to any sort of featuring the sort of derisking the calls we have in 2025. So that would be the kind of the first point. I think when it comes to calls for next year, we haven't made any decision on that at all and we've kind of been waiting to close the call date as ever we're very mindful of how the market views these products where we can feel makes rational content first to take action. We're also very mindful of our overall stakeholders and make sure we actively address all of them. And then I think in terms of liability management, we always see that as a useful tool. It's something we've used in times gone by. But as you know, kind of for me to announce what we might be doing in liability management, it kind of defeats the point of liability management. So yes, we find that useful tool and where we think it makes sense, of course, we'll take a look at it. So I think when it comes to MREL, I think you're right. CMG, I guess, negotiations or conversations continue. [indiscernible] is later on this year. We don't really see much movement in kind of what this means from a full perspective for another couple of years. But we're comfortable with our MREL levels and the mix that we have. And then so we don't have any intention to restructure the stack at this stage. James, do you want to pick up the leverage lending picture.