Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q2 2025 Fixed Income Conference Call and Live Webcast. I'm Moritz, the Chorus Call operator. [Operator Instructions] And 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, sir.

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. Our first half results demonstrate clearly where Deutsche Bank stands today. We delivered a pre-provision profit of EUR 6.2 billion, nearly double the same period in 2024. Robust revenues reflect our well-diversified business mix with 74% coming from more predictable revenue streams in the Corporate Bank, Private Bank, Asset Management and FIC financing. Net commission and fee income increased by 4% year-on-year, in line with our goal to boost revenues from fee-based and capital-light businesses. As anticipated, net interest income in key banking book segments and other funding also remained resilient. Adjusted costs remained flat. And as we intended, significant progress on our operational efficiency measures is offsetting business investments and inflation. Let us now look at the divisional development on Slide 3. All 4 businesses delivered double-digit returns in the first half of this year. Our diversified business mix is poised to perform in a fast-changing environment, particularly as our focused investments to serve clients are paying off across the platform. Our Corporate Bank has a leading market position in Germany and with deep roots in our home market is perfectly positioned to help clients capitalize on opportunities created by investment programs in Germany and Europe as well as the improving business momentum overall. The Investment Bank is focused on consolidating its position as a leading European FIC franchise. whilst Origination & Advisory is looking to grow market share, specifically in advisory, aided by recent investments, driving further revenue diversification. In the Private Bank, we are pleased to see the progress on our transformation reflected in the improvement in returns seen year-to-date. Personal Banking continues to drive efficiency through workforce reductions and branch network optimization, mainly in Germany. These steps, combined with increasing digitalization are enabling us to streamline operations and innovate our offerings. Asset Management stands to build for its diversified assets under management of more than EUR 1 trillion, and we believe it is ideally placed not only to serve German and European investors, but also to act as a gateway to Europe for global investors. Let's just now turn to our progress towards 2025 delivery on Slide 4, starting with revenue growth. Since 2021, we have achieved a compound annual growth rate of 5.9% in the middle of our target range of 5.5% to 6.5%. Second, we have achieved around 90% of our EUR 2.5 billion target for operational efficiencies with EUR 2.2 billion either delivered or expected from completed measures. Third, capital efficiencies have reached a cumulative total of EUR 30 billion, already at the high end of the bank's target range for full year 2025 and contributing to our strong CET1 ratio. We delivered another EUR 2 billion of RWA reductions this quarter through securitization transactions and already see opportunities to deliver further capital efficiencies in the second half of 2025. To sum up, our first half results demonstrate that we are on track to meet our 2025 financial targets, and we are fully focused on delivering them. In parallel, we are working on the next phase of our strategic agenda to further increase value generation beyond 2025. Turning now to net interest income on Slide 5. NII across key banking book segments and other funding was EUR 3.4 billion, up 5% quarter-on-quarter. Private Bank continues to deliver strong NII, supported by our structural hedge portfolio while Corporate Bank NII remained stable, supported by the ongoing hedge rollover loan income and a one-off benefit from hedge portfolio optimization. FIC financing. benefited from loan growth in the first quarter with strong lending margins offsetting FX effects. With respect to the full year, we confirm our NII guidance for key banking book segments and other funding of EUR 13.6 billion as we continue to see a tailwind versus 2024. The underlying contribution continues to be driven by the long-term hedge portfolio rolling over at higher rates and volumes, combined with stronger lending income in FIC financing and lower funding costs. Together, those factors more than offset margin normalization and FX headwinds. Looking at Slide 6, which is based on the market implied forward rates at quarter end, we can see that our hedge portfolio continues to position us well. In the second quarter, we have further reduced our short-term interest rate risk by terming out more of our deposit hedges, bringing the total volume invested longer term to around EUR 245 billion. As a result, a large proportion of our future NII is now locked in. And in addition, the absolute NII contribution of the hedge portfolio is increasing steadily year-over-year, while the long-term euro rates remain above 1%. Let us now turn to quarterly developments, starting with our loan book on Slide 7. During the second quarter, we have seen loan growth of EUR 3 billion adjusted for FX effects. The underlying quality of the loan book remains strong with around 2/3 of clients' locations in Germany and Europe. While our loan portfolio in the Investment Bank has further increased in line with our strategic objectives, we have also seen slight growth within our Corporate Bank segment. In the Private Bank, our focus remains on targeted mortgage reductions to optimize capital allocation. For the remainder of the year, we expect growth momentum in FIC financing to continue while the Corporate and Private Bank are well positioned to benefit from the expected growth in Germany and Europe. Moving now to deposits on Slide 8. Our well-diversified deposit book has slightly grown by EUR 4 billion during the second quarter, adjusted for FX effects. The strong presence in our German home market and a significant share of insured deposits continue to demonstrate the high quality and stability of the portfolio. In the Private Bank, we continue to see strong momentum from our retail campaigns in Germany. We are pleased with the strong deposit levels in the Corporate Bank and the encouraging underlying growth in site deposits. Looking ahead, we expect further campaign-driven growth within the German Retail segment, while strategic objectives in the Corporate Bank are centered around portfolio optimizations. On Slide 9, we highlight the development of our key liquidity metrics. The liquidity coverage ratio at the end of the second quarter increased by around 2 percentage points to 136% mainly driven by lower net cash outflows. We continue to maintain a high-quality liquidity buffer and hold about 95% of HQLA in cash and Level 1 securities. We are comfortable with our current liquidity position to remain focused on further strengthening the resilience of the balance sheet and growing liquidity levels. As such, we aim to conservatively align our liquidity position without having specific external liquidity targets. The net stable funding ratio slightly increased to 120% with a surplus above regulatory requirements of EUR 107 billion. This reflects our stable funding base with more than 2/3 of the group's funding sources coming from our global deposit franchise. Turning to capital on Slide 10. Strong second quarter earnings net of AT1 coupon and dividend reductions combined with diligent resource management, led to a CET1 ratio of 14.2% of 42 basis points sequentially. Lower risk-weighted assets were driven by credit risk, benefiting from continued execution of capital efficiency measures, predominantly through securitization transactions during the quarter. Market risk remained flat. Increases at the beginning of the quarter, reflecting market turbulence at the time have been offset through strict risk management and hedging. Moving to Slide 11. You can see that our capital ratios remain well above regulatory requirements. The CET1 MDA buffer now stands at 299 basis points or EUR 10 billion of CET1 capital. The 47 basis points quarter-on-quarter increase reflects our 42 basis points higher CET1 ratio and a 5 basis points lower systemic risk capital buffer requirement, where a reduction in Germany was partially offset by the increase in Italy. The buffer to the total capital requirement increased by 53 basis points and now stands at 371 basis points. Moving to Slide 12. Our second quarter leverage ratio was 4.7%, up by 8 basis points. principally driven by FX effects as higher Tier 1 capital was mostly offset by higher trading inventory. We continue to operate with a significant loss-absorbing capacity well above all requirements, as shown on Slide 13. The MREL surplus almost binding constraint increased by EUR 1 billion to EUR 23 billion. Our surplus thus remains at a comfortable level, which continues to provide us with the flexibility to pause issuing new eligible liabilities instruments for at least 1 year. Before we turn to issuance, let me quickly refer to Slide 21 in the appendix on which we offer our perspective on the bank's CRR 3 disclosure. As we have laid out in the analyst call yesterday, we have a strong incredible path to mitigate the potential impacts arising from the output floor. The implementation of CRR 3 is a multiyear journey, including several transitional arrangements that are subject to reviews which will mostly apply through 2032 and we are not planning franchise changing decisions today for an outcome that is almost certain to change. Moving now to our issuance plan on Slide 14. Despite geopolitical tensions and macro volatility, credit markets remain resilient in the second quarter. Our spreads developed constructively quarter-on-quarter, tightening by roughly 10 basis points on average in senior non-preferred, allowing us to further progress with our issuance plan at attractive funding costs. We confirm our previous guidance to issue between EUR 15 billion and EUR 20 billion to meet 2025 funding requirements. With year-to-date issuances of EUR 10.9 billion we have already completed a little more than 60% of our 2025 plan with remaining residual funding focused on senior non-preferred and preferred instruments. Since the last fixed income call at the end of April, we issued EUR 4.6 billion, primarily in senior non-preferred format. The most notable transaction during the second quarter was a EUR 1.5 billion senior non-preferred transaction, which attracted over EUR 9 billion in total orders. In addition, we issued a multi-tranche Japanese yen transaction across both senior preferred and non-preferred. Considering our USD 1.25 billion, 6% AT1 security, with an upcoming call date in October 2025, we will take a decision closer to the call date at the end of October. Several factors will be taken into consideration, including capital demand, refinancing levels versus reset, FX effects impacting CET1 as well as market expectations. This security was issued at a stronger U.S. dollar exchange rate, and hence, we had a small positive revaluation impact at current FX rates. The coupon would be set around 8.5% at currently roughly 50 basis points above current market levels. In terms of the timing of any core announcement, we always need to balance the desire to provide the market with certainty as soon as possible against the loss of capital at the time of the announcement. We are still assessing whether we will replace the transaction, and we'll provide further details later in the year. Before going to your questions, let me conclude with a summary on Slide 15. We are on track to meet our full year 2025 targets and remain comfortable with our trajectory to deliver an RoTE of above 10% and a cost-income ratio of below 65%. Our asset quality remains solid and despite uncertainty from developments around commercial real estate as well as the macroeconomic environment, we currently anticipate a reduction in provisioning levels in the second half of the year. Our improved profitability, sound risk profile and a strong balance sheet was recognized by a rating upgrade from Morningstar DBRS in June. In the same month, Fitch has raised our short-term rating on the back of improved investor confidence and resilient liquidity. Our strong capital position and second quarter performance provided a solid foundation as we head into 2026. We have already completed around 60% of our issuance plan for the year and plan to issue primarily more senior instruments in the second half of the year. With that, let's now turn to your questions.

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

Well done on the results yesterday. Three questions from me, please. Firstly, on capital, you've obviously got a new operating range. Based on that, am I supposed to think of 14% CET1 as being the floor for additional shareholder distributions and 13.5% is the floor for your MDA buffer. Is that how I should think about it? That's question one. Number two, any thoughts on ratings and ratings direction from here? You've had upgrades from DBRS and Fitch. Are you expecting anything else this year? And any comments on the changes from Moody's relating to their request for comment and/or the MDA. And then finally, a bigger picture one. You've mentioned on various calls in the past about playing some role in banking consolidation in Europe. obviously, that's alive and well. I guess at the moment, it seems to be a lot easier to do deals within one country rather than cross borders. I mean, just based on what we see. So the question is, do you think that DB will be involved in any form of M&A over the next 18 months? Can you see any angle there? That would be my 3 questions.

Thanks, Lee, and happy Friday, and thanks for joining the call. So I guess taking your first question around capital. So what James and Christian were kind of saying yesterday was so that our distribution policy remains unchanged. So we intend to repatriate 50% of our earnings via dividends and share buybacks as we communicated. And this also applies in the case of CET1 ratio will be at the low end of our target range of 13.5% to 14%. In addition, if we sustainably report a projected CET1 ratio above 14%, then this provides the flexibility for additional distributions. And when considering these excess capital distributions will make our assessment after consideration of projected business growth and the regulatory environment at this time, no different to what we have done in the past. And finally, in terms of share buybacks, they typically involve a 3- to 4-month regulatory review before they announce and we can execute it further. So I just want to sort of make that point as well, just in terms of timetables and then what should be most relevant for fixed income investors, as you were asking about is the fact that we have increased our MDA buffers steadily over time. And now we were around 300 basis points above CET1 MDA, which is much more in line with peers and given our own views of the world, we kind of feel that gap will continue to grow over time. And then in terms of rating actions, yes, we're very pleased with Morningstar DBRS upgrading all long- and short-term ratings for the bank at the end of June. That was based on the continued progress of our strategic transformation and our general path towards medium-term targets. Separately, we [indiscernible] our short-term ratings. We see that as proof of improved investor confidence and our resilient liquidity position, and we're confident that the continued delivery on our target should result in further positive rating revisions over time from other rating agencies. Of course, we are monitoring potential ramifications arise from various industry-related events. So obviously, there's a Moody's request for comment process ongoing. which the agency is seeking feedback regarding their banking methodology. But from what we can see right now, we're not expecting any repercussions on the baseline credit assessment for ourselves. And then on CMDA, there's still a few open items, including the availability of the final legal text. So delivery of that is still uncertain, but sometime in the next few quarters. And then that will take some time to transpose that international law and then Moody will need to reflect us in their ratings. But the long and the short of it from our perspective is our base case is we do not see any impact to our senior preferred ratings given just the overall size of our senior preferred layer we have in the stack. So that will be how I would think about the ratings picture. James has joined us very kind. So maybe I'll let him handle the M&A question.

Sure. Thanks, Richard. And Lee, thanks for the question. Really, nothing's changed about our perspective. I mean, point one, as you point out, we've always sort of subscribe to the industrial logic of mergers, consolidation, scale in the banking industry but we've also been consistent about saying that we were working on our own homework and improving Deutsche Bank before we'd consider anything. And nothing has really changed in that regard. I wouldn't sort of commit to a time line. So you mentioned 18 months. As time goes on, I think we feel better prepared as the company goes from strength to strength, and we get through some of the investments and remediation work we've been doing. But I don't think there's any change in terms of our thinking that we want to remain focused on self-help for now. As to your comment about cross-border versus domestic, I'd sort of to say, right now, unfortunately, Europe is showing itself to be, I'd say, whatever mixed about both. So that if you look at the transactions that have been in the market, there have been sort of -- there's been national resistance to national mergers and there seems to have been politically -- political resistance to cross-border mergers. So I'm not exactly sure what the preference is. You'd like to see a world where Europe genuinely wants to function as a single market, that some of the preconditions are created in terms of the legislative environment, things like Capital Markets Union, Banking Union, remove some of the frictions and then in essence, the political sensitivity around the role of banks lessens somewhat to allow that industrial logic to take over. And that's -- one can still dream, but that's hopefully the direction of travel ultimately. But nothing in all of this changes Deutsche Bank's view that we just remain focused on executing on our strategy and focus on self-help.

And the next question comes from Dan David from Autonomous.

Congratulations on the results. I have 2 sets of questions -- 2 topics I should say, 1 CRE and the second one just on AT1. So on U.S. CRE, I guess, U.S. CRE and scope of the severe stress test has reduced year-on-year to EUR 16 billion to EUR 13 billion. A year ago, I think you said that EUR 12 billion was modified. What's the figure now? And then a year ago, provisions in the U.S. book were EUR 614 million, so roughly 4% cover on the EUR 16 billion or 5.1% on modified part. Can you tell us what the cumulative provisions are currently, and just any color on the drivers of the reduction of the books, so sales and redemptions would be interesting. And the second one, I just wanted a quick one on the AT1. If I look at your issuance plans, it says that you've done -- it says you've maybe got a little bit more AT1 to do. And you made reference to reset levels versus new issuance levels, I guess, on the assessment decision. So should we assume that you need to print new AT1 to be able to call the October 30 AT1 that's coming up? Or could you call out right?

Yes, sure. So I'll take maybe the second one first, if you like. So yes, the answer is pretty simple. So I think on the slide, it shows we've issued EUR 1.5 billion year-to-date. I think the range we kind of gave us guidance as part of the overall EUR 15 billion to EUR 20 billion of issuance was EUR 1.5 billion to EUR 3 billion across AT1 and Tier 2. The comments I kind of made in the earlier where was basically just outlining, as you rightly said, that the current market in terms of where we are versus where we'd issued in terms of distant to reset spreads, obviously suggests would likely call and also the FX risk that we were talking about at previous AT1 calls is also positive. So I think from our perspective, from a rational perspective and how we kind of guide before, I think it's -- I think the market is kind of thinking about that the right way. And then in terms of -- what does that mean in terms of our plans around if we decide to do that and where we want to replace, that's really still our ongoing planning process around what we kind of see as internal demand for leverage, whether that makes sense. So no decision has been made on that. So that's why we're still working through that process, and we'll obviously update you guys as we kind of decide what we want to do. But essentially, we need to make a decision over the next couple of months or so.