Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q2 2026 Fixed Income Call. I am [ Matilda ], the Chorus Call operator. [Operator Instructions] The conference is being recorded. 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, Raja Akram, 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 the materials. With that, let me hand over to Richard.

Thank you, Philip, and welcome from me. We are pleased with the performance we delivered and momentum we achieved in the first half of 2026. We continue to invest in our global house bank, which paves the way for further growth, efficiency gains and value creation. We grew revenues to EUR 17.2 billion, well on track to reach our full year ambition of around EUR 33 billion. This momentum enabled us to deliver a post-tax profit of EUR 4.1 billion, our highest ever for a half year. We made further progress on our key ratios. Post-tax RoTE increased to 11.9%, while our cost/income ratio improved to 60.9% despite the impact of SVA accretive strategic actions we took in the second quarter. This momentum positions us well to deliver our 2026 objectives and reinforces our confidence in achieving our 2028 targets. We delivered strong performance across all our divisions, as you can see on Slide 3. All divisions delivered returns on tangible equity of 12% or higher. The Private Bank's transformation continues. We made progress on our target ratios despite absorbing costs relating to continued investments and the exit of its India franchise and grew client assets by more than EUR 55 billion in the first half year. The division has now completed all the branch closures foreseen for 2026 and continue to strengthen wealth management coverage. Asset Management grew assets under management by EUR 97 billion in the second quarter alone, which included record net client flows of EUR 25 billion. The Corporate Bank continued to grow business volumes in both loans and deposits, reflecting the strength of our corporate client franchise. And the Investment Bank supported clients through heightened market volatility, reinforcing our position as a trusted partner and gateway for investing in Europe, whilst also growing EMEA market share in investment banking and capital markets. At our Investor Deep Dive in November, we made clear that we view an RoTE of greater than 13% as a floor, dependent on the successful execution of our strategy. We also identified several trends that could provide further upside over time. Let me briefly update you on how those trends are developing on Slide 4. First, German structural reforms, including health and pension reforms are taking shape. The government's 34-point plan should boost economic activity in the years ahead. Fiscal expansion is slowly but steadily gaining momentum. Investment spending in the infrastructure and defense sectors has started. Our Corporate Bank and Investment Bank are ideally placed to capture opportunities. We are seeing encouraging steps in private pension reforms and are very well placed to support existing and new clients with investment solutions and help them participate in opportunities as the market develops. The second trend is AI, which is evolving even faster than we expected, and the potential benefits for us are becoming clearer. This gives us potential both for incremental operating efficiencies and revenue growth in the future. The third trend is Savings and Investment Union. Across Europe, momentum is building, especially as health and pension reforms are top of the agenda in Germany. The fourth trend we discussed in November is a more level regulatory playing field. We are encouraged to see an increasing policy focus on competitiveness, simplification and growth in Europe. Over time, we expect this to be supportive on several dimensions. The European Commission is taking a number of initiatives, including the recent proposal with a broader legislative package expected in early 2027. We believe that among European bank regulators, there's both increasing flexibility and political will to address some of the unintended consequences of CRR 3 whilst not compromising on resilience. Temporary relief on FRTB as soon as January 2027 and permanent relief for legislative package later on would also maintain the competitiveness of European banks in trading and capital markets. In other words, across all 4 areas, the trends are positive. Of course, the speed and exact shape of change are hard to predict, but the overall direction is encouraging. Turning to treasury-specific topics, starting with our net balance sheet on Slide 5. We continue to operate with a strong and conservative balance sheet, underpinned by robust capital and liquidity buffers that comfortably exceed regulatory requirements and support the group across cycles. Compared to the prior year period, we have demonstrated volume growth in both loans and deposits, which underpins the business momentum as well as our franchise strength. Capital remained robust in the second quarter. Our CET1 ratio was within our operating range between 13.5% and 14%. Our leverage ratio stood at 4.5% compared to 4.7% a year ago. Let me also spend a moment on our credit ratings on which you can find further details in the appendix on Slide 18. We were pleased to see further constructive developments during the quarter. Fitch revised Deutsche Bank's outlook to positive at the end of April following earlier positive outlook revisions from S&P and Moody's. As a result, we now have a positive fundamental rating outlook with all 3 mandated rating agencies. This reflects the progress we have made in transforming the bank, strengthening earnings resilience and continuing to deliver against our strategic objectives. Moving to quarterly capital developments on Slide 6. Starting with the CET1 ratio, we ended the quarter at 13.9%, up 11 basis points compared to the first quarter. Net income after deductions for AT1 coupons contributed 45 basis points, reflecting strong second quarter earnings, while deductions for distributions of 27 basis points represent a 60% payout ratio in respect to 2026 financials. The other category increased by 11 basis points due to equity compensation and reduced capital deduction items mainly from lower deferred tax assets. Turning to risk-weighted assets, which increased by EUR 5 billion, excluding FX effects of EUR 1 billion. The main driver of this increase was business growth, notably growth in loans and commitments alongside guaranteed funds in asset management. This was partially offset by increased RWA benefits from securitization and reduced CVA risk-weighted assets. We plan to launch new SRT platforms in the second half of the year to create additional RWA capacity. Lastly, the other category of risk-weighted assets includes effects of model recalibrations. Our capital ratios remain well above regulatory requirements, as shown on Slide 7. The CET1 MDA buffer now stands at 270 basis points or EUR 10 billion, reflecting the quarter-on-quarter increase in CET1 capital. The buffer to total capital requirement is 307 basis points, a further increase compared to the CET1 MDA buffer, mainly driven by our AT1 issuance during the quarter. On the leverage side, we ended the quarter at 4.5%, which is 5 basis points higher than prior quarter, leaving us with an MDA buffer equivalent to EUR 13 billion of Tier 1 capital. We continue to operate with a significant loss-absorbing capacity well above all requirements as shown on Slide 8. The surplus over our MREL and TLAC requirements now stands at EUR 22 billion. This reflects an increase of approximately EUR 5 billion compared to the prior quarter. The majority of the increase came from a lower requirement received during the quarter, as previously guided, reflecting the significant progress the bank has made towards resolvability. In addition, higher volumes of MREL eligible liabilities on our balance sheet were not fully offset by the increase in RWA and leverage exposure. Our MREL surplus continues to give us meaningful flexibility to manage eligible liability issuance and if market conditions or economics warrant, to pause new issuance for at least 1 year. Moving now to the development of the loan book on Slide 9. During the second quarter, loans grew by EUR 5 billion or 1% to EUR 491 billion. The underlying quality of the loan book remains strong, reflecting our conservative underwriting standards across all businesses. In the Private Bank, loan development remained aligned with our strategy, reflecting continued growth in Wealth Management, offset by reductions in selected retail lending portfolios. A further offset was driven by the classification of the India franchise as held for sale. Looking at the Corporate Bank, we have seen further growth in SVA positive portfolios in trade finance and lending. Within FIC financing, the growth momentum continued, primarily driven by the financing and solutions business, which includes well-collateralized asset-backed lending. For the remainder of the year, we see further growth opportunities across all businesses, whilst our focus remains on value accretion and capital discipline. On Slide 10, we provide details on the quarterly deposit development. Our well-diversified deposit book grew by EUR 12 billion or 2% during the second quarter to EUR 698 billion. Growth during the quarter has been driven by the Corporate Bank, where we saw an encouraging increase in sight deposit balances within corporate cash management. In the Private Bank, deposit balances slightly increased, supported by underlying campaign inflows and growth in Wealth Management and were partially offset by the classification of the India deposit franchise to held for sale. Looking ahead, we expect to continue to grow our deposit base in targeted portfolios in line with our strategy. Moving to net interest income on Slide 11. NII was solid at EUR 3.6 billion across the key banking book segments and other funding with sequential increases in all 3 segments. In the second quarter, deposit-related NII continued to benefit from underlying volume growth and the contribution from our hedge portfolio, while loan NII benefited from client demand. Looking at the divisions in the Private Bank, margins continue to progress steadily, particularly in deposits with volumes broadly stable in the quarter. In the Corporate Bank, net interest income also went up sequentially with both deposits and loans supported by increased client activity. In FIC financing, the results reflected continued strong demand for lending. For the full year, we expect NII across key banking book segments and other funding to slightly exceed our prior guidance of around EUR 14 billion and benefits from recent rate decisions to become more pronounced in 2027 and 2028, reflecting our structural hedging approach. On Slide 12, which is based on market implied forward rates as at the end of June, you can see our multiyear NII tailwind from rolling our hedge portfolio. The total volume of hedges is increasing over time as we grow stable noninterest-bearing deposits with around EUR 210 billion now invested longer term. The yield of maturing hedges this year is around 60 basis points on average and the 10-year swap rate at which they are reinvested is currently around 3%. Over the last quarter, we have opportunistically executed some forward starting hedges at attractive rates with the result of the amount of NII benefit, which is locked in has increased to around 90% for 2027 and 80% for 2028. The sensitivity of our reported NII to rate moves has further reduced as a result, and you can see that in the usual appendix slide. Moving to our liquidity and funding profile on Slide 13, which remains strong in the second quarter. Our liquidity coverage ratio was 140%, comfortably above the regulatory requirement. We ended the quarter with EUR 237 billion of high-quality liquid assets and the composition of that buffer continues to be very strong with a large majority held in cash and Level 1 securities. Our net stable funding ratio was 118%, while available stable funding increased to EUR 657 billion. The ratio remained broadly flat versus the prior quarter and reflects the business growth and associated increase in required stable funding sources, which was offset by stable funding contribution, mainly from core bank deposits. Overall, these ratios continue to underscore the resilience and diversification of our liquidity and funding base. Let us now look at our issuance plan on Slide 14. Credit markets remain resilient in the second quarter despite ongoing geopolitical uncertainty, supporting continued issuance activity. Since the last fixed income call at the end of April, we have issued a total of EUR 2.9 billion, taking the year-to-date total to EUR 9 billion or more than 70% of the midpoint of our 2026 guidance. Issuance highlights in the quarter included EUR 1.25 billion AT1 at the tightest spread ever for a Euro AT1 instrument issued by Deutsche Bank. The deal attracted a large investor base with more than 225 investors. We also issued a EUR 1 billion 6 non-core, 5 senior non-preferred issuance, which attracted more than EUR 6.5 billion in total orders and a [ CNY 3.5 billion ] senior preferred dual tranche with maturities in 2029 and 2031, taking our cumulative panda bond funding to [ CNY 9 billion ] in 2026. On capital, we have an upcoming call decision for our 4.5% Euro AT1 bond, which is callable in November 2026 by giving notification no later than the 31st of October. Based on current markets, the coupon would reset to roughly 7.3%, which is above current new issue levels. As usual, we will take a decision on this security closer to the call date after considering several factors, including capital demand, refinancing levels versus reset as well as market expectations. We confirm our funding requirements for 2026 remain between EUR 10 billion and EUR 15 billion. To conclude on Slide 15, we are on track to meet our objectives for 2026. Our divisions are performing well and strong first half revenues are putting us firmly on track to comfortably deliver on our revenue ambition of around EUR 33 billion. We continue to prudently pace our planned investments throughout the year, generate operating efficiencies and deliver on our full year expense guidance in line with our Investor Day commitments. Asset quality remains strong and portfolios are performing in line with expectations. We remain vigilant to potential geopolitical and other risks in the operating environment and expect our portfolios to remain resilient to those challenges. On an underlying basis, we continue to expect provision for credit losses to reduce slightly year-on-year. We remain committed to delivering attractive capital returns. That is why we continue to make CET1 capital deductions in line with our 60% payout ratio target, which balances the interest of all our stakeholders. The EUR 500 million share buyback from 2026 net income announced yesterday will commence upon completion of the current EUR 1 billion share buyback. First half year profitability lays a solid foundation for strong operating performance in 2026, and you can see this in our businesses. And finally, we have already issued a substantial amount of our funding plan and plan to issue primarily more senior instruments in the second half of the year. With that, let us turn to your questions.

[Operator Instructions] The first question comes from the line of Lee Street from Citigroup.

Well done on the results. I have 3 questions, please. Firstly, the call today was pretty bullish and pretty upbeat. But from a fixed income perspective against the backdrop of very tight spreads, I'd just like to get your thoughts on what you see as the main risks, micro or macro that Deutsche might face that could cause spread widening from here? Secondly, we've seen much of the big U.S. banks have issued lots and lots of debt significantly in excess of what they've issued in prior years to essentially grow the balance sheet given returns available. You're obviously not doing that, I suppose. Why are you not doing that? I suppose would be my question. And finally, I think a big theme over the last couple of quarters has been growing equities revenues within for investment banks. So what did it take for you to rethink about reentering that market would be my question? They are my questions.

Lee, this is Raja. Thanks for your questions. I will take the first and the third question, and I will have Richard speak on the second one. Look, the call yesterday was clearly one of confidence. I think it's on the back of our franchise momentum and what we've been able to accomplish versus our targets in the first half of the year. It doesn't mean that we are not watching the macro environment broadly very closely because it is a complicated one. We just were able to perform really well despite the uncertainties that are out there. We certainly don't think that the environment is completely benign from the perspective of geopolitics. Look, you are asking the right question. First of all, it's a matter of resilience. We want to make sure that we have very strong liquidity buffers, which we do. Two, we've been pretty focused on where we deploy the balance sheet in this environment. What are we watching for? Look, I think, obviously, one is the obvious one that geopolitical situation is quite relevant. There's some -- obviously some inflation risk upside -- to the upside. But at the same time, what we have tried to do is, one, we don't have any direct exposure to the situation from a geopolitics perspective, so which is a good thing. But on the other hand, we were being a little bit proactive. And as you know, last quarter, we built an overlay just to kind of anticipate some of the risks that we saw that could potentially materialize. Now none of them have so to date, the German consumer and the corporate has stayed somewhat resilient. So that's one. I think we clearly are obviously looking for what -- how long this shock will go on and what potentially could be outcome to the energy-dependent industries. Two, obviously, CRE. That is something that we've been looking at for a while, particularly the office sector in the West Coast. We're not seeing, frankly, deterioration in our portfolio. We are not seeing new positions entering into default. But there's clearly the legacy portfolio that you could continue to see revaluation risks but there, too, we think it's prudent to be proactive. And as Richard talked about, we're deciding that we want to derisk our portfolio at a faster pace there, especially with AI in the future and what -- potentially what impact that could have on people's -- the number of offices that are needed and what the productivity needs will drive. So clearly, that is something that we want to need to watch for, and therefore, we are being a little bit more proactive on that space. Look, in the last quarter, there was a lot of discussion around private credit. And we have obviously put out our information out there. We've kind of maintained our positions. We try to lend to sponsors that have a diverse business model. We try to have a low advance rate, comfortable with the exposure and underwriting standards, but that's a space we want to watch. Understandably so market is focused on the tail risks. And the interesting part there is that despite all the discussion on private credit, the borrowers that are in the upper spectrum that where we tend to lend to, they haven't seen a spread blowout because they are -- people are being pretty picky who they lend to and they can still get their lending done at a good spread because people want to lend to people who they feel are more secure. So yes, I think there are a few things that I mentioned. We don't anticipate that the spreads will stay this tight forever. That's why I think we have to be present. And part of it is our business model, which is, over time, going to be less and less balance sheet dependent, but more and more capital-light fee-based businesses. So that's the way we are navigating. Look, the other question to you was about equities. We made a decision in 2019 that we did not want that the business of trading was not something that we could really see benefiting from or it's a scale business. It was not -- and so that strategic decision we stick by. But we did say as the global house bank, we wanted to retain an equity capital markets franchise, which we did, and that has actually continued to do well. This quarter, we participated in some of the larger transactions that happened in the U.S. So we clearly have a very strong presence in EMEA. We have a research presence, which also supports our finance -- corporate finance business. So that's the area we're continuing to invest in. But at the same time, look, I think if you asked the risk question, the equity markets have been extremely hot and people have done extremely well. And I mean, if you were to think about what the risk is, I mean, we don't have that exposure. But if you -- how much prime brokerage exposure have has been put out there by others. Thankfully, from our perspective, we haven't participated in the upside. But consequently, we also are somewhat insulated from the downside if something was to happen. So I would say we are happy with what we have. Our goal is to just kind of invest in our advisory and origination business, but not redo or recreate cash equities or prime broker-style platform. And that's kind of where we are pretty certain that that's not where we're going to go back to. Richard, I don't know if you want to take the balance sheet question.

Sure. Thanks, Raja, and thanks, Lee, for your questions, and thanks for joining. So I guess around I guess, growing the balance sheet through issuance from the U.S. bank perspective. So I'd say a few things. So one is in terms of our own issuance plan, we've issued EUR 9 billion year-to-date already this year, and that's sort of 3/4 of our plan when you take the midpoint of the range. So we substantially kind of issued for the year, if you like, to kind of derisk that component vis-a-vis credit spreads. And on top of that, we've issued more spread-sensitive instruments as well. So we did a Tier 2 in Q1. We did AT1 in Q2. And of course, we kind of use that to deploy our balance sheet, not just for lending, but also for client demand and FIC. So we have, I guess, been issuing. But to be clear, we're not dependent in terms of -- from a 2028 target perspective on putting outsized balance sheet to work to deliver those targets, right? So we can -- we're pretty comfortable we can do that organically through our own initiatives. But of course, we saw some attractive risk-adjusted returns, then of course, we'll support our clients accordingly. And I guess I'm not quite sure where you go in this direction. But from a funding perspective, we have much larger sources of stable funding beyond issuance, right, in particular, retail deposit base, which a couple of the U.S. peers that you mentioned don't have. So those would be my thoughts on your questions.

The next question comes from the line of Robert Smalley from MacKay Shields.

Just 2. One on deposit competition. If you talk to French banks, Benelux banks, even a U.S. bank, they all see an opportunity in growing deposits in Germany. Can you talk about where they're growing these deposits and how you're meeting their challenge? And secondly, if you could talk a little bit more about your data center exposure and what your plans are around that business going forward?