Deutsche Bank Aktiengesellschaft (DBK) Earnings Call Transcript & Summary

Good morning, everyone, and welcome for the second day of the conference. Thanks all for being many here this morning. Raja, you joined about a year ago, 6 months now that you're fully in charge. And Germany promptly decided to make things interesting for you. We had a fiscal package big enough to change the macro conversation, an election calendar nobody can grow. Chase turning up to the competition for German deposits, an European consolidation very close to home. So most CFOs will have a honeymoon period, but you appear to have been handed the live agenda. But the good news is that the bank arrives here in rather best shape than the backdrop. The 28 plan with above 13% RoTE targets, revenues that finally look diversified rather than dependent and a capital story that has moved from repair to return.

So we have 40 minutes here, and we'll try to get underneath all of it. Maybe you can start with the general macro. And welcome, Raja.

Thank you, Tarik. Thanks for having me here, and very pleased to be here representing Deutsche Bank. Look, I think from my perspective, yes, the macro is complicated, but the direction of travel in Germany is, from my perspective, still very encouraging. If you look at stepping back, what has actually happened in Germany. Last year, we actually had a 50% increase in foreign direct investments. We just did a survey of international investors in Germany, still is it on top of the list from a desired location. We had 0.3% growth in second quarter. The projections for the growth rates in this full year and next year are actually creeping upwards. What I also find encouraging is the corporate sentiment, despite what you read is actually quite positive. We can see quite getting engaged. They're making investment decisions, where you see a little bit of lack of obvious consistency is on the SME sector. So the corporate confidence has not clearly and consistently transferred to SME, that's why you perhaps see a little bit less of that. The other thing that we think about it from a German perspective is last year alone, the VC funding was up by almost 44%. There were 3,000 new startups. So I would say, all in all, while Germany is not where we thought it would be when the stimulus and the defense package came in, I think, it would not be prudent to conclude that nothing is happening. So, as we as the largest bank based in Germany, certainly see activity and that you can see in our working capital finance transactions and our loan growth transaction. So all in all, I would say what we need is more of the same, but at a faster pace. But to say that momentum is not happening is probably not accurate either.

So we'll see how that translates into your guidance only. But before that, on the German politics I mean how would you really describe the political landscape? Because, I mean, the recent elections in different lenders point to some instability potentially at the government and [indiscernible] level and what implications on the fiscal stimulus and at least the speed of actually investment that you just mentioned and the growth? How do you see these implications?

Yes. So I'm probably the least equipped to print on German politics, given I've only been there less than a year. But look, I think one thing, you have to find the commonality. One thing is that Germany needs more reforms, more economic progress, more growth that goes down all the way, not just at the corporate sector. So from my perspective, that is the most important part is that the, there's alignment that there needs to be done more. I think from my personal perspective, any views that take away from a European perspective and lead towards more of an isolationist is probably not the one that we want but clearly, the reform agenda is on the table, the defense spending and infrastructure spending, we already see playing out. So while this -- the politics is something that we have to closely watch. At this point, I think what our -- what we see is that the activity is happening, and we'll see how it plays out. Look, it's decentralized political systems. At the end of the day, the government of the center is the 1 that actually is really important, and I think that's where we need to focus.

Turning to your strategic plan you presented in November last year with the '28 time line. So now almost a year, in what areas you think actually you've been and we'll go in detail on , but which area you see as a challenging to achieve? Or actually, you see more upside?

Sure. Look, in your introduction, you were kind enough to acknowledge that the overall landscape. But I would like to say I'm super happy about the start. We had a record first half with RoTE close to 12%. And -- so from a start perspective, to my own start but not also start to new strategy cycle, I said we would be doing pretty well. Look, we're just starting with no any particular order. If you look at what we have done on the private bank side where we had set a goal for EUR 1 trillion client assets, we have, I would say, done as well as we thought we could perhaps even better in terms of asset gathering. And that momentum is continuing. The asset management story is pretty clear. The long-term flows are strong. Germany and Europe is a destination, and we are playing that part. And thankfully and finally, Corporate Bank, which we always said would have a turnaround in the second half of the year, and we already started showing that in the second quarter. I think given what we're seeing, both in Germany and the loan growth and the -- our flows I think there, too, now we are right back where I thought we would be, and we will talk about it a little bit more. And finally, look, I don't need to say too much about our investment bank and especially our in fixed income franchise. It is come the jewel in some ways. It has actually done extremely well. IBCM, which actually had a little bit of a slower start to the year is finally fully participating in the U.S. perspective. Europe is where we are strongest, which has a little bit of slower growth. So I think perhaps still a little bit more work to do over there. Overall, the credit underwriting, credit quality has remained consistently where we thought it would be. So all in all, Tarik, I would say pretty pleased expenses we have managed to keep under control. And obviously, you saw the capital story that we actually started accelerating our buyback. So I would say, as the first 6 months ago, I would have not won a different start.

Perfect. And in terms of the overall strategy, I mean you've paid out with the CMD, obviously, but this diversification on focusing more on the repeat business for says less volatile, is that something that you see really happening at what pace? And of course, you want to be still big IP player, but how much of the focus on rest with the pension reforms in Germany and all other topics are actually pushing that angle of...

So the pension reform was not fully baked into our 2028 plan because at that time, the proposal was not. We didn't know what it would look like when it would come. So yes, that is certainly a tailwind. Look, even at today, 60% of our revenue are now coming from non-IP. So we have clearly started to shift that mix. The PBT will follow shortly after, and then it's a matter of how much capital do we really need in IP versus non-IP. So I think that mix, which is organic, is already happening. And if the reforms, general fiscal reforms and the pension reforms accelerate, clearly, that shift would progressively go faster. Look, what I want to point out to you is Wealth Management, we grew revenues by almost 8%. And I don't see that trajectory over the long term slowing down, given that we brought in EUR 60 billion of net new assets just in the first half of the year.

Okay. So digging more on revenues. Can you give us an overview of the key trends for each of the businesses?

Sure. As I mentioned, private bank continuing down its journey, what we saw in the first half of the year. strong deposit inflow in the German retail, wealth management continuing to bring in new assets and new investment products. So I've suggested what we see in the first half of the year, I see that trajectory continuing. Corporate bank, I've already mentioned that we believe that we will exit the year out in mid-single digits to slightly higher, and we expect to see the trajectory soon, meaning the second half of the year already evidencing that. Asset management, again, strong inflows. So I feel pretty good about where we were in the second quarter and where we are in the third quarter. And frankly, speaking on the investment banking side, FIC 2020-'25 was our strongest third quarter on record. In this quarter, you have to look at a little bit on a business level outside of credit trading, which was a record quarter, by the way, last year. Everything else seems to be up from where we thought we would be and exactly in line with where we were. So putting aside the credit playing dynamic, most of the products are up. We have still 6 more days to go in the quarter. So against a very strong third quarter last year, we still expect to be either flattish or slightly down. But if you remember, this is against a record quarter last year. I don't personally see the gloomy outlook in FIC over the long term that we've seen. We built a business here that is not an episodic quarter but a sustainable one. So I feel pretty good. IBCM, we have strong activity in M&A, ECM and DCM, offset a little bit by LDCM it mostly because of the calendar. So overall IBCM, I would expect we'll probably be flattish. So all in all, depending on the last 6 days ago, we could come out overall investor bank probably flat to maybe slightly down, but we'll see where the last 6 days go.

Okay. Thank you for those guidance. And I mean, we had last week some guidance from U.S. banks on the IB. And I think for the other users thing to really, from your perspective, how we should read across the U.S. guidance into Deutsche Bank, given your mix and so on overall -- not for the quarter, but in general, how?

Like I mentioned, I think the big business was just to dig that since it's such a big portion. We had a very strong July August is usually seasonally slow in. So there's no difference than what we would see in a normal year. September was a little bit of a mixed bag. But I think, as I mentioned, we have produced -- we are having a fit quarter, which is pretty much matching up to a record second quarter last year. And as we see our product mix and our diversification, I feel pretty good about where things are headed. Like that's why I mentioned, I didn't quite get the gloomy outlook specifically. Clearly, second quarter was an outsized quarter. But when we look at our third quarter, it is entirely in line with our expectations.

Thank you. And in terms of the bigger topic of super cycle investment and so on, I mean, clearly, it started very strong in the U.S. We can see from some sector data that is starting some green shoes coming into Europe, how you really do see that environment for the IB? And then specifically for you, do you have now the teams, the structure to be a key player and captures those revenues?

Yes. As I mentioned, in the U.S., we have been participating along with the U.S. banks in all the major transactions that had happened this year. So it gives -- it tests our hypothesis direct that we can be European alternative or at least alongside U.S. banks. The way I think about it is that European corporates need a little bit less dependence solely on U.S. U.S. corporates want diversification of advice. And for both, we have Deutsche Bank. So it's the 3Ds, from my perspective, worked pretty well. If you look at the data center financing and exposure that we have, 75% is U.S., 25% is Europe. So Europe is certainly a player, perhaps not to the same extent as U.S. perhaps U.S. is ahead, but if I think about this super cycle coming to Europe, then clearly, we will be the biggest beneficiary.

And in terms of putting balance sheet at work to capture those revenues. I mean, clearly, in Europe, we have slightly more constraints versus U.S. Do you don't see that as a handicap to be participating on those revenue?

Within our risk appetite and what we want to do. I don't think it is a handicap. So it has not kept us from deploying more or less. We are maintaining within our risk appetite. So I would say our constraint is perhaps our own risk appetite on know how exposed you want to be and when -- because we want to be with the hyperscalers. We want to be with the diverse companies. So from our perspective, it is not a handicap for us for what our ambitions are.

Okay. I'll talk to the audience if there's any question on the stage. No. So, I'll carry on. So I mean, still on revenues on the net interest income. I mean, the shape of the curve is completely different from where you actually have your assumptions on the last year in the plan. I think Q2, you kind of suggested that there is upside to the guidance, EUR 14 billion for this year and secondly '27/'28. Can you update us on what you see on that aspect?

Sure. I think we had provided previously guidance around NII of around EUR 14 billion. So given the rate environment, we certainly see that it will be slightly better than where we are. But if you think about the way our hedging program works that we actually have a structural hedge to protect against the downside risk, which means that our upside also comes gradually and sequentially. So it will be a bigger upside in '27 and a bigger one in '28 and go on. So the advantage of that is that while you don't get an immediate impact, but when rates do go up, it stays for us much longer. And that is how we have designed our interest rate management to not be a speculator here, but to manage interest rate through the cycle. So from my perspective, that's what we should expect to see that gradually over the outer years as the hedges roll over and we reset them at a higher rate. We see benefits and then those benefits last much longer. Even if the rates come down, we are protected and to the downside.

Very clear. Maybe you can talk a bit about deposits and what's your assessment on competition in Germany. I mean some will underplay a bit the new entrance competition, really. But how do you -- what do you see on the ground? And how do you actually position there?

So Germany is a very attractive and competitive market for deposits and it always has been. And I feel lucky that we are the largest player in the most attractive -- one of the most attractive deposit markets because that means that we have an opportunity. We have certainly seen new entrants come in, whether they are the fintechs or whether they're large banks with promotional offers and teaser rates for a certain period of time, that causes a short-term disruption, but not a long-term impact on our strategy. We just did the campaigns where we've talked about it, we never go out with the highest rates. And all of our campaigns, we got what we wanted to get. I think the difference that is that our relationships, we have 18 million existing customers. Our relationships are not just paid on a promotional rate. They are usually investment products attached with it transactional and operating deposits attached with it. So from my perspective, it has been less of an issue that would cause me to rethink our strategy even temporarily, if the betas are slightly higher these deposits for us are hugely accretive. So yes, they are there. We take into consideration what they're doing. But all in all, I would say it has not forced us to change our strategy.

And so what do you see in terms of pricing on deposits versus your deposit EBITA as well indication there?

So look, I think every new entrant has come at the very beginning with an attractive offer. The question really is how many of our clients actually leave and how many come back. The way I think about it is that we do a promotional campaign. What was our hypothesis of people who will stay post the campaign and what they will leave. And so far, we haven't seen a material deviation. So our model behavior has played out really well. So as I said, temporarily, you could see a higher rate dynamic play out, but these promotional rates expire eventually and clients who are solely transacting based on the rates generally tend to come back.

Very clear. Now in terms of conversion of those deposits into investment products, I mean, Germany hasn't been always the forefront of that. How do you see now lot of banks are introducing more and more products to convert those deposits, how is it going, although in your insight with the asset management and...

Yes. So I think this is obviously more of a play on the retail side specifically, where general clients steadily tend to sit on cash on deposits versus investment products. I talked about it in the first quarter alone, we had a record inflow of investment products, and we are continuing to see that trend. Now the big game changer, obviously, there would be the pension reform because that will set not only a new avenue for people to invest. But also, I think more importantly, it will create a culture of investing into the capital markets versus a culture of putting money into deposits. So the awareness is slowly coming, and we are actually working pretty hard on our 18 million customers to ensure that they have access to our products, both from inside the bank but also DWS, which obviously is a natural advantage for us that we are the only real bank there with a large wealth, retail, and asset management presence.

Yes. Just looking at the floor in case any question -- is there a question in the front here?

Can you give us an update on the commercial real estate exposures. Rates are now going up. I mean, virtually everywhere, the risk never really cleared. You can see some of your peers exposures in Europe and in Germany in particular, deteriorating. So it doesn't look like a great picture. And obviously, it's something that's tripped up many players in the market. So -- can you give us the state of the art on that, please?

Sure. So I think, as you know, commercial real estate has been a story for us the last couple of years, including something that we took in the first quarter. Our primary exposure for all our exposure, our high-risk exposure is down by almost 40% to 50% until the start of the cycle. So we have significantly worked that anything out, including exits that we did in the second quarter, which were intentional to get some of the nonperforming exposure out so that we don't have a revaluation or repricing risk. With that, most of our exposure that we were working through was not necessarily European, but it was the U.S. West Coast office exposure, which -- but we've kind of worked through over the last 2 or 3 years. So at this point, while that story is not fully over, we have substantially reduced both the notional plus we have a reserve for a large chunk for that. At this point, the gap between our stress loss scenario and our actual reserves is very tiny. So to the extent there's not a major upturning off the market, we feel cautiously optimistic that we've have got at least most of the issues behind us. We're not quite seeing the stress yet, at least in our book in Europe. But I obviously cannot define on other people's plates. But so far, Europe has not been really the main driver for us. In the past, it was the U.S. commercial real estate, especially West Coast.

So following up on this question, I mean, as alluded in Q2, you had to take extra provisions -- you mentioned it was SBA positive with higher capital generation on the back of that. So what should we expect for Q3? Is this something a trend that will continue here or you will be doing it in an opportunistic way?

As I mentioned in the second quarter, we will do it in an opportunistic way, and it will not be earth-shattering kind of a change when we see an opportunity to derisk but also free up capital that I would like to take that trade, Tarik. I think for the third quarter, on the CRPs. As I've said, the underlying quality of the book is pretty good, both on the private bank and the corporate bank. We're not seeing the level of stress that you would expect given the economic environment. Overall, I think, obviously, we have an indistinct charge related to a corporate bank exposure that has actually also been impacted a few other players as well. So I would expect our third quarter CLP to be somewhere between first and second quarter, nothing extraordinary.

Okay. And staying on asset quality, I mean you've been very clear about what Q3. But in general, I mean, we hear a lot of deliquencies and deterioration of quality in general for the SMEs in Germany. Is that something you see on your books? Or is it more kind of local smaller banks?