Deutsche Bank : Quartalsergebnisse (Transcript Fixed Income Call 26 April 2024 For Upload)

Deutsche Bank AG

Deutsche Bank Q1 2024 Fixed Income Conference Call

Friday, 26 April 2024 | 15:00 CEST

Transcript

Speakers:

James von Moltke, Chief Financial Officer

Richard Stewart, Group Treasurer

Philip Teuchner, Investor Relations

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RICHARD STEWART

Slide 1 - Delivering against key objectives

• Thank you, Philip, and welcome from me
• In February, we laid out a clear path to our 2025 objectives for financial performance and capital distributions and we have delivered in line with our objectives and targets
• Let me unpack some of the drivers of our first quarter results on slide 1
• Pre-provisionprofit was up 11% year on year to 2.5 billion euros, and more than 20% higher since we launched our Global Hausbank strategy
• This reflected continued progress on driving operating leverage, which is a core element of our strategy execution
• We increased revenues in our operating divisions by 3% year on year, while Group revenues were up 1% on a reported basis
• Group revenues include Corporate & Other, which tends to add some level of volatility into our revenue line
• As committed, we delivered growth in noninterest revenues, and saw an increase of 11% year on year in commissions and fee income, mainly in divisions where we made investments last year
• Net interest income remained stable in our banking books, but declined on a reported basis as expected
• We reduced adjusted costs by 6% year on year and 5% sequentially to around five billion euros, in line with our guidance
• Now let me turn to the progress across our strategic dimensions on slide 2

Slide 2 - Strong foundation for strategic execution

• Starting with revenues, we have delivered a compound annual growth rate of 6% since 2021, in line with our raised target range of 5.5 to 6.5% from 2021 to 2025
• As promised, we grew mainly in capital-light businesses with strong growth in Origination & Advisory, as well as in the Private Bank and in Asset Management, supported by high inflows of assets under management, underlying our franchise momentum

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• We aim to build on these developments as our franchise expands following our investments in growth initiatives across all business segments
• With net interest income resilient at the start of the year, and growth in noninterest revenues, we feel we are well on our way to our 2025 revenue ambitions
• We continue to deliver on our 2.5-billion-euro Operational Efficiency program; we have completed measures with delivered or expected savings of 1.4 billion euros, nearly 60% of our target, with around 1 billion euros in savings already realized
• The incremental efficiencies this quarter were driven by optimization of our business in Germany and the reshaping of our workforce in non-client facing roles
• We have further incremental measures already underway, including re- engineering of our operating model via additional front-to-back improvements of product processes, and harmonization of infrastructure capabilities
• This gives us full confidence that we will deliver on our commitment of a quarterly run rate of adjusted costs of around 5 billion euros in 2024 and total costs of around 20 billion euros in 2025
• Finally, on capital efficiency, we achieved a further 2-billion-euro reduction in RWAs in the first quarter, bringing aggregate reductions to 15 billion euros, already more than half our target range of 25 to 30 billion euros
• We continue to progress the capital efficiency measures with further reductions coming from data and process improvements, as well as further securitizations

Slide 3 - Provision for credit losses

• Let us now take a look at provision for credit losses on slide 3
• Provision for credit losses in the first quarter was 439 million euros, equivalent to 37 basis points of average loans
• The decline compared to the previous quarter was driven by moderate stage 1 and 2 releases of 32 million euros due to improved macroeconomic forecasts and model recalibration effects which occurred in the prior quarter

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• Stage 3 provisions at 471 million euros remained elevated at a similar level compared to the previous quarter. This included continued weakness in the commercial real estate sector, mainly impacting the Investment Bank, and the continued impact of the operational backlog in the Private Bank
• Our full year guidance for provisions is unchanged at the higher end of the range of 25 to 30 basis points of average loans
• This reflects our expectations that provisions will remain elevated in the first half of the year and should gradually reduce in the second half of the year
• The decline is expected to be driven by an improvement in the CRE sector and the partial reversal of backlog-related provisions in the Private Bank
• Overall, the underlying quality of our loan portfolio remains solid

Slide 4 - Deposit growth path intact

• Moving now to the development in our loan and deposit books over the quarter on slide 4
• All figures in the commentary are adjusted for FX effects
• Overall, loans have remained essentially flat during the first quarter
• Across segments, client demand has remained muted while we have seen encouraging momentum in O&A within the Investment Bank and the Private Bank
• Looking ahead, despite a challenging macro environment for lending businesses, we continue to expect growth in strategic areas by gaining market share
• Our deposit book grew by 9 billion euros compared to last quarter
• This growth has been most pronounced in the Corporate Bank with 8 billion euros of inflows, while growth in other segments was essentially flat
• We remain very pleased with the quality of our deposit portfolio as we benefit from a strong footprint in our German home market and from high diversification across client segments and products with little reliance on institutional wholesale funding
• For the remainder of the year, we expect a moderation of our deposit growth compared to prior quarters

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• In the appendix we provide further granularity around the quality of our loan and deposit portfolio

Slide 5 - Net interest income in-line with guidance

• Let us now have a look at our net interest income on slide 5
• Net interest income for the Group at 3.1 billion euros decreased by approximately 100 million euros compared to the previous quarter, with the reduction being driven by accounting effects
• As a reminder, these effects are revenue neutral on a Group level as the decrease in NII is offset by an increase in noninterest revenues
• Excluding these accounting effects, banking book NII was essentially flat as a decline in the Private Bank was offset by an increase in the Corporate Bank and lower funding costs in the Investment Bank and Corporate & Other
• The reduction in the Private Bank NII was largely driven by the non- recurrence of favorable one-off's as well as the ongoing impact of beta normalization
• On an absolute basis, NII in the Private Bank is in line with last quarter's guidance
• The increase in Corporate Bank NII was due to a positive one-off impact from a CLO recovery which was accounted as NII, with deposit betas showing a steady increase in line with our assumptions
• We expect to see Corporate Bank NII decline in the coming quarters as betas continue to normalize
• NII in FIC Financing was essentially flat quarter on quarter
• We are starting to see margin expansion on the asset side which, if it continues, will help offset margin compression from beta normalization
• In summary, the development in the first quarter reinforces our expectation that we will meet or improve on our prior guidance of a 600- million-euro reduction in banking book NII for 2024 relative to the prior year

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Slide 6 - Limited net interest income sensitivity in 2024

• On slide 6 we provide details on the sensitivity of our net interest income to interest rates
• Our rate sensitivity is slightly lower compared to the prior quarter due to effects of beta normalization as well as the impact of increased hedging as we look to position the balance sheet for the current interest rate environment
• Our sensitivity increases over time as a greater share of our portfolio comes due for renewal with the majority of our sensitivity in the later years coming from our Euro books
• Given that our hedge portfolio has an average duration of between 4 and 5 years, more than 90% of our hedge income for 2024 is already locked in
• As we discussed last quarter, our strategy is to stabilize NII, reduce sensitivity to unexpected market moves and at current rates we would expect to see a long-term tailwind from the rollover of our hedge books at current long term rates

Slide 7 - Sound liquidity and funding base

• Moving to slide 7, highlighting the development of our key liquidity metrics
• With a daily average liquidity coverage ratio of 136% we continued to operate with a robust liquidity position throughout the first quarter
• The stock of 222 billion euros of HQLA, of which about 95% are held in cash and Level 1 securities, was essentially flat compared to last quarter
• Deposit growth in the Corporate Bank facilitated the full repayment of our remaining 15 billion euros of TLTRO
• This included voluntary prepayments of 12 billion euros, well ahead of scheduled maturity
• The surplus above the regulatory minimum slightly decreased by about 4 billion euros to 58 billion euros as a result of higher net cash outflows, mainly on the back of continued deposit growth
• The net stable funding ratio at 123% reflects the stability of our balance sheet despite the early repayments of TLTRO in the quarter
• This corresponds to a surplus of 112 billion euros above the regulatory requirement

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• The available longer-term stable funding sources for the bank remain well diversified and are mainly supported by a robust deposit franchise, which continues contributing about two thirds to the Group's stable funding base
• We aim to maintain this funding mix going forward

Slide 8 - Strong CET 1 ratio

• Turning to capital on slide 8
• Our first quarter Common Equity Tier 1 ratio came in at 13.4%, compared to 13.7% at year-end 2023
• We had a strong capital supply this quarter and the sequential decline was driven by our distribution actions and plans, together with business growth
• 19 basis points of the decrease reflects the ECB approval for our 675- million-euro share buy-back which we commenced in March
• Half of first quarter net income was deducted for future capital distributions, in line with our 50% payout ratio guidance, with the remainder supporting other deductions
• 12 basis points of the decrease came from RWA growth
• The increase in RWA is net of reduction due to RWA optimization achieved during the quarter

Slide 9 - Capital ratios well above regulatory requirements

• Our capital ratios, whilst reduced quarter-on-quarter, remain well above regulatory requirements as shown on slide 9
• On the first of January this year, our Pillar 2 requirement has reduced following last year's SREP process
• This has lowered our MDA level by 3 basis points for the CET1 ratio and by 5 basis points for the Total Capital ratio
• Our CET 1 MDA buffer now stands at 229 basis points or 8 billion euros of CET1 capital

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Slide 10 - Leverage ratio stable

• Moving to slide 10
• At the end of the first quarter our leverage ratio was 4.5%, 8 basis points lower compared to the previous quarter
• The decline was primarily driven by lower Tier 1 capital, in line with the movement in CET1 capital
• Leverage exposure was materially unchanged with lower cash balances offset by higher trading related exposure

Slide 11 - Significant buffer over MREL/TLAC requirements

• We continue to operate with a significant loss-absorbing capacity, well above all our requirements, as shown on slide 11
• The MREL surplus, our most binding constraint, stood at 16 billion euros at the end of the quarter, a comfortable level continuing to provide us with the flexibility to pause issuing new Eligible Liabilities instruments for approximately one year
• Looking ahead, we expect a slightly higher binding MREL requirement from the SRB in the second quarter of 2024 which will only marginally reduce the existing headroom

Slide 12 - Issuance plan in line with previous guidance

• Moving now to our issuance plan on slide 12
• We took advantage of the favourable market conditions in the first quarter to make further progress on completing our issuance plan
• As of now, we have issued 7 billion euros, which is close to 50% of the midpoint of our 2024 plan
• Highlights included senior non-preferred issuances in US-Dollar, Euro and Sing-Dollar, together with a 3 billion Renminbi senior preferred transaction, our third and largest Panda bond to date
• We reaffirm the guidance of 13-18 billion euros for the full year 2024 issuance plan and expect to be active across the capital stack for the remainder of the year
• Some of you have asked us about our approach when evaluating call decisions, particularly those coming up in 2025 for our AT1 securities

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• I can reiterate our previous guidance that we always assess the economics of any call decision, for example, the refinancing or replacement costs versus the coupon reset
• There may also be instances where there are additional impacts such as the FX revaluation impact for AT1 securities accounted for as equity which we also consider

Slide 13 - Summary & outlook

• Before going to your questions, let me conclude with a summary on slide 13
• The first quarter showed that the expected benefits from our investments are materializing and will help to drive growth in noninterest revenues, while we have limited the downside on our interest income through our interest rate hedging activity
• This demonstrates that our businesses are positioned for further growth, contributing to delivery of our revenue target of around 30 billion euros in 2024
• We affirm our target to maintain our quarterly run-rate of around 5 billion euros of adjusted costs this year and around 20 billion euros for the full year
• We expect provisions for the year to come at the higher end of our guidance range of 25 to 30 basis points of average loans
• We are well positioned with our CET1 ratio of 13.4 % and we maintain a comfortable liquidity position above our targets
• Overall, our full focus remains on our progress, through the execution of our strategy and delivering on our 2025 targets
• With that, let us turn to your questions

Questions and Answers
Daniel David	Hi, all. I have a couple of questions. You've kind of
(Autonomous)	referred to it partially with your remarks at the end of
	that, but with the capital instrument issuance of 1 to 2
	billion in the plan this year, can you give us any steer
	what's informing that decision here? Noting there isn't
	any causal maturities this year, but clearly there is next
	year.
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	And then separately, maybe related, how do you think
	from today's perspective regarding the calls of the
	three AT1's that are up for call next year? Assuming
	that the economics can vary deal-by-deal, would you
	make different decisions based on those numbers on
	how you see it? Any information would be great.
	And then secondly, in the earnings call yesterday you
	were quite bullish on outperforming the prior guidance
	on NII. Can you remind us just the divisional trends
	you're seeing and how this may play out in 2025?
	Thanks.
Richard Stewart	Thanks Daniel and happy Friday and thanks for joining.
	I think the first question on the AT1s, you're right, I did
	allude to it in my remarks, but just for clarification. We
	stick with our guidance, as you say, for capital
	instruments of around 1 to 2 billion in AT1's or Tier 2's
	in 2024. And we will update you in due course when we
	reach a decision around which instrument and the
	timing of that.
	In terms of calls, DB will continue to make decisions
	regarding the exercise of an issuer call closer to the
	exercise date, balancing the interests of all of our
	stakeholders. Our approach is based on economic
	factors, including the usefulness of the instrument for
	capital funding and rating agency metrics, as well as
	the cost of the instrument versus other alternatives. I
	would note that the non-euro AT1 instruments, the
	historic FX balances also can play a role and can
	change that call decision, even if that call is beneficial
	from a credit perspective. We would note that despite
	the improvement of AT1 spreads we've seen this year,
	the recent spreads on most instruments are still below
	current market new issue levels, which is reflected in
	some of those instruments trading below par.
	Obviously we'll continue to monitor this as we progress
	through 2024.
	In terms of the NII question, I think bullish is a pretty
	fair characterisation. We touched on this in a few
	different answers to question yesterday, so let me try
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