Deutsche Bank Aktiengesellschaft
Q4 2016 Earnings Call Transcript

Published: 2 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. I'm Mia Valle, your Chorus Call operator. Welcome, and thank you for joining the Fourth Quarter 2016 Analyst Conference Call of Deutsche Bank. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. I would now like to turn the conference over to John Andrews, Head of Investor Relations. Please go ahead.

[John Andrews:]

Operator, thank you very much, and good afternoon from Frankfurt. I'd like to welcome everyone to our fourth quarter and full year 2016 earnings call. I'm pleased to be joined today by both, John Cryan, our Chief Executive Officer, and Marcus Schenck, our Chief Financial Officer. John will open with some brief comments and then Marcus will take you through the analyst presentation in more detail. And as always, the presentation is available on our website at www.db.com. As we did last quarter and every quarter, I would ask for the sake of efficiency and fairness to questions, please limit themselves to their two most important questions so that we can give as many people a chance to participate in the Q&A session as possible. Let me also provide the normal health warning to pay particular attention to the cautionary statements regarding forward-looking comments and you'll find those at the end of the investor presentation. With that out of the way, let me hand it over to John. John?

[John Cryan:]

Thank you very much and good afternoon, everyone. I intend to keep my remarks very brief. I know Marcus tends to take you through the numbers in quite some detail. Let me start with the group financial highlights that are set out on page two and just pick out some numbers. We're doing this in the afternoon this quarter so you will have had a chance probably to look through the numbers in some detail. But a quarter, on the face of it, which was in very difficult circumstances for the bank, towards the top of the P&L doesn't look too bad. We've reported positive jaws. Our net revenues for the quarter are up on the corresponding quarter the prior year, albeit by just 6%. But the quarter was overshadowed by litigation charges and impairment charges, something totaling €2.6 billion, which drove the loss before tax for the quarter of €2.4 billion and that €2.4 billion reversed the €1.5 billion or so of profit we'd managed to make before tax in the first nine months, yielding a loss of about €800 million for 2016 as a whole. And then we have a tax charge on top of that because of non-tax deductible items leading to a net loss of about €1.4 billion. So a disappointing overall result. However, there were some signs that I take as positive. The first is we managed to keep our reported revenues for the year at €30 billion. That was roughly our target. I admit that on an underlying basis they're a little shy of that, but nevertheless so as 2015 to some extent and there is some good news which I'll cover in a second. On the capital front, we managed to reduce our Risk Weighted Assets to the €358 billion level. I would also suggest that that's a tad lower than we were actually expecting, some of that reflecting a drop-off in business volumes that we saw, mainly because of idiosyncratic factors that were impacting the bank towards the end of the year. But the fully-loaded CET1 ratio of 11.9% is something of the order of an €11 billion buffer against the minimum regulatory requirement. On costs, as you know, during the year we saw the operating environment deteriorate even from the first quarter, and we took additional measures to attack the cost base for 2016 without sacrificing any of the investment we were making to make sure that the longer term strategic cost base was reduced. And that comes to a little in the overall reduction of costs. We're still en route with that adjusted cost amount of €24.7 billion towards our target of getting it to €22 billion and below. On the next page, we've covered just some of the litigation matters that we managed in the course of 2016, and frankly also in January 2017, to put behind us. There were actually a couple of dozen major issues that were of concern to management and our supervisory board, and we've settled within that a large proportion of them. And we're quite well advanced on the ones that are not yet formerly put behind us. So I think we're quite pleased with the progress we've been able to make. The big issue was obviously the civil case with the DOJ regarding RMBS, which we managed to settle just before Christmas. And that was really the most significant case because for the whole of the fourth quarter there was considerable uncertainty in the market and a lot of speculation in relation to how we would cope with the opening demand of the DOJ of that $14 billion ask. Anyway, that's now behind us, and that's paid. And we do have some consumer relief to deliver, but I think we feel reasonably confident that we're on top of that. In the other cases, without reading them all out, some of them we were concerned about, and we're very pleased to have them put behind us. That reserve at the end of the year, just to confirm, we have actually now paid, for example, the $3.1 billion to the DOJ. That reserve, as of today, obviously would have come down from actually settling, so that's positive. I think the other positive highlight that I would just cover while I'm doing the talking is the NCOU because I think we're very pleased with the way that we managed to meet our targets for that by the end of the year. On page 4, we've set up some of the metrics of its performance over its lifetime, and we've now dissolved that as an operating segment. So we won't see that in 2017 and going forward. We've simply let the residual assets go back to the original seeding operating divisions. Very pleasing. It was a division that's impacted the results for the fourth quarter. A lot of what happened in the fourth quarter was obviously teed up in earlier periods, but there is an impact on contra revenues from the NCOU which we won't see in future. There's an impact on the credit loss provision line which we obviously won't see in the future, but there's a positive impact on RWAs, and the CET1 benefits of the NCOU over its lifetime was something in the order of 2 percentage points or so. So, good to get that one behind us. On current trading, for those of you who listen to the press conference this morning, you would have heard that we were optimistic on a couple of fronts. One, obviously we've got a number of these challenges now behind us. But also I think we've seen particularly since Christmastime when we managed to put the RMBS case behind us, we've seen a recovery in our business volumes, and we've seen customers coming back to us. And although it's always early to make long-term prognostications for the year, morale in the bank is much better, and we're seeing a lot more client engagement. And so far this year, we've been pretty pleased with the progress we've been able to make. So it looks as though we've got a decent foundation, and with a lot of the one-off costs behind us that have been driving these negative overall results for the past couple of years, we're sitting here in early February this year in a very different mood from the one we were in a year ago, feeling a lot more confident and optimistic about the outlook for the rest of the year and actually for the delivery of our overall strategic plan. With that, I will hand over to Marcus who can take you through a lot of the detail.

[Marcus Schenck:]

Thanks, John. Welcome, and to the people in the US, good morning. Also from my side, to our Q4 2016 results call, allow me an apology right from the start. I will be talking for quite a bit, and in fact maybe a bit longer than usual given it's a full year review. Let me start by guiding you through the net income bridge for the fourth quarter of last year. Excluding C&A and at constant foreign exchange rates, revenues for the group increased by €0.9 billion versus the prior-year quarter. This includes €0.8 billion related to a gain on sales from our Hua Xia stake in the fourth quarter of 2016. Looking at the divisions, Global Markets revenues were down €41 million in Q4 with higher Debt Sales & Trading revenues offset by lower equity Sales & Trading revenues. For CIB, we saw an uptick in revenues of €36 million, the stronger performance in Corporate Finance was counterbalanced by lower Transaction Banking revenues driven by lower balances and the weak interest rate environment. PWCC revenues were up €504 million year-over-year, which includes a €694 million higher contribution from Hua Xia driven by the aforementioned sale, which was in part offset by lower revenues from the Private Client Services, or PCS, business in the U.S. after that unit was sold in September of last year. Asset Management revenues down by €36 million year-over-year, revenues profited from an increase in performance in transaction fees offset by negative fair value adjustments of guaranteed products and reduced management fees as well as the reduced assets under management. Postbank revenues were up by approximately €200 million, driven by ceased revenue burden from an adjustment to Bauspar interest provisions in the fourth quarter – which we booked in the fourth quarter of 2015. Non-Core Unit revenues were also up by €200 million year-over-year, reflecting the de-risking gains, whilst moving on with the overall wind down of this segment as John has described. C&A reported €400 million lower revenues compared to prior-year quarter with the main driver being negative effects from valuation and timing differences off our Treasury portfolio. The provisions for credit losses increased by €113 million, driven by provisioning primarily in our shipping portfolio. The adjusted cost base improved by €465 million year-over-year mainly from lower performance-related compensation. Restructuring and severance expenses were approximately €680 million lower compared to prior-year quarter and litigation expenses increased by about €400 million mainly reflecting the DOJ-RMBS settlement as well as smaller impacts from the recent settlements with U.S. and U.K. regulators regarding the Russian equities matter. Impairments increased by €1 billion primarily related to the sale of Abbey Life. Income tax expenses were up whilst we saw a favorable FX movement. As John pointed out, this overall leads to a net loss for the quarter of €1.9 billion. The following slide shows the net income bridge for the full year, representing our preliminary results at constant exchange rates. Global Markets revenues were down €1.5 billion compared to prior year, primarily driven by idiosyncratic factors in particular the impact on our client franchise from the DOJ or from the RMBS leak as well as the deliberate exit strategies announced in Strategy 2020 as well as market underperformance due to our business mix. I'll come to that in more detail later. CIB recorded lower revel revenues by €0.5 billion despite the fact that revenues from Advisory and Equity Origination and Corporate Finance significantly improved in the second half of the year. Transaction Banking revenues continued to suffer from low interest rate environment in Europe and depressed trade volumes. PWCC revenues were up €233 million year-over-year. Again, this includes the impact from the disposals of the Hua Xia stake and the PCS unit. Excluding this, revenues declined approximately 7% year-over-year reflecting reduced activity of our clients in more volatile markets as well as the continued low interest rate environment. Asset Management revenues for the year were slightly up and Postbank revenues were also up by €254 million. The Non-Core Unit revenues were down by €1.2 billion year-over-year which was in line with our de-risking strategy for this segment. C&A reported €623 million lower revenues compared to prior year. Provision for credit losses increased by €429 million, driven by provisioning, primarily driven in shipping as I mentioned but also in the previous quarters in the oil and gas portfolio. The adjusted cost base improved by €1.2 billion year-over-year, mainly from lower performance-related compensation. Restructuring and severance expenses were €277 million below prior year. Litigation for the full year were also €2.6 billion below prior year level, and so were the impairments by €4.5 billion since we had, as you will remember, those extraordinarily high impairments which we booked in the third quarter of 2015. Income tax expenses were slightly better for the full year, and FX movements for the year were also favorable. With that, we expect a net loss for the full year 2016 of €1.4 billion. Let me highlight again that these are preliminary results. In particular, our litigation costs may change either way until we publish our final numbers for 2017 on March 17. Sorry, the final numbers for 2016, of course. The next page provides an overview of our noninterest expenses for both Q4 as well as the full year 2016. For Q4, and at constant exchange rates, it increased by €300 million to overall €9 billion. The reduction of adjusted costs of €470 million got offset by higher non-operating costs such as the €1 billion impairment on goodwill and intangible assets triggered by the sale of Abbey Life as well as higher litigation of €400 million including effects from the DOJ's settlement. Restructuring and severance expenses were down by €680 million. And on a full year and FX adjusted basis, noninterest expenses hence came down by €8.5 billion. Let's look into our adjusted cost base over to the next page, which are €1.2 billion below prior year. You see five categories with the following year-over-year movements at constant exchange rates. Comp and benefits were down €1.1 billion driven by lower performance-related compensation. IT costs remained our second largest cost category which increased by €322 million, half of it due to higher depreciation of self-developed software. Professional service fees were up €106 million, influenced by regulatory implementation projects. Occupancy costs were €61 million higher, mainly driven by an impairment charge of €86 million books in the fourth quarter. Bank Levy and Deposit Protection costs decreased by €119 million due to U.K. Bank Levy double taxation relief as well as reduced deposit protection cost in Germany. In addition, other costs came down €415 million due to lower operational losses, reduced amortization for intangibles, divestments in the Non-Core Unit and reductions in staff-related non-comp expenses. What you also see on this slide is our head count development. Compared to last year, head count decreased by around 1,400 FTE including about 2,000 who were internalized. The main drivers for the reduction were Strategy 2020 measures as announced in the last year including the successful sale of the Private Client Services unit in PWCC. On our next slide, we show our capital position. Common Equity Tier 1 capital decreased slightly from €42.9 billion at the end of Q3 to €42.7 billion at the end of December as the negative net income was offset by the Hua Xia Bank disposal benefits as well as favorable FX movements. AT1 capital remained constant at €4.6 billion. Risk Weighted Assets decreased substantially by €27 billion compared to prior quarter to now €358 billion at the end of the year. The main drivers here were the following

[John Andrews:]

Operator, if we can begin the Q&A, please. Operator?

[Operator:]

Ladies and gentlemen, at this time we will begin the question-and-answer session. And your first question is from Jernej Omahen of Goldman Sachs. Please go ahead.

[Jernej Omahen:]

Okay. So good afternoon from my side as well. I guess the first question it's fair to kick it off by saying, well done on settling the U.S. litigation issues and on stabilizing the institution. But I guess that, as a consequence, the debate is now going to shift from the financial stability aspect to the topic of profitability. And I have just one question on this. And it goes as follows. So even post-settlement and stabilization, the funding costs for Deutsche Bank have risen and are higher today than at the time the restructuring plan was initially announced just over a year ago. The balance sheet constraint, I guess, is higher than what you must have thought at the time of the announcement. And if we take all the bad things out from the results, so litigation and one-offs, we get to just below 5% return on equity. So thinking about profitability in 2017 and 2018, when the starting point without litigation, without restructuring costs is 5%, when the funding costs are higher, when balance sheet is a constraint, how do we get from just below 5% to the 10% target or even perhaps just 7% or 8%? That would be my first question. Maybe the second one, purely on regulation. You talked about the Trump effect on the revenue side of the equation. It seems to be that there is a stalemate at the Basel Committee currently on finalizing Basel III. And I thought if you could share any thoughts with us on that. Thanks a lot.

[Marcus Schenck:]

Jernej, Marcus, let me start and then, John, you add. So, on your first question, which is, obviously one which would probably warrant almost a longer discussion, let me highlight the core points. First, I mean, we are seeing, at least relative to where we were three months ago, a tightening in our funding cost. But you're right. It's higher than – and I think you're referring to what it looked like in October of 2015. And we clearly have to do more to bring that down. With more and more clarity kicking in, in particular, on the litigation fronts, we would expect this to come down further. That's the first point. Secondly, we have not yet seen a lot of structural improvements on the cost side. I was highlighting that our target to – excluding Postbank gets to an adjusted cost base by 2018 is to be below the €22 billion number. And in fact, with that, you shouldn't interpret this as we're targeting to be at €21.9 billion. Now I don't want to hand out a number, but we clearly think we need to and can be more aggressive on that side, in particular utilizing – and that's why we put in place, I would say, a qualified hiring freeze. We can utilize the natural turnover that we do have in the bank. That cost save will give us quite some uplift. Most notably, quite frankly, you will also see this in our Retail business. And we do expect the revenue position of the bank that we had experienced in 2016 not to be representative for the coming years. As we've mentioned several times, we are already here in January now seeing just from the way clients interact with us, but also me just looking into the daily numbers, that the situation is turning. And I think that's the most important point. The 2016 profitability was heavily negatively impacted by a lot of noise and by very poor developments on the revenue side, which we do expect to turn. And that, combined with our cost measures, we do believe, were medium-term. Now whether that's 2018, we'll have to see. That's still our target. But I would say medium-term, we are clearly convinced we can take this bank to a 10% return. On the regulation side, Basel III/IV – I think the market calls it IV. The regulators call it III. We all know what we're talking about. I think what would be good is if we finally got clarity on what the outcome is, be it that there is no outcome, be it that there is a specific outcome. Right now, when asked, what do we think it will mean for us? I would say it's still more likely that we will get some conclusion from the Basel Committee. In terms of what it means numerically for us, at this stage, we would still stick to what we have communicated in October 15. Namely, it probably represents about €100 billion increase. The contribution on the Market Risk side from the FRTB is slightly lower than what we had expected back then, but it might be slightly higher on the credit side. And the one thing where we are certain, even if they come to – if and when they come to a resolution now on Basel IV – the implementation will be much, much later than what we had originally thought. The EU Commission has communicated that they would consider an implementation not before the beginning of 2021, maybe even as late as 2022. And even then there might be a phasing period, which could take it – looking at it today, it could be a seven-year to 10-year time horizon for this, which is very different compared to what we had anticipated 17 months ago where we were still of a view that everything would kick in, in 2019. Longwinded answer. I would say our base case is we will get a resolution in Basel. It will mean an increase, but it will come only sometime in the next decade.

[John Cryan:]

Can I just add a little comment on your funding cost point, Jernej? You shouldn't forget that the funding cost increase from spread increase that we saw, particularly in the fourth quarter, doesn't have a dramatic impact on our overall cost of funds because although the funded balance sheet is around about €1 trillion, we're only talking about the non-deposit fraction of that. And when our funding spreads were at their widest, we didn't lock them in. We didn't actually issue. We have seen it tightening. We're not happy that it's tightened enough. I actually think this company has always been extremely creditworthy. We just need to be able to show that with very long liquidity. And one thing which I would add just not to overdo the optimism, if you think about our deposit business, we're actually getting some tailwinds now because, less so in euros but certainly in dollars, the shape of the yield curve is actually now enabling us to make money from our liabilities. So a change in the yield curve, I think, over time, will to some extent counter effect the effect over time of replenishing our spread-affected funding.

[Jernej Omahen:]

Thanks for that. John, maybe if I just come back to your question very briefly. So it used to be the case that Deutsche funded cheaper than any of its competitors, particularly in the Investment Banking space. So did I understand your answer correctly? Do you expect that to return at some point in the future?

[John Cryan:]

That's why we turn up to work every day. No, I really do. I mean, we're the Europe's leading bank. We should fund at a rate that reflects that.

[Jernej Omahen:]

All right. Okay. Thanks a lot.

[Operator:]

Next question is from the line of Jon Peace of Credit Suisse. Please go ahead.

[Jon Peace:]

Yes. Thank you. I think, Marcus, you said this morning that fixed income trading was up 40% in January which would be a terrific acceleration and put you on the first quarter 2015 run rate. And I just wondered, is that all client business. Or was there anything unusual and lumpy in there? And then my second question was on Deutsche Postbank. What's the book value of that business at the moment? Because I think it's a bit less than the equity you allocated to it in the Financial Data Supplement. So I think it's a little bit less than €5 billion. And I just wondered, what is your sensitivity around the disposal of that business. How much of a write-down are you prepared to accept? What sort of CET1 accretion are you ideally looking for? Thank you.

[Marcus Schenck:]

Okay. Let me take the second question first. We have not and don't plan to disclose the book value of our Postbank asset because it's not a terribly helpful metric to disclose, in particular when an M&A track is also an option, which is why I also find it difficult to comment on an acceptable write-down. I think the only data that we can point to is that this business has, rounding, €40 billion of Risk Weighted Assets, which would – where about €40 billion would leave the bank in case of a disposal, be that via an exit through the capital market or through an M&A deal. And I guess one thing is also clear, and John has never made a secret out of that, I mean we will only be selling this asset if it gives us a meaningful capital relief, and hence, we will certainly not accept a major write-down. But I really ask for your understanding that from a negotiation point of view, it wouldn't be terribly smart for us to disclose the book value. On your first question, so, on the debt side, yes I did mention that January have seen an almost exactly 40% increase when comparing January 2017 with January 2016. There's nothing unusual there. It's clearly not all client activity. Some of that is also buy and hold positions. Let me, in this context, also highlight that – because we don't want to only throw out selective positive metrics, although, quite frankly, the pickup that we're seeing is in almost every business – where it's still pretty slow is in Equity Sales & Trading, where it's flattish to slightly down relative to the January 2016 numbers. This is predominantly driven by the fact that it just takes some time until you in a way bring back particular those prime brokerage balances which I think we've been fairly clear, some of which we lost in those unfortunate six weeks between September 2014 and the end of October. But there is reengagement and we have gradually seeing this turn. So on the Equity side, I'd be more cautious. It will take more time. The Debt side has reacted much, much faster.

[Jon Peace:]

Great. Thank you.

[Operator:]

Next question is from the line of Kian Abouhossein of JPMorgan. Please go ahead.

[Kian Abouhossein:]

Yes. Thanks for taking my question. First of all, congratulations, John, on the NCOU. That seems to be by far the best-performing business meeting its budget, I assume, for the year. I wanted to understand the Risk Weighted Assets movements in the group going forward because when I look at your capital generation, it's been mainly through shrinkage of Risk Weighted Assets. And it looks like that has been your focus for the fourth quarter. And I wonder, 2017, is that going to be a year of let's reengage and generate profits? I know January started well. But still, is that going to be the focus or is it going to be the key issue is capital buildup? And that could mean potential further shrinkage. And that takes me to the Risk Weighted Asset question considering that you used to have or still have a target of €320 billion by 2018 ex-Postbank if that is still relevant, that target, if you're there now ex-Postbank. And the second question relates to the cost base. If I adjust for variable compensation, I'm looking at roughly a cost of €25.8 billion run rate. It's probably even a bit lower I would think. And your original target was €26.5 billion. So you're running roughly €1 billion lower and I wonder is it not time to maybe reconsider the below €22 billion target and give a more updated target at this point? Thank you.

[Marcus Schenck:]

I guess I'll give it a first shot and then, John, you add. So, on your first question, RWA development in 2017 and focus. On the side of Risk Weighted Assets, we would expect those to actually go up, the reason – when you would take as a starting point the end of 2016 situation. And let me highlight and then I'll come back to 2017 what really happened in the fourth quarter. In a way, it's quite simple. You had a €30 billion reduction when you look at the whole group. €10 billion is from the disposal of Hua Xia and Abbey; €10 billion – I'm rounding a little bit – is from the NCOU; and €10 billion is in CIB end markets. This third €10 billion in CIB end markets, look at this as this was a reduction in business volume which we don't think is sustainable, as in will come back and we're actually seeing quite a bit of that already in the first month. So, you should make the assumption that there will be an increase in that space which will also take the Risk Weighted Assets back up a bit. And I think this is more a level which I think is sustainable or more sustainable throughout the year. Now there will always be some movement up or down. We will see some increase on the side of Operational Risk assets against the backdrop that the litigation settlements that we had in Q4 will actually only impact our Operational Risk Weighted Assets with a one quarter delay. So there will be some uplift. So long winded answer to highlight that, €358 billion will probably grow by €10 billion-plus in the very near future and is then more representative for how you should think about Deutsche Bank in 2017. We still need to manage two items in parallel, which is the capital buildup until the end of 2018 where we need to be or want to be at least at 12.5%, and we're committed to that and do everything that is necessary. But at the same time, we also want 2017 to be a year where from a profitability point of view we see an improvement. I don't think John or I want to sit here 12 months from now having to explain another year where we incurred a loss. We'll do our utmost to make sure that is not the case. Now on the cost side, your second point, you rightfully observed that it looks like we're a little bit ahead of the curve in terms of – or ahead of our own targets, which is why I've said in my remarks the max €22 billion target for the adjusted cost base excluding Postbank. In a way, that's still our target until we update that target, which we're not doing today, but we've made it very clear, I think, throughout the meeting that this is an upper limit. And we definitely expect to do better, and we'll do our utmost to do better. But today, we are not yet in a position to give out a more specific number there. We're still working on that.

[Kian Abouhossein:]

Okay. Thank you.

[Operator:]

And the next question is from Stuart Graham of Autonomous Research. Please go ahead.

[Stuart O. Graham:]

Oh. Hi, guys. Thanks for taking my question. I have two questions on capital first. The first question is on RWAs again. At the October 2015 Strategy Update, you talked about €40 billion of RWA inflation mainly due to Operational Risk over the period 2015 to 2018, and that was due to industry loss data, so nothing to do with Basel IV. I think so far we've had less than €7 billion of that, so my first question is, how should we think about that original €40 billion guidance? And within that, what if anything are you assuming from the ECB's TRIM project? The second question then is on the SREP ratio, which I think you're fully loaded SREP – fully loaded is 12.76%, which I'm calculating by taking the disclosed 11.76% and adding a Pillar 2G of 1%. So I guess the 12.5% CET1 target was based on a 25 basis points buffer on the old fully loaded SREP of 12.25%. So I guess I'm struggling to understand why 12.5% is still the right target on a fully loaded basis. Shouldn't it be more like 13%? That was my second question. Thank you.

[Marcus Schenck:]

I'll take the questions in the reverse order. So let me start with – I don't know where our SREP level is going to be in 2019 because we have not received our SREP letter for that year. What we do know is the levels we need to achieve in 2017 where the requirements that we need to be is just 9.51%. Now you can look at this and look at the development that we will see with the phasing-in of the capital conservation buffer as well as the G-SIB buffer, which will gradually take that number up, at the end, again, I mean people will probably know or notice the G-SIB buffer will, over time, double from 1% to 2%, and the capital conservation buffer will also double from where it is now. Now it is at 1.25%, and it will grow to 2.5%. These are the movements that we know which will move, over time, until 2019, should move the MDA up mathematically. This has always said that our guide (01

[Stuart O. Graham:]

Could I just clarify on that then? So you finished the year with Risk Weighted Assets of €358 billion. You're saying there will be some bounce back in CIB and Global Markets, so let's say that is maybe €10 billion. Then you've got the Operational Risk which maybe that's €8 billion. So it's kind of €18 billion of RWA increase-ish. And then ECB's TRIM project, do you have any clarity around that?

[Marcus Schenck:]

Given – first of all, timing wise, it's quite some time until this will really sort of kick in and we'll potentially start to have an impact and we don't know in what direction. We don't expect that to have an impact in 2017.

[Stuart O. Graham:]

Okay. And then just to finalize then, you're basically saying your SREP ratio, you're managing the bank on the phased-in, not on the fully loaded because you don't know what the fully loaded is going to be in 2019, yeah?

[Marcus Schenck:]

Well, in 2019, phased-in and fully loaded will be the same. There is no difference.

[Stuart O. Graham:]

But you don't know what the Pillar 2G will be at that point?

[Marcus Schenck:]

That's correct. That is correct.

[Stuart O. Graham:]

Got it. Thank you.

[Marcus Schenck:]

Yeah. Thanks, Stuart.

[Operator:]

Next question is from the line of Daniele Brupbacher of UBS. Please go ahead.

[Daniele Brupbacher:]

Thank you. Good afternoon. Can I just briefly come back to the MDA trigger level you've just discussed? And I mean, you said that there is variables. If CCB doubles, that's 125 basis points and if G-SIB doubles to 2%, that's another 100 basis points. So that my calculation would be a 225 basis point increase compared to the 9.51%. So am I wrong assuming it would increase on a five years (01

[Marcus Schenck:]

On the first question, the 9.51% is still on a phased-in basis. So, when you do the math in the – and we're happy to send you a sheet that shows that and maybe we actually can even put this on the web. On a fully-loaded basis, you will then in 2019 get to the 11.51%. You do the second question?

[John Cryan:]

Yes. And well, the second sub-part of that was the recycling of low return RWA, and that is very much part of the strategy for Global Markets. In fact, we're having the guys in markets formalize that a bit more by setting aside a clear view for us in the senior management of the company what assets are effectively legacy or back book, and then we will see a recycling. I mean, to some extent, if you take our forex business, they're recycling almost daily, weekly, but there would be the ability for us to recycle throughout the group some of the Risk Weighted Assets or the capital capacity that's freed up by running off some of the old back books. Sorry. On the interest rates sensitivity, I mean, it's very, very broad arithmetic, but if you took all of our spread-effected funding and you had a parallel shift of 100 basis points, you could do some quick arithmetic and get to something like €0.5 billion. But it's not great arithmetic, and we wouldn't expect a parallel shift anyway. But it's that order of magnitude.

[Daniele Brupbacher:]

Okay. Thank you. That's very helpful.

[Operator:]

Next question is from Magdalena Stoklosa of Morgan Stanley. Please go ahead.

[Magdalena L. Stoklosa:]

Thanks very much. Good afternoon. My first question is more structurally about the evolution of your FICC business from here. We've heard about better client engagement, better trading environment, but within your FICC portfolio going forward, where are you likely and of most to commit some balance sheet? And how you think about it more strategically? And on the industry level, if you were to take a stab at the magnitude of the global FICC revenue growth this year, what would your guesstimate be? So that's my first question. And my second request is a follow-up from my predecessor. The interest rate sensitivity – of course, we are kind of looking at a revenue split, which almost 50% is NII. So would you be able to give us slightly more context in terms of your sensitivity to short-end rate both in U.S. and in Europe? And also the level of potential upside driven by the steepness of the yields, be it the bonds or in the U.S.? Thank you.

[John Cryan:]

Okay. Let me take a crack at the evolution of the fixed income business. The big profit driver within our overall complex fixed income trading has always been our Credit Solutions business where credit trading house, first and foremost, when it comes to driving the profit line, and that would be generally the area in which we would to allocate capital. Now within fixed income, comes our forex business. It doesn't have much elasticity in demand. It's a very large, very stable business, but it's one we like. And we like the returns in that. In rates, I think it's fair to say a lot of the business that we used to write, a lot of the long-dated business, some of the complex and non-linear rates products that were written have really gone out of fashion, and that's more now of almost a securities business, centrally cleared, daily margined. And the margins there have fallen. And generally, our old OTC derivatives books are running off, and they're being replaced by a lot more liquid and materialized types of instruments. But credit, I think, is the area where we have a lot of value, where we're one of the market leaders, and where we're seeing, at the moment, a fair amount of client engagement. And it's very complementary to our client franchise out of the CIB.

[Marcus Schenck:]

On interest rates, I mean, admittedly I don't have for you broken down into currency and then short-end and the long-end of the curve, what does it mean? What may be at least directionally helpful is when you look at a shift in the overall curve by 100 basis points then for our stable businesses, and only for those you can actually give a reasonably reliable guidance, that represents an upward shift in the curve by 100 basis points, represents about €600 million higher revenue for the bank. So in our Global Markets business, it's quite dependent on how you're positioned and it's much more difficult and can actually vary the answer depending on the position of the bank, which is why I would shy away from giving any guidance there. But for the stable businesses or where we take deposits, 100 basis point shift is roughly equivalent to a €600 million improvement.

[Magdalena L. Stoklosa:]

Can we – and I'm sorry to be drilling on this. But, particularly, your euro sensitivity, because there's a friction in the market you could argue. Euribor had shifted up quite significantly over the last month. And if we assume some normalization from the negative, minus €40 billion of the ECB, that's short-end of the curve. Particularly kind of within the Postbank, particularly within your kind of banking book in Germany and in Western Europe in general, what would that sensitivity be? Because it would be very helpful for us as a context of how to sensitize the revenues going forward in those banking books.

[Marcus Schenck:]

So we need to come back to you there. The only reliable data I can give you now is what I said before.

[Magdalena L. Stoklosa:]

Okay. Thank you very much.

[Operator:]

Next question is from Andrew Coombs of Citi. Please go ahead.

[Andrew P. Coombs:]

Yes. Good afternoon. One question on slide 17 (sic) [16] on the Global Markets revenue outlook and then a second question on slide 34 on litigation. If I start with the Global Markets revenues, I'm intrigued by your comments particularly on the Prime. You said the FX being quick to recover. Equities will take a longer time. So with that in mind, could you give us an idea of the magnitude of the move in Prime Finance client balances over the past couple of quarters and perhaps how much of that relates to clients actually switching prime brokers, i.e., a permanent rebasing lower. And then my second question on slide 34. You made a lot of progress on settling some of the outstanding litigation cases. So I was slightly surprised that the contingent litigation liabilities have increased from €1.6 billion to €2.2 billion. Perhaps you could elaborate on what's driving that? You mentioned increased civil claims but I'd be interested in your commentary. Thank you.

[Marcus Schenck:]

So maybe I start with your first question, which I understand is related to our Prime brokerage business. In terms of balances that we lost in this tricky time period, I would say, it's sort of in the high-teens percentage points that we have lost. And we are now or since then we have seen a recovery of around a quarter of what we had lost. You take the litigation?

[John Cryan:]

Yes. On the contingent liabilities, we don't break them down. A lot of them are related still to legacy positions where we've received suits against us of a civil nature but relating to themes that you'll be familiar with.

[Andrew P. Coombs:]

Okay. Just last -

[Marcus Schenck:]

The only item I'd like to add maybe to the contingent liability movement, because sometimes this excites people, the increase that we have seen in contingent liabilities is all outside the United States.

[Andrew P. Coombs:]

Okay. Thank you. As a follow up (01

[Marcus Schenck:]

You're breaking up and your line is very – it's not stable.

[John Cryan:]

Andrew, we cannot hear you.

[Operator:]

Mr. Coombs, do you have a handset to use?

[Andrew P. Coombs:]

Is that clear?

[John Cryan:]

No.

[Operator:]

I'm sorry.

[Andrew P. Coombs:]

I'll come back. Thank you.

[Operator:]

Thank you. And we go on with the next questioner is Fiona Swaffield from RBC.

[Fiona M. Swaffield:]

Hi. Good afternoon. I had two questions. One was on leverage exposure and what we should look at going forward because I think if you take out Postbank, you're kind of at – you're already past your goals. So is there scope to reduce the leverage further, any more efficiencies going on and what the plan would be there? And the second is, you helpfully gave the impact or estimated impact of business exits and other moving parts on Global Markets. If we look at PWCC revenues, how much do you think the decline in 2016 was just due to idiosyncratic risk in that position? Thanks.

[John Cryan:]

I'll do the easy one, which was the first one, and let Marcus do the second. On leverage exposure, I do think there is scope for a reduction in our CRD4 leverage. The two areas that I would highlight, one is our liquidity pool. There will come a day when we don't need to run such enormous balances to placate our creditors and we should be able to take that down materially. And then we have, as we've mentioned before, significant add-on in our derivatives book, which I think is really a response to the fact that there's a limited confidence in some of our contract administration systems. And, over time, that will come off and that's still quite a sizable amount. I think it's shy of €150 billion or so.

[Marcus Schenck:]

Your second question was related to the – what we estimate to be the impact from sort of the DB idiosyncratic effects on our revenues. So we gave you where we think this is for markets. So, again, just for sake of making sure that it's clear. Markets, for the full-year, we had a reduction in revenues to the tune of €1.6 billion, of which €400 million we would attribute to conscious decisions the bank took in terms of exiting geographies and business segments. And the remaining €1.2 billion is – a bit more than 50% of that is what we think is DB idiosyncratic noise. The equivalent metric for PWCC – and, again, there's no science behind it but it's kind of slightly shy of €100 million has probably been the impact largely in the Wealth business.

[Fiona M. Swaffield:]

Thanks very much.

[Operator:]

Next question is from the line of Al Alevizakos of HSBC. Please go ahead.

[Alevizos Alevizakos:]

Hi. Thank you for taking my question. I've got one question more technical and one more strategic. I'm going to start with the more technical one on the back of you just said – what you just said, Marcus. I'm just interested to know on Operational Risk. I know that we're going to take additional RWA in 2017 because of all the settlements that just happened, but I'm just wondering after how many years actually can you reduce the Operational Risk related to specific losses that happened in the past. So, for example, the libel was a 2012 event. When will you be able to deduct it off the Operational Risk pool for the overall industry and for yourself? And then the second question is about the overall strategy for the Investment Bank. I do understand that you're trying basically to regain some market share. However, given that you have to keep on cutting costs and compensation and defer basically a lot of the bonuses, what actually makes you comfortable in the current market that you can retain all your top performers compared to some of your peers that actually they've got, let's say, more capital and they are coming in quite aggressively? Thank you.

[John Cryan:]

Let me take the second one first. On strategy, it's our intention to pay people market rates. The cost excess in our Investment Bank has always been our administration systems. We run far too many booking systems, far too many booking model. And we gave optionality over the way we did things to people and we're imposing the Deutsche Bank way of doing things. We're standardizing. We're computerizing. And the general and administrative expenses of the bank should come down significantly. The constraint would have been more in terms of capital resources and RWA capacity, but that, as we've shown, is plentiful. So I don't see any constraint over growing that business quite significantly in the course of the next year or two years.

[Marcus Schenck:]

Your question with regard to Operational Risk and when that starts to roll off, typically there would be something like a 10-year timeline, roughly, for that. So we would expect actually in 2018 the first items being starting to be taken out of our historical lock, so to say, but as you can see, it's still going to take quite some time until this will lead to a more material reduction in Operational Risk. And then also we need to see what the outcome in Basel is going to be, because it could be that the entire Operational Risk regime may actually in a way also change and be much more tied to size as measured in revenues and become more proportionate to that. But given today's rules, we would start to see first things roll off in 2018, but we'll have this for quite a while in our RWA.

[Alevizos Alevizakos:]

Great. Thank you very much.

[John Andrews:]

Thanks. And, operator, let me apologize in advance. We're 95 minutes into this, which is the length of your typical Hollywood film, and I know John and Marcus have an obligation so we have time for just one more question.

[Operator:]

And the question is from Andrew Stimpson of Bank of America. Please go ahead.

[Andrew Stimpson:]

Thanks, guys. Thanks for squeezing me in there. First question on Risk Weighted Assets, and just really helpful commentary around the rebound you expect in markets and then on Operational Risk. But I'm just wondering about Market Risk Weighted Assets. On slide 45 of the presentation packet, it looks like I guess that would make it kind of Christmastime or late December you had a big, what I would consider, VaR exception. I'm just wondering if that's going to feed through to some Market Risk Weighted Assets that isn't to do with client activity. And when that might feed through if that is the case? And then secondly on – I suppose this is a question about leverage. The LCR is at 128%. It is a bit higher than it used to, but it's not exceptionally high versus many of your peers. So, John, I know you said that you would expect that to come down, but given it's not that high versus peers, how much do you think that can really come down? And is it high because of CCAR? So CCAR in the U.S., once that's done it's going to come down? Because by my thinking if that doesn't come down, and you do see some of your securities financing transaction balances come back, then that's going to place some pretty significant backwards pressure on your leverage ratio. So I'm just trying to think how to pair that with the business growth you're talking about in January as well, please. Thank you.

[John Cryan:]

Well, on the liquidity buffer, I was being aspirational as to there being a time when we wouldn't need quite so much. I don't think it will be in the course of 2017 necessarily, although we'll see how it pans out. But I wouldn't expect to see that come down too much. We do need to make sure, though, that it doesn't grow much beyond where it is today.

[Marcus Schenck:]

Despite that you did spot in the Appendix, we'll not have an impact on the Market Risk Weighted Assets going forward.

[Andrew Stimpson:]

Okay. Maybe I'll follow up on that later.

[John Andrews:]

Great. Thank you, everyone, for your patience, and apologies to a small handful who could not get in their queues given the extended commentary we had to do today given it was full-year results. Obviously the IR team is available for any follow-up questions you may have, and we wish you a good rest of the day.

[Operator:]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Good-bye.