Deutsche Bank AG (NYSE:DB)
Q4 2009 Earnings Call
February 4, 2010 08:00 a.m. ET
Josef Ackermann - Chairman and CEO
Stefan Krause - CFO
Gurdon Wattles - Head, Investor Relations
Dieter Hein - Fairesearch
Philipp Zieschang – UBS
Dirk Becker - Kepler Capital Markets
Matt Clark - KBW
Georg Kanders - WestLB
Derek De Vries - Bank of America Merrill Lynch
Huw van Steenis - Morgan Stanley
Kian Abouhossein - JP Morgan
Stuart Graham - Autonomous Research
Welcome to Frankfurt. Welcome to Deutsche Bank’s fourth quarter and full year 2009 analyst conference.
Many of you will be familiar with the format of today. First we will have a presentation and some remarks from Josef Ackermann, then Stefan Krause will follow. And then we will go first to questions from those of you, who are attending in the room. And then I am going to ask Maria, the dial-in hostess for questions from, there are a number of people who are dialing in and following this call via the webcast.
Before we get started one very important request, please turn mobile phones and Blackberry's off. Not mute but off. You may not hear it but even if it is on mute it can interfere with the webcast. So thank you very much for your cooperation on that.
Secondly if we don’t get to a question; if questions exceed the time that we have available please except my apologies in advance, come back to IR and we will get an answer for you as soon as we can and follow up with you.
That's as far as I would like to go with opening remarks. I would now like to turn it over to the CEO Josef Ackermann to make some remarks about 2009. Joe.
Thank you, good morning and good afternoon where ever you are. Let me first say a few words about the financials of 2009 and then of course some words about the management agenda, just to keep you informed about what we said at the Investors Day, and then also talk a little bit about the regulatory changes how I see it. Everybody has probably a little bit different view. But coming back from Davos have some interesting and constructive discussions out here.
First the 2009. I think before and I read some of your comments, and to be honest this is a year of sensation and I think that’s the most important part to understand. We have one-offs on both sides and actually the net result of one-offs is a charge of EUR 3.5 billion pre-tax.
Now we can talk about the goodies or we can talk about the bad things. But important is that if these one-offs are behind us, we should be roughly EUR 3.5 billion better. That is a normalized level pre-tax and I think that is for me the key message I want give.
So you have seen the income before income taxes and net income and the RoE. I think what is important that we have been able to further strengthen our capital and our 12.6% and Core Tier 1 at 8.7%. That’s why we think we have to do more to strengthen the capital this year by not raising dividends too much.
To be honest this is also little bit what regulators are expecting from all of us. Actually our regulator are expecting two things, no bonus and no dividend. This was clearly… even more some politicians as was clearly communicated to all of us in Davos. I don’t want to provoke any negative reaction. We did pay bonus and we are increasing dividend, but all in a way hopefully that people can live with it without provoking a backlash which is too big and too negative for the industry for many years to come. In that sense we have also further reduced our leverage to now below 23.
Here we see the net revenues. We still have here some impairments and mark-downs by EUR 1.5 billion but the revenues are EUR 28 billion. So back to a level which most of us actually would have considered not realistic when the crisis started.
I remember we talked about receipts going back to ‘04, ‘05. Now we are back to ‘06 and not very far away from ‘07. And net income, above ‘05 not quite ‘06, ‘07 but shows that with these one-offs I mentioned we are getting close again to a more normalized level.
Assets. These are the U.S. GAAP pro-forma assets to EUR 891 billion and leverage ratio as a consequence 23. Capital ratio is now up to 12.6%, Core 8.7% and risk-weighted assets EUR 273 billion.
I think whatever we talk about going forward, it is just important to understand and I said that many times there is always a managed response though some of the calculations you are making more in a trend assumption. And I think that is proven here again.
Tier 1 capital, that’s up from EUR 28 billion the beginning of 2008 to a bit more than EUR 34 billion.
I don’t have to go into the different phases again. You have seen that at the Investor’s Day. But I just want to talk about how realistic some of these numbers are which we have presented to you in December.
Now CB&S. We have EUR 30.5 billion pre-tax number, which of course includes among others the payroll tax in the U.K. and some of the other mark-downs and things which we are going to talk about.
Key metrics. You see the massive reductions in assets and risk-weighted assets, and actually most importantly for me the value at risk number at a constant input which is down 57%.
So what we promised to you a year ago that we are going to lower the risk capital and you ask many questions whether we will be able to compensate for the lower risk and the lower proprietary trading revenues in other parts, we have been able to demonstrate that. And the dedicated proprietary trading is now down to a very low level. Actually it is below 2% of the Group’s revenues and even that is somewhat doubtful how you define proprietary trading.
So the Obama plan, which is somewhat and some think is highlighted as a big threat is certainly not a threat on a corporate level. I see more difficulties there in how much of this business is being transferred from our regulated sector to an unregulated one, and what does mean in terms of efficiency and liquidity in some of these markets. So that’s a broader impact I am talking about. But the corporate impact on Deutsche Bank is very small.
And by the way, it was clear in Davos from Larry Summers and others, it will affect U.S. banks globally. It will affect foreign banks only in United States. So that's in addition the correction of what I just said, a reduction of the impact.
Now revenue growth, and that is key that we were capable of growing in areas where we have some more where ‘flow’ businesses again and we could offset the reductions in revenues in the ‘flow’ businesses. And I think that is a very key message.
Maybe one word to CB&S which is important; you remember at the Investor Day and this was the biggest and the most intelligent question. The slow down which we have seen in the fourth quarter. Is that a trend or was it a transitional and temporary slow down? We are good at the time that this is more transitional slow down for a temporary phenomenon and our trend.
Now up till today I can confirm that our view was right, because we had very strong sales and trading results in January. It was so good that it doesn’t move on now.
GTB. Also here, gaining market share both, as we explained to you many times we are paying a price for low interest rates here. And this is true for the Bank as a whole. Now it is very often you hear from academics that banks are making a lot of money because of low interest rates and the noteworthy transformation. This has never been our attitude, we have always had a very disciplined Treasury and we don’t have this big mismatches. Now, does that mean that we are not making as much money as we could? Yes. But we don’t like the interest rate risk and we never did that.
So in that sense, our impact on GTB and retail from that philosophy is somewhat bigger than probably anticipated. That’s why we see of course a lot of upside potential if interest rates will start to normalize and of course recovery of the international traders fund.
Asset and Wealth Management. Rightly you alluded to a lot of challenges here. It was a big industry phenomenon but we did certainly not outperform. We have done a lot in terms of restructuring. You would see the comp and benefits down 30%, Bank comp 30%, FTE 25% in asset management We have good net new money growth in 2009 and that’s why we are confident that the way back to a profitable past is not temporary but will continue into 2010 just based on the new cost structure which we have.
For PWM, of course the same is true. We had some exceptional items. As you will see, also some restructuring charges and severance payments also out of the Sal. Oppenheim acquisition.
Now on Retail. Retail has suffered in two ways. One is the investment products have just not picked up. There was very slow demand for investment products and also bigger problem where the provisions. But here again we started to restructure pretty soon in the process. We had almost 250 million of severance. It will lead to EUR 100 million savings already in year 2010. So no more or no big number of severance, and savings of 100 million that alone keeps quite a swing. We have seen stabilizing provision for credit losses and we clearly see or hope that the investment product revenues are coming back when markets continue to stabilize.
Performance culture. We talked about the billion and you will hear more about that. We are, as started in 2009 have reduced headcount by roughly 3,000 and we have now and that’s most important, much more put an emphasis on cost discipline and efficiency again and in the front offices about employee productivity. So we have to look into the coverage people and the productivity of coverage people as one example. And of course we have the efficiency infrastructure of EUR 1 billion by 2011.
Now what is affecting us in terms of regulatory risk? First compensation, we are fully complied with the G20 but also BaFin and FSB and FSA recommendations. We have talked to them. We have presented that. And actually they felt that we are more advanced now than most banks they have seen. So in that sense I think we have done a lot. We have increased the fixed element shift in pay mix.
Now this would cost us EUR 700 million in 2010 but it has been clearly communicated that the increased fixed salaries will be offset in the variable. So we are not going to pay more in terms of fixed salaries and be issuing the same bonus as this year. So it will clearly go against the fixed income. So the overall compensation will stay. We then have of course much more deferrals in it and drawbacks, and the same is true for the Executive Board as well. So as I said, in full compliance with all the different guidelines and requests.
Capital. We said at the Investor’s Day that we have no plan to raise capital without adding cash flows. We still stick to that of course. We have now a buffer of EUR 7 billion in absolute terms above our 10% target.
Now a lot here is being discussed and I am just showing on the next page few of the things. The first is of course the trading book. The trading so far is in line with our expectation. There is some worsening in the securitization side, but nothing is of course decided. And of course we are talking not only us, we have with all the other banks are now talking to the regulators and showing the results of our impact sale. I cannot say what the final outcome will be but we are also preparing ourselves for reducing legacy assets so that they will again have a management response to where they will happen to.
At the same time it is absolutely crucial that we have the same coordinated implementation on a global scale. It is impossible for instance U.S. banks, would not adopt trading book, the requirements and the European would, I think that’s fully understood by the European politicians and their relatives thus far. This is irrespective of Basel II, not only with Basel II but just a same level of playing field for the trading book treatment.
On the Basel III, a lot is being discussed. You are familiar with that. We now have the impacts on the corporate level. We are also doing on behalf of the IIF but others are doing the same. Impacts are on a macro level, to see what that means in terms of impact on the real economy or on different markets. We will have to study available, probably beginning of March. We will clearly immediately provide that to the Basel Committee and the regulators and we will see what kind of discussion.
There are two issues. One is how much and the second is when. And so far I would assume that we are very constructive on all sides in terms of how much because everybody is aware of the implication on the real economy in a very fragile economic environment, and secondly everybody is aware of that we need a sufficient lengths of grandfathering to implement it.
Some markets will force foreshadow that of course as soon as the numbers are known. I'm always asked about numbers. The number is irrelevant. The number is a result of all the others. The question is what kind of deduction? What kind of nature of capital? What kind of add-ons? What kind of capital buffers? They are more important than at the end whether it is 4%, 5%, 6%, 7%, 8% or whatever percent.
But having fully recognized that we need more capital in the system, I think we have done everything to adapt to that as quickly and efficiently as possible. The other thing is living wills, their solution regime points been discussed. I don’t think that is imminent but it has to do with the corporate structure and of course it has to do with the reducing interconnectivity in the system. We are constructively and actively engaged in many of these dialogues and I don’t think that would be a major impact on us going forward. It may be time consuming, it may be challenging but I think we could deal with that.
The taxation issue based on what we know now; the U.K. tax is a one-off. We have other trends on the deferred payments based on the current proposal. Most banks especially U.S. cap banks have not been allowed to do anything in the first quarter. IFRS gives us more flexibility. So we have taking what we were allowed to take and I think that is a very good move. If there is no law at the end, of course we get it back. This is right now an unlikely scenario.
The U.S. tax. Different views on that. That would be especially in addition to the FDIC fee, something for the bailout and rescue packages. And that would have an impact. That would be longer term. And of course we would also here see how we can respond to some of these challenges. It would not be dramatic but will be not good. That’s why we are, the Bank is more proposing some sort of a fund maybe in the G20 or maybe on the European base which gives clarity because the cacophony of all this different measures now; scope of activities, taxation and many other things is bad and this certainly doesn’t increase the stability analysis. And I think everybody; the political side, regulatory and the practitioners are aware of that and are working that and I must say in a very constructive way.
So much to the regulatory, the way we see it and again the summary. So I stop here and Stefan Krause will continue with more details.
Yes. Also good afternoon, good evening or good morning wherever you are, ladies and gentlemen. Obviously it is much nicer pleasure this year to show these results as we had the session last year. I am sure you can all feel with us. I am actually going to start with the same chart that Joe ended, basically summarizing that we achieved more was less; more profits, lower leverage and that resulted in extremely good capital ratios that I don’t think I need to repeat.
If we go through the revenues, the revenues were EUR 28 billion for the year and EUR 5.5 billion for the quarter. In the first quarter we had specific items. We had monoline provisions of EUR 210 million with additional monoline reserves we decided to take. We had a property impairment of EUR 75 million on an impairment assessment. It is on our Cosmopolitan property and we had fair value losses on that, which also is a small number for Deutsche Bank of only EUR 29 million.
For the full year 2009 the underlying revenues before mark-downs are very close to the 2007 record levels. In the full year, we had EUR 1.5 billion negative impact driven by about EUR 925 million of mark-downs. Remember this was the number that last year was over EUR 70 billion and we had this one total significant property impairment of EUR 575 million over the year. That composes the number we showed here on the slide. The decrease versus the third quarter was largely driven by a slow down that we have reported of sales and trading revenues which as you know affected all our major peers and which I will return in a moment.
Provision for credit losses increased slightly to EUR 560 million in the fourth quarter. The impact from our IAS 39 reclassified assets was EUR 311 million. 80% by the way of these IAS, 99 provisions were driven by solely four names and also partly driven by accelerating some of the restructuring exercises that we decided to do in the year ‘09 that were originally anticipated to be done and show them respective results in the year 2010. Our provisioning ratio for IAS 39 portfolio is there for around 360 basis points.
Let’s recap our Investor Day statements on IAS 39 reclassifications. Again, over 1000 assets in this portfolio, of which only 30 are not performing. That's why we are not so concerned about the development and why it is so difficult to predict loan loss provisions on this portfolio because its one, its relation is case-by-case driven. In the Core portfolio excluding IAS 39, loan loss provisions remained relatively modest. The provisioning ratio in Q4 at U.S. was only 44 basis points. For the full year provision for credit losses was EUR 2.6 billion, therefore EUR 1.3 billion related to our IAS 39 reclassified assets.
In the PBC loan book very little movement in delinquency rates as you can see here in that chart versus the third quarter. About 70% of our PBC loan book is mortgages where we saw some stabilization of delinquencies in the fourth quarter including also by the way our first stabilization in Spain. Delinquencies in our small corporate book also appear to stabilize as you can see in consumer finance delinquency trends that have remained elevated. However we did see first improvements in the third quarter. These improvements reflect the targeted management efforts. For example, intensified collection efforts we have done in Italy and the introduction of obviously strength the credit application rules in India that we implemented or started to implement at the end of 2008 that showed the results in the year 2009.
In terms of the non-interest expenses as I have showed here on the chart, we are at EUR 4.2 billion for the fourth quarter 2009 and EUR 20.1 billion for the full year. Fourth quarter comp expenses obviously decreased. As you know we discussed and implemented our new comp plan for the years 2009 and then obviously subsequent took of the decisions for the comp plan 2010 and subsequent which I will describe to you in a moment as we comply towards 2020 and oversee regulatory requirements. We have therefore positive throughout effect for the first nine months of EUR 400 million related to this compensation plan, which was then counterbalanced by severance repayments of EUR 154 million and the impact as you know that we have discussed and described of the U.K. payroll tax which happens in this slide item of EUR 225 million.
Our full year 2009 comp ratio is 40% versus 44% and 43% respectively in 2006 and 2007, but and I think that’s a fair comparison we should be doing adjusting for the U.K. payroll tax and adjusting for the extraordinary severance that we had in the last year and more even comparison shows the comp ratio at 37%.
General and administrative expenses, we had non-recurrence of the compensation life charge in the third quarter. And fourth quarter savings offset this year. And expenses were in terms of our full year general and administrative expenses, they include about EUR 600 million of specific items predominantly litigation or settlement expenses versus approximately only EUR 230 million we had in the year 2008. So on an adjusted basis, on a comparative year-on-year basis, our general and administrative expenses are down by 4%.
Other non-comp expenses benefited obviously in the first quarter from the Scudder, intangible write-back up EUR 291 million that I have already alluded to this position also obviously includes the policyholder benefits and claims from our Abbey business of over EUR 150 million that as you know is an offset to our revenues.
Move on now to our compensation plan. Here we show the main structure is approximately EUR 2 billion of compensation-related expenses, was deferred and approximately EUR 30 million of shares will be granted in February 2010. We have complied with other requirements as you see in our key features. We have deferred compensation. As required, we have done the changes I think Joe alluded to these components and obviously we have a very extensive claw back option that was important to us as well.
Our income before income taxes was EUR 756 million in the fourth quarter and EUR 5.2 billion for the year. Pre-tax return on equity for the full year per target definition on our reported basis was 15% and that despite a rise in average active equity of EUR 2.5 billion. Our net income of EUR 1.3 billion reflects the tax benefit of EUR 790 million. That relates to our recognition of deferred taxes in the U.S., which obviously reflected the improved income projections which are based on the extremely strong performance we showed in the year ‘09 in the United States. So compensating with obviously the usual tax rates, the tax credit of EUR 554 million in the fourth quarter was recorded.
For the full year 2009 we have therefore an ETR of only 5%. And I would remind you also that next to obviously the effect we had in the fourth quarter, we had a third quarter effect that was quite significant as well whether positive outcome of text or the settlements which was partly offset by ten times on revaluation of deferred tax positions which resulted in a net benefit of EUR 369 million in that quarter. So that’s why our overall tax rate obviously for the year resulted as low as it is. Our mid-term guidance looking at our tax planning for our ETR remains unchanged between 30% to 35%.
Our Tier 1 ratio, the offset was 12.6% and actually that’s an all time record since the reduction of the Basel standards for the bank. And we also recorded our best ever Core Tier 1 ratio which excludes the hybrids which has improved to 8.7%. Tier 1 capital at year-end was EUR 34.4 billion since the beginning therefore of 2008, that means over eight quarters. Total Tier 1 capital has risen by EUR 6.1 billion.
As compared to 31st of December of 2009 we have a capital buffer in excess as Joe already mentioned of EUR 7 billion to our target of 10% Tier 1 ratio. During the quarter we continue also to reduce our risk-related assets through the number shown here in the chart, EUR 273 billion, which was mainly driven by lower market risk-related assets for a lower regulatory capital. Our marked multiplier was reduced and as you saw in some of the numbers we presented reduced very low at risk. Further risk reductions that outweighed headwinds contributed to about EUR 3 billion.
Versus end of the first quarter of 2009, risk-related assets have been therefore reduced. I think the impressive amount of EUR 43 billion. Did it end? As Joe said it is at $0.75 which costs us about approximately 50 basis points in our Tier 1 ratio. Joe has alluded to potential capital demand from ongoing regulatory discussions and all that’s the matter of quiet interest but I will not repeat the statements. We would as you know anticipate to close two acquisitions relatively early in 2010, Sal. Oppenheim, which we expect to be an impact of about 85 basis points assuming that we do a contribution in capital increase which is still in debate and our acquisition of ABN AMRO which is now expected to close actually on the first of April. Obviously both of these transactions will increase our risk-related assets.
On the next page, we show our success in leverage reduction. According to our target level definition our leverage by the 31st of December is at 23 times below our target of 25 times. In the fourth quarter total assets decreased to the lower positive market values from derivatives. On the IFRS basis we are down 10% in the quarter and we are down 32% versus previous year end, and on a U.S. GAAP basis were down 3% in the quarter and were down 13% over 12 months.
Obviously and I always make this cautionary statement, FX rate movements helped us. The weakness of the dollar did help us in terms of achieving this level below our target level. Obviously as the U.S. dollar strengthens again we will see counter effects affecting our leverage ratio.
Let me now go into the segment results very quickly. Obviously a topic that we see out of your reports and concerns because you see our revenues declined predominantly driven by sales and trading whilst here in CB&S. If you look at the P&L, we have a positive impact from the expenses but let’s not forget that this is obviously the segment that carries the largest part of the U.K. payroll tax of EUR 225 million which is both in CB&S.
Let me therefore go into the sales and trading number. Sales and trading revenues for the full year were at EUR 12.5 billion, adjusted for mark-downs. This year’s performance is one of the three best ever performance the Bank has had in its history.
The fourth quarter included the already mentioned mark-downs of EUR 0.2 billion that I referred to at the beginning. In the fourth quarter Joe mentioned that we saw a significant drop in client activity. For mid-November, phone calls to clients showed us that everybody was protecting the good results in the year 2009. The willingness to take further risk was very low. And margins same in the fourth quarter continue to normalize and started to come down. But therefore we also saw much lower volatility. This was not a trend. This was really a reaction to risk conversion towards year end as Joe has alluded to, we have seen at the beginning of this year.
In 2009 our business model has been successfully recalibrated as we promised to you that they our highly structured instruments have been significantly reduce and revenues are now predominantly slow driven considerably less prop trading. As we said we closed credit prop trading. On equity prop, we reduced [national] capital by 90%, 5% of sales in trading revenues which means less than 2% of group revenues prop trading.
We have by the way also to that further discussion eventually later on. We have no in-house hedge fund or private equity businesses. Thus we expect minimal impact on group revenues on the (inaudible) proposals and therefore I was honestly surprised by some of your EPS potential dilution that we observed in the market regarding this proposal. We are totally confident that we can completely back fire diminishing group revenues with other client revenues because as I told you they are not material.
Performance in January as we said has picked up significantly. We see very strong January revenues while revenues in our global finance and FX business have continued to be very healthy but have come down versus last year. As expected you know our activity in credit trading and equity derivatives has been extremely strong and the business mix and therefore obviously our business mix has improved. But again, caution, we cannot derive this quarter so even the year’s performance just from one month training.
We go to the topic of sales and trading debt in other products. Just let me do a quick statement of our monolines. We strengthened the severance reserves of Tier 2 monolines at year end just to make sure that we are protected. As you know we use a different system. We have the system audited again by the BaFin were discussions with BaFin, and I think we’ve reached an agreement that our reserve positions are satisfactory. As a result, total remaining exposure on all non-investment grade monolines has come down by approximately a third versus the 30th of September 2009 to about EUR 1.1 billion.
I show here on the chart to keep interest on our sales and trading debt and other positions. I am sure we will able to discuss about the business developments here. We will show you and we could show based on the disclosed numbers that actually our decrease in sales and trading in the fourth quarter was significantly lower than some of our competitors was. Even if we had to do to some clean up for some third quarter special effects, Deutsche Bank we still have much lower decrease in this quarter than most of our competitors.
Sell and trading equity, definitely a success story for the Bank. Also in the fourth quarter we also saw a slow down. For the year we have had a significant double-digit increase in this business. And again what is really positive is that we have gone away from prop trading in this business and our showing substantial increase in client activity, certainly one of the areas in our business where the crisis has helped us to gain market position.
On origination advisory, the origination revenues were EUR 379 million for the quarter. Advisory revenues were at EUR 105 million. In the fourth quarter of 2008 origination included write-backs of EUR 757 million related to (inaudible) and PCE deals which were cancelled or left at point.
Overall, we have narrowed the gap to the top five positions versus previous year, so despite the fact of having depressed fee pulls here. We are gaining market share and we are able to stabilize or improve our competitive position. We by the way further intent to not expect M&A activity to sour as obviously some uncertainty remains about economic development. However, we believe that the needs of recapitalization also in industrials and in banking will certainly help us to drive origination volumes up, and our pipeline in ECM continues to be very, very strong.
On with the Global Transaction Bank I think Joe has talked about the performance. We saw a decrease driven by lower risk-based funding credit. I mentioned here that obviously this is the business area that has been most positively impacted by the change in our funding. The pace on the funding had of benefit of about EUR 160 million. Still we see a very good return on equity 60%, return on equity for the quarter obliviously justifies our continued investment in our GTB franchise.
If I go to the next page at the beginning of 2010, we expect obviously further pressure on GTB and that’s a note of caution to you as you make your assets on a year-on-year comparison saving from the interest rate environment because on a year-on-year comparison as we saw the year 2009 lower interest had impacted stronger the second half of the year than it did the first half of the year. We are now in this same interest rate environment in the first half of the year than we were in the second half of year last year, just take into account when you look into your estimates.
On asset and wealth management, we had a net benefit of EUR 232 million from specific items. I have already talked to you about the intangible write-back on Scudder which is EUR 291 million which is related to the fact that we had a market value increase in our portfolios at the end. We have some specific charges here. Of course all the charges associated with the acquisition of Sal. Oppenheim will be charged and have been charged to this to asset and wealth management, P&L and as well we have had some substantial severance as we have reacted to the lowering of market volumes also in restructuring this business.
Asset management adjusted specific items, asset management delivered approximately EUR 190 million in pre-tax profit for the second half of the year driven by performance fees, an interesting observation. We really were able to realize performance fees in the three of our stable businesses that can get them. Our cost structure has been here very significantly entered into the new environment. There has been a lot of work done and we are very confident to benefit from this operating leverage we have created as we move on, Joe already described some of the savings in previous speeches of EUR 350 million and that will obviously benefit us already in the year 2010. We have therefore a much healthier level of underlying performance. We have also discontinued some or reduced some non-profitable business.
Net new money was EUR 9 billion for the quarter and the year so we’ve had clearly seen here also a turnaround after the outflows at the beginning of the year. Outflows were recorded though predominantly in low margin products such as money market funds while inflows could largely be seen into high margin products, which is also promising for the future development of this business. By the way also here inflows in January confirmed the positive trend.
PWM digested about EUR 55 million in severance as a result of efficiency measures during 2009 and our run rate savings will be approximately EUR 40 million for 2010 of which a portion already has been realized in 2009. The first quarter performance was slightly impacted by the EUR 7 million I have described already of the Sal. Oppenheim related costs that get assessed to PWM.
In our PBC business while the revenues we saw quite an interesting and different development while credit products interesting enough throughout the crisis have continued to deliver very strong results helping us also to cover our fixed expenses. Customer activity in our investment products did remain somewhat subdued. However also here we have seen a change in the first quarter 2010. We’ve seen a very strong product pipeline. The fourth quarter included one-off gains from visa dividend and Deutsche Herald of about EUR 97 million.
Adjusted for first quarter 2009 provision for credit loss release, provisions have favorably developed and stabilized during the year as I showed on the delinquency chart. Previous year our profit here was impacted by EUR 250 million of direct and infrastructure severance payments that obviously will not reoccur in 2010 and that hopefully will yield the benefits already in this year.
Here if I show you private and business clients we show the income before income taxes and I show this severance number in the quarter and if you add up the Life parts you will have it for the year. Here we show the net PCAM net money flows by quarter. As we show here in the fourth quarter we had EUR 9 billion net money inflows. So as you see driven by market value deterioration in the mid of the chart here as shown towards the fourth quarter of 2008 and see now recovering not only from market areas but also we are able to acquire additional customers.
So let me sum up with this last chart that you by now should be very familiar with. You seen it a couple of times. Deutsche Bank is a very different bank compared to 12 months ago. Again I think we are very proud to increase our profitability. We reduced risk and leverage. We improved significantly our capital base and hence now we can only say don’t get tired to say we do have now a significant capital buffer to prepare for some of the challenges ahead. Our recommended dividend increase should show on the one hand some steps of confidence but on the other hand we have to take into account that capital is the priority.
So thank you very much for your attention and I think we welcome now your questions.
Thank you very much Stefan. Thank you very much Joe. I would like to turn it now to questions in the room. And please just two small requests, one is press the red button on your desk mic so that you can be heard over the webcast and the second is for those who are dialing in. Would people in the room please state your name and the name of your company before you ask your question. Thanks for your understanding.
Dieter Hein - Fairesearch
Thank you very much. I am Dieter Hein from Fairesearch. I have three small questions. I was surprised regarding slow dividend. You are willing to pay or proposed and the topic was more the arguments that you fear some regulatory changes and you have to increase your capital ratios. The reason you gave here of that of the regulators, I am not pleased with bonus payments and dividend payments when you shall increase your capital, I can understand well.
My first question is what I can't really understand why you decided for a satisfying bonus for your stuff and that not for a satisfying dividend for your shareholders and especially that what I think the regulatory will not love, you have decided to pay the UK payroll tax for your bankers here? Second question is regarding your Tier 1 figure. Your target UK tax is 10%.
You are now well above. You need some capital for the acquisitions you have done. You told us in the past that you need more capital if you want to make a bigger acquisition. So is that now the higher capital for a bigger acquisition or you are really afraid for the regulatory requirements coming in the next years then I think you have to increase Tier 1 target if 10% is not enough?
Or third alternative, it’s a lot of fantasy in the coming years for higher dividends and share buyback programs for your investors. So, what alternative is closest to your strategy there on the Tier 1 ratio? And last question is I missed an outlook for your net income in 2010. I did understand that you did not want to give one last year but I don’t understand it for THE current year. And therefore my concrete question is do you think you can exceed the EUR 5 billion net income from last year and the current year and maybe you can give an explanation why? Thank you.
Okay, a lot of questions all around the sector uncertainty. I don’t know more than or not much more than you to do. I am just saying we wanted to optimize between shareholders, people and regulators, and that is the best optimization we could find. Now you can go further in one or the other. Maybe we are two modest on the dividend side because capital will not be increased as much as you think capital requirements or you may have been through generate in the bonus tax in the UK. I am saying we are in a competitive environment.
What we did is you can play around with the bonus tax first. I don’t think many banks agree that. Everything we hear and I mean a lot of bench marking and sell to a lot of people is they are all doing it the same way as we do. Of course you could have said you know obviously our link told me very clearly pay no bonus no tax. Well to be honest, I think it is not in interest of shareholders that our franchise is being destroyed in UK. What we are seeing that the impact, I don’t want to run the risk. So we felt we have to do something to keep the franchise intact and that is another optimization. We lower the bonus somewhat but not as much as to zero. So we do have to pay payroll tax in that. And in addition, we socialize. It cannot all go to the UK employees.
Secondly, those who are saying we are lowering the UK alone and then you know going around and said forget it in a year from now they care a few, it is not the way you run our business. We are straightforward, honest to you and to our people. And to be honest we couldn’t pay no bonus without jeopardizing the franchise and I think no one else can do that. If you do that then the question is does it all go to the shareholders and it should not, the answer is no. Should it all go to the UK employees?
The answer in my view is no. We are one bank, one team. So we said it is a burden sharing between shareholders and people and it’s a burden sharing on a global scale. That is the way we did it and I won’t be surprised if not every major bank is doing it the same way by the way.
The dividend. It is not that important from a capital point of view. The 50% more cost us about EUR 160 million in capital. It is more the second year. If you say we can pay that much more, you may provoke a regulatory response if you don’t like and not only for us but for the industry. It was absolutely clear that regulate the central bank and you heard from actual way but to say the target of many others they don’t want us to pay now high dividends this year. You can say who cares.
You’re accountable of the owners and not to the regulators. That’s why we did something and we understood that message. But going much further than that in my view would have been very negative and we are in a very sensitive situation right now. If I say we is not Deutsche Bank its all of us around the table. That’s why we felt we have to find the right optimum by the way it just got the first media reports from very critical journalists in UK who said completely right, they pulled it off again. So a little bit dividend, little bit bonus, a little bit tax and a little bit capital. So that’s the optimization we were in.
Is that something for the future? No, probably not. As soon as we know and have clarity about the capital impact we will know what it means and if you know and I don’t think that the bonus tax will be repeated so in that sense we will come back to a dividend policy which pleases our shareholders as we always state and you remember I always said that with the payout ratio being increased every year and we went up to 450, which was I think about 40% or somewhere close to 40% and now we are back to below 10%.
That is not something we want to do that’s something which we found wise to do in the current regulatory climate. That’s why we did it and I don’t think we have any other chance now. We said 10%. 10% is a high number. Your other bank say 8%, 6%. The whole question in my view is in your limit because it depends so much how you define risk of divestitures and how you define capital? You’re afraid. Many of you have done these reports. Every country has a specific item. UK gets very nervous about pension liabilities, I mean UK banks, French banks are getting more nervous on minorities, some others more on DTAs and let's see what the impact would be at the global solution. But I think as we always do to be a little bit ahead of the pack doing as we think is sufficient is the right thing to do. If you are too far then maybe productive but if you are not far enough you will have to go further.
And if you will be overtime, but it is obvious our side achieved to meet the requirements not at the end of phasing in but relatively fast. That is the best we can do on the knowledge we have.
Dieter Hein - Fairesearch
Do you want to talk briefly about net income in 2010 and versus ‘09?
That was a good question. We have never given forward-looking statements on that. We said that we started January very well and let's see how we see a lot of good things happening in our industry and also see the risks. [Sudden] risk asset inflation the tariff rates, which won't be unwound, the default rates going up, many other things, so we are aware of that. Do we think that we have this specific problem to run item? No. But do we think that the cumulative effect of all of that could be challenging? The answer is absolutely yes, as for everyone else. But we have [theories] so much and learned the lesson that I think we are much better of now then we were three years ago.
Philipp Zieschang – UBS
I have one follow-up question on capital and another one on your comp ratio. I mean as you already said I mean its pretty impossible to determine what the adequate capital level will be, but way you are at the moment how do you think about deploying or redeploying capital out of earnings that you gain now in January, February, March going to the second quarter do you achieve some scope for, do you feel comfortable enough to redeploy some capital into your business and also with the view to your seemingly comfortable leverage ratio now.
And the second question is on comp ratio. How much scope do you see for in an environment where revenues for Deutsche Bank might be structured beyond the pressure to structurally decrease comp ratios, I know this is a question about you have to retain talent but you think that’s a chance also from corporate governance pressure increasing to structurally drive down comp ratios for your business.
I asked in Davos, we have a small session behind close to us and I asked the following question. If you meet the gain in three years from now, do you think which of the three scenarios you think as the most likely one? First one, we do nothing in terms of compensation I am not talking about the structure maybe I will complied that was a structure, I am talking about content.
We do not think and in three years from now we are all back to normal and the economy is finally getting and everybody is happy to pay high bonus. Second one, we do something for actively to change it and the third one, we do nothing but there will be a regulatory political backlash. Indirectly via more capital, more taxation or directly in terms of influencing the compensation level.
A majority of your fact grew from our peers felt that scenario three is the most likely one. I then said that if this is the case we better do something in scenario two. And we initiated now on behalf of the IAS, a working group which talks about that. Now this is easier said than done. But my view is the more we see capital, the more we see incremental taxation, the more likely and the more necessarily and also for the benefit of shareholders that we do something on the compensation level.
So I cannot imagine that we pay the same compensation level going forward if the other things are changing so drastically as I expect them, and that is something we have to in sense of self regulation start working on it and there is I have to say broad support for that and now we are key bankers in the world.
On redeploying capital to our business we are and we will continue to deploy capital to our business but under the new paradigm discipline in not allowing balance sheets to grow up to much. We have supported acquisitions and I have the peaking work, we would have supported also an acquisition for the investment bank as well. So we are willing to grow our business I think the bank is back to growth mode but again but what we have learned that our odd business model is not the one that should reoccur, we do it with a tighter discipline and focus on return on these assets and focus on return on this capital deployed and we will have our business divisions competing for capital in terms of their returns.
Here, we have to make one point very clear because some may say this is a different story than we heard before because I always said no acquisition in investment banking which we don’t need. How about the seven [causes] alluding to a very specific I mean like the commodity we see in all the newspapers there is something very specific both on small acquisitions somewhere to compliment our activities investment but not an investment bank in anyway that we don’t need.
Philipp Zieschang – UBS
Philipp Zieschang from UBS. And three questions please, the first one is when can we expect more news with respect to your $1 billion in infrastructure savings and what charges should we expect in order to realize this? The second one is coming back a bit on the comp ratio you have mentioned it's underlying its 37% this year and could you comment whether you think this is the new price and could you also share and your view about the comp and the non-comp ratios within your 65% target for next year?
And thirdly, there is concern about the market with respect to the capitalization of your U.S. holding company. Obviously, you've activated additional deferred tax assets which could have driven the negative tier-one ratio up even further. Could you share in which way you are under pressure and probably bridge the gap between what you say is a solid capitalization of your operating entities versus the negative one on the holding? Thanks.
Okay, let me start first on the EUR 1 billion of efficiency gains that we want to show. We will be ready to announce that and we are willing to do a separate session on that. As you know, we have hired Mackenzie who has extensive experience in terms of these cost cutting exercises. They will use the same process and approach that they've used at other large tax companies, one of them I'm familiar with, obviously.
And we've also hired a person that's going to be in the lead. I'm sure you read in the newspapers, he comes with a vast experience in these type of cost reductions. The team is already working on it. We have formulated already a substantial amount of measures. Once we're complete I commit to you that we will give you some more details on the program and on the achievement of the program. Just give us a little bit of time to finalize that.
And our comp ratio 37%, is that the new base? We definitely believe yeah, that based on this structure, based on the changes and based on the structure of our new compensation system the answer is yes, that that's the direction I think comp is going. But also a [caveat] is we have to observe the competitive environment. We cannot put our franchise at risk and therefore, I think that's nothing we can commit to in an empty room type commitment. We have to see how the development is and see what happens to that.
The US, that's our town subsidiary in the US correctly, it is in a situation that it would need under subsidization requirements to show capital. We have alerted all of you that at the end it's a reallocation of capital that we would have to do intra-group. It's not an additional capital we need on our group, to be very specific.
Are there some, let's say, inefficiencies, because obviously currently we see our capital allocation to be optimal? Yes, of course there might be some inefficiencies, but I think we can manage them not to be significant or material as-far-as we see. Let's not forget that, despite the fact that tax revenue is very controlled and you need to show profits in the right geographic locations, you don't necessarily need to show assets in the right locations. So, there is some flexibility in managing that as well.
We understand we will have some time to adjust and adopt. We have already started the brainwork on how we can deal with that in the United States if it were to be come true. It doesn't really change significantly anything in terms of our assets. Actually, what it does is it would hedge our capital a little bit better because we would have more U.S. dollar capital associated to our U.S. based assets which, in itself, obviously would then reduce some of the volatilities we have to report on some of the ratios to you.
With regards to compensation the most important question will be do people really understand that now increasing the fixed part means that this will be compensated by reducing the variable part. And we said that over-and-over in our internal messages, not that someone thinks, well, it's fine, I have 10%, 20% more now and I'm expecting the same bonus based on the same performance in a year from now. That is not the case. The total compensation based on same performance has to be the same. That's just the shift between fixed and variable.
Philipp Zieschang - UBS
And just the restructuring costs of the EUR 1 billion, could you just mention what we should plug in the model?
There was no point to give you. Sorry, I have to speak through the microphone that I will give you some more details on. We hired Mackenzie again, we are responsible for it and I think in a few weeks we will be able to describe exactly our path to the EUR 1 billion.
Please go ahead.
Dirk Becker - Kepler Capital Markets
Dirk Becker from Kepler Capital Markets. And two questions, please. The first would be on the debt sales and trading. You said, Mr. Krause, in the November conference call that the margins in debt sales and trading are 10% to 60% above the pre-crisis levels and that you expected them to stay there. Nevertheless, I read a lot about lower margins and margin declines in your Q4 release, so can you update us on the situation there and whether you still believe that the margins will stay at the higher level?
The second question would be on the intangibles relating to Scudder, which you are writing back. I was a bit surprised to see that, because Scudder never occurred to me as a very successful acquisition for you. And I think the numbers in 2009 don't really give me a lot of sense that Scudder turned around in 2009. So why did you write back the intangibles? Maybe you can explain what the numbers behind that is and how Scudder performed in 2009?
Okay, let me talk about the margin evolution, to just harmonize these two statements we have done. Throughout the year 2009, at the beginning we saw incredibly high margins, sometimes a 100% than they were before, sometimes even more than they were. Throughout the year 2009, these margins have come down and that's what we have reported. Nevertheless, they did stay above pre-crisis levels and, nevertheless, we believe that they will stay above pre-crisis levels.
Why do we believe that? There is obviously much more consciousness about balance sheet, much more consciousness in the entire competitive environment, there is much more pressure on capital, there is much more pressure on correctly risk pricing, so therefore, and at the end you could say there is less competitiveness out there as well. So that's why we believe that, as they are coming down and as they have come down throughout the year 2009, the level at which they will come down and level to will be still better than in the pre-crisis years.
On the Scudder intangible write-backs, all I can say it's accounting to some part of it. We have impaired this asset, in the year before by a larger amount than the amount we recovered in the year 2009. And I think this kind of volatility, obviously, is volatility you see related on the fact that we mark-to-market. And what has occurred here is you saw the value of these funds increase and, therefore, the value of these intangibles increase.
As I told you, this business we've really looked at, we've restructured, we've adjusted the cost base. I must really say in Asset Management it was not done to improve the situation and, therefore, obviously our tests showed that we can write back to that.
Stefan Scharff - SRC Research
Stefan Scharff, SRC Research. I have two questions. The first question is about the loan book. You shrunk the loan book about EUR 10 billion last year and there is still PBC mortgages of about 25% of it, and there is German SME business about 20% of it. Can you give us a little bit more detail about the development of your loan book as we have seen interest income come down 14% after loan loss provisions in 2009, if you want to build up the loan book again or it will be on this level also in 2010? And the second question is about Hugo Banziger. He is not here today, your Chief Risk Manager. I miss him because he was here the last years. Is there a special reason though? Okay.
To answer your last question, it was quite an interesting question to actually ask. We looked into the records of the bank and usually this is a meeting held by CEO and CFO traditionally. We wanted to come back to that tradition. And on specific topics we invited, then, our other partners from the board to be here and assist us here.
Obviously, last year the big topic was risk and there was what we expecting lots of questions from you and, obviously, we didn't expect this to be the big issue any more after also our good results in the fourth quarter. I think we're looking forward, I think most of the risks are behind us and, therefore, we just thought that Hugo's time is better invested in continuing to monitor our risks in the Bank and actively working on it.
The second question that you asked us on the loan book. Well, we have seen a slowdown on the loan book but it was not especially, I would say, not in our German lending, which we have increased since the beginning of the crisis and which has remained very stable throughout the year of 2009.
So our loan book obviously has components in there that relate, for example, to our reclassified assets, that relate to other portfolios and those portfolios partially also, in these numbers we partially oversee portfolios that we have reduced in the effort to de-leverage the bank. We have shown you the decomposition of the loan book on that I think, by now famous, charts that shows you the different buckets. And what has happened is that, obviously, as we have de-risked the bank those loans we have been able either to restructure or to sell or reduce accordingly.
So, actually nothing really exciting happening in the loan book. We will continue, as Joe said, to invest. We will continue to keep our loans up. Our loan activity in Germany continues to support (inaudible). We have additionally announced an additional measure to support the (inaudible) in Germany and, again, we can say we will take any good credit.
Okay, please go ahead.
Matt Clark - KBW
Hi, Matt Clark, KBW. A couple of questions, please. Firstly, on the compensation in the fourth quarter, it looks like you've been deferring more than you would have previously under the old regime. What sort of benefit did that give to the fourth quarter compensation figure, and was it more than the burden of the UK tax provision? Second question, I think you mentioned commodities performed well. Could you just comment whether this is now, what the order of magnitude is? Is this now a $1 billion business for you in revenue terms?
And then, thirdly, on the Cosmopolitan Resort, could you give us a carrying value for your investment and also tell us what that carrying value is compared to your cumulative investment, so an idea of the valuation of that holding? Thanks.
Okay, I'll start with your comp question. The question is whether we are deferring more. Yes, basically, as we thought the new structure of our compensation system we needed to bring it in compliance and the compliance assumes that we have to defer. Was it counterbalance? We're not disclosing obviously any details about our compensation numbers. I hope for your understanding, because this is sensitive competitive information.
The Cosmo, let me talk about the Cosmo before I answer your commodities question. The project Cosmo is continuing to develop very well. The Cosmo project is on time, on budget as we speak. We actually in this project have benefited from the crisis because construction materials and construction costs, as you can assume, we could re-bid all our vendor contracts and had some substantial savings that helped us to avoid what usually happens in these multi-billion projects, that you have large cost overruns. So we're very confident that we will not have a cost overrun on this project as it's basically also completed to a large extent.
In the impairment analysis, we did twice in the year 2009, at the beginning and at the end. Obviously, the weakening of the economy has had its impact in Las Vegas, interestingly enough, not in terms of hotel occupancy rates but in terms of average room prices, which led to the two times impairment we did; one at the beginning of the first quarter and the second at the end of Q4 for a minor amount. We therefore believe that this asset is now very well valued and fairly valued within our book and has a lot of upside potential. Let's not forget this is for a period of time will be the last new hotel casino resort for a while in Las Vegas. I'm sure you're all familiar with the dynamics in Las Vegas, that the last and newest ones is the one that always will have the most guests coming.
Commodities revenues is one of the areas in the restructuring that in the change of our investment bank that we've been looking at. Our original targets, as we've always disclosed, were organic growth. As Joe said, eventually bolt on acquisitions in case the right opportunity shows up, but again, we stick to our plan based on organic growth. And the revenues were I would say so much above EUR 500 million and, therefore, in 2009 and we expect to grow that as we move on.
Matt Clark - KBW
Can I just follow up? When you say above 500 million, is that dollars or Euros? And then, secondly, are you able to give a figure for the Cosmo carrying value, I mean ballpark? It doesn't need to be to the nearest million?
It's a EUR 1 billion project, they are carrying values above EUR 2 billion. And the numbers I disclosed were in Euros, as always.
Georg, I think you had a question.
Georg Kanders - WestLB
Yeah, first of all, could you put into context this very well beginning with last year's very good start in sales and trading revenues? Is it, for example, in the plus, minus 10% range and should Jane, indicate it as its target for 2009? The second question is, when looking at new money in the Asset and Wealth Management business, I was quite surprised that mostly all of it came from the U.S. What is the reason for this, or are these only some larger names?
And the third question I have is on the cost development in the Asset and Wealth Management division where there is a sharp increase from Q3 to Q4. Could you elaborate a little bit on this, the sharp increase after adjusting for these goodwill items?
Okay, we don't give percentage points in deviation, but it's above 2007 even; it's a record result.
Can you repeat your question, because we were consulting what to tell you on your first one?
Georg Kanders - WestLB
So second was, on net new money, I was quite surprised that virtually all of your net new money in Q4 came from the U.S. Is this a special effect, is this one large name, or where does this come from?
The net new money development in Asset and Wealth Management, obviously, we have in the net new money development some market appreciation and, yes, we had some improvement in the United States, but I don't have now specific numbers for you to exactly tell you what it is, but we could get back to you if you like.
It's not only in devices. All these are diversified. And we all know that it's not a single name, by no means.
Thank you, Georg. At this point what I'd like to do is to invite for questions coming in from those who are dialing in via the dial-in facility. Maria, if you would like to go to the first question from those attending by phone, please.
Thank you, sir. The first question is from Derek De Vries from Bank of America Merrill Lynch. Please go ahead, sir.
Derek De Vries - Bank of America Merrill Lynch
Thank you. It's Derek from Bank of America. I have two questions. First, Mr. Ackermann kicked off by saying if you take the pre-tax profit there are about EUR 3.5 billion of negative exceptionals in there. I was hoping you could give us some more detail on that so we can understand how you did get to an underlying pre-tax of EUR 8.7 billion for the year.
And, second, I was wondering if you can provide some details on the stable funding ratio proposed by Basel III, just ballpark, understanding it's a consultation paper and there's going to be a quantitative impact study and all those other caveats you like to throw back at us. Just ballpark, where are you on stable funding ratio? And if it's below the 100%, just any sense as to, as you start to manage to a stable funding ratio, if you think it has any impact on profitability or if you're kind of there or thereabouts? Those are my two questions, thanks.
Okay. Let me start with the first one. We have positive one-offs of about EUR 1.6 billion that impacted our profit favorably that we counted in this number. And then we had total negative impacts of about EUR 5 billion that are counted in this number. I think we've mentioned some of them. We talked just about the Cosmo impairment. We had, obviously, based on some legacy assets, some charge-offs, like you heard about Compass or Kalla topics.
We talked about the fair-value gains, which are limited, though. We had a Huntsman settlement in the year. We have the UK payroll tax as non-recurring item. We have severance costs as non-recurring items. On the positive ones, obviously, we had the MTMs relating to Postbank, we had the Scudder intangible and obviously we had some in relation to our [REU] program some hedging gains.
That gives you about the number of effects that's between the positive, which are one-offs that increased our profit by EUR 1.5 billion, EUR 1.6 billion, and then the negatives that are one-offs that we don't see reoccurring, the swing that is this EUR 3.5 billion net. That gives you on a good view on how the true underlying profitability over the year was and it also gives us the confidence towards our EUR 10 billion target for the businesses, that that can be achieved.
Let's not forget that, rightfully so, you will say that we had higher margins in the investment bank and they will come down, on the one hand. But we still have depressed volumes across some of the areas of our investment bank. And on the other hand, let's not forget that all our stable businesses had to battle the storm in '09.
So if we assume recovery there I think it's very plausible why we do believe in the EUR 10 billion number. And again, on the stable funding ratio, again, I can always say what you already took ahead, as the rules are in the proposal are preliminary and are not final yet and, therefore, any impact of this number is difficult for us to make.
Let me also say that we strongly believe that we continue to have the best liquidity management and funding in place. And that was certainly one of the backbones and strengths to helping Deutsche Bank survive in the crisis, so we are not concerned. But I have to pass on we have not done calculations, as this is not final.
Maybe just one word. It goes without saying, but the EUR 3.5 billion are of course, non bonus corrected. Maybe there will be something else in addition.
Thank you, Derek. Can we have the next question, Maria, please?
The next question is from Huw van Steenis, Morgan Stanley. Please go ahead.
Huw van Steenis - Morgan Stanley
Good afternoon. Two questions. The first, I think the increase in dividend signals that you don't have any intention to accelerate the Deutsche Postbank deal, which some people have thought you might do. Could you just give your perspectives on when is the appropriate time for that and you obviously and you can take advantage of maybe the changes in the German market?
And then, secondly, to Davos, Mr. Ackermann was talking about the economic impact of reforms. Which of the three or four current proposals would you think most damage economic reform and, therefore, are highly likely to be watered down in any consultation process? Thank you.
Well, to the first one, I think we said many, many times that we are in no hurry, that we keep the strategic optionality which we have and that it is in the interest of shareholders to wait and do the necessary streamlining, restructuring before we move, and nothing has changed in that. The same, to some extent, in the Sal Oppenheim case. I just would like to say, we have every interest.
Now, if you do a somewhat linear calculation on what certain acquisitions mean for capital, you always should ask yourself what might be the management response. Would they keep everything in place? Would they reduce certain assets? Would they reduce loan books? Would they sell loan books or other businesses? So in that sense we want to work on that so that the impact for the shareholder is the best possible one. And I think that is in, hopefully, very politically correct terms what we are going to do.
In terms of economic reform, well, the biggest problem would of course be absolute uncertainty about further initiatives. So if you have taxation, special regulatory changes in one country or another country, that could add up to a cumulative impact which is very negative. I think secondly, but that's more a hypothesis we are working on with other banks, including, I think, your bank.
What does the trading book treatment mean for the securitization market? If you have more skill in the game and if you have more capital to allocate to securitization activities, does that impair this badly needed revival of the securitization market? And that will be, from an economic point of view, the biggest concern. Of course, the third one is a more obvious one, namely, the capital requirements which could put a lot of additional credit costs and would make it more difficult to finance the global economy. But the first two, in my view, are the most urgent ones.
Thank you, Huw. Maria, may we have the next question, please?
The next question is from Kian Abouhossein, JPMorgan. Please go ahead, sir.
Kian Abouhossein - JPMorgan
Yes. The first one is on the option to pay for Sal Oppenheim in new shares. Now that I look at your tier-one ratio, which is well above your minimum, is there the option not to basically have any new shares issued?
And the second question is, you, as Chairman of the IAF, what was really the three key points that came out of Davos? And where do we see a consensus building in terms of the way the banks want to go forwards? And what are the next trigger points where we see banks finding a way to respond to what the regulator is asking for?
Well, let me start with the second one. We will respond anyhow to the reforms because, otherwise, we're out of business. So, I don't think we have a lot of flexibility. No, no, I know what you mean. Well, I think, first of all, the spirit was very constructive, first thing, which was new. Before we had a lot of dialogue and debates via the media, and a lot of misunderstanding so, in that sense, I think everybody understands that things are still pretty fragile and that we should not overdo it.
Secondly, there is a clear understanding that there are two issues, which I've just alluded to, securitization and, of course, the lending market, which have a particularly important element in it for the real economy.
In terms of subsidization and the solution, living wills, I think people feel that we are still pretty far away from a response to that, even a solution to that. The key is absolute compensation. And two things are expected from us; that we come up with some self-regulation in compensation, and the second one is that we come up with some creative ideas on the liability side in terms of the resolution regime, including some contingent capital issues.
Kian Abouhossein - JPMorgan
And can you just allude a little bit on the compensation side? Will it go further than what has been announced by FSA and some other regulators?
Well, so far nothing has been announced. The big misunderstanding is that people are talking about structural changes. But the cap trade driver is not interested whether you get 1m which is deferred or whether it is a potential claw back in the next three or four years in case your company makes a loss. What they want to hear is the quantum, and the quantum is absolutely open. There's full competition to some extent, rightly so.
But the question is, are we provoking a regulatory or legal backlash. If you don't move on that front, then I would say most of the banks being present in, not all of them are actively involved but those who were actively involved felt that we should be aware of that regulatory or legal risk and we should start thinking about some sort of moderation or some sort of restraint.
Now, how that will work, it's very difficult to say. The answer is let's have a cap. Now a cap is a bit too simple probably. Others are saying let's have a payout ratio. But, to be honest, if you have a bad year, in order to maintain your franchise you may have to pay more than the 37% comp ratio so, in that sense, that will probably be not an acceptable solution. So whoever has a more brilliant idea is highly welcome to speak up in the weeks to come. But we are now working on some sort of responses to that. And it is absolutely necessary to come up with some pro-actives because, otherwise, you run the risk of having a complete change of culture in our industry.
And maybe it doesn't happen directly, as I said, but indirectly, by just asking for more capital, or asking for more taxes, but the burden would then lead to a lower profitability and, as a result, to lower compensation. And that is the key issue to everything to prevent that from happening.
Anything to sum up, Joe.
We have the built-in option and this is still being debated. There is no final decision taken, which path we take.
Ladies and gentlemen, with regret, I now have to ask for one last question and I'm afraid that's going to have to be the last one.
The last question is from Mr. Stuart Graham, Autonomous Research. Please go ahead, sir.
Stuart Graham - Autonomous Research
Hi. I had two quick questions. Firstly, back on Basel III, there's talk of increased risk weighted assets for the counterparty credit risk. Can you give us the figure for your counterparty credit risk [RWAs] and maybe some preliminary thoughts on how much that could increase by?
And then, secondly, on sovereign risk, Mr. Ackermann mentioned that as one of the factors still out there. Can you tell us concretely what you're doing to reduce your sovereign risk exposure and maybe give us a feel for how much you've reduced that over the last few months? Thank you.
For the first question, the impact study has just started and I don't want to give you any indication here. But that is really not the big problem. The big problem is more in the short term now on the trading book and, there, the securitization is the key issue. And you have to differentiate between new business going forward, which, based on what you know, would not be a big problem, and then, of course, to legacy assets. So I think you will see a lot of reduction to legacy assets in 2010 in order to be free to grow your business in 2011. That is what is key right now.
The sovereign risk, well, of course, we have started a long time ago to look into that. We are very comfortable with the exposures we have and I think we also have played a very positive role in not speculating against some of the sovereign risk.
I have one quick finance statement. I just got an update here from our staff to correct the carrying value on cost, what is. I was wrong. And our budget is around the figure that I told you and in terms of consolidated carry value right now is around EUR 1 billion.
Thank you, Stefan. Ladies and gentlemen, I'd like to thank everyone very much indeed for either your physical attendance or for your attendance via phone. Thank you again. And my apologies to anybody who still has questions, who didn't get a chance to ask those. Please come in. Don't hesitate to come to the Investor Relations department and we will do our best to follow-up with your questions and get back to you on that.
I wish you all a safe journey home, those of you who have attended in the room. And we very much hope to be seeing all of you during the year and keeping you updated on our progress. Thank you very much, indeed.
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