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Deutsche Bank, Ag (NYSE:DB)

Q1 2014 Earnings Conference Call

April 29, 2014 02:00 ET

Executives

John Andrews – IR

Anshu Jain – Co-CEO

Stefan Krause – CFO

Analysts

Nicholas Herman – Citi

Jon Peace – Nomura

Kian Abouhossein – JPMorgan

Jernej Omahen – Goldman Sachs

Stuart Graham – Autonomous

Fiona Swaffield – RBC

Dirk Becker – Kepler Capital Markets

Daniele Brupbacher – UBS

Jeremy Sigee – Barclays

Michael Helsby – Bank of America Merrill Lynch

Wolfgang Packeisen – WUP Finanz

Andrew Lim – Societe Generale

Operator

Ladies and gentlemen, thank you for standing by. I'm Mier, your conference call operator.

Welcome and thank you for joining the first quarter 2014 analyst conference call of Deutsche Bank. (Operator Instructions).

I would now like to turn your conference over to John Andrews, Head of Investor Relations. Please go ahead.

John Andrews

Good morning and thank you, operator. Good morning everybody. Thank you for joining us this morning to discuss our first quarter results. As usual, joining us today is our Co-CEO, Anshu Jain, and our CFO, Stefan Krause. First, Anshu will provide you with the highlights of the quarterly performance then Stefan will take you through the deck in greater detail.

As always, all the presentation materials are on the website, and we remind you to pay attention to the cautionary statements regarding forward-looking statements at the end of the presentation.

Without further ado, let me turn it over to Anshu.

Anshu Jain

Thank you, John. Good morning everyone. I'm going to address some key topics before handing over to Stefan -- capital, costs and business performance. We've always said capital was paramount amongst our strategic priorities, so let's begin there.

We said on last quarter's earning call that our capital ratios will be subject to volatility in 2014, and indeed that's what we are seeing. In the first quarter we saw greater clarity on the interpretation of regulatory implementation. We grew our capital base by €1.4 billion in the quarter, but this was more than offset by a rise in risk-weighted assets which were substantially due to the implementation of regulatory requirements. As a result, on a fully-loaded basis, our core Tier 1 ratio declined to 9.5% from 9.7% in the fourth quarter.

The regulatory bar is getting higher. We anticipate further headwinds from the final EBA’s rules on prudential valuation published in March and other developments.

Despite the higher bar, we're confident we can meet these challenges, and we remain committed to our capital targets. As we've consistently said, we have a range of measures which will help us do that. We would not rule out any option that's in the best interest of Deutsche Bank. Our preference is to reach our targets by organic means, but we reiterate our commitment to take all necessary measures to maintain our strong capital levels.

We're also acting decisively on other fronts to further bolster our capital and leverage. Last night we announced our inaugural issuance of new additional Tier 1 capital, a landmark issue, with a minimum size of €1.5 billion, the first part of a program of €5 billion of ATI issuance by the end of 2015 which we announced last year.

We reduced CRD4 exposure further in the quarter, which helped us raise our adjusted leverage ratio to 3.2%. We're almost halfway to meeting our €250 billion reduction exposure target by the end of 2015, which we announced last July. So we remain confident of exceeding a 3% minimum leverage ratio both under the current CRD4 rules and under the latest Basel rules.

Now let me say a few words on costs. Our adjusted cost base is in line with the first quarter of 2013. We have good reason for this, but going forward we will renew our focus on costs. Let me clarify.

Our OpEx program achieved further savings in the quarter, remained ahead of plan and is more than halfway towards our 2015 target. However, OpEx savings were offset by the cost of investments as we responded to changes in the business environment and to the increasing clarity of the regulatory landscape.

How are these impacting us? Let me give you some examples. Along with the rest of the industry, we're spending more than anticipated on adapting to new regulations all around the world. Simply put, we're complying with new rules and producing more reporting for more regulators. These are new but understandable requirements which we're committed to meeting and which require more people and upgraded systems. Some will be one-time expenses while others will be of an ongoing nature.

We're increasing headcount in compliance and related functions by over 500 people, and doubling the compliance IT budget to make sure we execute this diligently. We're also running a multiyear project to create single source of data required for all financial and regulatory reporting across the globe. We're adding supervisory capacity in the front office, our so-called first line of defense. We're adding several hundred people as part of the special initiative reporting directly to Jurgen and me, to give us three lines of defense across the business, control functions and group audit.

In CB&S, for example, this will comprise around 150 people. In anticipation of CRD4 requirements in pay mix, we are raising some salaries, although this cost will come through correspondingly lower bonuses. But you are beginning to see now the impact of those salaries and we'll do so in successive quarters too.

And last year we communicated investments of around €1 billion to elevate our systems and control to best-in-class. We're now beginning to see that in the P&L. This year this will consist in good measure of one-time investments into a safer and better platform.

We recognize that these investments are now part of the landscape. Here as well, the bar is higher. We will find additional efficiencies to ensure we meet our cost objectives, and we reiterate our commitment to meet our cost targets.

Let me now turn to performance in our core business. Pretax profit were €1.7 billion for the quarter. The core bank delivered reported pretax profit of €2.2 billion adjusted for cost-to-achieve, litigation and other specific items. Core bank pretax profit were €2.6 billion close to the €2.8 billion in the first quarter of 2013.

CBS is again our biggest profit engine with pretax profits of 1.5 billion. On our last quarterly call, we got questions about CB&S from both ends of the sector. Some of you asked why we're still committed to CB&S. Others asked if we were losing competitive capacity due to deleveraging. This quarter answered both those questions.

Despite business and regulatory headwinds and the cost pressures we just talked about, and notwithstanding our asset reduction, CB&S contributed post-tax ROE of over 18%. This business is essential for our client offering and for our global business platform. We outperformed in fixed income despite tougher business conditions, while equity revenues were stable and M&A advisory revenues grew year on year. As we've already communicated, we saw pressure on market share in some areas, but this partly reflects our deliberate shift in focus, from pursuing market share to maximizing profitability and returns. Let me give you an example.

For some issuers in some geographies; market practice has been to offer long-dated uncollateralized swaps. That makes it hard to match the revenue opportunity with the related cost and balance sheet usage. For that reason, we may choose to decline certain deals, which inevitably affect our market share.

We're now seeing the consolidation we expected in this business, particularly in Europe. We produced a strong quarter given the circumstances, but we're well aware that the investment banking industry is going through fundamental change. This business will be challenging in the near term and will require continual dynamic management. We're determined to work through that and we reiterate our firm commitment to a world-class CB&S platform.

Just as vital, over €1 billion of this quarter's IBIT came from our traditional banking businesses. Let me first turn to PBC.

Despite the long-term challenges of low interest rates and the fragmented market, this business turned in a near record first quarter result, €520 million in pretax earnings. We continued to focus on quality of earnings, notably fee income. We continued to work through major integration projects and we are pleased with the progress we are making on our German Mittelstand platform. The team, they are doing a great job.

In GTB, this is a business with very, very good performance metric, high returns on capital, good cost/income ratios, and good growth prospects. Of course we're not the only bank in the world which recognizes that. Profitability was strong, €367 million in the quarter, despite sustained record-low interest rate and margin compression, reflecting good cost and risk discipline. We haven't grown this business as rapidly as we would have liked, and for that reason we're accelerating investments and rolling out a new coverage model for global multinational corporate clients.

Last but not least, Deutsche Asset and Wealth Management. As you know, this is where the re-platforming effort of Strategy 2015 Plus is most intense. We are merging five businesses into one. We continue to work through that process, streamlining our funds offering, making strategic hires, and driving investment more [ph]. (Technical difficulty).

Headline pretax profit of €169 million may be below market expectations, but adjusting for the cost to achieve a major re-platforming, we've maintained solid operating profitability. We're starting to see results in the turnaround of net money closed with inflows of €3 billion in the quarter, driven by higher-margin businesses.

As we approach the halfway point of Strategy 2015 Plus, we're over halfway towards that 2015 goal in key areas -- in capital strength, reducing exposures, and OpEx savings. Operating-level performance in our four core business is resilient. The regulatory bar continues to be raised quarter after quarter, and for good reason, but we remain focused on our key targets and on taking the necessary measures to achieve. Our strategy remains the right path in the current environment.

Now let me hand over to Stefan, who will go through the results. After that, we look forward to answering your questions. Thank you very much.

Stefan Krause

Yes. Thank you, Anshu. And guten morgen out of Frankfurt. I will begin on page two because Anshu covered most of the numbers on page one.

So if you go to page two of the deck. It provides you with the bridge between underlying reporting results for the first quarter. In two sets we adjust for the non-core segments to arrive at what we look upon as the core bank, and costs in connection with legacy issues and with restructuring of our platform. This slide illustrates that the underlying results of the bank in the first quarter 2014, €2.6 billion were actually not far behind the results of the very good first quarter of 2013.

Let me now start by addressing some key current themes before I cover then the businesses, so I talk to capital, leverage and cost. So if you turn to page four, as you can see here, our common equity Tier 1 ratio declined 20 basis points in the quarter to 9.5%. That's 40 basis points increase from higher common equity tier 1 capital, principally due to net income, but offset by a 60 basis point reduction largely related to growth of risk-weighted assets of €23 billion. Of the €23 billion, RWA increased, about €10 billion was related to model updates for credit risk and CVA.

These updates came about from discussions with our home supervisor that granted formal approvals for CRD4 related model components in the first quarter, which are now officially included for the first time in our official regulatory filings as Basel 3 went live in Europe on January 1. We expect to mitigate some of these impacts in the coming quarters as we remain in constructive discussions with our supervisor on the implementation of this model.

The remaining €13 billion RWA increase reflected business growth, particularly in CB&S and GTB, and some normalization of market risk levels.

On page five we illustrate our progress on capital since launching Strategy 2015 Plus priorities. Our fully-loaded CT 1 ratio increased more than 350 basis points over the last seven quarters, a 50% improvement. And whilst this includes our €3 billion capital rate last year, risk-weighted asset reductions of more than €100 billion drove more than 75% of the total improvement in the ratio.

And the bottom chart we show our capital ratios on a phase-in basis. This is important because the current legal framework in Europe, fully consistent with Basel, includes transitional agreements to phase in certain capital deductions like DTA in stakes and in financial sector entities only over time. The 13.2% as of the 31st of March this year, our ratio is more than three times higher than the legally binding regulatory minimum comment Tier 1 equity requirement right now.

Also, remember that the ECB's comprehensive review considers a 5.5% threshold for the adverse scenario in its stress tests based on phase-in rules. Taking our December 31, 2013 phase-in ratio of 14.6% as a starting point for this exercise, you can see that, even after deductions being phased-in, by 60% by the end of the stress period, we have quite a significant buffer, above the published threshold, a buffer which was much lower in June 2012 when we announced capital as one of our key priorities.

Now let me conclude my remarks on capital on page 6, with providing an outlook. First, we remain fully committed to our 10% core Tier 1 ratio target by March 31, 2015. However, as noted in our last analyst call, with the pressure on our ratio, largely from potential risk of regulatory tightening beyond what we expected when formulating Strategy 2015 Plus.

A current example of this is the recent final draft technical standard on prudent valuation issued by the EBA for consideration by the European Commission. If implemented as proposed, the impact on our regulatory capital would be €1.5 billion to €2 billion. From a competitive standard, PruVal is a purely European issue, with no similar standard being considered in the U.S.

There are other uncertainties as well, whether it's other technical standards, such as the one on CVA issued by the EBA end of last quarter, or the impact of the ECB taking over regulatory supervision for large European banks later this year, which may result in further charges in supervisory practice.

We remain fully engaged with our regulators and continuously assess potential measures we may take to achieve our target, but we will not allow the financial strengths of Deutsche to be questioned and are prepared to take actions if and when required.

Let me now move on to leverage, on page seven, our second key theme. In the first part of 2014, we reduced our CRD4 leverage exposure by a further €23 billion net of FX. Only three-quarters into the program, we have reduced leverage by €116 billion or nearly half of our €250 billion target for the end of the 2015. Correspondingly, our adjusted fully-loaded leverage ratio is now 3.2%, up from 3.1% at the end of 2013 and 3% at the end of June 2013 when we started the program.

On page eight, I would like also to update you briefly on the expected impact of the latest Basel III leverage rules published. You will remember, in the fourth quarter call, we estimated the impact of the new BCBS rules would increase leverage exposure by roughly €200 billion from current CRD4 level. Since then there have been intensive dialogue with the industry and with regulators, all of which has helped us to refine our earlier estimates further.

With greater clarity from the industry-wide agreed position on derivative variation margin and the ongoing role of our legacy correlation trading portfolio, we are revising down the estimated impact of the Basel leverage rules from €200 billion to €100 billion. Let me add that whilst we clearly understand the intention and process to fully harmonize CRD4 with the latest Basel rules, we continue to see uncertainty with regards to the detail of the legislation and its implementation, as well as in the likelihood of further changes to the Basel rules themselves.

If you go on to page nine, that gives you an outlook on leverage. As I said, our adjusted fully-loaded leverage ratio stands at 3.2, up from 3 when we announced our €250 billion deleveraging program last year. The remaining €130 billion deleveraging would improve our ratio by a further 30 basis points, all else held constant.

Together with our targeted €5 billion AT1 issuance by year-end 2015, our fully-loaded leverage ratio would exceed a potential 3% leverage minimum without any help from earnings. Considering that a legally binding leverage constraint in Europe is not currently expected before 2018, you can see, while we remain highly confident, that we have all measures in place to meet currently foreseeable requirements well ahead of time.

To conclude on leverage, on page 10, I would like to quickly draw your attention again to the announcement we made last night, that we are launching our first issuance of new AT1 capital. Finally, I might say, in compliance with our new CRR rules.

As you will have picked up from the press, regulatory and tax issues have been clarified in Germany as well, so that we can now join our peers in coming up to the market with this new type of security. We're planning a multi-currency transaction and expect the total volume of at least €1.5 billion in aggregate. The trigger level before temporary write-down could occur will be 5-1/8%, leaving very significant headroom versus our phase-in common equity Tier 1 ratio which currently stands at 13.2% as shown before.

We will explain all these features in more detail during a road show next week, during which we also will conduct a public investor call. The issuance will be the first step towards our target to issue a total of €5 billion of the new type of securities by the end of next year.

Now let's move to the cost, on page 11. Reported cost of €6.5 billion in the first quarter are down approximately €150 million compared to the prior year as both compensation and non-compensation costs were lower. However, the improvement in reporting cost largely reflects the absence of net litigation costs in the first quarter of 2014.

Litigation costs in the first quarter are often low, as most settlements in the first quarter are required to be booked at subsequent events and recorded in our fourth quarter results, simply because our books are open longer at yearend and that's, as you know, what happens, for example, to the Kirch settlement this year. Despite the lack of litigation expense in the first quarter, we continue to expect significant litigation charges during the coming quarters, but cannot provide more guidance as to when they will actually materialize.

The increase in our adjusted cost base versus the first quarter of 2013 is mostly attributed to the seasonality of bonus accruals and related social security costs. Compared to the first part of 2013, our adjusted cost base remains flat. Let me explain this a little bit more on the following slide, number 12.

In the first quarter of 2014, we achieved more than €250 million additional incremental savings in our OpEx program, favorable FX effects further lowered our adjusted cost base. But we are also experiencing strong headwinds by additional spend necessary to comply with regulatory legal and control requirements.

This for example includes platform improvements which aim to enhance regulatory reporting; credit risk management capabilities for excess [ph] management; investments in additional resources to strengthen our internal controls framework across the Bank, Anshu mentioned these three lines of defense project; costs to support extensive regulatory requirements and information requests.

In addition, the bonus cap rules imposed by CRD4 have started to impact this year's cost development. We are generally assuming that an increase in fixed payments will be compensated by an equivalent decrease in performance-related pay, but a significant part of bonuses is deferred over several years, hence, we expect the increase in fixed component to result in higher reported costs for both the years 2014 and 2015, with the effects on deferred compensation only kicking in later.

We are asking our shareholders at the Annual General Meeting on May 22, as you may have seen, to approve a one-to-two limits for variable compensation, in order to minimize the fixed cost implications and to retain a reasonably significant element of discretionary pay. In case the AGM approves the one-to-two ratio, we currently estimate that this would result in a €300 million increase in reported costs in 2014. In select cases we've begun to adjust the compensation structure. This effect accounted for about €50 million in the first quarter.

We expect our OpEx program to successfully continue throughout the year, and as a result, to reach the targeted cumulative savings of €2.9 billion by the end of 2014. However, due to the cost effects I've just described, we expect the full year 2014 adjusted cost base to remain roughly flat compared to 2013.

Now let me very briefly touch on Group results before moving into the individual segment performance. So let's go to page 14. Here you see our Group revenues; they were down 11% or €1 billion versus the first quarter last year, most of this decline was driven by lower revenues in CB&S, approximately about €500 million and NCOU was approximately €400 million which I'll discuss later in the segment results.

So if you turn over, next page, the significant reduction in provision for credit losses versus the first quarter of 2013 is mainly due to the lack of large single items that we had in the first quarter. The €108 million reduction compared to the previous year's first quarter is reflected in all businesses by PBC and it’s again mainly a result of no large single items in the current quarter for GTB, CB&S and NCOU.

The increase in PBC related to a positive one-off effect from portfolio sales in the same quarter last year. Adjusted for this effect, provision for credit losses in PBC slightly decreased and reflects the ongoing strong credit environment in Germany.

For the full year we expect to return to lower levels compared to prior year due to the significantly de-risked NCOU book and due to what we think will be a stable market environment.

Let's move on to page 16. Here you can see that revenues in the first quarter came down a lot more than cost did, and therefore Group profits decreased significantly both before and after taxes. As a result, year on year the return on equity came down from 12% to 8%. And as you can see, our tax rate is within the guidance of 34%, 35%.

Let's move on to the segments and their results very quickly. Let's start on page 18 with CB&S. Despite a very difficult quarter for the industry, our CB&S revenues were down only 10% year on year. This quarter we transferred the commodities business in wind-down to the NCOU and thus, it was not included in the CB&S results in the quarter. Market conditions remain challenging with lower client volumes, lower market volatility and lower client risk appetite.

Overall costs were flat as ongoing cost reduction initiatives were offset by increased regulatory and control related expenditure, investments to enhance our market-leading, and change in compensation structure in anticipation of CRD4, as I already discussed.

Turn on to page 19, sales and trading revenues were 10% lower year on year, mainly due to foreign exchange. Including the exited commodities business, the decrease would have been 16%. Core rates in Europe and slow credit revenues were higher year on year, with particular strength in distressed products. Slightly lower cash equity revenues were offset by better derivatives as well as prime finance businesses, as we can see on the chart below.

Turn to page 20, origination and advisory, the global fee pool in origination and advisory was down year on year across all regions, driven by lower issuance in DCM. As a result, our business was down too. However, our M&A revenues were significantly higher in the year-to-year comparison.

Now let's move on to page 21. PBC, as we can see, improved its IBIT in the first quarter of 2014 to €520 million. Adjusted for cost-to-achieve, the pretax profits that came at €627 million. So I think a quite good result.

Key drivers for these results were a €70 million one-time gain from a prior period sale transaction, strong investment revenues across all businesses and provisions for credit losses close to record lows. The first quarter 2013 provisions for credit losses benefited from a one-time gain of approximately €30 million from loan portfolio sales. Please note that cost-to-achieve for the remaining quarters are expected to be higher than in the first quarter, with full year 2014 CtA somewhat above 2013 level.

If you go to page 22, I'll run you through the different PBC divisions. The strong IBIT increase in private and commercial banking was driven by the aforementioned €70 million gain, as well as by higher investment in credit products revenue. The pretax profit of our business unit Postbank suffered slightly from ongoing deleveraging measures was significantly up, as you can see, from the first quarter of 2013.

The result in advisory banking internationally was affected by the strong increase of costs related to our OpEx program. This was partly offset by higher revenues from investment in insurance products, as well as an increased contribution from our stake in Hua Xia.

Page 23 you see GTB. GTB you had really a very good start into the year, with a reported IBIT of €367 million for the first quarter. Despite an ongoing challenging market environment, revenues grew year on year in APAC. In terms of provision for credit losses, remember that we had a single client credit event in the prior-year quarter. We expect the difficult market conditions to persist throughout the year. However, we will continue to support the anticipated business growth in GTB by growing our market share and pushing client activities in our core markets and products.

On page 24 you see the results of Deutsche Asset and Wealth Management. Its IBIT was €169 million or €241 million if I exclude the cost-to-achieve, litigation and impairment. And Deutsche Asset and Wealth Management had approximately €2.6 billion of inflows this quarter. Wealth management inflows were €2.5 billion and strong flows in the passive and alternative but just partially offset by net outflows in our institutional active channels, primarily lower-margin fixed income mandates that were taking away. So the business continues to integrate and streamline in order to achieve cost savings, platform optimization and improved efficiency, as well as improving obviously the margin on its business.

So let me now go to our last division, on page 25, our non-core operations unit. As I mentioned earlier, the commodities assets which we designated for wind-down late last year were now transferred from CB&S to NCOU during this first quarter, and all of NCOU figures had been restated to reflect this transfer.

This Special Commodities Group, which includes exposure to base metals and energy, consists of approximately €3 billion year-before risk-weighted assets. And I said the de-risking standards anticipated to be materially complete by the end of 2015. However, during the first quarter, the Special Commodities Group suffered an IBIT loss of approximately €200 million primarily due to U.S. power exposures that were impacted by extreme weather conditions. Excluding this impact, the first quarter results represent a relatively benign quarter for the NCOU.

Also revenues continue to trend lower year-over-year, in-line with our de-risking strategy. These de-risking actions alone delivered net gains of €68 million. On the following slide, I would like to provide you with some additional transparency on the NCOU.

We've gotten a lot of requests from you and from investors to provide some more support so you can better estimate future results of our non-core segments, and we have designed this new slide, and we hope it fulfills its purpose. We present a view of the division back to 2012 and a breakdown of the P&L in order to highlight the key drivers of the NCOU performance.

First, you see the financial portfolio. It primarily includes wholesale assets such as the legacy CB&S and PBC portfolios. Revenues from these assets have reduced over time, in line with our de-risking strategy. But the overall performance includes the impact of credit losses and costs associated with managing these positions.

Second, the non-financial portfolio primarily includes the operating assets. These are businesses such as the Cosmopolitan of Las Vegas, Maher Terminals, and obviously formerly BHF Bank.

The de-risking line highlights the gains which we have realized from selling the NCOU assets. Taken together with the reduction in associated RWAs, it shows how the NCOU strategy has been a success from a capital perspective. Then you'll see the fade-out and resolution impact such as the various impairments, mark-to-market losses and valuation adjustments which have been realized along with cost of fixed liabilities.

I will also continue to caution that we expect litigation to remain a headwind, with costs in NCOU set to gradually decrease over the next few years as legacy matters are resolved.

We move on to page 27. From a de-risking standpoint, the first quarter of 2014 has been another positive. Main achievements being the completion of the sale of BHF Bank and further risk reduction in the credit correlation book. However, this positive impact from de-risking was partially offset by adjustments in our RWA for credit valuation adjustments. Together with the losses suffered by STG [ph] in the first quarter, this has led to an overall negative impact on capital of 6 basis points. This means live-to-date NCOU has generated approximately 150 basis points towards our core Tier 1 ratio. However, as we anticipated, the pace of de-risking has slowed, and we do expect there to be somewhat a negative impact on capital in the coming quarter.

Now on page 28 you see our consolidation adjustments reported a pretax loss of €336 million in the first quarter of 2014, compared to €255 million in the prior-year period. This development primarily reflects the funding valuation adjustment of €94 million recognized in the first quarter of 2014. Such adjustments were included in C&A in the first quarter of 2013 for the first time, if you remember in our discussions.

So this ends my presentation, and Anshu and I are now ready to take your questions. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instructions). And the first question is from Kinner Lakhani of Citi. Please go ahead.

Nicholas Herman – Citi

This is actually Nicholas Herman at Citi. JPMorgan guided the move from current exposure method to the SACCR would benefit their leverage ratio by about 30 bps. Would you be able to provide some guidance on that as well please? Thank you.

Stefan Krause

It was difficult to hear your question. Do you mind repeating it?

Nicholas Herman – Citi

Sure. I just said that JPMorgan guided that, moving from the current exposure method for derivative exposure and the leverage ratio would benefit the ratio by 30 bps, by moving to SACCR. Would you be able to provide some guidance on as to how that would benefit your ratio as well please?

Stefan Krause

Yes. We're assessing this, but we have no guidance at this point of time. The issue is that the cross-effect from variation margin are to be analyzed, but we are expecting a benefit, I have no number for you here yet.

Operator

And the next question is from Jon Peace of Nomura. Please go ahead.

Jon Peace – Nomura

My question was on your toolbox of capital measures from slide six, to get to the 10% target. It looks like you put them there in order of preference. I just wanted to confirm that and wondered if you could expand on the portfolio measures item. And finally, if you were to resort to authorized capital, how would you think about sizing what would be appropriate? Thank you.

Stefan Krause

So I'm really surprised about the question. No, kidding aside, we really expected those, your question around it. So to say it clear, and I think I state, as we always have stated, no change in our statements, is that organic first. I think that's what we owe our shareholders. I think that the path the Deutsche Bank has taken certainly has been the more difficult path. But it is delivering a more sound, a more safe, and a better bank, because we are, at high speed, are de-risking and cleaning up our balance sheet, taking down our risks and creating a better bank and forming capital.

And as you saw from my slides in the NCOU as an example, as well as in many of our businesses, it has been quite successful. And we will continue every effort along. So that's priority number one.

But obviously looking at the size of regulatory headwinds that we are, from our perspective, unexpected, that we did not include in our 2012 plans, we don't rule out any other option. And I do not want to add to any further speculation around the capital discussion at this point.

Jon Peace – Nomura

Just on the portfolio measures, I mean what particularly were you referring to in that context? Thanks.

Stefan Krause

We were referring to sales. For example, there are several parts of business; there were businesses that we've sold, smaller transactions that we continued where we continued to clean up our overall portfolio. These are mainly activities that don't fit into the new strategy anymore. I can give you some names, CME [ph], Deutsche Card Services. These are transactions that we announced.

Operator

The next question is from Kian Abouhossein of JPMorgan. Please go ahead.

Kian Abouhossein – JPMorgan

The first is, unfortunately, coming back to capital I'm afraid. Just on CVA, you mentioned that there will be a mitigation effect. Can you just indicate, is that correct? It was about 10 billion of CVA charge? And in your outlook, you do talk about further CVA risk-weighted asset impact. I'm just wondering how we should think about risk-weighted assets for the year-end considering you also had quite a bit of growth in your risk-weighted assets for your business.

The second question is related to costs. And the way I read your statement, it sounds like you're on track on gross costs but there is a lot of additional costs coming in. So I'm wondering what it means in terms of net cost and hence how should we think about your cost income target guidance that you have given at the Investor Day? Are they still valid, would you say, or do you think there is some risk to those targets?

Stefan Krause

Okay Ken, thank you for your questions so let me go through. We explained obviously in the analyst that call that for CVA further details on the modeling approach might evolve in our regulatory discussion. As a result we might see some volatility around CVA, RWA until year-end, and that's when I referred to volatility in the capital ratio as something we have to do with.

So we will provide the details then as we go. In terms of the RWA gains, we had obviously the increase in the first quarter was partially regulatory driven and partially driven by obviously business growth that we allowed. This business growth is -- generally business growth that occurs in the first quarter is seasonality driven. The normalization RWA we don't expect to go away because obviously we need to continue to allow our business to achieve the budgeted target.

On the regulatory side we see some change. We had some surprises in the first quarter in terms of regulatory additional RWA and this is an ongoing discussion with our regulators. We got -- in the area of the CVA multiplier we got an increase in this quarter and obviously the Basel related number is lower and we will see this as obviously something that, assuming we fulfill requirements that our regulators have imposed on us, we might be able to manage away, even maybe within the year of 2014 if we comply with the requirements here.

So therefore my message stays that volatility is what you -- in the capital ratio is what you need to expect. But as I also reiterated, that does not change our view that we can achieve the 10% by the end of the first quarter of 2015. It's just the way they are will be a little bit volatile. And as you can see, for example, we did build capital this quarter quite nicely, but then the RWA movement impacted us negatively and overcompensated for the capital build, and this is how you have to think about it.

Now on the costs, what you have to look at, 2014 is a challenging year in terms of reporting costs because on the one hand we're achieving quite nicely the OpEx savings; we are on target, we have actually had a very good over-target experience in many of our businesses. So we continue -- the OpEx program continues to deliver nice. But at the same time we have enormous costs to achieve so they basically compensate the savings, plus -- and that's also the unexpected part -- the amount of regulatory costs. To give you an example, just the amount of investigations going on at the bank that would include hundreds of people, that include lots of work to be done, that includes lots of salaries. Think about just the cost of the AQR for the bank this year. We had all these regulatory costs that were unanticipated in our original plan that obviously are hitting us as well. But we anticipate all those costs to be mainly done with as we move throughout 2014.

So that's why you have this two-way picture. You'll hear me talking about great cost savings, but when you look at the numbers -- and that's why we predict costs to be mainly flat for the year. Also we achieved quite substantial operating cost reduction. That's how you have to think about costs for budget.

Kian Abouhossein – JPMorgan

If I may add one more on risk weighted assets. Is there any indication you can give us of what we should think in respect to risk weighted assets by year-end? Because you clearly also have €40 billion of correlation portfolio run-off in terms of assets.

Stefan Krause

Yes we don't anticipate a substantial reduction for the year. It's not a substantial reduction. Obviously we will continue to de-risk so I think that if I look at the amount of RWAs that we can take down, there's still potential and we will do so. But on the other hand, we obviously have this regulatory headwind so there might be always the same story of compensating RWA increases due to regulatory requirements.

Operator

The next question comes from the line of Huw van Steenis of Morgan Stanley. Please go ahead.

Huw van Steenis – Morgan Stanley

Two questions. First, during the first quarter you got a lot more regulatory priority on the U.S. holding company requirements and I was just wondering if you could update us on your latest thinking on the amount of capital funding and the structure for the U.S. entity, because I was surprised we didn't have an update on that this morning.

And then secondly, just more philosophically as you think about the fixed income business, when I include the commodities change which you made, your marketing of fixed income actually didn't improve in the first quarter versus everyone who's reported so far, but your capital intensity of supporting that business obviously increased materially and it obviously strikes me that it's increasing yet further from the comments you've made on the call today. Is there anything you can actually do to make this business more capital efficient or is it just inevitable it's going to become more and more capital intensive to keep -- you're going to have to run to stand still in terms of the capital intensity of that business? Thanks.

Stefan Krause

Okay. So let me start with the FBO plans. The reason we are currently working on this, as you know the FBO rules came out. Second, I did update you that there were some other reliefs versus our plan, mainly due to the longer timeframe of implementation. Bottom line, we got 12 months more implementation time which for us means in terms of the capital there one further year of retained earnings versus our current plan. So therefore obviously we were quite relieved in terms of understanding the new framework that certainly gives us some more time.

Now the plan, as you know in the framework we have made a new capital plan by the beginning of next year to that effect and we have to deliver obviously a capital plan and discuss it internally and with our regulators before that. And that's work that we are doing. But I will tell you again, nothing has changed from our view and the numbers have not substantially changed from our view, other than it's more of a relief in those terms.

But I think we didn't give you an update but I'm sure by maybe the end of next quarter when we're done with our plan and have it approved et cetera, et cetera we can talk more about it. But in principle, assume that the numbers that we've given you in the past are still valid.

On fixed income, you're right, the business -- the move of commodities was mainly driven by the fact that we have decided to exit and unwind this business; therefore we moved it to the non-core unit. You are right that therefore the number, the duration if we do an asset comparison, was a little bit higher than -- still pretty good against our competitors. And still I think we felt we had a good quarter in fixed income.

The capital intensity of this business will change of course because the type of risk that we are carrying in this business is much lower; it's much more slow, it's a much less structured business and therefore obviously we are continuing to optimize the model to run. We have higher throughput, higher turn, lower risk in this business, so you can assume that the capital intensity of this business will continue to decrease. Some of this business will also structurally be changed in terms of being run over exchanges so the risk profile will change which also should benefit the capital intensity of this business.

Operator

The next question is from the line of Jernej Omahen of Goldman Sachs. Please go ahead.

Jernej Omahen – Goldman Sachs

Stefan, the first question from my side is on fixed income revenues and you claim that Deutsche Bank's FIC was down 10% year on year, which compared to the U.S. peers and also Credit Suisse reporting, would be a great achievement, given that your peers were down 15% to 20%. But can you just explain to me -- so if you didn't do the reclassification of commodities into the non-core unit i.e. if you left the FIC as it was last quarter, what would the year-on-year progression have been?

Stefan Krause

Yes it was 16% and I think I put it in my presentation and we discussed it before. Still, if I can say Jernej, still better than the street.

Jernej Omahen – Goldman Sachs

Yes, still better than the street, so still respectable, yes. But the second question I have is on the composition of this because you say that you've done worse in FX, in credit structuring and in EM, and I guess we should probably add commodities to that, and you've done better in credit flow which I can understand, but that you've also done better in rates, which I think has been a particular point of pressure for all of your peers. Can you just elaborate a bit on that point, that you had a good quarter in European rates? What was driving that?

Stefan Krause

Well I can verify that this is the composition. That we did better, like you said, in FX credit -- did worse in FX credit and obviously then, if I have to add the commodities so U.S. right? Yes we did have a better flow in rates. I will owe you the answer on what's driving this. Let me come back to you in a few --

Jernej Omahen – Goldman Sachs

I'd really appreciate that because I think it's exactly the opposite and the magnitude of difference is quite meaningful to all of your peers. And the third question I have --

Stefan Krause

We did have some sales of assets also; we had have some activity which did have some --

Jernej Omahen – Goldman Sachs

You realized gains?

Stefan Krause

Yes.

Jernej Omahen – Goldman Sachs

You realized gains in your rates business?

Stefan Krause

Yes.

Jernej Omahen – Goldman Sachs

By selling inventory.

Stefan Krause

Yes.

Jernej Omahen – Goldman Sachs

All right. Okay. Thank you. And the last question I have, and I promised to John I was going to be brief today, so the last question I have is on page four. When you say model updates, what do you mean by that? Is this the reversal of model optimizations of last year or is this something new? So when you say the risk weighted assets were up due to model updates, what does that mean, page four?

Stefan Krause

Yes this means the following. As you know, when we implement models they have to be approved and reviewed by our regulators, right?

Jernej Omahen – Goldman Sachs

Right.

Stefan Krause

And now we have the new Basel III framework which changes many of the approaches to modeling, which changes many of the rules we have to apply, and which also changes some of the math. And therefore Europe went live with Basel III models like CVA formally this quarter and we needed to get regulatory approval. So don't forget we are making these assumptions all within this famous forecast for our capital ratios.

So we had to assume what the approvals looked like for this capital without having any specific technical guidance from regulators et cetera and had to wait for the final formal approvals which told us what to apply. I gave you the example; we had a CVA multiplier that by the rules of Basel III is fixed at a certain percentage, 3% for example, but the regulator, local regulator can adjust it upwards if so required. And for example in one of these cases we get an upward revision of the CVA multiplier because obviously we will have to fulfill other requirements to get there.

This is what we're now working through and as we said, we can believe we can reverse some of this after addressing the correctly issued -- issues addressed by the regulators. So think about it first time of application of Basel III model and think about that of course now we can start the process of optimization and the process of addressing some of the concerns that our regulators issued. Also with data flows and processing and easy things like this to fix that we can adjust now.

Jernej Omahen – Goldman Sachs

Okay. And Stefan then finally on this slide, so can you just confirm that this is the way to think about this. So Deutsche has committed to a 10% core equity tier one at the end of the next quarter, so at the end of March. So your indication before was that you expect risk weighted assets not to change substantially, if I understood you correctly. So let's say that they stay flat, €373 billion. So that means you need at least €37 billion and let’s say €38 billion of capital which is a gap of €3 billion to where Deutsche Bank is today. And then you tell us that EBA change is going to hit you to the tune of €2 billion so that's a gap of €5 billion and then you're guiding for substantially higher litigation charges and costs to achieve for the rest of the year so I'm assuming capital formation or capital build as you call it would slow. So how does this gap fill?

Stefan Krause

First of all I don't know if we understood correctly, it's 2015, right, end of first quarter 2015. So we have a year --

Jernej Omahen – Goldman Sachs

Yes so in four quarters.

Stefan Krause

Four quarters to go, okay.

Jernej Omahen – Goldman Sachs

Yes.

Stefan Krause

And I can tell you our view is that based on -- don't forget what -- and our risk weighted asset count, I said mostly for 2014 but obviously we have -- our anticipation is how do we go into 2015 and portfolio measures we can take -- make demands from our perspective. Plus of course the story is a strong retained earnings story and the story is also further improvements that we can get there. And again we have not excluded any measures in case of these assumptions that we have made on the organic build are not -- we're not able to implement them, or if we get even stronger regulatory headwinds to deal with. So I think overall it's a quite doable way, an organic way. If, assuming obviously which we don't know yet, for example we don't have substantial further regulatory headwinds, I tell you for example on the issue of AQR it's open.

And don't forget in your math, what you forget is the capital deduct items. On the math you forgot the capital deduct items and the deduct items in the Basel III framework are the biggest driver of the numbers. Don't forget if I look at my balance sheet capital, it's €55 billion right now and in the framework it gets deducted down to about €37 billion. So the capital deduct items are a big area. This is DTAs, this is other things where you can -- that you have to include in your math.

And then, Jernej, to finish your question, I got now the information so our strength in FIC comes from distressed products.

Jernej Omahen – Goldman Sachs

From what?

Stefan Krause

Distressed product sales.

Jernej Omahen – Goldman Sachs

But is that part of rate?

Stefan Krause

Credit, flow credit.

Jernej Omahen – Goldman Sachs

No but my question was that one of the areas of strength quoted is rates which is the area of particular weakness.

Stefan Krause

But it was slightly, only slightly up, not significantly up, that’s how we struggling.

Jernej Omahen – Goldman Sachs

Well it says here core rates revenues higher, driven by strong performance.

Stefan Krause

Yes it's slightly higher.

Jernej Omahen – Goldman Sachs

Slightly higher. I think it is slightly higher.

Jernej Omahen – Goldman Sachs

Okay. So slightly stronger performance. Thank you very much.

Stefan Krause

Okay. You're welcome.

Operator

The next question is from Stuart Graham of Autonomous. Please go ahead.

Stuart Graham – Autonomous

I'm a bit confused on a few things, sorry. On the FIC again, so we're now saying rates -- there wasn't any gains in there, the gains are in the flow credit. Maybe you can tell us what those one-off gains were?

And I guess I'm still trying to understand why rates were so good relative to others, because I think everybody had a great Q1 in Japan last year, which wasn't the case this year. So what was flow rates? So two questions on FIC, one, what was driving rates better than last year given the Japan negative delta, and two, how big were the one-off gains in flow credit?

Then a question on your cost guidance. You're saying that underlying costs will be flat. So that's the €23.2 billion I guess that you've given us the underlying costs. And I'm guessing that assumes that the AGM passes the two for one so if it doesn't then there'll be another €300 million on that? That's the next question.

And then the final question is on your phased-in core Tier I of 13.2%, that's the same as your phased-in Tier 1. So I don't quite understand how those numbers can be identical, particularly because I think almost every other bank in Europe deducts goodwill from the core equity tier one phased-in, which you clearly can't be doing and I wonder how the ECB is going to treat that. So I'm trying to understand how your equity -- core equity Tier 1 can be the same as the Tier 1 under the phased-in 13.2%. Thank you.

Anshu Jain

Stuart, let me take the fixed income question. Core rates and credit flow trading were both up modestly year over year, but obviously contributed to the fact that we were down less than peer average. So the fact that we are pointing it out as a good performance is the fact that it wasn't down as much as you would have expected. By the way, we didn't have such a strong first quarter last year either. So year over year both core rates and credit flow trading were up modestly single digit percentage. Can't give more details than that.

Stefan Krause

So on the cost guidance, we give the guidance flat. You're asking the question whether flat before or after one -- they are flat after the one to two approval. And I said that we would have to add another €300 million to size it if we don't get the one to two approval to clarify that, that's what I said in my presentation.

Stuart Graham – Autonomous

And the flat is that €23.2 billion underlying cost you talk about?

Stefan Krause

Yes. Okay.

Stuart Graham – Autonomous

And on the phased-in 13.2%?

Stefan Krause

The phased-in in Tier 1, the core Tier 1 is 13.2% and you can find the explanation of this in our interim report on page 47 where you see that goodwill intangibles and other deductions we can make from still eligible AT1 which is a hybrid. So we can deduct it from that component in the capital stack. So look at page 47 of the report; there you see the disclosure.

Stuart Graham – Autonomous

Yes I saw that but almost every other European bank tells us that goodwill is still a deduction and not subject to phasing, whereas you seem to think it is subject to phasing and I wonder how -- if you're right then --

Stefan Krause

But Stuart, can I say this is what we understand the rules to provide. It's a deduction from AT1 instrument and that's our understanding of the rules, and our discussion -- and from our discussion with our regulators.

Stuart Graham – Autonomous

So the regulator's fine with what you're doing there?

Stefan Krause

Yes. But that's our current understanding.

Operator

Our next question is from Fiona Swaffield of RBC. Please go ahead.

Fiona Swaffield – RBC

I just had a question about the AT1 issuance. How should we look at the incremental cost of this issuance? Should we assume that other maturing non-eligible instruments with a similar cost come off or should we be factoring something in as a P&L drag over time? Thank you.

Stefan Krause

Well, as you know, we have old Tier 1 instruments that obviously will roll off over time. And as you know, their regulatory recognition is still there and it decreases over the next three years by about a third every year. Those ones obviously have much lower coupons because obviously this was a completely different instrument than the rest of the instrument is. So -- and therefore obviously there will be some costs but let's see how we can price our instruments to come to final conclusions. But obviously we would expect there will be some additional costs because the risk type of these instruments is obviously different.

Fiona Swaffield – RBC

Just to follow up, can you check, you may have said it, but if you have I haven't caught it. Have you given any information on the increase on the cost of de-risking at all in the quarter?

Stefan Krause

No we haven't. But look at the split of the NCOU; it gives you a good view on how the de-risking exercise is coming.

Fiona Swaffield – RBC

So I should look at the €68 million on slide 26?

Stefan Krause

Yes. But let me remind you one thing only, because the costs are higher but in terms of your models, I think your question asking, the AT1 is treated as dividends for accounting purposes, the coupon. Don't forget it's the capital instrument; it's not going to be reflected in interest costs. Just let me make sure that it's different, okay.

Fiona Swaffield – RBC

You mean it's a shareholders' equity adjustment.

Stefan Krause

Yes.

Operator

Next question is from Dirk Becker of Kepler Capital Markets. Please go ahead.

Dirk Becker – Kepler Capital Markets

Two quick questions please. The first would be on the German banking tax. There are reports out that the banking tax will have to treble in the next couple of years to get Germany's contribution to the resolution fund, correct and I believe your banking tax burden was €200 million in the last couple of years. So should we expect this to get to €600 million?

And then the second question would be on your possibilities to increase your capital by selling performing assets, and I was thinking about your Chinese stake in the Hua Xia Bank which should be worth a couple of billions. Is this something that you would consider selling before raising capital?

Stefan Krause

Let me talk about the tax. It's an effect that is very difficult to anticipate because we don't know exactly how the tax is going to be calculated or know exactly the numbers. We do anticipate from today's perspective an increase but I remember when the German bank levy was introduced the numbers were also much higher and the numbers that we are now reported have been much lower. So I can say difficult to say but obviously -- if I look at the discussion today, obviously there will be some more expense from a European perspective than from a German levy only. And if I look at how they're sizing the fund and the numbers they want to get to, I would assume that there will be some more expense. But the final application rules and the breakdown for Germany are not available yet so it's difficult to predict; it's just let's say a macro view that I give you the answer on.

And then on performing assets, as in -- in long they don't fit into our new strategic focus, of course we also will and have sold performing assets. By the way, this is also valid for some of the sales we have done, especially the ones we've done later; they were performing assets. If I think about the BHF sale and things like that, these are businesses that did contribute to the bottom line of Deutsche Bank but are not in scope for our new strategic orientation anymore. So this is not an opportunistic selling losses only approach, our de-risking initiative. Okay?

Operator

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

Daniele Brupbacher – UBS

Can I just briefly go back to the underlying cost base and €23.2 billion and the guidance there obviously was that it probably will be around slightly this year. So struggle a bit to reconcile all the moving parts in here. You mentioned two to one, you mentioned the regulatory cost around AQR and other areas, but at the same time obviously cost benefits should be in that line as well and originally the cost benefit this year, incremental cost benefit, would have been around €1.4 billion if I recall correctly, probably a bit less or a bit more, let's see. But clearly a big number. So what is the missing part if two to one is €300 million additional cost and regulatory costs probably another few hundred million? So which other areas would increase? Just that question as a follow-up.

And then on slide 6 you mention explicitly AQR. From your perspective, which are the areas where you pay most attention, where you see potential biggest risks coming in that whole process?

And then just lastly, on slide 4 the €8.3 billion. I mean you do talk about normalization so we should read this not as a Q1 seasonality increase but really back to more normal levels throughout the year? And then also can it be a bit more specific in terms of where you -- in which product areas you saw this increase? Thanks.

Stefan Krause

I can totally understand that this cost -- movements within the cost base are difficult to reconcile altogether because there are so many factors impacting it. First of all yes, we have significant benefits from OpEx which are run-rate savings will be quite good. These run rate savings are largely compensated obviously by still investment we're doing in 2014 and the year that we have anticipated this balance to turn massively positive, by positive meaning in reduction, of course is 2015 when our investment into these platform projects, improvement and efficiency projects will start to taper off significantly. And then obviously the full extent of the savings will come.

Now it was -- it is already positive in 2014 but then we had the following costs. First we had a whole bulk of additional regulatory costs that are eating into this positive balance which you know, I disclosed some of it, is investigations, it's the implementation of Basel III, the running of the AQR project, you can imagine how expensive that is, additional audits, additional reviews. This is just -- when I say it's expensive, it's only expensive from running. And that can easily be €0.5 billion in 2014, just to give you precisely what these total costs of regulatory spend are.

And then of course the one to one itself is €300 million additionally but the two to one already carries an increase of your base compensation level, whilst we still have to carry the higher deferrals from previous years. That's a pure timing issue that sits in 2014. And that's why our guidance is that net of all these effects our reported cost base will more or less stay flat versus the previous year and that obviously now excludes the litigation component that obviously we've assumed to be outside of this number.

Daniele Brupbacher – UBS

No I think I can follow these moving parts but what confuses me, unless we are talking about two different numbers, but the adjusted cost base, according to slide 57, of Q4 is the €23.2 billion which obviously excludes costs to achieve but it would include the cost benefit. So I do understand that the net benefits really kick in next year but actually the adjusted cost base is exactly a way of looking at the cost base including the benefits but excluding the cost to achieve. But we can probably follow up afterwards--

Stefan Krause

No I can explain it to you. What we exclude is the CTA, which is the cost to achieve, but not the CCB. CCB in our terminology is the Constant Change Budget. It's like the -- definitely because that's ongoing for us as well. And those costs are higher.

Daniele Brupbacher – UBS

Okay. And in PBC, just as a follow-up there, because underlying costs went down only €100 million in 2013. I haven't found the number for Q1 but it's probably down a bit more. And the original cost-cutting target for PBC was, if I remember correctly, €1.5 billion?

Stefan Krause

Yes.

Daniele Brupbacher – UBS

How much behind schedule are you there or is it really sort of hockey stick effect going into--

Stefan Krause

Yes. PBC again -- we can give you some more details after the call. But in principle take it PBC is completely on plan and Powerhouse timing was geared towards 2015 to achieve the net benefit. So same moving parts for PBC as well. Obviously on the CRD4 compensation much lower impact in PBC than obviously in CB&S, but other than that at the end it's similar dynamics.

Daniele Brupbacher – UBS

Okay and just briefly on the AQR and the €8.3 billion [ph]?

Stefan Krause

Again AQR we don't have any specific area of concern on assets. I would describe the main concern that we have at this point. If you look at the guidance given now, you will know that they are not going to use IFRS valuation in terms of regulatory capital calculations, but want to see more prudent valuation than in IFRS. Whilst IFRS tries to get the fair value and to a more midpoint market estimate, we see more of what EBA is trying to cover also with PruVal, more prudential valuation.

So what's going to happen basically is that of course our IFRS book will stay unchanged but for capital -- regulatory capital purpose calculations there might be valuation adjustments that we'll have to implement in our 2014 trends. And these valuation adjustments are very difficult to estimate from this point of view. It's very difficult for us to say how big are they going to be, what's the logic of that going to be. And that's one of the big unknowns that I've been talking about in terms of our capital plans for the year where we don't know how big this number could come out to be. It's just very difficult to say. The moment they left -- basically for regulatory purposes they leave IFRS straight valuation, we cannot predict anymore. We feel very comfortable with our IFRS approach and our IFRS valuation and therefore our IFRS based regulatory capital calculation but this is now obviously very difficult to estimate.

So most of the adjustments, by the way, we also expect and obviously come from the stress test, but some obviously may be applying also to the reported ratios and, as you know from the guidance the ECB has given, there will be an adjustment to the initial capital that goes into the stress test which will be obviously then valuation driven.

Operator

Next question is from Jeremy Sigee of Barclays. Please go ahead.

Jeremy Sigee – Barclays

It's just a couple of follow-ups on the comp discussion. Could you quantify the step-up in base comp under the two to one scenario? That's my first question.

And secondly, I think you said, of the variable comp award this year and next year, that you would be deferring more. I just wondered if -- did I get that right and could you put a rough quantification on that? What were you deferring? What will you be deferring?

Stefan Krause

First we have the one to one adjustment which is the bigger one, which is about €650 million, would be if we don't get the two to one approval. And then about €300 million of that gets lowered if we get a two to one approval. That has to do with how much we have to increase the base compensation. Now our philosophy will be total comp will be maximum equal. So then obviously if we take out let's say €650 million or €300 million out of and transfer it from variable into fixed compensation, obviously fixed compensation now will be -- variable compensation will be reduced by the equal amount. The problem is, by variable compensation that is reduced will only be shown up in the financials over the next couple of years because most of that is deferred already. So we're not planning any significant changes to our deferral program, but the 2014 tranche of that is mostly deferred. So in that sense this is how the dynamics work.

And now we still have, if you say in the one to one scenario, this €600 million higher variable compensation that's going to hit our 2014 numbers, the share of previous years that's coming in. So that's how you should think about it.

Jeremy Sigee – Barclays

But for the current year variable compensation awards you think you'll be deferring a similar amount to previous years, what you defer forward?

Stefan Krause

Yes. And let's not forget, this is not -- this will affect a rather small, about 5% of the population of the bank, which tend to be obviously the higher comp area of the bank, which tend to be already in the five-year deferral program (indiscernible). So don't forget, this will affect -- the one to one or two to one only applies to really small -- not to 100,000 employees. In the one to one scenario, as you could see from our AGM information, about 4,700 employees and about 1,700 employees in the two to one scenario. So it's a small proportion. But obviously it's the higher bonus and therefore also automatically the higher deferral population of the bank.

Operator

Next question is from Michael Helsby of Merrill Lynch. Please go ahead.

Michael Helsby – Bank of America Merrill Lynch

I just want to turn to slide 6 if I can where you're just talking about the capital measures to clearly offset the headwinds that you've got in the risks. I'm just curious; it looks like the order that you've listed the measures in is in your order of preference. So firstly is that correct i.e. dividend reduction is at the back end? And am I right in assuming when you say authorized capital you're talking about accelerated book build?

And just linking onto that, is there a trigger point that you -- from a CET1 basis where you think the risk of that is higher? So you're flagging that your core Tier 1 potentially is going to go down towards 9%. If it goes below 9% should we see that as triggering an accelerated book build? Thank you.

Stefan Krause

Okay. First of all, please don't take the sequence of this chart literal, otherwise we would have put numbers in front of it. So I only wanted to highlight, and that continues to be our statement, organic first before we do any of the lines measures, other measures and that includes the whole bucket that we have on that list. And obviously these decisions then have to be made at the point in time and we'll have to look at those. And that includes if you look at the bonus reduction, dividend reduction and authorized capital I would all look them in one bucket of type of categories you do. This is the bucket of after organic I would say once again.

There is no floor from our view because at the end of the day we are fully committed still to achieve the 10% by the first part of 2015. And as I told you, and told the market constantly, I would be much more concerned if I'm anywhere close to breaching current framework capital minimum ratios that I also highlighted. Deutsche Bank has never had a better capital versus current regulatory requirements than today.

We've never been better capitalized; we have three times buffer against what minimum requirements are. So in terms of day-to-day running the bank, there is no concern. And let's not forget, we are all discussing this projected 2019 capital requirements and the speed in which any bank can get to these projected numbers that only will be valid from a regulatory standpoint in 2019. So let's put also the urgency of moving this from a legal and regulatory standpoint it's quite, quite different and quite much more relaxed than the markets always make it sound.

So in that sense we are committing to the 10%. We see that we can get there. We have made you aware though that there are some uncertain -- still uncertain, that could be also sizeable, regulatory headwinds that we have to deal with. And they were not part of our original plan and not part of our original statements therefore of achieving our capital. And that's why we have moved on to tell you that we cannot exclude anymore any non-organic measures as well because of these headwinds that we have to -- these unanticipated headwinds that we have to deal with. So just only to clarify your point on this.

Michael Helsby – Bank of America Merrill Lynch

Okay. Can I just ask you as well, on the FIC trading performance, about the timing of that? That might sound funny but we got a lot of feedback from investors that you saw at a large competitor conference in March and this was after JPMorgan and Citigroup had talked about the trading performance that they saw. And certainly the feedback from investors was such that it felt like you've been performing worse than peers. So it feels like something big happened in March that completely turned around your revenue performance in the quarter. So is that right or is it just you were being coy or -- can you just give us a bit more color on how you saw the quarter developing?

Anshu Jain

Let me take that. I'm not sure where that presumption -- I'm aware that there were some stories about us losing competitive market share. And I said at the beginning of my presentation today that we have chosen to step back in certain areas, which by the way are pretty low profitability, particularly post cost of equity. We've taken a very deliberate stance, in fact we said this at the end of the fourth quarter that we are no longer looking to be all things to all people, even in fixed income. We are very mindful of cost of equity, cost of balance sheet, cost of leverage. So you will see some cosmetic drop in market share. We were never expecting to see a huge diminution in revenues, and by the way we aren't claiming anything dramatic.

The gains we've talked about in core rates and credit flow trading are very modest positive year over year. Yes when seen in the context of a competitive drop of 15% to 20% that is pretty good, but no nothing dramatic. We did have some dealing in distressed but yes, core rates, credit flow trading modestly up year over year. Our market share relatively unchanged. So I suppose we didn't deteriorate the way you were expecting but I wouldn't claim anything dramatically superior this quarter versus this time last year.

Operator

Next question is from the line of Wolfgang Packeisen of WUP Finanz.

Wolfgang Packeisen – WUP Finanz

There seems to be very obvious confusion on the street about capital requirements for banks in general. If we listen to ECB's Mario Draghi, he's insisting that the EBA stress test will increase confidence in banks' capital and the lending capacity. What I see is just the opposite seems to be happening right now, since even you keep flagging increasing volatility in capital ratios as the year progresses. Here is my question. Don't you think that this somehow needs to be fixed after even Bank of America now needed to track back twice this year on their capital plans and analysts really start to moan about banks being really, really hard to figure out? Thank you.

Anshu Jain

Let me take that question. No, look, broadly I think what the ECB is doing is very positive in the long run for European banks. By the time we're done with AQR, by the time we're done with stress tests there's no question that the levels of prudence are being raised. There's no question that the standards are being tightened. But in the long run that will simply result in a higher level of confidence that banks will feel towards each other and more importantly the system will feel towards banks.

The price we'll all wind up paying to an extent, and I think this is happening on both sides of the Atlantic in different ways, on our capital standards and liquidity standards that will be stricter than what we would have predicted a couple of years ago. But in general I think this is good for the system and a price which is well worth paying.

Operator

Next question is from Andrew Lim of Societe Generale. Please go ahead.

Andrew Lim – Societe Generale

On the leverage ratio, what would you consider an adequate target longer term? I think in the past you've highlighted 3.5% as a target by the end of 2015. Is that still the case now? And then, even if you do target 3.5% by that time, I think by that time your peers will be more towards 4%. So you'll still be bottom of the peer group in that sense. So I'm just wondering what your thoughts are in that respect?

And then staying on the leverage ratio, it doesn't seem to me that there's a cap on how much hybrids you can issue as part of the capital stack. I know your €5 billion commitment there, that's equivalent to 150 basis points on risk weighted assets for Tier 1 ratio purposes but for leverage ratio purposes is it possible for you to issue more hybrids and therefore reduce your need for equity? Thank you.

Stefan Krause

Well we don't see any competitive advantage in the leverage discussion. I think we don't -- therefore obviously we will comply. We have no aim to be a market leader in terms of leverage; it doesn't make any sense to us. As you know, we've been discussing this measure. It's not very sensitive so it doesn't really help us to really understand the risk nature of the business; it doesn't really help us to compare banks. And two banks, one bank with 3% leverage and the other with 4% leverage, the 4% leverage can be still much, much higher risk bank than the 3% bank and therefore we always put out that this may be somewhat a misleading discussion.

And therefore we'll be compliant but we're trying to understand what the framework is going to be and what the minimum requirements are going to be. You also have to consider that in Europe we continue to be largely bank balance sheet funded. The companies of Europe use bank balance sheets to fund themselves, especially small and mid-sized companies in Europe. We therefore see that the need for balance sheet in Europe is much higher than in the U.S.

That's why we don't think that the comparison holds true. Obviously we would also benefit if more mid-sized companies moved to capital markets; that would be also interesting for our business model and that would help us. But on the market side we still will need balance sheets. So therefore no aim to be at the top of that pack. Whilst on capital we have, we don't have on leverage.

Andrew Lim – Societe Generale

And on the CoCos, whether that can form a bigger part of the leverage ratio stack?

Stefan Krause

Well there is in theory no cap so therefore obviously theoretically you could do more on that. But don't forget the costs associated with it and at the end this will be a financial decision, what makes sense in overall life. So with the €5 billion we believe that that's what we need right now. And that's I guess but to only to answer your question, there's no cap. And then let's not forget on the threshold, and the question is what is it going to finally be. The EBA is mandated to suggest a leverage threshold for Europe by the second half of 2016. So we still have some time to go there and then at that point we'll understand what the minimum requirements are.

Operator

Excuse me Mr. Andrews, there are no further questions at this time. Please continue with any other points you wish to raise.

John Andrews

Thank you Operator and thank you everybody for joining us today. Obviously the IR team at Deutsche is available for any follow-up questions and we wish you all a good day.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.

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