Deutsche Bank AG (DB) John Cryan on Q1 2016 Results - Earnings Call Transcript

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Deutsche Bank AG (NYSE:DB)

Q1 2016 Earnings Call

April 28, 2016 2:00 am ET

Executives

John Andrews - Head-Investor Relations

Marcus Schenck - Chief Financial Officer

John Cryan - Co-Chief Executive Officer

Analysts

Daniele Brupbacher - UBS AG (Broker)

Jernej Omahen - Goldman Sachs International

Kian Abouhossein - JPMorgan Securities Plc

Stuart O. Graham - Autonomous Research LLP

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Alevizos Alevizakos - HSBC Bank Plc (Broker)

Jeremy C. Sigee - Barclays Capital Securities Ltd.

Amit Goel - Exane Ltd.

Nicholas D. Herman - Citigroup Global Markets Ltd.

Andrew Stimpson - Bank of America Merrill Lynch

Huw van Steenis - Morgan Stanley & Co. International Plc

Operator

Ladies and gentlemen, thank you for standing by. I'm Miavale, your Chorus Call operator. Welcome and thank you for joining the First Quarter 2016 Analyst Conference Call of Deutsche Bank. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session.

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

John Andrews - Head-Investor Relations

Operator, thank you, and good morning to everybody here in Frankfurt. I'd like to welcome you to the earnings call this morning. I'm joined by Marcus Schenck, our Chief Financial Officer, who will take you through the analyst presentation, which is public and available on our website at db.com. I'm also pleased to be joined by John Cryan, our Co-Chief Executive Officer, who will participate in the Q&A session at the end of today's prepared remarks.

As we did last quarter, I would ask for the sake of efficiency and fairness that questioners please limit themselves to their two most important questions so that we can give as many people a chance to participate in the Q&A session as possible. And to ensure the absence of doubt, two questions do not means six. Let me also provide the normal health warning to pay a particular attention to the cautionary statements regarding forward-looking comments that you will find at the end of the investor presentation.

With that, let me hand it over to Marcus to take you through the presentation.

Marcus Schenck - Chief Financial Officer

Thank you, John. Good morning and welcome also from my side to our Q1 results call. We recorded net income for the quarter of €236 million, with revenues of €8.1 billion and non-interest expenses of €7.2 billion. RWA at quarter-end was €401 billion and leverage exposure was €1,390 billion. Core Tier 1 ratio stands at 10.7%, and leverage ratio is at 3.4%.

Allow me a short comments on the calculation of the core Tier 1 ratio. It is fully loaded and takes into consideration the management board's decision not to propose any dividends on common stock for the fiscal year 2016, hence do not accrue for the same. Please note that this is still subject to no-objection by the ECB Governing Council. Clearly, this has been one of the most challenging quarters in a while because of the difficult market environment. All our businesses that are linked to the capital markets experienced a significant decline in revenues versus Q1 of 2015, whilst our other businesses remained more resilient and have not been affected in such a severe way.

We actively manage our risk-weighted assets so that we did not have the usual seasonal increase in RWA during Q1. Nevertheless, Core Tier 1 ratio declined to 10.7%. The Hua Xia sale, which we expect to close in the second quarter would have added another roughly 50 basis points to our Core Tier 1 ratio.

Let me go into some more detail for the quarter, starting with the usual net income bridge. Turning first to revenues: At constant exchange rates, reported revenues for the quarter are down €2.2 billion compared to Q1 of 2015. That is a 21% overall drop. Relative to the last quarter, which is the fourth quarter of 2015, revenues were up 24%. We saw a substantial decline in global markets driven by the weak market environments, low client activity and the implementation of strategic decisions with regards to exiting certain countries closing or downsizing certain businesses, as well as off-boarding of high-risk or low-profitability clients.

Similar picture for CIB. This is a result of a weak performance in Corporate Finance and a challenging-market environment whilst revenues from transaction banking were solid.

PWCC revenues were down €347 million. This includes €247 million impact from Hua Xia as we booked an equity pickup in Q1 of 2015 and recorded negative net valuation impact in the first quarter of this year. Asset Management revenues are at €44 million, but this includes several one-off effects which I will outline later when we speak about segments.

Non-core unit revenues were down €382 million including losses of €90 million from de-risking. In Q1 of 2015, non-core unit revenues included a one-time recovery of €219 million related to a legal matter. Loan loss provisions increased by €87 million in the quarter, reflecting specific events in a few portfolios. Overall, the outlook for our credit portfolio remains relatively benign, something I'll address in more detail shortly.

The adjusted cost base improved by €168 million mainly from lower bonus and retention. We booked €285 million for restructuring and severance in the quarter compared to only €66 million in Q1 of 2015. Main drivers are the business optimization in Germany and restructuring costs caused by footprint rationalization measures.

On the litigation side, we made progress in resolving a number of matters in the quarter. These were materially covered by existing accruals. The absence of large non-tax deductible litigation charges led to a lower effective tax rates compared to prior year. Currency movements were slightly beneficial for the bank and as a result, we closed the quarter with a net income of €236 million.

Let us look into some items more closely. Page 4 shows the breakdown of our Q1 non-interest expenses into the categories we announced end of October 2015. Non-interest expenses at constant exchange rates are down by €1.3 billion. Main driver clearly is a €1.2 billion lower litigation charge. You see an increase of €200 million in severance and restructuring. The biggest portion comes from provisions related to German business optimization.

Other restructuring costs include country footprint rationalization measures. At constant exchange rates, adjusted costs went down by roughly €200 million.

When you look into adjusted costs in more detail on page 5, you see that at constant exchange rates, compensation and benefits were down €229 million, mainly due to lower cash bonus and reduced retention charges. IT costs remain our second largest cost category. A significant portion of the €86 million increase comes from higher software amortization. Professional service fees are up €48 million mainly driven by higher supports for our regulatory project in the U.S. and the overhaul of our KYC and client on-boarding procedures. Costs for bank levy and deposit protection is at a similar level compared to 2015. The decrease and other costs include the impact of disposal activities in the NCOU, namely the sale of the Prince Rupert port in 2015.

Few words on litigation: Our reserves have slightly decreased to €5.4 billion, contingent liabilities decreased from €2.4 billion at year end to now €2.1 billion. The decrease is primarily driven by provisions used for certain matters as well as closure of proceedings. U.S. mortgage repurchase demands and reserves remained unchanged.

We have resolved a number of matters in the first quarter. The settlements were materially covered by existing accruals. BaFin closed several special audits and will not impose any sanctions. Precious metals, both gold and silver has been settled. Progress with respect to several other matters has been made which has also led to some provision release.

Let us now look at our capital position. Core Tier 1 capital declined from €44.1 billion at the end of 2015 to €42.8 billion at the end of March 2016; as said in line with the bank's decision to not pay dividends for the fiscal year 2016, we did not accrue for dividends. This has been discussed with the ECB and it is subject to a non-objection period by the ECB Governing Council.

There are several reasons for the decline in Core Tier 1 capital. The net income of the quarter of €200 million is partially offset by AT1 accruals and €0.3 billion share buybacks and hedge premia for equity compensation. Other effects included a €0.4 billion prudential filter for DVA/FVA gains from credit spread widening and a 10 – 15% (9:44) effect. On top of that, Core Tier 1 capital was impacted by an FX effect amounting to negative €0.6 billion. AT1 capital remained constant at €4.6 billion.

Our RWA increased by only €4 billion compared to prior quarter including a €6 billion decrease caused by FX. Main driver behind the overall RWA increase is the €8 billion increase in op risk RWA, driven by recent internal and industry losses and settlements. However, we avoided the usually much steeper increase in Q1 as we kept market risk at low levels in light of very volatile and unfavorable market.

Core Tier 1 ratio dropped from 11.1% at year-end to 10.7%. The driver is the reduction in Core Tier 1 capital. It should be noted in this context that the benefit from our sale of our stake in Hua Xia Bank announced last December is not yet reflected in these numbers since that will only be included at closing which we expect to occur in Q2 of 2016.

As said before, this would have added another 50 basis points to our Core Tier 1 ratio as of March 2016. Please note that the ultimate impact will then depend on our reg capital composition at closing. Leverage exposure decreased by €5 billion in Q1 of 2016 including a benefit from currency movements of €32 billion. This was offset by an increase in cash and other of €33 billion, half of which was cash, the other half including increases in our strategic liquidity reserve, pending settlements, loans, and various other small items.

In the quarter, we also reduced our trading inventory by €17 billion whilst increasing our securities financing transactions up to €16 billion, both in response to market volatility and client demand. Overall, our leverage ratio declined from 3.5% to 3.4% at the end of the quarter and once again adjusted for Hua Xia, this would still be at 3.5%.

We recorded an increase of provisions for credit losses of €86 million compared to Q1 of 2015 resulting from specific events and selective portfolios. Therefore, I would like to give you some background on three focused industries, oil and gas; metals, mining, and steel; as well as shipping.

As you can see on the left-hand side of the slide, our gross funded loan exposure for these industries account for only 7% of our total corporate loan book. In detail, the loan exposure to the oil and gas sector is €7 billion, of which 50% is investment grade. Less than 25% is related to sub-investment grade exposure in higher risk industry sub-segments; however, this is predominantly senior secured. We recorded provisions for loan losses of €21 million for the quarter.

In the metals, mining, and steel loan portfolio of €6 billion, we see the impact of the industry downturn as only 32% of the exposure is investment grade. A significant portion of this portfolio is in emerging markets. This quarter we recorded provisions of €45 million. A large portion of our loan exposure to the shipping industry of €5 billion is in sub-investment grade, however, the portfolio is largely collateralized, well-diversified across shipping types and predominantly domiciled in Europe. New loan loss provisions for the quarter were at €34 million.

Let us now look into the segments for the first time in our new reporting structure. As you will have seen in our restated financials, global markets is essentially composed of the sales and trading units from our former CB&S segment.

The first quarter of 2016 was a challenging one for this new segment which records a positive IBIT of €380 million. This is, however, higher than the prior-year quarter primarily due to lower litigation cost. Revenues were 23% lower on a reported basis or 30% after adjusting for the impact of CVA hedges, DVA, and FVA.

Lower revenues reflect a number of factors both market-driven and some DB-specific. Firstly, as you've seen from our peers, markets were particularly challenging this quarter with macroeconomic and political uncertainty being severe most notably in Europe and Asia. This led to substantially lower client activity, weakness in both equity and credit markets, and a challenging risk management environment, which burdened our market-making activities, particularly when compared to a typically strong first quarter.

Secondly, Deutsche Bank intentionally gave up some revenues in Q1 2016. As a result of some enhancements to our KYC processes, we lost some revenues. Furthermore, we have made good progress on the rationalization of our country footprint which, for global markets, entails the hubbing of our EM debt business; and most materially for Q1 of 2016, the exit of our onshore GM presence in Russia.

We have also significantly reduced the capital that we allocated to securitized trading which at quarter-end was less than half the level of the prior year. We were helped by gains from our tender offer which resulted in a gain of €80 million in global markets this quarter. While it is clearly difficult to precisely measure the impacts of these DB specific factors, we estimate they accounted for around 20% to 25% of the decline in our global markets revenues year-on-year.

Global markets costs declined by 34% in the first quarter year-on-year. This was primarily driven by lower litigation cost. We booked a net litigation release of €68 million in the first quarter of 2016 versus €1.2 billion litigation expense in the prior year. On an adjusted basis, global markets costs were also lower with a 3% decline, reflecting lower bonus with front office head count 4% lower than at the end of 2015.

We keep up with our commitment to Strategy 2020. RWA declined by 6% compared to last year with an increase in op risk RWA more than offset by business de-risking. RWA was up a little on the seasonally low print (16:54) at year-end.

Let's take a closer look at our sales and trading units. Please note that revenues from CVA hedges, DVA, and FVA are reported through other. So the sales and trading numbers you see here exclude any impact from these items.

In debt sales and trading, our FX business had a solid first quarter supported by sustained macro volatility. Lower revenues primarily reflect a particularly strong prior-year quarter, where the removal of the Swiss Franc peg generated significant client activity and where market-making activity was supported by a clearer trend.

Rates now consists of our trading businesses in Europe and the U.S., with the Japan and Australia desks now reported through Asia-Pacific local markets. Rate revenues were lower in the first quarter of 2016, and similar to FX, this partially reflects our strong prior year quarter where the European business was particularly supported by the ECB's QE program.

Our credit business now includes flow trading and our distressed products businesses in the U.S. and Europe, as well as former Credit Solutions business. Credit was impacted by weak credit markets in January and February, and by the aforementioned reduction in securitized trading, where we are de-risking according to strategy. We also had an exceptionally strong quarter last year particularly in distressed products. The quarter ended strongly reflecting strong deal execution and improving market conditions. And while year-on-year results were lower, we are pleased with the overall performance of our credit business in this quarter.

The emerging market debt business reports broadly as per the old CB&S structure. Lower revenues in the first quarter were a result of the weak market environment coupled with the impact from exiting certain regions, most notably Russia. Asia Pacific local markets combined our Asia, Japan, and Pacific local FX and rates businesses. Following a strong prior year quarter, revenues fell this quarter as political and macroeconomic risks in China led to a particularly challenging market environment.

In equity sales and trading, it was a difficult quarter for our cash equities and equity derivatives businesses. Both of these were impacted by lower client activity as clients were less active than normally expected for this time of the year. In cash equities Asia, flows were notably lower although our U.S. business held up well. The derivatives market conditions particularly impacted the U.S. and Europe. As we've noted before, we have lost some market share as we believe we have underinvested in our equities business over the last few years.

We're very committed to equities as part of our strategy, and we are reinvesting here in our confidence that we will regain market share. In contrast, our finance business had decent performance in the first quarter. Revenues were flat year-on-year despite challenging market and some lower market valuations. Client balances grew when compared to a year earlier. The pipeline in this business is robust, and we remain committed to investing in it.

Corporate & Investment Banking recorded an IBIT of €316 million for the quarter. Net revenues declined by 15% in a volatile market. This results from lower primary activity in our corporate finance business. At the same time, macro-driven declines in trade financing activity, as well as continued low interest rates negatively impacted revenues in our transaction banking business. We booked provisions for credit losses of €136 million. The increase, compared to Q1 of 2015, is mainly the result of single-credit events in the quarter. This provisioning level does not, however, reflect risk insurance instruments on these exposures in the form of CLO and PRI instruments, which will partially offset these provisions over the next several quarters.

Non-interest expenses were broadly unchanged year-on-year. Positive effect from lower bonus accruals and heightened cost discipline were more than offset by higher restructuring activities resulting from our strategic initiatives.

Page 15 provides a deeper view of the revenue development. Year-on-year, we see solid revenues in transaction banking. This was supported by strong performance in institutional cash and securities services, benefiting from higher interest rates in the U.S. and transaction volume growth. However, this was more than offset by lower revenues in trade finance and cash management activities for corporate, resulting from subdued trade finance activity and persistent low interest rates in Europe. Revenues from origination significantly decreased year-on-year both in equity and debt due to challenging markets and lower client activity.

On the debt side, we now do see a slightly better pipeline, but the situation overall remains challenging. Despite a fee pool decline in the first quarter of 2016, we recorded a year-on-year revenue increase in advisory as a result of transactions announced last year which now closed in the first quarter of 2016.

In PWCC, revenues for the quarter were down 17% on a reported basis. This development is predominantly attributable to Hua XIA Bank. While we recorded an equity pickup of €123 million in Q1 of 2015, the current quarter included only a negative net valuation impact of €124 million. Excluding those two Hua Xia Bank effect, PWCC revenues declined by 5% on the back of lower client activity and continued low interest rates.

Loan loss provisions are low, reflecting the quality of the portfolio in a benign economic environment. Non-interest expenses were broadly unchanged versus Q1 2015. Cost containment measures offset the higher provision for restructuring and severance related to our strategy implementation.

Looking into PWCC sub-segments, slide 18 shows the revenue development of our private and commercial clients, as well as wealth management businesses. Please note that revenues from Hua Xia Bank are separate, i.e., not part of PCC revenues.

PCC revenues include revenues of our German and international businesses. We saw a revenue decrease of 4% in Germany and 6% year-on-year in the international business, both driven by lower investment and insurance revenues, as well as lower deposit income.

Revenues in Q1 2016 in Germany included €50 million dividend payment from a PCC shareholding. Margins in the credit businesses remained stable during the quarter. Wealth management revenues include revenues of our four wealth management regions globally. Revenues are down 8% versus a strong Q1 of 2015. The decline versus the first quarter 2015 was firstly driven by lower performance and transaction fees as a result of the current market environment with lower client activity.

Secondly, lower management fees hit overall revenues as they are impacted by lower market levels and asset values. This was partially compensated by higher net interest revenues from deposits, mainly due to higher margins.

Wealth management gross margin is at 55 basis points which is slightly lower than in the first quarter of last year. However, we see margins again improving in the last two quarters after a low in the third quarter of 2015. Please note that this is the first quarter 2016. A stricter definition for invested assets became effective and client assets were introduced as an additional metric for PWCC but also for asset management.

Accordingly, invested assets include assets held on behalf of customers for investment purposes and/or client assets that are managed by Deutsche Bank on a discretionary or advisory basis and/or assets that are deposited with Deutsche Bank. Client assets include invested assets plus other assets over which DB provides non-investment services such as custody, risk management, administration, and reporting.

For PWCC, we see a decrease of invested assets in the quarter of €22 billion, most of it related to market depreciation and FX movements. Net outflows in the quarter were €4 billion, 50% in wealth and 50% in PCC. You can find details in the appendix of the deck.

Let us move to Postbank, which we report as a separate segment for the first time. Please be aware that Postbank segment figures do not match Postbank's stand-alone view (26:37) figures due to separation costs, other items in C&A segment, as well as further consolidation effects.

Net revenues in the quarter were stable versus Q1 of 2015, while savings and current accounts continued to be burdened by the persistent low-interest-rate environment, mortgages, and consumer finance continued to show a double-digit growth due to new loan business and margin improvements in the quarter. Provisions for credit losses further declined from already low levels, reflecting Postbank's low-risk business model.

Non-interest expenses for the quarter remained stable, so that Postbank reported an IBIT of €122 million, an improvement of 8% year-on-year. Please note, this still includes a negative €55 million contribution from assets and predominantly liabilities formerly reported in the non-core units. Adjusted for that, Postbank's IBIT stands at €177 million for the quarter. These negative NCOU contributions will significantly reduce over the coming three years to four years.

The following page provides an overview of asset management. IBIT and asset management was weaker year-on-year, coming in 3% lower impacted by weaker operating revenues and unfavorable market conditions. Revenues were down year-on-year in Q1 2016, driven by non-recurrence of performance fees in Alternatives and partially offset by Active. Please note that Q1 of 2015 saw a write-down on HETA exposure of €110 million. These were largely from low-margin products in the U.S. including cash and to a lesser degree in EMEA ex-Germany.

Invested assets were €739 billion as of end of March, a decrease of €38 billion versus end of December last year driven by net asset outflows, unfavorable foreign currency movements, negative market development and disposals. Non-interest expenses excluding Abbey Life came in broadly flat. The non-core units wind-down continues to progress and delivered further capital accretion from asset sales this quarter. That said, de-risking came in slower than originally planned.

I can also confirm that we have recently agreed the sale of Maher Port Elizabeth, which we expect to close later in the year once all regulatory approvals are obtained. We do not expect this to have a material impact on our financials.

And as you may have seen, the IPO of Red Rock Resorts formerly known as Stations Casino (sic) [Station Casinos] (29:21) priced two days ago. The overall IBIT performance for Q1 2016 reflects the actions we are taking to execute our strategy. This includes litigation matters which continue to burden results. Please note that in the first quarter of 2015, we had a positive €219 million contribution from a settlement in favor of Deutsche Bank. Allocated costs to the segment accounted for €96 million for the quarter.

C&A reports a material year-on-year IBIT decline to the tune of almost €350 million. Main driver for this is the decrease of 47% in valuation and timing differences; Effects such as the buyback of Tier 1 eligible issuance in Q1 2015, the impact of our CDS development and other accounting treatments of centralized in C&A and reflected in the valuation and timing differences.

Allow me to conclude with some comments on our progress so far, as well as an outlook for the remainder of the year. This is our first full quarter in a multiyear restructuring. Obviously, progress we are making this early in the structuring is not always obvious in the financials. But let me briefly recap some of what we've accomplished so far.

The accelerated wind down of the non-core unit is largely on track, and we continue to expect the non-core units to be below €10 billion RWA by year-end, at which time we will likely collapse those assets back into the operating segments. We continue to sell the non-financial asset portfolio in the non-core units at capital ratio accretive prices. Most recently, with the announced sale of Maher Port business in New Jersey, and as mentioned, the Red Rock Resorts IPO.

Outside of the non-core units, we completed the sale of DB's asset management business in India. Additionally, we closed 43 retail branches in Europe outside Germany, as our retail bank restructuring accelerates. The separation of Postbank is almost complete, which is the key step for the eventual deconsolidation. We are actively in the process of downsizing our operations, but some of this work happens in phases. In addition to the retail branch closures I just mentioned, we have made significant progress in our announced perimeter reduction. Country exits are well under way, with the first exit to be completed in 2016. At this stage, we have basically pulled out of the global markets activities in all markets where we had planned to do so, leaving behind only an FX business in a few selective countries where we need this for servicing our corporate clients.

We launched our previously announced enhancements of our KYC processes including off-boarding clients deemed high risk; and we have continued to reduce certain global markets activities in particular in the area of securitized trading.

We also made good progress on the technology side. We decommissioned 500 applications, which is 12% of our application base and off-boarded 700 vendors in the procurement rationalization program. Finally, we settled a number of litigation cases within our existing reserves, a very positive development.

In terms of outlook, Q1 was extraordinarily challenging for the global capital markets and for the industry. While there has been improvement in the last month or so, there remained a number of macroeconomic and geopolitical risks to the global markets and the global economy.

As such, we would expect the revenue environments to remain challenged in 2016. Against that backdrop, we reiterate what we noted in the past that 2016 will be the peak restructuring year for Deutsche Bank. In line with our prior guidance, we anticipate restructuring and severance cost for the full-year to be approximately €1 billion. FTE was quasi-flat in Q1 as we continued to internalize critical external stuff. We also continued to hire in critical functions to strengthen our controls and our franchise. We do anticipate FTE will decline in the second half of the year.

Given the front-loaded nature of certain investments we needed to make for key issues like technology and the IHC in the U.S., we reiterate our prior guidance that adjusted cost in 2016 will likely be flat to last year. Obviously, given the meaningful deterioration in the operating environments, we are looking at accelerating some measures to lever costs down more quickly.

We are updating our RWA guidance for 2016. Rather than the expected flat RWA versus end of last year, we're now targeting a €15 billion to €20 billion decline in risk-weighted assets for 2016. This is planned despite ongoing upward pressure from uncontrollable factors like op risk across all businesses.

The closure of the sale of Hua Xia Bank remains on track to be completed in the second quarter. The case has been filed with the CBRC, and we are now awaiting final clearance. In fact, that would boost our pro forma Core Tier 1 ratio by approximately 50 basis points. While litigation remains a substantial challenge as we've noted before, we still target to settle the largest outstanding cases we faced over the course of this year. We also remain focused on our core franchises recognizing that any restructuring has element of inherent disruption. As John noted last quarter on this call, we will manage through our restructuring, defend our franchises, and continue to serve our core clients.

Finally, we'd note that for too long, critical and needed restructuring at the bank was delayed, and we do not wish to repeat this. While a challenging operating environment does indeed complicate elements of the restructuring, we remain focused on doing the heavy lifting for Deutsche Bank, particularly this year. We want this bank to emerge as a leaner, safer, and more efficient organization which is truly focused on clients. When we get there, we will also generate attractive returns for our owners.

That completes my review of the financials. I'll now hand back to John Andrews, and then both John and I – John, John, and I, are happy to take your questions.

John Andrews - Head-Investor Relations

Thank you, Marcus. Operator, can we start the Q&A session, please?

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. And the first question is from the line of Daniele Brupbacher of UBS. Please go ahead.

Daniele Brupbacher - UBS AG (Broker)

Good morning, and thank you for the presentation. Just two things, one on Postbank and one on the NCOU, please. On non-core, you reiterated the below €10 billion targets for year-end, but obviously in Q1, there was a bit of slow progress here. Could you just talk us through what will drive the further reduction and how much dependent that is on market conditions in terms of – that we will see a bit of an accelerated profile? That will be helpful.

And then just on Postbank, could you share your latest thoughts regarding the planned IPO? And in that context, for us, in order to value that business. If I look at slide 18, you did say the legal entity Postbank will still have somewhat different numbers driven by separation effects and C&A. Could you just quantify those? Does it mean that the €177 million pre-NCOU would be higher all over? That would be useful, thank you.

John Cryan - Co-Chief Executive Officer

Good morning, Daniele. It's John. Maybe I'll take the one on NCOU and then Marcus can give you an answer on the Postbank question. On NCOU, I think the first point I'd make is that, it's important to realize that a lot of the positions left in NCOU are not straightforward market liquid positions. And a lot of the exits that we're planning for this year are actually negotiated exits. The skill set that we're applying to that division now is much more akin to sort of corporate finance, almost M&A style negotiations of each position.

A lot of that is unbundling. For example, we've unbundled (38:28) insurance that holds – that have assets held against them. So, the position is driven by a hedge rather than by the asset side. On the equity portfolio, the two big positions we've now contracted to exit as Marcus said, the Red Rock IPO priced a couple of days ago and we've contracted with the buyer on the board and they take a while to complete; the IPO not but the negotiation with the regulator on the board will take a quarter or more. So, a lot of what we're doing is actually teeing up exits that will crystallize later in the year.

You're right that in the first quarter some of the more liquid asset disposals were a bit slower, but we don't expect that to continue. And at the moment, it's not posing a problem to an extent that we need to reduce positions.

Marcus Schenck - Chief Financial Officer

On your question in relation to Postbank, or the two questions, first on the difference between standalone and the segment, for the first quarter this will be roughly €45 million difference, which is essentially the de-consolidation costs being the single biggest item within that, so the separation cost that we incur when carving out those activities that needed to be carved out or handed back to Postbank.

Now, where do we stand on the process, I think, here, I can only reiterate what we communicated in January which is that Postbank, a little bit like Deutsche Bank, has sort of two restructuring tasks. A, they have their own program to improve the cost position of the bank which is making a very good progress. And B, they're also looking to further enhance the asset mix of Postbank which is, I would say, super risk conservative at this stage. And they have now embarked on a route to basically enhance the margin profile of the bank making good progress as we can already see a bit of that in the first quarter by expanding more into consumer finance, as well as also increasing the corporate footprint of the bank.

All of this will take some time, and as we said in January, we think we are highly likely better advised to await some of the improvements, both on the cost and on the margin side, before we embark on selling the assets.

Daniele Brupbacher - UBS AG (Broker)

Thank you very much.

Operator

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

Jernej Omahen - Goldman Sachs International

Good morning from my side as well. So, I have three questions, please. The first one is a numbers question, I guess. I'm looking at Deutsche Bank making a profit but the tangible book value per share going backwards, and I guess the key reason is this foreign-currency translation impact of €1.1 billion this quarter, and I just wonder whether you can just shed some more light as to what the key moving parts were within this line.

The second question I have is on capital formation and ECB's SREP ratio, so the ECB is saying that the SREP ratio for Deutsche is 12.25%. Deutsche is now broadly, I think, 200 basis points short of that number, so if we should take into account the guidance from the start of the year that this year is going to be broadly flat, potentially slightly loss-making as a whole, so, no capital formation this year. This then leaves you €8 billion of capital to be formed over the course of 2017 and 2018. I just wondered to what extent you feel that that is a target that's comfortably achievable. Because it does imply a reasonably steep return on equity for both 2017 and 2018.

And the last question I have is the traditional question on the foreign bank organizations rules and their implementation, so I think we've got the quarter left until those rules go into effect, and I was wondering if you could update us as to how the preparations for the implementation of those rules are going. Thanks very much.

Marcus Schenck - Chief Financial Officer

Good morning, Jernej. So let me start with the one that probably most people find relevant, which was your second question. Yes, SREP needs to then eventually be at 12.25%. Yes, we do expect capital ratio to predominantly be – to basically be flat for 2016. But no – I think your math is right when you assume that you keep RWA completely flat. But as we highlighted in our strategy announcement, there's two factors that will allow us to get to the required capital ratio. One is the generation of capital, both through basically producing profits but partially also through some disposals which we expect to have a positive impact, Hua Xia being an example for that.

And then secondly, we will be taking down RWA, most notably, clearly here we need to highlight Postbank which will mean that there's €40-plus billion of RWA that will leave the bank. And we will also have a benefit from the reduction of the non-core unit which was not producing profits. We'll improve the Core Tier 1 capital ratio for the bank. So, that – those are and continue to be the drivers that we are very confident will allow us to achieve the necessary capital position.

Jernej Omahen - Goldman Sachs International

Marcus, can I just ask, do you think that the disposal of Deutsche Postbank increases or decreases the SREP ratio requirement?

Marcus Schenck - Chief Financial Officer

It doesn't change it.

Jernej Omahen - Goldman Sachs International

Do you think it's – the ECB will say it's still 12.25%?

Marcus Schenck - Chief Financial Officer

Yes.

Jernej Omahen - Goldman Sachs International

Okay. Thank you.

John Cryan - Co-Chief Executive Officer

Yes. Jernej, it's John. Don't forget that the SREP is based on phase-in ratio and in Q1, our phase-in ratio was 12%.

Jernej Omahen - Goldman Sachs International

Yeah. I know.

John Cryan - Co-Chief Executive Officer

The 10.7% we've shown you, 11.2% pro forma.

Jernej Omahen - Goldman Sachs International

No, I get it. Yeah. Yeah. I get it.

Marcus Schenck - Chief Financial Officer

And the – you almost answered your first question yourself. It is, indeed, mainly currency movement and the capital and then the AT1 that drives down tangible book value per share. On the FBO or the creation of the IHC, yeah, I would say we're well on track. The one item that we still find most challenging is making sure that we are in a position to produce all the required reports automatically from our systems given this has never in the past been really the way we looked at the business. That is probably the single biggest challenge.

But we have – all the governance is now in place. We have reorganized the businesses so that we essentially run the IHC more or less as a separate division. Now, separate not as in it is no longer kind of linked into the businesses, but we have a management team for the IHC. There's a board for the IHC. The internal reporting has been set up for the IHC. So, we actually view this whilst costly, we view it as a project which is actually quite well on track and do not expect hiccups until beginning of June.

Jernej Omahen - Goldman Sachs International

Okay. Thank you very much.

Operator

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

Kian Abouhossein - JPMorgan Securities Plc

Yeah. Hi. Thanks for taking my questions. First question is related to the cost side. €26.5 billion was set when the revenue environment was quite different. And year-on-year, your revenues are down around on a group basis, let's say, around 20%. And I'm wondering, I can understand the investment cost, wondering why there shouldn't be more room on the variable side as a minimum considering that the revenue line looks also weaker; and in that context, are we still talking with this kind of revenue environment that you see at €1 billion to €1.5 billion net cost reduction over three years?

And then the second point, the second question is related to earlier indication that was given on profits where the indication was that we could have a slight loss of profits for the year. Considering that this was a very tough quarter, and it looks like you're doing more cost measures in the second half rather than the first half, and litigation is well managed, is it not fair to say that one can be more confident that you actually make a profit for this year? Thank you.

Marcus Schenck - Chief Financial Officer

Okay. So, I think your first question, if I get it right, is why aren't we seeing more flexibility on the cost side yet?

Kian Abouhossein - JPMorgan Securities Plc

Sorry, if I may say cost guidance. I mean, you're saying flat year-on-year. Revenues are down 20%. So, you know people should not – expect to pay the same as revenues go down.

Marcus Schenck - Chief Financial Officer

Yeah. So, when I alluded to cost being set for the year, I said that we still expected the adjusted cost to be flat versus 2015. We are of course, and I think I highlighted that in my remarks, looking into potentially accelerating some of the cost measures that we have planned until the year 2018 as a reaction to what we are now seeing in the market. Clearly, if volumes – if market activities stay at a low level, then we will react to that.

We have seen March and also April to clearly improve over the performance in January and February on the revenue side. So, in that sense, I would say, in a way, it's too early in the year. But we are looking at ways to potentially improve the cost position by accelerating some of the measures. But at this stage, we don't want to give out a revised guidance for that.

The 2018 target is still our target. So, there's no change to that. I think we've always said in October that we think this is an absolutely realistic target for the bank, which we are highly confident we can achieve. And we've also never made a secret of the fact that if there's more that can get done, then more will get done. But our stated target is unchanged.

Now, as it relates to net income for 2016, I think I can pass that on to John who I think was the last – who has made comments on that.

John Cryan - Co-Chief Executive Officer

Yes, okay. And I don't think I have much to add over and above what I said publicly in London a month or so ago, which was on an operating basis, the year is looking in line – first couple of months were very slow, especially compared with how they normally are. The issue that we have is that we want to get an awful lot done this year. And the point I made about profitability is that to some extent the lower the profits or if we have a marginal loss, it could be more the hallmark of success and a bigger profit may be a hallmark of us not having achieved doing a lot of what we want to achieve. So, for example, although yet we haven't reached agreement with the workers' council in Germany, and so we haven't yet brought ourselves into a position where we post up the remainder of the restructuring reserves. We'd like to get there and we'd like to post our restructuring reserve.

Similarly on litigation, we'd like to settle as many cases as we can and the possibility that that could cost us additional amounts, where we choose to settle at amounts over and above whatever reserve we might have just to clear it away and remove the uncertainty. So, to some extent, the worse the outlook looks on paper, it may be indicative of us being able to clear a lot of the backlog of work that we've set ourselves. But at the moment it's unclear to us whether we are making a small loss or a small profit, but at the moment, it's looking as though we are on the cusp.

Kian Abouhossein - JPMorgan Securities Plc

Okay. Thank you very much.

Operator

Next question is from the line of Stuart Graham of Autonomous Research. Please go ahead.

Stuart O. Graham - Autonomous Research LLP

Oh, hi. Thanks for taking my question. I had two questions. The €15 billion to €20 billion RWA managed down, where does that come from? I'm guessing it's in global markets. That's the only business where you could move RWA down so much; and last quarter you were saying how new business in global markets was really good and how you're investing, and how you really like that. So, how do you square that? Then I guess, as a subset to that question, what's the revenue attrition that you expect to come with that €15 billion to €20 billion?

And then my second question was just a clarification question. Maybe I misunderstood, but, Marcus, you said that the Core Tier 1 ratio is going to be flat, flat on what? Is it presumably flatter, the year-end Q4 2015 rather than Q1 2016? Maybe I misunderstood. Thank you.

Marcus Schenck - Chief Financial Officer

So, yes. First, your second question, yes, what I meant is referring to the year-end 2015 Core Tier 1 ratio, and that's for 2016 we expect to be flat on that. And then with regard to the €15 billion to €20 billion additional RWA reduction, confirmed, the lion's share is in global markets, but we expect that to be at around €10 billion and there are indeed also in the other segments ways that we see to reduce some of the RWA; in particular in our PWCC segment, we do see some potential to reduce without it having a material impact on the revenue side. So, it's not exclusively going to be market. It's basically spread across predominantly PWCC and markets.

Stuart O. Graham - Autonomous Research LLP

But, I guess, then last quarter, you were saying how you like the new business in global markets, how you're investing, now you're burning the furniture in global markets in order to keep the capital ratio going up. I mean, I guess, back to Kian's question, you could cut cost, you could cut capital, you seem happy to cut RWAs in the business you were saying was good last quarter, how do we think about that?

Marcus Schenck - Chief Financial Officer

So, look, I think we've always said that in markets we were going to reduce the perimeter. We were going to take down RWA, and there are activities that we are shrinking or partially exiting. Some of that is partially reflected already in our numbers. I highlighted it in particular in the area of securitized trading. We have, in the last couple of quarters, reduced our RWA through that segment, and we will continue to do that in the remaining quarters of the year. And there are some other segments that we highlighted at end of October. We have exited some of the emerging markets – global markets presence. Clearly the single biggest one to be highlighted there is Russia. So, we've always said that in GM we were going to reduce our RWA footprint. It doesn't mean we don't like the business, we always said we need to focus it more, and that will allow us to also reduce the RWA in that segment.

Stuart O. Graham - Autonomous Research LLP

Maybe I misunderstood. So, I thought last time the message was 2016, RWAs in global markets were flat, and then 2017 and 2018, we cut them. It sounds like the 2017 and 2018 cut is you are now bringing forward into 2016. Is that correct?

Marcus Schenck - Chief Financial Officer

Correct.

Stuart O. Graham - Autonomous Research LLP

Okay. That makes sense. Thank you.

John Cryan - Co-Chief Executive Officer

That's correct.

Operator

Next question is from Fiona Swaffield of RBC. Please go ahead.

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Hi. Morning. It was further questions on RWAs, two parts. Firstly, on op risk, obviously another big increase this quarter. And you mentioned you've held some of the increase you're already expecting. How should that play out going forward and if you got any comments on kind of recent proposals out of Basel kind of standardized versus AMA because I think your original guidance on op risk was based on AMA rather than standardized. So, how would that change?

And just generally on the overall technical inflation that you expected on your 2020 update in October. Had anything changed to make you change that number or are you more confident, for example, the trading book review? How do you feel now that you've had more chance to look at the new final rule? Thank you.

Marcus Schenck - Chief Financial Officer

So, let me start with your second question first on the inflation assumption. We obviously have clarity now on the FRTB. That, as we highlighted, came out in a way that we feel comfortable with it, and that is very much in line with our assumptions that we made at the end of October.

With regards to credit and op risk, yeah, the final verdict from Basel is still pending. There have been new consultation papers. There's now going to responses back to that. We have not seen things or expect things that would cause us to change the inflation assumptions neither to the downside nor to the upside relative to what we communicated in October. So, our guidance for inflation would still be the same as we highlighted on October 29. We do expect for the year 2016 further increase in op risk largely because of how the impact of litigation cost works as the biggest driver.

Now, with regard to the question of AMA versus standardized, I think what we see happening actually is a more or less a convergence of the two, also something that we alluded to in October of last year that indeed we see our AMA model driving up op risk quite materially in relation to the litigation charges and getting closer to where we would land using standardized approach. So, that, including the inflation assumption that we highlighted, we think that basically our AMA model will take us to the same level that we would stand at with standardized approach.

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Thanks very much.

John Cryan - Co-Chief Executive Officer

Fiona, I'd just like to add that – just to clarify, we're not making any changes to our plans as a consequence of the two working papers the BCBS issued a consultation on operational risk-weighted assets, non-credit risk-weighted assets. And we're relying, therefore, little bit on the strong statements made by the GHOS, The Group of Governors and Heads of Supervision that there'll be no net impact on capital requirements for banks. That seems to reflected by the noises coming out of Brussels. But as Marcus said there, there could on the surface be an impact as the BCBS papers were implemented, as they were issued for consultation. But so far, no changes at all to our approach.

Marcus Schenck - Chief Financial Officer

I would say the only change in guidance that I would dare to make at this stage is that there's one assumption where I think we would probably revisit that and that is in October of last year, we said that we expect the inflation all to be applicable with January of 2019. We know for FRTB it's going to be end of 2019. I dare to say that our base case on the other two would probably also not necessarily now land for January of 2019, which is maybe just a detail point but it may be more than a detail point because going back to Jernej's question on the creation of capital to get to the relevant ratios; I think we have at least one more year to get to the relevant ratios compared to what we had expected in October of last year.

Fiona M. Swaffield - RBC Europe Ltd. (Broker)

Thanks.

Operator

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

Alevizos Alevizakos - HSBC Bank Plc (Broker)

Hello. Good morning. Thanks for taking my questions. Both of my questions are effectively on capital and leverage. Quick question following Fiona's question just before. What I'm wondering is if you believe that actually SREP requirements will still stay at 12.25%, when all these rules come into place in 2019?

And the second part of the question is whether you believe that you still need the 4.5% to 5% leverage ratio? And also, John, to your comment that I've read on Bloomberg probably last week, what's your opinion now on AT1 securities? Do you still target to issue another €3 billion to €5 billion or now this plan is scrapped? Thank you.

Marcus Schenck - Chief Financial Officer

Maybe I'll take the first one and then John talks about AT1. So, look, I think so far, we can only rely on what we've been told and we've been told by the ECB that our SREP level has dropped 0.25%. So I think it would not be prudent to make the assumption that once the inflation kicks in, we sort of anticipate that we will see a decline in the SREP level. I don't think that it would be prudent for us plan for that. Clearly, we're always scratching our head in trying to better understand what exactly is meant when basically all the regulators are saying that they don't want all the new rules to have an impact on the capital position on average for the bank.

Exactly how the math is going to work and I'm sure you hear the same from our peers that everything that we're seeing so far come out of Basel is pointing towards an RWA increase. I have not yet spoken to many that are highlighting that you're seeing a bit decrease. So, if there is on balance an increase in RWA and all the ratios stay constant, math would say that then there is more capital needed somehow. But – as I said, we are not planning for a decline in the SREP level. I don't think that would be prudent.

On leverage ratio, here our target still is, as you mentioned, 4.5% to 5%. It's really more a target for us. It's not I would say a binding constraint like the SREP level. So, the SREP level we absolutely have to be north of 12.25%, north as in there has to be some buffer to be put on top of that.

On the leverage ratio, the ECB we see it to be more relaxed on that metric but given how the perimeter reduction works for the bank given where we expect us to be from a capital position, the 4.5% to 5% is more something that will almost automatically result. But it's not as firm a target for us as the 12.5% on the Core Tier 1 ratio. And on AT1, John, you want to comment?

John Cryan - Co-Chief Executive Officer

Well, I think the AT1 is part of a bigger issue for us when we look at the structure of our capital. At the moment, we're still working on the assumption that the German rule on the TLAC comes into full force and effect, I think, in January next year, that then renders us, I think at the moment, something like a TLAC ratio of something like 27%, which is way above the requirement.

We have – essentially, TLAC, I think the latest number is about €109 billion, maybe even slightly higher. It's in the appendix. €66-billion-plus of which would be non CET1 TLAC. The question is whether we're held to that as the limiting factor or whether we do need to issue some form of AT1. We always look at the AT1 from a group consolidated perspective. We do use it, actually, internally between entities. And there, it does have a useful use for us. And it will remain part of the potential toolbox. But at the moment, just looking at the price, for example, of our 6% euro AT1, now would not be a good time to issue any of this stock. And I think the market is still very uncertain as to the way that it operates. It's still a little bit subjective.

It's not clear how it ranks versus TLAC although it forms a part of our TLAC, and because there's a subjective override from the perspective of the regulators. But they're our views. But I'm not sure those views are always certain, and when I speak to investors, I get such varying views that all I can conclude is that we still need to do a lot of education work, or the market generally needs to do a lot more education. So, it's still potentially part of the toolbox, but it's not a particularly attractive instrument for us from a pricing perspective.

And I still think it's not as well understood by the market as it should be. And also, in the context of a German company involves issuing shares, and I've got this philosophical view that if you issue shares and have them count as debt, it's not as good as issuing shares and having them count as shares. But that's my view.

Alevizos Alevizakos - HSBC Bank Plc (Broker)

Okay. Thanks very much.

Operator

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

Jeremy C. Sigee - Barclays Capital Securities Ltd.

Good morning. Thank you. My first question is coming back on to the cost point, and specifically just taking global markets. It looks like the underlying costs there are about €400 million or €500 million heavier than they should be. They're very close to last year's 1Q which is a much higher revenue level and €400 million or €500 million above the 2Q, 3Q cost run rate underlying, which is a much more similar revenue run rate. So, are there any specific items, lumpy things causing that heavier 1Q 2016 cost level in global markets, because otherwise, it seems a bit baffling.

My second question is about NCOU. You talked about successfully running down the assets in NCOU and potentially allowing you to fold it back in, so effectively it disappears. I just wondered what that means for the P&L drag from NCOU because if we look at consensus expectations, they're really quite a heavy drag, something like €3.5 billion in 2016, still €1.5 billion in 2017. And I just wondered if there's scope for some of that P&L drag to disappear as the assets effectively disappear now.

Marcus Schenck - Chief Financial Officer

So, let me first go into your first question. I think your first question is suggesting that we do see an increase in our adjusted costs in global markets quarter-on-quarter, that's actually not the case. So, there's a decline on the adjusted costs in our markets segments quarter-on-quarter. So, I don't know what exactly you are alluding to there.

Jeremy C. Sigee - Barclays Capital Securities Ltd.

Well, let me tell you there's a very slight decline year-on-year, so you've set a number of €2.335 billion for 1Q 2016 clean, and clean for 1Q 2015, it was €2.4 billion; but clean for the remaining quarters of last year was €1.9 billion, €1.9 billion, €2.0 billion based on the numbers that you gave for litigation and restructuring and severance. So, versus 2Q, 3Q or 4Q, it looks from your number it's a €400 million or €500 million increase in the cost level in global markets.

Marcus Schenck - Chief Financial Officer

So, the biggest difference is that the bank levy has been fully booked into the divisions this quarter, unlike what we did last year where we phased that into divisions throughout the year. So, that's a big driver for the segments. And in fact, the front office – when you look at the direct costs of the front office, they actually have taken out both people and costs. We have seen some increase on our infrastructure cost sides, which we always said is a longer journey to take that down, but sort of the biggest difference is – it's on the bank levy.

Now, with regards to your other question, do you want to do that, John?

John Cryan - Co-Chief Executive Officer

I'm happy to do it. I think, Jeremy, on the NCOU, the plan is at the end of the year for there not to be that much left to get back into the divisions. At the moment, there are a couple of asset groups which we would approve going back. There are some performing mortgages that can go back into the PCC International businesses. On the non-performing ones, I think we'd rather remove them. I think when you look at the previous numbers for NCOU, there are a couple of items that you should take into account. One is the high cost (71:45) they're out of the NCOU. But the other big item for NCOU would be the litigation amounts. It's been charged with a considerable proportion of our overall litigation charges, and as a consequence, upon its windup, we would expect that to disappear. So, the ongoing drag from assets that currently constitute the NCOU next year would not be material.

Jeremy C. Sigee - Barclays Capital Securities Ltd.

And do the operating costs disappear as well whether it's people, or systems.

John Cryan - Co-Chief Executive Officer

Yeah. There are very few people left – the systems they use and their rent from global markets to a large extent, but that would go, yes.

Marcus Schenck - Chief Financial Officer

You have some more detail in the appendix where you can also see that there is a €96 million charge for the quarter, which is allocated. Half of that is essentially people that you can clearly identify that solely work for the non-core units. So, for example, I think in the finance we have something like 30 people working in finance for the non-core unit. With the non-core unit disappearing, you wouldn't need that. So, the €100 million or €96 million for the quarter, 50% of that is cost that will really go away with the closure of the non-core unit. The remainder is really allocated cost, which will be sticky and then remain to be part of the bank.

Jeremy C. Sigee - Barclays Capital Securities Ltd.

Okay. That's very helpful. Thank you very much.

Operator

Next question is from the line Amit Goel of Exane. Please go ahead.

Amit Goel - Exane Ltd.

Hi. Thank you. I just got a question trying to reconcile the capital and the earnings guidance. So, I'm just to trying to understand if the group is kind of breakeven and risk-weighted assets are down about 5% during the course of the year, plus there's a 50 basis point gain and from the Hua Xia stake sale, how you get to a flat CET1 ratio at year-end? If there's some other kind of capital effect that I'm missing?

Marcus Schenck - Chief Financial Officer

So, the – I mean, the overall RWA reduction this year will result from running down the non-core unit to below €10 billion. As we highlighted, we will also see some further perimeter reduction in markets as Stuart enquired, this is largely accelerating some of what was planned for the outer years.

The non-core until will have some negative P&L effect which we highlighted. But – so, from a net income point of view, there is, we do expect the year to be quasi-neutral, i.e., there is no big positive, no big negative number that we're targeting. And hence, the guidance for the Core Tier 1 ratio being more or less flat as we were at 11.1% as of last year, and that's roughly where we would expect to land also at the end of the year with RWA being then more at the €380 billion to €390 billion level. So, RWA is going to be slightly down over the year, and there's no material net income, and that's what gets you then to a quasi-flat Core Tier 1 ratio.

Amit Goel - Exane Ltd.

Okay. But I was just thinking with the stakes sale in Q2. So, surely that's also then obviously creating an uplift. So, you get to that 11.2% plus or minus whatever the earnings are in Q2.

Marcus Schenck - Chief Financial Officer

That is correct. But I also want to highlight just so that people don't get carried away, we did have for the first quarter a very low litigation charge. Our statement that we'd still expect a material litigation cost clearly falls off what we had last year but still material for the remainder of the year as we are very actively working on resolving the major issues as John highlighted. This is the year of restructuring which is litigation, which is driving down the non-core units, and which is booking provisions for – in particular for the head count reduction in our German activities.

Amit Goel - Exane Ltd.

Okay. Okay. Thank you.

Operator

Next question is from the line of Nicholas Herman of Citigroup. Please go ahead.

Nicholas D. Herman - Citigroup Global Markets Ltd.

Yes. Good morning and thank you for taking my questions. In PWCC, revenues felt quite weak even after accounting for the Hua Xia valuation effects and the dividend. How much do you think of the revenue decline is one-off in nature and how much do you think can bounce back?

And then, in asset management, we've now seen three consecutive quarters of outflows. You are rationalizing the portfolio. But how much more outflows do you expect to continue to come? Thank you.

Marcus Schenck - Chief Financial Officer

So, on the second question, we don't plan for more outflows. That's definitely not our target. I think we, like many others, have – of our competitors, have seen outflows in particular in Q1 of this year. I don't think that we stand out in any shape or form there. So, there's no plan to shrink the perimeter further or exit certain activities, business-to-business, that we view as a growth business.

On the PWCC side, I think here, we need to look at this by diving a bit deeper into the different segments in our German business which has been holding up quite okay. There we expect to see some pickup on the investment and insurance product that has been particularly weak in the first two months. So, basically our clients didn't do a lot. People were very passive, and we didn't see people transacting. That is slightly changing. We continue to expect there to be pressure on the deposit side given the interest rate situation, and we are seeing some improvement on some of the credit side in particular as we've seen in the last eight weeks, I would say, improvement on the margin side.

So, overall for the year, I think there's a risk that PWCC in the German business might come out slightly below where we were last year, but we're still reasonably on track there.

In our wealth business, the situation there was obviously impacted much more by the market environment in the first quarter. So, we've seen, as in our retail business, clients be very passive on the investment side. That is starting to pick up. In wealth, I would also like to highlight that here it's partially also us starting to implement some of the regulatory requirements that are going to kick in, in the future which is putting some pressure on a few sort of client perimeter situations.

So, I would not expect the business to completely recover during the year; the losses that we incurred relative to last year in the first quarter, but we are also in our wealth business now seeing a pickup in activity in March and April over the months of January and February. And in our international business, you know that there are some markets that have been more negatively impacted, I would say, most pronounced in Poland. But we've also seen some decline in what is a small business, but there was a €10 million decline in our business in Portugal. I think their situation is similar to the retail business in Germany, the investment and deposit side is not performing well or has not been performing well in the first quarter and it's now starting to gradually pick up.

Also here, I would say, our ability to completely recover the drop that we had in the first quarter is a little questionable. So, like for the German business, I would expect us to come out slightly below last year's result. So, that's how I would comment different segments within PWCC for the remainder of the year.

Nicholas D. Herman - Citigroup Global Markets Ltd.

That's extremely helpful. Thank you very much. If I just ask one just quick follow-up on asset management on costs, do you expect any – the DOL fiduciary ruling came out early this year, do you expect any increase in costs or impacts to the operations there, as well?

Marcus Schenck - Chief Financial Officer

We don't think it's particularly material. No.

Nicholas D. Herman - Citigroup Global Markets Ltd.

Okay. Great.

Marcus Schenck - Chief Financial Officer

No.

Nicholas D. Herman - Citigroup Global Markets Ltd.

Thank you.

Operator

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

Andrew Stimpson - Bank of America Merrill Lynch

Thanks. Good morning, guys. Coming back to the point on the costs in markets, can you say – and sorry if I missed this but can you say how much the bank levy was in the markets business please? Because I guess the way I was looking at it was that costs are only down by about 3% year-on-year but your revenues have dropped by 30%. So, just trying to get an idea of how much you've already flexed the cost on an underlying basis, please?

And then secondly on prime services, you said that revenues and balances grew which is good but it was a little surprising to me given, A, what happened in the first quarter; and B, obviously some of the bank-specific stuff that you went through particularly in February; and then thirdly, and probably most importantly, you are still very much a leverage-constrained bank at the minute. So, to grow one of the famously, more leverage-constrained businesses just seems odd strategically but maybe you could comment around your thinking on that, please? Thank you.

Marcus Schenck - Chief Financial Officer

So, on the – maybe I'll start with your last question. I mean, by the way, one of the reasons why our leverage ratio right now is where it is at 3.4% is the fact that we are carrying quite a substantial amount of cash and liquidity on the balance sheet.

And now, there is still the de-leveraging program that we alluded to actually first time back in April of last year that we are in the process of executing. Now, we didn't do a lot or we didn't do anything material in the first quarter of this year which shouldn't come as a big surprise given that basically this was a completely silent market and there was basically nothing one could do. That de-leveraging has gotten quite a lot more traction in the last few weeks.

So, we do expect that de-leveraging to continue in particular in our markets business. So, there's no change to our target to drive down leverage in quite a material way over the next couple of years. And hence, that in conjunction with us clearly expecting to start to generate capital from next year onwards will also drive up the leverage ratio. On your first question, I think the global markets bank levy charge in 2016 was about €400 million, that was booked for the first quarter and then I think your second question was on prime brokerage. You want to do that?

John Cryan - Co-Chief Executive Officer

Yeah. Just on prime brokerage, the point you made about maybe market concerns back in February about our counterparty credit. I think what we've done is that we've made a lot of progress with most of our major institutional counterparts in communicating to them the point on the TLAC; the fact that our TLAC ratio is sitting at 27% of RWAs at the moment.

And I think they recognized that the rating they should be looking at for example is the Moody's counterparty credit rating. Because if you look at the senior unsecured debt rating, you're looking at something that is a TLAC rating and I alluded earlier to the fact that that's a little uncertain at the moment because people are not I think yet totally au fait on how that might work. The CDS references the TLAC. So the CDS, I think we've successfully communicated to many major institutions, is also referencing something that isn't indicative of our counterparty credit rating.

So, when we focus clients on the A2 rating, I think they're more than satisfied with us as a counterpart. And generally speaking, in our prime finance business, in our repo business, they like the service levels. They like the products that we offer, and we are keen to grow balances there. You shouldn't forget that we're a bank and we're in the business of using our balance sheet in lending. And there's too much focus, I think, sometimes on shrinking ourselves to greatness. We're in business to grow Deutsche Bank. We just want to grow it in the right places. And prime finance is an area where we see good margins. We think it's a well controlled business. It's a business that the guys in equities like because they build their business around it. So, that will continue to be an area of focus and investment for us.

Andrew Stimpson - Bank of America Merrill Lynch

Brilliant. Thank you. And just to come back on the bank levy. Is that €400 million for the group or for markets?

Marcus Schenck - Chief Financial Officer

That's just markets.

Andrew Stimpson - Bank of America Merrill Lynch

Okay. Thank you.

John Cryan - Co-Chief Executive Officer

It's about 80% or so allocated to global markets.

Andrew Stimpson - Bank of America Merrill Lynch

Sure. Thank you.

Operator

Next question is from the line of Huw van Steenis of Morgan Stanley. Please go ahead.

Huw van Steenis - Morgan Stanley & Co. International Plc

Good morning. Thanks very much for a helpful call this morning. Two just clarifications. First, on operational risk, I think on the previous call, you mentioned that operational risk would probably offset the shrinkage in the non-core unit, which I interpreted as a kind of €20 billion potential increase for the year of which we've had €8 billion today. Would that still be sensible sort of expectations for the full year or with the new change in standards for op risk, is there a risk that there will be continued inflation as some cases get settled?

And then, secondly, just on this point about counterparty concerns fading. Would you argue that now they are completely being kicked into touch, or is there still more that you can win back over the coming months and quarters? Thanks.

John Cryan - Co-Chief Executive Officer

On operational risks, we did say that we saw something like €8 billion for the rest of the year. Most of that would come from some industry metrics into our model.

Marcus Schenck - Chief Financial Officer

But that's litigation charges that we see in the industry and in our own books that's driving this...

John Cryan - Co-Chief Executive Officer

Sorry Huw, the other point I was going to make is we've already seen €8 billion in Q1.

Huw van Steenis - Morgan Stanley & Co. International Plc

Yes.

John Cryan - Co-Chief Executive Officer

That's €16 billion for the year with some generous rounding.

Huw van Steenis - Morgan Stanley & Co. International Plc

Yes.

Marcus Schenck - Chief Financial Officer

But that will not completely offset the non-core unit decline because in the non-core units, there's another €20 billion plus that we expect to come down for the remainder of the year and on the – I think your second question on counterparty concerns, still existing or fading away, look I think we've clearly seen already in March and that continues to be the case in April, a much more sort of normal business activity. We clearly also have some noise in the context of us exiting some clients, exiting certain markets. And so that no longer – we don't see this being a very relevant topic. I think people are also more and more starting to understand the issue that as a counterparty we're actually a much better counterparty from a rating perspective today; or to be technically precise, we will be as of January of next year when the German law will become effective than what we have been six months ago.

Huw van Steenis - Morgan Stanley & Co. International Plc

Yes. Fantastic. Thank you.

Operator

In the interest of time, we have to stop the Q&A session right now. And I hand back to John Andrews.

John Andrews - Head-Investor Relations

Thank you, everyone, and apologies, we have to move on to a press call. For the handful left in the queue, obviously the IR team stands by to respond to any and all questions over the course of the day and beyond. And thanks for the taking the time to attend the call this morning.

Operator

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

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