Deutsche Bank's (DB) CEO John Cryan on Q3 2016 Results - Earnings Call Transcript

Deutsche Bank AG (NYSE:DB) Q3 2016 Earnings Conference Call October 27, 2016 3:00 AM ET

Executives

John Andrews - Head of Investor Relations

Marcus Schenck - Chief Financial Officer

John Cryan - Chief Executive Officer

Analysts

Daniele Brupbacher - UBS

Jernej Omahen - Goldman Sachs

Kian Abouhossein - JPMorgan

Stuart Graham - Autonomous Research

Jon Peace - Credit Suisse

Al Alevizakos - HSBC

Jeremy Sigee - Barclays

Amit Goel - Exane

Andrew Coombs - Citi

Magdalena Stoklosa - Morgan Stanley

Andy Stimpson - Bank of America Merrill Lynch

Jacques-Henri Gaulard - Kepler Cheuvreux

Andrew Lim - Societe Generale

John Andrews

Good morning from Frankfurt. I’d like to welcome everyone to this morning’s Earning Call. I’m joined this morning by our CEO John Cryan, our CFO Marcus Schenck. John will open the call with some brief comments and then Marcus will take you through the analyst presentation, which is available on the website www.db.com.

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 you can give as many people a chance to participate in the Q&A session as possible. Also let me pre-warn you that due to scheduling obligations we will need to end the call no later than 9:30 CET this morning.

And let me finalize with the normal health warning as can you all to pay particular attention to the cautionary statements regarding any forward-looking comments that you will find at the end of the Investor Presentation.

With that out of the way, let me hand it over to John. John?

John Cryan

Thank you, John, good morning, everyone. Let me make a few brief comments before handing over to Marcus to take you through the details of our results.

The outcome for the quarter showed the strength and the resilience of our operating businesses in a tough environment. And it showed the progress we’re making towards restructuring the bank. However, the quarter was clearly overshadowed by the attention paid to our negotiations concerning the U.S. Department of Justice’s initial settlement of proposal relating to RMBS matters.

This has created uncertainty, uncertainty that affects the markets’ view of Deutsche Bank as an investment, uncertainty that affected some clients’ views of Deutsche Bank as a counter party and uncertainty that even affects our financial planning and strategy execution. We remain keen to settle and are other open matters with the U.S. authorities.

We also continue to focus on the execution of our plan. We took advantage of accommodating markets to cut RWA largely through the promised accelerated rundown of our non-core unit. We’re now confidently on-track to wind-up the NCOU at year-end.

We’re beginning to see the positive impact of our simplification and cost management measures so these will only really come through in earnest in 2017.

The macroeconomic and geopolitical outlook has worsened over the past year, that’s particularly true as the challenging interest rate environment in Europe seems unlikely to change in the short-to-medium term. And the demands for regulatory capital continue to build.

We’re acutely aware of these changing contours of the operating environment and we are responding. As I said in the last quarterly call, we need to restructure and modernize the bank faster and with higher intensity. We’re taking steps now particularly to achieve additional cost savings in RWA reductions.

But we’re also addressing the more challenging outlook in our planning to ensure we achieve our financial goals. But first and foremost, we must remove the overhang by litigation cases and the regulatory investigations by settling those matters. This remains our and my top priority.

In the meantime we’ll continue to execute our restructuring and adjust our planning and most importantly remain focused on serving our clients.

Now, Marcus would review the quarterly results.

Marcus Schenck

Thank you, John. Good morning, and welcome also from my side. For the quarter, we reported an EBIT of €619 million and a net income of €278 million. Compared to prior year third quarter, revenues are slightly up to €7.5 billion and non-interest expenses decreased substantially. Clearly this is driven by the material negative one-off items we had in Q3 last year, in particular with the goodwill write-downs. Looking just at the adjusted cost base, costs were down €300 million for the quarter.

Risk-weighted assets at quarter-end were at €385 billion and leverage exposure was at €1,354 billion. With that, fully loaded Core Tier 1 ratio came in at 11.1% and 12.6% on a phased-in basis. Hence, 30 to 40 bps up versus last quarter. This does not yet include the effects from the sale of our stake in Hua Xia, which will add another 50 - around 50 basis points to the full-loaded ratio in Q4 of 2016. The leverage ratio is slightly up to 3.5%.

Let me guide you through the net income bridge for the third quarter compared to prior year. At constant exchange rates, revenues for the Core Group including the non-core unit - excluding the non-core unit and Hua Xia slightly increased by €150 million versus Q3 2015.

Global market revenues were up €227 million compared to prior year quarter. The main driver is the solid performance in debt sales and trading which increased 14% year-over-year driven by strong performance in rates and credits.

For CIB we saw minor decline in revenues of €20 million. This is a result of continued weakness in primary fee-pools as well as lower revenues in GTB compared to prior year quarter.

PWCC revenues were up €293 million year-over-year. However, prior year quarter included a negative valuation impact on the Hua Xia stake. Excluding these effects, we see a revenue decline of 5% reflecting the ongoing difficult market environment.

Asset management revenues are up €190 million year-over-year. This is mainly driven by a higher Abbey gross - Abbey Life gross-up. We see reduced active and passive management fees and lower alternative investment income, partially offset by stronger fees in alternative assets.

Postbank revenues were down by €58 million reflecting the continued revenue burden from low interest-rate environment weighing on revenues from savings and current accounts, which was partially offset by sale of assets in the third quarter of 2016.

The non-core unit revenues were down by €429 million year-over-year. This actually shows the significant progress the NCOU made towards our year-end wind-down targets which comes with a planned loss but also a RWA relief versus a gain on sale in Q3 of 2015.

Loan loss provisions; increased by €121 million driven by provisioning primarily in shipping, as well as oil and gas. The adjusted cost base improved by €218 million, mainly from lower cash bonus and retention expenses. As we proceed with the implementation of our cost reduction, we booked €19 million higher restructuring and severance expenses compared to prior year quarter. Litigation expenses decreased and the resolution of several litigation matters in the quarter was materially covered by existing accruals.

We obviously did not experience the impairment charges we had in Q3 of last year, and income tax expenses were slightly higher due to positive pre-tax income in the current quarter but partially offset by favorable FX movements which overall leads to a net income for the quarter of the set €278 million.

The next page provides an overview of our Q3 non-interest expenses. At constant exchange rates, they were down by €6.5 billion. It is important again to highlight that the third quarter of 2015 as you all will remember was burdened by extraordinary negative effects amounting to €5.8 billion.

Background was the impairment of goodwill and other intangibles in the former divisions CB&S and PBC which were reflected in the non-interest expenses. At the time, we see €0.7 billion lower litigation charges compared to prior year. And at constant exchange rates, adjusted costs dropped by €0.2 billion.

Looking into adjusted costs in more detail on the next page, you see four main categories with the following movements at constant exchange rates. Compensation and benefits were down €330 million driven by lower cash bonus and reduced retention charges. IT costs remains our second largest cost category, which increased by €160 million, half of this is driven by higher software depreciation. Professional service fees were up €28 million, which is largely related to the projects with regard to Strategy 2020. And lastly, occupancy costs were higher to the tune of €45 million.

Compared to prior quarter, headcount is down 192 FTE. At first glance, this does not seem a lot. But when looking at FTE development, one also needs to consider the 1,553 FTE we internalized in the course of the year.

Let me move on to the litigation side. Our legal reserves have increased to €5.9 billion which is €300 million higher than at the end of Q2 2016. We settled a number of cases during the quarter. Contingent liabilities again decreased from €1.7 billion at the end of Q2 to now €1.6 billion. Year-over-year, we observed a decrease in contingent liabilities by about €1 billion.

U.S. mortgage repurchases reserves remain unchanged at €334 million. With regards to the current status of our settlement negotiations with the Department of Justice, we ask for your understanding that we cannot give you an update. Let me just say the following.

As we already stated, the discussions with the DoJ to result its investigation of Deutsche Bank pre-financial crisis RMBS business are ongoing. Deutsche Bank is committed to come to a resolution of this matter at a reasonable amount as soon as possible. However, the timelines are not completely in the bank’s hands alone but also depends on the Department of Justice.

Other resolutions and settlements in Q3 of 2016. In this quarter, Deutsche Bank continued to achieve resolutions in some of its highest risk matters and its finalizing agreements to resolve others. Publicly, we can comment on two. In FX, the CFDC issued a letter declining to take action and closing its global investigation related to Deutsche Bank. Noteworthy is also our US$98 million first-mover settlements of the gold and silver class actions in the U.S. earlier this year that we have paid in Q3 of 2016.

This was a good decision given that the U.S. Court denied the remaining bank’s motion to dismiss and the case will now proceed to discovery for the non-settling banks and costs of subsequent settlements will potentially rise.

Let us now look at our capital position. Common equity Tier 1 capital decreased from €43.5 billion at the end of Q2 2016 to €42.9 billion at the end of September 2016. This includes a negative €0.2 billion FX effect principally due to U.S. dollar depreciation. Please be mindful of the fact that risk-weighted assets and leverage come down with lower U.S. dollar as well.

The positive effects from the €0.3 billion net income was more than offset by the following negative effects we summarized in the category other. Firstly, €0.3 billion negative impact from pensions due to lower discount rates. Secondly, €0.2 billion higher deductions of intangible assets which is mainly due to capitalization of self-developed software. Thirdly, negative €0.2 billion deconsolidation effects. And last but not least, the DTA rose to €0.1 billion in the quarter triggering a correspondingly higher core Tier 1 deduction. Our AT1 capital remained constant at €4.6 billion.

RWA decreased by €18 billion compared to prior quarter including a €2 billion favorable FX effect. Clearly the main drivers were ongoing NCOU de-risking effects, which contributed €10 billion of RWA relief. The remaining €6 billion RWA reduction mainly reflects lower credit risk RWA in global markets and CIB.

As a result, core Tier 1 ratio improved to 11.1% per quarter end, on a fully-loaded basis. The respective phase-in ratio is 12.6%. And then let me again remind you of the benefit from the sale of the second Hua Xia, which we announced in December is not reflective in these numbers since that will only be included at closing.

We’re highly confident that this will happen within the fourth quarter. Closing would have added another 50 basis points to the core Tier 1 ratio as of September 2016, which would have raised our fully-loaded core Tier 1 ratio to 11.6%. Again, please note that the ultimate impact will then depend on our regulatory capital and capital composition at closing.

Leverage exposure decreased by €60 billion in the third quarter 2016, which brought up the leverage ratio to 3.5%. Again including the benefit from Hua Xia, pro forma, this would have been 3.6%.

There are two ways of looking at the leverage exposure development. Firstly, looking at the walk for the group. You see that next to FX, the two biggest drivers were the changes in derivatives as well as cash collateral and other. Derivatives decreased by €18 billion reflecting the following.

First, FX mark-to-market, which normalized following the Q2 2016 Brexit decision, which drove-up mark-to-market last quarter. Second, lower exposure and core rates in equities, and third, targeted deleveraging which is principally at this stage roll-offs.

In addition, we also saw cash balances and available for sale inventory coming down in the quarter. Secondly, you also see the quarter-over-quarter movements for our different segments. Biggest moves were in global markets and CIB which are mainly reflective in the effects that I just outlined.

In addition, we overall recorded further NCOU de-risking of €4 billion in the quarter through the unwinding and sale of certain positions.

With that, allow me a few comments on our liquidity and funding position. Firstly on liquidity, at quarter-end we recorded €200 billion of liquidity reserves versus €223 billion as of June 2016. Our liquidity coverage ratio LCR remains broadly flat to June at 122% versus 124% in Q2 of 2016. Then secondly on funding, 72% of total funding comes from more stable sources which is exactly what we saw in prior quarter.

Total external funding decreased by €35 billion to now €957 billion. As of October 26, 2016, our funding plan is 93% complete. We issued €20 billion out of the full-year 2016 plan of €30 billion. The average spread was LIBOR plus 120 basis points and the average tenure was 6.6 years.

Let me now move on to the segmental results, starting with global markets, where we reported an EBIT of €330 million. Revenues were up €244 million, an increase of 10% or 11% excluding CVA/DVA/FVA.

Higher revenues were driven by solid performance in debt sales and trading. Global market costs decreased 49% primarily due to no goodwill impairment and lower litigation charges compared to significant impacts in both in the prior year as mentioned before.

Excluding these non-operating costs, as well as expenses for severance and restructuring, global market expenses held by 4% year-on-year driven by lower compensation. Nevertheless, global market continues to invest in technology enhancements to improve our client service and our core operating environments. A good example of this is the re-platforming of our clearing infrastructure.

This is the transition to a new technology platform for our listed derivatives and clearing business that supports over 1,000 clients clearing on 54 exchanges globally. With that, we have deployed a faster, more scalable and stable service for clients at lower cost. Our clearing technology landscape is now much simpler with 20 applications decommissioned, 175 end-user defined applications eliminated and 26 data sources consolidated into a single-clearing data hub.

RWA and markets decreased slightly year-on-year to €164 billion. Global markets, has made substantial progress towards its perimeter reduction objectives. A good example is the completion of the reshaping of our securitized trading business. We’ve also now reduced our balance sheet and agency RMBS by more than 90%.

In addition, global markets, has completed three quarters of its country optimization strategy in 2016 ahead of schedule and is on target to complete the remainder on time. In this context, I can also inform you that last night, we signed the sale of our Mexican business.

Let us take a closer look at our sales and trading units. In debt sales and trading, we see an increase of 14% compared to prior year and an increase of 13% quarter-on-quarter. This was driven by strong performance of our rates and credit businesses, partially offset by weaker performance in our emerging markets in Asia-Pacific units.

Few comments on specific businesses. Our FX business was flat year-on-year with decent revenues despite a normalization of market volumes following the UK’s referendum on EU membership. Rates revenues were significantly higher year-over-year driven by strong performance in Europe. We saw robust deal-flow and interest rate swaps with both corporate and public sector clients.

In credits, we had our strongest quarter so far this year. Revenues were significantly higher year-over-year, driven by robust deal execution and financing and lending to the real economy including in the infrastructure structure.

In addition, our credit trading business benefited from higher client flows and improved market conditions. However, we did not benefit to the same extent as our peers given the smaller size of our U.S. credit platform. Furthermore, we did not participate in particular, in the strong performance of securitized trading like our U.S. competitors did given us, exiting this business.

The emerging market debt and Asia-Pacific local markets businesses had significantly lower revenues driven by lower client-flow, the rationalization of our country presence, and less favorable market conditions.

Equity sales and trading revenues were 5% lower versus the prior year quarter. Cash equities revenues were lower year-on-year driven by lower market volumes. Equity derivative revenues were significantly higher year-over-year compared to a very challenging prior-year quarter where we saw some client-driven inventory losses.

Prime finance revenues were robust albeit lower year-over-year reflecting higher funding costs and lower client balances. Global markets debt sales and trading, market share was down slightly year-on-year in Q3 driven by actions taken as part of strategy 2020 and our relative regional skew towards Europe and APAC.

However, this change in market share is well within the range of the last several quarters whilst, our equity sales and trading market share was roughly flat year-on-year.

Our clients value the strength of the Deutsche Bank franchise, our execution capabilities and our ability to deliver innovative solutions that our global markets’ platform continues to generate consistently solid revenue performance despite market noise is a testament to our great employees, the intensity of client dialog and the quality of the idea generations that we bring.

Our revenues hold up well despite global markets, risk-taking being at multi-year lows. Nevertheless, we will continue our journey to focus our global markets business, more focus in terms of clients, products, regions and business lines. But we are committed to continue as a relevant bank in this space, in particular, since this is needed to service our corporate client franchise.

In addition, we’re optimistic that the current quarter like Q3 will show better results compared to the final quarter in 2015.

With that, let me now outline the key highlights for our corporate and investment bank CIB, where we record an EBIT of €640 million, as you can see on the chart a steady upward trajectory through our 2016. Year-over-year revenues were nearly flat despite continued in primary fee-pools, corporate finance revenues increased, which however was offset by lower transaction banking revenues this quarter, largely driven by weaker demand and interest rate driven margin pressure in our trade and corporate cash management businesses.

Loan loss provisions increased to €176 million. Year-over-year, this increase in credit losses reflects continued provisioning on exposures in shipping and oil and gas. These factors are affected by adverse macroeconomic developments.

Adjusted for impairment, restructuring costs and litigation, non-interest expense has declined 12% year-over-year, mainly due to lower compensation costs.

Looking at the revenue development across CIB, we see an upward trend over 2016, whilst we are still behind the year-to-date level of 2015. In detail, trade finance and cash management revenues are down 3% compared to prior year. This is on the back of further deteriorating interest rates, lower trade loan volume in APAC and reduced client volumes from higher risk countries with Deutsche Bank deliberately decided to exit some relationships.

Institutional cash and security services showed resilient performance, stripping off some positive one-off effects in the previous year quarter. We saw a significant upward momentum in corporate finance, despite continued weakness in primary fee pools. Based on that, revenues were up 4% year-over-year.

Our performance in the equity origination sub segments mirrors this development, up 12% compared to prior year. Background for this increase, were higher origination volumes.

EMEA has benefited from the improving sentiments reflected in significantly strong issuance activity versus the first half of 2016, including IPO of RWA Innogy, the largest European IPO since 2011.

Net origination recorded a good quarter driven by strong investor appetite for higher yielding assets, coupled with a number of large acquisition financing deals. Advisory recovered slightly compared to last quarter however, 21% declined against a strong prior year quarter.

Let us now move to private wealth and commercial clients. Revenues for the quarter were up 20% on a reported basis. However, the third quarter of 2015 included negative €0.5 billion for Hua Xia Bank and a benefit from an extraordinary dividend payment of about €100 million.

Adjusted for these items, our product revenue was declined 5% versus a strong prior year quarter, on the back of reduced activity of our clients in a volatile market and of course continued low interest rates.

Provisioning for credit losses remain on very low levels, reflecting continued good portfolio quality and a benign economic environment. Non-interest expenses were down 38% driven by a goodwill impairment of €1 billion in the third quarter last year. Excluding this impairments, non-interest expenses slightly increased by 3% including investments in digitalization.

PWCC’s invested assets decreased by €43 billion compared to prior quarter, which is mainly due to €37 billion PCS divestment effects, €9 billion net outflows, which mainly appeared in low-margin products in the second half of September following the negative market perception concerning Deutsche Bank.

These effects were partially offset by €6 billion market depreciation and foreign exchange related effects.

Looking into PWCC’s sub-segments. The next slide shows the revenue developments of our PCC as well as wealth management businesses. Please note that revenues were Hua Xia Bank are, not part of PCC revenues. PCC revenues in last year’s third quarter benefited from extraordinary dividend payments of around €100 million, excluding this impact, we saw a revenue decline of roughly 7% in the quarter compared to a very strong prior-year quarter driven by lower investment and insurance revenues as well as lower deposit income.

On the other side, credit product revenues showed a solid growth of 5% reflecting higher loan volumes and a modest margin increase. Wealth management revenues were down 1% versus a strong third quarter 2015. The decline was mainly caused by performance and transaction fees, which declined by 25% and lower management fees, which were down 6% driven by the more difficult market environments, with reduced activity of our clients as well as very low levels of equity capital market activities in the U.S.

Net interest revenues were down 4%, driven by the ongoing low interest rate environment in Europe. Net interest revenues remain stable compared to prior-year quarter.

With that, let us move on to Deutsche Asset Management. As mentioned before, and important to remember, when looking at the asset management results is that we have announced the agreement to sell Abbey Life to Phoenix Life Holdings. Under the terms of the transaction, Phoenix Life Holdings Limited will acquire 100% of the Abbey Life business, for £935 million which translates into €1,085 million based on current exchange rates.

The transaction is subject to regulatory approvals including that of the prudential regulatory authorities. The sale will have a net positive capital impact upon closing of the transaction.

On a pro forma basis, it would have improved Deutsche Bank’s core Tier 1 capital ratio on a fully loaded basis by approximately 10 basis points.

The transaction will result in an expected pre-tax loss of approximately €800 million primarily resulting from impairment of goodwill and intangible assets. The transaction will not have a material impact on Deutsche Bank’s available distributable items on the German GAAP.

We expect closing latest by Q1 2017. Let me now come to the asset management results for the quarter. Net revenues for asset management including the Abbey Life gross-up are up 30% compared to prior year, whilst revenues excluding Abbey Life gross-up were down 8% year-over-year. This is mainly due to reduced active and passive management fees and lower alternative investment income.

However, performance fees were higher year-on-year let by alternatives. Non-interest expenses including Abbey Life are up 24%, whilst if you exclude the Abbey Life expenses, asset management would be down by 15% year-over-year led by lower compensation. This leads to an EBIT of €216 million for the quarter.

During the quarter, asset management has seen asset outflows of €11 billion largely reflecting changes in client asset allocation. Over the year, we have seen outflows as U.S. investors have tilted away from U.S. dollar hedged international equity exposure, while in Europe, investors have shown strong demand this year for physical replication, fixed income ETS, where we are still building out our offering. Both of these features are reflected in Q3 outflows.

Now, looking at the results for Postbank on the next slide. The third quarter EBIT excluding impairments from prior year decreased by €43 million. On the revenue side, we saw a decrease by 7% or €58 million compared to prior year quarter. This reflects the continued revenue burden from low interest-rate environment weighing on revenues from savings and current accounts.

The improvement in other revenues was primarily driven by asset sales. Similar to PWCC, the further reduction of loan loss provisions reflect a benign economic environment in Germany. Excluding impairment of goodwill and intangibles in 2015, non-interest expense was broadly flat despite continued investments in efficiency and digitalization.

The non-core units on the next page, has made significant progress towards our year-end wind-down targets. RWA reductions of €10 billion have been achieved in Q3, which comes, a long way the reduction of level-3 assets held in the non-core units, further de-risking activities and progress, which will enable us to close the distribution with less than €10 billion RWA by year-end.

EBIT performance has been driven by a combination of de-risking losses and litigation charges. We’re well on track relative to the targets set out one year ago. Looking forward, further incremental losses are anticipated from de-risking, however, this is expected to be lower than previously communicated.

We’re confident that to shut-down the non-core unit by year-end, which signals a major success of de-risking Deutsche Bank.

Lastly, a short look at C&A, where we report a negative EBIT of €215 million for the quarter. A significant driver of the Q3 V&T P&L was the flattening of both the Euro and the U.S. dollar interest rate curves. In addition, an above average number of extraordinary effects from early terminations and new transactions relating to the treasury issuance portfolio, added to the negative result in V&T.

With that, let me now hand over back to John Andrews, who will moderate our Q&A session.

John Andrews

Marcus, thank you. Operator, we’d like to start the Q&A session please. And if I could remind everyone to ask just two questions, so we can try and get through as many in the queue as possible. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question is from the line of Daniele Brupbacher of UBS. Please go ahead.

Daniele Brupbacher

Good morning and thank you. I wanted to ask about cost and also the IHC. On costs, I mean, at the Q2 results, you were guiding for basically flat cost versus 2015 for this year. And I think year-to-date of the nine months underlying costs were somewhere around €19 billion, so that implies either a very significant pick-up in the fourth quarter close to €8 billion or the cost guidance is now too conservative.

Could you just update us on your expectations for the cost base this year? And then secondly, on the IHC, which I think is now live since July 1. Could you, would you be able to share with us a few numbers regarding the size, profitability and capitalization that was, of that unit? Thank you.

John Cryan

Okay, so, thanks for the questions. On your first question, with regards to outlook for our adjusted cost base for the group. We do indeed expect for the full-year to come out below where we were last year which is where we had originally guided towards.

As you will be able to tell from my comments on the various pages, a big driver of that is in particular also lower compensation costs but there are also first effects from cost cutting measures which at this stage largely affect in particular external headcount but we do indeed expect our adjusted cost base to come out below where we were last year?

On your second question, with regard to the IHC, we’re not disclosing specific numbers in relation to that unit. So, I will at this stage stick to that policy.

Daniele Brupbacher

Thank you. And is it correct that you will have published those numbers at some point in time like mid-November I believe 45 days after the?

John Cryan

That is correct. And we prefer to comment once we have published them.

Daniele Brupbacher

Okay, great. Thank you.

Operator

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

Jernej Omahen

Good morning from my side as well. I’ll limit myself to one question actually. And it’s going to be on the liquidity position of the bank. So, I think that the quarterly results suggest that the liquidity reserve was down broadly €20 billion between Q2 and Q3. And I just had two sub-questions on that. So, the first one is, in your mind, is it fair to say that the bulk of the volatility on the liquidity side of the equation was captured with the Q3 results.

I believe I’m correct in saying that the share price troughed on the 29 September and then rose subsequently. I just want to confirm with you that you haven’t seen acceleration on the deposit and liquidity side of the equation post the quarter end.

And the second question I had still on liquidity, the unsecured wholesale balance is down €12 billion Q-on-Q. And I think the last time there was turbulence with Deutsche Bank during the first quarter of this year, was the prime brokerage deposit suffered as they did this quarter, unsecured wholesale didn’t, it was actually up Q-on-Q. I was just wondering what’s driving that.

Can you also confirm that the U.S. dollar liquidity position is as robust as the consolidated liquidity position reported for the group? Thanks very much.

John Cryan

Thank you, Jernej. So, on your first question, with regard to our liquidity reserves, it clearly, the last two weeks in September post the unfortunate leak of an initial, ask from the Department of Justice has caused a lot of speculation around the bank. And that certainly took to some extent its toll. That’s probably continued for another week in October, and since then the situation has stabilized our liquidity reserves as of today, largely where they were at the end of September.

And our prime brokerage business certainly has suffered and we show that in the numbers. But the development with regards to that business is, quasi has followed what we have seen with regard to liquidity development namely there was probably another week of speculation into October and since then the situation as that also for liquidity, the liquidity reserve has stabilized.

The U.S. dollar liquidity is basically at it’s actually even slightly better by now but that’s more a function of how we have managed the situation.

Jernej Omahen

Okay, Marcus, this is great. Can I just go back to one thing you said, because I think it’s all important, so, if I understood you correctly, you’re basically saying the liquidity position as of now is pretty much, or the liquidity reserve is flat on where it was at the end of the quarter?

Marcus Schenck

So, the liquidity reserve as of today is broadly unchanged. As I said, we have seen in October, in particular in the first one week, maybe first 10 days, further noise. We have seen some more deposit outflows. As you can see, we have them and I commented on that in the last two weeks of September. But by now we’re looking at a stabilized situation.

Jernej Omahen

Okay, perfect. Thank you very much.

Operator

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

Kian Abouhossein

Yes, thanks for taking my questions. The first question is related to numbers, and maybe you could just clarify if you’re still on track with what was announced previously in terms of targets. Basically you mentioned risk-weighted assets should be ex-Basel IV harmonization about €320 billion, €100 billion plus for harmonization. So, are these numbers still intact? And in that context, is the IPO/sale of Postbank still on track? So that’s the first question.

The second question, just on counter party risk. If I look at your funding cost, it has more or less doubled relative to last year. And I’m trying to understand what other businesses besides PB is it impacting? And in this context, how are you John, spending time, these clients, do you actually have to get involved and talk to clients to calm them down, discuss this on the position of Deutsche. I’m just wondering from a corporate perspective how they’re interacting with you?

John Cryan

Well, let me do that first. To dispel any myths, I don’t just sit pouring over spreadsheets, which is, some people define my personality. I actually like to spend I’ve got a personal rule that I have to spend at least an hour a day with clients. And I do spend an awful lot of time with people who are sometimes, counterparts, competitors, vendors, all sorts of stakeholders in the bank.

And you’re right, particularly latterly, but also back in the sort of late January February, you do spend part of the meeting explaining the position of Deutsche Bank.

Generally speaking that then dispels the more lurid of the myths about the bank. But we do engage a lot with corporate clients, as I said the €14 billion number when it became public was a cause for disquiet amongst lot of people who work with the bank. And clearly, I think what I should do on this call is thank all of the staff in the bank who have spent a lot of time engaging with clients, to make sure that they understand the fact as opposed to some of the section.

So, yes, we have been spending time with clients. On the targets that you mentioned, they remain targets. We are working hard to try to achieve them. As I said in my remarks, the environment hasn’t got any better. A year ago, we didn’t expect interest rates to do what they’ve done, we didn’t expect the bake, expect the Brexit. And the bank’s been through the ringer a couple of times.

But I think we still believe that we’re on track, we’re doing the right things. We have picked up the pace, picked up the intensity of it. We do see the costs coming down, to the Daniele’s question about cost guidance. I think the cost guidance was, with the benefit of hindsight a bit too conservative because we picked up the pace and intensity of some of our cost reduction programs.

Having said that, we’re still investing in improving the bank and it’s important that we continue to invest and that we don’t abandon our investment projects just to reduce the costs because we need to manage this bank for the medium-to-long term and not to the next quarter’s EPS.

So, it is important that we look at costs. We do see a diminution in revenues across many of our businesses, as Marcus said, a lot of that driven by negative interest rates but not just. We don’t know how much new business was impacted we can take stabs at it. But we know that when our name is in the headlines for the wrong reasons, the phone doesn’t ring as frequently, we don’t know how frequently it would have rung had the name not been in the headlines.

So, we expect some revenue attrition but we work hard on it. And it’s a credit to our people. And that’s an asset they’ve gone out there and raised revenues on a quarter-on-quarter basis.

Marcus Schenck

On your question with regard to funding costs and how businesses are impacted, you’re just being mindful of the fact that what we’re talking about in terms of where we raise money is €28 billion which we’ve done year-to-date out of our total external funding of €957 billion. So you’re right, our funding cost for that €28 billion out of €957 billion has gone up. But you have to put it little bit into context.

That means that we are pleased with the funding cost that we currently have, of course not. This is something that we need to work on and something that we would expect once we have resolved the major matters to also normalize and get back into the overall pack. But again, it’s €28 billion out of €957 billion.

Kian Abouhossein

For me it’s more a marginal impact in terms of doing business on a long-dated basis. And my spread level is increasing or doubling. I’m just wondering how is, it impacting just your PB business, because the marginal return is declining on each dollar if you’re using long-dated funding. That’s what I’m trying, I’m just thinking about it from a what is my marginal cost am I getting, gives a certain business that it’s much more difficult for me to do due to doubling of spreads that’s what I’m trying to understand in the market business.

Marcus Schenck

So, again, we have many sources for our funding not just this one. But I agree with you longer term, we certainly have to take this number down. What I guess my point is that we can manage the situation right now, longer term, as I said before we’re clearly mindful of the fact that we have to bring this number back into where the competition raises money.

Kian Abouhossein

And just to be clear, Postbank is still on track to be IPOed/sold?

John Cryan

Yes, so, just coming back to your last question. When you said on-track, it’s sort of on-track. We’re still in a position we were in at the end of Q2, which is, the company is ready for sale and available for sale, but we don’t want to sell it until we get an attractive price for it. And we have considerable amount of time and flexibility to try to achieve that.

Kian Abouhossein

Thank you very much for your time.

Operator

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

Stuart Graham

Hi, I had one question and maybe a follow-up. John, you had two near-death experiences on the share price within eight months. What lesson do you see or draw from that? It seems to me like the market has lost faith in your strategy and requires a fundamental change. But maybe you see it differently? Thanks.

John Cryan

I do see it differently. And I don’t try to manage the share price every, I try to manage the bank.

Stuart Graham

Okay. So, in the outlook statement in the interim report, it sounded like you’re still committed to the 10% ROE in 2018 and 70% cost income ratio. Firstly, is that right? And given consensus is a long way away from that, what if all got wrong that you see that we don’t see?

John Cryan

Those are still the targets. And we always said we need to be able to execute and demonstrate we can get there, rather than just talk. So what we’ve tried to do is deliver. And on the first-year plan we set ourselves, we’re pretty comfortable that we’ve been delivering most of what we said we’d do.

Environment has been harder but we’ve picked up as I said the pace and intensity of what we’re doing. And it’s not for lack of hard work or commitment from our people. So, we’re trying as best as we can to meet the target.

Stuart Graham

With all these stories about re-litigating prospect and all that sounds like you think the plan is fine, there is, no dramatic changes needed. It’s just about executing on what you talked about?

John Cryan

That’s correct.

Stuart Graham

Okay. Thank you.

Operator

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

Jon Peace

Yes, good morning. So my first question was just on global markets. In the original RWA deleveraging bridge, you said you were targeting €30 billion net reduction in risk-weighted assets. Is that still the number and how far through that are we given the reduction you see in this quarter?

And the second one is just on your C1 target of 12.5% at the end of ‘18. Do you feel any pressure to get to that number sooner? And I wonder whether you might comment on recent press stories about possible partial floatation of Deutsche Asset Management to accelerate that? Thank you.

Marcus Schenck

For your first question in terms of taking down RWA in global markets, we’re still pursuing the €30 billion cuts where I would say at this stage, more than half way through. And as I indicated and also John has just alluded to, we’re constantly looking at where we might have more possibility to free up capital. So, this is a continued exercise and we’re still firmly committed to delivering I would say at least €30 billion.

Secondly, with regards to the core Tier 1 targets, I mean, look here, the situation is, we will have our minimum regulatory requirements which would be communicated to us very shortly through the SSM. So, when we get our final SREP letter, we will know what our new MDA and what our new SREP level, is going to be.

And we were at every point in time aspired to be north of those levels, so that we meet the requirement. And that’s how we need to manage the situation.

And on your, what was your third question?

Jon Peace

Asset management.

John Cryan

On asset management, Nicolas Moreau joined to lead that business on 1 October this year. And if you think Marcus and I had a baptism of fire mid-year last year, imagine how Nicolas felt. He’s been on-board 27 days, so, we’ve asked him to review the business. And he will be coming back to the board recommending his views.

Asset management is bit of a dynamic industry. If you look at our flows, our U.S. business particularly money markets, given the changes there has come under pressure. So we’ve asked him to look at the individual constituent businesses and come up with a capital allocation plan for it.

And as I’ve said many times before, we like asset management a lot, maybe return on equity is not the right metric for it, but it’s very high, it was 33% in the quarter. It’s a great contributor to the profits and the cash flow of the bank. And we’d like to keep it an integral part of the group.

That’s not to say we don’t manage it actively and that’s Nicolas’ job. But we’d like to give him a little longer than 27 days in which to come up with his plans to how we take the business forward. But it’s important for us as part of the group, and we want to keep it as an integral part of the group.

Jon Peace

That’s great. Thank you.

Operator

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

Al Alevizakos

Hi, thank you for taking my questions, two questions from my side. I just wanted to know first of all what would be the mid-term target for the ROT post the NCOU unwinding at the end of the year. And at the same time, do you still want to compete with the 5% leverage ratio given that now if you need to raise AT1 securities, probably it’s going to be at higher funding cost?

And the second question was basically on the U.S. I understand that you’re currently on ongoing deleveraging kind of route. Can you provide the number on the size of the deleveraging even on an absolute basis on a relative basis? Thank you very much.

Marcus Schenck

So, I’m not sure what exactly your first question with regards to ROT is. I think there I can in a way only echo what John said, our targets. So what we’ve put out in October of last year still remains our target that we aspire to achieve.

On leverage ratio, I think we’ve made that clear throughout the year, being north of 5% is not a holy-grail for us. If we fall short of 5% that’s from our point of view that’s perfectly all right as long as we have it at a level which I would say for European standards is perfectly acceptable.

And as said before, the real metric that we need to manage is our core Tier 1 ratio. As long as we secure our core Tier 1 ratio being north of our regulatory requirements, we will actually naturally take our leverage ratio up and it will not be a bottleneck for the bank. I mean, I expect it to be clearly north of 4%, when we achieve our core Tier 1 ratios north of the SREP requirements. So it will not be a bottleneck for the bank or a metric against which we need to manage actively.

With regards to the U.S., I would at this stage prefer to stick to what I said before namely we were not going to comment on specific actions in the U.S. and how that business is managed. Deleveraging is an overall target we have for the bank. And yes, a portion of that is applicable to the U.S. but we’re not breaking this down specifically. I think that’s our belief at this stage.

Al Alevizakos

Okay. Thank you very much.

Operator

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

Jeremy Sigee

Thank you, good morning. These are kind of follow-on questions now. The first is, you’re cutting assets and costs across the group, particularly in the global markets business. Are there any specific activities there that you’re exiting or downsizing more than your original plan that you outlined a year ago, that’s the first question?

And then the second question is, I just wonder if you could come back on the comments around Postbank, I’m not sure I fully understood what you were saying. The extent to which it’s on-track as originally planned or whether you are looking at other options including reintegration or other possibilities?

Marcus Schenck

First question, the business is that we’re exiting, I refer to the page in I think it might actually almost have been - almost exactly a year ago. It’s still the same businesses. Clearly the most pronounced and which actually has cost us quite some revenues this year is pruning our securitized trading business which has come down substantially over the last 12 months. Our RMBS business and so, it still holds true what we communicated a year ago.

With regards to Postbank, clearly the situation with that bank is that it is in 2016 going through cost restructuring as is the case for Deutsche Bank that burdens the P&L because there is, a lot of one-off effects in there, which take profitability down. And we’ve also said that Postbank during 2016 and I expect that to also be the case at the beginning of 2017 is aiming to improve its own ability to generate assets that give a higher yield than just residential mortgages.

And we think the combination of cost cutting and improving the yield on the asset side, and particularly demonstrating that they can do so are key prerequisites for us to sell that business be that by way of an IPO or by way of a trade sale. And hence this is a 2017 topic. I think those were your two questions.

Jeremy Sigee

Okay, thank you.

Operator

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

Amit Goel

Hi, thank you. Two questions from me. The first, if you can just clarify on the capital kind of guidance, I think Group’s targeting still something like 11.1% CET1 ratio as the year ends. Clearly at Q3 you’re 11.1% and you say that in Q4 you still expect to close Hua Xia getting another 40 to 50 basis points. It seems like there is still a bit more RWA reduction to come from NCOU to get down to the €10 billion.

So, I just want to check where the other kind of I guess minus 50 bps or so is coming from, are you expecting more significant losses to come through in the fourth quarter?

And the second question relates to the costs where the costs are bit better, the guidance is slightly better on the back of the variable comp, on the comp inflation. I just want to check what your, kind of thinking is, what you’ve done in terms of the variable comp accrual. And what you’re thinking in terms of costs if on an EBIT level, the group is close to a breakeven performance at the end of the year which may impact some of the deferred compensation? Thank you.

Marcus Schenck

On your first question, yes, indeed, I mean, predicting where we’re going to land with regards to core Tier 1 ratio by year-end, is not an easy task against the backdrop of some material litigation cases, still being out there and open as to where we will be able to settle them. And please don’t forget that the year actually ends on March 16, because on March 17 we will be publishing our full-year results.

And the sort of the litigation books which is always a great pleasure for our reporting guys that they unfortunately closed a night before we publish. So there is, still several months to go.

And your analysis is perfectly correct. We do expect we firmly expect the closing of Hua Xia. And we are certainly working on further RWA reduction, but we also do expect additional burden from the litigation side because we are fully committed as John has said several times to try to resolve more of the outstanding cases, so that’s - we hopefully soon get to a position where the bank can look into the future and stop looking backwards.

With a non-core unit, in three months we think we can stop looking backwards there. But we very much like to also get to a point where we with regards to litigation can stop looking backwards.

And then, your second question regarding cost and EBIT outlook and how that impacts bonus and compensation, this is something that obviously where have to be looked at, at year-end. I think we’ve made it very clear that against the backdrop of the development that we see and also our expectation on the litigation side. And we have taken down the course for variable compensation where exactly that is going to land that will depend on where we land for the year.

But it took its tolls during the first three quarters. And I mean, we’ve commented on that in almost every segment that costs are largely down because we’re taking compensation down for the year.

Amit Goel

Thank you. So, just to clarify, so 50 bps is roughly or kind of best guess to the overall impact of the litigation settlements that you’ll be doing for 2016?

Marcus Schenck

I’m not going to give you a precise number there. Our target is to be on the core Tier 1 ratio, broadly where we were last year which is in this 11%, and we’re not exclusively driving where settlements are going to land. There are others involved as well.

Amit Goel

Sure. Thank you.

Operator

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

Andrew Coombs

Good morning, I have two questions, both follow-ups to the previous one actually. The first is within the last quarter, you said that you expected to resolve four or five major litigation cases by year-end. I just wanted to confirm if that was still the case, and also by year-end do you therefore mean March rather than December? That’s the first question.

The second question is coming back to compensation, if I look at global markets’ compensation it’s down 25% year-on-year in the first nine months. If I look at headcounts front-off, this is only down 4% year-on-year, total headcount actually up 1%. So, I just wanted to check the count and variable compensation accrued you talk about, how much of that is actually due to a genuine underlying cut versus is there any change in your deferral policy assumptions or anything else we should be thinking about there? Thank you.

John Cryan

Shall I take the first one on the litigation item? We still would like to resolve all of our major litigation items. I assume it’s possibly. Ideally that’s before year-end. As we found we’re not in control of the time-table on this. But it’s what we’re trying to achieve and it’s the best guidance we can give you but we don’t control the matter. But yes, it probably would now stretch to amounts that would be incorporated in our 2016 results. So until we file 20-F, the books remain open for any preexisting litigation item.

Marcus Schenck

And let me try to answer your question on comps. First of all, I would like to highlight that for 2016 we had group-wide introduced a let me call it, a pay-mix shift, i.e. we have moved in particular for the more junior population variable compensation into fixed compensation. So, that is one of the reasons why also VC comes down.

And then, be mindful of the fact that in particular the deferred compensation how it actually hits our P&L, it doesn’t hit it’s all in the year when we sort of allocate it to people but it hits when it’s being - when invests. So this year, we are to some extent seeing the reduction in variable compensation which we had last year, which impacts then the following years, i.e. ‘16, ‘17 onwards.

But clearly, we also have taken down also the cash component that we expect to payout to people for the year 2016, so it’s a combination of those three effects, pay-mix, secondly lower delivery due to the fact that 2015 bonus came down. And then thirdly the fact that the cash bonus to be that we currently plan the 2016 we have also taken down.

Andrew Coombs

Thank you. There are some press reports out there that are discussing the possibility that you might pay more compensation stock-vest cash this year. I presume if that was the case you could then defer those compensation costs as and when they vest. Is that the case or are you expecting keep stock versus cash proportion similar to history?

Marcus Schenck

In what form variable compensation will be paid is not yet decided. I mean, clearly I would say that given the situation of the bank and the profitability situation of the bank. In particular thinking about the senior population of the bank having more, tight towards the share price development in the future, seems to make sense to us. But there are no decisions yet taken as to how exactly the composition is going to look like.

And as said before, we in particular first need to wait and see how the profitability is going to evolve over the remainder of the year.

Andrew Coombs

Thank you very much.

Operator

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

Magdalena Stoklosa

Thank you very much, good morning. I’ve got two questions. My first is about the regulatory inflation of risk-weighted assets. In Strategy 2020 you’ve talked about €100 billion, so my first kind of question would be, is this guidance staying put? And but also, if you could give us your take on the evolution of kind of the Basel IV discussion particularly now when you’re kind of looking for some guidance in the beginning of the year? So that would be my first question.

And my second question is a little bit more conceptual. Could you kind of help us think about the trajectory of your fixed revenues going forward, of course this was a very strong quarter for you, very strong quarter for the industry. But how should we think about it going forward particularly taking into account that of course the balance sheet shrinkage is happening at the same time?

And I suppose how does it impair the business and effectively whether the risk-weighted assets kind of taken out, are kind of lazy potentially from businesses, as I think have discussed earlier today which were very, very kind of heavy capital usage, just conceptually if you could help us? Thank you.

Marcus Schenck

On your first question regarding what the market calls Basel IV and the regulators call full implementation of Basel III. My first comment would be our guidance that we do expect at least €100 billion of inflation remains intact. Clearly, the developments I would say in the last eight weeks that’s we hear from what the technical people in the Basel committee are looking into is going more in the direction of trying to be more in line with the stated political objective namely that there shall not be a significant increase in the capital requirements for the banks.

So, relative to the initial consultation papers, there are now features being explored that we understand will take the inflation down. We still however do expect inflation in the €100 billion at least €100 billion still remains our best estimate. And so I wouldn’t want to depart from that. It is probably bit on the conservative side at this stage but the best number that we have.

Now as it relates to our FICC business, indeed it has been a pretty decent quarter now. We would expect our business clearly be impacted by the fact that we have exited a number of places in particular as it relates to our emerging market footprints. As we pointed out we have taken conscious decisions to pull-out a number of markets and concentrate our activities in the big hubs that, has cost us some business this year.

And combined with exiting some activity such as securitized trading, my estimate would be that for the first nine months, the decline in revenues that we have seen is probably somewhere around a quarter of that decline is basically explained through those activities.

Going forward, I think our fixed business is going to be likely a bit more stable and less seasonal than it was in the past. We still expect this to be one of our strongholds going forward.

Magdalena Stoklosa

Okay, perfect. And can I just follow-up, within that €100 billion estimate, what in your mind is likely to hit the most and some credit operational market risk force kind of on the revisions if you like?

Marcus Schenck

As we - whilst we didn’t put any specific numbers to this chart that we published a year ago, you can tell from the optics that we’re putting highest weight on credit. And that’s certainly is the one that we expect to have the biggest impact. I mean, we know it by now on market risk because FRTB is decided, so that one is clear.

And on the other two, clearly, on Op risk, the development in Basel seem to point towards the direction that the impact there is going to be a bit more muted than what was originally expected. Credit risk, we clearly expect to be the biggest driver of inflation.

Magdalena Stoklosa

Perfect. Thank you very much.

Operator

Next question is from the line of Andy Stimpson of Bank of America Merrill Lynch. Please go ahead.

Andy Stimpson

Good morning guys, thanks for taking my questions. Two from me. And when you think about your capital levels and buffers about the regulatory minimum. Do you ever look at what your transitional capital levels are, I know, actually we tend to look at the fully loaded? But maybe if you could just tell us how the regulator looks at those transitional numbers, does it matter?

And because it looks as if you could be quite close to those levels, come January 1, depending on what litigation costs are and what the threat is the phase-in [indiscernible] pushes the minimum up at the same time as your transitional capital number comes down?

And then secondly on your internally developed software, clearly are making a huge amount of investments there. And could you just talk about how much of that is just to make regulatory demands and implement a lot of this regulation, how much is genuine innovation as we might all think of it inside of AI or global chain or anything much more, juicier?

I just want to understand how much of that spending which as you point out is some of it gets deducted straight from capital. How much of that is kind of a positive NPV projects and how much of it is just to take the boxes from the huge amount of new rules that we’ve all got to comply with? Thank you.

Marcus Schenck

Thanks for your questions Andy. So, the first question, we do indeed primarily actually look at phased-in. the point is, I think it’s, I think for the outside world it’s always easier to compare fully loaded metrics.

The phased-in is the one that matters for regulatory purposes which is why that clearly is the one that we always look at and so, it is important. As you rightfully point out, the numbers for January 1 are tight. I think at this stage it’s also important to highlight that the model that the regulator applies will change to some extent because we were going forward, have a MDA, which includes the pillar 2 requirements.

And then there will be the SREP level which adds to the MDA, the pillar 2 guidance. The automatism that existed in the past is hence then changed a bit. You absolutely have to be north of your MDA because if you’re south of your MDA then clearly certain metrics are triggered automatically as in for example you could not be paying your AT1 coupons.

That MDA level as we pointed out, we do expect to come down substantially relative to the SREP level for 2016. As it relates to the SREP level in 2017 which will then include the pillar 2 guidance, yes, I mean, with our guidance for a fully loaded around 11% core Tier 1 ratio, will be at around the level of last year’s SREP levels. We have not yet received the final numbers on MDA and pillar-2 guidance. We’ll have to see where that stands.

But you’re right, we will certainly, we do not expect to be substantially north of our SREP level we certainly expect to be north of our MDA.

Secondly, on the software developments, I’m not so sure you’re going to like my answer but the truth is, let me give you just an example, there are clearly reg projects that we are pursuing such as the implementation of FRTB where you could argue, there is a lot of IT spend just to make sure that we will be compliant with new regulation.

But of course, when implementing those changes, you use those projects to also make sure that you have some efficiency gains. So it is quasi impossible to separate completely what is purely just a reg IT spend and what improves efficiency and makes us in a way a better and safer bank. They go in a way hand-in-hand. I know this doesn’t really help you. Technically speaking, I would say that about 40% of our current change the bank spends is for regulatory projects. I could see that rise in the coming three years to something like 50%.

But again, that 50%, it doesn’t mean that that doesn’t bring any improvements from an, efficiency from a controls point of view. So bit careful on how you interpret this 40% to 50%. Does that answer your question?

Andy Stimpson

Yes, that was - I did like your answer, you’d be pleased to know. And just to go back on capital level. So, I understand MDA I’m not sure to include that in my question part, I understand that there wouldn’t be an implication there. But for equity holders, if we said you did go below even just slightly, what happens, maybe you could talk us through what the regulators, what would happen, what do the regulators do? Clearly, automatic AT1 coupon offset, but is there anything else that happens presumably there is something that happens between you and the regulator at that stage or maybe not?

Marcus Schenck

So, just to make sure I don’t answer a question that you haven’t asked. You are referring to what if we are below our pillar 2 guidance?

Andy Stimpson

The pillar 2G yes, yes.

Marcus Schenck

So, the way we understand this is that then you need to sit down with the regulator and convince the regulator that you have a firm plan that gets you back north of your SREP level which is the sum of MDA and pillar 2 guidance. Yes, whilst if you’re below your MDA, there are automatically certain things triggered. So, an example would be you could not be paying a dividend. Now you all know that we don’t contemplate any way to pay a dividend for 2016.

But so there are no automatic triggers when you break your pillar 2 guidance but you need to sit down and present a plan, how you get back to north of your SREP level.

Andy Stimpson

And do they say, within three months, 12 months or we don’t know?

Marcus Schenck

We don’t know.

Andy Stimpson

Okay, fine. Thank you very much.

Operator

Next question is from the line of Jacques-Henri Gaulard of Kepler Cheuvreux. Please go ahead.

Jacques-Henri Gaulard

Yes, good morning gentlemen. Thanks for taking my questions. Two very quick questions. First of all, well done on killing on the non-core operations unit by the end of the year that will be a relief for everybody, I guess the question is, your level of losses there has been very consistent over the first three quarters.

Can we expect roughly the same level of loss in Q4 or is it likely that it’s going to be heavier as assume what’s left to get rid of is more difficult to get rid of?

And the second question is really more generic, I mean, since the second half of September, we’ve seen an insane amount of communication from bloggers from anybody from press. But unfortunately a lot of leaks, we have the feeling came also from the bank. Is there anything you can do to effectively control that or effectively convince people that it’s not the right solution to add fuel to the fire? Thank you.

John Cryan

I’ll take the second question first. Yes, it’s infuriating. There are all sorts of speculation and it really is non-sensical some of it. On the same day we can have people buying shares in our company and selling shares. And I don’t know if it comes from internally or externally, we just don’t know where some of this speculation, where these leaks come from. We have looked but we never find.

But unfortunately the only way to combat this is actually to deliver what we say we’re going to deliver and improve the bank and where possible meet our targets. And hopefully people get immune to the fact that there is, all sorts of non-sense spoken about the bank from time to time. And they listen to the official communications and not to speculations.

Marcus Schenck

On your first question with regard to the non-core units, we actually would expect the losses in that entity to be lower in the fourth quarter. And the reason for that is that a number of the assets that still sit there for example our remaining position in Red Rock Resorts, our assets where we actually would expect we can sell them without generating a loss and in the case of [indiscernible], I mean there was a transaction that has been signed. And we do expect closing in the fourth quarter.

And then there is a bunch of roll-offs that we still have. So from a de-risking cost point of view, we certainly do expect this to be a quarter that will not be burdened as much as the previous quarters. However, don’t forget the result of the non-core unit is the one that is probably large, the one that is largest exposed to the ongoing litigation procedure.

In particular our RMBS matter, technically sits in the non-core units, yes. So think of the non-core units as in before and after litigation, before litigation will be better, after litigation to be seen.

Jacques-Henri Gaulard

Super. Thank you very much. Very clear.

John Cryan

Just some figures and the fact, but the non-core, in the first nine months of the year, the non-core had cost us €1.7 billion against the core bank making €3.3 billion. And if that €1.7 billion you’ll see in the pack its €400 million of that has been from litigation pages 31.

Operator

And the last question is from Andrew Lim of Societe Generale. Please go ahead.

Andrew Lim

Hi, sorry. Sorry for the background noise. I’ve got three questions please. One on capital, and sorry, first question on capital is what you think, what do you think is the adequate capital target that you should be aiming for? I know we’ve talked a lot about the SREP target of probably 12.25%. And I think you’ve given the share price, the markets informing you that maybe more capital is needed.

So, just wondering what your targets for the CET1 leverage ratio? I know you’ve talked about the leverage ratio of 4% being achieved. But big part of that increase would come from extra issuance of AT1 capital I presume. So, maybe another €5 billion. So actually within that your CET1 leverage ratio, were simply quite weak, and have 3.3%. So, I was just wondering what your thoughts are on that please?

And then the second question is, actually on Postbank, you talked about an adequate price being achieved. But given that the RITs only 3%, I was wondering what kind of price you actually hope to achieve? Thank you.

Marcus Schenck

On your second question, we will of course not be pointing out to the world what our price expectations are before we have stopped any process. So sorry, that one we will not answer.

On your first question, medium-term our targeted core Tier 1 capital remains to be at least 12.5%, which we aspire to achieve in the coming years. And us achieving that number as said before will take our leverage ratio comfortably north of 4%. That does not require us to issue AT1 paper in the near future as in the coming one or two years.

Andrew Lim

Right. If I run through the calculations then, if you hit 12.5% on the CET1 ratio, then your CET1 leverage ratio would, might only be 3.3%, perhaps 3.4%, which strikes me still on the weak side, I don’t know if your calculations entirely?

Marcus Schenck

I would then like to refer you also to the presentation that we gave a year ago, just one example selling Postbank will represent a material lever for further deleveraging because they actually carry given the big mortgage book they have, quite a bit of leverage, RWA it’s maybe not as pronounced. That’s combined with the ongoing deleveraging in our markets business. We take our overall leverage down. And then, if we manage to get to at least 12.5% core Tier 1 ratio with €400 billion of risk weighted assets when you then do the math you can see that we’ll be comfortably north of 4%. But happy to do this in a follow-up and walk you through the details there.

Operator

Thank you. We have no further questions. I hand back.

John Andrews

Great, thank you everybody. Thank you for listening today. And obviously if you have follow-up questions the IR team is standing by. Thanks.