Earnings Call Transcript - DB Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Sandra, the chorus call operator. Welcome and thank you for joining the Deutsche Bank Q3 2023 Analyst Conference Call. 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 Silke Szypa, Deputy Head of Investor Relations. Please go ahead, madam.

Silke Szypa, Deputy Head of Investor Relations

Thank you for joining us for our third quarter 2023 results call. As usual, our Chief Executive Officer, Christian Sewing, will speak first; followed by our Chief Financial Officer, James von Moltke. The presentation, as always, is available to download in the Investor Relations section of our website at db.com. Before we get started, let me just remind you that the presentation contains forward-looking statements, which may not develop as we currently expect. We, therefore, ask you to take notice of the precautionary warning at the end of our materials. With that, let me hand over to Christian.

Christian Sewing, CEO

Thank you, Silke, and a warm welcome also from my side. It's a pleasure to be discussing our third quarter and nine-month results with you today. These results show our continued progress on the path to our targets in several respects. First and foremost, we continue to demonstrate strong earnings momentum. We generated profit before tax of €5 billion in the first nine months, after absorbing nearly €950 million in non-operating costs including restructuring related to operational efficiencies. Our post-tax RoTE was 7% and would have been nearly 9% excluding these non-operating costs and with bank levies apportioned equally across the year. This reflects progress on our path to meet our 2025 target of above 10%. Second, we are seeing progress across all three dimensions of accelerated execution of our Global Hausbank strategy, namely revenue growth, operational efficiency, and capital efficiency. Strong operating performance is driven by business momentum through a well-balanced business model. Revenues in the first nine months were €22.2 billion, up 6% year-on-year, well above our target growth rate. Private Bank and Asset Management together attracted net inflows of €39 billion alongside €18 billion of deposit growth at the Group level in the third quarter. We also continue to make progress on the second dimension of our Global Hausbank strategy, operational efficiency. We have progressed with existing measures and we have additional measures in flight. And in terms of capital, we are delivering on our distribution commitments. We are on track to complete the €450 million share repurchase announced in July, thereby delivering total distributions across 2022 and 2023 of €1.75 billion. We finished the third quarter with strong capital. Our CET1 ratio was 13.9%. In addition, we have identified further capital opportunities and we now see scope to free up additional capital of €3 billion...

James von Moltke, CFO

Thank you, Christian. Let me start with a few key performance indicators on Slide 8 and place them in the context of our 2025 targets. Christian outlined the business momentum and our well-balanced revenue mix, which resulted in revenue growth of nearly 7% on a compound basis for the last twelve months relative to 2021. This performance puts us well on track to deliver revenue growth above our 2025 target. Our strong revenue growth combined with cost management led to a 2-percentage point improvement in the cost income ratio to 73% and our return on tangible equity was 7% in the first nine months of 2023. These ratios would have improved by almost 5% and 1.8 percentage points if adjusted for higher non-operating costs and if bank levies were apportioned equally across the year. Our capital position remained strong with the CET1 ratio at 13.9% this quarter after absorbing regulatory headwinds and the impact of the share repurchase. Our liquidity metrics also remained strong. LCR was 132%, in line with our target of around 130%, and the net stable funding ratio was 121%. In short, our performance in the period reaffirms our resilience and our confidence in reaching or exceeding our 2025 targets. With that, let me turn to the third-quarter highlights on Slide 8. Group revenues were €7.1 billion, up 3% on the third quarter of 2022 or 6% excluding specific items...

Nicolas Payen, Analyst

I have two questions, please, on capital. The first one is on your increased capital efficiency. Could you give us a bit more color on how you managed to increase your reduction targets by €10 billion? And also regarding the €3 billion of potential additional freed up capital to 2025, what does it mean for your capital distribution and your targeted €8 billion shareholder distribution? Should we expect a meaningful increase as soon as next year?

Christian Sewing, CEO

Well, good morning, and thank you, Nico, for your question. Let me take the first part and then I hand over to James. Look, let me start that this is a very important and I think very good day for Deutsche Bank, because I think what we show now also on the capital side is nothing else than further evidence that our long-term strategy and obviously, the diligent execution around it is paying off more and more and obviously more to come.

James von Moltke, CFO

Sure. Thank you, Christian, and Nicolas, thank you for the question. To give you a little bit of color on what is the optimization we've accomplished so far. You’ve seen us do three securitizations over the past couple of quarters including one on the Italian consumer portfolio in this quarter, and that’s been sort of quicker and more effective than we might have expected. And then when we talk about data and process improvements, we think there’s still a distance to go with that.

Adam Terelak, Analyst

I have one on capital and one on revenues. I appreciate you don't want to front run exactly what we're going to look like in the short-term, but you're on the tape this morning discussing higher payout next year than in your original planning. Can you confirm that that original plan was the plus 50% on the buyback to match the dividend increase? And can you also discuss whether we can look at more regular capital return over the next few years rather than having to wait for full year results each year?

Christian Sewing, CEO

Look, let me start on briefly again on the capital question. And again, I think it’s good order to discuss all the details with our regulator first. But I think you’re right, the 50% dividend pass, we always said, and we also said that this is quite a good guidance for our past guidance on the share buybacks.

James von Moltke, CFO

So, Adam, a couple of things on your comments. Our group NII number is a very noisy line and we've talked about it before the impact of the FX swap book and therefore the rate differential between euros and dollars plays a role here as does hedging results and other parts of the treasury piece, which is why it's actually I think more instructive to look at the net interest income and the margins of the businesses especially PB and CB.

Chris Hallam, Analyst

Just two from my side first on cost. Could you give us a sense of the size of the inflation headwinds you were able to offset and underlying costs in the quarter as well as how you'd expect to end the year given the Q4 one-offs you flagged?

Christian Sewing, CEO

Yes. Potentially, I start on your second part and obviously James shall add. Look on the difference in the 2025 targets I think it comes from both sides. Number one, a further increasing revenue line James just outlined, the 2024 pass, our confidence in the 30 billion in 2024.

Timo Dums, Analyst

I've got two please. One is on Q4 and the other question is on O&A. So starting with Q4, maybe you could provide specifics on the one-offs you flagged for the current quarter. So a quantification maybe on the restitution of the National Resolution Fund and the year-end adjustments, tax adjustments that you mentioned that would be helpful?

James von Moltke, CFO

Briefly on the second question, yes, we would see continued improvement sequentially in O&A, and we would look to a much more significant improvement going into then to 2024. So, we're optimistic there.

Giulia Miotto, Analyst

Regarding commercial real estate, I appreciate the details provided in the slides. When I compare your provisioning levels, particularly in the U.S., to what U.S. banks have reported this quarter, it appears that your provisions are lower. I am curious about the confidence that supports these comparatively lower provisions in these specific markets, especially considering the challenges facing U.S. office spaces.