Deutsche Bank - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, welcome to the Deutsche Bank Q2 2024 Analyst Conference Call and Live Webcast. I'm Moritz, the Chorus Call operator. I would like to remind you that all participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question and answer session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ioana Patriniche, Head of Investor Relations. Please go ahead.

Ioana Patriniche (Head of Investor Relations)

Thank you for joining us for our second quarter 2024 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, 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, Ioana, and a warm welcome from me. I'm delighted to be discussing our second quarter and first half results with you today. After another quarter where we made progress across the businesses on our strategic initiatives, we are on track to hit our financial targets. We generated revenues of EUR 15.4 billion in the first half, on track to EUR 30 billion of revenues this year. We have franchise momentum across all businesses, driving commissions and fee income. Our capital-light businesses are gaining market share, such as our Corporate Bank and Origination & Advisory, which we expect to continue in the second half, alongside a more supportive NII environment. We also delivered on our adjusted cost target. Our quarterly run rate is at EUR 5 billion, in line with our commitment.

Our results were impacted by the litigation provision of EUR 1.3 billion related to the acquisition of Postbank, which we had to book this quarter. As said before, we strongly disagree with the changed and unexpected assessment of the court, and we are working hard to ultimately minimize the impact of this legal matter for our shareholders. But importantly, the bank's operational performance was not impacted. On the contrary, on an underlying basis, we delivered year-on-year improvements on our key target ratios. Excluding the Postbank takeover litigation provision, our post-tax return on tangible equity was 7.8%, up from 6.8% in the first half last year. The best first half and second quarter since 2011, which demonstrates the continued momentum in our operating businesses. Our cost-income ratio also improved from 73% to 69% year-on-year.

Finally, our CET1 ratio of 13.5% remains solid, despite absorbing Postbank and a number of legacy litigation matters, which shows our capital strength and gives us confidence to deliver on our capital distribution commitments. Let me now discuss in more detail some of the drivers of our first half results on slide two. Pre-provision profit was up 17% year-on-year to EUR 4.7 billion, excluding the impact of the Postbank takeover litigation provision. We also demonstrated positive operating leverage, a core element of our strategy execution. We grew revenues in our core businesses by 3% year-on-year, while group revenues were up 2% on a reported basis.

Our reported non-interest revenues were up 14% year-on-year, with strong growth in commissions and fee income of 12%, which demonstrates clearly that our strategy to grow our capital-light business is working. And we continue to deliver better than expected NII performance in our banking books, which provides additional comfort to our revenue path for 2024 and in years thereafter. We reduced our adjusted cost to EUR 10.1 billion year-on-year, and we continue to deliver savings through our operational efficiency program, which I will discuss in more detail in a moment. Now, let's look at the franchise achievements across our businesses on slide 3. In the first half year, the Corporate Bank delivered a 16% increase in incremental deals won with multinational clients compared to the prior year period.

Our success with our clients were also rewarded with a series of high-profile awards, and we have continued to make investments to further strengthen our positioning with our clients. We are building out our structuring capabilities and our originate-to-distribute model, taking advantage of our broad investor base. All of that gives us confidence we can sustain our momentum. The Investment Bank made significant advances across the franchise over the first half of the year. Origination & Advisory increased its global market share to 2.6% in the first half year, a gain of more than 70 basis points over the full year 2023, and we raised our global ranking from the eleventh to the seventh.

The business continued to support clients through its multifaceted product offering, including M&A sell side advice, as well as debt issuance linked to the partnership between Grant Thornton and New Mountain Capital. Fixed Income & Currencies revenues were up 3% year-on-year, supported by a 7% increase in financing revenues, even compared to a strong prior year period. The Private Bank also continued to build momentum with EUR 19 billion of net inflows in the first six months, supporting growth and assets under management of EUR 34 billion. We are also seeing recognition for our transformation and digitalization efforts in our retail Personal Banking franchise, with 13% more logins in Postbank's mobile app since end of 2023. We are also improving services for our ultra-high net worth clients and, for example, have established a dedicated team in Germany for ultra-high net worth clients.

We are leveraging our enhanced technology and product capabilities to expand into FX products, strategic asset allocation or Lombard lending to ultra-high net worth clients in Europe. And we have further developed our key client relationships to boost asset gathering. In the first half year, Asset Management grew assets under management by EUR 37 billion to EUR 933 billion. This was boosted by continued strong inflows into passive, in line with our strategy, which saw net inflows of EUR 18 billion in the first six months and is expected to support future revenue generation. Now let me turn to our progress against our strategic objectives on slide 4. We continued to make progress on all three pillars of our Global Hausbank strategy. Starting with revenue growth, we delivered a compound annual growth rate of 5.7% since 2021.

This underscores the benefit of a well-diversified and complementary business mix. Stable NII in our banking book segments was supported by strong non-interest revenues following our investments in our growth initiatives. Looking at the drivers behind commissions and fee income strength in the first six months, we saw growth mainly in our capital-light businesses. We saw particular strong momentum in Origination & Advisory as the market recovered and our franchise is strengthening and gaining market share, a trend we expect to continue. Our initiatives in the Corporate Bank are also paying off. Commissions and fee income grew by 6%, with business growth across all regions, which is notably visible in trade finance and lending. We gained market share in our documentary trade business, and our structuring capabilities are expanding, which includes increasing contribution from larger transition financing deals.

In Wealth Management and Private Banking, we grew non-interest revenues from investment products and lending by 11%. We will continue to build on these developments, and with business volumes growing, we are confident that our revenue trajectory will remain strong in the second half of the year. First, the impact from the expected NII normalization will be lower than initially anticipated, with full year NII in our banking book segment broadly stable to the prior year level. We will see continued commissions and fee income growth, mainly in Origination & Advisory, Corporate Bank and Asset Management. This puts revenues of EUR 30 billion clearly in sight. Additionally, we are highly focused on targeted resource allocation and on driving balance sheet velocity.

We continue to deliver on our EUR 2.5 billion operational efficiency program, having completed measures with delivered or expected gross savings of EUR 1.5 billion, 60% of our target, with around EUR 1.2 billion in savings already realized. As part of this program, we have made workforce reductions of 2,700, including 700 FTEs during the second quarter alone, reaching nearly 80% of the planned total through end 2024. In addition, we have reduced contract external staff by approximately 1,100 in 2024 to date. We have clear sight of the remaining savings yet to come from our operational efficiency program, which will offset inflation and our investments in business growth. Our optimization initiatives in Germany are expected to generate savings of around EUR 500 million.

Investments to reduce the complexity of our organization by improving technology and optimizing the workforce across infrastructure will deliver a further EUR 550 million. And automation of processes, alongside better alignment of our front to back setup, including the recent organizational changes, will deliver another EUR 250 million euros.... This gives us firm confidence that we are on track to deliver on our commitment of a quarterly run rate of adjusted cost of around EUR 5 billion in 2024, and that we will further reduce this run rate closer to EUR 4.9 billion by the end of the year to meet our non-interest expense objective of around EUR 20 billion. Finally, on capital efficiency, we achieved a beneficial equal to a EUR 4 billion RWA reduction in the second quarter through data and process improvements.

As a result, cumulative RWA reductions from capital efficiency measures reached already EUR 19 billion. We have a line of sight on further reductions coming in the second half, and we are working towards meeting or exceeding our EUR 25 billion-EUR 30 billion target. Let me conclude with a few words on our strategy on slide five. Our first half results represent another milestone in the progress with our Global Hausbank strategy and set a path to achieving our 2025 target of greater than 10% return on tangible equity. First, we saw strong momentum across all businesses in a more mixed operating environment than we had expected. With a better-than-expected NII trajectory, coupled with our complementary and growing global franchise, we are confident that our strong revenue momentum will deliver revenues of EUR 30 billion this year.

The investments we have made in our business give us confidence that this run rate will continue, as around 75% of revenues come from more predictable businesses. We are the go-to European bank for our clients and will continue to build on it by offering clients full service products and solutions. This builds our confidence that we can achieve our 2025 target of EUR 32 billion. Second, we are delivering operational efficiencies, which maintain our EUR 5 billion run rate in 2024 and will translate into further cost savings, achieving EUR 20 billion of non-interest expenses in 2025. Simply put, our revenue growth, combined with our cost reductions, will ensure positive operating leverage.

Third, we have put material legacy items behind us, and although this results in higher litigation charges this year, progress we are making should position us to deliver without major surprises in 2025. Fourth, we will see normalization in credit costs next year, closer to the underlying run rate we have this year after overlays and hedging, which will further bolster higher net income. We remain dedicated to creating value for our shareholders. Our earnings power and the progress we have made with capital optimization give us full confidence that we can maintain our trajectory to increase distributions beyond our original goal of EUR 8 billion in respect of the financial years 2021 to 2025.

We completed the share repurchase program launched in March, bringing cumulative shareholder distributions through dividends and share repurchases to EUR 3.3 billion since 2022, and we will continue to manage capital with the same discipline as over the past several years. To sum up, with our business momentum and all the progress made, we have a clear line of sight on our target for our TE of greater than 10% for 2025. With that, let me hand over to James.

James von Moltke (CFO)

Thank you, Christian. Let me start with a few key performance indicators on slide 7 and place them in the context of our 2025 targets. Christian mentioned our continued business momentum, which resulted in revenue growth of 5.7% on a compound basis for the last 12 months relative to 2021 within our revenue growth target range. Our reported half year cost-income ratio was 78%, and return on tangible equity was 3.9%, both impacted by the Postbank takeover litigation provision. Excluding this provision, the ratios were 69% and 7.8%, showing further improvement compared to 2023. Our capital position remained solid in the second quarter, with the CET1 ratio at 13.5%, despite absorbing the aforementioned litigation provision. Our liquidity metrics also remained strong.

The liquidity coverage ratio was 136%, above our target of around 130%, and the net stable funding ratio was 122%. In short, our performance in the period reaffirms our resilience and our confidence in reaching our 2025 targets. With that, let me turn to the second quarter highlights on slide 8. Group revenues were EUR 7.6 billion, up 2% on the second quarter of 2023. Non-interest expenses were EUR 6.7 billion, up 20% year-on-year, driven by the increased litigation charges in the quarter. Non-operating costs, including litigation charges of EUR 1.55 billion euros.

Beyond the Postbank takeover litigation provision of EUR 1.3 billion, there were additional charges of approximately EUR 220 million related to a series of legacy items we resolved in the quarter. We also booked EUR 106 million of restructuring and severance charges in line with our full year guidance. Adjusted costs increased 2% year-on-year due to higher compensation and benefits. Provision for credit losses was EUR 476 billion, or 40 basis points of average loans, and I will discuss both adjusted costs and provisions in more detail shortly. We generated a profit before tax of EUR 411 million and a net profit of EUR 52 million. Our tax rate in the quarter of 87% was impacted by the aforementioned litigation charges, which were largely nondeductible.

Excluding these litigation effects, the expected tax rate for the full year continues to be around 30%. In the second quarter, diluted earnings per share was negative 28 cents, and tangible book value per share was EUR 28.65, up 6% year-on-year. Let me now turn to some of the drivers of these results. Let me start with a review of our net interest income on slide 9. NII was essentially flat across all of our key banking book segments at EUR 3.4 billion, slightly above prior expectations. NII in each of the banking book segments followed the same trends as seen in the prior quarter. Our base case is that our quarterly NII run rate will remain broadly stable, and we reiterate that we expect to improve on our earlier guidance for the full year banking book NII.

The group number, reflecting accounting effects, decreased by approximately EUR 100 million compared to the previous quarter. This effect is offset by an increase in non-interest revenues and has no overall revenue impact to the group. With that, let's turn to adjusted cost development on slide 10. Adjusted costs were EUR 5 billion for the quarter, up 2% year-on-year. The year-on-year increase was driven by higher compensation and benefits costs, which were up by 6%, reflecting higher performance-related compensation, wage growth as expected, and increases in internal workforce after our targeted investments in talent throughout 2023, including Numis. Let's now turn to provision for credit losses on slide 11. Provision for credit losses in the second quarter was EUR 1,476 million, equivalent to 40 basis points of average loans.

The sequential increase in Stage I and II provisions to EUR 35 million was mainly driven by the net effect of overlays and model enhancements, which were partly mitigated by quarter-on-quarter portfolio movements. Stage III provisions remained at an elevated level, but reduced slightly to EUR 441 million. The decrease was mainly driven by the Private Bank. While provisions in the Investment Bank remained stable and were largely related to commercial real estate exposures, provisions in the Corporate Bank increased, driven by two larger impairment events. Looking ahead to the second half of the year, we are now seeing some stabilization in the broader U.S. CRE sector, though office, U.S. office remains broadly unchanged. Overall, this should lead to lower provisions compared to the first half, but our office CRE portfolio will continue to be impacted.

We also continued to conservatively manage our loan book with lower growth rates, including active management of single-name concentration risks, through well-established comprehensive hedging programs. Reflecting on these items and considering developments in the first half of the year, we revise our full year guidance for provision for credit losses to be slightly above 30 basis points of average loans. Before we move to performance in our businesses, let me turn to capital on slide 12. With 13.5%, our second quarter Common Equity Tier 1 ratio was up slightly compared to the previous quarter. CET1 capital improved slightly, reflecting lower regulatory capital deduction items and strong net income for the quarter, largely offset by the Postbank takeover litigation provision.

Risk-weighted assets increased from business growth, together with higher operational risk RWA, including the impact of the Postbank takeover litigation provision, mostly offset by reductions from strong delivery of capital efficiency measures. At the end of the second quarter, our leverage ratio was 4.6%, 13 basis points higher compared to the previous quarter. The 12 basis points of the increase were driven by higher Tier I capital, due to the EUR 1.5 billion additional Tier I issuance in June. With that, let's now turn to performance in our businesses, starting with the Corporate Bank on slide 14. Corporate Bank revenues in the second quarter were EUR 1.9 billion, essentially flat year-on-year, and up sequentially, driven by growth in commissions and fee income and resilient deposit revenues as higher business volumes compensated higher client payouts.

We have seen good progress on our growth initiatives to offset the normalization of deposit revenues by further accelerating non-interest revenue growth. Commissions and fee income increased by 5% sequentially and 9% year-on-year, driven by strong momentum in trade finance and lending across all products, as well as in depositary receipts in our Trust & Agency Services business. Deposits increased by EUR 3 billion in the quarter and are EUR 32 billion higher year-on-year, driven by higher term and sight deposits across currencies. The sequential increase in provision for credit losses was driven by Stage 1 and 2 provisions after moderate releases in the prior quarter, and higher Stage 3 provisions, which included two larger events in the European and German corporate segment, which were largely covered by risk mitigating measures. Non-interest expenses were essentially flat year-on-year, as higher internal service cost allocations and compensation costs-...

were mostly offset by lower litigation costs. This resulted in a post-tax return on tangible equity of 15% and a cost-income ratio of 62%. I'll now turn to the Investment Bank on slide 15. Revenues for the second quarter were 10% higher year-on-year, driven by a strong performance in Origination & Advisory. Revenues in Fixed Income & Currencies were essentially flat year-on-year, reflecting the base effect of a strong prior year quarter. Financing, credit trading, and emerging markets revenues were essentially flat year-on-year. In credit trading, the non-repeat of strong distress performance in the prior year was offset by strength in the flow business, thanks to our prior period investments. The macro businesses were both down year-on-year. The performance in rates primarily reflected the ongoing uncertainty around central bank interest rate policies, while FX revenues were impacted by reduced volatility.

This was partially mitigated by strong performance in the spot business, benefiting from investments into technology. Moving to Origination & Advisory, revenues doubled compared to the prior year, gaining market share both year-on-year and sequentially, while we maintained the number one rank in our home market. Debt origination continued to drive performance with an ongoing recovery in the leverage debt market, while investment-grade debt issuance activity remained elevated. Advisory revenues were strong and materially higher, both year-on-year and quarter-on-quarter, benefiting from the previously highlighted investments made into the franchise. Looking ahead, we are encouraged by our third quarter O&A pipeline, which is materially higher year-on-year. Although the market anticipated slowdown in M&A industry volumes in the summer and over the third quarter, may limit the possibility to outperform the very strong second quarter.

Non-interest expenses and adjusted costs were both slightly higher year-on-year, reflecting the impact of strategic investments, including the Numis acquisition. Provision for credit losses was EUR 163 million, or 63 basis points of average loans, driven by Stage Three impairments. Turning to the Private Bank on slide 16, pre-tax profit nearly doubled compared to the second quarter last year. Let me walk you through the drivers. Revenues in the quarter were EUR 2.3 billion. This includes higher revenues from investment products and lending, which were more than offset by continued higher funding costs, including the impact of minimum reserves and the group neutral impact of certain hedging costs to the business. Excluding these effects, revenues would have been up by 1% year-on-year.

The sequential revenue development reflects a typical seasonal pattern, as some investment activities tend to be concentrated at the beginning of the year. As Christian mentioned before, the Private Bank saw strong business momentum, with net inflows into assets under management of EUR 7 billion in the quarter. Personal banking revenues were impacted by the aforementioned higher funding and hedging costs for our lending books, partially offset by resilient deposit revenues in Germany. Revenues in Wealth Management and Private Banking increased due to higher lending business and investment revenues, offset by lower deposit revenues in Germany. The Private Bank has continued its transformation, with 38 branch closures in the first half of the year, and headcount reductions of more than 1,000 FTEs in the last 12 months. Non-interest expenses declined by 13%, including lower restructuring and severance costs, and the non-recurrence of provisions for individual litigation cases.

The improvement in adjusted costs of 3% reflects normalized investment spend and transformation benefits, partially offset by still elevated service remediation costs. We expect these to taper off in the remainder of the year, continued contributing to a run rate improvement in the second half of the year. The overall quality of our portfolio remains stable. Provision for credit losses benefited from a gain on sale of a non-performing loan portfolio, but still include the temporary effects of the operational backlog in Personal Banking, which are expected to reduce during the second half. Let me continue with Asset Management on slide 17. My usual reminder, the Asset Management segment includes certain items that are not part of the DWS stand-alone financials. Profit before tax improved by 55% from the prior year period, driven by higher revenues and lower non-interest expenses.

Revenues increased by 7% versus the prior year. This was primarily from higher management fees of EUR 613 million, resulting from higher fees generated by liquid products, due to increasing average assets under management. Other revenues were significantly higher, benefiting from lower treasury funding charges and a one-off insurance recovery in the quarter. Performance and transaction fees were significantly lower, driven by performance fees in alternatives real estate. Non-interest expenses were 4% lower due to lower litigation expenses in the quarter, while adjusted costs were essentially flat compared to the prior year, despite inflationary pressures. Passive investments saw a net inflow of EUR 9 billion in the quarter due to shifting consumer behavior from active into passive investment strategies. Digital channel distribution is supporting strong growth in passive, resulting in positive momentum and six consecutive quarters of net inflows.

Assets under management decreased by EUR 8 billion to EUR 933 billion in the quarter. The decrease was attributable to net outflows, despite positive market appreciation and FX effects. Net outflows of EUR 19 billion were primarily in low margin products in Fixed Income, Cash, and Advisory Services. The cost income ratio for the quarter declined to 68%, and return on tangible equity was 18%, both improving from the prior year quarter. Moving to Corporate and Other on slide 18. Corporate and Other reported a pre-tax loss of EUR 1.5 billion this quarter, versus the equivalent pre-tax loss of EUR 153 million in the second quarter of 2023, primarily driven by the Postbank takeover litigation provision of EUR 1.3 billion. Revenues were positive EUR 73 million this quarter.

This compares to positive EUR 85 million in the prior year quarter. Valuation and timing differences were positive EUR 216 million in the quarter, driven by partial reversion of prior period losses and impacts from interest rate moves. This compares to positive EUR 252 million in the prior year quarter. The pre-tax loss associated with legacy portfolios was EUR 144 million, driven primarily by litigation charges and other expenses. At the end of the second quarter, risk-weighted assets stood at EUR 32 billion, including EUR 13 billion of operational risk, RWA. In aggregate, RWAs have reduced by EUR 9 billion since the prior year quarter. Leverage exposure was EUR 36 billion at the end of the second quarter, slightly higher than the prior year quarter. Finally, let me turn to the group outlook on slide 19.

The second quarter and first half performance demonstrate the successful execution of our strategy, and we remain confident that our businesses have strong momentum and are positioned for further growth. So our full year 2024 guidance for revenues and adjusted costs have not changed, respectively at EUR 30 billion and around EUR 20 billion. Provision for credit losses for the year are now expected to come in slightly above 30 basis points of average loans. Finally, we have successfully mitigated several headwinds to our capital position, which supports our distribution plan, and this remains a key management priority. And as Christian said, our full focus remains on the execution of our strategy, and the progress made in 2024 positions us well to achieve our 2025 targets. With that, let me hand back to you, Ioana, and we look forward to your questions.

Ioana Patriniche (Head of Investor Relations)

Thank you, James. Operator, we're now ready to take questions.

Operator (participant)

Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to use only handsets and eventually turn off the volume off from the webcast. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question comes from Chris Hallam from Goldman Sachs International. Please go ahead.

Chris Hallam (Managing Director)

Thank you. Good morning, everyone, and thanks for the presentation, the remarks. So the first question is on revenues. I guess on a headline basis, the momentum is positive, but the mix is changing, a little bit more on NII, perhaps a little bit less on fees outside of the Investment Bank. So if we look through for the EUR 30 billion for this year and EUR 32 billion, let's say, for next year, are you confident on those two numbers? And in particular, how would you see fees progressing both inside and outside of the IB? And then second, could you give us an update on where your discussions have got to with the ECB regarding any additional capital requirements relating to your leveraged finance business, and how you see the outlook for you LevFin franchise over the coming couple of years?

Christian Sewing (CEO)

Thank you, Chris. It's Christian. Thank you very much for your questions. Let me start, and as usual, James may want to chip in. Look, on your first question on revenues and on kind of your key question, both numbers for 2024 and 2025, the answer is a clear yes. Let me start with 2024. You have seen the H1 numbers. To be honest, I'm really happy with that, with the EUR 15.4 billion, because all businesses have actually delivered. And the nice thing is, if I now go over the next quarters, and let me start with the predictable, more predictable divisions, i.e., the Corporate Bank, the Private Bank, Asset Management.

You can actually see that the momentum and the numbers which we have seen in the first two quarters are very, very good guidance for Q3 and Q4. I would even say that for the Private Bank and Asset Management, I even expect a slightly better development in H2 versus H1. Given also that what James said in his prepared remarks on NII, but also in particular because the inflows and the assets under management behave in a very satisfactory way. On the Corporate Bank, I think a number, you know, which is around EUR 1.9 billion, given all that I can see from the mandates we win, is something which we can also plan for Q3 and Q4.

That I would really say, those three divisions are really having a good momentum. Yes, we benefit a bit more from a better NII than we expected at the start of the year, but even next to that, the underlying fee business behaving very well. On the Investment Banking side, I absolutely believe that overall, I think the trajectory which we have seen over the last years, in terms of market share wins, in terms of stability of revenues-

... In terms of also predictability of revenues, if you think about the financing businesses, which we have, also show me that, the second half will be a very satisfactory one. Honestly, July started so far, pretty, pretty good, in the Investment Bank. And what makes me confident, in the O&A business could be that the summer is a little bit slower in terms of M&A business than what we have seen in Q2 but overall, the market will further recover. We have gained 70 basis points in market share in the first half year. We believe that this will also be the case throughout the year. And to be honest, the investments which we have done in the Origination & Advisory business are really only starting to pay off.

So the new people which we hired last year, they are gaining more and more momentum. So to be honest, I even expect that we get more market share in an overall market, which from a fee pool is increasing, over the next 12-18 months. So, that makes me confident that starting with a EUR 15.4 billion revenue number, the EUR 30 billion is absolutely inside, and, and I'm, I'm highly confident that we achieve that. Now, 2025, the first thing I would like to say, it's for the first time, so to say, Chris, other than 2024 and 2023, that both kind of income streams, NII and fee income, are both going into an increasing direction. So it's, it's different than in the former years, where we always had one of these streams, which was kind of decreasing.

In 2025, we have, so to say, two positive growing engines. That obviously helps us as a start. Now, if I there go, actually through the business, on the Corporate Bank, we think that 2025 will be another increase over 2024. Why? Because we can simply see the number of mandates, transactions we are doing, and the investments which we had, in particular in our platform business, in our payment businesses, are paying off. So therefore we gave you also in the prepared remarks, the wins which we had in Q2. All that, and the feedback we have from the clients point into another increase in 2025. And again, the NII is behaving even better than we thought at the start of this year. Private bank, clearly up next year. Why?

We always told you that, we have a tailwind in NII in 2025, over 2024. Secondly, we are obviously benefiting from the constant inflows into assets under management, and we don't believe that there is any change in the second half of the year, so the starting point is, even a different one. Similar, actually, in Asset Management. Also in those areas like alternatives and passive, where Stefan Hoops has this, focus on, we are growing. And on the Investment Bank, actually, I, I do believe we will grow in, in all three areas. Number one, we have made further investments into our trading business, in particular, regionally in the US. We have new people starting now as we speak, and we will grow that business, the trading business over there.

Secondly, I refer back to the remarks on the O&A business. We expect the fee market to increase next year, further increase over this year. Secondly, market shares will grow with those investments which we have done, also talking about Numis. And thirdly, the financing business is not only stable, but if I look at the income and revenue streams which we have planned for next year, actually also an increase. All that from a very encouraging behavior in 2024 makes me absolutely confident that we can achieve the EUR 32 billion next year. To the second question on the ECB, to be honest, you know, I have seen that portfolio, the leveraged lending portfolio now for the last 15 years.

To be honest, it always behaved very well because I think our risk appetite, the way we have managed our risk, has demonstrated that we are in very good control of that business. You also know, Chris, and this is not a secret, that two years ago, we had started the discussions with the ECB. We got a capital add on at that point in time of 20 basis points, which was reduced last year by 5 basis points. I know that there is a discussion between the industry and the ECB.

I take it as a very positive signal that the ECB is now reviewing the comments and our arguments from the industry, and therefore, you know, also obviously with all outside opinions which we get for our portfolio, I feel very confident with the level of provisions we have, with the way we manage it. It's a key business for us. It's a core business of ours. That will not change, and I'm sure we will also come to a solution there, which shows that we have managed it in a fair way. I don't know, James, whether you want to add?

Chris Hallam (Managing Director)

All, all good. Okay, thank you very much.

Christian Sewing (CEO)

The next question comes from Nicolas Payen, from Kepler Cheuvreux. Please go ahead.

Nicolas Payen (Equity Research Analyst)

Yes, good morning. Thanks for taking my question. I have two, one on distribution and one on litigation. On distribution, I was wondering if we could have an update on what is your total distribution target, because you committed to distribute above EUR 8 billion of capital, but could we have a bit more clarity by how much you expect to exceed this EUR 8 billion mark? And also, timing-wise, what should we expect, notably for the share buyback? Is a top up completely excluded for H2? And what about the pace in 2025? And regarding litigation, what should we expect regarding litigation provision in H2? Because more globally, you have now reduced quite significantly your contingent liability. So I was wondering, should we expect a lower litigation cost run rate for the future rates, for the future years? Thank you.

Christian Sewing (CEO)

Thank you very much. Let me start, Nicolas, and then James will, I think, comment on both questions. On the distribution, because that is really important for me, there is no change in guidance. We will distribute more than EUR 8 billion in the timeframe from 2021 to 2025. Nothing has changed. Obviously, from a timing point of view, as we said, end of April, with the item on the Postbank, provision of EUR 1.3 billion, which we had to digest, we always said that we now need to have two quarters, actually, where we show operating strength, where we restore capital. And to be honest, I'm really happy of what has been done in this bank. We are at 13.5% capital.

We have created excess capital also in the last quarter. We are clearly above, so to say, the 13.2%. We have created excess capital, but I want to show to the market another quarter of this operating strength. And with the, with the comments I just made on revenues, with costs which are absolutely in control, we are around the EUR 5 billion. We have our clear way, to, to the next year. I'm absolutely confident that we show another very strong quarter in Q3, which generates capital. And then, obviously, we are back in the progress, process, and, and we will, go back and enter into discussions. That, that is clear for me. But I always signaled that after the Postbank litigation, which the bank digested, we, we really powered through this. We want to show two good quarters.

Number one is done, and I tell you, number two will come.

James von Moltke (CFO)

Thanks, Christian. Nicolas, thanks for the question. Look, I just echo Christian's comments. You know, we've returned almost EUR 1.6 billion already this year. Through the capital actions that we took in the second quarter, we were, I think, very successful offsetting the impact of the Postbank provision, and our step off into the second half of 13.5% on the CET1 ratio is a good starting place. Your question about the trajectory going forward, you know, if I refer you to slide 22 of our investor deck, we've tried to be as clear as possible on what we've referred to as baseline expectations. And so if you look at that on the dividend, you know, we've paid out this year, EUR 883.

The 67.5 cents next year would be about EUR 1.3 billion. The EUR 1 dividend that we intend to pay out in 2026, in respect of 2025, would be nearly another EUR 2 billion. And then if you trace the, the buyback sort of trajectory forward, and let's just assume for a second 50% increase a year, the next two numbers in that series would be about EUR 1 billion and EUR 1.5 billion. Cumulatively, that would add to slightly above EUR 9 billion. And so that's what we're working to deliver to shareholders. As Christian mentioned, build excess capital in the back half of the year, we wanna be positioned to achieve those types of payouts.

Now, we did make a sort of an editorial change to page 22, really trying to kind of separate a little bit the share buybacks from the payout ratio discussion. Because to some extent, we look at the payout ratio as a minimum, not a maximum, and hence, building excess capital into the back half of the year, you know, can position us to preserve that buyback trajectory, even if the payout ratio goes north of 50%. So that's hopefully clarity and on what the baseline expectations are. Just the last thing to say, last time you saw that slide, there was this idea of top-ups.

Obviously, the unexpected provision in 2024, at least for now, has taken away the idea of a top-up in 2024, but we haven't given up on top-ups in 2025 and 2026. It depends on sort of all of the ins and outs in the capital plan. But I'd just echo Christian's confidence that we, I think we've been able to show that the Postbank provision did not take us off stride, and we remain committed to the profile we show on page 22.

If I go to your litigation question, look, obviously there's been a transition between the contingent liability number and the balance sheet provision, driven by the Postbank litigation, takeover litigation provision, but actually not only that provision, some other items also moved between the two, sort of the off-balance sheet and the on-balance sheet accounts. As we said last quarter, the profile has changed pretty significantly, if you like, of risks that are still unknown. And we're committed to continuing the work over the back half of the year to put ourselves in a position for, I would call it, dramatically lower litigation provisions and regulatory enforcement actions going forward.

You know, really, we'd like to be in a position at the end of the year to have what I'd call as clean a slate as possible, going into 2025, and sustainably so, because if you like, we'll address the unknown elements of the known items. And as we look to the future, sort of, you know, the pipeline of new things coming in that we can see, and by the way, the benefits of all the investments we've made in controls, you know, should give us much more confidence about the outlook going forward.

Nicolas Payen (Equity Research Analyst)

Thank you.

Operator (participant)

The next question comes from Anke Reingen, from RBC. Please go ahead.

Anke Reingen (Analyst)

Yeah, thank you very much for taking my questions. The first is on the loan loss guidance for 2024. If you can maybe give us a bit more, what gives you confidence of the decline to more like 25-30 basis points in the second half, and what you've assumed on commercial real estate within that number? And you sort of like said in 2025, you expect loan losses to normalize. Would that be the 25-30 basis points or the 20 basis points you mentioned in the past?

Just on capital, I just wondered if you can give us some more clarity on the expectation with the benefit from the delay of the FRTB, what it could mean for the EUR 15 billion you previously guided to, and would you consider this in your distribution as an actual benefit? Sorry, just one last question on the dividend and the distributions. If you have a payout ratio, if the €0.68 dividend per share would correspond to more than 50%, am I right from your previous comments to understand that your focus is the absolute distribution rather than the payout ratio? Thank you very much.

James von Moltke (CFO)

Thank you, Anke. Yeah, and I'm happy to take all three. Christian may want to add. But look, look, the CLP guidance change, I would think of it as more related to what has already happened in the year, in the first half, than about our outlook for the second half. You know, we've had a number of events, really two corporate defaults, and then an overlay that we booked in Q2, that have taken us, you know, slightly north of what we'd anticipated when we spoke to you three months ago. And while you're always a little bit looking at a crystal ball, we've been, you know, in a granular way, looking through the portfolio, including commercial real estate, to have a view on the second half.

You'll recall that I've talked in the past of a 2024 run rate, closer to, say, EUR 350 million per quarter, that we felt was sort of present. And that, in a sense, is, let's say, EUR 100 million of CRE sitting on top of EUR 250 million of ordinary course run rate that is in the portfolio. Now, let's start with the last point. We still see the same stability in our underlying portfolios in both the retail and the corporate portfolios, so we haven't seen a deterioration. On top of that, we've seen, as I mentioned, a handful of defaults, and also an overlay that we booked. In CRE, I recall that we'd seen a stabilization in 2024, relative to the deterioration that was taking place last year.

That actually persisted in, in the second quarter. What is perhaps a little bit worse is that the, the sort of beginnings of a recovery that I might have expected three months ago, that hasn't happened yet. Doesn't change our view, frankly, of, of the direction of travel, and that essentially, over time, the new defaults and the valuation adjustments that remain in that portfolio begin to sort of burn out. You know, CRE, if you, if you go back to the fourth quarter results, we'd said to expect about EUR 450 million in 2024, consistent with our 2023 performance. That is probably worsened ever so slightly, call it EUR 50 million, maybe EUR 75 million, in terms of our expectation, but not dramatically.

As I say, the larger part of the change in guidance is what's already happened in the year around a couple of corporate items and the corporate defaults and the overlay. On FRTB, obviously good news for the industry in Europe, because I think it would have put us at a competitive disadvantage if the U.S. were not to go forward and Europe to go forward. So we think it's a sensible change. It essentially cuts in half. If just simple math, we had given you, say, EUR 15 billion of RWA increase from CRR 3 as of January first next year, and I'd now build about EUR 7.5 billion into the models and move the other EUR 7.5 billion into the first of January 2026.

So that's obviously helpful in our capital path, helpful to us in terms of building up this excess capital I just talked about, at looking into the 25 distributions. And then that feeds nicely into your third question, which is binding. We think of the 50% payout intention as, you know, if you like, a floor, it's what we would then accrue to during the year based on the interim profit recognition. You know, because of the impact on profitability in 2024 coming from the Postbank provision, you know, that payout ratio, I think, will easily cover our dividend and maybe some amount of repurchase.

But what we want to do is put ourselves in a position of being in excess capital to fund the rest of the repurchase in 2025. And hence, to your point, we wouldn't view the 50% payout as being binding.

Anke Reingen (Analyst)

Thank you very much. Thank you.

Operator (participant)

The next question comes from Kian Abouhossein from J.P. Morgan. Please go ahead.

Kian Abouhossein (Managing Director)

Yeah, thanks for taking my two questions. I wanted to come back briefly on cost. In your remarks, Christian, you talked about the EUR 4.9 billion run rate potentially at the end of the year, and I just wanted to see how you think about the flexibility that that offers next year to get to your cost income guidance. If you can talk maybe around, is there flexibility to run below EUR 20 billion in that sense, considering you're indicating a lower number for the end of the year, even if it's adjusted versus stated, and how that thinking is around and confident is around the cost income guidance? The second question is related to provisions again. I wanted to just dig a little bit deeper after Anke's question, the detailed answer in respect to CRE.

Clearly, the assumptions are that CRE will stabilize, it sounded like that, in 2025, and I wanted to just get a better understanding what assumptions you're making. If you can talk a little bit about the input assumptions, price, price performance in CRE US, default rates that you're assuming on a macro level, in CRE, and so we get a better understanding. And lastly, if I just may, on leveraged loans, you kind of answered the question, but I also wanted to see if there's any leveraged loan additional provision requirement, does that mean there could be a buyback, a pushback?

Christian Sewing (CEO)

Look, Kian, let me start with the cost answer. First of all, I think most important is that we stick to our target and that we show you that we deliver on that, like we-- like I think we have demonstrated from Q4 2023, when we started with the EUR 5.3 billion of quarterly costs, that we come down to a EUR 5.0 billion, which we have done. Now, looking ahead, and what is in the pipeline of additional cost measures to be executed over the next quarters in terms of achieving the EUR 2.5 billion of overall cost cuts.

I'm very confident that we will come to the EUR 4.9 billion of quarterly costs at the end of Q4 starting of Q1. So this is for us, where we are focusing on. In this regard, we have obviously put all the cost measures into so-called key deliverables, which we are tracking on a biweekly basis in the Management Board. And we can actually see that with all the investments we have done, with all the also headcount cuts, which we have executed in Q1 and Q2, we are delivering on that in Q3 and Q4, and therefore, I'm confident that the run rate of EUR 4.9 billion, which we need for 2025, will be achieved.

To be honest, in this regard, Kian, just to give you a little bit of a feel, the hardest quarter to achieve the EUR 5 billion was actually Q2, right from the start of the year, because all the salary increases actually came into Q2. We had a lot of the staff reductions to be done in Q2, where these people were still, so to say, on our payroll, and both we have managed, i.e., you saw the number of reduced workforce, not only internally, but also externally, what we managed to do in Q2. And secondly, we digested the wage and salary increases, i.e., the annual tariff increases, which we digested.

And now we are working down these key deliverables, as I just said, and that gives me all the confidence that we are coming to the run rate of EUR 4.9 billion. Now, what further flexibility do we have in that? The EUR 4.9 billion is obviously then also correlated to, so to say, our revenue aspirations and the revenue target I laid out. You know, from our previous discussions, that there is always a certain flexibility also on the cost number in terms of flexibility when it comes to less volumes, when it comes to variable comp, when it comes to technology investments. And obviously, this is all in our hand, and therefore, I, I don't want to rule out at all that there is further flexibility.

But for me, given where the momentum of the bank is on the revenue side, I have all, all eyes focused on the EUR 4.9 billion, and here I can give you my full confidence that we will achieve that, because all the underlying structural cost reductions are actually in time, in plan, in execution.

James von Moltke (CFO)

Kian, turning to your question on provisions and the impact of CRE, maybe I can draw your attention to slide 34 in the investment in the IR deck. Now, this is where I had guided that the next in the series would be down in Q2, and so, you know, as always, predictions about the future are a slightly uncertain science. But we've sort of traveled more or less at the level we had in Q4 and Q1. So the recovery that I mentioned earlier didn't come as quickly as I'd expected. And look, by the way, the 130 in Q2 actually had some impact of the overlay. So if you take that out, we were at 123, essentially flat to the last two quarters.

Now, what gives us confidence about the direction of travel here? Really, two things. One is that if we look at the portfolio in a granular way, so loan by loan, which loans, in which loans do we see, you know, the possibility of future default, that number is declining. And so, so the, if you like, the risk content that remains in the portfolio, is declining. And what drove the kind of miss to my expectations this quarter, was more that the existing, the defaulted portfolio, our estimation of lifetime losses increased in the quarter. So that also will find, you know, a level and stabilize it at some point. So I'd hoped that, and expected that we'd probably be closer to 100 in the second quarter.

Let's see how this develops in the quarters to come. But given the way portfolios like this perform, you know, the downslope can be quite dramatic. And then on leveraged lending, look, we believe our provisions or the allowance for loan losses is prudent and adequate for the risks we see in the portfolio. We are always, you know, open to and taking on feedback from our internal AQR views, our auditors, and also the regulators when they come in to review the portfolios. And at the end of the day, it is for us to determine on the basis of the accounting rules what the appropriate provision is.

We'll continue to monitor it in a dynamic way, but we think our practices are good, and we will continue to engage in a constructive way with the supervisors on that dialogue.

Speaker 15

Thank you.

Operator (participant)

The next question comes from Tom Hallett, from KBW. Please go ahead.

Tom Hallett (Director)

Hi, thank you for taking my question. Can you tell us how you see the deposit mix and loan trends developing in the second half of the year across the Corporate Bank and the Private Bank, and how much some of the recent political uncertainty may be impacting this? And then secondly, on SRTs, which is obviously becoming quite a popular tool for banks these days, could you just give us some color on the potential CET1 benefits over the next year? And then maybe quantify or help us understand the size of the overall opportunity here, which, you know, as an outsider, I guess I'm thinking about it in terms of the size or the scope of assets that are generally earning below their regulatory cost of capital. Thank you.

James von Moltke (CFO)

Thanks, Tom. Two interesting questions. Look, loan growth has been more sluggish in coming than we'd expected, as you've heard on our calls for the past, say, year or so. That said, we did have loan growth in the second quarter, and the kind of first encouraging sign, we have EUR 2 billion of loan growth this quarter. And we think that the kind of indicators of increasing activity are there. And there's certainly demand in some of the, you know, more structured lending areas. So we think that recovery is starting. In the retail portfolios in particular, where there's still sort of a relatively slow environment in German mortgages, and our portfolio attrited slightly. But again, there, I think we've found a floor and can grow from here.

On the deposit side, really encouraging sort of performance, especially in Corporate Bank. But we also see in the Private Bank a clear ability to raise deposits at pricing that is attractive. So you may see a leveling out a little bit of the deposit growth in the back half of the year, but we think the volumes there generally are encouraging in terms of healthy growth, frankly, on both sides of the balance sheet going forward. If I look at SRT, for us, you know, some of our risk transfer programs are 20 years old. So we've been at this for a while. We have good structured programs.

We have a great level of engagement with the investors in our structures that have been with us for a long time. And we're sort of constantly on the lookout for portfolios where we think they can be more efficiently held, you know, off of the bank's balance sheet than on our balance sheet. Therefore, I would say the scope, you know, isn't dramatic, but there's still things we look at. And you've seen that as part of the, you know, program we've had for capital efficiency of where we... After 25-30, as you've seen in the past year or so, securitization has been part of that. Growing our SRT programs or the funded credit link note programs we have is also being part of that.

So I think a marginal contribution from here, and we're always looking, but, but we have a, a reasonably sizable, you know, benefit as, as things stand from those types of, types of structures. One last comment to make, at the risk of going along. As we get into the CRR3 world and the impact of the, of the output floor, obviously, there's a, there's a whole new sort of vista, if you like, of, of assets that we may look to, take off our balance sheet because we'll be solving for another variable. So in the past, it's been managing concentration risk and to a lesser extent, RWA. Going forward, it'll be those two things plus, plus the impact on the output floor, of different asset classes.

Tom Hallett (Director)

Okay, thank you.

Operator (participant)

The next question comes from Giulia Aurora Miotto from Morgan Stanley. Please go ahead.

Giulia Aurora Miotto (Executive Director)

Yes. Hi, good morning. My first question is on the Private Bank, and could you please give us a bit more detail, a bit more color on how quickly the fee line can grow, and what initiatives you have underway to really control this and drive this in the next quarters and in 2025, in particular? So that would be my first question. And then, secondly, you talked about loan growth dynamics. What about asset margins? How are those evolving in your main lending products, please? Thank you.

Christian Sewing (CEO)

Yeah, let me take the first question, Giulia, on the Private Bank. Actually, it's first of all, a continuous improvement on the fee business growth in the Private Bank. Kind of in particular, when I look to the future, quarter over quarter. Why? Because we have a constant inflow in our assets under management, by the way, domestically as well as internationally. And by the way, also, and this is very nice, not only so to say in the Private Bank and Wealth Management business, but also in the Personal Banking business in Germany.

Secondly, I think for the Private Bank, if we, if we think about the overall profitability, there is a huge focus now on turning around the Personal Banking business in the Private Bank in Germany. That obviously, given all the integration work which we, which we are doing and which we have done, in particular last year with the IT transformation, had an unacceptable return on equity so far. But if I look actually at the strategy from Claudio, how he will digitalize this business, how we actually will make this business, in particular for the investment and fee-related business, a business which is there for 19 million clients, and in particular for the 50 million Postbank clients, I expect actually a good growth coming from this Personal Banking.

And at the same time, we are now realizing the fruits of integrating the IT, i.e., the costs are coming down. And here we are talking, like we said in the previous calls, about a EUR 500 million cost reduction, just as a direct cost in the Private Bank as a result of the integration. So, it's a constant growth across the subdivisions in the Private Bank, but the real lever is actually bringing the Personal Bank in Germany with a clear plan to an acceptable return on equity over the next 12-18 months, which is then obviously also a huge lever for the overall group profitability.

James von Moltke (CFO)

So maybe I could add, and this is also a little bit in answer to Chris's question earlier, which was about sort of fee and commission engines outside the Investment Bank. Obviously, just in the Investment Bank, a big part of the story this year and next year is advisory and underwriting fees, where we think the momentum, the wallet growth is there, and there's an opportunity that we're executing on to increase our market share. But if you go away from the Investment Bank, as Christian just said, you know, the Private Bank earns commissions and fee revenues in brokerage and investment management fees and commissions. Asset management does the same on the investment management side, and you have visibility into those revenue sources from the AUM increases or development over time.

You can also be helped or hindered by, by the market levels. But the visibility is there. And then in the Corporate Bank, you've got fees on loan inception, loan processing, you have payment activity, custody activity, again, sort of an asset-driven trust and agency services. And again, the visibility into those revenue sources is high, including based on the, the RFP process and the implementation of new business that we win. So, so as I say, the visibility into these, these revenue sources is, is strong, and based on our, our current outlook, we can see some of these lines continuing the types of growth rates this year so far, which has been 12%, each quarter and for the half, extending into next year.

On the spread side, there too, you know, we've been surprised to the upside this year, frankly, on both sides of the balance sheet. So as we've talked about, deposit margins have been better than anticipated as the pass-through continues to outperform. On the loan side, the same has been true. The spreads in the front book have been better than we anticipated. To be fair, a bit mixed in the Private Bank, but in Corporate Bank and Investment Bank, there's been reasonably healthy spreads and new lending in the front book. And that sort of margin expansion has contributed to the better than expected net interest income than we'd anticipated.

By the way, the other driver of the NII outperformance is also spreads on our unsecured debt. So all of those engines are helping sustain this year, the net interest income line, and contribute to the expected growth next year.

Giulia Aurora Miotto (Executive Director)

Thank you.

Operator (participant)

The next question comes from Mate Nemes, from UBS. Please go ahead.

Mate Nemes (Equity Research Analyst)

Yes, good afternoon, and thanks for the presentation. I have three questions, please. First of all, on RWA reduction. I think you have achieved now EUR 19 billion in total RWA reduction, as a result of the optimization program. Could you give us a sense of the timing of the remaining reductions to get to your EUR 25-30 billion targets? Is that largely coming through in the second half of this year, or some of that should be in 2025? Then the second question is on share buybacks. Just referring to your slide 22, and the 50% per annum growth in share buybacks.

I think, the original expectation, certainly by the market, was, a higher total amount of buyback, in 2024, on which the, the increase into next year would have been obviously, quite substantial. My question is, are we looking at a 50% increase versus the EUR 675 million, for the buyback next year? Or, should we think of a potentially larger increase due to the scrapped, second tranche of the buyback, in 2024? And finally, the last question is on, the Corporate Bank, loss provisions. Could you give us any sense of, these single cases or single corporate events? Are they reflective of any, deterioration in the overall asset quality in the broader corporate sector? Thank you.

James von Moltke (CFO)

So thank you, Mate, for the questions. Look, first of all, we're very pleased with the progress there and credit to the teams that have been working so hard to drive this optimization. You know, broadly speaking, as I mentioned in the prepared remarks, I would hope that we could achieve another EUR 2 billion in Q3, and there, I think we've got good line of sight to that, maybe a little bit more. And if we achieve the same in Q4, I would be pleased. So if we got to, say, EUR 4 billion incremental this year, bringing us to EUR 23 billion, maybe EUR 24 billion, that would be good performance. Which, to your point, leaves 5 or 6 next year to get to 30, and potentially there's upside beyond that.

That obviously is helpful in driving the excess capital creation that I talked about earlier. So assume for modeling purposes, EUR 4 billion this year and at least EUR 6 billion next year. On the buyback, yeah, it was what was taken out in 2024. I think the consensus number was that the second buyback authorization could be something in the order of EUR 400 million-EUR 500 million this year. And that was actually a fair assumption, and absent the litigation provision, I think we would have been in a good position to seek that. But I want to be clear, the baseline was intended always to be off the, you know, in this case, EUR 675 million, with potential top-ups, depending on the level of excess capital in each year.

I want to reiterate the baseline expectation. That's something that management's working towards to deliver. And let's see whether there's room for the top-ups. We certainly haven't given up on the idea that there would and could be top-ups, and those top-ups would take us from the call at 9.2, that's implied by the progression, to something beyond that. Again, it underscores why it is that we say we've got confidence in exceeding the EUR 8 billion.

Christian Sewing (CEO)

On the asset quality in the corporate book, I think James already said that, no, there is no deterioration. To be honest, the two cases James were referring to is actually, so to say, dominated by one case in Europe. But also here, yes, we had to build a loan loss provision. But I think overall, we should also not forget that the risk management overall has actually worked quite well, because we have a substantial coverage actually from a CLP point of view.

Which again brings me back to the point that, yes, you see a slightly elevated loan loss provision number, but the real run rate, if we take overlays out and if I also take this into account, the real run rate of a loan loss provision is, in my view, actually the normal run rate of EUR 250 million, plus a quarterly number, which always can happen. And you can now say it's 75, it's EUR 100 million. But that brings me also to the confidence, because we don't see from a rating point of view, from a watchlist point of view, from upgrades versus downgrades, we don't see any material deterioration. Also, not in the German midcap book, brings me to the confidence that-

... Actually, a number of EUR 1.3 billion is a number where I'm absolutely confident that there should be a run rate for Deutsche Bank in terms of loan loss provisions per year.

Mate Nemes (Equity Research Analyst)

That's great. Thank you very much.

Operator (participant)

The next question comes from Stefan Stalmann from Autonomous Research. Please go ahead.

Stefan Stalmann (Partner)

Yes, good afternoon. Thank you very much for taking my questions. I have just two left, please. Starting with the Private Bank, you mentioned an NPL sale. Can you tell us roughly how big this was in notional terms, and whether there was actually a PNL profit or loss on the back of this sale? And the second question relates to the valuation and timing differences in your Corporate Center, which have been mostly positive in recent quarters. Can we think of this as a balance which is still negative, and you're still working yourself out of this back to neutral? Or is it actually now a positive overall balance, and there's a risk that eventually that normalizes down to neutral with negative effects in coming quarters? Thank you very much.

James von Moltke (CFO)

Thanks for the question, Stefan. So briefly, I don't know the notional of the NPL sale, but in round numbers, think of us as having a CLP benefit of about EUR 25 million in the quarter on the sale, which was offset by incremental CLP or a continued drag from the operational disruptions of about the same amount. So call it EUR 150 million, that you see in the second quarter is a pretty good indication of the run rate going into the second half of the year in the Private Bank, given, you know, we wouldn't necessarily expect well, the drag from operational items we do expect to go away and potentially reverse in the second half of the year. And you know, the PNL sale, the NPL sale wouldn't necessarily repeat either.

On the valuation timing differences, I'd really call out two elements. The first is pull to par in the investment portfolio, and that has a short-term and a sort of a more medium-term element. In the short term, some of the pull to par in Q2 was actually Q1 losses, given the market movements, and we expect some more of that to bleed into earnings in the second half of the year. So there's a short-term element. There's actually also, given the way the hedges work, there's also a longer-term element, which we expect to come out over a much longer period of time. So yes, in a sense, there's a positive balance, call it that way, that is to come.

There's also the impact of, you know, our swap funding book, which is helpful. It today represents, you know, it's driven by the differential between euro and dollar rates. That's remained, by and large, supportive. And how that trends from here will depend on the gap between the two rates. So different parts, I don't see it disappearing in a heartbeat, but over time would moderate, let's say, in a 2-3-year time horizon.

Stefan Stalmann (Partner)

Great. Many thanks.

Operator (participant)

The next question comes from Matthew Clark, from Mediobanca. Please go ahead.

Matthew Clark (Analyst)

Hi, it's a follow-up question on the leveraged loan potential ECB supervisory expectations deductions compared to your risk-weighted add-on, Pillar 2 add-on. So do you see the supervisory expectations on provisioning as being incremental to the existing Pillar 2 add-on that you have, or do you see it as potentially netting against what you... The effective burden you've already got on your requirements? Thank you.

James von Moltke (CFO)

Look, Matthew, it's always hard to speculate about items which are, at the end of the day, in the hands of the regulators. Again, I really would like to say that we find it positive that the ECB is taking our arguments. It is reviewing its process. I told you that we already were subject to a capital add-on. We feel with all the information we have, that we have provisioned in an absolute accurate way. And I think we have shown that over the long term, and therefore, overall, we feel comfortable. But I think it would be the wrong thing now to speculate about anything. I think direction of the ECB, I find that constructive.

We have constructive discussions, and then, let's see what happens. But the direction last year, that they reduced from 20 basis points to 15, also shows that there was, at least, some confidence in our processes.

Matthew Clark (Analyst)

Okay, thank you.

Operator (participant)

The next question comes from Jeremy Sigee from BNP Paribas Exane. Please go ahead.

Jeremy Sigee (Equity Reearch Analyst)

Thank you. Just a couple of small follow-ups, please. Firstly, on the changes in regulatory adjustments that helped capital in the quarter, could you talk a bit more about what those were and whether there's more of them to come, or any reversals, or they just are what they are? So, that would be helpful. And then my second question is, just on the Russia case, you mentioned it in the notes. Could you confirm that there's no financial impact in this quarter, and in fact, there's no provision booked because it's fully offset by the claim, and just how confident you are in that, because other banks involved seem to be taking charges relating to that case.

James von Moltke (CFO)

Thanks, Jeremy. So I’ll refer you on the first question to page 42 of the interim report. And the main driver that we’re referring to is what we call the expected loss shortfall. And that’s, but in that disclosure, you see the various regulatory capital deduction items. The ELSF has been something that’s increased significantly year-on-year, reflecting the portfolio changes that we introduced last year, and some of the, I’ll call it, seasoning of those models. And yes, it’s one of the areas that we’re now looking at how we can mitigate and manage. And so that helped us on the regulatory capital deduction items in the quarter. It is just learning, you know, which exposures drive the ELSF and how we can mitigate that.

To your question about direction of travel, actually, the next step will be up, as one more model kind of becomes live in that world. But then we, I think, would be at a sort of a steady state level, and we will work to optimize from that. On Russia, we essentially booked offsetting, you know, provision and an indemnification asset. And so we feel we're appropriately, you know, the risk is appropriately reflected on the balance sheet. And the evolution of the cases has been overall in line with our expectations. So we don't see sort of a change in the risk position there, and therefore no change in how it's reflected in the financial statements.

Our expectation is that claim will be prosecuted and in a way that enables us to enforce the indemnification claim.

Jeremy Sigee (Equity Reearch Analyst)

Great, thank you.

Operator (participant)

As a reminder, anyone who wishes to ask a question may press star followed by one. The next question comes from Andrew Coombs from Citi. Please go ahead.

Andrew Coombs (Equity Research Analyst)

Good morning. I think the vast majority of questions have been answered now, but perhaps I could just ask, on slide 29, on your interest income sensitivity. It's in light of the PMI data today. I think this is the first time you've switched this from 2024 to 2026, to 2025 to 2027 sensitivity. And you've got a big step up, particularly in the euro sensitivity coming through in 2027. I assume this is in part related to the structural hedge, but, anything you can do in terms of, providing more color on why such a big step up going through from 2026 to 2027, in your interest rate sensitivity guidance? Thank you.

James von Moltke (CFO)

Thanks, Andrew. Appreciate the question. You know, really just time. You know, actually, the first time when we prepared this slide, I was surprised because it looked like the sensitivity had expanded, and I missed that we'd moved it forward by a year. And so that gives you an indication of how successful we've been, frankly, in closing down the rate sensitivity, you know, on our balance sheet. So 27 being larger is simply a function that our hedge portfolio, you know, or less of it goes out that far in time. And what you'd expect to see us do as we roll over the hedges is bring more of that in and reduce the sensitivity, you know, further down the track.

And equivalently, the EUR 90 million in 2027 in euros, I would expect to see go down unless there's some change in our view of the, you know, of the likely future path of interest rates. So in short, I'm happy with the way that we've managed the sort of ALM challenges of the last several years. And I think, again, it's one of the things that gives us confidence and visibility into revenues in the future, the success of our hedging and the impact of the hedge rollover in over the next several years.

Andrew Coombs (Equity Research Analyst)

Okay, thank you.

Operator (participant)

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Ioana Patriniche for any closing remarks.

Ioana Patriniche (Head of Investor Relations)

Thank you. Thank you for joining us and for your questions. For any follow-ups, please come through to the investor relations team, and we look forward to speaking to you on our third quarter call.