Deutsche Bank - Earnings Call - Q3 2025 FIxed Income

Transcript

Operator (participant)

Ladies and Gentlemen, welcome to the Q3 2025 Fixed Income Conference call and live webcast. I'm Moritz, the course 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 Philipp Teuchner, Investor Relations. Please go ahead.

Philipp Teuchner (Head of Investor Relations)

Good afternoon or good morning and thank you all for joining us today. On the call, our Group Treasurer Richard Stewart will take us through some fixed income specific topics. For the subsequent Q&A session, we also have our CFO James von Moltke with us to answer your questions. The slides that accompany the topics are available for download from our website at db.com. After the presentation, we will be happy to take questions. Before we get started, I just want to remind you that the presentation may contain forward-looking statements which may not develop as we currently expect. Therefore, please take note of the precautionary warning at the end of our materials. With that, let me hand over to Richard.

Richard Stewart (Group Treasurer)

Thank you, Philipp, and welcome from me. We delivered record profitability in the first nine months of 2025. We are tracking in line with our full year 2025 goals on all dimensions. Nine month revenues at EUR 24.4 billion are fully in line with our full year goal of around EUR 32 billion before FX effects. Adjusted costs are consistent with our guidance. Post-tax return on tangible equity is 10.9%, meeting our full year target of above 10%, and our cost-income ratio at 63% is also consistent with our target of below 65%. Operating leverage drove our profit growth. Pre-provision profit was EUR 9 billion in the first nine months of 2025, up nearly 50% year on year or nearly 30% if adjusted for the impact of Postbank litigation impacts. In both periods, we saw continued revenue growth of 7% with momentum across all businesses.

Net commission and fee income was up 5% year on year, while net interest income across key banking book segments and other funding was essentially stable. 74% of revenues came from the more predictable revenue streams. The Corporate Bank, Private Bank, Asset Management, and Financing businesses in FIC cost discipline remained strong. Non-interest expenses were down 8% year on year with significantly lower non-operating costs, largely due to the non-repeat of Postbank litigation provisions. While adjusted costs were flat and our asset quality remained solid. Provisions were in line with expectations. We had no exposure to recent high-profile cases. Let me now turn to our progress on the pillars of strategy execution. On slide 3, we are on track to meet or exceed all our 2025 strategy goals. The compound annual revenue growth rate since 2021 was 6%, in the middle of our range of between 5.5% and 6.5%.

In a changing environment, we are benefiting from a well-diversified earnings mix. Operational efficiencies stood at EUR 2.4 billion either delivered or expected from measures completed. In other words, 95% of our EUR 2.5 billion goal. Capital efficiencies have already reached EUR 30 billion in RWA reductions, the high end of our target range. We continue to see scope for further efficiencies through year end. During the quarter, we launched our second share buyback program of 2025 with a value of EUR 250 million, which we completed last week. This brings cumulative distributions since 2022 to EUR 5.6 billion. Let us now turn to some remarks on our businesses on slide four. We are delivering strength and strategic execution across all four businesses in our Global House Bank. All businesses have delivered double-digit profit growth and all four have delivered double-digit RoTE in the first nine months.

The Corporate Bank continues to further scale the Global House Bank model and delivered strong fee growth of 5% in the first nine months and was recognized as the best trade finance bank. Our Investment Bank has been there for clients through challenging times this year and has seen an increase in activity across the whole client spectrum. Private Bank has made tremendous progress with its transformation so far this year with nine months profits up 71%. Our growth strategy in Wealth Management is paying off. Assets under management have grown by EUR 40 billion year to date with net inflows of EUR 25 billion. In Asset Management, the combination of fee-based expansion with operational efficiency drives sustainable returns of 25%. We are benefiting from our strength in European ETFs and are expanding our offering in that area.

Turning now to net interest income on slide five, NII across key banking book segments and other funding was EUR 3.3 billion in the quarter. Private Bank continues to deliver steady NII growth supported by the ongoing rollover of our structural hedge portfolio as well as deposit inflows. Corporate Bank NII is slightly down quarter on quarter, principally driven by lower one-offs, while it continues to be supported by underlying portfolio growth as well as hedge rollover benefits. With respect to the full year, we are on track to meet our plans on a currency-adjusted basis. Turning to slide six, which reflects market implied forward rates as of quarter end, we can see that our hedge portfolio positions us well in the third quarter. The total volume invested long term stayed around EUR 245 billion or around EUR 200 billion excluding equity hedges.

The result of our hedge approach is that a large proportion of our future NII is now locked in. In addition, the absolute NII contribution of the hedge portfolio grows steadily as new hedges are executed above the rate of maturing hedges. In the appendix, you can also see that our NII sensitivity remains contained with little change quarter over quarter. Looking at the development of the loan book on slide 7, we can see that during the third quarter loans grew by EUR 3 billion adjusted for FX effects. The underlying quality of the loan book remains strong. Around two thirds of our clients are located in Germany and Europe. Our loan portfolio in the investment bank shows sustained growth driven by FIC as well as encouraged momentum in O&A.

In the private bank, we continue to deliver on our strategic commitment to a capital efficient balance sheet through further targeted mortgage reductions. We also saw encouraging growth in wealth management in the Corporate Bank. Client demand remains muted this quarter as geopolitical uncertainties continue to persist. However, looking ahead, we expect lending in the Corporate Bank to benefit from the fiscal stimulus in Germany and to accelerate over the course of 2026. The lending outlook also remains strong in FIC. It reflects our strategic focus on growing the franchise and expanding market share. Moving now to deposits on Slide eight, our well-diversified deposit book has grown by EUR 10 billion during the third quarter. Adjusted for FX effects, our portfolio continues to be of high quality, supported by a strong domestic footprint and a substantial level of insured deposits.

Deposit growth has been most pronounced in the private bank, where we saw continued momentum and strong inflows from our retail campaigns. In Germany, the Corporate Bank portfolio has also grown during the quarter, driven by inflows in sight deposits on the back of high client engagement. For the remainder of the year, we expect further inflows from deposit campaigns in the Private Bank. We also see opportunities for growth and portfolio optimizations in the corporate bank. On Slide nine, we highlight the development of our key liquidity metrics. We managed our liquidity coverage ratio to 140% at quarter end, thereby demonstrating the inherent strength and resilience of our balance sheet. The surplus above the regulatory minimum increased by about EUR 5 billion due to slightly higher HQLA and reduced net cash outflows.

We continue to maintain a high-quality liquidity buffer and hold about 95% of HQLA in cash and Level 1 securities. The net stable funding ratio slightly decreased to 119% with a surplus above regulatory requirements of EUR 101 billion. This reflects our stable funding base, with more than two thirds of the group's funding sources coming from our global deposit franchise. Turning to capital on Slide 10, strong third quarter earnings net of a Tier 1 coupon and dividend deductions led to an increase in the CET1 ratio to 14.5%, up 26 basis points sequentially. RWA remained flat during the quarter as an increase in credit risk RWA driven by higher loans and commitments was offset by a reduction in market risk, notably in SFAR.

As we head into the fourth quarter, let me remind you of the 27 basis points CET1 benefit we still have from the adoption of the Article 468 CRR transitional rule for unrealized gains and losses, which will expire at the end of the year. Also, following revised EBA guidance from June 2025 regarding the calculation of operational risk under the new standardized approach, we must now perform the annual update of operational risk RWA already by the end of 2025, which is expected to lead to a 19 basis points drawdown in CET1 ratio terms, all else equal. Applying these two items to our third quarter CET1 ratio will result in a pro forma CET1 ratio of approximately 14%, which is also roughly where we expect current RWA to finish. Our capital ratios remain well above regulatory requirements.

As shown on slide 11, the CET1 MDA buffer now stands at 325 basis points or EUR 11 billion of CET1 capital. The 25 basis points quarter-on-quarter buffer increase reflects our higher CET1 ratio buffer. The buffer to total capital requirement decreased by 8 basis points and now stands at 362 basis points. Moving to slide 12, our third quarter leverage ratio was 4.6%, down 11 basis points principally from higher loans and commitments alongside increased settlement activities at quarter end. Tier 1 capital was essentially flat in the quarter as the derecognition of the $1.25 billion Tier 1 instrument that we called in September materially offset the quarter-on-quarter increase in CET1 capital. We continue to operate with significant loss-absorbing capacity well above all requirements. As shown on slide 13, the MREL surplus, our most binding constraint, increased by EUR 2 billion to EUR 26 billion.

Our surplus thus remains at a comfortable level, which continues to provide us with the flexibility to pause issuing new eligible liabilities instruments for at least one year. Moving now to our issuance plan on slide 14, credit markets developed constructively in the third quarter and our spreads also benefited from this trend. Our senior non-preferred bonds tightened by around 20 basis points on average in the quarter, allowing us to issue at attractive funding costs. With year-to-date issuance of EUR 15.1 billion, we have already reached the lower end of the range of our full-year guidance. We reaffirm our target range of EUR 15 billion-EUR 20 billion for the full year. Since the last fixed income call in July, we issued EUR 4.2 billion primarily in senior non-preferred format across euros and dollars. Residual funding for the year 2025 will be focused on the senior preferred instruments.

Such issuance typically takes the form of private placements or retail-targeted issuance as opposed to public benchmarks. We expect 2026 requirements to be in a similar, possibly slightly lower range as compared to 2025. As usual in the fourth quarter, we may consider pre-funding 2026 requirements depending on market conditions. To summarize on slide 15, we are on track to meet our full year 2025 targets and remain confident in our trajectory to deliver a return on tangible equity of above 10% and a cost-income ratio of below 65%. Our year-to-date performance supports our revenue and expense objectives. Our asset quality remains solid, and despite uncertainty from developments around commercial real estate as well as the macroeconomic environment, we continue to anticipate lower provisioning levels in the second half of the year. Our strong capital position and third quarter profit growth provide a solid foundation as we head into 2026.

With year-to-date issuance of EUR 15 billion, we have substantially met our issuance needs for the year. With that, let us turn to your 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 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 disable the loudspeaker mode and eventually turn off the volume from the webcast while asking a question. 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 Lee Street from Citigroup. Please go ahead.

Lee Street (VP and Distressed Debt Trading Strategist)

Hello, good afternoon. Thank you for doing the call and thank you for taking my questions. I have two questions, please. First, not trying to front run your investor day, but as we look ahead for the next few years, do you think it's reasonable to presume that a 10% return on tangible equity should be like the floor of where we should be seeing Deutsche Bank perform on an annual basis? That'd be my first question. Secondly, you helpfully gave details of your private credit exposures, which look quite light. You give a lot of detail on your commercial real estate exposures. You had that for some time. Setting those two sectors aside, what other areas are on your watch list at the moment and where you're paying attention, getting briefings on? That would be my two questions. Thank you.

James von Moltke (CFO)

Thanks, Lee. Hi, it's James. Happy to take the questions. Look, without being drawn to specific numbers, we certainly are working over the years to come to put a good amount of distance between where we are operating at any given time and sort of a low point. This through-the-cycle thinking is not lost on us. In other words, I do believe that the structural profitability of the company has risen to the point where numbers like what you throw out are entirely possible. I think the other thing specifically from a credit investors perspective, the PPNR, and we still disclose the PPNR in Christian's slides in the Equity deck. The PPNR that's associated with that profitability has become a larger and larger potential loss-absorbing kind of layer, as is the capital that's disregarded in the ratio as you go through the year on the payout level.

Without changing the ratio, you have some loss absorption as the year goes by. I do believe it paints a more and more robust picture as time goes on. On the credit side, you called out those two areas. Obviously, private credit for us was not a source of concern. It's a source of kind of watch given the potential read across, and we've done some work on that. CRE has remained a soft spot for sure, and you've seen that in our quarterly reporting. We do expect in time there to be a healing of that market, and we've seen some initial positive indicators, but I think it remains a watch item.

I'd say beyond that, earlier this year, you'll recall we'd done a fair amount of work looking at our portfolio in terms of potential sensitivity to the trade changes and policy changes, as well as specifically the automotive and manufacturing sectors in Germany. We've actually seen that hold up very well this year and are pleased with the performance. No doubt as the world moves on, time moves on, it will remain a watch area for us. I think the last thing to call out is sort of geopolitical risks. We tend to see very little exposure in our portfolios to the events that you've seen. We of course continuously stress test for either real or potential events, and that's also an ongoing area of focus for us. Hope that helps.

Lee?

Lee Street (VP and Distressed Debt Trading Strategist)

very helpful.

Thank you very much, both.

Operator (participant)

The next question comes from Dan David from Autonomous. Please go ahead.

Dan David (Credit Analyst)

Good afternoon. Thanks for taking my questions and congratulations on the results. I've got three if possible. The first maybe is just leading on from what Lee was just asking. I think as a result of one of your French peers, receivables financing is kind of the latest buzzword. Can you just talk about your exposure in that area and where we would see it in the Deutsche Bank balance sheet if you do have exposure? The second one is on Tier 2. You've maintained a Tier 2 deficit offset by the surplus in AT1 for a while now. Is that how we should think about your capital stack going forward? I guess. Is that likely to change? The third one is a bit more broad on the topic of sustainability, noting the kind of ongoing political developments in Europe. Do you feel at a competitive disadvantage compared to U.S.

peers as a result of the sustainability landscape in Europe? Would appreciate any thoughts, thanks.

James von Moltke (CFO)

Sure, Dan. Thanks, James. I'll perhaps take the first and third and ask Richard to take the capital stack question. Receivables financing, I can't tell you the sort of the size of the portfolio, but we in trade finance, we do some sort of supply chain financing. I don't think it's a large exposure, but it's certainly something that we do in trade finance, and there can be some exposures of that nature in ABS as well, in ABS format. We have some exposures, but I would not think of it as a significant exposure for us as a group. As always, I don't want to recite all of the controls that we put around our book as a whole, but obviously anything we do in receivables financing has the same type of first and second line scrutiny as we do in other secured, non-secured financing types.

On the sustainability side, I would not think of it as a competitive disadvantage. Let me make a few points. Firstly, we've made a tremendous amount of progress in our overall sustainability agenda in the firm over the years, represented or recognized, among other things, in our ESG ratings, which have improved, but also the business activity that we do with clients as they think about their transition plans, sustainable financing, transition financing. I don't want to go so far as to say it's a competitive advantage, but to a certain extent, the fact that it gets de-emphasized perhaps by some of our peers across the Atlantic gives more of that space to us and others who remain engaged on the topic. I noticed an article this week that spoke to higher financing levels.

For.

Renewable energy sources this year than carbon-based energy sources. To give you an example, the market's evolving and clearly there's also a revenue and business opportunity attached to some of this, which can be impacted by changes in the landscape. We don't think of it as a competitive disadvantage. The last point to make is just on the disclosure requirements. Of course, we do embrace simplification and standardization of disclosure requirements and taxonomies because we've been through a big build phase in the world and what the requirements are for banks. The more one can simplify that landscape without losing the benefit of some of the models, taxonomies, definitions that we've created over the years, that's a benefit to the banks.

Richard Stewart (Group Treasurer)

Hi Dan, it's Richard here and thanks for joining. Pick up the Tier 2 question. When we kind of think about our capital stack, you know, we first kind of assess our Tier 1 capital needs first. Once that is addressed, the account looks at the combination of both the Tier 1 and Tier 2 bucketing. As you kind of seen over the last couple of years, we probably overpopulated our CET1 bucket just to solve for client demand, for leverage. That is something that has been the approach we've taken over the last few quarters. We kind of expect our current thinking for that to continue. Having said that, Tier 2 instrument is still a useful instrument for us. We still think it's valuable. It's not saying we're precluding from issuing that space in the future.

Operator (participant)

The next question comes from Robert Smalley from McKay Shields. Please go ahead.

Robert Smalley (Analyst)

Hi, thanks for taking my question during the call. I have two. First, on commercial real estate, which has been nettlesome, could you talk a little bit about specifically where the issues are? I know on the REIT side we get building by building type of disclosure, but we talk about where they are, what the plan is, and how much restructuring you're looking at versus kind of nursing these things along for another couple of quarters. If we are seeing restructuring, will it manifest itself in charge-offs in the fourth quarter? My second question is on the supplement that came out yesterday on page.

12.

About 40%+ of stage one, stage two loans are off-balance sheet positions. Could you characterize what those are generally, because they don't go into stage three? Is it mostly timing issues, et cetera, that puts them into stage one? Is there possibly a better way to do this than bucketing them in stage one, stage two, and stage three? It seems to pump up the numbers, but it seems to overstate the stage one and stage two numbers, though they seem to cure pretty easily. Thank you.

James von Moltke (CFO)

Thanks, Rob. So it's James, there's a couple answers to questions on the CRE. The concentration of the CLPs that we've seen in the past couple of quarters has been in those exposures on the West Coast that we've referred to. You know, 60%, 70%, let's say, of the credit loss provisions this quarter has related to West Coast and that's particularly California and Washington State. Where that goes from here, I spoke a little bit about yesterday, but what we do is look at the portfolio on a forward basis, first of all, looking at which loans are coming up for refinancing or extension and taking a view as to which will be sort of money good loans that are eligible for refinancing or extension.

For those loans that are either sort of on the border or look to be troubled, we work intensively with the sponsors on what the strategy is for value, sort of preservation creation. I'd say that the tone of that effort has deteriorated a little bit as more of the equity has been consumed in the projects, but still remains overall positive. We look to create sort of good outcomes and sharing of the burdens. There's a small portfolio of real estate owned as well. To your question of what does that mean for the future, it's always going to be somewhat past dependent, dependent on what happens to appraisals, what happens to the individual buildings in terms of their lease footprint, in terms of sponsor decisions.

At each quarter we essentially mark the portfolio to the most recent appraisal and our expectations as to outcomes of those discussions, and we feel good about the marks, including incidentally in the most recent quarter, having taken a portfolio to the market and seen bids come back that have been, by and large, very close to where we had those positions marked. Short version of all that, it's too early to call an end to the trend. As I said yesterday, certainly we'd like to think we're much closer to the end than the beginning, even on the West Coast, although that's where the uncertainty is. Your reference to page 12, you are well in essence right. Obviously we follow what the accounting standard requires in terms of the IFRS 9 provisioning and the portfolios against which the provisions are taken.

You can see that on off balance sheet provisions, which are overwhelmingly essentially derivatives and in some cases committed facilities. The amounts that are not recognized on the balance sheet tend to have a huge bias towards obviously stages one and two. Much of that represents our trading businesses. You may recall, Rob, that in disrupted market environments we sometimes have migrations of those portfolios down. It's typically temporary, as your question refers. I don't know if there's a better way to disclose, but as you can see, the associated provisions are relatively nominal. I'm not sure how helpful at the end of the day the disclosure is. Hopefully that all helps. Rob, nice to have you with us.

Robert Smalley (Analyst)

Thanks, and good to be with you. Appreciate your answers. That's very helpful as always.

Operator (participant)

Ladies and gentlemen, as a reminder, anyone who wishes to ask a question may press star and one at this time. It looks like there are no further questions at this time. I would like to turn the conference back over to Philipp Teuchner for any closing remarks.

Philipp Teuchner (Head of Investor Relations)

Thank you, Moritz. Just to finish up, thank you all for joining us today. You know where the IR team is if you have any further questions, and we look forward to talking to you soon again. Goodbye and have a nice day.

Operator (participant)

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.