Yahoo Finance Deutsche Bank Aktiengesellschaft (NYSE:DB) Q1 2024 Earnings Call Transcript
Deutsche Bank Aktiengesellschaft (NYSE:DB) Q1 2024 Earnings Call Transcript April 25, 2024
Deutsche Bank Aktiengesellschaft isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, welcome to the Q1 2024 Analyst Conference Call and Live Webcast. I'm Morita, Chorus Call operator. [Operator Instructions]. At this time, it's my pleasure to hand over to Ioana Patriniche, Head of Investor Relations. Please go ahead.
Ioana Patriniche: Thank you for joining us for our first 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 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: Thank you, Ioana, and a warm welcome from me. I'm delighted to be discussing our first quarter results with you today. In February, we laid out a clear path to our 2025 objectives for financial performance and capital distributions, and we have delivered in line with our objectives and targets. Group revenues were €7.8 billion. This reflects business growth and franchise momentum, particularly in areas where we have been investing like our capital-light businesses, while net interest income was more resilient than expected. This performance underlines the benefit of our complementary business mix. We are delivering on our cost targets. Adjusted costs were in line with our commitment to a quarterly run rate of around €5 billion for this year.
Provision for credit losses remained elevated this quarter, but in line with our expectations and prior guidance, considering where we are in the credit cycle. Portfolio quality remains very solid, and we continue to expect provisions for the year to be at the higher end of our guidance range of 25 to 30 basis points of average loans. Our return on tangible equity was 8.7% in the first quarter, up from 8.3% in the first quarter last year. Capital remains robust. Our CET1 ratio was 13.4%, enabling us to remain on track in raising distributions through shareholders and supporting business growth. Let me unpack some of the drivers of our first quarter results on Slide 2. Pre-provision profit was up by 11% year-on-year to €2.5 billion and more than 20% higher since we launched our global house bank strategy.
This reflected continued progress on driving operating leverage, which is a core element of our strategy execution. We increased revenues in our operating divisions by 3% year-on-year, while group revenues were up 1% on a reported basis. Group revenues include Corporate and Other, which tends to add some level of volatility into our revenue line. As committed, we delivered growth in noninterest revenues and saw an increase of 11% year-on-year in commissions and fee income, mainly in divisions where we made investments last year. As expected, our reported net interest income declined this quarter, but net interest income remained stable in our banking books, and James will shortly talk you through this in more detail. We reduced adjusted costs by 6% year-on-year and 5% sequentially to around €5 billion, in line with our guidance.
This includes bank levies and higher compensation costs, which James will discuss later. Now let's look at the franchise achievements across all divisions on Slide 3. The Corporate Bank delivered strong business growth with a 5% increase in incremental deals won with multinational corporate clients compared to the prior year quarter. We closed a series of landmark project finance transactions and saw strong momentum across the structured credit market and trust and agency services. We also ranked #1 in 17 categories in the 2024 Euromoney Trade Finance survey, including being the best trade finance bank in Western Europe for the seventh consecutive year. Demonstrating the strength of our business model, the Investment Bank delivered a strong quarter with notable advances across the franchise.
Investments in talent boosted our origination and advisory market share to 2.6%, a 70 basis point increase compared to the full year 2023 with notable gains in LDCM and DCM, elevating our global ranking from 11th to 7th. Our advisory franchise benefited from the breadth of our product set in the quarter. In GTCR's acquisition of Worldpay, we provided an integrated offering from financial advice to debt financing through to FX and rate hedging. The revenue increase in FIC was driven by both financing and our well-balanced business portfolio, which supports our revenue profile through the cycle. We maintained our strength in credit trading driven by our investments in 2023, particularly in the flow business, and we also grew revenues in the Americas.
These developments further diversified revenue mix in our portfolio. The Private Bank benefited from our investments, accelerated business momentum delivered €12 billion of net inflows in the first quarter, which makes it 17 consecutive quarters of net inflows bringing the total assets under management to €606 billion with a strategic shift towards fee-generating investment solutions. We also continue to strengthen capabilities in strategic areas by increasing coverage of ultra-high net worth individuals in Germany and enhanced offering of investment solutions including third-party exclusive collaborations, which should drive further inflows. Asset Management delivered another strong quarter of volume growth. Net inflows were €9 billion ex cash, helping assets under management grew by €45 billion to €941 billion, over €100 billion higher than in the prior year quarter, which we expect to support future revenue generation.
Now let me turn to the progress against our strategic objectives on Slide 4. Starting with revenues. We have delivered a compound annual growth rate of 6% since 2021 in line with our raised target range of 5.5% to 6.5% from 2021 to 2025. As promised, we grew mainly in capital-light businesses with strong growth in origination and advisory as well as in the Private Bank and in Asset Management, supported by high inflows of assets under management, underlying our franchise momentum. We aim to build on these developments as our franchise expense following our investments in growth initiatives across all business segments. With net interest income resilient at the start of the year and growth in noninterest revenues, we feel we are well on our way to our 2025 revenue ambitions.
We continue to deliver on our €2.5 billion operational efficiency program. We have completed measures, which delivered our expected savings of €1.4 billion, nearly 60% of our target with around €1 billion in savings already realized. The incremental efficiencies this quarter were driven by optimization of our business in Germany and reshaping of our workforce and non-client-facing roads. We have further incremental measures already underway, including reengineering of our operating model via additional front-to-back improvements of product processes and harmonization of infrastructure capabilities. This gives us full confidence that we will deliver on our commitment of a quarterly run rate of adjusted cost of around €5 billion in 2024 and total cost of around €20 billion in 2025.
Finally, on capital efficiency, we achieved a further €2 billion reduction in RWAs, bringing aggregate reductions to €15 billion. As we are intensifying our work on capital efficiency with further reductions coming from data and process improvements as well as securitization, we remain highly confident that we can meet our target range of €25 billion to €30 billion. Let me conclude with a few words on our strategy on Slide 5. In a nutshell, we delivered on all key initiatives and targets in the first quarter. And as we progress on our global house bank strategy, we are on the right path for both our clients and our shareholders. First, we have a strong and growing franchise. Clients come to us as our well-balanced, complementary businesses provide them with full service products and solutions.
This supports our revenue growth through different market cycles and drive our market share. And as we said consistently, Clients want a partner that offers them an alternative to large U.S. banks, a partner with our expertise, product range and global network. Second, we continue to improve our operational efficiency. We are maintaining our cost discipline. And as always, we are committed to our approach of self-funding our investments. 2023 marked the peak of our investments, but we continue to invest to reduce the complexity of our organization through improving technology, processes and control capabilities. Finally, we are absolutely focused on creating value for our shareholders. And as we said in previous quarters, we are fully committed to increasing shareholder distributions as rewarding our shareholders is a top priority.
We are confident we can increase distributions well beyond our original goal of €8 billion in respect of the financial year 2021 to 2025, and we expect to continue to grow dividends and make incremental share buybacks. With that, let me hand over to James.
James von Moltke: 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 6% on a compound basis for the last 12 months relative to 2021, the midpoint of our recently upgraded revenue growth target range. The cost/income ratio of 68% in the first quarter shows a 7 percentage point improvement against 2023, driven by operating leverage from sustained revenue growth and cost management. Our return on tangible common equity was 8.7% for the first quarter. Our capital position remained robust with the CET1 ratio at 13.4% this quarter after absorbing the impact of the share repurchase and the deduction for future distributions in line with revised EBA rules, reflecting our payout ratio policy.
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 123%. 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 first quarter highlights on Slide 8. Group revenues were €7.8 billion, up 1% on the first quarter of 2023 or 2%, excluding specific items. Noninterest expenses were €5.3 billion, down 3% year-on-year. Nonoperating costs this quarter included litigation charges of €166 million and €95 million of restructuring and severance charges. Adjusted costs decreased 6% year-on-year, mainly due to lower bank levies. Provision for credit losses was €439 million or 37 basis points of average loans, and I will discuss this in more detail shortly.
We generated a profit before tax of €2 billion, up 10% year-on-year and a net profit of €1.5 billion, also up 10% compared to the prior year quarter. Diluted earnings per share was €0.69 in the first quarter and tangible book value per share was €29.26, up 7% year-on-year. Our tax rate in the quarter was 29%. 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. Net interest income for the group decreased by approximately €100 million compared to the previous quarter with the reduction being driven by accounting effects. As a reminder, these effects are revenue-neutral at the group level as the decrease in NII is offset by an increase in noninterest revenues. Excluding these accounting effects, banking book NII was essentially flat as the decline in the private bank was offset by an increase in the corporate bank and lower funding costs in the Investment Bank and Corporate and Other.
The reduction in the Private Bank net interest margin was largely driven by the non-recurrence of favorable episodic effects in the fourth quarter of 2023 as well as the ongoing impact of beta normalization. On an absolute basis, net interest income in the Private Bank is in line with the plans on which our NII guidance from last quarter was based. The increase in corporate bank NII was due to a positive one-off impact from a CLO recovery, which was accounted as NII with deposit betas showing a steady increase in line with our assumptions. We expect to see a corporate bank NII decline in the coming quarters as betas continue to normalize. NII in fixed financing was essentially flat quarter-on-quarter. We're starting to see margin expansion on the asset side, which if it continues, will help offset margin compression from beta normalization.
In summary, the development in the first quarter reinforces our expectation that we will meet or improve on our prior guidance of a €600 million reduction in banking book NII for 2024 relative to the prior year. With that, let's turn to adjusted cost development on Slide 10. Adjusted costs were around €5 billion for the quarter, specifically €5.02 billion, excluding bank levies, up 3% year-on-year, but down 4% sequentially, in line with our guidance. We were disciplined in most expense categories and the modest increase was primarily driven by higher compensation and benefit costs, reflecting inflationary pressures on fixed remunerations and increases in internal workforce after our targeted investments in talent throughout 2023 and higher performance-related compensation.
The increase in compensation and benefit costs was partially offset by workforce optimization. Let's now turn to provision for credit losses on Slide 11. Provision for credit losses in the first quarter was €439 million, equivalent to 37 basis points of average loans. The decline compared to the previous quarter was driven by moderate stage 1 and 2 releases of €32 million due to improved macroeconomic forecast and model recalibration effects, which occurred in the prior quarter. Stage 3 provisions at €471 million remained elevated at a similar level to the previous quarter. This included continued weakness in the commercial real estate sector, mainly impacting the Investment Bank and the continued impact of operational backlogs in the Private Bank.
Our full year guidance for provisions is unchanged at the higher end of the range of 25 to 30 basis points of average loans. This reflects our expectation that provisions will remain elevated in the first half of the year and should gradually reduce in the second half. The decline is expected to be driven by an improvement in the credit commercial real estate sector and the partial reversal of backlog-related provisions in the Private Bank. Before we move to performance in our businesses, let me turn to capital on Slide 12. Our first quarter common equity Tier 1 ratio came in at 13.4% compared to 13.7% at year-end 2023. We had a strong capital supply this quarter and the sequential decline was driven by our distribution actions and plans together with business growth.
19 basis points of the decrease reflects the ECB approval for our €675 million share buyback, which we commenced in March. Half of the first quarter net income was deducted for future capital distributions in line with our 50% payout ratio guidance, with the remainder supporting other deductions. 12 basis points of the decrease came from RWA growth. The increase in RWA is net of reductions due to RWA optimization achieved during the quarter. At the end of the first quarter, our leverage ratio was 4.5%, 8 basis points lower compared to the previous quarter. The decline was primarily driven by lower Tier 1 capital in line with the movement in CET1 capital, with leverage exposure broadly unchanged. With that, let's now turn to performance in our businesses, starting with the Corporate Bank on Slide 14.
Corporate Bank revenues in the first quarter were €1.9 billion, essentially flat sequentially and 5% lower compared to the prior year quarter, which marked the revenue peak of the current rate cycle. Year-on-year, the revenue decrease reflected the normalization of deposit revenues, lower loan net interest income and the discontinuation of remuneration of minimum reserves by the ECB predominantly impacting our corporate treasury services businesses, partly offset by 3% higher commissions and fee income. On a sequential basis, the revenue of development mainly reflected lower overnight NII. Loans declined by €5 billion compared to the prior year quarter and remained flat sequentially, reflecting muted demand and our continued selective balance sheet deployment.
Deposits were €31 billion higher year-on-year and over €10 billion higher than the fourth quarter, mainly driven by higher term deposits. Provision for credit losses was €63 million or 22 basis points of average loans, essentially flat versus the prior year, reflecting resilience of the corporate loan book. Noninterest expenses decreased sequentially driven by lower internal service cost allocations and the FDIC special assessment charge in the prior quarter, but increased year-on-year due to higher litigation costs. This resulted in a post-tax return on tangible equity of 15.4% and a cost income ratio of 64%. I'll now turn to the Investment Bank on Slide 15. Revenues for the first quarter were 13% higher year-on-year on a reported basis or 14% when excluding specific items.
Revenues in fixed income and currencies increased by 7% versus the prior year quarter demonstrating the underlying diversification of the business. Financing performance was solid with revenues up 14% year-on-year, reflecting a robust carry profile and strong levels of issuance and securitization fees. As this is the first time we are disclosing financing revenue separately, you can find further information on the composition of the business in the appendix on Slide 38. Credit trading revenues were again significantly higher year-on-year as the business continued to build on the successful execution of our strategic initiatives and investments made through 2023, specifically in the Flow business. Emerging Markets revenues were also significantly higher, with revenues up across all 3 regions.
Client activity was up year-on-year, aided by the investments in Latin America. Foreign Exchange revenues were significantly higher, benefiting from the non-repeat of the interest rate market dislocation seen in the prior year. The impact of a refocused business model with investments into controls and technology are also beginning to materialize and collaboration with the wider franchise is driving cross-sell revenues in the quarter. Rates revenues were significantly lower when compared to a very strong prior year quarter and reflected a reduction in market volatility. Moving to Origination and Advisory, revenues were up 54% when compared to the prior year quarter, with the business gaining market share in a growing fee pool environment, both year-on-year and versus the prior quarter.
Debt Origination revenues were significantly higher, benefiting from a material improvement in the leveraged debt market conditions. While investment-grade debt issuance activity was also higher year-on-year. Advisory revenues increased versus the prior year despite a reduction in the industry fee pool. The announced pipeline for the second quarter also remained strong. Noninterest expenses and adjusted costs are lower year-on-year as a result of significantly lower bank levy charges partially offset by higher compensation costs reflecting targeted investments in 2023, including the Numis acquisition. The loan balance increased versus the prior quarter was primarily driven by increased activity in debt origination linked to the recovery seen in the industry this quarter with a smaller increase in financing.
Provision for credit losses was €150 million or 59 basis points of average loans. The increase versus the prior year was driven by an increase in stage 3 impairments primarily in the CRE portfolio. Turning to the Private Bank on Slide 16. We implemented a new reporting structure this quarter, reflecting our client segmentation. For further details, please see Slide 39 in the appendix. The division reported revenues of €2.4 billion, including higher revenues from Investment Products and Lending, which were more than offset by continued higher funding costs, including the impact of minimum reserve remuneration and the group neutral impact of certain hedging costs now allocated to the business previously in treasury. Sequentially, revenues remained stable, driven by higher revenues from investment products, in line with our strategy to grow commissions and fee income and reflecting seasonality.
We saw continued strong business momentum with net inflows into assets under management of €12 billion, mainly in investment products in Wealth Management and Private Banking, particularly in Germany. Revenues in Personal Banking were impacted by the aforementioned higher funding and hedging costs for our lending books, partially offset by better deposit revenues in Germany. Wealth Management and Private Banking achieved higher revenues from lending and investment products, offset by lower deposit revenues in the international businesses. The Private Bank has continued its transformation with nearly 80 branch closures and headcount reductions of more than 800 in the last 12 months, benefiting from prior investments. Together with normalized investment spend and lower bank levies, these initiatives drove adjusted costs down by 6%.
This trajectory includes the impact of higher service remediation costs, which is expected to roll off over the remaining quarters of the year. Pretax profit increased by 24% driven by -- primarily by cost reductions. Provision for credit losses in the quarter was affected by elevated workout activity in Wealth Management as well as continued temporary effects from the operational backlog in Personal Banking. Overall, the quality of our portfolios remains intact. The previous year quarter included single name losses in Wealth Management. 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. Assets under management increased by €45 billion to €941 billion in the quarter, a record high.
The increase was attributable to positive market appreciation of €30 billion, net inflows and positive FX effects. Net inflows of €8 billion were primarily in passive, once again, continuing the positive momentum in X trackers that we've seen throughout last year. The business remains the #2 ETP provider in EMEA by net inflows with growth outpacing the market and hence gaining further market share. Constructive equity markets are influencing investors to switch into passive strategies, but despite this, we've also reported positive net inflows in active products, mainly driven by fixed income and quantitative strategies. Revenues increased by 5% versus the prior year. This was primarily from higher management fees of €592 million, resulting from higher fees in liquid products due to increasing average assets under management.
Noninterest expenses were 5% higher, while adjusted costs were 3% higher than the prior year. Compensation and benefits costs were higher, mainly driven by variable compensation due to DWS' share price increase, while non-compensation costs were effectively flat despite inflationary pressures. Profit before tax has improved by 6% from the prior year period, mainly reflecting higher revenues. The cost income ratio for the quarter was 74%, and return on tangible equity was 14.5%, both improving from the fourth quarter of last year. Moving to Corporate & Other on Slide 18. Corporate & Other reported a pretax loss of €302 million this quarter versus the equivalent pretax loss of €208 million in the first quarter of 2023. Revenues were negative €140 million this quarter, primarily driven by funding and liquidity impacts and other essentially retained items.
Valuation and timing differences were positive €2 million, driven by negative net impacts from interest rate movements offset by partial reversion of prior period losses. This compares to positive €239 million in the prior year quarter. Pretax loss associated with legacy portfolios was €96 million, driven primarily by litigation charges and expenses. At the end of the first quarter, risk-weighted assets stood at €33 billion, including €12 billion of operational risk RWA. In aggregate, RWAs have reduced by €11 billion since the prior year quarter. Leverage exposure was €36 billion at the end of the first quarter, essentially flat to the prior year quarter. Finally, let me turn to the group outlook on Slide 19. The first quarter showed that the expected benefits of our investments are materializing and will help to drive growth in noninterest revenues, while we have limited the downside to our net interest income given our interest rate hedging activity.
This demonstrates that our businesses are positioned for future growth, contributing to the delivery of our revenue target of around €30 billion in 2024. We affirm our target to maintain our quarterly run rate of around €5 billion of adjusted costs this quarter and around €20 billion for the full year. We expect provisions for the year to come in at the higher end of our guidance range of 25 to 30 basis points of average loans. With our CET1 ratio of 13.4%, we are well positioned, and we'll continue to focus on distributions with a targeted payout ratio of 50% for the financial year 2024. And finally, as Christian said, our full focus remains on our progress through the execution of our strategy and the delivery of our 2035 targets. With that, let me hand back to Ioana, and we look forward to your questions.
Ioana Patriniche: Thank you, James. And with that, operator, we're ready for questions.
Operator: [Operator Instructions]. And the first question comes from Kian Abouhossein from JPMorgan.
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