Oct 31, 2007
Executives
Wolfram Schmitt - Head ofInvestor Relations Anthony di Iorio - ChiefFinancial Officer
Analysts
David Williams - Fox-Pitt Kelton Jeremy Sigee - Citigroup Michael Rohr- MainFirst Bank Dieter Hein - Fairesearch Philipp Zieschang - UBS Jon Peace - Lehman Brothers Stuart Graham - Merrill LynchInternational Kian Abouhossein - JP Morgan Joachim Muller - Cheuvreux Carsten Werle - OppenheimResearch Stefan Stalmann - DresdnerKleinwort Georg Kanders - WestLB Anke Reingen - Execution Kinner Lakhani - ABN Amro
Operator
Good morning, ladies andgentleman. Welcome to the Deutsche Bank analyst call.
(Operator Instructions). We will now join you in theanalyst call with Dr.
Wolfram Schmitt, Head of Investor Relations. Thank you.
Wolfram Schmitt
Yes. Thank you, Dan.
This isWolfram Schmitt. Good morning.
It is a great pleasure for me to welcome all ofyou to our third quarter call. With me is Anthony di Iorio, who will performthis call and give a presentation and answer your questions.
As usual our disclosure today issupported by a variety of documents. The earnings release, a financial datasupplement, the full interim report and a set of slides, which we will referto.
All products, as you know, arecarrying the usual disclaimer regarding forward-looking statements. In theinterests of time, I will not read that out to you, but I trust that all of youwould have read it before we start.
With that, Tony, I think youstart your presentation and then we will go into the Q&A session rightafter that. Thank you.
Tony?
Anthony di Iorio
Thank you, Wolfram, and goodmorning, everyone. As we announced this morning, our earnings in the thirdquarter of 2007 were EUR1.4 billion pre-tax, EUR1.6 billion after-tax and thesenumbers are disclosed on page three of our analyst presentation.
The quarter was characterized bya loss in trading positions in Investment Banking and in fact, an overall lossin the CB&S segment reflecting the impact of market conditions. We arepleased though, that the stable businesses of Global Transaction Bank, Assetand Wealth Management and the Private and Business Clients segment performedvery well with earnings of EUR832 million for the quarter.
We also had strong contributionfrom Corporate Investments and a positive impact from tax credits and I will gothrough these in detail in just a minute. We are happy also to report that ourTier 1 ratio for the quarter was up.
It was 8.8% and that, we believe,demonstrates our commitment to strong capital management. Before I get into the details, Ijust want to reflect back on a disclosure we made on the 3rd of Octoberregarding the anticipated results for the quarter and just compare those to whereour results for the quarter are.
On the 3rd of October, weindicated that our expected pre-tax income would be EUR1.2 billion, and infact, it came in at EUR1.4 billion. Our net income, we said, would exceed EUR1.4billion, and it did at EUR1.6 billion.
Our CB&S segment, at the time weforecasted would have a loss of between EUR250 million and EUR350 million, andthe loss was EUR179 million. Our sales and trading in threeselected areas that we've highlighted, we anticipated would be in the range ofa loss of EUR1.5 billion.
In fact, the number is EUR1.560 billion. And finally,on leveraged finance, we said that we expected a write-down of up to EUR700million in the quarter, and the write-down, in fact, was EUR603 million.
As we go through this presentation,we're also going to provide additional information on the exposures that we hadat the beginning of the quarter and where we ended at the end of the quarter. On page four, you can see whathappened with our pre-tax, our ROEs, rather, 19%, which we said areanticipated, or our target was 25% over the cycle, and the 19% helped us, orcontributed to a reduction, but, still for the nine months, we are at 33%.
Ourdiluted earnings per share are at 11.13%. If you turn to page five, wepresent the same statistics on a target definition basis, and this excludessome gains in our Corporate Investment segment principally, and as you can seefrom the chart, the target definition, pre-tax ROE for the quarter was 12% ascompared to 25% for the third quarter last year.
And our EPS, on a dilutedbasis, was EUR1.76 for the quarter compared to EUR2.11 for the prior quarter. Turning to page seven, incomebefore taxes, we report a decline of 19% from the third quarter last year,although the mix of these earnings is very different because of thecircumstances in the third quarter.
So, that's the EUR1.4 billion I commentedearlier. On the full year basis, we are up on nine months 14% compared to theprior year at 7.3%.
Within these numbers, we had EUR606million of gains in our Corporate Investment segment. EUR305 million of those relateto the sale of Industrial Holdings and then recent investments, the [Washer]Bank stake, the option on that stake, rather, which is a derivativethat's managed or carried in Corporate Investments, and the final gain on thesale of our building in 60 Wall Street, New York, were EUR301 million.
In the third quarter of '06 theCorporate Investment sector contributed EUR216 million. So, while we had EUR600million this quarter, that number is up from the EUR217 million from last year.
If you turn to the next page,eight, we disclose our net income, which is up 31% to EUR1.6 billion and infact, higher than our pre-tax. And as we indicated in our earnings release,there were three principal reasons for that.
The first is the one-time impactof the change in German tax law on our provisions for deferred taxes, which hadbeen accrued at the higher rate, so that was re-measured and adjusted thisquarter, and that was a credit. The second is the utilization ofsome capital losses, which in the United Statescan only apply against capital gains.
We did have capital gains, principally onthe sale of the 60 Wall Streetbuilding. And so, we were able to reflect those this quarter, the effect of thosecapital losses, and finally, through the resolution of some outstanding taxmatters with the revenues.
So as a result, we showed that increase. On a guidance basis, the rate forthis quarter probably, would have been, not probably, would have been below30%, absent these items, and a lot of that is due to a reduction in our globalrate mix, because many of the losses that we experienced in CB&Sparticularly were in the US,which is our highest tax jurisdiction.
So, the rate would have been just under30%. Going forward for 2008, wereiterate our guidance of 33% to 35%.
So, the tax rate this quarter, evenbefore these charges, is lower than what we would anticipate it being as we goforward. As we indicated in some earlier calls, only about a quarter, 25% ofour income, is earned in Germany.So, the impact of the reduction, apart from this one-time large benefit wouldbe smaller in future quarters, going up.
If we turn to page nine, you cansee what happened to our revenues, which are down 20%. Again, we'll talk aboutthis in a little bit, but this is driven by the reduction in CIB, CB&Sprincipally.
The one thing that I would tell you in this quarter is that ourregional diversification and the growing diversification has helped, so, thepercentage of our revenues coming from Asia Pacific are up from the priorquarter. And then in Germany,we showed an increased revenue as well due to both the favorable economicconditions here as well as our expansion in PBC with the acquisitions.
The following page, page 10,shows the breakdown of our earnings, net revenues, rather, as to source. And onthe left-hand side of the chart, you can see our stable businesses, GTB, Assetand Wealth Management and PBC, which together contributed EUR3.2 billion ofrevenues.
CB&S, after those write-downs, was at just under EUR1.3 billionand the Corporate Investments is EUR654 million. The Consolidation &Adjustments column, and I'll talk about this later, is impacted by a VATrecovery, which is a credit as well as recovery of some insurance claims wemade on previously settled legal matters, and then offsetting that aremark-to-market versus accrual adjustments that we normally make to bring ourmanagement accounts inline with IFRS.
That said, if you turn to page11, you can see the change in our revenues from the third quarter last year,down 20%, with the largest change being in CB&S, and then increases in ourstable businesses, as well as in CI. Turning to non-interest expenses,they're down 22%.
On the comp side, they're down EUR1 billion from the prioryear quarter of EUR2.7 billion, and more than that for the second quarter andthat's driven by lower performance-related compensation, particularly inCB&S. And let me describe how we did not change methodology.
We have appliedconsistent methodology throughout. The way we accrue bonuses is we calculatefor each business the net income before bonus for that business on ayear-to-date basis.
And then we apply a formula which varies according tobusiness and then record in the current quarter the difference between thatresult and what had been accrued in the prior period. So, in CB&S, we ineffect the -- because the pre-tax income before bonus was down for the year, wetook back some of the bonuses that had been accrued in the first threequarters.
When we get to the ratios, thecost ratios, and I'll refer to this again, we expect the number to go back toour run-rate for the first half of the year of about 44%, both in the fourthquarter and perhaps 43% to 44% for the full year. So that's the issue there.
Wedid not change, or do not anticipate changing our distribution between cash andstock, and in fact, we applied the same assumption that we did in the firsthalf of the year to the third quarter. On the non-comp, we show EUR1.8billion, which is flat with the third quarter last year, but down from therun-rate in the first half.
And this is where those two adjustments that Ialluded to earlier are booked. The EUR1.8 billion is EUR1.845 billion.
We had arecovery of that based on a modified method of reclaim, which we have discussedwith the tax authorities, and they have agreed, and that number was EUR138million. In addition to that, we hadinsurance recoveries on claims we had previously paid on legal exposures of EUR81million.
So, the number for the quarter would have been EUR2.064 billion absentthose, and that is consistent with our run-rate. We've spoken to our businessesand our infrastructure managers about the need to focus on this for the fourthquarter, and preliminary indications, based on forecasts, our third quarterreviews, indicate that they are focused on it.
On the year-to-date, ournon-interest expenses are EUR15.9 billion, are up 8%, and I should mention thatthat is compared to a 10% increase in revenues. So, what this shows is thatwhile our comp cost base is flexible to the extent we can with performance,that our non-comp requires constant diligence and monitoring, which we're allfocused on.
At the same time, we are expanding in some of our businesses, andso that involves both comp and non-comp. But that's the explanation of thereturn.
I talked about the cost incomeratio. So, for the quarter, the overall ratio is 69%.
And the year-to-date 68%,and if you were to look at the comp ratio, the 33% is a result of what I justdescribed with regard to the performance comp. And, as I said, that number willprobably revert to the first half average in the fourth quarter assumingnormalized business conditions.
Our non-comp ratio is up from where it had been,and this demonstrates the effect of lower reported non-comp, were more thanoffset by the reduction in revenues. If we turn to page 15, you willsee the effect of our segments.
CB&S, as indicated earlier, reported a lossof EUR179 million, which was below what we had announced on the preliminaryfigures of the 3rd of October, and our stable businesses, GTB, AWM and PBC showgood increases, and we discussed both CI and the Consolidation &Adjustments. The following page is presentedjust to have you focus on the improvements in our stable business, incomebefore taxes, so that in the year 2006, they had generated EUR2.6 billion ofpre-tax.
And, so far this year, they've generated EUR2.4 billion, and we'revery pleased with that result. If we turn to CB&S, page 17,you can see the details of the EUR179 million, the loss I just alluded to, andwe'll talk about in sales and trading, and in leveraged and corporate finance,the effects here.
But I would like to focus just for a minute on thecomposition of the write-off that we announced of EUR1.560 billion. And we saidthat that was in three principal areas, most of it.
So, of the EUR1.6 billion, halfof it, or approximately EUR730 million was in our designated prop strategiesand that included both fixed income and debt. And the mix there was about 60%or EUR400 million or so in credit in the fixed income prop and about EUR300million in the designated equity prop.
The second area was the CDOcorrelation, where the loss was about 30% of the EUR1.560 billion. So, that'sabout EUR465 million.
The third was the RMBS business, which includessub-prime, but also includes prime. And, as we indicated, although,we're not exposed on an overall basis, because we've been net short thesub-prime, we did experience some basis risk effect in the third quarter, whenthe correlation between our short positions and what happened on the longpositions, and we'll get into that in a minute, didn't react as they normallywould.
In addition to that, we hadlosses of about 5% of the total or about EUR100 million in other strategiesdealing with principally with fixed income. So, that's the composition of the EUR1.560billion.
I can tell you that throughout the period, we applied accounting andvaluation principles consistent with what we have in previous periods, and wewill continue to do that. One additional comment, weincluded in this number, and it's in our sales and trading debt number, is EUR22million of mark-to-market gain on our own debt.
We applied the fair value optionon a very selective basis, and that's why that number is substantially smallerthan what you perhaps have seen from other disclosures. Turning to sales and trading debt,the result here was a reduction of 71% in revenues, from EUR1.980 billion to EUR576million.
This indicated that the credit piece here, which includes both theprop as well as our CDO book, was down for the period, and the write-downs forthe period were based on exposures, and let me just cites some numbers to you. On the CDO book, at the beginningof the quarter, we had notional exposure, excluding RMBS, but includingsub-prime.
We have a separate book for RMBS, which consists of, principally,prime mortgages and securities. The exposure was just under EUR10 billion atthe beginning of the quarter.
Of that, we were net short just over EUR1billion. At the end of the period, we hadmanaged that exposure down, and at September 30, the CDO correlation exposurein global credit trading was less than EUR1 billion, with the sub-prime exposureremaining at just over EUR1 billion net short within that number.
What we saw during the period isalthough we brought our net exposure down, because we were net short, at theend of August, when the United States Government announced support for the sub-primeposition, the cash position values remained relatively unchanged. However, wehad significant losses on our net short position, which is principally, it isthe ABX.
Because of this dislocation, andbecause of the anticipated dislocations between the cash and derivativemarkets, we had tract a policy throughout the month of August of bringing thoseexposures down, looking to cut our net exposures. We continue to manage the netlongs down, and to reduce the basis risk, and although on a hedged basis, weremain net short, the sub-prime, there still is basis risk because there's noassurance that the trenches are going to move in a correlated way, which iswhat we saw at the end of August.
So, that's what contributed to those effects. In our mortgage back book, wealso had losses, and some of this came from sub-prime, although, as I've said,in our total exposure as of the end of the quarter, we had a very smallsub-prime long, and it was down in less than single digits.
And we havethroughout the quarter been looking to bring down the prime exposure as well.We did bring it down, and we about halved it, and we're still managing that atthe current time. The negatives in credit and themortgage backed trading were offset by substantial performance in our FX andmoney markets business, where we saw customer trading revenues up, and I thinkthe depth of our client relationships and the scope of our operation in theseareas stood us very well there.
We also saw improvements in our rates business,as we experienced, as we were the beneficiary of a flight to quality in thatbusiness. With regard to sales and trading equities,we showed a reduction in net revenues from EUR690 million to EUR428 million,and a substantial portion of that was due to the losses that I referred toearlier in our designated proprietary book.
In the third quarter last year, wewere almost flat in designated prop, and this quarter, we had a loss. And asindicated in the chart, the losses were due to dislocations.
Again, our strategies were longshort as well as net long equity in certain other strategies. We lightened upon our short positions, in the anticipation that the equity markets woulddecline.
The equity markets improved, and so, we suffered some losses on ourhedges in the proprietary book, but the derivative shorts we have in our EquityDerivatives business, which contribute to a reduction in the revenues in thatbusiness from the third quarter last year as well as from the second quarter. Nevertheless, the Equity Derivativesbusiness was helped with strong performance in our retail structure.
So, theinherent business activities in many of our strategies were positive, andcontributed in both equities and debt during the quarter. But, the volatilityand the dislocations, particularly in expected and normalized correlations, ledto losses both in our debt as well as in our equity trading.
Cash equities showed strongperformance in non-Japan Asia and we're pleased toreport that our Prime Services business showed a good improvement, and this isdue to significant new mandates and to new segments that we've broken into. If we turn next to originationand advisory, and I'd like to make some comments on our leveraged financeexposures before getting into the P&L.
If you look at the table on page 20,we show the development of those commitments, and the analysis of the nature ofthose commitments in the second quarter. On September 5, in a speech thatJoe gave at a Handelsblatt conference, we disclosed the number at that time ofloans to sponsors of EUR29 billion and you can see that in the October 31numbers.
Now, let me put that intocontext. At the time that we disclosed that, there were discussions in themarket, and other disclosures, about the size of the leveraged financepipeline, and the numbers we saw, discussed loans to sponsors.
So, to put out anumber, that was consistent with what had been talked about in the market, westated at that time the EUR29 billion. However, as you can see from thechart, we also had other commitments, other loan commitments, and we had bondcommitments to both sponsors and others, and that was a pipeline of EUR43.7billion, with equity bridges of EUR750 million.
At September 30, we were at EUR41.4billion of total commitments, and you can see the breakdown there. There weresome reclassifications based on negotiations among the categories.
So, that'swhy some of them decreased and some of them increased, and there's also an FXimpact in sales. So, the reduction from EUR43.7 billion to EUR41.4 billionincludes a series of things, as I said, including FX and sales.
Most of the commitments, though,were still on the books in one form or another, and as you can see to theright, the breakdown between our classification of that EUR41.4 billion betweentrading and loans held. And, as you can see, less than3%, I should say, of our total commitments are in loans held, which means thatmore than 97% will be treated as trading assets and mark-to-market, and I thinkit's important just to understand how we came up with this breakdown.
At the time a commitment is made,there is an intent provided by the business as to how much of that they expectto sell, and how much of it they expect to hold. The numbers that you see, the EUR1.3billion, is the amount that the business indicated they wanted to hold, at thetime they proposed the commitment.
What's important about that isthat we did not move intent during the period from trading to loans held toavoid a markdown, because it was only the loans in trading that are subject tomarkdown. However, the loans held are subject to a general valuation calculate,or deduction per charge in our loan provision.
So, the important point there isthat we did not change our intent. We did not move assets into categories thatwould not be mark-to-market, but we marked as we had originally intended.
In terms of the EUR41 billion, EUR14billion is funded, and EUR27 billion is un-funded, and if you look at the tableon the bottom right of the page, you will see the expected funding period ofthe EUR27.5 billion by quarter. If you look to the left of the page, let mecomment on one other thing.
Our equity bridges at the time that we announced on5th of September were EUR750 million and the latest number, although this changesday-to-day, because we're selling it, is now down to below EUR350 million. Andthere's been no material change in the commitments.
So, that's the exposure. During the quarter, we tookwrite-downs of EUR603 million, against these commitments, and that brings ouryear-to-date write-downs, net of fees, at EUR715 million.
We've indicated thatin the second quarter, our write-downs were not insignificant. They were EUR112million, and so the gross write-downs, including fees that we will not earn,were 3.6% of our trading commitments.
So that number relates to, if yougo to the right, the EUR40.1 billion of the commitment that's in trading,because the loans held are not subject to write-down. They're accounted for atcost, at amortized cost, net of credit impairment.
With that said, let's turn to page21, where you can see the origination and advisory effects. The numbers aredown totally from total revenues from the third quarter last year by 77%, sofrom EUR642 million to EUR148 million.
The bulk of that is in our highyields, where we reported a net charge of EUR603 million. And as you can see,the origination on the left hand side was only down EUR120 million, and that isdue to a couple of factors.
First of all, on our debtorigination, we had some positive revenues that offset the EUR603 million, sothat we were just under EUR300 million on investment grade and other debtrevenues, excluding the write-downs. In addition to that, we had a very strongequity origination quarter, and you can see those numbers in the financial datasupplement we put out, and likewise, record advisory revenues at EUR269million.
So, the story here is we had thewrite-downs on the high yield. By the way, in calculating those write-downs, wehad an extensive process, including an independent pricing review program byfinance, in consultation with valuation specialists from KPMG as to methodologyand benchmarks.
We looked at indexes. We lookedat sales that were being made in the market by us as well as others, and wepretty much confirmed, based on that, the marks originally proposed by thebusiness and by credit risk management.
On the advisory and equityorigination, you can see on the right-hand side that we gained on equityorigination in market share and dominance, the number one position, in EMEA. Onadvisory, our market share is up in the US.So, our pipeline remains robust, and we gained a number one position ininternational bonds in the investment grade sector.
If we turn now to our stablebusinesses, the first of which is GTB, and as you can see from page 22, we hada significant increase in income before taxes, 55% from EUR170 million to EUR263million. This was a record third quarter revenue and profit for GTB, withstrong performance in growth in our domestic custody business, as well asgrowth in our cash management businesses, where we believe we're benefitingfrom a flight to safety.
The business has performed verystrongly in the nine months and as you can see from the table, pre-tax profitsare EUR724 million. If you were to go back several years and look at thecontribution from this business, you can see dramatic growth and that indicatesthe efforts that [Bernstein Muller] and Michael Cohrs and others have put intoboth strengthening the bottom line, but at the same time remaining focused oncost discipline.
Asset and Wealth Management hasshown a substantial profit growth, with strong money inflows. So, our pre-taxis up 45% from EUR182 million to EUR265 million.
The result looks like adecline from the second quarter. However, I remind you that the second quarterhad in it the gain on the sale of some of our businesses in asset management,and so absent those, we would have shown an increase in the pre-tax.
For the year-to-date, EUR744million and so there have been some very positive developments there. Theresults for the quarter have been helped by strong performance fees in assetmanagement, in our retail asset management businesses here in Europe,particularly, and in RREEF.
Although, I would add that on ayear-to-date basis, our performance fees in this business, and we've commentedon these previously as being lumpy, are down by more than EUR100 millioncompared to where they were on a year-to-date basis last year. PWM is enjoying the results fromits investments last year.
2006 was a very difficult year for them. PierreDe-Weck, who runs that business, added substantial numbers of personnel,principally client-facing or client supporting and we're beginning to see thebenefits here with both growth in invested assets, as well as growth intransaction revenues.
Net new money for the quarter inthis segment was EUR13 billion and for the year-to-date it is EUR32 billion, sovery strong results in asset and wealth management. Private and business clients reportedthe best quarterly pre-tax results ever.
Up 15% from the prior year, from EUR264million to EUR304 million and this is due to strong revenues from our loan anddeposit business, as well as an increase in our advisory businesses, sobrokerage transactions. Net new money in the segment was$4 billion for the quarter, and we've gotten 250,000 new customers.
We starteda marketing campaign, in effect a reintroduction of norisbank in the market andthose costs are reflected here. There will continue to be marketing andpromotion costs in the fourth quarter.
We're beginning to see investments inour Polish businesses and PBC increasing, and we're continuing to invest in Asia. Now let's turn to capital andrisk management.
Page 26, you can see what's happening to our impaired loans,which are down from EUR2.5 billion to EUR2.4 billion from June to September.Our coverage ratio on reserves is down slightly, but we don't think that's anindication yet of a trend. It's early, and if you can see the 64%, it's higherthan any other quarter, but the second.
So, it is an issue that we'remonitoring. The credit environment here in Germanyhas been positive, and if you turn to the next page you can see the effects onour credit provisions, which at EUR105 million are up from both the thirdquarter last year and second quarter this year, but a lot of that is due to areduction in the releases in CIB.
You can see them going from EUR42 million inthe second quarter this year to EUR19 million, and from EUR27 million lastyear. And on PBC, that number isincreased, but included in this quarter is an adjustment in Berliner Bankleading to the full conversion from an HGB basis, German GAAP basis, ofcalculating the loan loss provisions, to an IFRS, and from the time weintegrated Berliner Bank in terms of going through the records and establishingthe basis, it took us several months to do, and so, there was an increaseincluded in EUR124 million.
Absent that, we would have beendown, and just slightly above the third quarter last year. And I remind youthat the third quarter last year did not include either norisbank or BerlinerBank.
If we turn to the next page, ourcapital management, because of efforts to control and hedge risk on a robustbasis, risk weighted assets were up just EUR3 billion from the second quarter.Our equity was up because of earnings and a hybrid issuance we did in thebeginning of July. And as a result, our Tier 1 ratio, we're happy to report, isup to 8.8%, and that is very important for us because it not only indicates theresult of a tight capital management, but it's also important for counterparts,rating agencies and others, to see how focused we are on this number.
One issue I'd like to comment on,before going on to the other pages, is our liquidity. At the end of the secondquarter call, I was asked a question about, did we experience any fundingproblems, and my answer was that I did not know of any.
Maybe I should havebeen more explicit or articulate, because some observers misunderstood that fora fallback from our stated goal of transparency. We did not have any fundingproblems.
Funding is managed by Hugo Banziger as part of risk, so he's theBoard member responsible for it. And his efforts, and those of Chris Whitman,our Group Treasurer, were very successful during the quarter.
And as a result,we consistently enjoyed excellent access to liquidity throughout the quarter. Our efforts during the quarterwere to lengthen out and latter out maturities, to reduce dependence on overnightfunding.
And so, we did do some term funding, and locked in funding, which wethought was prudent to do, and, in fact, in some cases, Chris, working with ourGlobal Markets colleagues, were able to tap into certain segments of the termmarket that had been dormant, in effect reopening those. So, we're very satisfied with theway liquidity has been managed.
We continue to have easy access or not easyaccess, but access, excellent access. And I should comment on one other thing.As a bank with a large and stable deposit base, our funding risk is also helpedin terms of that characteristic.
Turning to page 29, let's talk alittle bit about the future, and we don't make forward-looking statements. Butwhat we'd like to do, as Joe Ackermann said in a recent speech, we reaffirm ourcommitment to our stated strategy.
He indicated in the shareholderletter that accompanied the interim report today that we stay the course,although as he indicated, we may make some adjustments in individual businesslines, to refocus resources toward areas with the greatest growth potential. So the phase 3 agenda remainsintact, and if you turn to the last page of the prepared presentation, page 30,we'd also like to reiterate what Joe said on the 3rd of October, that we reaffirmour commitment to our previously stated financial targets, which include,assuming market conditions are normal for our profit targets for 2008.
Our stable businesses have allconfirmed commitments to their targets, although we believe it will be achallenge for PWM, as they do. But they're still committed and working towardsit.
And, as you see from the results, the stable businesses are making goodprogress toward those goals. Performance in CB&S goingforward will be linked to market conditions, and it's therefore very difficultto predict.
Nevertheless, and we have spoken to leaders in this business overthe last week, they remain positive that market conditions are beginning toshow signs of normalizing, although that is not a prediction. But they'reheartened, and remain focused on these goals.
Some of you might be interestedon, how the fourth quarter has started? And again, we mentioned in theshareholder letter that October has started out very positively, and what I'dalso like to add is that some of the businesses that had the biggest challengesin the third quarter are credit trading businesses, and our designated propbusinesses have contributed, as well as others, to this positive start.
However, as I said on the secondquarter call, it is early in the quarter, and so, we would like to caution younot to extrapolate any positive sentiment we have now, although, we arepositive overall to forecast or as a forecast of fourth quarter results. With that, I will end my preparedremarks and open it up for questions.
Thank you.
Wolfram Schmitt
Thanks, Tony. Ben?
Operator
(Operator Instructions). Thefirst question is from Mr.
David Williams of Fox-Pitt Kelton. Please go ahead,Mr.
Williams.
David Williams - Fox-Pitt Kelton
Hello. Good morning.
It's DavidWilliams here from Fox-Pitt Kelton. Obviously, with regard to your commentsjust at the end about extrapolating into the rest of the quarter, UBS,obviously, yesterday was saying October got off to a good start, but they doexpect further write-downs in the business in the investment bank.
I just want to ask, is thereanything out there at the moment that makes you think you may have to takefurther write-downs on any of your sort of positions really in any of thecredit markets or otherwise? That would be the first question.
And the second question would be,have you got a changed view on prop trading? Obviously, in the quarter it wasdifficult, probably, I guess on the comp driven models and positions and thatcaused some of the losses.
Are you scaling back those positions and windingdown some of your prop activities? Or, do you just see the quarter as anaberration, and would expect ongoing to have some contribution from those propmodels as they were previously delivered?
Anthony di Iorio
David, as far as fourth quarterwrite-downs, we monitor positions on a daily basis. We look at the markets.
Wehave marked both our trading positions and the leverage finance positions asrealistically as we could at the end of September. We believe that those are goodmarks.
Experience since has shown us that they probably are. But I don't know-- there's nothing we anticipate, because, if we had anticipated it, weprobably should have reported them at the end of September.
So, our marks are based oncurrent market conditions, which could change. As I indicated, although, we'renet short, for example, on the sub-prime, there is basis risk.
And what we sawat the end of August with the announcement, we could see other aberrations inthat regard. So at this point, if we knew ofanything, we probably would have recorded it.
So, but that doesn't mean thatthere won't be based on market or changes in market conditions. As far as prop trading, we lookat our strategies on a regular basis.
I don't think, I think that there aresome strategies, one that we've already shut down on designated prop. We'relooking at our positioning.
Our guys look at the markets andtrends, and the best information that they have, and I think from time-to-time,those strategies change. But a lot of that, apart from the change I mentionedjust a minute ago, is based on market conditions.
I would add that on ayear-to-date basis, we are showing positive results in both equity prop, whichis down from the prior year nine months, but still positive this year, despitethese write-downs, and designated equity prop. And in designated fixed income,we are also showing a year-to-date profit.
David Williams - Fox-Pitt Kelton
That's great. Thank you.
Wolfram Schmitt
Thanks, David. Next please.
Operator
The next question is from Mr.Jeremy Sigee of Citigroup. Please go ahead, sir.
Jeremy Sigee - Citigroup
Good morning. Thank you verymuch.
Could I continue, a little bit, the discussion, since you've given it,about how 4Q has started? Because it seems that a number of areas, particularlyin the credit business, are still not functioning normally at the moment.
Marketsare still pretty much closed. So, I just wondered, if you could talk about that?And: which areas you're most concerned about looking ahead into early next yearas well?
Anthony di Iorio
In the credit markets, as Iindicated, some of the positive results so far have come from those areas thathad big challenges in the third quarter. And that would include credit trading.We've taken down our risk significantly.
We are looking at opportunities allthe time. And, so far, I don't know that I would read the market in any way,but the only thing I can report is that the results have been positive.
Jeremy Sigee - Citigroup
Okay. And, can I ask a secondquestion on a different subject?
Just looking at your share buybacks, they'veobviously been scaled back. The buybacks that are taking place, are theseintended for share-based compensation schemes or cancellation?
Or, a mixture ofthe two?
Anthony di Iorio
It's probably a little bit ofboth, but the principle at this time during the year except to fund commitmentsto new hires, the share buybacks would principally be as part of our sharebuyback program. Our biggest share buybacks would obviously come inanticipation of hedging the grant, which will be made next February.
So, it's amixture of both, although I would probably lean towards a larger componentbeing the share buyback program.
Jeremy Sigee - Citigroup
Okay. Thank you very much.
Operator
The next question is from Mr.Michael Rohr of MainFirst Bank. Please go ahead sir.
Michael Rohr- MainFirst Bank
Yes. Hi.
Good morning. It'sMichael Rohr from MainFirst.
Just, two questions remaining. First of all on theremaining exposure, you've given us the details on LBO and CDO exposure.
However,maybe I've missed that can you clarify the exposure on the residential mortgagebacked securities a bit more? And: how this evolved during the quarter?
And,especially: what write-off rate you took there? And secondly a question on thestaff costs especially on the personnel expenses.
We've seen that they fell offpretty quickly and I just wonder, given the sharp fall-off: whether there'sanything special in there apart from your formula that you usually use? Thankyou.
Anthony di Iorio
Michael, on the residentialmortgage exposures, what's left on our books on the long side is almost allprime. As I indicated, the sub prime is a very small component.
It's indecimals. And, as far as the prime, we've taken it down about to half of whereit was at the beginning of the quarter and it's in the high single digitscurrently.
Although we're moving this position, we're buying, selling, and Idon't want to get into too much, this is a very actively, as all of ourpositions are, managed book. So, I'd prefer not to go beyond that, becausethere are competitive issues here.
Michael Rohr- MainFirst Bank
Sure.
Anthony di Iorio
As far as staff costs areconcerned, as I said the third quarter was driven -- if you look at the accrualrates, there are higher accrual rates in certain businesses than others. So,where our accruals came down because of the year-to-date adjustments, thosewere the higher effects, higher percentages.
That said, we anticipate thefourth quarter to be back to our normalized, but let me add a couple of things. First, there is no bonus per seon the corporate investments P&L.
So, because of the size of that in thecurrent quarter you can't just look at ratios and that's why you have to lookat absolute monetary trends. In addition to that, we didbenefit on the bonus accrual for one with the weakening of the dollar.
The neteffect was less than 100 million as I remember, but, nevertheless, that had aneffect. So, depending on what happens to currencies, depending on what happensto performance, we're going to see whatever the fourth quarter bonuses are.
We're not storing up bonuses torecord them. We've applied the formulas consistently throughout the year.
Andthat's the effect.
Michael Rohr- MainFirst Bank
Alright. Thanks very much.
Anthony di Iorio
You're welcome Michael. Thanks.
Operator
The next question is from Mr.Dieter Hein of Fairesearch GMBH. Please go ahead sir.
Dieter Hein - Fairesearch
Yes. Good morning.
I would liketo ask two or three questions. First, I'm very interested on your personalopinion, Tony, regarding: how reliable are the evaluation adjustments on theglobal investment banks in the third quarter?
Is it possible to compare, forexample, the charges Goldman Sachs made with the charges of Merrill Lynch, orwith Deutsche Bank, in your point of view? And: do you think we've got from thebig auditor companies, together with the accountants from the big banking companies,together with the watchdogs like SEC, general standards to evaluate all theseitems?
And, the question regarding yourevaluation adjustment of EUR2.2 billion: Where did you use a mark-to-marketevaluation and where mark-to-model evaluation? Maybe you could break up in thisyour EUR2.2 billion?
Thanks.
Anthony di Iorio
Okay. I don't know that I'dventure a personal opinion, but the fact that I'm the CFO and we're putting outthe numbers.
Dieter, we would not have published these numbers if we were notcomfortable with the valuations. Now that said, in certain partsof our balance sheet there is judgment, because you can't go out and findmarks.
However, in applying that judgment we have done it consistently with theway we've done it in the past. There has been independent review away from thebusinesses by finance and market risk management.
We discussed this in our secondquarter call as to our practices and policies. We continued that fully.
So, webelieve that our evaluations are correct based on market conditions at the endof September. With regard to the auditors,we've had extensive discussions with a number of accounting firms to help usinterpret, principally with KPMG, but we have engaged in discussions withothers as to how to apply valuation methods.
The accountants published areport, a white paper in the third quarter. Three of them in fact, one of themon valuations, second on accounting for leverage finance commitments and athird on accounting for asset-backed commercial paper conduits.
In all three wecompared what was said in those papers to what we were doing. And we found thatwe were totally consistent.
So, concerning the methodologiesthat we've used, which is not the only question you've asked, they areconsistent with the best thinking and the guidance provided by the accountants.With regard to where we've used judgment for mark-to-model versusmark-to-market, we would wish that there would be more observable marks in themarket. That said, if you're at theleading edge in terms -- with other firms, in terms of product development andactivities, it is sometimes difficult to find observable marks.
We arepreparing to disclose our level one, level two, level three data at the end ofthe year and I indicated this at the other quarter. And, although we're notready at this point to disclose actual numbers, I can tell you, based on theanalysis that we have done in preparation for the disclosure at the end of theyear, our level three assets and liabilities are directionally proportionate inthe absolute with where the other U.S.firms have disclosed.
And the ones we've seen so far are the August quarterends, because we've seen that data in their 10Qs. So, on an absolute level: When we start publishing thisnumber we're going to look a lot better as a percentage of assets at fairvalue.
And the reason for that is that IFRS requires a gross-up of certaintrading assets, derivatives and others, liabilities that would be netted underU.S. GAAP.
So, the base against which the percentageswill be calculated are a much higher base, therefore the percentage is a lotsmaller. And I've mentioned and that's why I think we've got to focus and weshould all focus on the absolute number.
But it is, directionally, the same inabsolute terms. But we'll deal with that at the end of the year.
Wolfram Schmitt
Okay, Dieter?
Dieter Hein - Fairesearch
Yes.
Wolfram Schmitt
Can I make a quick announcement?I'm hearing from the moderator about the long queue of attendees who would liketo raise a question. May I suggest, ask, if everybody limits to one question aswe want to serve everybody.
Thank you. Let's go on.
Operator
The next question is from Mr.Philipp Zieschang of UBS. Please go ahead sir.
Philipp Zieschang - UBS
Morning. You've mentioned thatactually you were about to reallocate some resources within the investmentbank.
Could you just comment in terms of what areas you perceive to show thehighest structured growth rates going forward? Because, obviously, structuredcredit, where you probably had a profit contribution of 25% to the group,somewhat, in terms of growth engine somewhat questioned.
So, about your futuregrowth pockets within the (inaudible) great if you could just comment on that.Thanks.
Anthony di Iorio
Thank you, Philipp. We're stilllooking at things and I think it's premature, and certainly I shouldn't makethat announcement here.
But we are studying where we are allocating capital,the returns we're making on the capital, what the markets are telling us andwhere opportunities are. We're a global firm.
We're interested in expanding ourglobal platform and we're interested in renewing our product array and thoseare the principles underlying this review. And it's something we do all thetime.
If we weren't doing it now, after the third quarter, we would obviouslybe remiss. But, I think, it's premature Philipp, but you'll see in futurequarters where those changes are.
Philipp Zieschang - UBS
Thanks.
Anthony di Iorio
You're welcome.
Operator
The next question is from Mr. JonPeace of Lehman Brothers.
Please go ahead sir.
Jon Peace - Lehman Brothers
Good morning. I had a question oncapital management.
We heard from UBS yesterday that Basel II was going to costthem, maybe, around 50 basis points. So, I just wondered: what your currentthinking was with respect to Basel II?
And, in that context, you've obviouslygiven us a plan to raise your dividend payout. With Basel II on the horizon,and after a tough year: do we still expect the payout to rise from the currentmid-30s in 2007?
Or: is it going to take a little bit longer to reach the goalof a 50% payout? Thanks.
Anthony di Iorio
Jon, as far as Basel II, we'restill working through this and we're still working with the regulators in termsof model approval. So, we're not ready, although I think we have given numbersin the past.
We expect, based on our current risk profile and expectation, thatwe will apply the advanced approach, which we're hopeful of and we're workingtowards that, and there's nothing to indicate that we won't. We see our Tier 1ratio being somewhere over nine, maybe as far as the mid-nines.
So, if you usenine point plus, I think, you'd probably have a good sense. But again, I don'twant to state a number that we're not comfortable on the footing.
As far as the dividend isconcerned, we have already accrued, or set aside as part of our Tier 1 capital,it's not an accounting accrual, but it's a calculation accrual, a dividend ofapproximately EUR4.12. So our Tier 1 ratio is based on a capital that at 37% ofour net income assumes or as a charge in there for a dividend equivalent ofEUR4.12.
That compares to EUR4.00 for last year. The ultimate decision ondividends is a recommendation by the Supervisory Board to the Annual GeneralMeeting, so I would not assume or presume to state what it's going to be.
Wehave our goal to 50%. We will work towards that goal, but, obviously, we wouldalso have to reflect our capital management, our opportunities for growth aswell and what our earnings potential is.
But we're very encouraged by where weare, the dividend has come up significantly. But that's where we are.
Jon Peace - Lehman Brothers
Great! Thanks.
Anthony di Iorio
You're welcome Jon.
Operator
The next question is from Mr.Stuart Graham of Merrill Lynch International. Please go ahead sir.
Stuart Graham - Merrill Lynch International
Hi. Firstly, thanks for the extradisclosure, that's very useful.
I just wanted to ask on the CDO exposure, whichyou said you managed down from 10 billion to 1 billion. Could you give me somecolor on: how you achieved that?
Which is obviously a very good performanceover Q3, please.
Anthony di Iorio
Stuart, a lot of that came --none of it was moved and you haven't implied that, but none of it was moved outof trading into other categories of the balance sheet. So, in case anyone hasany thoughts of that, it came from sales and closing down derivative positions.And so it was just taking down our risk.
Stuart Graham - Merrill Lynch International
So: these were genuine sales? Itwasn't that you were hedging positions?
You actually managed to sell thesepositions down?
Anthony di Iorio
That's correct, yeah. We tookdown some strategies more than others considerably, but that's correct.
Stuart Graham - Merrill Lynch International
In that context the 465 millionhit you talked on correlation trading seems quite low. 465 on shifting 9billion is only like a 5% haircut and I wouldn't have thought that people wouldhave been buying these assets at only a 5% haircut in Q3.
Or: am I missingsomething?
Anthony di Iorio
Some of the confidence we have inour marks is based on the fact that we did see realization on sales or closingdown derivative positions. So, we were able to use that experience to look atour verification.
I don't want to start talking about individual trades andcertainly I don't have in front of me all the positions, so whether there hasbeen some additional hedging, but what I do know, in some of the positions, isthat we genuinely took down through sales.
Stuart Graham - Merrill Lynch International
Okay. Can I just squeeze onequestion on generally in structured finance?
Your exposure to US monolines, ifyou could just comment on: how bigger it is? Is that a significant issue for yououtside of CDO space, more generally in structured finance business?
Anthony di Iorio
I don't think we want to talkabout the individual or specific exposures. We monitor them carefully.
I thinkin the aggregate they're not, relative to the size of our loan book or evenour, so some of these our derivative positions to our trading assets are notsignificant, but we are monitoring what's happening in that sector verycarefully. If things do change we certainlywill react in terms of both protecting our risk, as well as what we record inthe books.
But, the total exposure is not significant or material relative toour overall exposure.
Stuart Graham - Merrill Lynch International
Okay great! Thanks for thedisclosure.
Thank you.
Wolfram Schmitt
Thanks Stuart. Next please?
Operator
The next question is from Mr.Kian Abouhossein of JP Morgan. Please go ahead sir.
Kian Abouhossein - JP Morgan
Yes, hi. I have a questionregarding your balance sheet.
It's the first time that we're seeing over eightquarters you're actually reducing your total assets. And I was wondering: ifthis is a trend that will continue within the group considering your fundingcosts on inter-bank and term that has gone up significantly?
And in addition, I'm just tryingto understand: if you are thinking about reducing your financial assets at fairvalue which are materially higher even on a US GAAP adjusted basis to yourpeers? Do you see any change in your overall balance sheet asset size over thenext year or so?
Anthony di Iorio
Kian, I would not say that wedon't reflect on the absolute size of the balance sheet, but our principalfocus is on risk. And so, risk-weighted assets are how we manage the balancesheet size.
Certainly, we do look at absolute balance sheet. I would not readanything; we've taken down some risk, as we talked about in this call.
But, Iwould not see any strategic move or strategic implication from whether or notthe trend is up or down. As far as financial assets atfair value: Fair value has a discipline and requires a discipline.
Now, that'snot the question you asked. So, we're not troubled at all that a good part ofour balance sheet is in fair value, because each morning we wake up and we findout what happened the day before and we're able to test those marks on aregular basis and so, understanding: where we are?
And: what risks we have? Isvery important.
If your question is: is our riskappetite reduced? And: are we going to take down our risk positions?
I think wesee opportunities in the markets and, as we see opportunities and we think awell-capitalized bank that has good funding sources and stable sources offunding is in a very strong position to take advantage of opportunities as theycome up. So, we certainly will look at risk prudently.
I'm just looking at the balancesheet size and I draw your attention to one category that maybe is driving oris creating some volatility in the effect and that's other assets and otherliabilities. And in fact our balance sheet is going up instead of down.
But:maybe you were talking about financial assets? I don't know which, because thebalance sheet is going up.
It's down from the second quarter, but if you lookat where that…
Kian Abouhossein - JP Morgan
Yeah, sorry, from the secondquarter, that's what I mean. So, it's been growing fourth...
Anthony di Iorio
If you look, other assets,financial assets are down marginally.
Kian Abouhossein - JP Morgan
Yeah.
Anthony di Iorio
Other assets are down from EUR252billion to EUR215 billion. The biggest item in there is trade-based settlementdate receivables.
And that's going to move the same thing by the way on otherliabilities. It's trade-based settlement date liability.
So, depending on tradingactivity, depending on where settlements are and periods, settlement periods,that number is going to move up and down. I hope that answers your question.
Kian Abouhossein - JP Morgan
And: if I may follow-up on that?Is there any drive by local regulators to look more at leverage ratios ratherthan just Tier 1? Do you get any demand from local regulator to look at thatratio a bit more?
Anthony di Iorio
We have not heard of one, wedon't know of any, Kian. They might be thinking about it.
But it's the riskinherent because if someone had a very large book of gilts and bunds and USgovernments and someone else had a smaller balance sheet and higher gearingratio, better gearing ratio, I'm sorry, higher gearing ratio or capital ratio.I don't know what that would tell you. I think you've got to look at the riskand, as far as we know, that's what the regulators are focused on.
Kian Abouhossein - JP Morgan
Okay. Thanks.
Wolfram Schmitt
Next please?
Operator
The next question is from Mr.Joachim Muller of Cheuvreux. Please go ahead sir.
Joachim Muller - Cheuvreux
Yeah. Hi, it's Joachim Muller.Just a technical question on your leverage finance book: The EUR40 billion thatyou have in your trading book, at what stage, let's assume it will be difficultto sell down most of that book: at what stage would they become sort of likehedge maturity and you would have to reclassify them?
And: what kind of impact wouldthat have on your risk-weighted assets weighting and Tier 1 impact? Maybe youcan comment on that a bit?
Anthony di Iorio
Yes. Joachim, once we'veclassified them as trading they will stay in trading.
So, the commitment here isin trading. We looked at, as I said earlier, where the intent was.
Based onthat intent, we have classified them. If they are classified as tradingunder IFRS, we don't have the latitude of even changing them, unless there wasa mistake in the classification.
Under US GAAP there may be some latitude. So,we will not change those.
Joachim Muller - Cheuvreux
So, even if there was nopossibility, because of the market conditions, to sell them?
Anthony di Iorio
We would still have to keep themin trading as far as we understand and they would still be mark-to-market. Now,as far as regulatory capital is concerned, they could stay in the trading bookas trading assets I believe for 180 days from the time that they're funded.
After that 180 days they would beclassified for regulatory purposes as banking book assets and therefore take ahigher capital charge. So, in terms of reported balance sheet, there won't be achange.
As far as regulatory treatment, if they're here for longer than 180days there will be a change.
Joachim Muller - Cheuvreux
Okay. Thank you.
Anthony di Iorio
You're welcome.
Operator
The next question is from LucaOrsini of One Investments. Please go ahead.
Luca Orsini, please go ahead andask your question.
Wolfram Schmitt
Probably gone. Shall we move on?
Operator
The next question is from Mr.Carsten Werle of Oppenheim Research. Please go ahead sir.
Carsten Werle - Oppenheim Research
Yeah, hi. Carsten Werle,Oppenheim.
Good morning. In the October performance update that you gave, youprovided us with number of EUR32 billion for Deutsche Bank-sponsored ABCPconduits.
Is this number still correct? And, am I right to assume that themajor part of this EUR32 billion is on your balance sheet, not off balancesheet?
And, perhaps, for those parts which are off balance sheet; you couldstill give us some indication which is dollar denominated assets and what's ineuro?
Anthony di Iorio
Yeah. The EUR32 billion was thenumber at September 30th.
The latest report I received would indicate that,that number if it has moved has not moved materially. So, assume it's stillEUR32 billion.
Of that EUR27 billion is consolidated on our balance sheet andif you look at the interim report, it's included in a category called, “It'sAvailable for Sale”. And part of itis in “Available for Sale” and partof it is in “Loans”.
So the loan portion of that is about EUR15 billion. The “Available for Sale”portion is approximately EUR11 billion, so there's some rounding there, butthat's the EUR27 billion.
Five is not on our balance sheet. The five is neitherin dollars nor in euros.
I believe it's in Australian dollars. Probably, it'sin Australia.And the reason we don't consolidate it is that under the accounting rules wehave no direct exposure, the assets would revert to the seller upon default.
We should talk about why we havethese sponsored conduits. The intent of these is to provide access to thecommercial paper market to customers who generate loans of their own.
And theseare normally commercial companies, but it could be some financial companies,who want access to the commercial paper markets. And, as part of our business, weprovide them that access.
But, because of the terms of the agreement, we needto consolidate them. So, the number of EUR32 billion is there and I hope thenumbers I've given you have helped you.
Carsten Werle - Oppenheim Research
Yeah. Many thanks.
Anthony di Iorio
You're welcome.
Wolfram Schmitt
Thanks Carsten.
Operator
The next question is from Mr.Stefan Stalmann of Dresdner Kleinwort. Please go ahead sir.
Stefan Stalmann - Dresdner Kleinwort
Yes. Good morning everyone.
Ihave one question please regarding the development of your risk-weighted assetsand in particular the fact that it does not seem to show any sign of growingcounter-party risks from your derivative book. I'm actually quite puzzled to seethat your derivative marks during the quarter have hardly risen despite the substantialjump in volatilities across the board.
Could you explain why the derivativemarks on mark-to-market values have hardly risen? And, why there has been noreflection of possibly rising counter-party risks on your derivative book inyour risk-weighted assets?
Has there been any change in theway that you account for these positions? Or how you measure the risk weightingcoming out of that?
Thank you very much.
Anthony di Iorio
Yeah. Stefan, there has been nochange in the way we account for Derivatives and the marks are falling throughas they have, depending on levels, from quarter-to-quarter.
The risk-weighted assets went upjust about EUR3.5 billion and if you are interested in the breakdown of that Ican give it to you. And there was an FX benefit.
Derivative component is upabout double that, so somewhere in the 7 billion range. The derivativecomponent of risk-weighted assets.
Loans were down undrawncommitments are about flat. Other commitments are up by about 4.5 billion, 4.4billion and the FX had about just over 6 billion positive, so it reduced therisk-weighted assets.
So, if you would look at it, theFX benefit from the weakening dollar, for example, pretty much offset theincrease in the derivatives. And so, what was left came from other assets andliabilities including contingent assets and other securities and assets.
Wolfram Schmitt
Okay, Stefan?
Stefan Stalmann - DresdnerKleinwort
Thank you.
Wolfram Schmitt
Ladies and gentlemen, in theinterests of time I suggest we'll take three more attendees with questions.
Operator
The next question is from Mr.Georg Kanders of WestLB. Please go ahead sir.
Georg Kanders - WestLB
As you have announced somerestructuring; do we have to assume that there will be a significant restructuringcost in Q4?
Anthony di Iorio
We say, we've announcedrestructuring, this was in the US,one business MortgageIT we had some restructuring. We're not anticipating anyrestructuring program.
We're still looking at plans as to refocusing, but, atthis point, we're not anticipating, we're not planning or restructuring. But,plans aren't done yet and that doesn't preclude that there won't be, but at thecurrent time and -- we don't anticipate.
Wolfram Schmitt
Georg, I think it's important tosay, we said it [and we showed] as well that we may make some adjustments inorder to refocus some resources. We haven't mentioned restructuring and,therefore, we don't mention restructuring costs.
Okay?
Georg Kanders - WestLB
Okay.
Wolfram Schmitt
Thank you. Next please.
Operator
The next question is from Mrs.Anke Reingen of Execution. Please go ahead, ma'am.
Anke Reingen - Execution
Yes. Anke Reingen, Execution.Just one question on the diluted number of shares; we have seen ongoingdecline.
Is this a trend we should expect to continue? And: is this actually areal decline in the number of diluted shares?
Or, will we see those sharesbasically working back to higher levels at some point? Thank you.
Anthony di Iorio
I don't think I'd, Anke, viewthat as a trend. There're some technical issues for the reduction.
One of thosehas to do with the restructuring of some hedges on shares with regard to theREU program. And then other parts are just due to both the exercise of optionsby our employees, which moves from diluted to -- if you look at the sharesissued in the third quarter went up and part of that is just a shift.
So, thereis no trend I'd read into that.
Anke Reingen - Execution
Thank you
Wolfram Schmitt
Next please.
Operator
The next question is from Mr.Kinner Lakhani of ABN Amro. Please go ahead sir.
Kinner Lakhani - ABN Amro
Yes. Hi.
Good morning. I justwanted to focus on the 2008 target, particularly in relation to corporatebanking and securities.
You do talk about confirming your target subject tonormal conditions. So, my question is what are normal conditions for the fixedincome or the debt sales on trading revenues?
Are you thinking more 2006, '05,'04? And how do you contextualizethis?
Particularly with regard to the intellectual capital businesses whereDeutsche Bank is overweight, but where in certain areas it's likely thatactivity will take a long time to come back to recent levels?
Anthony di Iorio
Again Kinner, I don't know thatI'm qualified to state, but let me tell you what I think normal marketconditions are. And I don't think I'd go back and look at any one period,because what is normal might be different in the future.
I would look at twoissues. The principal issue is liquidity.And so for conditions to be normal there has to be liquidity, meaning frominvestors, buyers, that returns to the market.
And we're beginning to see somesigns of that, although it is early. And I think we would want more time andwant to see that develop further before declaring victory on that regard.
The second is volatility. Nowvolatility in a way helps us, but if things perform in a more orderly way thatwould also help us.
So, it's when the market has the feeling that risk isappropriately priced, when that happens. And as I said, because liquidityis returning, at least there is some indications that certainly could beinterpreted as people believing prices are reflecting risk reward.
And we wouldsee it where there's neither a boom nor a bust. So, maybe that doesn't answeryour question, but, as I said at the beginning, I don't know that I could -- oram qualified to define that and it may be different tomorrow from where it wasyesterday.
Kinner?
Kinner Lakhani - ABNAmro
Thank you.
Anthony di Iorio
Thanks.
Wolfram Schmitt
With that we would like to closeour call over one and a half hours into the call. Thanks everybody.
If we mighthave cut somebody short, please come back to the Investor Relations team. Weare more than happy to answer any questions.
Anthony di Iorio
Thank you very much.
Wolfram Schmitt
Thank you and goodbye.