Oct 30, 2012
Executives
Joachim Müller – Head, IR Stefan Krause – CFO
Analysts
Jernej Omahen – Goldman Sachs Christopher Wheeler – Mediobanca Stuart Graham – Autonomous Kian Abouhossein – JP Morgan Cyril Meilland – Cheuvreux Derek De Vries – Bank of America
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2012 conference call of Deutsche Bank.
Throughout today’s recorded presentation, all participants will be in a listen-only mode. This presentation will be followed by a question-and-answer session.
(Operator Instructions) I would now like to turn the conference over to Joachim Müller, Head of Investor Relations. Please go ahead, sir.
Joachim Müller
Yes, good morning. This is Joachim from Investor Relations.
Welcome to the presentation of our third quarter results today from Berlin. I hope that you have received all of our documents.
Just to remind you, take note of the cautionary statements regarding forward-looking statements at the end of the presentation. And with that, I will pass on to our CFO, Stefan Krause who will lead you for the presentation pack.
Stefan?
Stefan Krause
Thank you, Joachim and good morning once again and thank you for joining us on our third quarter results call. We are obviously aware of the difficulties it presents to many of you that we are reporting on the same day as one of our friendly Swiss competitors that’s out with a lot of news.
Therefore I’ll make an effort to focus only on some selected points in my presentation. And to start saving time, therefore, I will leave chart 3 for you to read to yourself as I will cover the topics and messages in the different slides to come.
Let me go over to slide 4, as you know, at our recent Investor Day, we have announced several changes that will impact our segment reporting for year-end 2012. The key changes are the setup of the non-core segment and the transfer of the passive asset management businesses from CB&S to asset management.
Please note that all these changes are not reflected in the disclosure today, we’re presenting – that we’re presenting to you and have generally left our disclosure format unchanged for this quarter to avoid changing it several times. I can tell you that many of my colleagues in finance are working very hard to prepare for our analyst session on the non-core segment, which is scheduled to take place on December 13.
We will also aim to put you into a position to rework your models prior to the publication of our fourth quarter results on the 31st of January 2013. At this point I would also like to mention that as part of the resegmentation of our business we will assess the carrying value of the goodwill and the intangibles.
Logically at this stage we cannot rule out an impairment charge. We are in the process of finalizing the planning process for 2013 and beyond and we’ll be able to quantify the impact, if any, when we report on the fourth quarter of 2012.
Let me go over to page 5. Group revenue as you can see in the third quarter benefited from a €1 billion improvement in all our operating businesses versus the second quarter of 2012.
80% of this increase came from the investment bank. This was partly offset by a negative swing of €358 million in consolidations and adjustments where we reconcile group and segment reporting.
I will discuss more revenue details when we come to the segments. Now, move to slide 6.
Our provision for credit losses for the third quarter and we see excluding the IAS 39 reclassified assets and the other interest income in relation to Postbank was €301 million, unchanged from the prior quarter. The portion of our provision that relates to the IAS 39 reclassified assets increased by €130 million compared to the prior quarter reflecting two effects.
First, in relation to our accelerated de-risking program, we sold certain previously impaired IAS 39 reclassified assets at a loss, and as a result, recognized €61 million as a provision for credit loss. Secondly, two specific IAS 39 reclassified assets accounted for the remainder of the increase of credit provisions in CB&S.
Overall, we see full year 2012 provisions coming in line with our plan ex the de-risking and Postbank effects. On page 7, we talked about our non-interest expenses.
In line with our announcement at Investor Day, we have begun to implement our restructuring plan and the cost related to that is reflected in a separate P&L line called restructuring activities. Beyond the expenses reported in the restructuring line, there were an additional €44 million of severance costs which are also related to our operational expense program, but are not shown in the restructuring line due to the formal requirements attached to that.
Taken together, the €320 million cost achieved is roughly half of the €600 million budget we have set aside for 2012. This excludes €71 million of cost achieved in connection with the integration of Postbank.
As for the second half of 2012, the Postbank integration program is accounted for separately. It will be integrated into the Operational Excellence program starting in 2013.
Let me go over to page 8 where we take a closer look at the development of our underlying cost base in line with how we plan to do it on a going forward basis in order to track the progress of our cost reduction efforts. Based on our communication at the Investor Day, we have adjusted the reported expenses for cost-to-achieve that I just mentioned, as well as for policyholder benefits and claims, and for litigation charges.
For the nine-month comparison, we’ve also adjusted for the VAT charge relating to the impairment of a German VAT claim which occurred, as you can remember, in the third quarter of 2011. On that basis, underlying expenses are down 3% in the third quarter versus the second quarter 2012, and up 3% in the first nine months of 2012 versus the same period in 2011.
Considering the changes in FX rates, there was no meaningful impact on the cost trend in the third quarter versus the second quarter. In the nine months comparison, underlying expenses would actually have decreased by 1% if adjusted for currency changes.
I will make a few more comments on the new cost program in the third part of my presentation, so let’s go to page 9 and I would suggest that we just jump over this one as well and go straight to page 10. We finished the quarter, as you can see, with a Core Tier 1 ratio of 10.7%, which is a 57 basis points increase compared to the 30th of June.
Two-thirds of the increase in our Core Tier 1 ratio reflects our successful de-risking, which I will talk more about later on, and one-third our quarterly net income. With regard to our Tier 1 ratio, let me put things into perspective.
This ratio, which only a few years ago was managed to a target of greater 10% and to 8%, to 9% before that, now stands at 14.2% and that is under the more stringent rules of Basel 2.5. Let’s review the capital and risk-weighted asset development in the quarter in a bit more detail on the next page which is page 11 in your document.
The positive effects of our third quarter de-risking measures are most visible in two areas, as you can see. First of all, in Core Tier 1 capital where securitization-related capital deductions have come down by approximately €700 million as we have sold highly capital consumptive positions and secondly, in risk-weighted assets, where credit risk-weighted assets came down at €5.1 billion.
This reflects some of the de-risking including activities at Postbank but also some data and processing enhancements. Capital formation was further helped by net income which, again, added €0.7 billion to our Core Tier 1 capital.
Other factors are comparatively immaterial in the quarter as you can see. Let me turn to page 12.
Let me briefly provide you with an update on our Core Tier 1 ratio targets and our related actions as presented at Investor Day. I’m really pleased to inform you that our de-risking measures are very much on track and we can confirm our Core Tier 1 ratio ambitions as communicated at Investor Day.
More specifically, we have delivered €25 billion of reductions in Basel 3 risk-weighted asset equivalents in the quarter, almost one-third of our planned de-risking target of €90 billion by March 2013, ahead of our original plan. Of the €25 billion reduction, €17 billion is from the securitization positions which we sold in the quarter and the remainder from improvements in our operating model, such as regular process and data enhancements, as well as from other small initiatives.
As you have seen on slide 6, we have incurred €61 million of loan loss provisions in relation to our de-risking in the quarter. However, we also recorded some gains when exiting some of our highly capital consumptive exposures.
Overall, our de-risking-related loss before taxes for the quarter was only €8 million. So, we effectively freed up €2.5 billion of capital at almost no cost.
This small loss should not be used as a benchmark, of course, for the remaining portion of the exposure. I think that speaks for itself.
It’s also worth noting that we experienced quite strong market demand for these positions which may not be the case at all times going forward. My impression, though, from recent meetings with investors is that the discussion on capital has moved on to try to better understand risk-weighted assets.
I will, therefore, come back to that theme a little bit later in my presentation. But now let’s move on to the business divisions, and let’s go straight, I would suggest, to page 15.
Our investment bank delivered a best ever third quarter, as you can see in sales and trading, by continuing to manage towards a low-risk client focused business model. VaR is flat quarter-on-quarter, despite a 15% increase in sales and trading revenues resulting in a significant uptick in our return on VaR, which continues to remain market leading.
We’ve had only two negative trading days in the first nine months of the year. The increase in cost versus the second quarter was driven by €229 million of cost-to-achieve related to our Operational Excellence program, and the €165 million increase in policyholder benefits and claims related to Abbey Life.
Excluding these two items, costs are down slightly versus the second quarter, and this is including a slight increase in litigation expenses. On restructuring, we’ve made good progress.
At the end of the third quarter, approximately 1,200 of the announced 1,500 head count reduction in CB&S and related infrastructure functions had been completed. This was in addition to the reduction by 500 roles that had taken effect by the end of the first quarter of 2012, as you may recall.
We expect the vast majority of the headcount reductions completed so far to be off the platform by year-end. Let me now move to page 16 and turning to (inaudible).
Our sales and trading debt revenues improved materially versus the second quarter of 2012, and the third quarter of 2011, driven by increased client activity across most products. This was our best ever third quarter for sales and trading debt.
For the third quarter in a row we had record FX volume despite a difficult quarter for the FX market, with lower volumes overall reflecting low levels of volatility. However, competitive pressures on margins resulted in revenues being flat quarter-over-quarter.
Rates revenues were higher both quarter-on-quarter and year-on-year, driven by a record corporate issuance and increased market liquidity as market conditions normalized. Higher credit revenues both year-on-year and quarter-on-quarter benefited from tighter credit spreads with DB also experiencing strong client activity across both flow and client solutions.
Let me just turn now to page 17, as you can see we’re very pleased with the higher equity revenue both quarter-on-quarter and year-on-year, underpinned by strong performance in cash equities due to the improved market sentiment in the U.S. and Europe.
In cash equities, we increased market share both quarter-on-quarter and year-on-year in Europe and Asia reflecting outperformance in the declining market and ongoing franchise momentum. In equity derivatives, revenues were up versus the third quarter of 2011, but down quarter-on-quarter reflecting overall lower market volumes.
Prime brokerage revenues were in line both year-on-year and quarter-on-quarter versus the seasonal highs of the second quarter. On page 18, you see our origination and advisory revenues that were both up quarter-over-quarter and year-on-year.
Market conditions as you know were very favorable in the quarter and we saw significant increase in activity across debt and equity capital markets. Our pipeline remains reasonably strong.
Our M&A pipeline is stronger than this time last year and our ECM pipeline is strong and comparable to this time last year. One of the key deals during the quarter was the AIG €16 billion block trade in support of the U.S.
Treasury sell-down of their equity position in the company where we were a lead book runner as well as the stabilization agent. Let me now turn to page 19, in GTB for which the third quarter has been traditionally the weakest, business has continued to benefit from strong business momentum with broad based strengths across products and regions.
The client base remained very solid and we observed inflows in balances and deposits. In Asia we continue to grow at a higher double-digit percentage.
Cost discipline and scalable growth remained a major focus against the second quarter of 2012 if adjusted for smaller one-offs. Let me assure you that in GTB we are working hard on our growth plans to deliver on our ambitious IBIT target for 2015.
And the third quarter 2012 has been one of the many little steps it will take to get there. Let me turn to page 20, our asset and wealth management business.
In asset and wealth management, underlying revenues are slightly up even after adjusting for the two gains mentioned on the slide. So we are pleased to see some signs of stabilization after finishing the strategic review in asset management.
It’s true that we have still seen conservative outflows in asset management but more than half of that related to a single mandate where the termination of the contract had already been communicated back in November of 2011 that is in connection with our announcement off the strategic review. I would like to point out again that our new strategy is to keep the asset management businesses that have been under review, and to make them part of the new integrated model in asset and wealth management including the third-party passive business coming from CB&S.
Therefore, for the next couple of quarters, we’ll continue to focus on restructuring and a further stabilization of the business and its relationship with clients. Let me now go individually into the businesses on page 21.
As you can see in asset management, revenues are also up versus last quarter even excluding the aforementioned gain on sale in RREEF. A generally improved market environment and a strong performance in our fixed income funds resulted in higher performance fees in the quarter.
Let’s move to the cost side of it. We’ve initiated the restructuring activities related to our Operational Excellence program and booked €55 million cost to achieve for this quarter which is the single largest driver of the cost increase.
As you know, it is our ambition to release €700 million of cost synergies in asset and wealth management so expect further cost-to-achieve to come in the next few quarters. So let’s move on to private wealth management on page 22.
Here you see the IBIT increased by €21 million versus the second quarter. Adjusted for approximately €40 million non-operational cost in the second quarter and €36 million restructuring cost related to our Operational Excellence program – program in the third quarter underlying expenses remained flat.
Our private wealth management business continues to achieve positive net inflows for the third quarter in a row. This quarter’s net inflows of €5 billion were generated across all regions.
For the first nine months of 2012, PWM has now recorded inflows of €13 billion. Now let’s focus on PBC and we start on page 23, given the ongoing low interest rate environment we are quite satisfied with the performance of our retail business.
It has benefited – benefit in particular from specific gains, which resulted from an acceleration of non-core asset sales at Postbank. At the same time, PBC has successfully continued its efforts to grow the loan volumes, most notably in the high quality German mortgage business and to re-price some of the products.
The cost increase versus the second quarter of 2012, which came despite a slight decrease in cost-to-achieve, resulted from several factors. To begin with, there was a negative effect related to our cooperation with HuaXia Bank, the comparison with the second quarter also suffered from an adjustment with regard to internal cost allocation which had brought the second quarter cost line below the run rate.
And in addition, there have been higher costs to comply with regulatory requirements. Regarding the integration of Postbank, we currently anticipate that the cost-to-achieve were significantly increased in the fourth quarter but the total amount used in 2012 will be about €50 million to €100 million lower than the full-year back to the €500 million we had expected earlier in the year.
But the Postbank integration, to tell you, is very well on track. Please note as well that the cost-to-achieve booked in PBC in this and the following quarter, which is related to the Powerhouse project, which is the Postbank integration, is not part of the €4 billion total investment we currently target for the group-wide Operational Excellence program.
Let me move on to page 24 and let me give you a little bit longer explanation to see that our consolidation adjustment reported a loss of €332 million. To a small extent, this is the result of corporate items, mainly the costs for hedging investments in some of our foreign operations.
The accrual for bank levies, which is also included as a corporate item, have no meaningful net effect this quarter after credit which resulted from the double taxation agreement with the UK becoming effective. €273 million, or over 80% of the C&A loss, are not economic losses but accounting effects that will all reverse over time.
If these were economic losses, they would be reported in the business segment, not in C&A. In the first quarter of 2012, similar effects had been a negative €390 million.
I will quickly repeat the explanation of the effects I had given at that time. All three components relate to positions which are fully hedged economically but where volatility arises from an asymmetry in the accounting treatment of some of the underlying positions versus the related hedge instruments.
In the segment reporting, the underlying instrument and the hedge are marked-to-market with a difference too at the cost treatment in the underlying under IFRS reported now in C&A. We are reducing this asymmetry through hedge accounting to the extent possible but this is not possible 100% as you can see.
In the third quarter, approximately half of the €273 million arose as a consequence of the bank’s funding U.S. dollar assets by swapping their euro borrowings into U.S.
dollars in the basis swap markets. This is substantially cheaper for us than tapping the U.S.
dollar markets directly. The price of the swap, which is marked-to-market through the P&L, is subject to the relative desirability of the euro versus the dollar.
This is so called basis spread. Therefore, to the extent that hedge accounting hasn’t achieved, there is P&L movement when the basis spread moves.
In this quarter, the negative effect resulted from a narrowing of the mid to long-term spreads which means from an increase in the relative desirability of the euro versus the U.S. dollar.
In a similar way, a €90 million loss resulted from the accounting asymmetry related to the interest rate positions. The third effect arises from the impact of changes in credit spreads on owned debt instruments carried at fair value.
The key thing to take away is that these accounting effects are just timing differences and reverse over time in our consolidations and adjustments. However, the time span over which these reversals will take place can be several years as the relevant markets variables move, so accounting volatility arises.
Let me move finally to the current topics. At this time, I will focus on three core things that we thought might be of interest to you this time around.
First, I will provide you some more transparency on the risk-weighting as I have said before on the balance sheet. Secondly, I will provide you with more clarity on the starting point for our cost reduction program because we’ve got a lot of questions on that.
And finally, I invite you to take a quick look at our new external compensation panel that we’ve just announced. If you go over to page 26, before I go into these topics specifically, let me take – make a brief reference to a report issued by the Enhanced Disclosure Task Force or EDTF yesterday.
The EDTF is a private sector initiative, as you may know, organized under the offices of the Financial Stability Board and includes representatives of asset management funds, investors and analysts, global banks, including Deutsche Bank’s credit rating agencies and auditors. The report issued includes a number of principles and recommendations for enhanced risk disclosures of banks, which we expressly welcome.
This report is a valuable contribution to refine and improve the quality and usefulness of risk disclosure across the industry. Deutsche Bank will carefully consider all of the EDTF’s principles and recommendations and seeks to adopt them in a timely manner starting with enhancements being made in the upcoming annual report 2012, which will be published on March 21, 2013.
In this spirit, the first slide in today’s key current issues section aim at providing you with further transparency on Deutsche Bank’s risk-weighted assets in relation to our balance sheet, peers, and other risk measures. Let’s have a look at the first slide, page 26.
30% of our balance sheet consists of cash and deposit with banks, which are predominantly with central banks and reverse repo securities borrowed with a margin daily and based on good quality collateral. These assets attract very low risk weights and often a risk weight of zero, given their very low risk nature.
More than 85% of our reverse repo book is with investment grade counterparties typically AA or A rated with a remaining lifetime of less than three months. The further 30% of our balance sheet is made up of loans, which attract an average risk weight of 38%.
Let me give you more details on that on the next slide. Whereas the portion of loans on our balance sheet is comparable to major U.S.
peers, the composition of the loan book has some notable differences. Both loan books reflect similar mortgage loan percentages, as you can see here in the chart; however, in the higher risk consumer loan category, we have only 5% in comparison to approximately 28% for our U.S.
peers. Additionally our mortgage and consumer finance book is predominantly in Germany, where contrary to the U.S., the value of mortgage collateral has been resilient over the last five years and the unemployment rate remained on low levels even during the crisis resulting in low levels of delinquencies for Deutsche Bank.
The significantly lower share of consumer loans and the absence of a house price bubble in Germany, as well as generally high lending standards, are key drivers behind the very significant difference in historical loan loss ratios. As you can see on the page, for the total loan book, including, by the way, our corporate loans, which also performed quite well over recent years, you find that our historical five-year average loss rate is around 50 basis points, which compares very favorable to the 300 basis points observed from major U.S.
peers as analyzed here. Considering these factors, we believe that our average risk weight for our loan book of just below 40% is quite adequate in comparison to an average risk weight for our U.S.
major peers of 100%. Let me turn to page 28 and give you also some more insight into our market risk, risk weighted assets and how we look at them from a capital adequacy perspective.
At the end of 2010, we had €24 billion market risk RWAs under the then relevant Basel 1 regime. With the introduction of Basel 2.5, this moved up to €64 billion at the end of this quarter.
Included in this number is the effect of our home regulator imposing an add-on of 2.5 to the minimum multiplier of 3-times. In aggregate, a rather punitive VaR multiplier which is certainly in excess of what our peers face.
If we now add trading book securitizations which translate into market risk RWAs of €19 billion under Basel 3 but are currently capital deduction items under Basel 2.5, we come to a total risk-weighted asset equivalent of more than €80 billion. Assuming a 10% capital ratio, this translates into more than €8 billion of regulatory capital.
However, from an economic risk view, our stress testing shows that approximately €4 billion of capital are sufficient to cover for potential market risk losses in the worst of all severe stress scenarios as per our trading market risk economic capital models. In other words, we have a €4 billion capital buffer over and above our economic capital.
I hope this gives you some more sense while we believe that our risk-weighted asset density, in this case for trading assets, is sufficient. Let me now – move now to page 29 to the second topic which is our cost reduction program which we have announced at our Investor Day and which aims to reduce our cost base by €4.5 billion.
As we are aware that there is still some skepticism out there that we can really pull this off, on the left-hand side, I would like to start with giving you transparency as to the cost basis we’re looking at. To begin with, we have the €27.3 billion which is the annualized number for total cost in the first half of 2012.
In this €27.3 billion, there were €2 billion of costs which we did not include in the relevant cost basis. These were mainly litigation and severance costs, as well as policyholder benefits and claims that we, of course, cannot influence with the cost reduction program.
In the box in the middle of the graph we give you transparency as to what these cost items are likely to consist of going forward in line with the definition we provided you at Investor Day. Beyond the effects we have identified for the first half of 2012, there could be FX changes, regulatory spend where it goes beyond the level of the first half of 2012 or reinvestments of the savings.
This list is potentially not complete but we will try to provide you with the transparency you need to assess where we stand against the starting point of €25.3 billion. Beside the absolute cost numbers which we will track, our overall target is the cost/income ratio of 65%.
The cost/income ratio will also be an important guideline as we do not know what the environment will look like in three years’ time. If the revenue opportunities will be better than we currently anticipated, of course, we would be likely to reinvest some of the savings to make sure that we can capture growth if and when it comes.
If revenues will be lower than our plan it will be more difficult to make the 65% but when you – can expect to us to deliver on the announced absolute cost reduction. In the third hand side you see – on the right – sorry, on the right-hand side on that chart, you’ll see a simplified version and this is just a repeat of the chart that Henry presented to you at the Investor Day.
We just wanted to re-clarify the timing of both the anticipated savings and the one-time costs this program will require. And finishing up with the third topic, as you know we have announced an independent expert panel that will now start reviewing our compensation structure and governance.
This is part of our commitment to be at the forefront of cultural change in the industry and to further align shareholder and employee interests. We’re pleased that the panel consists of various senior and highly credible professionals and is chaired by Dr.
Jürgen Hambrecht, the former CEO of BASF. As we have announced at the Investor Day, the panel’s findings will already look at 2012 year-end compensation.
So, let me quickly sum up my presentation. We are quite satisfied with the level of our third quarter group results, particularly as these reflect approximately €300 million of cost-to-achieve for our restructuring programs and also digest roughly €300 million of litigation charges.
We are pleased to show you progress on our efforts to generate capital organically, in particular through substantial de-risking. We are aware that we are now entering a phase of execution and delivery on the promises we have made at our Investor Day.
We know that you will expect us to execute and deliver despite the possibility that there could be considerable additional headwinds from both the regulatory and the market environment. The next touch point will be our session in December, where we will give an update and more transparency on our non-core segment.
So, thank you for your attention and I look forward now to your questions.
Operator
(Operator Instructions) And the first question comes from Jernej Omahen from Goldman Sachs. Please go ahead.
Jernej Omahen – Goldman Sachs
Good morning. It’s Jernej here from Goldman Sachs.
I just – I have two questions. The first one relates to the move by one of your competitors that we’ve seen this morning, UBS, where they’ve announced that they’re moving out, essentially, of their FICC operations outside of Switzerland, more or less.
And the rationale that they give is they think that they can’t make an adequate return for their shareholders and even without FICC, which is the lowest ROE business, I think, within most investment banks currently given the capital intensity. They’re targeting a 15% pre-tax return on equity without their FICC operations.
And I was wondering how do you think about that? So why is Deutsche Bank’s FICC operations so different that you can make those returns, the 15% ROE that other – your competitors think that they can’t?
And the second question is how do you view the exit of, what I guess was a major competitor, whether that could be an opportunity? And the second question is just now going to be a traditional question on leverage, I guess.
So, I think the leverage after this quarter is around 34-times, which is now the highest of any large European bank and I was just wondering, there’s a very detailed guidance on Core Tier 1 ratios, Basel 2.5, Basel 3, what is your sense of where sort of the comfort zone for the simple leverage ratio would be for Deutsche Bank? Thanks very much.
Stefan Krause
Okay, Jernej. Good morning.
Thank you for your questions. And I think you asked a good question, but obviously I would have to acknowledge that I haven’t seen all the details, obviously, of the UBS plans and that’s why please understand that I can’t comment in detail about it, but in general, as a market leader in fixed income, a reduction in capacity is obviously a good thing, to be honest.
As we communicated at our Investor Day, we would expect a barbell-ing of the investment banking landscape where banks are either global universal banks or smaller niche players and the economics of Basel 3 that we said we also acknowledged at our Investor Day and other regulations makes it really increasingly difficult to achieve adequate returns when you are mid or low tier – when you only have a mid or low tier market share and we have explained to that. That’s what we believe this business will look like more – it’s a competition around scale.
And we see it similar. We obviously are a market leader.
We have that scale and therefore, we can – we believe that we can make money in this. We consider the investment required in our own platform to achieve our target returns under Basel 3 that they are substantial but obviously if you are a competitor that doesn’t start from the same strength, that’s being – and having already a strong scale and platform in there, it of course will be more difficult to make a decent return, but that’s why we feel quite comfortable.
We told you that we anticipate that some competitors will leave that scene, which is traditionally what happens in these areas of consolidation. And then secondly your leverage number, we understand and appreciate the official discussion around it.
Obviously, we believe that leverage is accrued in non-risk adjusted measure and should not be looked at in isolation. It’s also important to consider that the quality and sustainability of funding is more important as we have always told you.
30% of our adjusted assets are reverse repos, for example, in securities borrowed and cash deal from banks. So, of course, we could influence this ratio quite rapidly, and we don’t necessarily make a better bank out of Deutsche Bank, especially in these uncertain times where cash will be very important to hold, so, just a simple example, now if you look at leverage in isolation, you could come to wrong decisions when running a bank.
Jernej Omahen – Goldman Sachs
Yes. Can I...?
Stefan Krause
And, therefore, what we do acknowledge and what we have made over the last couple of quarters, as you know, we have continued to reduce our leverage ratio. We have put out a comparative number.
There’s some confusion, obviously, of how to look at the number and some of the numbers provided were wrong. But we have – we’ve worked on and will continue, obviously, to focus on it, but we very much warn that looking at leverage is the wrong indicator to look at.
It leads to wrong conclusions.
Jernej Omahen – Goldman Sachs
Yes. Can I just ask one question on this 34% of the balance sheet, which is cash and reverse repos and basically absorbs no equity, according to your slide 26, I have a risk weight of below 1%.
How much of Deutsche Bank’s revenues are associated to this part of the balance sheet broadly? Do you have a fence?
Stefan Krause
Well on the cash, obviously, nothing, tiny, tiny, tiny, yes.
Jernej Omahen – Goldman Sachs
Today nothing, yes.
Stefan Krause
All this is part of our business, we hold this clearly to be prepared for the insecure environment. And the – as you know, the repo business is an important business for our clients.
It’s certainly not a high margin business, but it is for our clients an important service we have to provide and it’s part of our business model.
Jernej Omahen – Goldman Sachs
But it’s probably fair to say that this portion of your balance sheet is by far the most profitable of the entire group because it absorbs no equity, I assume?
Stefan Krause
Well, if you do, yes, probably if we were to divide debt by this low levels of equity, it could be, yes. I don’t have the numbers off the top my head, but could be.
Jernej Omahen – Goldman Sachs
And thank you very much, thanks.
Stefan Krause
But obviously, it carries a bad leverage so it should be, in your definition, no good business.
Jernej Omahen – Goldman Sachs
So my point is if you wanted to reduce the leverage, the return on equity of the group would be quite impacted, yes?
Stefan Krause
I wouldn’t know. It’s so small, so forget it.
It’s so small portion of the capital. So if you would do the math, it’s probably – it’s a high – very small portion, though.
If you volume weight it versus the capital attached, it has probably very small impact.
Jernej Omahen – Goldman Sachs
I guess this is why I’m asking the question, because I think the return on equity is disproportionate, so it’s a small portion of capital but it might be a big portion of ROE.
Stefan Krause
Yes.
Jernej Omahen – Goldman Sachs
If we could have the revenue on that figure, at some point in the future, that would be great. Thanks a lot.
Stefan Krause
Okay.
Jernej Omahen – Goldman Sachs
Thanks.
Stefan Krause
Thanks, Jernej, for your question.
Operator
And the next question is from Christopher Wheeler from Mediobanca.
Christopher Wheeler – Mediobanca
Yes, good morning. I’d like to ask you just a couple of questions about slide 29 and I apologize if I’m getting ahead of ourselves here.
But on the cost, Stefan, you obviously showed similar data at the Investor Day, but can you just – are you further down the road from being able to tell us of the €4.5 billion of savings which you’ve shown there, the breakdown between what is effectively personnel costs and what is non-personnel costs, just roughly? But also just try and give us a flavor for what that means in terms of staff numbers because I don’t think you were keen to discuss that at the meeting back in September although you did say 100,000 staff and 30,000 contractors.
And then just in line with that, just looking at the restructuring charges on the right-hand side, again, can you just give us some indication as to kind of split we should be expecting between the divisions, how much will fall broadly in the investment bank and how much will fall elsewhere? Thanks very much.
Stefan Krause
Okay. On your last question, there’s a slide in our investor presentation that I can refer you to because we gave you a complete disclosure by business segments.
The...
Christopher Wheeler – Mediobanca
You did actually, yes. That’s fine.
I’ve got them, yeah, sorry; I’m just looking at that now.
Stefan Krause
(Inaudible), there we separated it out. You should see that and if you have...
Christopher Wheeler – Mediobanca
Yeah, thanks.
Stefan Krause
Further questions about it, we can answer them on the phone. Then in terms of numbers of head count, we on purpose are abstaining to give any specific head count numbers.
And just please understand that there, for the sensitivity around it, we don’t disclose that number at this point in time. We will be reporting as soon as we are completed with our discussions with worker councils, etcetera, etcetera, and then obviously, we might then give you disclosures around these numbers.
But at this point, I think it doesn’t make any sense to communicate these numbers. And we have given you a number of about €1.9 billion, what we called organizational streamlining, yes, and that, basically, you could take as a good proxy for the numbers, the personnel related expenses.
But don’t forget that also in the streamlining we also have cuts in our hierarchy which means flattening of the hierarchy and things like that involved. So, just take it only as an approximate number.
Christopher Wheeler – Mediobanca
Okay. Thanks very much, Stefan.
Thank you.
Stefan Krause
Thanks, Christopher.
Operator
And the next question is from Stuart Graham from Autonomous. Please go ahead.
Stuart Graham – Autonomous
Hi, good morning. I had two questions please.
Firstly your Basel 3 Core Tier 1 ratio, I know you don’t disclose it in the presentation but I estimate it’s around about 6.1% at the Q3 stage. Can you say if that’s roughly right?
And the second question is on Liikanen, I know you probably think it won’t happen. But if it were to happen, could you give us some feel for what you think that does; A, to your business model; and B, does it impact your €4.5 billion cost savings given that was based around silo busting and I guess this is about putting silos back in place?
Thank you.
Stefan Krause
To start with the – Stuart, to start with your first question. I think I cannot confirm your 6.1%.
It’s much, much closer to our January 1 target right now. Yes, so, it’s – and as you saw we made a substantial progress in the quarter.
So, we are much higher than what you have calculated or estimated at this point.
Stuart Graham – Autonomous
Could you tell us that number then? I mean all your peers tell us that number.
Stefan Krause
Yes. Let me give you an approximate number.
It’s about 7%.
Stuart Graham – Autonomous
Right now?
Stefan Krause
Right now.
Stuart Graham – Autonomous
Okay, thank you.
Stefan Krause
Yes. And then the – I think that on your Liikanen question, because there’s always two ways to look at Liikanen.
The first way to – we just think that economically for Europe, it would be a mistake to implement Liikanen, more from an overall economic point of view. And that’s certainly our main concern, that it really doesn’t help us and it has quite significant competitive implications for Europe and has quite significant impacts on the general economy because it misses to really explain the role of banks and the role of somebody in the economy having to recycle money that is provided from the economy into business available money and into economic activity.
We are, and especially that’s valid for Germany, we are a country that has a structural deposit overhang. And therefore, bank failers in Europe have been driven by structural deposit overhangs, have not been driven by any of the other concerns that politicians have today.
And the fact that we failed to recognize that what we have to deal with is to make sense out of deposit overhangs and to use them and recycle them into economic activity, that that’s what is important and that’s at the end, the role of what a future European banking system should do and have to do, otherwise, we are creating exactly the banks that were the big failers in Europe. And the fact that Liikanen ignores that and ignores the true source of banking system problems has us concerned in the sense that hopefully the debate will show that there’s a thought process mistake on that.
In terms of our bank, of course, we made some assumptions for our investor presentation and, of course, we assume that the global universal banking model is the one we’re going to be used and all our targets were related to our global universal banking approach. If that would be theoretically no longer possible, then, of course, we would have to restate all our targets and numbers because we would have to then take a deep look at what these impacts would be.
But it’s premature to consider it because we hope still, obviously, that sense will prevail and that we understand in Europe that creating a problem with our structural deposit overhang, creating banks that have deposit overhangs will not be the solution to come to a better financial system.
Stuart Graham – Autonomous
Presumably you’re doing some contingency with planning in terms of if this were to happen, what would be the impact. When do you think you would have some results of that?
Stefan Krause
Well, we have done a fairly rough estimate of that. That is, of course, something you always do.
But obviously, at the moment, we don’t comment on these numbers. You may understand, Stuart.
Stuart Graham – Autonomous
Sure. I understand.
Okay. Thank you.
Stefan Krause
Thank you, Stuart.
Operator
And the next question is from Kian Abouhossein from JP Morgan. Please go ahead, sir.
Kian Abouhossein – JP Morgan
Yes, hi. Apologies.
I might have missed a slight part of what you said earlier, but you have this equity number which looks very good, equity sales and trading. And I was wondering, you indicate that your cash equity numbers were actually up quarter-on-quarter.
I just wondered if you can talk a little bit conceptually of what’s driving that strong number. What are you doing as you indicate you’re gaining market share?
And the second question is on your market risk-weighted asset slide 28, you indicated Basel 3.5 and 4, will not be a revision to Basel I and will not have a material impact the way I interpret it. And just wondered what your interpretation is of Basel 3.5 and 4.
I assume you are referring to the trading risk review and proposal and if you could share some views of what you see as an interpretation of this? Thank you.
Stefan Krause
Okay, let me start with our sales and trading cash equities quarter-on-quarter, what’s up. So, our market share gains occurred geographically in Europe and Asia.
You know that our – that we had a good development in these two geographies. These are geographies where we normally are – have strength.
We have improved – we saw improved client activity and it just shows our longer-term investments in this business. We saw in its – and I can only tell you good client activity and overall.
And then we saw in the quarter, especially towards the end of the quarter, a much better market sentiment also in the U.S. Yes, that helped us.
And as you know we have informed you and told you a couple of times that we have gotten to a much better U.S. position than we used to have and we are clearly now, after the crisis when we relate to our (inaudible) we believe ourselves to be a winner in the crisis.
It’s reflected in this business that we have really – we have had some good strengths, yeah. So, in that sense, it was a sound business with geographically, Europe and Asia, with a good sentiment in the U.S.
and our good market position and acceptance in the United States. So on your question on the trading book review, we obviously agree with the BCBS objective to seek a more consistent framework for our trading book risks.
We would add that the fundamental reviews should cover the current hedge work of market risk capital framework in its entirety because I think it will help us all to get more clarification on this. We are very positive about the reviews; focus on concerns around value at risk and the risk of market illiquidity stemming from the financial crisis.
These are valid concerns that obviously we need to address. That said, obviously the new framework should be based on obviously a realignment of capital rather than starting from the presumption that yet more capital is needed.
We plead for maintaining capital ratio is valid. I made the math for you on the slide to prove to you what sense does it make if I have doubled the coverage for my worst possible risk in capital, why should we drive higher levels of capital into the banks?
At some point, this doesn’t make any sense anymore because we are forgetting why we have capital, which is to protect our banks from crisis situations and to double the capital we need for a worst case risk scenario. I think we believe in – we think that a comprehensive risk sensitive framework should not reside in supervisors using further add-ons, yes, or calibrating the framework individually.
We think that we should have more comparability on a global level and we should have less of these charges we get that make it very intransparent for you as market participants to really understand the risks and – for the different banks. And we believe that hopefully we will get a comprehensive quantitative impact assessment that should be undertaken.
So I think that’s all we can say at this date to it.
Kian Abouhossein – JP Morgan
Just a follow up on page 28, I mean, you do indicate that there will be credible standard model allowing for netting and diversification or rather provision for credible standard model allowing for netting and diversification. But if I look at your VaR diversification, you net about 56% of your gross VaR and at year-end 2011, if I look at rates, FX, etcetera, which is one of the highest nettings of any bank globally.
And I’m just wondering why you have more diversification and then you don’t believe it’s going to be a big impact when actually there will be a provision of harmonization. Is there something else that I’m missing?
Stefan Krause
No. I think the indicator gives you the right reason.
We are a really global diversified bank and we are more diversified than others are and, therefore, obviously, this is what our netting is recognizing. And, yes, we have a higher netting but that is our business model.
The reason you build and create a business model is exactly to diversify risks is an old way of risk managing your business, and that’s what the bank does and the indicator tells you the bank does it well.
Kian Abouhossein – JP Morgan
Okay. Thank you very much.
Stefan Krause
Yes. Okay.
Thanks, Kian.
Operator
And the next question is from Cyril Meilland from Cheuvreux.
Cyril Meilland – Cheuvreux
Yes. Good morning.
I have a question regarding the PBC business and especially the performance of Postbank. Because a large part of the increase in revenues quarter-on-quarter is coming from other products, so I just checked and it’s apparently not coming from PPA amortization which is relatively flat quarter-on-quarter.
So could you comment – I think you mentioned some gains from disposals of the non-core assets of Postbank. So can you elaborate a bit more and tell us where this rise in revenues is coming from?
Stefan Krause
Yes. As you know, Postbank – if you remember, when we acquired Postbank, we had shown you the balance sheet of Postbank, which roughly half was the core bank – the core retail bank that we were interested in and about €100 billion in assets were assets that we were not intending to hold over longer periods of time.
By the way, Postbank was one of these classical banks with a deposit overhang that obviously was then forced to invest in other non-retail based assets, yes, and those create the problems we think that Liikanen doesn’t address very well. So in that sense, we went ahead and had announced that we will de-risk Postbank and we will cut their risk-weighted assets to – that at the time were around €70 billion to €80 billion to about €40 billion which is what we believe to – that we need to run a clean retail bank.
And with now, obviously, the program that was started as the initiative of our new strategy, we have sped up the de-risking at Postbank again. It has done very well so far, but we did some additional measures.
And what basically happened, because when we acquired Postbank, we had taken PPA effects on those assets and we had already taken some market valuation assessment, we were able to sell them better. Obviously, then we’ve generated some gains, yes?
And that’s just the logic of and the results of our acquisition accounting, and that’s what you see reflected in terms when we talk about profitability. The PPA effect for Postbank in the quarter was about €190 million.
So, obviously that was also a contributor to the good performance on the group level of the Postbank results. You will see that as we continue to de-risk assets that were part of the market adjustment, the market valuation adjustment in Postbank over the next couple of quarters, that we may see similar effects happening.
Cyril Meilland – Cheuvreux
Sorry, but the PPA amortization that you mentioned on slide 35, is only 46 for the quarter. So, the €190 million you’re referring to...
Stefan Krause
That is the irregular. We have...
Cyril Meilland – Cheuvreux
Okay.
Stefan Krause
Two components. We have regular PPA and irregular PPA.
Cyril Meilland – Cheuvreux
Yes.
Stefan Krause
And that’s only the irregular PPA. Yes?
Cyril Meilland – Cheuvreux
Okay.
Stefan Krause
Okay.
Operator
And the next question is from Derek de Vries from Bank of America.
Derek De Vries – Bank of America
Hi, thanks for the questions. Just the last area I had that I want to touch on a little bit was litigation.
I guess you guys are on track for about €1 billion of litigation charges this year. First is that the right level to think about as we think into 2013, 2014?
Is about €1 billion of litigation charges is the right level? And then in your – I just sort of skimmed through your text around litigation.
It looks like there’s a new issue that’s popped up and that’s U.S. embargoes and related matters.
I was wondering if you could just give a little bit of color; what’s changed since Q2 that has caused you to add that to the text there? And then I guess the last issue on litigation is there was the charge in the quarter, what is that for?
Is that – I assume it’s U.S. RMBS, but please correct if I’m wrong.
Stefan Krause
Yes, Derek. Thanks for your questions.
Obviously, I think this topic of litigation will keep us busy, as you correctly said, quite a while, you’re right in that. The problem is we don’t have any projections on these litigations as they are largely settlements or discussions in court cases, we can’t really project out numbers on specific periods.
I think your number approximately will be close to that number you quoted for this year. Very difficult to say what the levels in the next couple of years exactly will be.
You do know that we have a capital charge imposed by Basel to protect our capital. So our regulatory capital has a 2.5 – €12.5 billion risk weighted assets charge associated for litigation and that should cover litigation over the next couple of years.
That may give you some indication of the size. We have given a second disclosure of €2.5 billion which is what we expect litigation to be, which is obviously not estimable and therefore we cannot provide accounting reserves for it.
That would be the second number. But it’s very difficult to give specific forecasts on which period exactly these litigation charges will come.
And then we don’t give specific comments on any cases for this quarter. These settlements generally are obviously private and confidential.
Derek De Vries – Bank of America
Okay. But I mean, you added the text on the U.S.
embargo, so, I guess something happened there. Is it an investigation or – I guess what happened that caused you to add that text in this quarterly report?
Stefan Krause
As we always look at our disclosures, we always – and we have discussions with regulators and have discussions with auditors around it. We need to obviously review all the cases that go through and as you correctly said, we look at any disclosure we have to provide.
This is just an additional disclosure that we deemed appropriate to do that we might have not done in the past, but nothing specific or nothing material associated for this disclosure, just improving our transparency around it.
Derek De Vries – Bank of America
Got it. Thanks.
Operator
Excuse me, Mr. Müller, there are no further questions at this time.
Please continue with any other points you wish to raise.
Joachim Müller
Yes. Thank you.
I guess this concludes our third quarter results discussion. And with that, I’d like to thank everyone for their interest and see you on the road.
Bye.
Operator
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day.
Good-bye.