Feb 2, 2017
Executives
John Andrews - Deutsche Bank AG John Cryan - Deutsche Bank AG Marcus Schenck - Deutsche Bank AG
Analysts
Jernej Omahen - Goldman Sachs International Jon Peace - Credit Suisse Securities (Europe) Ltd. Kian Abouhossein - JPMorgan Securities Plc Stuart O.
Graham - Autonomous Research LLP Daniele Brupbacher - UBS AG Magdalena L. Stoklosa - Morgan Stanley & Co.
International Plc Andrew P. Coombs - Citigroup Global Markets Ltd.
Fiona M. Swaffield - RBC Europe Ltd.
Alevizos Alevizakos - HSBC Bank Plc Andrew Stimpson - Bank of America Merrill Lynch
Operator
Ladies and gentlemen, thank you for standing by. I'm Mia Valle, your Chorus Call operator.
Welcome, and thank you for joining the Fourth Quarter 2016 Analyst Conference Call of Deutsche Bank. Throughout today's recorded presentation, all participants will be in a listen-only mode.
The presentation will be followed by a question-and-answer session. I would now like to turn the conference over to John Andrews, Head of Investor Relations.
Please go ahead.
John Andrews - Deutsche Bank AG
Operator, thank you very much, and good afternoon from Frankfurt. I'd like to welcome everyone to our fourth quarter and full year 2016 earnings call.
I'm pleased to be joined today by both, John Cryan, our Chief Executive Officer, and Marcus Schenck, our Chief Financial Officer. John will open with some brief comments and then Marcus will take you through the analyst presentation in more detail.
And as always, the presentation is available on our website at www.db.com. As we did last quarter and every quarter, I would ask for the sake of efficiency and fairness to questions, please limit themselves to their two most important questions so that we can give as many people a chance to participate in the Q&A session as possible.
Let me also provide the normal health warning to pay particular attention to the cautionary statements regarding forward-looking comments and you'll find those at the end of the investor presentation. With that out of the way, let me hand it over to John.
John?
John Cryan - Deutsche Bank AG
Thank you very much and good afternoon, everyone. I intend to keep my remarks very brief.
I know Marcus tends to take you through the numbers in quite some detail. Let me start with the group financial highlights that are set out on page two and just pick out some numbers.
We're doing this in the afternoon this quarter so you will have had a chance probably to look through the numbers in some detail. But a quarter, on the face of it, which was in very difficult circumstances for the bank, towards the top of the P&L doesn't look too bad.
We've reported positive jaws. Our net revenues for the quarter are up on the corresponding quarter the prior year, albeit by just 6%.
But the quarter was overshadowed by litigation charges and impairment charges, something totaling €2.6 billion, which drove the loss before tax for the quarter of €2.4 billion and that €2.4 billion reversed the €1.5 billion or so of profit we'd managed to make before tax in the first nine months, yielding a loss of about €800 million for 2016 as a whole. And then we have a tax charge on top of that because of non-tax deductible items leading to a net loss of about €1.4 billion.
So a disappointing overall result. However, there were some signs that I take as positive.
The first is we managed to keep our reported revenues for the year at €30 billion. That was roughly our target.
I admit that on an underlying basis they're a little shy of that, but nevertheless so as 2015 to some extent and there is some good news which I'll cover in a second. On the capital front, we managed to reduce our Risk Weighted Assets to the €358 billion level.
I would also suggest that that's a tad lower than we were actually expecting, some of that reflecting a drop-off in business volumes that we saw, mainly because of idiosyncratic factors that were impacting the bank towards the end of the year. But the fully-loaded CET1 ratio of 11.9% is something of the order of an €11 billion buffer against the minimum regulatory requirement.
On costs, as you know, during the year we saw the operating environment deteriorate even from the first quarter, and we took additional measures to attack the cost base for 2016 without sacrificing any of the investment we were making to make sure that the longer term strategic cost base was reduced. And that comes to a little in the overall reduction of costs.
We're still en route with that adjusted cost amount of €24.7 billion towards our target of getting it to €22 billion and below. On the next page, we've covered just some of the litigation matters that we managed in the course of 2016, and frankly also in January 2017, to put behind us.
There were actually a couple of dozen major issues that were of concern to management and our supervisory board, and we've settled within that a large proportion of them. And we're quite well advanced on the ones that are not yet formerly put behind us.
So I think we're quite pleased with the progress we've been able to make. The big issue was obviously the civil case with the DOJ regarding RMBS, which we managed to settle just before Christmas.
And that was really the most significant case because for the whole of the fourth quarter there was considerable uncertainty in the market and a lot of speculation in relation to how we would cope with the opening demand of the DOJ of that $14 billion ask. Anyway, that's now behind us, and that's paid.
And we do have some consumer relief to deliver, but I think we feel reasonably confident that we're on top of that. In the other cases, without reading them all out, some of them we were concerned about, and we're very pleased to have them put behind us.
That reserve at the end of the year, just to confirm, we have actually now paid, for example, the $3.1 billion to the DOJ. That reserve, as of today, obviously would have come down from actually settling, so that's positive.
I think the other positive highlight that I would just cover while I'm doing the talking is the NCOU because I think we're very pleased with the way that we managed to meet our targets for that by the end of the year. On page 4, we've set up some of the metrics of its performance over its lifetime, and we've now dissolved that as an operating segment.
So we won't see that in 2017 and going forward. We've simply let the residual assets go back to the original seeding operating divisions.
Very pleasing. It was a division that's impacted the results for the fourth quarter.
A lot of what happened in the fourth quarter was obviously teed up in earlier periods, but there is an impact on contra revenues from the NCOU which we won't see in future. There's an impact on the credit loss provision line which we obviously won't see in the future, but there's a positive impact on RWAs, and the CET1 benefits of the NCOU over its lifetime was something in the order of 2 percentage points or so.
So, good to get that one behind us. On current trading, for those of you who listen to the press conference this morning, you would have heard that we were optimistic on a couple of fronts.
One, obviously we've got a number of these challenges now behind us. But also I think we've seen particularly since Christmastime when we managed to put the RMBS case behind us, we've seen a recovery in our business volumes, and we've seen customers coming back to us.
And although it's always early to make long-term prognostications for the year, morale in the bank is much better, and we're seeing a lot more client engagement. And so far this year, we've been pretty pleased with the progress we've been able to make.
So it looks as though we've got a decent foundation, and with a lot of the one-off costs behind us that have been driving these negative overall results for the past couple of years, we're sitting here in early February this year in a very different mood from the one we were in a year ago, feeling a lot more confident and optimistic about the outlook for the rest of the year and actually for the delivery of our overall strategic plan. With that, I will hand over to Marcus who can take you through a lot of the detail.
Marcus Schenck - Deutsche Bank AG
Thanks, John. Welcome, and to the people in the US, good morning.
Also from my side, to our Q4 2016 results call, allow me an apology right from the start. I will be talking for quite a bit, and in fact maybe a bit longer than usual given it's a full year review.
Let me start by guiding you through the net income bridge for the fourth quarter of last year. Excluding C&A and at constant foreign exchange rates, revenues for the group increased by €0.9 billion versus the prior-year quarter.
This includes €0.8 billion related to a gain on sales from our Hua Xia stake in the fourth quarter of 2016. Looking at the divisions, Global Markets revenues were down €41 million in Q4 with higher Debt Sales & Trading revenues offset by lower equity Sales & Trading revenues.
For CIB, we saw an uptick in revenues of €36 million, the stronger performance in Corporate Finance was counterbalanced by lower Transaction Banking revenues driven by lower balances and the weak interest rate environment. PWCC revenues were up €504 million year-over-year, which includes a €694 million higher contribution from Hua Xia driven by the aforementioned sale, which was in part offset by lower revenues from the Private Client Services, or PCS, business in the U.S.
after that unit was sold in September of last year. Asset Management revenues down by €36 million year-over-year, revenues profited from an increase in performance in transaction fees offset by negative fair value adjustments of guaranteed products and reduced management fees as well as the reduced assets under management.
Postbank revenues were up by approximately €200 million, driven by ceased revenue burden from an adjustment to Bauspar interest provisions in the fourth quarter – which we booked in the fourth quarter of 2015. Non-Core Unit revenues were also up by €200 million year-over-year, reflecting the de-risking gains, whilst moving on with the overall wind down of this segment as John has described.
C&A reported €400 million lower revenues compared to prior-year quarter with the main driver being negative effects from valuation and timing differences off our Treasury portfolio. The provisions for credit losses increased by €113 million, driven by provisioning primarily in our shipping portfolio.
The adjusted cost base improved by €465 million year-over-year mainly from lower performance-related compensation. Restructuring and severance expenses were approximately €680 million lower compared to prior-year quarter and litigation expenses increased by about €400 million mainly reflecting the DOJ-RMBS settlement as well as smaller impacts from the recent settlements with U.S.
and U.K. regulators regarding the Russian equities matter.
Impairments increased by €1 billion primarily related to the sale of Abbey Life. Income tax expenses were up whilst we saw a favorable FX movement.
As John pointed out, this overall leads to a net loss for the quarter of €1.9 billion. The following slide shows the net income bridge for the full year, representing our preliminary results at constant exchange rates.
Global Markets revenues were down €1.5 billion compared to prior year, primarily driven by idiosyncratic factors in particular the impact on our client franchise from the DOJ or from the RMBS leak as well as the deliberate exit strategies announced in Strategy 2020 as well as market underperformance due to our business mix. I'll come to that in more detail later.
CIB recorded lower revel revenues by €0.5 billion despite the fact that revenues from Advisory and Equity Origination and Corporate Finance significantly improved in the second half of the year. Transaction Banking revenues continued to suffer from low interest rate environment in Europe and depressed trade volumes.
PWCC revenues were up €233 million year-over-year. Again, this includes the impact from the disposals of the Hua Xia stake and the PCS unit.
Excluding this, revenues declined approximately 7% year-over-year reflecting reduced activity of our clients in more volatile markets as well as the continued low interest rate environment. Asset Management revenues for the year were slightly up and Postbank revenues were also up by €254 million.
The Non-Core Unit revenues were down by €1.2 billion year-over-year which was in line with our de-risking strategy for this segment. C&A reported €623 million lower revenues compared to prior year.
Provision for credit losses increased by €429 million, driven by provisioning, primarily driven in shipping as I mentioned but also in the previous quarters in the oil and gas portfolio. The adjusted cost base improved by €1.2 billion year-over-year, mainly from lower performance-related compensation.
Restructuring and severance expenses were €277 million below prior year. Litigation for the full year were also €2.6 billion below prior year level, and so were the impairments by €4.5 billion since we had, as you will remember, those extraordinarily high impairments which we booked in the third quarter of 2015.
Income tax expenses were slightly better for the full year, and FX movements for the year were also favorable. With that, we expect a net loss for the full year 2016 of €1.4 billion.
Let me highlight again that these are preliminary results. In particular, our litigation costs may change either way until we publish our final numbers for 2017 on March 17.
Sorry, the final numbers for 2016, of course. The next page provides an overview of our noninterest expenses for both Q4 as well as the full year 2016.
For Q4, and at constant exchange rates, it increased by €300 million to overall €9 billion. The reduction of adjusted costs of €470 million got offset by higher non-operating costs such as the €1 billion impairment on goodwill and intangible assets triggered by the sale of Abbey Life as well as higher litigation of €400 million including effects from the DOJ's settlement.
Restructuring and severance expenses were down by €680 million. And on a full year and FX adjusted basis, noninterest expenses hence came down by €8.5 billion.
Let's look into our adjusted cost base over to the next page, which are €1.2 billion below prior year. You see five categories with the following year-over-year movements at constant exchange rates.
Comp and benefits were down €1.1 billion driven by lower performance-related compensation. IT costs remained our second largest cost category which increased by €322 million, half of it due to higher depreciation of self-developed software.
Professional service fees were up €106 million, influenced by regulatory implementation projects. Occupancy costs were €61 million higher, mainly driven by an impairment charge of €86 million books in the fourth quarter.
Bank Levy and Deposit Protection costs decreased by €119 million due to U.K. Bank Levy double taxation relief as well as reduced deposit protection cost in Germany.
In addition, other costs came down €415 million due to lower operational losses, reduced amortization for intangibles, divestments in the Non-Core Unit and reductions in staff-related non-comp expenses. What you also see on this slide is our head count development.
Compared to last year, head count decreased by around 1,400 FTE including about 2,000 who were internalized. The main drivers for the reduction were Strategy 2020 measures as announced in the last year including the successful sale of the Private Client Services unit in PWCC.
On our next slide, we show our capital position. Common Equity Tier 1 capital decreased slightly from €42.9 billion at the end of Q3 to €42.7 billion at the end of December as the negative net income was offset by the Hua Xia Bank disposal benefits as well as favorable FX movements.
AT1 capital remained constant at €4.6 billion. Risk Weighted Assets decreased substantially by €27 billion compared to prior quarter to now €358 billion at the end of the year.
The main drivers here were the following: Non-Core Unit de-risking effects which contributed €9 billion, €10 billion from the disposals of Hua Xia and Abbey Life, €5 billion CIB Risk Weighted Assets optimization initiatives, for example, via securitizations, hold book reduction, and client rationalization; an €8 billion RWA reduction in Global Markets and then €3 billion group-wide Operational Risk Weighted Assets reduction reflecting progress made on systems control and governance. Lastly, there were unfavorable €6 billion FX effects which however are Core Tier 1 ratio neutral.
We need to recognize that some of the RWA reduction, in particular, in CIB and Global Markets, were related to the stress the bank went through in Q4. We actively managed our positions to strengthen capital and liquidity as we were suffering from adverse client reactions.
The situation has profoundly changed since the announcements of a settlement with the DOJ, but I'll come back to that later on. As a result, Core Tier 1 ratio improved by 11.9% per quarter end on a fully-loaded basis.
The phase-in ratio is at 13.5%, a positive result, which reflects our disposal activities, disciplined capital management as well as business volume reductions. The following page shows that we maintained significant capital buffers versus our Pillar 2 requirements, which also operate as MDA trigger.
What you see reflects the old and new requirements the ECB has set following the completion of their Supervisory Review and Evaluation Process, or in short the SREP, for both year-end 2016 and January 1, 2017. The 13.5% phased-in Core Tier 1 ratio per year end and 2016 is well above the required 10.76%.
And end of last year, the ECB notified us of our Pillar 2 requirements for 2017. Target is to maintain a Core Tier 1 ratio of at least 9.51% on a CRR/CRD4 phase-in basis compared to which we record 12.76% per January 1 of this year.
In more detail, the SREP minimum requirement for 2017 is composed as follows: a minimum Pillar 1 requirement of 4.5%, an additional Pillar 2 requirement of 2.75%, a so-called capital conservation buffer of 1.25%, the countercyclical buffer of currently only 0.01% and, lastly, the G-SIB buffer which for Deutsche Bank right now is at 1%. Let us take a look at the development of our leverage exposure which only slightly decreased by €7 billion in Q4 2016.
The walk shows you the details. The biggest reduction item were portfolio movements reflecting deleveraging of business assets, most notably in our security financing transactions, SFT.
Just over €20 billion of the reduction is in the equity business whilst the rest is in our debt business. In equity, the reduction is less, principally in the U.S., as we have seen counterparts react to the DOJ leak.
On the debt side, we have seen similar dynamics but much less pronounced. Around a third of the debt reduction is client led, again, principally in the U.S.
with the rest reflecting expected seasonal slowdown plus some specific factors. For example, our efforts to migrate derivative CSAs towards cash margining allows us to also unwind transactions by which we were borrowing securities to place as margin.
On the other hand, we see a material increase in assets held at group center, which reflects the buildup of the cash element of our liquidity reserves. The reported leverage also rose because of unfavorable FX movements, notably in U.S.
dollar. Before we move on to the segmental results, a few words on funding and liquidity.
The left-hand side of my slide 13 shows you that we continue to maintain a well-diversified funding profile. 72% of our funding comes from most stable funding sources.
This number has been stable for several quarters now. Our total funding sources increased by €20 billion to a total of €977 billion.
In line with our 2016 funding plan, we raised €13.8 billion at three months Euribor plus 129 basis points with an average tenor of 6.7 years. For 2017, we already record issuances of €3.5 billion.
There's a very strong performance on the liquidity side where we report a liquidity reserve of €218 billion per year end versus €200 billion per end of September of 2016. The liquidity coverage ratio moved up to 128%.
The bank showed strong resilience in relation to its funding and liquidity position on the back of one of the most challenging quarters in years. And we are seeing the turnaround post the DOJ settlement reflected in the performance of the last four weeks.
Let me now turn to a new slide which gives an overview of our balance sheet composition and the funding structure. Our IFRS headline figure of €1,591 billion is a gross figure before any netting.
Adjusting for legally binding netting agreements, primarily in derivatives, as well as offsetting cash collateral and pending settlements, brings the total funded balance sheet down to €1,077 billion. Whilst it's not a direct U.S.
GAAP equivalent, this allows for a much better comparison with those of our peers who report under U.S. GAAP.
You might recognize that this number does not tie back to the €977 billion shown on the previous slide. Let me briefly explain the difference.
Our balance sheet overview is a straightforward representation of our IFRS balance sheet adjusted for the largest netting items which are commonly applied, for example, in U.S. GAAP or leverage exposure calculation.
Derivative mark-to-market, derivative cash margin, and pending settlements amounting then to the €1,077 billion, whereas our external funding sources overview, which is the €977 billion you have seen, also eliminates those liabilities which do not provide us with structural funding. However, this slide gives an overview of the funding structure of our balance sheet and you can think of this in a few broad categories.
First, our deposit funding more than covers our loan book by €90 billion with excess deposits also being held as liquidity reserve as a buffer against any stress-related deposit outflows. The loan to deposit ratio stands at only 82%.
Second, our cash and securities positions, including reverse repos, substantially exceed the volume of short-term wholesale liabilities with the excess being supported by our long-term debt and equity, which, at €243 billion, represents more than 20% of our funded balance sheet. And then third, there are then a number of remaining sundry items that substantially offset each other.
Let me also add some further color on a couple of specific asset side items. Of the €409 billion of loans, two-thirds are German mortgages or other high-quality corporate loans.
The cash position of €193 billion represents an unusually high level and not something we expect to persist. This is a consequence of actions taken during the fourth quarter to enhance available cash balances as a precautionary measure in the light of more challenging funding conditions during the height of the RMBS speculation.
We hope this gives you a better sense for our balance sheet. With that, let me now move into the segments.
Starting with Global Markets where we reported an IBIT of only €16 million for the full year 2016 and a loss of €737 million for the fourth quarter. Revenues were down €38 million in Q4, a decrease of 3% year-on-year and a small increase of 2.4%, excluding CVA/DVA/FVA.
On a full year basis, revenues were down €1.6 billion or 14%. There are three main factors driving this relatively disappointing revenue development.
First, a Deutsche Bank specific aspect are the deliberate exit strategies which we announced in October 15, particularly in areas like securitized trading and RMBS as well as the emerging market country exits. These explain about a quarter of the full year Global Markets revenue reduction.
And given they were concentrated in debts, around half of the full year fall on that side. Strategy 2020 impacts are much less impactful in the fourth quarter, as we had already initiated many of these actions in Q4 2015.
Second, DB idiosyncratic factors and in particular the impact of our client franchise on the RMBS leak in September. We saw reductions in client activity levels and balances along with elevated funding costs.
And this impacted our Equities business in particular this quarter. Whilst it is difficult to measure precisely, we think that this accounts for around one-third of the full year Global Markets revenue reduction with similar impacts in both Debt and Equities.
For the fourth quarter, these factors account for almost all of the year-on-year delta in Equities with a slightly smaller effect on the Debt side. Three, we think our business mix has harmed us as well as market revenue pools have been lower in areas where we are strongest in debt such as FX and emerging markets, whereas areas where we have less presence, either because of our geographical mix or as a function of our strategy, have seen better revenue pool development.
Examples here would be flow credit and securitized products, particularly in the U.S. as well as U.S.
rates. Equity revenue pools are also materially down this year.
The business mix impact has two effects. Firstly, it impacts our full year period-on-period comparative performance and broadly explains the remainder of the reductions not due to the two DB specific factors above.
Again, this is less of a factor in the quarter when strong performance and credit in Asia helped drive an outperformance versus a relatively weak quarter last year or the year before. Secondly, and this is harder to measure, when taken alongside the two DB specific items above, we think business mix helps explain the relative underperformance we have seen versus our U.S.
peers. This is a trend we have now seen for a number of quarters.
Global Markets cost for the quarter decreased by 11% primarily due to lower litigation charges as well as lower comp as well as non-comp expenses and the impact of currency movements. Global Markets RWA decreased by €158 billion.
This is – sorry – were at €158 billion. This is €3 billion lower year-on-year.
Global Markets continued to make substantial progress towards its perimeter reduction objectives and has now completed approximately 90% of our country optimization strategy. Global Markets is also approximately 50% complete with its Strategy 2020 Risk Weighted Asset reduction announced in October of 2015.
Let's take a closer look at our Sales & Trading units. In Debt Sales & Trading, we see an increase of 11% in fourth quarter revenues.
This was driven by strong performance of our credit in Asia-Pacific Local Markets businesses, partially offset by weaker performance in our Emerging Markets businesses. A few comments on specifics.
Revenues in our FX business were higher year-over-year driven by higher client activity as a result of increased volatility around U.S. elections.
Rates revenues were flat year-over-year. We saw solid client flow in Q4, offset by challenging conditions at the quarter end.
In Credit, we had another strong quarter. Revenues were higher year-over-year driven by strong performance in financing and solutions, commercial real estate and distressed businesses, particularly in the U.S.
Our Emerging Market debt revenues were lower year-over-year driven by underperformance in Central and Eastern Europe as well as Middle East and Africa. By contrast, our Asia-Pacific Local Markets revenues were significantly higher year-over-year due to favorable conditions in Asia and a difficult quarter in the year before.
Equity Sales & Trading revenues were 23% lower versus prior-year quarter. Cash Equity revenues were lower year-over-year driven by lower commissions, especially in Europe and Equity Derivative revenues were higher year-over-year compared to a challenging prior-year quarter mainly due to a more favorable trading environment.
Prime Finance revenues were significantly lower year-over-year, reflecting higher funding costs and, what we mentioned before, lower client balances on the back of all the noise around Deutsche Bank in Q4. 2016 was a challenging year for us, particularly in the first quarter and the fourth quarter.
However, we have seen a marked turnaround in client sentiment post the DOJ settlement with activity levels returning. It will take time to fully recover, but we are pleased with the progress in January thus far.
With that, let me now outline the key highlights for the Corporate & Investment Bank where we record an IBIT of about €300 million for the quarter and expect €1.7 billion for the full year 2016, which represents an increase of 17% compared to prior year. Revenues are marginally up comparing Q4 2016 with Q4 2015.
This reflects the strong performance in Corporate Finance which was counterbalanced by lower Transaction Banking revenues. On a full year basis, revenues declined 7%.
Provisions for credit losses increased to €244 million for the quarter and €672 million for the full year. The significant increases primarily driven by the shipping portfolio where that industry continues to suffer from persistent structural oversupply, reduced global demand, and the secondary effects from the insolvency of major a shipping liner earlier this year.
Noninterest expenses for the quarter decreased by 3% to €1.3 billion and by 18% to €5.1 billion on a full year basis. Excluding impairments, litigation, restructuring and severance, adjusted costs were down 6% reflecting lower compensation cost and savings from active cost management.
Looking at the revenue developments on the next page across CIB in detail. The page outlines the aforementioned revenue increase in Q4 2016 compared to the general development in 2016 as well as the full year decrease compared to 2015.
Trade Finance and Cash Management Corporates revenues for the quarter are down 9% compared to prior year. The performance has been impacted by persistent low interest rates in Europe, subdued trade volumes combined with ongoing portfolio management measures, including refinement of our client risk appetite and country exit initiatives.
Underlying margins remain flat, and business remains strong. Institutional Cash and Security Services revenues were also 6% down for the quarter.
Institutional Cash revenue continued to be impacted by ongoing business perimeter decisions and country exists whilst performance in Security Services remains very stable. Equity Origination is up 6% in Q4 versus prior year.
We see quite a strong momentum in IPOs with a pipeline building particularly in the U.S., taking the momentum also into 2017. Debt Origination developed quite nicely and is up 57% for Q4 2016.
The leverage loan market returned to more normalized market dynamics against unseasonable weakness in Q4 2015 where we saw notable slowdown in market activity and in liquidity. M&A Advisory revenues for the quarter were also up by 15% year-over-year particularly due to weaker Q4 2015 but also reflecting stronger momentum in the markets.
Market activity has been stronger with Deutsche Bank acting, for example, as lead advisor in several high profile transactions globally. Let's move to the Private, Wealth & Commercial Clients.
In PWCC, revenues were up 3% for the full year of 2016 and 27% in the fourth quarter. This, however, included the impact from the sale of Hua Xia Bank in Q4 2016 which had a revenue contribution of around €750 million.
In Q4 2015, we recorded a positive contribution of up to €62 million. In comparison, it's also impacted by the sale of the PCS unit in September of 2016 which led to deconsolidation effects for both revenues and costs.
Excluding Hua Xia and PCS, revenues declined by approximately 7% for both the fourth quarter and full year 2016, reflecting reduced activity of our clients in more volatile markets and in continued low interest rate environment. Provisions for credit losses came in nearly flat, comparing Q4 2016 with Q4 2015, an even 15% down looking at the full year numbers, reflecting the good quality of our loan portfolio.
Noninterest expenses were down 20% for the full year and 31% in the quarter. The decline primarily reflects significant charges in 2015 related to goodwill impairments, restructuring and severance, and a software write-off which we had in the fourth quarter of 2015.
Excluding these factors, noninterest expenses remained almost flat compared to prior year. Higher costs for investments in digitalization were mainly offset by lower compensation-related expenses.
We saw net outflows of Invested Assets in the fourth quarter amounting to €24 billion. This was mainly in Wealth Management in October 16 following the negative market perception of Deutsche Bank.
However, we saw reduced outflows in November and December, and we're now starting to see inflows in January. Looking into PWCC's subsegments, the next slide shows the revenue development in both the Private & Commercial Clients side as well as Wealth Management.
Please note that the revenues from Hua Xia are not part of the PCC revenues. Revenues in our Private & Commercial Clients business units were down 7% for the full year and 6% for the quarter.
Please bear in mind that these revenue declines occurred in a period with significant restructuring activities in Germany which took its toll on the organization. In Q4 2016, revenues from Investment and insurance products were down 18% year-over-year, reflecting the reduced client activity and the lower interest rate environment led to a 17% decline in Deposit revenues compared to the prior-year quarter.
Credit product revenues, however, increased by 2% compared to Q4 2015, and by 3% in 2016 on the back of higher volumes. Revenues in our Wealth Management business declined by 10% over the course of 2016 and by 21% in Q4.
Both declines were impacted by the aforementioned PCS deconsolidation. Excluding PCS, Wealth Management revenues decreased by 7% in both full year and Q4, mainly reflecting the impact of the more challenging market environment, on client activity, negative Deutsche Bank market perception, and some strategic de-risking activities.
However, there is good revenue momentum during Q4 2016 across Wealth Management Asia-Pacific, Germany, and in the U.S., which continues in January. With that, let's move to Deutsche Asset Management.
We finalized the sale of Abbey Life to Phoenix Life Holdings at year end 2016. This, however, affected the results where we recorded an IBIT loss of €0.8 billion for the quarter and an IBIT loss of €0.2 billion for full year 2016 driven by the impairment of €1 billion from the Abbey Life sale which also comes, however, with an RWA relief of €4 billion.
Asset Management reported revenues were down 8% for the quarter but nearly flat for the full year 2016. When adjusting for the Abbey gross-up, revenues were down 4% on the quarter.
Higher performance and transaction fees in the alternatives business were more than offset by negative fair value adjustments of guaranteed products and reduced management fees. Noninterest expenses increased as a result of the €1 billion impairment, which was partially offset by lower compensation cost.
For the full year 2016, Asset Management recorded net asset outflows of €41 billion compared to prior year. A third was driven by liquidity products yielding single-digits basis point returns.
Just over 20% came from Passive products, mainly reflecting broad market trends as investors repositioned their exposures. In the U.S.
market, investors pulled basically money from currency hedged ETFs. Despite the challenging 2016 outflows, the average fee margin improved in 2016 compared to 2015.
As we received strong inflows in dividend strategies and corporate bond funds, the prospects of our ETF platform in 2017 are positive, especially as a number of our fixed income ETFs have now switched from synthetic to physical replication. Postbank.
Postbank reported an IBIT for the full year 2016 of €367 million. However, the last quarter was burdened by one-off charges for litigation, restructuring and severance as well as negative contribution from Postbank Non-Core Unit and hence ended with an IBIT loss of €2 million.
Revenues for the quarter were up 34% to €0.8 billion whilst we see an 8% increase to €3.4 billion on a full year basis. Key driver was ceased revenue burden from an adjustment to Bauspar interest provisions in Q4 2015 and the sale of certain investment securities.
We saw a stable development in provisions for credit losses despite rising loan volumes reflecting benign economic environment in Germany and good portfolio quality comparing Q4 with prior-year levels. On a full year basis, we saw a decrease of 13%.
Noninterest expenses were down 12% to €763 million for the quarter due to cost control and lower expenses for strategic initiatives. Postbank realized savings in non-compensation direct costs besides regulatory driven cost inflation, while expenses for compensation and benefits remained broadly flat.
Further efficiency improvements driven by clients oriented end-to-end process optimization as well as streamlined digitalized processes. When comparing non-interest expenses on a full year basis, it is important to keep in mind the impairment charges that occurred in 2015 which explained nearly 50% reduction, the nearly 50% reduction year-over-year.
As highlighted earlier, we are pleased to confirm that the Non-Core Unit has successfully reached its target of consuming less than €10 billion of Risk Weighted Assets. The division is now closed effective January 1, 2017, which marks the end of a successful strategy to resolve these legacy assets.
In the quarter, there was a significant amount of de-risking activity, including the disposal of Maher Port Elizabeth and the sale of our remaining equity stake in Red Rock Resorts, as well as further bond and structured asset sales. The IBIT performance in the quarter was driven by the resolution of litigation matters, specifically in relation to our legacy RMBS business where we have taken a further provision of €1.1 billion on the basis of our agreed settlement with the U.S.
DOJ. Excluding litigation charges, the NCOU burdens the group in 2016 by €1.5 billion.
Again, the good news is that this will no longer be the case in 2017. The cost reallocated to the group, a question we often get, is approximately €300 million, and we are aiming to further reduce this.
The remaining €5.5 billion of IFRS assets will now be transferred to our core divisions, primarily into Global Markets and PWCC, with negligible ongoing asset-driven IBIT impact expected. Let me skip the next page on C&A to provide you with some final comments on outlook.
As John noted, we have another year of restructuring ahead of us but against the backdrop of what looks like an improving operating environment. In terms of costs, we anticipate that litigation will remain a burden in 2017 as we continue to work on resolving legacy matters.
We clearly made good progress last year with some of our largest matters and continue to do just this week with the resolution of the Russia mirror-trading issue with two key regulators. And while I can't provide any meaningful forecast, I want to caution you from thinking that 2017 is a year with no legacy litigation drag.
In particular, we do expect a number of civil litigation matters that need to get resolved. 2018 should then be the first year where this normalizes.
In terms of our adjusted cost base, we are still confident that we will hit our 2018 target of adjusted costs of around – of maximum €22 billion. We will begin to see cost reductions flow through from investments made last year as well as from the impact of expected head count declines this year, as we will maintain our hiring restrictions and expect to conclude our previously announced German retail branch closings mainly in the first half of 2017.
We expect credit costs to improve in 2017 in part with a successful wind down of Non-Core Unit as well as the good overall quality of our credit portfolio. For Q1 2017 specifically, we expect Risk Weighted Assets to rise as business volume increased notably from the seasonal rise in activity in our Markets business which we already see evidence of in January.
In terms of capital, this remains a clear focus for us, and we remain committed to achieve at least 12.5% Core Tier 1 ratio by 2018. We expect sufficient preliminary AT1 payment capacity for the 2017 coupon without utilizing previously established so-called German GAAP 340 reserves.
Whilst we are just one month into the year, the trends in the operating environment are positive. January saw improvements across basically all businesses.
In particular, Global Markets was running meaningfully ahead of last year, most notably in rates and credits. We have also seen a meaningful client activity pickup in January.
This reflects not only clients reacting to the improved outlook but also from reengagement by those clients who did reduce their activity with us in reaction to the turmoil from the RMBS speculation that spilled into the fourth quarter. With a resolution of this matter, we are confident that the client reengagement will continue, but it will also take some time.
In Corporate Finance, the high yield market is experiencing one of its strongest starts to a year ever in the U.S., and we also see a meaningful pick up in EMEA. The leverage loans market is experiencing the carryover of the momentum from 2016.
Investors have strong cash positions, and our pipeline is building strongly in that space. Deutsche Bank is winning a good share of the deals and the wallet.
In ECM, year-over-year January revenues nearly doubled, though that increase admittedly is due to a very weak January 2016. Deutsche Bank is benefiting from the expected wave of IPOs as the markets have persistence from what is called the Trump Bump.
In M&A, volumes are already higher than last year, in particular strong activity coming out of EMEA. As mentioned earlier, Deutsche Bank has been mandated on some key M&A deals.
Our M&A numbers are up 21% in year-over-year revenue. The slow recovery from the asset reduction initiatives and other perimeter de-risking activities, we'll see revenues decline which will set the new normal in GTB, though some upside is expected to be seen from U.S.
interest rate hike. Deposits are expected to be flat but we have seen a reduction of payment volumes in comparison to January 2016 due to the perimeter exits.
Client behavior and reactions are much more positive and stabilized following the DOJ confirmation, though it's too early to assess the full reaction. In PWCC, we also saw an encouraging start in the year across all business units.
We have good momentum in PCC Germany, mainly driven by higher client activity on the investment and insurance side as well as the strong pipeline in the Commercial Clients segment. The same holds true for the various countries in PCC International supported by higher volumes and material deposit inflows.
Also, Wealth Management had a strong start in the year, in particular in our Asia Capital Markets business, which have had the best start into the year ever. Asset Management started well into 2017 with €5 billion net inflows so far in January across all regions led by U.S.
and EMEA. A large portion is driven by liquidity money market product but also a strong start for Passive ETF products in both U.S.
and EMEA. As you can see, we start into the year with a positive momentum in all divisions and we approach 2017 with a continued determination to pursue our restructuring, maintain our financial strength and engage our clients in what looks like an improved operating outlook.
I know this has been long, quite detailed. Let me now hand it over to John who will moderate the Q&A session.
John Andrews - Deutsche Bank AG
Operator, if we can begin the Q&A, please. Operator?
Operator
Ladies and gentlemen, at this time we will begin the question-and-answer session. And your first question is from Jernej Omahen of Goldman Sachs.
Please go ahead.
Jernej Omahen - Goldman Sachs International
Okay. So good afternoon from my side as well.
I guess the first question it's fair to kick it off by saying, well done on settling the U.S. litigation issues and on stabilizing the institution.
But I guess that, as a consequence, the debate is now going to shift from the financial stability aspect to the topic of profitability. And I have just one question on this.
And it goes as follows. So even post-settlement and stabilization, the funding costs for Deutsche Bank have risen and are higher today than at the time the restructuring plan was initially announced just over a year ago.
The balance sheet constraint, I guess, is higher than what you must have thought at the time of the announcement. And if we take all the bad things out from the results, so litigation and one-offs, we get to just below 5% return on equity.
So thinking about profitability in 2017 and 2018, when the starting point without litigation, without restructuring costs is 5%, when the funding costs are higher, when balance sheet is a constraint, how do we get from just below 5% to the 10% target or even perhaps just 7% or 8%? That would be my first question.
Maybe the second one, purely on regulation. You talked about the Trump effect on the revenue side of the equation.
It seems to be that there is a stalemate at the Basel Committee currently on finalizing Basel III. And I thought if you could share any thoughts with us on that.
Thanks a lot.
Marcus Schenck - Deutsche Bank AG
Jernej, Marcus, let me start and then, John, you add. So, on your first question, which is, obviously one which would probably warrant almost a longer discussion, let me highlight the core points.
First, I mean, we are seeing, at least relative to where we were three months ago, a tightening in our funding cost. But you're right.
It's higher than – and I think you're referring to what it looked like in October of 2015. And we clearly have to do more to bring that down.
With more and more clarity kicking in, in particular, on the litigation fronts, we would expect this to come down further. That's the first point.
Secondly, we have not yet seen a lot of structural improvements on the cost side. I was highlighting that our target to – excluding Postbank gets to an adjusted cost base by 2018 is to be below the €22 billion number.
And in fact, with that, you shouldn't interpret this as we're targeting to be at €21.9 billion. Now I don't want to hand out a number, but we clearly think we need to and can be more aggressive on that side, in particular utilizing – and that's why we put in place, I would say, a qualified hiring freeze.
We can utilize the natural turnover that we do have in the bank. That cost save will give us quite some uplift.
Most notably, quite frankly, you will also see this in our Retail business. And we do expect the revenue position of the bank that we had experienced in 2016 not to be representative for the coming years.
As we've mentioned several times, we are already here in January now seeing just from the way clients interact with us, but also me just looking into the daily numbers, that the situation is turning. And I think that's the most important point.
The 2016 profitability was heavily negatively impacted by a lot of noise and by very poor developments on the revenue side, which we do expect to turn. And that, combined with our cost measures, we do believe, were medium-term.
Now whether that's 2018, we'll have to see. That's still our target.
But I would say medium-term, we are clearly convinced we can take this bank to a 10% return. On the regulation side, Basel III/IV – I think the market calls it IV.
The regulators call it III. We all know what we're talking about.
I think what would be good is if we finally got clarity on what the outcome is, be it that there is no outcome, be it that there is a specific outcome. Right now, when asked, what do we think it will mean for us?
I would say it's still more likely that we will get some conclusion from the Basel Committee. In terms of what it means numerically for us, at this stage, we would still stick to what we have communicated in October 15.
Namely, it probably represents about €100 billion increase. The contribution on the Market Risk side from the FRTB is slightly lower than what we had expected back then, but it might be slightly higher on the credit side.
And the one thing where we are certain, even if they come to – if and when they come to a resolution now on Basel IV – the implementation will be much, much later than what we had originally thought. The EU Commission has communicated that they would consider an implementation not before the beginning of 2021, maybe even as late as 2022.
And even then there might be a phasing period, which could take it – looking at it today, it could be a seven-year to 10-year time horizon for this, which is very different compared to what we had anticipated 17 months ago where we were still of a view that everything would kick in, in 2019. Longwinded answer.
I would say our base case is we will get a resolution in Basel. It will mean an increase, but it will come only sometime in the next decade.
John Cryan - Deutsche Bank AG
Can I just add a little comment on your funding cost point, Jernej? You shouldn't forget that the funding cost increase from spread increase that we saw, particularly in the fourth quarter, doesn't have a dramatic impact on our overall cost of funds because although the funded balance sheet is around about €1 trillion, we're only talking about the non-deposit fraction of that.
And when our funding spreads were at their widest, we didn't lock them in. We didn't actually issue.
We have seen it tightening. We're not happy that it's tightened enough.
I actually think this company has always been extremely creditworthy. We just need to be able to show that with very long liquidity.
And one thing which I would add just not to overdo the optimism, if you think about our deposit business, we're actually getting some tailwinds now because, less so in euros but certainly in dollars, the shape of the yield curve is actually now enabling us to make money from our liabilities. So a change in the yield curve, I think, over time, will to some extent counter effect the effect over time of replenishing our spread-affected funding.
Jernej Omahen - Goldman Sachs International
Thanks for that. John, maybe if I just come back to your question very briefly.
So it used to be the case that Deutsche funded cheaper than any of its competitors, particularly in the Investment Banking space. So did I understand your answer correctly?
Do you expect that to return at some point in the future?
John Cryan - Deutsche Bank AG
That's why we turn up to work every day. No, I really do.
I mean, we're the Europe's leading bank. We should fund at a rate that reflects that.
Jernej Omahen - Goldman Sachs International
All right. Okay.
Thanks a lot.
Operator
Next question is from the line of Jon Peace of Credit Suisse. Please go ahead.
Jon Peace - Credit Suisse Securities (Europe) Ltd.
Yes. Thank you.
I think, Marcus, you said this morning that fixed income trading was up 40% in January which would be a terrific acceleration and put you on the first quarter 2015 run rate. And I just wondered, is that all client business.
Or was there anything unusual and lumpy in there? And then my second question was on Deutsche Postbank.
What's the book value of that business at the moment? Because I think it's a bit less than the equity you allocated to it in the Financial Data Supplement.
So I think it's a little bit less than €5 billion. And I just wondered, what is your sensitivity around the disposal of that business.
How much of a write-down are you prepared to accept? What sort of CET1 accretion are you ideally looking for?
Thank you.
Marcus Schenck - Deutsche Bank AG
Okay. Let me take the second question first.
We have not and don't plan to disclose the book value of our Postbank asset because it's not a terribly helpful metric to disclose, in particular when an M&A track is also an option, which is why I also find it difficult to comment on an acceptable write-down. I think the only data that we can point to is that this business has, rounding, €40 billion of Risk Weighted Assets, which would – where about €40 billion would leave the bank in case of a disposal, be that via an exit through the capital market or through an M&A deal.
And I guess one thing is also clear, and John has never made a secret out of that, I mean we will only be selling this asset if it gives us a meaningful capital relief, and hence, we will certainly not accept a major write-down. But I really ask for your understanding that from a negotiation point of view, it wouldn't be terribly smart for us to disclose the book value.
On your first question, so, on the debt side, yes I did mention that January have seen an almost exactly 40% increase when comparing January 2017 with January 2016. There's nothing unusual there.
It's clearly not all client activity. Some of that is also buy and hold positions.
Let me, in this context, also highlight that – because we don't want to only throw out selective positive metrics, although, quite frankly, the pickup that we're seeing is in almost every business – where it's still pretty slow is in Equity Sales & Trading, where it's flattish to slightly down relative to the January 2016 numbers. This is predominantly driven by the fact that it just takes some time until you in a way bring back particular those prime brokerage balances which I think we've been fairly clear, some of which we lost in those unfortunate six weeks between September 2014 and the end of October.
But there is reengagement and we have gradually seeing this turn. So on the Equity side, I'd be more cautious.
It will take more time. The Debt side has reacted much, much faster.
Jon Peace - Credit Suisse Securities (Europe) Ltd.
Great. Thank you.
Operator
Next question is from the line of Kian Abouhossein of JPMorgan. Please go ahead.
Kian Abouhossein - JPMorgan Securities Plc
Yes. Thanks for taking my question.
First of all, congratulations, John, on the NCOU. That seems to be by far the best-performing business meeting its budget, I assume, for the year.
I wanted to understand the Risk Weighted Assets movements in the group going forward because when I look at your capital generation, it's been mainly through shrinkage of Risk Weighted Assets. And it looks like that has been your focus for the fourth quarter.
And I wonder, 2017, is that going to be a year of let's reengage and generate profits? I know January started well.
But still, is that going to be the focus or is it going to be the key issue is capital buildup? And that could mean potential further shrinkage.
And that takes me to the Risk Weighted Asset question considering that you used to have or still have a target of €320 billion by 2018 ex-Postbank if that is still relevant, that target, if you're there now ex-Postbank. And the second question relates to the cost base.
If I adjust for variable compensation, I'm looking at roughly a cost of €25.8 billion run rate. It's probably even a bit lower I would think.
And your original target was €26.5 billion. So you're running roughly €1 billion lower and I wonder is it not time to maybe reconsider the below €22 billion target and give a more updated target at this point?
Thank you.
Marcus Schenck - Deutsche Bank AG
I guess I'll give it a first shot and then, John, you add. So, on your first question, RWA development in 2017 and focus.
On the side of Risk Weighted Assets, we would expect those to actually go up, the reason – when you would take as a starting point the end of 2016 situation. And let me highlight and then I'll come back to 2017 what really happened in the fourth quarter.
In a way, it's quite simple. You had a €30 billion reduction when you look at the whole group.
€10 billion is from the disposal of Hua Xia and Abbey; €10 billion – I'm rounding a little bit – is from the NCOU; and €10 billion is in CIB end markets. This third €10 billion in CIB end markets, look at this as this was a reduction in business volume which we don't think is sustainable, as in will come back and we're actually seeing quite a bit of that already in the first month.
So, you should make the assumption that there will be an increase in that space which will also take the Risk Weighted Assets back up a bit. And I think this is more a level which I think is sustainable or more sustainable throughout the year.
Now there will always be some movement up or down. We will see some increase on the side of Operational Risk assets against the backdrop that the litigation settlements that we had in Q4 will actually only impact our Operational Risk Weighted Assets with a one quarter delay.
So there will be some uplift. So long winded answer to highlight that, €358 billion will probably grow by €10 billion-plus in the very near future and is then more representative for how you should think about Deutsche Bank in 2017.
We still need to manage two items in parallel, which is the capital buildup until the end of 2018 where we need to be or want to be at least at 12.5%, and we're committed to that and do everything that is necessary. But at the same time, we also want 2017 to be a year where from a profitability point of view we see an improvement.
I don't think John or I want to sit here 12 months from now having to explain another year where we incurred a loss. We'll do our utmost to make sure that is not the case.
Now on the cost side, your second point, you rightfully observed that it looks like we're a little bit ahead of the curve in terms of – or ahead of our own targets, which is why I've said in my remarks the max €22 billion target for the adjusted cost base excluding Postbank. In a way, that's still our target until we update that target, which we're not doing today, but we've made it very clear, I think, throughout the meeting that this is an upper limit.
And we definitely expect to do better, and we'll do our utmost to do better. But today, we are not yet in a position to give out a more specific number there.
We're still working on that.
Kian Abouhossein - JPMorgan Securities Plc
Okay. Thank you.
Operator
And the next question is from Stuart Graham of Autonomous Research. Please go ahead.
Stuart O. Graham - Autonomous Research LLP
Oh. Hi, guys.
Thanks for taking my question. I have two questions on capital first.
The first question is on RWAs again. At the October 2015 Strategy Update, you talked about €40 billion of RWA inflation mainly due to Operational Risk over the period 2015 to 2018, and that was due to industry loss data, so nothing to do with Basel IV.
I think so far we've had less than €7 billion of that, so my first question is, how should we think about that original €40 billion guidance? And within that, what if anything are you assuming from the ECB's TRIM project?
The second question then is on the SREP ratio, which I think you're fully loaded SREP – fully loaded is 12.76%, which I'm calculating by taking the disclosed 11.76% and adding a Pillar 2G of 1%. So I guess the 12.5% CET1 target was based on a 25 basis points buffer on the old fully loaded SREP of 12.25%.
So I guess I'm struggling to understand why 12.5% is still the right target on a fully loaded basis. Shouldn't it be more like 13%?
That was my second question. Thank you.
Marcus Schenck - Deutsche Bank AG
I'll take the questions in the reverse order. So let me start with – I don't know where our SREP level is going to be in 2019 because we have not received our SREP letter for that year.
What we do know is the levels we need to achieve in 2017 where the requirements that we need to be is just 9.51%. Now you can look at this and look at the development that we will see with the phasing-in of the capital conservation buffer as well as the G-SIB buffer, which will gradually take that number up, at the end, again, I mean people will probably know or notice the G-SIB buffer will, over time, double from 1% to 2%, and the capital conservation buffer will also double from where it is now.
Now it is at 1.25%, and it will grow to 2.5%. These are the movements that we know which will move, over time, until 2019, should move the MDA up mathematically.
This has always said that our guide (01:13:34) would move it to 11.51%. How big then the add-on from the Pillar 2 guidance is?
Quite frankly, we don't know. And which is why we would stick to what we have been saying so far – namely, we want to be at least at 12.5%.
That doesn't suggest we want to be at 12.51%. We want to be at least at 12.5%.
But these are the facts that we know today. On your first question regarding the Operational Risk Weighted Assets, you rightfully point out that we had in October of 2017 said that we are expecting a good portion of the €100 billion to come from Op Risk.
Some of that will be driven by the industry and our own losses. And as I highlighted, you should expect – the market should expect some increase in Operational Risk Weighted Assets in the year 2017 on the back of the large RMBS settlement and other settlements that we have.
I don't want to throw out a number but it's probably – it can be a high-single-digit number which we will see this year. The outcome from Basel, we don't know.
We actually think what we're hearing is that the impact on Operational Risk right now looks a bit more muted than what we had anticipated in October of 2015 on the credit side. On the other hand, I would say, there are still some items which are open there that could be somewhat downside in a sense that the number might be lower.
On balance, we would still stick to the €100 billion that we had highlighted.
Stuart O. Graham - Autonomous Research LLP
Could I just clarify on that then? So you finished the year with Risk Weighted Assets of €358 billion.
You're saying there will be some bounce back in CIB and Global Markets, so let's say that is maybe €10 billion. Then you've got the Operational Risk which maybe that's €8 billion.
So it's kind of €18 billion of RWA increase-ish. And then ECB's TRIM project, do you have any clarity around that?
Marcus Schenck - Deutsche Bank AG
Given – first of all, timing wise, it's quite some time until this will really sort of kick in and we'll potentially start to have an impact and we don't know in what direction. We don't expect that to have an impact in 2017.
Stuart O. Graham - Autonomous Research LLP
Okay. And then just to finalize then, you're basically saying your SREP ratio, you're managing the bank on the phased-in, not on the fully loaded because you don't know what the fully loaded is going to be in 2019, yeah?
Marcus Schenck - Deutsche Bank AG
Well, in 2019, phased-in and fully loaded will be the same. There is no difference.
Stuart O. Graham - Autonomous Research LLP
But you don't know what the Pillar 2G will be at that point?
Marcus Schenck - Deutsche Bank AG
That's correct. That is correct.
Stuart O. Graham - Autonomous Research LLP
Got it. Thank you.
Marcus Schenck - Deutsche Bank AG
Yeah. Thanks, Stuart.
Operator
Next question is from the line of Daniele Brupbacher of UBS. Please go ahead.
Daniele Brupbacher - UBS AG
Thank you. Good afternoon.
Can I just briefly come back to the MDA trigger level you've just discussed? And I mean, you said that there is variables.
If CCB doubles, that's 125 basis points and if G-SIB doubles to 2%, that's another 100 basis points. So that my calculation would be a 225 basis point increase compared to the 9.51%.
So am I wrong assuming it would increase on a five years (01:17:26) basis to 11.76%? So a bit higher.
Just wanted to clarify that. And then I wanted to ask about the Risk Weighted Assets in Global Markets.
Obviously a big success in reducing Non-Core. But I was wondering within Global Markets, you also at the Investor Day announced certain reduction targets, I think it was €30 billion or something, but that is obviously a net number.
And I was just wondering how you think about, let's call it, recycling of existing RWAs. There must be some RWA which is relatively unprofitable and whether you can sort of get out of these positions and reinvest that money at much higher levels.
And then, John, just regarding the interest rate sensitivity that was very useful in terms of how you think about it and what your exposure could be. But will it be somewhat possible to be a bit more specific around what a, let's say, 100 basis point parallel shift of the U.S.
yield curve would mean at least like in the banking book? I'm not talking about second order impact in terms of trading volumes, et cetera.
That would be extremely helpful. Thank you.
Marcus Schenck - Deutsche Bank AG
On the first question, the 9.51% is still on a phased-in basis. So, when you do the math in the – and we're happy to send you a sheet that shows that and maybe we actually can even put this on the web.
On a fully-loaded basis, you will then in 2019 get to the 11.51%. You do the second question?
John Cryan - Deutsche Bank AG
Yes. And well, the second sub-part of that was the recycling of low return RWA, and that is very much part of the strategy for Global Markets.
In fact, we're having the guys in markets formalize that a bit more by setting aside a clear view for us in the senior management of the company what assets are effectively legacy or back book, and then we will see a recycling. I mean, to some extent, if you take our forex business, they're recycling almost daily, weekly, but there would be the ability for us to recycle throughout the group some of the Risk Weighted Assets or the capital capacity that's freed up by running off some of the old back books.
Sorry. On the interest rates sensitivity, I mean, it's very, very broad arithmetic, but if you took all of our spread-effected funding and you had a parallel shift of 100 basis points, you could do some quick arithmetic and get to something like €0.5 billion.
But it's not great arithmetic, and we wouldn't expect a parallel shift anyway. But it's that order of magnitude.
Daniele Brupbacher - UBS AG
Okay. Thank you.
That's very helpful.
Operator
Next question is from Magdalena Stoklosa of Morgan Stanley. Please go ahead.
Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc
Thanks very much. Good afternoon.
My first question is more structurally about the evolution of your FICC business from here. We've heard about better client engagement, better trading environment, but within your FICC portfolio going forward, where are you likely and of most to commit some balance sheet?
And how you think about it more strategically? And on the industry level, if you were to take a stab at the magnitude of the global FICC revenue growth this year, what would your guesstimate be?
So that's my first question. And my second request is a follow-up from my predecessor.
The interest rate sensitivity – of course, we are kind of looking at a revenue split, which almost 50% is NII. So would you be able to give us slightly more context in terms of your sensitivity to short-end rate both in U.S.
and in Europe? And also the level of potential upside driven by the steepness of the yields, be it the bonds or in the U.S.?
Thank you.
John Cryan - Deutsche Bank AG
Okay. Let me take a crack at the evolution of the fixed income business.
The big profit driver within our overall complex fixed income trading has always been our Credit Solutions business where credit trading house, first and foremost, when it comes to driving the profit line, and that would be generally the area in which we would to allocate capital. Now within fixed income, comes our forex business.
It doesn't have much elasticity in demand. It's a very large, very stable business, but it's one we like.
And we like the returns in that. In rates, I think it's fair to say a lot of the business that we used to write, a lot of the long-dated business, some of the complex and non-linear rates products that were written have really gone out of fashion, and that's more now of almost a securities business, centrally cleared, daily margined.
And the margins there have fallen. And generally, our old OTC derivatives books are running off, and they're being replaced by a lot more liquid and materialized types of instruments.
But credit, I think, is the area where we have a lot of value, where we're one of the market leaders, and where we're seeing, at the moment, a fair amount of client engagement. And it's very complementary to our client franchise out of the CIB.
Marcus Schenck - Deutsche Bank AG
On interest rates, I mean, admittedly I don't have for you broken down into currency and then short-end and the long-end of the curve, what does it mean? What may be at least directionally helpful is when you look at a shift in the overall curve by 100 basis points then for our stable businesses, and only for those you can actually give a reasonably reliable guidance, that represents an upward shift in the curve by 100 basis points, represents about €600 million higher revenue for the bank.
So in our Global Markets business, it's quite dependent on how you're positioned and it's much more difficult and can actually vary the answer depending on the position of the bank, which is why I would shy away from giving any guidance there. But for the stable businesses or where we take deposits, 100 basis point shift is roughly equivalent to a €600 million improvement.
Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc
Can we – and I'm sorry to be drilling on this. But, particularly, your euro sensitivity, because there's a friction in the market you could argue.
Euribor had shifted up quite significantly over the last month. And if we assume some normalization from the negative, minus €40 billion of the ECB, that's short-end of the curve.
Particularly kind of within the Postbank, particularly within your kind of banking book in Germany and in Western Europe in general, what would that sensitivity be? Because it would be very helpful for us as a context of how to sensitize the revenues going forward in those banking books.
Marcus Schenck - Deutsche Bank AG
So we need to come back to you there. The only reliable data I can give you now is what I said before.
Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc
Okay. Thank you very much.
Operator
Next question is from Andrew Coombs of Citi. Please go ahead.
Andrew P. Coombs - Citigroup Global Markets Ltd.
Yes. Good afternoon.
One question on slide 17 (sic) [16] on the Global Markets revenue outlook and then a second question on slide 34 on litigation. If I start with the Global Markets revenues, I'm intrigued by your comments particularly on the Prime.
You said the FX being quick to recover. Equities will take a longer time.
So with that in mind, could you give us an idea of the magnitude of the move in Prime Finance client balances over the past couple of quarters and perhaps how much of that relates to clients actually switching prime brokers, i.e., a permanent rebasing lower. And then my second question on slide 34.
You made a lot of progress on settling some of the outstanding litigation cases. So I was slightly surprised that the contingent litigation liabilities have increased from €1.6 billion to €2.2 billion.
Perhaps you could elaborate on what's driving that? You mentioned increased civil claims but I'd be interested in your commentary.
Thank you.
Marcus Schenck - Deutsche Bank AG
So maybe I start with your first question, which I understand is related to our Prime brokerage business. In terms of balances that we lost in this tricky time period, I would say, it's sort of in the high-teens percentage points that we have lost.
And we are now or since then we have seen a recovery of around a quarter of what we had lost. You take the litigation?
John Cryan - Deutsche Bank AG
Yes. On the contingent liabilities, we don't break them down.
A lot of them are related still to legacy positions where we've received suits against us of a civil nature but relating to themes that you'll be familiar with.
Andrew P. Coombs - Citigroup Global Markets Ltd.
Okay. Just last -
Marcus Schenck - Deutsche Bank AG
The only item I'd like to add maybe to the contingent liability movement, because sometimes this excites people, the increase that we have seen in contingent liabilities is all outside the United States.
Andrew P. Coombs - Citigroup Global Markets Ltd.
Okay. Thank you.
As a follow up (01:28:26) -
Marcus Schenck - Deutsche Bank AG
You're breaking up and your line is very – it's not stable.
John Cryan - Deutsche Bank AG
Andrew, we cannot hear you.
Operator
Mr. Coombs, do you have a handset to use?
Andrew P. Coombs - Citigroup Global Markets Ltd.
Is that clear?
John Cryan - Deutsche Bank AG
No.
Operator
I'm sorry.
Andrew P. Coombs - Citigroup Global Markets Ltd.
I'll come back. Thank you.
Operator
Thank you. And we go on with the next questioner is Fiona Swaffield from RBC.
Fiona M. Swaffield - RBC Europe Ltd.
Hi. Good afternoon.
I had two questions. One was on leverage exposure and what we should look at going forward because I think if you take out Postbank, you're kind of at – you're already past your goals.
So is there scope to reduce the leverage further, any more efficiencies going on and what the plan would be there? And the second is, you helpfully gave the impact or estimated impact of business exits and other moving parts on Global Markets.
If we look at PWCC revenues, how much do you think the decline in 2016 was just due to idiosyncratic risk in that position? Thanks.
John Cryan - Deutsche Bank AG
I'll do the easy one, which was the first one, and let Marcus do the second. On leverage exposure, I do think there is scope for a reduction in our CRD4 leverage.
The two areas that I would highlight, one is our liquidity pool. There will come a day when we don't need to run such enormous balances to placate our creditors and we should be able to take that down materially.
And then we have, as we've mentioned before, significant add-on in our derivatives book, which I think is really a response to the fact that there's a limited confidence in some of our contract administration systems. And, over time, that will come off and that's still quite a sizable amount.
I think it's shy of €150 billion or so.
Marcus Schenck - Deutsche Bank AG
Your second question was related to the – what we estimate to be the impact from sort of the DB idiosyncratic effects on our revenues. So we gave you where we think this is for markets.
So, again, just for sake of making sure that it's clear. Markets, for the full-year, we had a reduction in revenues to the tune of €1.6 billion, of which €400 million we would attribute to conscious decisions the bank took in terms of exiting geographies and business segments.
And the remaining €1.2 billion is – a bit more than 50% of that is what we think is DB idiosyncratic noise. The equivalent metric for PWCC – and, again, there's no science behind it but it's kind of slightly shy of €100 million has probably been the impact largely in the Wealth business.
Fiona M. Swaffield - RBC Europe Ltd.
Thanks very much.
Operator
Next question is from the line of Al Alevizakos of HSBC. Please go ahead.
Alevizos Alevizakos - HSBC Bank Plc
Hi. Thank you for taking my question.
I've got one question more technical and one more strategic. I'm going to start with the more technical one on the back of you just said – what you just said, Marcus.
I'm just interested to know on Operational Risk. I know that we're going to take additional RWA in 2017 because of all the settlements that just happened, but I'm just wondering after how many years actually can you reduce the Operational Risk related to specific losses that happened in the past.
So, for example, the libel was a 2012 event. When will you be able to deduct it off the Operational Risk pool for the overall industry and for yourself?
And then the second question is about the overall strategy for the Investment Bank. I do understand that you're trying basically to regain some market share.
However, given that you have to keep on cutting costs and compensation and defer basically a lot of the bonuses, what actually makes you comfortable in the current market that you can retain all your top performers compared to some of your peers that actually they've got, let's say, more capital and they are coming in quite aggressively? Thank you.
John Cryan - Deutsche Bank AG
Let me take the second one first. On strategy, it's our intention to pay people market rates.
The cost excess in our Investment Bank has always been our administration systems. We run far too many booking systems, far too many booking model.
And we gave optionality over the way we did things to people and we're imposing the Deutsche Bank way of doing things. We're standardizing.
We're computerizing. And the general and administrative expenses of the bank should come down significantly.
The constraint would have been more in terms of capital resources and RWA capacity, but that, as we've shown, is plentiful. So I don't see any constraint over growing that business quite significantly in the course of the next year or two years.
Marcus Schenck - Deutsche Bank AG
Your question with regard to Operational Risk and when that starts to roll off, typically there would be something like a 10-year timeline, roughly, for that. So we would expect actually in 2018 the first items being starting to be taken out of our historical lock, so to say, but as you can see, it's still going to take quite some time until this will lead to a more material reduction in Operational Risk.
And then also we need to see what the outcome in Basel is going to be, because it could be that the entire Operational Risk regime may actually in a way also change and be much more tied to size as measured in revenues and become more proportionate to that. But given today's rules, we would start to see first things roll off in 2018, but we'll have this for quite a while in our RWA.
Alevizos Alevizakos - HSBC Bank Plc
Great. Thank you very much.
John Andrews - Deutsche Bank AG
Thanks. And, operator, let me apologize in advance.
We're 95 minutes into this, which is the length of your typical Hollywood film, and I know John and Marcus have an obligation so we have time for just one more question.
Operator
And the question is from Andrew Stimpson of Bank of America. Please go ahead.
Andrew Stimpson - Bank of America Merrill Lynch
Thanks, guys. Thanks for squeezing me in there.
First question on Risk Weighted Assets, and just really helpful commentary around the rebound you expect in markets and then on Operational Risk. But I'm just wondering about Market Risk Weighted Assets.
On slide 45 of the presentation packet, it looks like I guess that would make it kind of Christmastime or late December you had a big, what I would consider, VaR exception. I'm just wondering if that's going to feed through to some Market Risk Weighted Assets that isn't to do with client activity.
And when that might feed through if that is the case? And then secondly on – I suppose this is a question about leverage.
The LCR is at 128%. It is a bit higher than it used to, but it's not exceptionally high versus many of your peers.
So, John, I know you said that you would expect that to come down, but given it's not that high versus peers, how much do you think that can really come down? And is it high because of CCAR?
So CCAR in the U.S., once that's done it's going to come down? Because by my thinking if that doesn't come down, and you do see some of your securities financing transaction balances come back, then that's going to place some pretty significant backwards pressure on your leverage ratio.
So I'm just trying to think how to pair that with the business growth you're talking about in January as well, please. Thank you.
John Cryan - Deutsche Bank AG
Well, on the liquidity buffer, I was being aspirational as to there being a time when we wouldn't need quite so much. I don't think it will be in the course of 2017 necessarily, although we'll see how it pans out.
But I wouldn't expect to see that come down too much. We do need to make sure, though, that it doesn't grow much beyond where it is today.
Marcus Schenck - Deutsche Bank AG
Despite that you did spot in the Appendix, we'll not have an impact on the Market Risk Weighted Assets going forward.
Andrew Stimpson - Bank of America Merrill Lynch
Okay. Maybe I'll follow up on that later.
John Andrews - Deutsche Bank AG
Great. Thank you, everyone, for your patience, and apologies to a small handful who could not get in their queues given the extended commentary we had to do today given it was full-year results.
Obviously the IR team is available for any follow-up questions you may have, and we wish you a good rest of the day.
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.