Oct 26, 2017
Executives
John Andrews - Deutsche Bank AG James von Moltke - Deutsche Bank AG John Cryan - Deutsche Bank AG
Analysts
Kian Abouhossein - JPMorgan Securities Plc Jernej Omahen - Goldman Sachs Jon Peace - Credit Suisse Securities (Europe) Ltd. Jeremy Sigee - Exane BNP Paribas Magdalena L.
Stoklosa - Morgan Stanley & Co. International Plc Andrew P.
Coombs - Citigroup Global Markets Ltd. Stuart O.
Graham - Autonomous Research LLP Daniele Brupbacher - UBS AG Anke Reingen - RBC Europe Ltd. Alevizos Alevizakos - HSBC Bank Plc Adam Terelak - Mediobanca SpA (United Kingdom) Natacha Blackman - Société Générale SA (UK)
Operator
Ladies and gentlemen, thank you for standing by. I am here, your Chorus Call operator.
Welcome and thank you for joining the Third Quarter 2017 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 would like to welcome everyone to our 2017 third quarter earnings call.
I'm joined today by John Cryan, our Chief Executive Officer, and James von Moltke, the Chief Financial Officer. James will walk you through the analyst presentation, which is available on our website at www.db.com and then both, James and John, will be happy to take your questions.
As always, we ask for the sake of efficiency and fairness the questioners limit themselves to two questions, so that others can be given the opportunity to participate in the call. Let me also provide the normal health warning, asking you to pay particular attention to the cautionary statements regarding any forward-looking comments.
You will find those statements at the end of the investor presentation. With those details out of the way, let me please hand it over to James.
James von Moltke - Deutsche Bank AG
Thank you, John, and welcome to everyone. Let me start with some high-level observations on slide 2.
We continue to improve profitability this year as we make progress on costs in a difficult revenue environment. While reported revenues for the nine-month period declined 10%, excluding the impact of DVA and own credit, revenues declined 5.5%, while total non-interest expenses declined 12% and adjusted costs dropped 4.5% both on an FX neutral basis.
Nine-month IBIT was €2.6 billion, a marked improvement versus 2016, but clearly we have a lot more work to do. While the challenging operating environment affected our performance, all of our businesses are on track in executing their strategic plans.
First, in PCB, we completed restructuring initiatives in both Postbank and Deutsche Bank that included branch closures, a regional reorganization and an operational streamlining that reduced FTE and more importantly, prepared the two banks for their eventual merger. We also concluded a high-level labor agreement in Germany that supports our merger and synergy plans.
The detailed planning for the merger is complete and we have submitted our full integration plan to the ECB. As a result, we are on track to merge the legal entities that house our German retail and commercial banks in the first half of 2018.
Second, the preparations for the partial flotation of Deutsche Asset Management are proceeding well. We're making good progress on the operational and legal separation of the business.
We also aligned the organization structure of the business by bringing active, passive and alternative capabilities into one integrated investment platform and we created a single global coverage group. Third, in CIB, we made progress, regaining market share in several important sales and trading areas like rates, particularly European rates, while investing in key areas like credit and corporate finance by making a number of targeted hires.
Beyond these high-level initiatives, we also made progress in business disposals, signing five agreements since the beginning of the third quarter, including sales of our corporate services and alternative fund services businesses. We remain focused on these and other contemplated disposals that reduce complexity and costs.
We continue to make progress on litigation and enforcement matters, having resolved a number of cases with only minimal impact on reported litigation costs. Lastly, we maintained a strong balance sheet to support future growth and serve client needs, while preserving the soundness of the bank.
The group financial summary on page 3 presents our results, which I will address in greater detail in the following pages. To reiterate my previous comments, IBIT was materially higher than last year at €933 million this quarter and €2.6 billion for the first nine months as the decline in non-interest expenses more than offset the revenue pressure.
And we continue to maintain our financial strength with a fully loaded CET1 ratio of 13.8% and a leverage ratio of 3.8%. Turning to non-interest expenses on page 4, adjusted for FX, third quarter non-interest expenses declined 11% from the prior period or over €700 million to €5.7 billion.
About €400 million of the decline was from lower litigation and restructuring costs. Additionally, approximately €100 million of the decline was from the absence of costs related to Abbey Life policyholder claims and benefits and impairments.
FX neutral adjusted costs were down 3% year-over-year, which I'll address on the next page. Looking at the nine-month comparison, non-interest expenses on an FX adjusted basis declined by €2.5 billion.
Of the decline, €1.2 billion resulted from lower litigation and restructuring expense and approximately €500 million was from the combination of the absence of Abbey Life and an impairment charge recorded in the prior period. Nine month to-date adjusted costs fell 4% or over €800 million on an ex-FX basis.
On page 5, adjusted costs of €5.5 billion declined €188 million or 3% on an FX neutral basis in the third quarter. Approximately €100 million of that decline was in other expenses and in part reflected the absence of an operating business in the NCOU that was sold in late 2016.
Professional services declined €84 million from lower utilization of outside legal services, consultant fee and other external support. Compensation expense was flat to last year in the third quarter, reflecting lower salary expense resulting from head count declines, offset by higher accruals for current-year variable compensation as we returned to a more normalized remuneration structure this year.
IT costs increased 3% largely from increased amortization for self-developed software as we continue to make needed IT investments to drive greater automation, enhanced controls and lower costs. Turning to the nine-month period, adjusted costs declined €820 million or 4% on an FX neutral basis.
The drivers were similar to the quarterly trends with lower other expense largely from the absence of the NCOU, movements in compensation expense, higher IT and lower professional services. Turning to capital items on page 6, the fully loaded CET1 ratio was 13.8% at quarter-end and 14.6% on a phase-in basis, both slightly lower than the second quarter.
The lower ratios were driven by the decline of CET1 capital to €49.1 billion. Excluding the impact of FX, the CET1 capital decline resulted from a number of items, including movements in DTA, pension plan gains and losses, intangibles and OCI.
Also recall that our reported net income is offset by the ECB's dividend guidelines for regulatory capital purposes, which require us to assume a 100% payout ratio. Risk-weighted assets were unchanged in the third quarter at €355 billion as increased RWA in CIB, largely for op risk, was offset by the impact of FX translation.
Turning to leverage on page 7, the fully loaded leverage ratio was flat at 3.8% in the third quarter. On a reported basis, leverage exposure fell €23 billion to €1.4 trillion, but increased by €1 billion on an FX-adjusted basis as growth in CIB was mostly offset by a decline in cash.
Let me now turn to the segment results, starting with CIB on page 9. CIB reported third quarter IBIT of €361 million, down 63% year-over-year.
This was largely driven by a 23% decline in quarterly revenues to €3.5 billion. The revenue performance reflected the difficult market environment in the third quarter, which continued from the second quarter with subdued client activity and continued low volatility.
Partially offsetting the lower revenues were non-interest expenses that fell 10% or approximately €300 million to €3 billion in the third quarter. The expense decline was driven by lower litigation and restructuring expense.
Adjusted costs were essentially flat in the third quarter as favorable FX and slightly lower compensation costs were offset by higher IT and other expenses. RWA of €242 billion declined 2% from the prior year, reflecting ongoing de-risking and the impact of FX, which offset increases in op risk RWA and from leveraged NCOU assets being transferred into CIB at the start of 2017.
Let me now turn to the individual businesses within CIB, starting on page 10, with Global Transaction Banking and Origination and Advisory. GTB reported €974 million of revenues in the third quarter, in line with the prior quarter, but 14% below last year's third quarter.
GTB's revenue decline reflected a number of factors. Roughly one-third was due to U.S.
dollar weakening and increased funding costs related to the methodology change I outlined last quarter for charging the cost of liquidity to the businesses. Additionally, about one-third of the decline was from strategic client and product perimeter reductions.
The remainder was largely the absence of one-off items recorded in the prior year and ongoing margin pressure as well as lower volumes. Origination and Advisory revenues declined 24% to €475 million.
The major driver of the decline was debt origination, where revenues fell 27% to €287 million in the quarter as market issuance volumes in loans and high-grade were lower than the third quarter and as we noted before, we chose to reduce our activity in the U.S. leveraged finance market due to changes in our credit risk appetite.
Equity origination revenues fell 25% to €66 million and advisory revenues decreased 14% to €122 million. While market activity levels remained generally subdued, many of the transactions that generated revenues this quarter were mandated towards the end of last year when Deutsche Bank was subjected to idiosyncratic stress.
We believe in this quarter's results, we are seeing lag effect of mandates missed at that time. Nonetheless, we believe this is a transitory challenge and we continue to build up our corporate finance capabilities with targeted hires and remain confident that we will grow our market share.
Let me now turn to our markets business on page 11. Starting with financing, which you recall, we separated largely from our former Debt Sales & Trading segment with our second quarter results.
Financing reported revenues of €610 million in the third quarter, an increase of 5% from the prior year. These results reflected higher revenues in commercial real estate and asset-backed lending.
FIC Sales & Trading third quarter revenues declined 36% year-over-year to roughly €1 billion. For purposes of a like-to-like comparison to our peers, if we had reported the third quarter using our prior FIC Sales & Trading segment that was in effect last year that included a large portion of the revenues now in the reported financing segment, the comparable year-over-year decline in revenues would have been 24%.
The market environment for fixed income remained challenging in the third quarter with subdued client activity and low volatility across all major businesses. Credit revenues were significantly lower compared to a very strong third quarter of 2016, which benefited from the higher flow activity and strong market conditions.
Rates revenues also declined compared to a very strong prior-year quarter as low volatility impacted client volumes. FX revenues declined as both volatility and client flows were lower compared to last year, which was very active for FX and the aftermath of the Brexit vote.
Equity Sales & Trading revenues declined 16% to €525 million in the third quarter, reflecting a year-over-year decline in Prime Finance, although revenues increased versus the prior quarter, and improved cash equities revenues, which included a gain on a disposal and lower equity derivatives revenues reflecting reduced client flow and persistently low volatility. Let me note that we are confident in the strength of our CIB franchise.
We remain focused on covering our clients, investing in our key franchises and growing market share. Now, let's move to the Private & Commercial Bank on page 12.
PCB reported third quarter IBIT of €332 million, a 78% increase from the prior year. Third quarter revenues of €2.6 billion increased 3% year-over-year.
The revenue growth included a number of one-off items, including €108 million gain from the sale of a stake in Concardis, a German payment services provider, and further gains from the workout of legacy positions in Sal. Oppenheim.
Offsetting the gains was the absence of €81 million in the prior year from the U.S. PCS business, which was sold in the third quarter of 2016.
Excluding the impact of these items, year-over-year revenues were essentially flat as the revenue pressure from the interest rate environment was, to a large extent, offset by additional fee income, mainly generated in Postbank. Non-interest expenses declined 2% in the quarter and adjusted cost declined 4% as investment in digitalization, regulatory initiatives and higher performance-related compensation expense were more than offset by the absence of PCS costs and the benefits from the restructuring activities I referred to earlier, including the completion of the PCC branch restructuring program.
As a result of the restructuring efforts to-date, approximate net head count in PCB declined 1,400 in 2017 and 2,200 in the last 12 months. Turning now to the individual businesses within PCB on page 13, third quarter revenues in Private & Commercial Clients increased 7% to €1.3 billion.
This growth reflected €95 million of the gain from the Concardis sale. Excluding Concardis, revenues in PCC were down less than 1% year-on-year as lower deposit revenues were largely offset by growth in other areas, particularly fee income from investment products.
Postbank reported third quarter revenues of €824 million, 6% above the prior-year period. This growth reflected higher fee income, largely from a new pricing model on current accounts, higher investment product revenues as well as increased loan revenues as lending volumes grew.
This growth more than offset continued declines in deposit revenue from the interest rate environment. Additionally, Postbank recorded a €13 million gain from the Concardis sale in the quarter.
Wealth Management reported third quarter revenues of €429 million, a 14% decline from the prior year. The primary driver of the decline was the absence of €81 million from the PCS business that was sold last year.
FX translation effects also contributed to the decline. These effects were partially offset by gains from a further successful workout of Sal.
Oppenheim legacy positions. Wealth Management net interest income also declined year-over-year because of loan book sales and a lower deposit base, while commission and fee income remained essentially flat, reflecting good momentum in Germany and Asia Pacific.
Turning now to Deutsche Asset Management on page 14, as it was the case last quarter, we are showing the results for the current and prior periods, excluding the impact of the Abbey Life gross-up on net revenues and non-interest expenses, as Abbey Life was sold at the end of 2016. The results this quarter have a number of items that mask the operational performance, including a recovery related to a real estate fund this quarter and the absence of a number of non-recurring items recorded in the prior-year period.
While reported revenues of €628 million were flat year-over-year, if you exclude the effects of the non-recurring items, revenues declined 3%. However, that revenue decline was largely from lower performance fees and alternatives, where free recognition is periodic.
Thus, the results were a timing rather than a performance issue. Non-interest expenses, excluding the Abbey Life gross-up, of €433 million in the quarter were unchanged year-over-year with the absence of core Abbey Life costs and lower restructuring expenses, offset by higher compensation and benefits costs.
Year-over-year invested assets declined 1% to €711 billion at quarter-end with a net new asset inflow of €4 billion in the quarter and market appreciation being offset largely by the impact of foreign exchange and of divestments, primarily assets in Abbey. Let me turn briefly to Consolidation & Adjustments on page 15.
C&A reported IBIT of €44 million in the quarter, mainly driven by valuation and timing differences of €186 million. Let me now end with some comments on outlook.
First, economic strength around the globe remained strong, particularly in the eurozone as growth expectations recently have been improving and sustained economic growth is ultimately the key driver of our business. Nonetheless, the capital markets revenue environment remained muted with subdued client activity and low volatility across a range of markets and that trend has continued thus far in October.
As we look to the fourth quarter, costs remain a top priority and we expect the progress we've shown in maintaining quarterly year-over-year declines in adjusted costs to continue, although we expect the decline to be smaller, reflecting in part our return to a more normalized variable compensation structure. Obviously, final expense numbers will be subject to many decisions, including those around compensation that will be made later in the quarter.
And as we've noted in prior guidance, we anticipate booking a restructuring charge in the fourth quarter triggered in part by the labor agreement relating to the planned merger of our German retail and commercial banks as well as other planned restructuring. Litigation remains difficult to forecast and has year-to-date been meaningfully below our own initial expectations.
While I can't give you particularly detailed guidance, we still expect to book higher litigation charges in the fourth quarter than for the first nine months of 2017. Finally, credit quality continues to improve and as we've noted in the past, we expect credit provisions in 2017 to be below 2016, but it is worth mentioning that credit provisions thus far in 2017 have benefited from releases that may not repeat.
John and I would be happy to take your questions.
John Andrews - Deutsche Bank AG
Operator, can we start the question session, please?
Operator
Ladies and gentlemen, at this time, we will begin the question-and-answer session. And the first question is from the line of Kian Abouhossein with JPMorgan.
Please go ahead.
Kian Abouhossein - JPMorgan Securities Plc
...taking my questions. The first question is related to the cost guidance that you've given on page 22.
You talk about slightly lower cost than the 2016 cost number and the quarter before, you talk about a further decline from 2016. I'm just wondering should we read something into the slightly different text?
Are there any additional costs that we need to think about or compensation-related issues that you just mentioned, if you could give some clarity in that respect? And then, the second question that I have is about market share and maybe you can talk a little bit more generally about market share movements.
Your fixed income number is more in line with the U.S. players now.
On equities, clearly, I would say worse, especially when you take out the one-off gain and maybe you can just tell us how much that is and what it is exactly in the Equity Sales & Trading line? And if you can just talk a little bit about what we should think about what will bring back your market share to a higher level and regain some of that market share, if you can talk about that.
James von Moltke - Deutsche Bank AG
Sure, Kian. It's James.
So, I'll try to – there's a lot in those questions, I'll try to be as brief as I can. First of all, on costs, our year-to-date track record has been to be down ex-FX in adjusted costs by, call it, low-single digits.
All we're really trying to do is indicate that last year's fourth quarter, given the compensation decisions we made, is, call it, a tougher relative comparable. And so, while the decisions are still outstanding in terms of comp for the year, it's that comparison we wanted to draw your attention to.
In terms of market share in equities, as you saw on the slide, we're down 16% year-on-year. There are really three businesses that we break that into, one is cash equities and we were up in that market, including a gain, although without the gain, we were still up, and then Prime Finance and Derivatives.
Let me take those two in order. Prime Finance, as we've talked about in the past, we've been very focused on regaining the client balances that were lost last year's fourth quarter and that we've worked to regain this year.
As we say on the slide, we're pleased to report that now we've surpassed the September 30 level in client balances, although the average was still lower in the third quarter than it was in last year's third quarter. And we're also recovering the margin loss that we'd suffered earlier this year.
So, I think an important point we want to bring out there is that the underlying drivers of revenues in that segment of the equity business are now regaining traction and we would expect that to have an impact on the future. Obviously, in equities, client engagement and cash derivatives and prime is a key feature.
We'll sort of swim with the market in terms of how overall equity market performance plays out. And the last item is Equity Derivatives and they're in a very low volatility market.
We've maintained, I think, a conservative risk posture and both volumes and that conservative risk posture have dampened our revenues. If you put all that together, I think there's some reason to believe we can regain momentum in that business, especially in Prime, but we're dependent in part on levels of activity in the market coming back.
Kian Abouhossein - JPMorgan Securities Plc
And can you just talk about fixed income as well? Yes, you're in line with your peers in terms of performance, but you clearly come from a lower level, especially in the second quarter, and we were maybe hoping for some market share regaining.
James von Moltke - Deutsche Bank AG
Well, I think two things. One is I do want to emphasize the 24% that I walked you through, which is consistent segmentation with our peers and also with our prior-year segmentation.
So, that's the number to focus on. If you focus on that, we are very much in line in FIC markets, fixed income markets, maybe towards the better end of peers that have reported so far.
But you need to peel back the onion even further to really get a good sense of market share performance. And there, there's a number of different marketplaces where we've actually gained market share.
The one I could point to rates derivatives for example, but there are others in our FIC complex. So, I'd ask you to peel the onion and look at individual business areas and, in particular, for example, the Coalition reporting, which is always on a lag, but I think was a pretty good demonstration of our relative performance in the first half, whereas you can see we gained share in a number of areas.
Kian Abouhossein - JPMorgan Securities Plc
All right. Thank you very much.
James von Moltke - Deutsche Bank AG
Our pleasure.
Operator
Next question is from the line of Jernej Omahen from Goldman Sachs. Please go ahead.
Jernej Omahen - Goldman Sachs
Yes. Hi from my side as well.
I have two questions please. So, the first one is on the press release, which accompanied the results earlier this morning on the – creating the one bank, two brands in your retail segment.
And I just want to ask a question. There's a sentence in there, in the press release, that says, and I'm reading out now, "Deutsche Bank will also benefit from lower financing costs across the group."
Can you please help us think both conceptually, but also obviously if you could help us quantify what you mean with – what Deutsche Bank means with this statement? And then, the second question I have is just dwelling a little bit on the comments before from the market share loss or the poor revenue performance in the corporate finance business.
And, James, I think you characterized it as a transitory challenge and that Deutsche continues to invest and rebuild in the franchise. And I was just wondering, from where you sit now, is there any sense that the investments would pay off in the near future or should we prepare ourself for further revenue weakness as the year progresses?
Thanks a lot.
James von Moltke - Deutsche Bank AG
So, Jernej, sure. It's James again.
Just to clarify, which business were you referring to when you were talking about the transitory effect?
Jernej Omahen - Goldman Sachs
The corporate finance operation.
James von Moltke - Deutsche Bank AG
Okay. Because I think you said FIC or at least I heard FIC.
And so, let me take those two questions. On the press release about the Postbank and Deutsche Bank integration, that's a good catch.
One thing we want to highlight there is that a lot of the focus has been on the waiver and the relationship between the subsidiary and the parent from a funding and capitalization perspective, but there are also efficiencies inside that legal entity in a number of respects. Emrail (28:18) is an example.
I mean, that entity will have a series of its own regulatory and capitalization requirements. And so, what we're highlighting here is that in addition to the cost savings that we've highlighted, there are some foregone financing costs that will result from the merger.
So, hopefully that clarifies that statement in the press release. In terms of corporate finance in the transitory point that we made, look, corporate finance, as you know, is a business where revenues come in a lag.
And so, the business that we recognize from a revenue perspective in the third quarter of 2017 was mandated, let's say, in the fourth quarter of 2016 and first quarter of this year. So, transactions go from mandate to negotiation, announcement and eventually closing and it's on the closing that there is revenue recognition.
So, the point we're making is that the third quarter in that type of business still reflects the idiosyncratic stress. And to your question about what gives us comfort that we see momentum, we see it in our internal pipelines that are building, but there is also, I think, some external evidence that you could look to.
A good example I could give is that our announced deal volume in M&A is 20% higher than at this time last year.
Jernej Omahen - Goldman Sachs
Thanks a lot, James, and maybe just searching back on the funding synergy question, thanks for the conceptual explanation, is there a way for us to try and put numbers on that funding synergy?
James von Moltke - Deutsche Bank AG
I wouldn't do it at this point. We can probably follow up in due course, but I wouldn't put numbers.
Again, I do want to emphasize it's largely foregone incremental funding costs that would have been there.
Jernej Omahen - Goldman Sachs
Thank you very much.
Operator
And the next question is from the line of Jon Peace with Credit Suisse, please go ahead.
Jon Peace - Credit Suisse Securities (Europe) Ltd.
Yes. Thank you.
So, my first question is on the €35 billion of RWAs you identified back in March that you were looking to run off in the Corporate & Investment Bank. I just wondered how far through that process are you and has it had much impact on the P&L in the last couple of quarters?
And as we look forward from here, I don't know how much P&L impact should we expect? And then, my second question was on near-term and medium-term risk-weighted asset development.
Do you expect much from the ECB TRIM exercise by the end of the year? And as we think longer term, I know you've not really revised that €100 billion number for Basel IV before, but some – any updates in the context of output floors either in terms of magnitude or timing?
Thanks very much.
James von Moltke - Deutsche Bank AG
Sure thing, Jon. So, you slipped in three questions in – in that RWA related.
I guess the answer to the first question, nothing extraordinary that you are seeing in terms of the runoff pattern of the legacy NCOU assets, so more or less running off according to their schedules naturally. There obviously are transactions that we will take advantage of from time to time, but there's nothing material that I'd point to.
And in general, the NCOU businesses, which are now baked into the segments, those assets are performing relatively speaking neutral from an earnings perspective. I will point out that if you look at the segments from an expense basis, there is expense embedded in the segment, that's relatively small amount, but there's some expense embedded in the segments that wasn't in the segments and we haven't adjusted for on a year-on-year basis.
On TRIM and then Basel III, on TRIM, it's too early to give you any real feedback. In some ways, we're just awaiting additional feedback from the regulators.
So, no impact that we can share with you at this point. We simply don't have that feedback yet.
And then, on Basel III, again there's too much uncertainty to give you updated guidance. You'll recall, we had guidance out there, it's now relatively dated, but what I really point you to is that there are many levels of uncertainty yet about Basel III, first of all, whether an agreement is reached and if there is an agreement, at what output floor, but then within the output floors and the various elements of the underlying calculations, there's also a high degree of uncertainty as to what those details would result in for us.
So, short version is too early to give you new guidance.
Jon Peace - Credit Suisse Securities (Europe) Ltd.
Okay. Thank you.
Operator
And the next question is from the line of Jeremy Sigee with Exane BNP Paribas. Please go ahead
Jeremy Sigee - Exane BNP Paribas
Hello. Thank you.
First question is a follow-up. I don't think I heard you give the number on the equity gain, the asset sale in equities and linked to that, I wondered if you could also give us the number for the one-off recovery in Asset Management.
So, if you could clarify those two one-offs, give us numbers, that would be great. And then, second question was just on the pattern of restructuring charges, obviously it was a very light restructuring charge in this quarter and you are guiding to a heavier charge again next quarter.
I just wondered if you could talk about what drives the variation in those charges, why it was so light this quarter and why it's becoming heavier again.
James von Moltke - Deutsche Bank AG
Sure. Just to give you a little bit of that detail, I'm always reluctant to be drawn on too much that we haven't laid out, but I'll give you those numbers of 20 (34:04) in the first, so the gain that you see in cash equities.
And in round numbers, 20 and 50, so 50 (34:11) being the unusual item in Deutsche Asset Management. On restructuring, it just depends on when we have a sufficient information to make a management decision and estimate what the future cost of that management decision will be.
So, in many respects, it depends on how far advanced we are in our preparations and discussions and analysis.
Jeremy Sigee - Exane BNP Paribas
So, it is not linked to any specific event, the sort of return to heavier restructuring charges in the fourth quarter? That's not because you've suddenly got approval for something or anything like that?
James von Moltke - Deutsche Bank AG
Well, the reason I'm guiding to this as a potential event in the fourth quarter or – and perhaps even a likelihood is the progress we've made on the Deutsche Bank and Postbank integrations or the PGK and Postbank integration. So, we believe we're closer based on our discussions with the unions and the workers' representatives or workers' councils to coming to an agreement that would allow us to recognize a restructuring expense.
In terms of sizing, I think it's too early to give you real clarity on that, but it's this event that we wanted to make you aware of and to the extent we have an update to provide, we'll obviously do so.
Jeremy Sigee - Exane BNP Paribas
That's very helpful. Thank you.
Operator
The next question is from the line of Magdalena Stoklosa with Morgan Stanley. Please go ahead.
Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc
Thank you very much for taking my questions. They're both on Postbank.
Now, the first one would be, what are the high-level terms of the agreement with the Post and particularly the ability or your kind of willingness to continue using the postal outlets to sell or market your financial product? And really, secondly, Postbank's loan portfolio was up almost 2% kind of quarter-on-quarter and I was wondering if you could give us a sense of where do you actually see the loan demand heading in Germany for both the blue bank and Postbank over the next, let's just say, a year, 18 months.
And my last very quick one, we had a very encouraging fee development in Postbank in the quarter and how sustainable is that? Thank you.
John Cryan - Deutsche Bank AG
Magdalena, it's John. I'll take the first one, which is on the relationship with the Deutsche Post.
We think this is a good outcome for us. Essentially, we are renting their premises in order to distribute products and give access to ATMs and some rudimentary banking services and that's been extended to 2025.
We think it's beneficial for us and also beneficial for the Post, because it's a good use of their facilities. So, it's something we strove to achieve and we're reasonably pleased with the outcome.
James von Moltke - Deutsche Bank AG
On the Postbank items that you had, so we were very pleased to see the growth in lending and it is predominately consumer lending in Postbank, a mixture of secured and unsecured. But it reflects the success essentially in customer marketing and advertising and therefore the origination of loans, which, given the environment here, is encouraging.
It's hard to give really forward-looking views to you on how long we intend to continue those trends. We think the indicators that we've seen so far over the past couple of quarters are encouraging, but I think it's too soon to give you clear guidance on whether we expect that to continue.
I will say that the fee and commission income is also encouraging and because some of that reflects changes in fee structures on the accounts, year-on-year, you'd expect that element of the fee income to create benefit in the coming several quarters until we lap that. So, overall, very encouraging progress in Postbank, both on loans and on fees.
Magdalena L. Stoklosa - Morgan Stanley & Co. International Plc
Great. Thank you.
Operator
Next question is from the line of Andrew Coombs with Citi. Please go ahead.
Andrew P. Coombs - Citigroup Global Markets Ltd.
Good afternoon. If I could ask one on divestments and then I have a follow-up on equities base.
Starting with the divestments, you mentioned you'd signed off by disposal so far, but on the last paragraph on page 19 of the interim report, you also talk about reevaluating some of your disposal decisions. And then, certainly from the press reports coming out of Spain seem to suggest that the Spanish retail business was a business you were considering disposing of and that's no longer the case.
So, with that in mind, do you stand by your €2 billion capital failed guidance from divestments and likewise the €0.9 billion of cost saves in the 2018 cost target that comes from planned disposals? That would be the first question.
The second one on equities, a follow-up on the prime margins, what we're seeing so far as you've talked about your balance is rebuilding, but because the margins have been somewhat lower, we haven't really seen it coming through in the revenue line. You said that prime margins are actually now stabilizing and recovering as well.
So, could you just elaborate a bit on that, please? Thank you.
James von Moltke - Deutsche Bank AG
Sure. Thanks, Andy.
I'll take the questions and John may want to add, especially on the strategic items. So, in general, we're pleased with the progress we've made in our disposal plans this year.
And as I highlighted, five transactions signed since midyear. And I think one important thing just to note about those transactions is they represent really a simplification of our company and I'd single out the corporate services and alternative fund services as businesses where we're pleased with the transactions because of that simplification.
But as you note, there are – and we point out in the interim, we're going to look at this as a portfolio of actions. And without confirming or denying specific steps, I think the key message is that we're going to be disciplined in executing on the transactions in a way that's fair to shareholders, reduces complexity and creates value in terms of capital and also the cost picture, which I'll come to.
So, we remain focused on that process. On capital, just as a side note, always a lot of uncertainty about capital forecast as it relates to (40:52) transactions and that's true of market M&A transactions, so private transactions are also true of an IPO-like Deutsche Asset Management.
So, I think we sort of bake it all into a large cake in terms of our forward-looking view on capital. Your point on expense is a good question.
We benefited this year from a decline in operating expenses, not just from legal and restructuring as well as operating on the go-forward business, but also, to some degree, from disposals. As I say, it's a portfolio and as we point out, there may be an impact on the 2018 expenses.
It's early to say what that'll be, given we're still working on what the offsets would be and which other transactions we do manage to bring to fruition. So, it's a fair point that the disposal program will influence our 2018 expense run rate, but by how much and what the offsets will be, it's too early to say.
John Cryan - Deutsche Bank AG
Yes, Andy, more broadly on some of the strategic questions about whether we dispose or otherwise restructure, I think Spain for us has always been an interesting one. We have a very large infrastructure down there.
You may know we've got about almost 250 branches, for a relatively small bank, we also have a very, very good digital offering and the two are to some extent out of balance right now. So, we're looking at options for just improving the operating leverage of that entity and then – and optimizing it.
But it was a review of options as to what we do with the business. And we do need to do something, because we need to modernize it, but the digital offering that we've developed down there with a relatively small number of people looks very, very promising.
So, we like what we see.
James von Moltke - Deutsche Bank AG
And your question – and just to come back on the prime margins, I wouldn't give you specific numbers, but if those margins dropped, roughly speaking, by a-third, we've recaptured more than half of that one-third drop. So, we see – and that progress has been actually pretty steady from the second quarter into the third quarter.
So, we're encouraged by what we see both on balances and on the margin progression.
John Cryan - Deutsche Bank AG
May I just on the cost savings from the disposals, we did show you that walk to how we get to the €22 billion and then the €21 billion run rates and that did have a step in there, as you may remember, for businesses that we would dispose of. I think we probably still stand by our cost targets, but we may achieve them in a slightly different way, but it may only be slightly different, but we have to manage our portfolio businesses quite dynamically.
It doesn't mean we're actively looking to dispose of everything, but we have to manage the business for bottom-line performance and for relevance to the client base and that relevance very much hinges on technology. And so, it's a question of whether we invest or whether we look at other options for business, but we, by default, want to invest.
Andrew P. Coombs - Citigroup Global Markets Ltd.
That's very clear. Thank you, guys.
Operator
Next question is from the line of Stuart Graham with Autonomous Research. Please go ahead.
Stuart O. Graham - Autonomous Research LLP
Oh. Hello.
Thank you for taking my questions. I have two, please.
The first is, I wonder if you could talk us through how you think about the impact of the likely U.S. regulatory change on Deutsche's competitive position.
It looks to me as if quite a few things in the Treasury white papers would be helpful for you in absolute terms, but I guess I worry that they're even more helpful for your larger U.S. peers, meaning that net-net, you might still come out a relative loser from that process.
I'm interested in how you think about that. That's the first question.
And the second question is on staff costs, which are down 1% year-on-year at the nine-month stage, but as you say that's a function of lower FIC staff (45:02) costs and benefits offset by higher bonus accruals. So, could you tell us what the year-on-year percentage change is in FIC staff (45:10) costs and benefits, please, i.e.
excluding bonus accruals? Thanks.
John Cryan - Deutsche Bank AG
On the U.S. regulatory change, I guess the inevitable answer to your question about whether the bigger U.S.
banks benefit proportionally more is probably the case, because our business is a sub-holding company in U.S. We haven't really quantified the impact of the changes, but they would, net-net, clearly be positive from the perspective of maybe freeing up a bit of capital and reducing the demand to hold as much liquidity as we do.
That would enable us to deploy more resources in growing our U.S. business.
The overall point that I would make, though, is that, notwithstanding the fact that we raised €8 billion back in March and April, because the risk-weighted assets haven't gone up, regulatory constraints clearly haven't really applied to us, because the truth is we haven't deployed a single cent of the €8 billion that we raised and that's notwithstanding great efforts to try to grow the business. But the way that we've been able to de-risk the balance sheet and the relative lack of demand for credit product, which we would hold on the balance sheet, given the demand from institutions for credit paper, which we find at the moment relatively easy to sell, we're not deploying more risk.
But that's not the long-term intent, clearly. We've been hiring people to originate new business and hiring people to distribute it, but we do intend to deploy some of the money that we raised back in March or April.
Otherwise, we'll have questions about what we do with the excess capital that we would therefore have if we didn't deploy it.
Stuart O. Graham - Autonomous Research LLP
And just could I, which bits of the white papers excite you most in terms of health for Deutsche, if there are certain that jump out at you?
John Cryan - Deutsche Bank AG
No, I guess, some – no, not particularly. I mean all of them, I think, inure (47:20) to our benefit to some extent.
James von Moltke - Deutsche Bank AG
So, it's James. On the salary expense item, again we're cautious about what additional disclosure we want to give out, but the ballpark would be about 3% down in that line item.
I do want to give you a health warning, though, that when you look at salary expenses, there's a lot that goes into it around benefits and also the composition of the head count. So, we've moved some expense over the past year from the consulting line to the salary line based on in-sourcing.
So, I do want to give you some caution about how much you focus in on a single line like that, because it reflects a lot of things.
Stuart O. Graham - Autonomous Research LLP
Thank you. Could you just remind me, the amortization of prior year's deferrals that's going through the P&L this year, I think it was €900 million (48:30) last year, but what's the number for this year?
James von Moltke - Deutsche Bank AG
I think we'll leave at that in terms of the disclosure, Stuart. It's something we manage and there's again a lot of different ingredients that go into that, including the stock price, the forfeiture and what have you.
I don't think it's a useful number to kind of draw conclusions from.
Stuart O. Graham - Autonomous Research LLP
Okay. Thanks.
Thank you for taking my questions.
Operator
Your next question will be from the line of Daniele Brupbacher with UBS. Please go ahead.
Daniele Brupbacher - UBS AG
Good afternoon. Thank you.
I wanted to ask about the famous NII, slide 23, the sensitivity slide. And I mean you are saying there clearly that obviously this is two scenarios, one of shifted rates versus unchanged rates.
And I was just wondering how we should quantify or whether you could indicate a bit the additional NII headwinds that would come through in case of unchanged rates. So, I understand this slide 23 is a bit of a net view and you were explicitly referring to deposit revenue headwinds in the context of Postbank.
So, just any additional numbers...
James von Moltke - Deutsche Bank AG
Daniele, excuse me, can you speak up? We can barely hear you.
Daniele Brupbacher - UBS AG
Oh, sorry, is it better now?
James von Moltke - Deutsche Bank AG
Yes.
Daniele Brupbacher - UBS AG
Is it better now?
James von Moltke - Deutsche Bank AG
Yes.
Daniele Brupbacher - UBS AG
Sorry for this. It was on slide 23, the famous NII sensitivity slide.
There, you are saying obviously this is a scenario of shifted rates versus unchanged rates. And I was just wondering how significant NII headwinds would be in case of unchanged rates, because this is obviously a bit of a net view here.
And in the context of Postbank, you were saying that you still have deposit revenue headwinds, which is obviously a bit that is the delayed P&L impact coming from lower rates. Just any additional numbers or statements around that would be helpful.
Thank you.
James von Moltke - Deutsche Bank AG
Sure, Daniele. It's James.
Couple things. In some ways, let me start at the end of the question, which is the headwinds, particularly in our three deposit businesses of GTB, Postbank and the Deutsche Bank retail franchise; they each have their own interest rate characteristics and they'll tend to sort of lag in terms of rates based on those characteristics.
So, it's hard to give you a single number, a single indicator. I would say that the retail businesses are getting ready to begin to lap the pressure of the interest rate hedges that are still on the books at higher rates, call it, later this year, early – sorry, later 2018, early 2019.
So, getting closer to the end of that headwind and the headwind I'd characterize in the tens of millions of euros in the segment overall. So, still considerable in terms of the work you need to do to overcome the headwinds.
If you then turn to the future, the challenge – you point to slide 23, which is a net interest income sensitivity slide, reflecting what is highly stylized scenario of 100 basis points across the curve and in all currencies. Now, that's obviously, as I say, stylized, because what happens depends on the shape of the curve, the speed with which rates move and then the beta on the deposits, that is how quickly you pass on increases in the rate environment to customers.
What I'd say is the businesses benefit more on the short-end as you see and that's pretty typical of banks and we're not dissimilar in that regard. And obviously, the key issue for us is the very low beta that you'd expect to see in the early stages of a European tightening wave or cycle.
Basically today we have a negative margin on customer deposits and we would expect the betas to be essentially zero at least until the time when there's a profit margin to be made. And arguably quite low thereafter, given that this will be a recovery for the banking sector as a whole.
Is that helpful in helping to answer your question?
Daniele Brupbacher - UBS AG
Yeah, absolutely. Thank you very much.
Very useful.
Operator
Next question is from the line with Anke Reingen with RBC. Thank you.
Anke Reingen - RBC Europe Ltd.
Yeah, good afternoon. Two questions, please.
First is on the cost guidance for 2018 again. In light of what you said for 2017 on the group level slightly lower and flat on CIB.
I would like to get more comfort on how you get there and if there's anything you can tell us a bit more about the mix of compensation as well as non-comp (53:16) expenses. And then, secondly, on your announcement from this morning on the €900 million synergies by 2022, from your retail mergers, just to confirm, how does it split into revenues and costs and does it also include the €500 million you previously identified under 2021?
Thank you very much.
James von Moltke - Deutsche Bank AG
So, I hope I've got all of those questions, Anke, but feel free to ask a follow-up if I'm missing a little bit. Firstly, I wouldn't want to talk about the comp, non-comp mix too much.
What I would expect to see, relatively speaking, is similar trends to what we've shown over the past several quarters. So, we're managing our external consultant and professional services spend as tightly as we can.
As I mentioned, there's some replacement between that line and the salary and benefits line. We are managing compensation expenses carefully and head count carefully, but we're also highly cognizant that we need to compensate our employees fairly and incentivize.
IT is the other thing I'd point out, where you'll see a continuing investment over time that does result in an intangible sort of ladder if you like of amortization expenses of that capitalized software. So, lots of different moving parts, but I wouldn't expect the trends necessarily to be significantly different from what you've seen so far.
If I think about Postbank, which I think was the third part of your question, because of the time it takes to really capture those synergies, which, relatively speaking, is back-end loaded, there really isn't much or anything to talk of, certainly in 2018 in terms of a contribution to the 2018 targets from that merger integration. It's a little bit more back-end loaded than that.
And I think a part of your question was about the €900 million, it's overwhelmingly cost synergies that we're expecting once they're fully realized, as we say in the materials in 2022.
Anke Reingen - RBC Europe Ltd.
And the €900 million includes the previously guided €500 million cost savings under 2021?
James von Moltke - Deutsche Bank AG
I don't know what the read-acrosses you're making there, but the things that we've talked to where the €900 million of total and also, what we call, the cost to achieve the expectation that there'd be some severance costs that are incurred along the way as we talked about a little earlier.
Anke Reingen - RBC Europe Ltd.
I'll follow up with you (56:00). Thank you very much.
James von Moltke - Deutsche Bank AG
Thank you.
Operator
And the next question is from the line of Alevizakos with HSBC. Please go ahead.
Alevizos Alevizakos - HSBC Bank Plc
Hi. Thank you for taking my two questions.
Question number one is on the sensitivity that you may have in any potential tax cuts in the U.S. What does it mean effectively for your group tax rate and how could we think about modeling it, whether we just have to use the Intermediate Holding Company accounts or whether we should also use the large number of U.S.
branches that you have outside the IHC? And the second question is on the back of the divestment question that was asked earlier.
I just want to ask, what is the rationale for the Deutsche Bank asset management IPO, given that John already suggested that you still have a lot of capital excess from March? And also questioning, is the timing now really ideal, given that the AUM performance has been lackluster for the last two years?
Thank you very much.
James von Moltke - Deutsche Bank AG
Sure. I'll take a couple of those questions and John may want to add a little bit.
So, the guidance we gave for taxes is a blended statutory rate of a range of, let's say, 30% to 35%. And it depends on the location, if you like, or the composition of our IBIT around the world.
We're a beneficiary. Obviously, if there's tax reform in the U.S., those earnings would be subject to lower tax.
I would, at this point, guide you that it really takes us to the lower-end of our existing blended range of blended statutory rates. So, it's helpful, we think, based on our current estimation within that range.
I'd highlight there is one thing to keep in mind is that there would be potentially a charge or a valuation adjustment related to the DPA. That would be, I think, a relatively insignificant item from a capital perspective, because it's already deducted in the numerator, but you'd see that run through the income statement.
John Cryan - Deutsche Bank AG
On the pros and cons of the asset management IPO, the capital benefit was never really a driving factor. I think we listed a number of pros to this and did recognize that there was some frictional costs and obviously a little bit of additional complexity on governance, but the pros we still think are overwhelmingly attractive.
First was to make the intrinsic value of the business much more transparent. We don't believe that sitting under Deutsche Bank as a division, it gets the recognition that it could.
I think that also improves client and consultant perception. There's an ability, I think, to attract and, of course, retain key personnel, because there is an opportunity to apply a more direct drive for our people in that division and also there's an opportunity which we've yet to decide what we do with, but to opt out of the Instafile, (59:15) the German institution – the compensation order in Germany, which isn't applicable to the pure play independent asset managers and therefore, it enables us to lose that competitive disadvantage.
We think there's much more strategic flexibility in what may be a consolidating industry and we've said that there are one or two smaller bolt-on team lift-outs or acquisitions that we would look to make within that business just to balance it out a bit more. And not to mention, there's clearly an enhanced recovery measure.
So there's a benefit to us from the overall sort of living will recovery and resolution imperative that we set up a traded and quite significant subsidiary. And anyways, it's in alignment with our group strategy.
We do want to keep this controlling interest, but we think it simplifies the bank, it makes that business, which is a fiduciary business, it helps us with MiFID, it's a standalone fiduciary manager with third-party funds and we just think it's the right thing for the business to do. But I agree it has the potential, subject to timing and the amount we raise to give us more capital.
Alevizos Alevizakos - HSBC Bank Plc
Excellent. Thank you very much.
Operator
And the next question is from the line of Adam Terelak with Mediobanca. Please go ahead.
Adam Terelak - Mediobanca SpA (United Kingdom)
Yes. Good afternoon.
I just had a couple of questions to dig into liquidity. Clearly, you guys have worked quite hard to build liquidity in the past quarters, but how should we think about excess liquidity from here?
The liquidity coverage ratio is up at above 140%, but I noticed your stressed net liquidity position is now pretty close to the internal risk appetite, which is up to €20 billion. And then, secondly on the same point, actually some cash has been redeployed into the investment bank, but it seems to be mostly into highly liquid securities.
Is there any room for further redeployment of this excess cash or any excess cash into high-returning trading businesses? Thanks.
James von Moltke - Deutsche Bank AG
Sure, Adam, great questions. So, I think this quarter what you saw is an improvement in terms of the efficiency of the balance sheet in terms of liquidity usage.
I would say that, at the second quarter, we'd had some inflows that were somewhat episodic and so, we had an unusually high position and there was some efficiency that we were able to create as the quarter went on. It's always hard to say whether that's the start of a trend, but we're certainly comfortable with the liquidity that we retain, which I think is still extremely strong, giving us the flexibility to continue to support clients with loan and also markets assets.
You're right in terms of the deployment of cash this quarter, essentially was a use of cash in largely the repo balance sheet, which is good, but they aren't the highest-returning assets that we have and we'd love to see more of it going into – to funded loans, but that's obviously a function of the market opportunity.
Adam Terelak - Mediobanca SpA (United Kingdom)
So, just a follow-up, do you have the excess liquidity to be able to do that at this stage?
James von Moltke - Deutsche Bank AG
Yes, we do.
Adam Terelak - Mediobanca SpA (United Kingdom)
Okay. Thank you.
Operator
And our last question for this call is from the line of Natacha Blackman with Société Générale. Please go ahead.
Natacha Blackman - Société Générale SA (UK)
Hello. Thanks for taking my question.
I'm aware you have a fixed income call next week, but could you please provide a quick update on your funding plan for the remainder of the year? And specifically, I'm wondering on Tier 2 and senior unsecured.
Should we still expect about €1 billion each there as per your last updated Q2? Thank you.
James von Moltke - Deutsche Bank AG
So, I don't want to get too far ahead of Dixit and steal any thunder from his call next week. In general, as the opportunity – in some ways, it answers the last question of Adam's, as the opportunity to deploy balance sheet has been more limited than we might have expected in general.
And as I think we indicated on the second quarter fixed income call, our funding plans were probably trending towards less rather than more. On Tier 1 and Tier 2, I wouldn't want to speak to our plans at all.
And we'll have more to say either on the call next week or if and when we are in the market.
Natacha Blackman - Société Générale SA (UK)
All right. Thank you.
Operator
That is our last question. I hand back to John Andrews.
Please go ahead.
John Andrews - Deutsche Bank AG
Operator, thank you, and thank you, everybody, for joining our relatively efficient call today. IR team is standing by with any follow-ups and wish you good luck for the rest of the earnings season in here in Europe.
Bye-bye.
Operator
Ladies and gentlemen, the conference has now concluded and you may disconnect the telephone. Thank you for joining and have a pleasant day.
Good-bye.