Feb 2, 2018
Executives
John Andrews - Head, IR John Cryan - CEO James von Moltke - CFO
Analysts
Stuart Graham - Autonomous Research Kian Abouhossein - JPMorgan Jernej Omahen - Goldman Sachs Magdalena Stoklosa - Morgan Stanley Daniele Brupbacher - UBS AG Jeremy Sigee - Exane BNP Paribas Andy Stimpson - Bank of America Merrill Lynch
Operator
Ladies and gentlemen, thank you for standing by. I am Mia, your Chorus Call operator.
Welcome and thank you for joining the Fourth 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. [Operator Instructions] I would now like to turn the conference over to John Andrews, Head of Investor Relations.
Please, go ahead.
John Andrews
Operator, thank you and good morning to everybody from Frankfurt. I would like to welcome you to the 2017 fourth quarter and full year earnings call.
I'm joined today by John Cryan, our Chief Executive Officer, and James von Moltke, the Chief Financial Officer. John will begin with some of his opening remarks and then James will take you through the analyst presentation, which is available on the external website www.db.com and afterwards we'll be happy to take your questions.
We do have a lot to cover today and unfortunately I need to enforce hard stop at 9:30 CET as John and James need to move to the Annual Media Conference here in Frankfurt. So it's particularly important for the sake of efficiency and fairness to questions.
Please limit themselves to just questions, so that we can allow as many people as possible to participate in the call. Let me also provide the normal health warning, that you pay particular attention to the cautionary statements regarding any forward-looking comments that you will find those statements at the end of the investor presentation.
With that let me hand it over to John. John?
John Cryan
Thank you, John, and good morning everyone. I'd like to start by giving you an update on the progress we've made so far with our modernization program here at Deutsche Bank.
I also want to cover where we stand in relation to recent development in the regulatory environment and in light of the recent US corporate tax reforms and what impact these have on the bank. I then like to share with you my views on the outlook for 2018.
So let me begin with the summary of the bank's report card on progress so far. Our financial results for 2017 are most impacted by the 12% year-on-year decline in reported revenues.
That decline reflected not just the operating environment, but also the strategic decisions we made in 2015 and 2016 to trim the scope of our businesses. James will discuss this in more detail when he reviews our results.
Nonetheless, our operating profitability did improve year-over-year and had it not been to the year-end write down, the value of our US deferred tax assets. We'll be reporting a net income today just under €1 billion.
This would have reflected more accurately the overall performance of the bank in 2017, while this would not have represented an attractive return on the banks capital. It would have shown that 2017 was another year of progress.
We remain on track towards building sustainable and acceptable levels of profitability and attractive returns to shareholders. As it is, we're reporting a post-tax loss of €0.5 billion on the pre-tax profit of around €1.3 billion.
We make progress on costs last year as reported noninterest expenses declined by €4.1 billion largely as a result of lower non-operating expenses. However, €500 million reduction in 2017 in adjusted cost also contributed to that result.
The bank's other financial metrics demonstrate the continuing conservative nature of our balance sheet and our risk profile. Our decision to raise capital last year markedly improved our regulatory capital ratios, which were the top end of those of our peer group and it reinforced the resilience of the bank.
And although our leverage ratio remains below our long-term target this is impart driven by the sizable cash buffers we hold, which nonetheless does continue to be a drag on our profitability in the current rate environment. Our value of risk metrics, our loan to deposit ratio, our liquidity coverage and our stable funding levels all comfortably meet or exceed our target.
Credit loss provisioning in the year was at cyclical low and we did not see the level of litigation and regulatory settlement expense that has been a hallmark of recent prior years. Our balance sheet and our cash position are in great shape which allows us continue our modernization efforts from a strong financial foundation.
What is not acceptable is our profit and loss account and this will be our determined focus for 2018 and beyond. Deutsche Bank today is in a very different condition from the bank I joined 2.5 years ago.
We've made tremendous progress although much of it not yet evident in our current financial statements. We've largely completed our de-risking efforts.
The lion share of non-compensations have been sold down, a process this management team began with the decision to accelerate the wind down at the NCOU in 2016. Most of our major regulatory enforcement and legal cases have been resolved or are in advanced stages of being resolved which was and is a priority of mine.
Indeed, our success in resolving these matters last year was somewhat marked by the low level of net new litigation expense we reported. We achieved better than expected settlements in number of matters impart thanks to core operations discounts granted to us by regulators and law enforcement agencies.
We're making steady progress in remediating the banks former broad range of control deficiencies, just to meet our own best-in-class standards. Where we've identified weaknesses we've generally introduced interim, compensating controls with a typically predominantly manual in nature.
We're now turning our focus towards investing to automate these measures to drive further improved control and cost efficiency. This will remain a multiyear operation, but we have the budgeted roadmap to achieve success.
We're also well on our way to transforming the company into one driven by technology and here we've made reasonable progress. In 2015, we promise to reduce our IT complexity significantly and here are some milestone to-date.
We've reduced the number of core operating systems we used by about a third. But still have a lot of work to do here to get to our target of just four operating systems.
We've taken down the number of intersystem reconciliation types by around 40% but need to reduce this again by half to achieve our target of 300 by 2020. On private clouded options, which is critical to achieve adaptability and efficient use of our IT platforms?
Progress is been a little slow. It currently runs at 36% against the target of 80% but we now have a clear runway from regulators to increase this proportion in the coming three years to achieve our target.
When we built an industry leading cyber security unit, which protects us against about seven credible cyber-attacks per second around the clock, 365 days of the year, we said we would build an efficient and resilient foundation for the bank's future core technology and we're delivering on that promise. Critical application uptime in 2017 was 99.994% by far the most stable in the bank's history.
We successfully launched the bank's Fabric. Which allows developers to deploy applications in minutes rather than months?
Expect more to come in 2018 as we continue to transform the bank into being data and technology led in its client delivery systems and its own contract administration systems. We intend to deploy the capture, use and management of data to build the competitive advantage.
We also made progress in each of our businesses strategic initiatives in 2017. As we announced in March, we successfully formed the new corporate investment bank into an integrated organization dedicated to delivering better commercial banking and capital markets capabilities to our core clients.
In our private and commercial bank, we're largely complete with the substantial proprietary work to enable the merger of Postbank with Deutsche Bank's domestic German bank which we currently expect to finalize in the second quarter. We also largely completed the legal and operational preparation for the planned partial floatation of DWS.
We will execute this transaction in the earliest available window subject of course to market conditions and to some final regulatory approvals. So far so good, but let me turn to the competitive environment and in particular the regulatory backdrop.
Our public debt ratings remain disappointingly low given the low levels of risk we run and the enormous cash buffers, we manage as a group. And our share price only reflects the current earnings potential of the group and not the future state.
We remain under considerable and persistent regulatory pressure. In 2017, the bank had almost 3,000 formal meetings with regulators.
That demand in us [ph] to maintain capital and liquidity buffers remains high. Our SREP capital ratios increased last year as a result phase-in process, but despite the undoubted progress we've made in remediating the bank, our SREP remains the highest of our peer group.
The bank clearly remains too complex for comfort in the eyes of many and the resulting requirements to hold significant buffers against the perceived risk posed by this complexity negatively impacts our profitability and our returns. We need to remedy this.
We need still better data management and more comprehensive control systems and we will deliver on these items over the next couple of years. In addition, we have recently two examples of further regulatory headwinds developing.
First with the finalization on Basel rules in December and more recently with the enactment of US tax reform and in particular the BEAT provisions. Much uncertainty remains about the potential effect of both particularly the new Basel rules.
With many years ahead of us that impact assessments before the final transposition of these rules in EU law, with both we'll likely have material impact without active mitigation efforts. Mitigation over that time will require reassessment of the attractiveness of our various products and services and the scale of our resource commitment.
I make this point not to set alarm bells ringing quite the contrary. I want to stress that we will remain flexible and adaptable in our response to the changing regulatory environment.
Let me conclude with some broad comments about 2018. So James will provide some more specific details when he makes his remarks.
The outlook for revenues in 2018 seems improved compared with 2017. All of the major markets globally are enjoying good economic growth.
Germany and the broader Eurozone should see good year-on-year GDP growth. The prospects the interest rate increases in the Eurozone do however seem to be a 2019, rather than 2018 phenomenon if market implied forward rates prove accurate.
Nonetheless, we would expect market anticipation of an eventual rate move in Europe to fuel increased client activities this year. Credit markets do seem a little overboard, so we remain on the lookout for a possible sharp correction perhaps later in the year.
Client activity levels picked up in January from the almost stagnant flows that we and the markets more generally seem to experience throughout a large part of last year. To what extent this is seasonal, cyclical or secular remains to be seen but the macroeconomic backdrop remains broadly supportive of increased activity levels.
Almost constant change and improvement will be the hallmark of the Deutsche Bank of the future. We will continue to manage the company as dynamically as possible and work on enhancing our nimbleness to create leadership position in a rapidly changing world.
We'll be strict to with capital allocation and focused on generating better returns. We feel well positioned to capture additional share of growth.
We will continue to invest in people and in systems and do so successfully. And importantly, we must focus on what we can best control and that means achieving greater efficiency through improvements in our cost structure.
Driving down cost remains a critical component of improved and sustained profitability and we will intensify our efforts here in 2018. I'll now hand over to James who'll take you through the details of our results and then he and I will be happy to answer your questions.
James von Moltke
Thank you John. Good morning and thank you all for listening today.
Let me review our results starting with the group financial summary on Page 3. The reported 12% year-over-year decline in revenues was affected by number of significant one-off items and non-operational charges as well as the impact of asset and business sales.
Notwithstanding this, 2017 clearly was a challenging year particularly for the corporate and investment bank which faced a weak revenue environment and for the private and commercial bank that continued to confront headwinds from low interest rates while simultaneously making investments in the business. And while cost remains a challenge, we did make some progress last year, that I will address shortly.
And if not for the write-down of our DTA, due to US tax reform we would have reported positive full year net income rather than a loss. Our pre-tax profits also improved with €1.3 billion of reported EBIT following pre-tax losses in each of 2015 and 2016.
And our reported EBIT included an additional €1.3 billion of non-operating items like DVA, restructuring, litigation and impairment. Demonstrating the operational profitability in 2017 was not fully represented in our reported results.
That said, we're certainly far away from acceptable levels of sustained profitability and returns and have much work to do, to get there. Finally we continued to manage our credit exposure well in 2017 with provisions for credit losses declining nearly €1 billion.
Page 4, highlights the impact on our reported revenues of major non-operational items like DVA, the impact of movements in owned credit spreads and that of disposals that we made as part of our strategy. These adjustments result in a 5% year-over-year decline in revenues.
And while declines in our core businesses are never welcomed, it shows that our performance was better than our reported results indicate. Let me turn to noninterest expenses on Page 5.
Adjusted for FX, fourth quarter noninterest expenses declined 19% or €1.7 billion to €6.9 billion. The decline was primarily driven by €1.3 billion decline in litigation expense year-over-year and the absence of an impairment related to the sale of Abbey Life at the end of 2016.
These items more than offset the approximately €400 million increase in restructuring and severance and €350 million increase in adjusted cost in the fourth quarter that I'll detail on the next page. For full year 2017 noninterest expenses of €24.6 billion fell €4.1 billion or 14% primarily reflecting declines in net litigation expense, the absence of major impairments and Abbey Life related policyholder benefits and claims and nearly €500 million decline in adjusted costs.
Turning to Page 6, fourth quarter adjusted costs were €6.3 billion, an increase of 6% year-on-year on an FX adjusted basis. While we achieved year-over-year reductions in virtually every component of adjusted costs particularly in professional services fees and occupancy this was more than offset by €600 million increase in compensation expense, that increase in compensation primarily reflected the impact of paying variable compensation for 2017 after not doing so in 2016 as well as from adjusting deferral terms to better match competitor practice and improve the flexibility of our expense base.
On a full year basis, adjusted costs declined 2% or approximately €500 million as the increase in compensation expense was offset by declines in other expense items as our restructuring efforts continue to bear fruit. While we made demonstrable progress in a challenging 2017, our fourth quarter expense performance was unsatisfactory and a reminder that it is a management team we have to redouble our efforts to address structural costs and improve the expense culture at Deutsche Bank.
Turning to Page 7, we highlight our CET 1 and RWA trends. We reported a fully loaded CET ratio of 14% at year end and 148% on a phase-in basis.
The slight increase in both ratios from the third quarter reflected lower RWA that more than offset a decline in CET capital. CET declined to €48.4 billion in the fourth quarter.
There were a number of complicated drivers of the CET 1 ratio this quarter that requires some explanation. First; of the reported €2.2 billion loss in the fourth quarter €1.4 billion reflected the write-down of DTA of which a substantial portion was already deducted from our CET 1 capital.
Additionally because of ECB accrual policies in the calculation of our regulatory capital previously we could not include €1.7 billion of interim profit from the first three quarters of 2017 in our CET 1 capital. Given the reported full year loss for 2017 this quarter we were able to reverse the accrual of those unrecognized profits which resulted in €1.7 billion addition to CET 1 in the fourth quarter.
RWA declined €11 billion to €344 billion as business related RWA growth and CIB of approximately €4 billion was offset by declines in operational risk and market risk. Now let me add a few comments on the CET 1 outlook.
Our guidance that we will manage the bank towards the CET 1 ratio comfortably above 13% remains. However there are number of items that will have impacted our CET 1 ratio on January 1, 2018.
First the impact of IFRS 9 which is detailed in a slide in the appendix will be approximately 8 basis points on our CET 1 ratio in the first quarter. Additionally, new ECB guidance on the capital treatment of revocable payment commitments to the single resolution fund and deposit guarantee scheme.
We estimate we'll reduce our CET 1 by approximately 10 basis points. So our reported 14% fourth quarter CET 1 ratio essentially dropped to approximately 13.8% on the first day of 2018.
A further 10 basis point impact will arise from the payment of AT1 group bonds for which no accrual was reflected in the year end 2017 CET 1 because of the reported full year loss. We're also carefully assessing the impact from some ongoing regulatory developments.
For example, around the treatment of guaranteed funds which could result in a further reduction to our CET 1 ratio in the first half by as much as an estimated 40 basis points. On the plus side of the ledger, we expect our CET 1 to benefit from the expected partial floatation of our asset management business.
Lastly, let me clarify the fact that no common dividend accrual was included in the year-end 2017 CET 1 capital ratio. As a mechanical consequence of having reported to full year loss.
As a management board, we've not made a determination regarding a common dividend recommendation in respect to 2017. Fully loaded leverage ratio on Page 8 was 3.8% at year end.
Leverage exposure decreased in the quarter by €25 billion. €15 billion on an FX adjusted basis as cash and business growth in CIB were more than offset by declines in pending settlements.
I would note that if we excluded Central Bank cash from our leverage calculation as UK appears to and if we were to account for pending settlements under IFRS settlement date accounting our fully loaded leverage ratio would be approximately 80 basis points higher. Let me now turn to the segment results starting with the corporate investment bank on Page 10.
CIB reported full year EBIT of just under €900 million down by nearly half versus the prior as the decrease in revenues was only partially offset by lower noninterest expense and lower credit provisions. 2017 CIB revenues of €14.2 billion fell 15% or 13% if you exclude the impact of DVA.
This performance principally reflected higher funding costs, low volumes and low volatility in the trading businesses throughout the year. The lag effect of client engagement with us after the challenges we've faced in May, 2016 as a result of the leak of the potential settlement with the US Department of Justice and perimeter adjustments in GTB.
Noninterest expenses declined by 8% or €1.1 billion to €13.1 billion primarily driven by €800 million decline in cost associated with litigation and restructuring. And the absence of €300 million goodwill impairment.
Adjusted cost in 2017 of €12.9 billion were unchanged as higher compensation expense from the catch up of paying variable compensation for 2017 offset declines in non-compensation costs. For the fourth quarter, CIB reported an EBIT loss of €733 million.
The loss resulted from quarterly revenues declining 16% to €2.7 billion and a 2% increase in noninterest expenses again largely driven by higher compensation expense. While this was a difficult year, as the industry faced a challenging revenue environment.
We are disappointed with our performance. The fourth quarter was particularly challenging as progress in reducing costs was offset by needed increases to compensation to invest in our franchise after having severely reduced variable compensation in respect of 2016.
Credit risk continues to be a good story in CIB, with provisions declining 98% in the quarter and 74% for 2017. In an environment that was broadly stable albeit with some high profile single name credit events that did not impact us.
RWA of €232 billion declined 3% from the prior year period as the impact of FX and ongoing de-risking offset increases in Op risk and the inclusion of legacy NCOU assets transferred into CIB at the start of 2017. Let me now turn to the specific CIB business segments, starting with global banking, transaction banking and origination advisory on Page 11.
GTB reported fourth quarter revenues of €953 million, a 12% year-over-year decline. As we've noted in the past couple of quarters.
There have been a consistent set of factors that have contributed to the GTB revenue declines including the impact of FX and higher group funding costs, persistent margin pressure in trade and strategic client and country perimeter reductions. While GTB's results in the last few quarters have been weaker than expected and we anticipate the current trends to also affect the first quarter's results.
Our expectations are for GTB's performance to improve in the second quarter as we will have lapped the impact of a number of the negative headwinds like client and perimeter reductions and should see the benefit of mandates we have won begin to produce revenues particularly in the second half of 2017. Origination and advisory revenues declined 3% to €537 million, but increased 13% from the third quarter 2017.
The sequential revenue trend underscores the view we expressed last quarter that our O&A franchise is benefiting from client reengagement with us, following the pressure we experienced in May 2016. Debt origination revenues increased by 14% to €338 million in the fourth quarter and by 18% relative to the third quarter driven by our performing well in investment grade and high yield, both of which saw active markets in the quarter.
However equity origination data [ph] revenues fell by €63 million in the fourth quarter [indiscernible] by half €63 million in the fourth quarter, despite a robust issuance calendar that was concentrated in sectors and geographies like US healthcare where we underperformed. Advisory revenues were flat versus the prior year at €137 million, but 12% higher than the third quarter.
The revenue performance in A&O in the fourth quarter doesn't yet fully reflect the momentum we see building in the business from accelerating client engagement and growing pipelines. In M&A, we were third in global announced transactions in the fourth quarter and continue to see our pipeline build.
The pipeline is also higher in DCM and the quality of our equity pipeline has improved with higher ratings towards IPOs than was the case a year ago. Which we believe is a further indicator of the recovery in this business.
So as we enter 2018, we are very confident that our efforts to build our corporate finance business will continue to bear fruit. Let me turn to financing, fixed income and currencies and equities on Page 12.
Starting with financing which reported a 16% decline in the fourth quarter revenues to €522 million from a strong prior year quarter. The decline resulted from lower revenues in commercial real estate and asset-backed lending, investment grade and the impact of higher funding charges.
Turning to fixed sales and trading. Fourth quarter revenues reported of €554 million represented a 29% decline year-over-year.
Including the FIC related parts of our financing segment to facilitate a more accurate peer comparison. Year-over-year quarterly FIC sales and trading revenues declined by 20%.
As was the case for much of 2017, the market environment for fixed income remain challenged with low volatility across all major asset classes and subdued client activity in key business combined with unfavorable FX movements and increased liquidity related funding costs. Additionally, challenging trading conditions in some areas like emerging markets further contributed to the weak quarterly results.
Let me briefly review each of the major businesses in FIC. Credit performed well as revenues were broadly fat compared to a good fourth quarter of 2016.
Revenues and rates were significantly higher albeit versus a challenging fourth quarter of 2016 and with particular strength in Europe. Foreign exchange declined significantly as both volatility and client flows were lower compared to the fourth quarter of 2016 that benefited from an active trading environment especially around the US Presidential Elections.
Emerging markets results in the quarter were particularly weak driven by subdued client activity levels but more significantly difficult trading conditions in a number of markets like Venezuela, South Africa and Turkey. Equity sales and trading quarterly revenues declined 25% to €332 million reflecting significantly lower revenues in equity derivatives largely due to adverse market conditions that caused poor trading results particularly in European derivatives and lower cash equities revenues largely from reduced market volumes in both Europe and the Americas.
However, Prime Finance revenues increased year-over-year reflecting continued growth in balances and improved margins. Overall we believe that our Prime Finance business enters 2018 in a much stronger position.
Our average Prime Finance balances are now above the levels of late 2016, with stable margins versus the third quarter 2017 and materially higher than 12 months ago. Let me now review the private and commercial bank starting on Page 13.
For the full year we reported PCB EBIT of €382 million, a 73% decline from 2016 and revenues of €10.2 billion, 8% lower year-on-year. Revenues were affected by number of non-operational items that included the positive impact from Hua Xia and the US PCS business in 2016.
And a contra revenue impact resulting from the agreed partial sale of our Polish retail business in the fourth quarter of 2017. Excluding the impact of these non-operational items which we disclosed on this slide.
2017 PCB revenues were flat year-over-year as higher fee income and loan growth offset the impact from persistently low interest rates on deposit revenues. For the full year 2017 noninterest expenses increased 3% to €9.5 billion largely driven by higher restructuring costs.
Adjusted costs for 2017 of €9 billion were essentially flat to the prior year as cost saves from measures like branch closures and the absence of expenses related to PCS were offset by ongoing investment spending particularly in technology and higher variable compensation. In the fourth quarter, PCB reported an EBIT loss of €659 million on quarterly revenues of €2.3 billion.
Excluding the impact of the non-operational items PCB revenues in the quarter were flat as higher loan revenues offset lower deposit revenues. Fourth quarter noninterest expenses increased 22% to €2.9 billion driven by €400 million of restructuring expense and higher adjusted costs.
Adjusted cost of €2.4 billion in the fourth quarter grew 7% versus the prior year period as realized cost savings during 2017 were offset by increased investment spending and higher variable compensation. Let me now turn to the individual businesses within PCB on Page 14.
Fourth quarter revenues in private and commercial clients of €1.1 billion declined 14% largely due to the €160 million contra revenue for the Poland transaction. Excluding this impact operational revenues in PCC were essentially flat in the fourth quarter.
Fourth quarter revenues in Postbank of €802 million were down 3% versus the prior year period primarily from one-off gains. Excluding these gains revenues were essentially flat as loan growth and higher fee income from current accounts offset continued margin pressure in deposit revenues.
Wealth management revenues in the fourth quarter €452 million increased 14% versus the prior year period largely from gains related to the workout of Sal. Oppenheim.
Portfolios and asset sale. Let me end the PCB discussion with the observation that deposit revenues will remain under pressure throughout 2018.
That we expect to offset that largely with growth in loans and fee income, as is been the case for most of 2017. Let me now turn to asset management on Page 15.
When looking at asset management's year-over-year comparisons you need to keep in mind that last year included Abbey Life in our operations, which affected asset management's results by a gross up of revenues which was then offset by an expense item for policyholder benefits and claims. Additionally, there were also core Abbey revenues not included in the gross up and in the fourth quarter of 2016, a €1 billion impairment related to the disposal of Abbey.
To better see the operational performance of asset management, we disclosed the revenue and EBIT impact on Abbey on the slide. We've also included a more detail reconciliation to get from our reported asset management results here to standalone, proforma, DWS results on Page 27 in the appendix.
2017 reported EBIT was €725 million versus €206 million loss in 2016, a decline less than 1% excluding Abbey. Reported 2017 revenues declined 16% to €2.5 billion, but excluding Abbey grew 2% year-over-year largely driven by higher management fees.
Fourth quarter asset management EBIT over €115 million fell 45% year-over-year excluding Abbey. Largely reflecting the 2% decline in revenues driven by primarily by lower periodic performance fees in alternatives and active and higher adjusted costs.
Ex-Abbey, noninterest expenses in the fourth quarter rose 20%, as the prior year period included one-off provision release. While in the full year noninterest expenses were 3% higher.
Assets under management were €702 billion at year end, a €4 billion decline versus 2016. As €16 billion of net new inflows were offset by FX and the impact of disposals primarily from the US private equity business and the Luxemburg based Sal.
Oppenheim. Asset servicing business.
Turning briefly to C&A on Page 16. C&A was in EBIT loss of €67 million in the fourth quarter and €695 million for 2017.
Most of the year-on-year quarterly decline reflected valuation and timing differences trigged by changes in the bank's credit spreads while the full year also included previously disclosed negative currency translation adjustment related to the sale of our operations in Argentina and Uruguay. Let me conclude with some brief outlook remarks.
Our original adjusted cost target for 2018 was €22 billion of that included approximately €900 million of planned cost savings that we highlighted last March would be achieved through business disposals, while we made progress on planned disposals many of which we've announced plans for some those sales have been delayed and in some cases suspended. As a result, we currently do not expect the planned €900 million of cost savings to materialize in 2018.
Nonetheless, based on transactions that have either being signed or expected to sign and close within the year approximately €300 million of the cost savings from these business sales would impact our 2019 results. In the interim we will continue our efforts to complete more of these business sales.
We do expect the approximately €900 million on cost associated with these business will be a bit neutral to slightly positive in 2018 as we also retain the associated revenues. We also had unplanned cost items arise in the 2018 planning process from items like higher than expected BREXIT costs and Method II [ph] impacts.
Additionally some of the cost synergies originally plan to materialize in 2018 from the merger of Postbank into our German banking entity have been delayed, as we now expect to complete that merger in the second quarter. As a result those savings are now expected to be realized in 2019.
Nonetheless, we've been taking additional measures to offset these and other impacts and also expect to benefit from current FX rates in our reported costs relative to our earlier planning assumptions. So putting that all together, we now expect our adjusted cost in 2018 will be approximately €23 billion which reflects our original €22 billion target plus the cost impact of the delayed and suspended business sales.
In terms of the outlook for credit; provisions in 2017 were lower than we'd anticipated and were unusually low by historic standards. But these results did benefit from a number of recoveries that are unlikely to repeat.
So we expect to see increases in credit costs in 2018 that would suggest that full year credit provisions will likely be closer to historically normal levels for us rather than the €500 million recorded in 2017. In addition let me remind you, that with the implementation of IFRS 9, hence forth credit costs will be more sensitive than in the past to changes in the credit outlook.
In terms of restructuring we're very focused on achieving our cost saving while delivering restructuring expense below current guidance overtime, but currently we expect restructuring expense in 2018 to be broadly in line with 2017 levels. Litigation expense in 2017 was unexpectedly low given the success we had in resolving a number of matters below our estimated provisions, but while still building additional provisions throughout the year.
But as we look into 2018 and with the caveat forecasting litigation expense is difficult to do with precision. We would expect litigation to be meaningfully higher than 2017, well below the elevated level seen over the past number of years.
That said, overtime we expect that litigation will continue to decrease reflecting not only the resolution of legacy matters, but also the impact of our multiyear investments in our control and compliance functions. Turning to the broader economic, our outlook.
We're optimistic about 2018 as John noted. The global economic backdrop is clearly strengthening and that is driving acceleration of client engagement and expectations of eventual interest rates normalization in the Eurozone bode well for our future revenues given the interest rate sensitivity of our balance sheet.
To echo John's previous comments notwithstanding the current prospects of an improvement in the operating environment we will continue to manage our risk levels and balance sheet conservatively. Permit me a final comment before turning to your questions.
Which is that we must attack our costs with renewed vigor. Deutsche Bank has long been justly criticized for being a core cost manager and we're not happy with our fourth quarter performance.
That said, we're slowly turning this ship around if you look at our adjusted cost trends, these past two years. the revenue weakness of the last year underscore that we're not cutting fast enough and also challenging in our goal of achieving positive operating leverage [ph].
So we're going to be even more aggressive on cost management. Deutsche Bank's cost culture simply has to improve and John and I have made that a priority in 2018.
With that, John and I will be now happy to take your questions.
Operator
[Operator Instructions] and the first question is from the line of Stuart Graham with Autonomous Research. Please go ahead.
Stuart Graham
Two questions, please. One strategic and one in numbers.
On the strategy I appreciate that you're confident that Plan A to deliver a return on tangible will still work, but being open minded. My question is, what are signals you would be looking for that is not working and that you would need to consider a Plan B, that's the first question.
My second question is on the numbers. Can you tell us the bonus part please both the staff view [ph] the equivalent figures the last year's €500 million and the P&L charge, the equivalent figure for last year's €1.3 billion and also could you just confirm with no repeat of the €1.1 billion special retensionable [ph] of last year.
Thanks.
John Cryan
Good morning, Stuart. It's John.
Maybe I'll take the first one and then hand you over to James for the second one. You're right I talked a lot in my remarks about dynamic management of the business and I think that was aimed at answering or anticipating your questions.
I clearly in most of our businesses, we don't actually face much in the way of breaking some headwinds, the easy ones would be asset management, wealth management, private and commercial bank in Germany and particularly relatively un-impacted by the regulatory changes the Basel community has recommended. We're not just driven by regulatory change, but we do need to look at the prospects of earnings this sort of return on tangible equity, the 10% target from some of our other businesses and particular as they've balance sheet intensive in the past.
What we're trying to do particularly as we improve our data, improve our systems. We're trying to work out which businesses have a strategic feature, which today are actually earning these returns and which adjust masked in our accounts to some extent by the fact that we've got this inherited book which is you know in some areas of the bank makes the loss.
We also of course have to be mindful of the fact that the markets are changing too. So if you look at simple product such as cash equity, secondary trading of cash equities.
A lot of the growth volume has moved away from banks in total. So we need as I said in my remarks try to come to a business judgment as to whether last year was indicative of future years.
I think in the number of areas I would say, particularly in interest rates because I think we will see an improvement in Euro interest rates by which I mean they go above zero, which will take away huge drag from many of our businesses particularly in GTB and the banks in Europe. The other would be whether or not we're in a cyclical downturn or whether or structurally the markets have changed and business has moved out of the banks.
We [indiscernible] face it, some of the driving force behind some of the regulation it's to move, make this so expensive it's moved away from banks and we absolutely need to be responsive to that. And it's not an excuse well we've got some very big books that drive some of our current returns.
But we are being as self-critical as we can be and this is being driven by the front office. Self-critical as we can be as to what the prospects, for various of our business lines are in future and we're trying to match our investment in systems and people to reflect that business judgment.
So we're continuing to invest and you've seen in the fourth quarter that was another cynical attempt to move expenses into the fourth quarter, 2017 and out to 2018 for which we've given target. Genuinely is investments in systems and people.
To try to achieve these returns which we do still we can get and we still are reasonably confident roughly about the timing, although we do require some environmental changes particularly in relation to interest rates before we can overall meet that 10% target.
Stuart Graham
So just to summarize, it sounds like you're talking about evolution of Plan A rather than revolution of Plan A, is that right?
John Cryan
If you'd read my speech for the German media a bit later, that's. I used those two English words in German to say exactly that.
It's quite hard, a revolution in such a huge company. It's actually quite hard and we do have to evolve, but we're trying to do that.
Again as I said on the basis of the use of technology and using data we're capturing now oodles more data than we ever could, our old systems just didn't have the capacity. As we move onto these modern platforms, the data and metadata that we can capture is a complete paradigm change from where we were and we want to transform the company into something that looks more like a tech company and that's not, to try and change the rating of the company that's actually I think the answer to lot of the questions and challenges that we do face.
Is using data much more effectively because generally when banks have lost market share, it's been people who can use data more freely, more effectively and to greater benefit of clients.
Stuart Graham
Thank you.
James von Moltke
And Stuart, it's James. On our compensation question, I don't want to jump ahead of the disclosure that will come out with the annual report as you know, accounting for compensation especially deferred compensation is complicated and as we sit here today, the number's that we've reported represented a provision.
So I'll ask you to wait for that final disclosure, but to give you some sense of the line in our financial statements that captures this. It's less than 20% of the total compensation and benefits that we report on the face of the supplement, to give you a sense of order of magnitude.
The other number I'll perhaps give you is that, is the amount of swing that represented on a year-on-year basis which was €750 million from what it was severely restricted year as you know last year. So the compensation is clearly up year-on-year considerably and largely driven by that line, although they're offsets in the year, in salary expense and of course in the accrual for prior year awards again given the relatively low level of variable compensation that was awarded last year.
Stuart Graham
Thank you and there's no repeat of the €1.1 billion special awards, this year.
James von Moltke
That's correct.
Stuart Graham
Got it. Thank you.
Thanks for taking my questions.
Operator
Next question is from the line of Kian Abouhossein with JPMorgan. Please go ahead.
Kian Abouhossein
You mentioned at the end of the presentation that cost [indiscernible] and cost focus is going to be 2018 major item on your list. Can you talk a little bit more in detail of how you think about this part of the equation on the P&L considering you're giving guidance of €23 billion and also beyond that, how should we think about cost development and how much of the €900 million of disposals targeted disposals are still online so to say and how much are scrapped in total?
In that context, can you also talk about Basel IV and the potential impact on Basel IV and has it impacted your dividend guidance, no guidance at this point. And how should we think about Basel IV and the ranges that could be in terms of outcome and how should we think no statement on the dividend, please?
James von Moltke
It's James. I'll start with the first couple of questions and maybe tag team with John on the last.
So on expenses obviously we think very intensively about expenses every day and I think my comment was really directed at the need to look at the structural cost base in the company because we clearly have to operate these businesses at wider margins than we do today and cost is a significant part of the equation especially in an environment that we face like in 2017 of revenue pressures that exceeded our expectations. So the work as I think around quietly going after structural expenses and decisions that we make every day that's painstaking work and is detailed work and that's where we're focused.
I don't want to draw some contrast with the work that's been going on over the past couple of years as I mentioned I think we're showing progress in managing adjusted cost in a number of different line items, but of course the pressure arises both as you see inflationary factors some of which are out of our control and as you see a revenue environment that remains challenging and that we need to partially offset. As I mentioned about M&A, that's obviously been a significant swing factor since the March guidance that we provided.
As you've seen I think we've made actually very good progress over the course of 2017 in some complicated transactions that do a lot to simplify the company but had relatively lower impact than our original expectations on expenses in 2018. We're continuing to work on our M&A perimeter and that will take time, so I can't tell you exactly how much of that €900 million will ultimately come out as we shape the company going forward, but we remain focused on executing on our plans, focused on simplifying the company through those M&A actions.
John Cryan
Kian on the dividend, the long and short of it is, for this year 2018 we did say that we would pay some sort of proportional divided, we called it competitive. Therefore 2017, I think the decision that we announced supervisory board will make in March is one that doesn't really hang on much at all, it certainly wouldn't be driven by the new Basel roles because I mean without giving too much guidance we've paid nominal dividends before, we've about 2 billion shares just over, so we're not talking about very much in cash terms.
So this wouldn't drive a decision in 2025 and whether we could accommodate the new Basel rules. It will be driven by other factors.
The dividend point I mean it's always an emoted one. Financially for the company it's not particularly material and isn't driven by those factors.
Those factors could be important. They're very, very difficult to gage though of course they're so far out, they're awfully end of our planning horizon and sitting here today we have no clue what our book will look like in five, six, seven, eight years' time against which we will need to measure the capital impact.
Of course we have go through impact assessments, the commission before it puts any of this into law or into CR3 [ph] we'll be doing impact assessments and of course we'll manage the business in the interim to mitigate the impact of that assessment. So we will be working obviously closely with the commission and the with the regulatory community.
We'll be doing the types of stress test and quantitative impact studies and AQR's that we do in the normal cause, but it's incredibly hard to give you guidance today on what impact those rules will have on the book, whose shape and content we can't really guess that today.
Kian Abouhossein
Thanks. If I may just follow-up on the cost side.
If I look at your revenue base. Just in fixed income you're still doing extremely well actually compared to some other peers.
Is there an underlying issue in the banks that you're not able to say I'm going to cut 500 net of cost, is there. I'm just trying to understand conceptually if you have a cost base of €23 billion, why is it so difficult to say €500 million of cost [ph], which is easy to say for an analyst, but what is underlying, is there an underlying issue on your organization that you [technical difficulty] not cost out?
John Cryan
Can I have a go? And then James can have a go.
We can cut cost and the easy way to cut costs is not spend €2 billion this year on fixing the banks. It's cutting bank on compensation and making people feel miserable.
I mean obviously have a very large and reasonably fixed cost base. We have software we need to amortize, we've real estate that's not very flexible.
We have a large number of people, we have to keep the lights on. So it's tons of stuff which you get with Deutsche Bank.
We're a large global bank with huge reach and we're going to have a big cost base. At the margin though, it's relatively easy to cut costs.
However I think one of the many root causes of where we are and where we have been, is that we did manage get the company for short-term gain. And last year a lot of the miss, if you want to call it that on costs, we didn't set any guidance was actually investing and it's investing in fixing things and it's investing in building things.
And I'm afraid we're still investing in fixing things. So one of the big impacts we saw in Q4 is that we felt and we felt a bit pressurized, but we felt that we needed to get a move on fixing all of our KYC stuff.
It's been taking a little bit too long. It's very complicated.
We're off boarding lots of clients most of which were dormant or not relevant to the company anymore, but we've hired lots of people in our client data services area together move onto to get this fixed. Now we won't need all of those people long-term because once everyone's probably onboard as in properly documented, you don't need that catch up.
And in future we need to build systems to do that and not just throw lots of external consultants and then hire lots of internal people to make up that difference. So it's - although it looks like cost it's actually catch up and the new can automate it.
On the general cost of doing running our business the contract administration, managing our books again. The only answer we have because we need to improve the control environment, but also just the utility value of our systems to invest in them and build modern technology that captures lots of data that actually helps us build those businesses.
So lot of it, is investment rather than expense and banks have never been very good at letting out what is running expense and what is investment in the future. And we need to continue to invest in the future, we still have a budget for 2018 of roughly €2 billion, we think that's the right amount that the bank can accommodate in profit and loss charges in a year to rebuild the bank.
And set it in on the right track for the future. So I think you will see us continue to invest because that's the right thing long-term for the bank.
In lots of markets that are new to us, even in our core bank in Germany. In the retail bank where almost unrecognizable from where we were five years ago, much more digital, much more online and we just managed data differently.
So I think we need to keep our foot down, where strategically we're a bit weak because we don't have that big bedrock of earnings that some of our major global competitors have, that can help us withstand the variability and the volatility in earnings in our trading businesses and we need to work on that too. So we do have this balancing of capital allocation to businesses that provide us with a steady stream of revenues, profits and capital creation versus some of our trading businesses which were and the markets are great, but when the market's acquired or even half more or bend [ph] as they were, back end of last year they don't look very effective.
Kian Abouhossein
Thank you very much.
Operator
Next question is from the line of Jernej Omahen with Goldman Sachs. Please go ahead.
Jernej Omahen
I've two questions, please. So the first one is on the John is on your comments on the impact of the US corporate tax reform.
Can you just give us a sense dynamically how do you expect the US effective tax rate to evolve following the US corporate tax reform for Deutsche? And if you could clarify whether the tax base effect applies also to your branch assets or whether it is specific just for the assets that you have in the IAC.
John Cryan
James, want to answer that one.
Jernej Omahen
Perfect. And the second question I have is, you hinted both in the context of the US as well as you were making comments about certain parts of the investment bank and if I heard that correctly notably about your cash equities operation, that you might take another look at some of this operations from a strategic perspective.
And I was just wondering were you trying to say that if the US corporate tax reform stays as it is now, if there's no amendment for the financial institutions that you might consider resizing the scope of that operation again. Thanks very much.
James von Moltke
Jernej, it's James. I'll take the first question on taxes and the impact on corporate tax rate.
in the US a few considerations, firstly the federal tax rate obviously goes to 21%, you retained state and local taxes that then feed into your US effective tax rate based on business mix. The tax rate applies to our US taxpaying entities in total which includes the operations that are booked in the branch.
Full firm, the tax as I think we said or alluded to, the tax reform would give us 2% to 3% of a reduction in the effective tax rate overtime, so that moved us into the lower end of the previous range that we'd established that's obviously to the company in the long-term and as you think about then about the base erosion and to your abuse provision, knows as BEAT. Clearly that's something we've got to manage through as John mentioned we've done the work to take a view that in the medium term we would not be liable for BEAT related tax payments, but that takes some structuring and other work to ensure that's the case.
And in the very near-term we may find ourselves liable for BEAT payments.
John Cryan
Jernej, on the.
Jernej Omahen
Sorry, apologies. In the near term, we find ourselves liable to BEAT payment, so the effective tax rate in the US, in the near term goes up.
John Cryan
No, it goes down even if you on a blend of what you would ultimately pay against pre-tax profit, even if you're captured in BEAT.
Jernej Omahen
All right and it's just to confirm one more thing, so Deutsche Bank files for the purposes of tax accounts you filed both the IAC and the branch together in the US.
James von Moltke
Yes, it's actually it is slightly broader tax group then that, but those are the two important parts of it.
Jernej Omahen
All right, okay.
John Cryan
And Jernej on that question of what's changed in the secular fashion? What's changed cyclically and what's changed seasonally?
Plus I should have chosen more than one business. I wasn't suggesting that cash equities is anything other than a business that's been commoditized and has changed significantly over the past 10 years.
It used to be a trading venue that was dominated by banks, now longer is. There are other areas where there has been definitely secular change.
One area would be non-linear rates. Any banks rates business today is writing much less as a complicated stuff that was written 10, 15 years ago but it doesn't mean rates is not an important market.
Companies, institutions, bond issuers will always want banks to help them. Hedge interest rates by writing interest rates swaps on options, but the long dated and quite high margin business that was written in the first decade of the century just isn't a business anymore.
Of course there are some insurance companies and some pension funds that will write reasonably complex rates contracts, but they're relatively rare and they're not as high margin as they used to be. So lots of business and not too much necessarily just commoditizing, but they're changing a lot and we have to be responsive to that change.
So it's an appreciation for how technology can change a market that's so key to future capital allocation and to investing in the systems and the people we need to be in specific businesses. It extends too to banking.
It's not just in the brokerage area. It extends too into asset management.
Where we are also to some extent reallocating resource to much more modern forms of retail and institutional asset management product. So we just need to be a little bit more dynamic and breakaway from a slight tradition that we've sensed it, Deutsche Bank.
Which is we, we do what we used to because it used to be successful. And get the sense that we need to be much more forward looking and much more judicious about resource allocation in terms of capital investment in future systems and investment in people.
That was all. It's not a statement about any of our businesses, we have to manage all of them dynamically and have a view in each and every one of them of where that business is going.
Jernej Omahen
Thank you very much.
Operator
Next question is from the line of Magdalena Stoklosa with Morgan Stanley. Please go ahead.
Magdalena Stoklosa
I've got two. One is more strategic and I suppose we're continuing the discussion we had, what we had over the last half an hour, already.
But when you reflect on your current market performance this year in second equities and that's from both perspective the underlying kind of market conditions versus your more strategy kind of perimeter decisions that you have taken. How do you see it going from here?
I think that what interest me really is what would be your kind of strategic imperatives in CIB going forward. So that's the first one and the second one, is really about PCB and the cost because we have seen them up kind of 7% on the clean basis versus flat revenues and again going forward.
How do you see 2018 cost base in that division? Particularly as the savings on branches and FTEs that we have seen kind of completed this year should come through.
Thank you.
John Cryan
Well on the - let me take the perimeter and then we can address the PCB question. On the perimeter, I think Jernej referred earlier to that €900 million of costs that attached to businesses that we had ourselves earmarked for sale or divestiture one sort or another.
And those businesses are not core to us and they remain not core. And for each and every one of them it's inappropriate to go into details.
So there's a reason why the disposal or whatever action we were going to take is delayed. But we do expect the causes of those delays which are not normally ours, they're the potential buyer universe, so those to go away and we would intend to continue to proceed with the plans we originally had.
But the timing has been impacted. On the rest of the footprint, it's sort of what I just said in response to Jernej's question.
Which is that we have to dynamic, but basically what you see today is what you get other than the areas which we earmarked for disposal and those areas are not core to Deutsche Bank. The vast majority of our customers possibly wouldn't even know we had these businesses that we're earmarking for sale and when we sold them, we wouldn't feel any different to anyone.
So there's nothing material other than the two big projects which we got underway. One is obviously the combination of Postbank and Deutsche Bank in Germany and the other is the partial IPO of DWS.
Outside of those two big ones, it's a lot of tidying up, which we intend to do, but there is nothing material, but we will be dynamic is capital allocation.
Magdalena Stoklosa
John, if I may follow-up a little bit on this because of course we have concentrated on the cost impact on the kind of the business parameter that you're kind of going forward. But we have also, but what would be - also the revenue one as well.
I think that I suppose, what we're grappling with the, is the I know it's a funny word to talk about the kind of normalized revenue power of your CIB business because in the end of the day, you look at the group and they literally and those revenues account for literally 55%, 57% of your total. So of course what is happening there is absolutely key for us to kind of to look forward and I think that's to a degree, I suppose what we're grappling with as well.
John Cryan
Yes and that's understandable. I mean if you look at what is probably still our core business which - it's our biggest business.
Which is our fixed income sales and trading area combined with our financing business. If you look at the coalition data for the first three quarters last year, we're number three.
Now even if you aim off for the fact that we're not number three by very much. We're still resolutely top five.
Notwithstanding the fact that we've seen revenues decline. We've actually gained market share and question, whether that's actually part of our strategy, it's just what happened.
We've lost revenues, but others have lost more revenues. And it's because there's been change in those markets.
Question is, does that come back? And I think a lot of it does.
But maybe some of it doesn't and some of it's just seen commoditization of pricing. Now one of the reasons I think it comes back is that there has been some margin erosion, no doubt about it.
But we also suffered volume erosion. Now did we suffer that because of idiosyncratic Deutsche Bank issues [ph]?
I don't think so anymore. Because we're more than open for business.
So I think volumes have dipped and they may have dipped because people aren't doing anything Euro rates for example until rates start to move, that's what we found in the US Dollar before the Central Bank started changing rates. There wasn't much activity when the rates started to move, we saw a pickup in activity.
The price implies volatility is very low, that tends not to drive volumes. So our derivatives businesses have just seen lower volumes.
But when we look at the market data and we tend to trust coalition I think it's the industry standard and we look at other competitors results. We see a similar pattern, is it volume related or is it margin?
A bit of both but I think the volume can come back. I could sit here and tell you about January.
One month doesn't make a whole year. January last year was very good.
January is seasonally generally very strong. Lots of institutional clients put positions on for the year.
Many corporate come back to work after the break and do stuff. Our pipelines look great.
But that's pipeline [indiscernible] until they're converted into revenues and they're valuable but we need to see that activity come to fruition and we think it is. So in our M&A business, which is never been a particular strong - we've never been number one in M&A.
in announced deals in the fourth quarter, we are number three globally. Now we happen to be in three of the five really big M&A deals and that's very sporadic.
It just happens to be where we are in the fourth quarter, but the pipeline generally is quite good. So it's hard to say, capital markets will continue to incredibly important.
Banking will always be very important. But on the price times volume equation.
I think we've seen in the fourth quarter, seasonal, cyclical and some structural downturn.
James von Moltke
So on the expense question related to PCB. It's James.
As we look forward to 2018 inside the planning that gets you to that €23 billion number, you'd see a slight decline in PCB expense. Now within that, there are lots of moving parts there's the beginning of merger synergies from the Postbank integration.
Their investments, that we're making and we've alluded to in our prepared remarks and there's investments in future revenue growth that we're making in technology and other areas. So lots going on under the surface in PCB.
One thing that I would say that applies to PCB and the other divisions and not just the CIB. Is that part of the increase and expenses that you saw in PCB in the fourth quarter was also a catch up on variable compensation.
So in last year's decisions on compensation it wasn't only CIB that was captured in that, but the other divisions as well, so you see an increase in fourth quarter expenses they're too because of that compensation decisions of this year.
Magdalena Stoklosa
Great. Thank you.
Operator
Next question is from the line of Daniele Brupbacher with UBS. Please go ahead.
Daniele Brupbacher
Just sorry again on the cost outlook. I mean listening to your remarks, is it fair to assume that you still feel comfortable getting closer to €21 billion in 2021 given a lot of just timing differences within the trajectory.
And then just briefly on this famous NII slide, I think it's Slide 24 this time. The NII sensitivity I mean my understanding that this is basically the banking book and obviously there's lot of assumptions behind that.
Would it be just possible for you to give us a little bit of sensitivity in terms of second order impact on trading, trading revenues? Is that significantly less or more than these levels which you show on that slide that would be very helpful?
Thank you.
James von Moltke
Sure. I'll try to take both and John may add to my comments on net interest income.
So on cost outlook for 2021. We're still very focused on achieving the original targets that we laid out for 2021.
Of course the uncertainty around the how much of that originally targeted M&A perimeter leads to a variation around that number, which can be both up and down and will reflect some of the strategic thinking that we make from here. It's also a long way out and so the revenue trajectory that we actually achieved to the earlier question will also clearly influence the expenses out that far.
But in our current planning, we're continuing to keep those long-term targets very much front and center in our minds. On the net interest income front as you saw and it actually increased a little bit, our asset sensitivity in the quarter which I think is positive given the greater expectations now of rate increases in Europe, perhaps a little earlier than was originally thought and that greater sensitivity frankly reflects growth in our deposit books which you saw in the quarter.
it is the banking book as you say and that has a bunch of assumptions built into it, in terms of a static balance sheet, the contractual positions that you have appointed in time, but I think it's directionally useful in understanding the future revenue benefit that importantly comes with no additional costs, given that it's built into the balance sheet and frankly the cost basis, I think stand today. The second order impact are always hard to gage, as John said to in response to the earlier question activity in a number of the markets businesses depends on their being more than one view in the marketplace as to the pace and the extent of interest rate increases overtime.
And I think one of the things you saw in 2017 was frankly too unified point of view and the marketplace as to how that was taking place and obviously impact on liquidity of Central Bank actions. So as that begins to shift to a different environment, in general you would think the volatility and rates markets would pick up and the second order impacts would generally be positive in the trading books in addition to positive, in the banking books.
Daniele Brupbacher
Thank you.
Operator
Next question is from the line of Jeremy Sigee with Exane BNP Paribas. Please go ahead.
Jeremy Sigee
Couple of questions. So the first one, some of your balance sheet guidance and targets a bit dated now and a lot has changed.
I appreciate involves some estimations and I just wondered if you could give us your current expectation for where you think RWAs might be in 2020 and also what you're thinking equivalent number might on a fully loaded Basel IV basis. And perhaps while we're having that conversation you could also give us an idea where you expect your leverage exposure to be in 2020.
Then my second question much more specifically. It looks like on the comp accrual that you took almost the whole of the variable comp accrual in 4Q last year.
It looks like there is very little accrual, as we went through 1Q, 2Q and 3Q and it was pretty much more than 4Q. I wonder if you could talk a bit more about that, is that correct?
Why was that? And will 2018 be [indiscernible] differently?
John Cryan
So Jeremy, I'll take both. I'd say too far out to think.
Obviously we have our planning for both RWA and leverage exposure into 2020, but to comment on it publicly. It's probably too far out.
I think in RWA terms directionally no question but that it is up, even on the existing business, we simply see inflation factors around regulatory technical standards and interpretation, rule changes and the work that we're doing to prepare for the implementation and things like FRTB. So our thinking is, that it is up even for the business that's on the books today.
And how much depend on a lot of developments. One is, what business we're writing a couple of years from now and the second is, our ability to mitigate and offset some of those RWA inflationary factors.
So that's an area of intense focus in our organization essentially to manage the balance sheet and capital efficiency as best we can. I would say in the leverage exposure world, that actually counts in some ways double.
I would be seeking to manage the company as much as possible at or below the leverage exposure levels that we have and we do believe there is additional efficiencies that we can build in terms of use of the leverage balance sheet overtime. So I can't say precisely, but directionally up in RWA and I think directionally flat in leverage exposures ideally down.
In terms of the comp accrual, we did accrue as you'd expect in the first three quarters of 2017 for expectations around compensation or variable compensation awards at the end of the year and so you see in Q4 two effects, one is, decisions we made that went beyond the year-to-date accrual that was based on planning assumptions, but as we looked at the businesses and the decision to invest especially in light of the decisions of the prior year, it resulted in a higher accrual and that accrual then compared to a year in which the decisions in the opposite direction if you like, especially impacted the fourth quarter compensation and benefits at line. So you see two decisions reflected in the fourth quarter, but absolutely accruals throughout the year as you'd expect us to do.
Jeremy Sigee
Thank you, just on the first point. About the RWA guidance.
I guess I'm noting that lot of your peers are giving guidance either on what their RWA numbers are estimated to go up to or if they're not doing that, they're giving guidance around how much quantum of, CET1 capital that expect to need. So I guess for the latter, if you prefer to do that, would you still reason in terms of leverage ratio partly because it looks like the binding constraints and partly because it's a more knowable sort of frame of reference, is that how you would guide us to expect your capital requirements?
James von Moltke
Yes, absolutely. We do want to just reiterate that nothing has changed in terms of our capital goals, which is to build overtime to a leverage ratio of 4.5 and to preserve the CET1 ratio at comfortably above 13.
And so to your point, as we look to the future and build in expectations about balance sheet usage, RWA inflation and other factors. Clearly we have to - we've built expectations and informed our actions based on that forward looking view of RWA and leverage exposure.
Jeremy Sigee
And do you specify the CET1 component within that 4.5 leverage ratio targets?
James von Moltke
Do we specify? I mean I just think of it as mathematically it's the same numerator for practical purposes.
So as I think about that you're managing a different denominator. When you look at the two ratios.
Jeremy Sigee
So 4.5 pure CET1 not including AT 1?
James von Moltke
No, no it's a Tier. Yes it's Total Tier 1 capital in that ratio.
Frankly, the AT 1 is in part to me an outcome of capital structure that's driven by the regulatory level or standard. So you'd expect to see us manage to basically the required if you like levels of AT 1 and subordinated debt in the capital structure.
So I think of that as, put it this way reasonably mechanical as I think about numerator.
Jeremy Sigee
So is that way around rather than necessary to having to be 3.7, 4 north or anything on that leverage ratio is driven by the stack more broadly?
James von Moltke
Yes. And we think of it as glide path and as I say, we don't, while I know there is discussion about the leverage ratio and I've made some comments about cash and liquidity as well as pending settlements in our leverage ratio.
We feel comfortable with where we are and the glide path going ahead.
Jeremy Sigee
Okay, thank you very much.
Operator
And we have time for one more question. Andy Stimpson of Bank of America Merrill Lynch.
Please go ahead.
Andy Stimpson
Just one clarification question and one on net interest income. When you said January was best, I just wanted to check whether that was a year-on-year comment or whether that was just quarter-on-quarter?
and then on the net interest income guidance obviously that's up again but I just wanted to check how you think that's going to come through within the business units because PCB's net interest income is actually up year-on-year and hasn't performed too badly despite all the layer, right? I know you said that deposit costs or deposits have been worst, but actually that's been offset by that alone.
So really the big decline in net interest income group level has come from CIB. So with that slide of the back of the deck saying how rate sensitive [indiscernible] is that really, are we expecting that to come through mainly in the CIB division and then also have we seen any benefit from the higher US rates [indiscernible] through this year?
Thank you.
James von Moltke
So couple questions [indiscernible]. So first of all we do break out by division where we expect it to new net interest income to arise in a rising rate environment and it's split between the divisions because of course in CIB there is a banking book on the liability side largely in GTB and on the asset side both in GTB and the banking businesses and markets businesses.
As I think two - of the questions, markets NII is frankly very hard to predict, at the best of times. It depends really on how transactions are booked and whether revenues appears, commissions or as net interest income or carry.
So we focus mostly on the bits of it that are accrual and you know and predictable. If I think to your question about performance year-to-date, as John said a month is early, we were seeing solid performance really across all of our businesses year-to-date.
It's early but their comment is really more if you like a sequential comment. The fourth quarter was unusually quite across really almost all market businesses and especially in the case of the fourth quarter on a year-on-year comparison and I think it was encouraging to see the typical seasonal rebound and January, if you look like a more normal month again.
It is as John said and probably just a touch behind last year, but last year was a strong first quarter so hopefully that gives you all the reference points that you're looking for.
Andy Stimpson
Great. Thank you.
Operator
On the interest of time. We have just stopped the Q&A session and I hand back to John Andrews.
John Andrews
Operator, thank you. And thank you everyone for dialing in.
And apologies to those who we left in the question queue, but as I announced before we do have another obligation that John and James have to get quite importantly. Obviously the IR team is happy to engage with all of you and respond or any follow-up questions and we wish you a good rest of the day and weekend.
Thank you.
Operator
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day.
Goodbye.