Okay, I am delighted to be opening the third and final day of the conference by hosting Christian Sewing, CEO of Deutsche Bank. Christian, as you know, has been a member of the management board since January 2015 and Chief Executive Officer since April 2018, and in fact has served at Deutsche Bank since 1989. Given Christian's position within the German economy, we're going to start with a bit of macro backdrop before diving into some Deutsche Bank-specific questions with some time towards the end of the session for Q&A. First and foremost, Christian, thank you very much for joining.
Thank you very much for having me.
Let's talk about the macro, particularly given the new government and the prospects for a fiscal tailwind over the next few years. Where do you see the most significant outstanding challenges for the economy? Which structural reforms does Germany need to move forward? How is Deutsche Bank positioned to benefit from these opportunities and challenges, and also the build-out of the Savings and Investment Union? I guess there's a lot of questions here, but the last one is, is there really political will to make the Savings and Investment Union happen this time around?
Yeah, at the end of the answer, you need to remind me if I answered everything right. Look, first of all, I think you have seen Levin Holler yesterday here because I saw him yesterday morning, and he told me that he is attending your conference, which made me actually invite him to one of our conferences so that he is not only coming to Goldman. I am really optimistic because the willingness and speed, and also the hunger of the German government to change things is really noticeable. You can see it, and I will come to the economy soon, but you can also see it with the action they are driving across many fields.
I mean, look, after the election, which was a little bit of a bumpy start, we all know that early May with the election, but what the Chancellor did, where he traveled, what he did, what kind of, also surprise travels he did on the first weekend, all that has an impact actually, i.e., in signaling also to other countries that, so to say, Germany is back and that we want to change things, that we also want to take our responsibility, which we have in Europe, to a different level than before. Exactly that has an impact on the underlying economy.
Look, for me, it is not a surprise that in May, when there was the first survey of the, so to say, business confidence of German entrepreneurs, that it was far more positive than people expected and than what we have seen before. Therefore, simply the way the new coalition started its work and how quickly they jumped onto certain issues gives me a lot of confidence. Now, to the issues they need to do, number one, I always said already in March that I do believe that the fiscal package, the EUR 500 billion, but also the additional defense spending, is positive. We have also seen credit agencies and credit rating agencies who said it's even credit positive to Germany as long as we see structural reforms in Germany.
In this regard, I'm taking comfort from the coalition meeting, which happened actually yesterday, two weeks ago, on a Wednesday afternoon, where you have seen later on four pages of changes, what they want to do over the next six to nine months in two phases, certain changes before the summer, then other changes before the end of the year. There are three or four items which I think are vital in order to actually show the economy and the entrepreneurs that things are moving. Number one, they need to make sure that before the summer, there are certain agreements on the accelerated tax reform, whether it's the write down, the amortization schedule, which should be changed, whether it's then also already the decision that the tax rate for corporates will be decreased, I think from the year 2028 by 1%.
All these are positive signals. I do believe that the government will make sure that this kind of change will go through the parliament before the summer. If you look into the details of these four pages, actually, you see that they will work on the energy prices, which is, in my view, the most important part for the manufacturing area in Germany. You know, we are always looking at the Mercedes-Benz, at the Daimler, at the BMW, at the Siemens. You really, in order to understand Germany, you need to go into the midcap and family-owned businesses. The number one problem they have is actually energy prices.
If next to the tax reform, we get, so to say, support on that side, which is again planned for the next few weeks, I do think that that can be a booster. Now, what does it mean if you really make the EUR 500 billion work? And also there, there's a clear schedule how to make it work starting actually in the second half of 2025. It will have an economic, the real economic impact will be in 2026, but it starts to get implemented in 2025. If you have these structural reforms, another thing will happen that the medium and midcap companies will start to invest themselves. And we have seen that in our loan book for the last two or three years. It was actually, there was actually no real demand.
We always planned at the start of the year for a higher loan book in Deutsche Bank. In particular, the loan book in Germany was usually at the end of the year not there where we planned it at the start of the year. Now we can see for the last six or eight weeks that we have a different level of discussions with our clients. That is number one. The midcap clients, the family-owned businesses, are actually having an underlying positive mindset in order to invest again. The second part, which is unfortunately not that discussed, is actually the private clients in Germany.
For the last six months, we have seen the highest saving ratios in Germany, within Deutsche Bank accounts, i.e., the ratio of what has been saved from the net income of private clients, retail clients was almost as high as to the peak of COVID times. Now at COVID, you cannot spend, or almost you could not spend. Now we can spend. Nevertheless, the saving ratio was as high. Imagine this positive mindset is now transferred also to the private clients. The consumer confidence will actually also increase. By the way, also in May, we saw the first increase in consumer confidence. Therefore, I do believe that this title of working coalition, Arbeitskoalition, that is the name they gave themselves, is exactly the right thing to show to the society and to the economy in Germany that things are moving.
Now, to your last question, what does it mean for Deutsche Bank? Of course, it's net positive. Things are obviously moving slowly. As I said, the deployment of the EUR 500 billion in terms of economic growth, we will see in real numbers in 2026. We, at Deutsche Bank, believe that there will be an economic growth in Germany of clearly above 1% in 2026. We think in 2025 it's approximately 0.3-0.4%. From the activity level in the corporate bank, from the activity level also in the private bank, because there's also the discussion on the restructuring of the pension system in Germany, it will absolutely go up. Last but not least, we just said it in a pre-discussion, Chris, we see an asset rotation from other continents into Europe.
To be honest, Deutsche Bank is one of the very few banks being the gateway to Europe. And that's what we see. I think everything what we are seeing in Germany and Europe is actually in the medium and long term net positive for all the four businesses of Deutsche Bank.
Right. Excellent. Maybe before we go into the divisions, just something on 2025, the targets. I mean, recent macro has been volatile in certain areas. That's been putting pressure on the outlook for revenues and also for credit costs. What is the path now towards your 2025 targets? How are your ambitions on capital and also on operating efficiency going to support that delivery?
Yeah, we do not change. If you want to have that answer, because we are confident in our business mix. And to be honest, we obviously are very, very happy with the start of the year. Q1 was a really good quarter for us. We can see also in Q2 that the business mix is helping us. Stable businesses are in line with our expectation. That counts for the private bank. Corporate bank will be better in Q2 than in Q1. We had a little bit of a slow start in the corporate bank in Q1, and therefore we see sequentially an improvement in Q2, modest, but improvement as in line with our expectation. Asset management will have another very strong quarter.
You know what the nicest thing is in all the three businesses, and that's where I'm looking on, is that actually the return on equity in all three businesses in Q2 will be better than in Q1. That shows me that the operating leverage, that what the management is responsible for in Deutsche Bank, is making progress quarter by quarter. That's the way I measure Claudio, Stefan Hoops, and obviously Fabrizio. That I can see in the stable business. Investment bank is behaving satisfactory. Why do I say that? Because, you know, as my peers, we see a little bit of a weakness in the O&A business, but fortunately overall, the investment bank will be in line with Q2 of last year because we can actually compensate it with the fixed business and the financing business.
cost, we stay to the guidance of the EUR 20.4 billion number of adjusted costs for the full year. You know, 85% of our EUR 2.5 billion of cost measures, which we wanted to do by the end of 2025, have been implemented. So EUR 2.1 billion is, so to say, realized capital, you know, with the 13.8 number, I think we have a really good starting base. That tells me that with the business mix we have, despite all of the volatility and also uncertainty, which has an impact obviously on a business like O&A, but despite that, the business mix of Deutsche Bank is strong enough that, also in such a scenario, we can achieve our 10% return on equity.
Very clear. Now if we sort of dive in a bit more detail to each of the divisions and let's start with the ideas you just discussed, you know, at the beginning of the year, there were big revenue growth targets for O&A for 2025. That's, as you said, been impacted by the recent macroeconomic developments. You talked about the better supports you can expect out of the fixed business, how much of that O&A headwind can be absorbed by fixed. Maybe more specifically, how has trading in Q2 developed after, I guess, what was a very volatile beginning and, you know, beginning of April? If we think about what is FICC going to do in Q2, how's it going to support, and then how does the O&A pipeline look like?
Yeah, look, as I said, overall, I think the investment bank in Q2 will be kind of in line with the number which we have seen in Q2 of 2024. You are right. We actually saw at the beginning of the year that the O&A business will grow with a higher rate than we currently see it. Now in this regard, we clearly benefit from the outperformance in FICC in Q1, which was stellar. I have to say I'm very happy with the performance, also with the FICC business in Q2. It will be up low single digits year over year, always taking into account that we had a very kind of rough start for the first 15 days in April, and we made good for that.
Already at the end of April, we said we are sort of back there where we want to be. I think FICC has shown this performance, and, you know, it really plays now to our strengths that the overall investment bank actually comprises three businesses, and the balancing out in these businesses works well. We have a financing business which always returns and revenues more than EUR 3 billion per year. We have made market share gains in the FICC business over the last four or five years. We can see actually that the tendency of our clients around the world, that they would like to have an alternative to the US banks also in terms of investment banking, is actually playing into our cards.
That means even in volatile times, even in times where there is a lot of uncertainty with the market share we have, with the market position we have in Europe, in Asia, but also now gaining in the US, there is a foundation of revenues which is always coming. Therefore, you know, even in these days where, obviously, the investment bank is facing a lot of volatility, the bank is, or the investment banking division is actually doing very well on the O&A business. Look, of course we will have a weaker Q2 than we initially thought at the start of the year. The main issue is actually whether you have canceled deals or whether it's delayed deals. I can see a very robust pipeline.
I can see a lot of activity, but of course, since April 2, companies are delaying decisions, are rediscussing decisions. I can see now already deals which we are working on, which potentially are not accounting for Q2, but slipping in Q3. If I really look at the overall, full year outlook for the investment bank, even for the O&A business, will it be weaker than we initially thought? Yes. To be honest, we talk about a lot of delayed, but not canceled deals. With the outperformance in FICC, as we have shown in Q1, I think we will hit our plan, actually, in the investment bank. On top of that, I think in the stable businesses, we are in line with our plan and business like, as a management, is outperforming. That gives me the confidence.
If we look at the private bank, I think one of the more remarkable divisional targets is, is ambition you have to, you know, to sustainably hit a mid-teens return on tangible equity in that business. Can you talk us through some of the levers you have to deliver on that ambition?
Yeah, and look, it's always easy to talk about ambitions in 18 to 24 months, as I said it in March when I gave the guidance of mid-teens RoTE. Also, look what we achieved already in Q1. I think the RoTE of the private bank was around 8%. I know not good enough. The problem is that the legger is the German retail business, but there we have done a lot over the last 12 months. Claudio is doing a fabulous job actually in increasing the profitability. I said something in my first answer that we can see in the stable business that the RoTE of the three stable businesses sequentially will be better in Q2 than in Q1. You know, the 8% is Q1. We will be better in Q2. That is not only a Q2 impact.
That is the gradual improvement which we will see also after that. Why? On the revenue side, we see actually the momentum in terms of deposit growth. We see actually that on the client interaction, in particular on the investment side, we see a solid development, in particular in Germany. On top of that, all the cost reduction efforts Claudio has implemented are now paying off. We told you at the beginning of the year that we will take 2,000 people out of the German organization, in the private bank, in particular in the retail bank. We did 400 people, I think in Q1. That is a gradual process. We will achieve the 2,000 people at the end of the year.
We told you that we are closing more than 120 branches or 120 branches for the full year. We did 60 branches in Q1. We will do the rest over the year and obviously we are working towards that already in Q2. We have, fortunately, seen now the fruits of consolidating the IT Postbank and Deutsche Bank. Also there, on a monthly basis, we see cost reduction. Therefore, you can also see in Q2 that the cost impact is actually positive. We see good momentum on the revenue side. I am very positive that the retail business in Germany, which was the problem child in terms of profitability, is now gaining momentum from a return point of view based on solid revenues, but in particular on cost reductions.
That will actually pave the way to a mid-teens return on equity. We started to show that in Q1 and as I said, Q2 will be better than Q1.
Then pivoting to the corporate bank, I mean, the corporate bank is core to the global house bank strategy. How do you see the corporate bank supporting clients in the current environment and over the medium term, particularly in the context of some of the disruption we are seeing to global supply chains? You mentioned the sequential improvements in performance in Q2. I just wonder if there is anything else we should look out for this quarter.
First of all, for the setup of Deutsche Bank and also where we are in Germany, in Europe, but in the rest of the world. I need to be a little bit careful that I'm not annoying my colleagues internally, but the corporate bank is kind of at the core and at the heart of what Deutsche Bank is doing. Deutsche Bank was founded 155 years ago in order to facilitate corporate banking. That's what Deutsche Bank is at the core. You can see that this momentum is building, sort of say, quarter by quarter and that also our clients see us actually as that, as the global corporate bank and as the European alternative to the US banks when it comes to global corporate banking.
Also, I know awards are awards, but it is quite fascinating that Deutsche Bank actually won 180 awards just for the corporate bank last year. I mean, it is really something when you think about that we only established the corporate bank again in 2018 at the end of 2018 and where we are right now. It is a real success story. Why is it so important? For three reasons. Number one, I do believe that in this world, which is fragmented, which is full of geopolitical uncertainty, I have never had more intense meeting with corporate clients right now in terms of advisory business, but also how to actually redistribute and restructure their own network and supply chains. Now, in order to be a good partner, you need to be available around the world for these corporates.
You need to be for these corporates, you need to be a local partner in the local markets. That means you need to be actually in 17 or 18 markets in Asia. If you are not in Indonesia, in Thailand, in Vietnam, you will not get the corporate cash management of these clients. It is impossible because you need to have the local network. That is what we have. You cannot believe how many discussions we have with our corporate clients around the world, given the geopolitical uncertainties where they simply want to rediversify and reduce dependencies. That means they are going broader and they want to have a global bank with local expertise. That is exactly what Deutsche Bank is. That is number one. Number two, the corporate bank is obviously very, very helpful in all the discussions we now have in Europe and in Germany.
You have seen the announcement yesterday from the EIB where we have an arrangement with the EIB to do a EUR 500 million, so to say, credit facility in particular for defense spending. We have quite a sizable book for defense industry already. We told the market that it's double digit billion exposure. If you really look into the defense spending, if you really talk to the CEOs of the big defense companies, you don't need to actually provide them with additional cash. They are cash rich. The problem of the defense industry is the supplier industry. It's actually the medium term and smaller businesses in Germany, in Italy, in France, in Poland, which we need to finance.
Now there's a risk appetite question, obviously, and therefore we are working with KfW, with EIB in order to make sure that we are leveraging the programs of the German government, the 500 billion and saying, how can we actually support that program with potentially guarantees, first loss pieces, public private partnerships, you name it. For that, in order to facilitate that, these banks like EIB or KfW actually expect from you that you have expertise in corporate banking, that you know the clients, that you can do the credit process, that you can do the credit assessment. That's what we do. That's at the core of what Deutsche Bank is doing.
Therefore, Fabrizio took the right decision and invested significantly in our defense business over the last six months because we could see it coming obviously in 2024 that this is something which, obviously, is essential for the government. Financing pockets like the defense industry. Last but not least, the corporate bank is obviously super important, in particular when you now think about again, the reallocation of assets from the U.S., but also from other parts of the world into Europe. It is not only that investors are investing into Europe, but you can also see other corporates from other continents coming into Europe and they want to have a strong corporate bank in Europe knowing the market.
In this regard, the corporate bank is, if I think about the next two to three years, will be absolutely a growth story for Deutsche Bank.
I want to sort of blend two questions together on operating costs and also on credit costs. I mean, if you think about, you know, your target to keep adjusted costs essentially flat year over year, can you talk through some of the line items that what you're working on beneath the surface to deliver on that? I mean, on cost of risk, you know, you're guiding for credit losses, EUR 350 million-EUR 400 million per quarter on average through the year, but Q1 was higher than that. Maybe just how do you think about the near-term outlook on, on cost of risk as well?
Yeah, let me start with cost of risk. You're right. The guidance is EUR 350 million-EUR 400 million. We kind of, with the first quarter of EUR 471 million, I think we always said that this was, that the year starts higher with loan loss provisions. We actually believe now, with three weeks to go, that the second quarter will be modestly below Q1. We are exactly seeing the trend which James mentioned to you at the end of Q1, that we see a gradual reduction over the year and therefore we keep the guidance of approximately EUR 1.6 billion for the full year in terms of loan loss provisions. The nice thing is, Chris, that there is no deterioration of the credit portfolio. We don't see a deterioration in the German mid-cap portfolio.
If I look at watch lists, if I look at upgrades versus downgrades, very stable portfolio. We have a little bit of valuation adjustments in the real estate portfolio given where the interest rates in the U.S. are, but honestly, all reasonable and doable. Therefore, the trend is clearly coming down over the rest of the year. Stage three, I do not see a lot of issues. We had a temporary headwind in stage one and stage two also from the tariff discussion. To be honest, I am comfortable with the forecast we had and it is trending down, i.e. quarter over quarter. On the cost side, I am happy actually. I think we have done good work. I told you about the $2.5 billion program, 85% through.
Obviously we are now thinking about more to come after the $2.5 billion, but that's something for beyond 2025. That means that the $20.4 billion is a number we are holding onto. We showed $5.1 billion of cost in Q1. I think it's a good guidance for the next quarters. I can also see actually, and again, this shows the transformation and the long-term impact of our transformation for the bank, that we also, you know, have a little bit more flexibility and that we see flexibility if, for instance, we would see a weakness in revenues that we can do something on the cost side.
I'm very comfortable with the EUR 20.4 billion, and potentially there is even a little bit more to come over the rest of the year.
Interesting. On the CET1 ratio, you stated at the AGM, you now intend to operate in the range of 13.5-14%. Previously, the target was around 13%. What is the implication of that, both in terms of capital distribution, but also in terms of business growth, your flexibility to fund the balance sheet growth, particularly in the context of the comments you made on the growth dynamics you are seeing in Germany?
No impact on distribution. We simply aligned our guidance and our targets, ratio to that, what we see operationally, quarter by quarter. We showed the 13.8% in quarter one at the end of the first quarter. To be honest, if I look through the coming quarters, then I think everything between 13.5-14% is something which we are targeting. I think we have a very conservative target, because for instance, on the FRTB side, our planning still assumes it is coming, though I am absolutely convinced it is not coming. There is further upside to that. That means nothing will change on our distribution goals.
I.e., we are very confident that we can distribute more than EUR 8 billion of capital for the years 2021-2025, including obviously dividends in 2026 and share buybacks in 2026 for 2025. That is all trending in the right direction, and hence, look, we simply aligned our operating ranges to what we are seeing. Also, I wanted to be from a distance to MDA there where most of our peers are.
Okay. My last question before I open up to audience Q&A. You're currently executing a EUR 750 million buyback, and you've said that, you know, you've applied for a second tranche for the second half of the year. Maybe you could just give us an update on how you expect to see the sequencing of the buybacks this year.
Look, I stay reserved on that one because it's a regulatory discussion we have, but I think, you know, from our side, it was a positive message that, despite we were telling you in April that we are thinking about the next application after the second quarter results, that we did this application to the ECB end of May, that shows you that overall we feel that the bank is, despite the complexity which we see also in Q2 in this world and some of the volatility in the investment bank, that we are pleased with the overall performance, that we are confident for our targets, and therefore we applied. Overall, we intend to continue our distribution strategy and also the approach behind, and the math behind this distribution strategy, for 2025 and then also for the oncoming year.
Very confident.
Okay. Okay. With that, let's open up to audience Q&A right here in the middle. If you could just wait for the microphone. Thanks.
Appreciate your comments on two topics, Savings and Investment Union, and your position, and then consolidation in Germany and in Europe.
Consultation?
Consolidation.
Consolidation. Consultation.
That would be an easier answer.
Look, on the Saving and Investment Union, I am really pleased that I think it is, to whomever I talk in the political arena, people in Germany, people in Brussels, when I am in Paris, when I am in Rome, it is one of the three key items on the agenda of the politicians or the governments in place in those countries or for the commission. That makes a huge difference. We can see in this regard a real movement. I do believe that also what we have seen in terms of asset reallocation over the last three or four months, it actually fuels the discussion.
And also when I talk with the new German government on Savings and Investment Union, you can really see that they understand why it's so important to now make progress, whether it's on securitizations, whether it's also in terms of certain regulation. I really see a sea change in the behavior of the rule makers, that we need to be quicker, more decisive, and that we have to move. Number one. Number two, I think sometimes we are doing the mistake that Savings and Investment Union is only seen on a European level.
I'm quite happy actually with the discussions and the willingness of the German government, despite it was potentially not that outspoken in the coalition agreement, to think about structural reforms to the pension system, because I really do believe that we also need to work on our domestic capital market in Germany in order to thrive that. A revival, a restructuring of the pension system in Germany will help dramatically. I mean, if I just think about how much deposits the Germans used to export into the U.S., if we use only a fraction of that for investments into German assets, into European assets, that would help a lot. Also, that discussion is taking place. By the way, using your question, that is why I'm such a believer in the long-term criticality of our private bank in Germany.
I really do believe that we will see change in the mindset of our clients in Germany when it comes to the applications of investments and where to put investments in. That is something where I'm always telling Claudio, and obviously with his background being somebody who comes from the investment side, saying this is the highest growth area for Deutsche Bank over the next three, four, five, six years that we will make sure that deposits are far better actually invested for our clients than before. Therefore, we need the products, we need the process, we need a digital approach. That's where we are investing. In the future, the private bank in Germany is not only an efficiency story, it will be actually a growth story because of the investment side.
In this regard, the governmental willingness now to move also on capital markets reform and on the pension reform will help significantly on consolidation. Look, it's a topic for the last seven years. We see, obviously in particular in certain domestic markets, a consolidation. If you indirectly ask for Deutsche Bank, look, I stay to that, what I said, if you are in the position that you can achieve the 10% RoTE by yourself. I could also talk now a little bit more what is coming beyond 2020, 2025 in terms of how can we move from 10% to a higher return on equity. I can tell you most of that is in our hands. We can grow organic, we can grow organically. We can still actually right-size costs in certain areas.
I'm not looking so much on consolidation for Deutsche Bank. I simply focus on ourselves because there's so much potential we can still raise.
Great. Just at the front here, we have time probably for one more.
I appreciate your optimism. When I listened to the bank regulator sessions yesterday, my heart sank.
I wasn't there.
Okay. We're probably better. How do you see that evolving? Because it just seems like such a headwind for the economy and the banking system.
Yeah, you need to be resilient. But, you know, if you have been a CEO of Deutsche Bank for seven years, you know how to be resilient. And, therefore, you know, I think we need to continue the discussions. We need to continue to present facts. We need to continue to convince regulators that not only we need a level playing field, but that we are so robust and solid that, you know, we should also use our solidity and robustness in order to finance the economy. And, to be honest, I can see improvements and I can see that discussions are taking place.
Again, I, we didn't discuss the regulatory landscape here this morning, but to be honest, in the discussions I have with the German government, with the European Commission, I can really see a movement that there is willingness to debate and discuss how we can achieve a global level playing field. My view is that also on issues like not only securitizations, but FRTB, we will see movements. I think that people are acknowledging, also in Brussels, that if FRTB is not implemented in the U.S. or U.K., that it won't be, at least not implemented in 2026 in Europe. We can have solid discussions with the EU on other items like securitizations.
To be honest, I also take it as a positive signal that central bankers are discussing with the ECB on level playing field and on simplification of rules. I think we should not use the word deregulation because I really do believe we have done mistakes in 2008 and regulation has also helped, overall, but simplification of rules is important. Therefore, I also see it as a positive signal that, for instance, the German national regulator actually reduced the sectorial additional capital buffer for mortgages six weeks ago or four weeks ago. We are slowly but steadily going into the right direction, but you need resilience, but I have resilience.
Resilience is a good topic to wind up on. Thank you again for coming here and joining us and sharing your comments with everybody in the room.
Thank you.