Deutsche Bank AG — FY 2018 Form 20-F
Reporting period: Year ended December 31, 2018; filed March 22, 2019. The filing reports annual results, not standalone fourth-quarter figures. Financial statements are audited and prepared under IFRS as issued by the IASB. KPMG issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting as of year-end.
Business context and key financial metrics
Deutsche Bank is a global banking group organized around Corporate & Investment Bank (CIB), Private & Commercial Bank (PCB), and Asset Management (AM). In 2018 it completed the merger of its German retail banks, partially sold its Polish retail business, and completed the DWS IPO while retaining approximately 80% ownership.
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenues, before credit-loss provision | €25.316bn | €26.447bn |
| Net interest income | €13.192bn | €12.378bn |
| Provision for credit losses | €525m | €525m |
| Noninterest expenses | €23.461bn | €24.695bn |
| Income before income taxes | €1.330bn | €1.228bn |
| Income tax expense | €989m | €1.963bn |
| Net income (loss) | €341m | (€735m) |
| Operating cash flow | (€54.066bn) | €39.576bn |
| Total assets | €1,348.1bn | €1,474.7bn |
| Loans at amortized cost | €400.3bn | €401.7bn |
| Deposits | €564.4bn | €581.9bn |
| Long-term debt | €152.1bn | €159.7bn |
The statement of income reports net interest income of €13.192bn and noninterest income of €12.124bn, totaling €25.316bn before the €525m credit-loss provision; net interest income after provision was €12.667bn. The filing’s net cash and cash-equivalent balance declined €48.203bn to €180.822bn. Cash flow figures reflect substantial operating cash outflows and should be read alongside the bank’s liquidity metrics.
- Margins and costs: Net interest margin improved to 1.33% from 1.21%; cost/income ratio improved to 92.7% from 93.4%. Adjusted costs were €22.8bn, versus €23.9bn.
- Capital: CET1 ratio was 13.6% (14.0% fully loaded at 2017 year-end); Tier 1 ratio was 15.7% under transitional rules. Fully loaded leverage ratio rose to 4.1% from 3.8%; phase-in leverage ratio was 4.3%.
- Liquidity: Liquidity reserves were €259bn, down from €280bn. The year-end liquidity coverage ratio was 140%; stressed net liquidity position was €48.1bn, up from €32.6bn.
- Other: Full-time-equivalent employees fell to 91,737 from 97,535. The share price ended the year at €6.97, compared with €15.88.
Material changes versus 2017
- Revenue declined 4%, with CIB, PCB and AM each facing revenue pressure. CIB revenue fell 8%, largely reflecting strategic repositioning, lower client activity and challenging markets. AM revenue fell 14%, with lower performance fees and outflows; PCB revenue was broadly flat.
- Net interest income rose 7%, supported by higher average rates and a reduction in average interest-bearing liabilities. Fair-value gains on financial assets and liabilities fell 54%, partly due to mark-to-market losses from higher U.S. interest rates.
- Noninterest expenses declined 5%, including lower compensation, professional-service and litigation costs. Income before tax rose 8%. Net income improved mainly because the 2017 result included a €1.4bn one-time charge to remeasure U.S. deferred tax assets following U.S. tax reform.
- CET1 ratio declined as CET1 capital fell and risk-weighted assets increased. Total assets contracted 9%, reflecting balance-sheet optimization, lower derivative values and reductions in trading and secured-financing positions.
- IFRS 9 was adopted January 1, 2018, changing financial-asset classification and impairment accounting. The transition reduced shareholders’ equity by €671m and fully loaded CET1 capital by approximately €393m; some 2018 and 2017 credit-risk disclosures are not directly comparable.
Outlook, management commentary and risks
Management’s 2019 targets were adjusted costs of €21.8bn, post-tax return on average tangible equity above 4%, and internal headcount below 90,000 by year-end. Longer term, the bank aspired to approximately 10% return on tangible equity in a normalized environment. Capital ambitions were CET1 above 13% and a phase-in leverage ratio of 4.5% over time. Management proposed a €0.11-per-share dividend for 2018, subject to shareholder approval and applicable distribution constraints.
- The strategy emphasizes a more stable revenue mix, growth in PCB and DWS, refocusing CIB on core transaction banking, capital markets, financing and treasury services, and rigorous cost control. The bank targeted €900m in annual synergies from the German retail merger, fully realized in 2022 and beyond; estimated integration and related investment costs were €1.9bn.
- Management identified subdued client activity, low euro-area interest rates, low volatility, competition and strategic restructuring as headwinds. Its 2019 economic outlook anticipated slower global and euro-area growth, with Brexit and trade tensions among downside risks.
- Material legal and regulatory exposures include ongoing investigations into money laundering controls and the Danske Bank correspondent-banking relationship, the November 2018 search of Frankfurt offices, and other litigation. BaFin ordered improvements to AML/KYC controls and appointed a special representative; its mandate was extended in February 2019 to correspondent-banking controls. The filing estimates possible losses, where reliably estimable, of approximately €2.5bn for civil litigation and €0.2bn for regulatory matters; these are not probable-loss provisions and exclude matters for which loss cannot be reliably estimated.
- Other notable uncertainties include Postbank takeover litigation, including claims totaling almost €700m excluding interest; a German tax dispute concerning pension-asset income, with €616m of tax and interest paid and under challenge; execution of restructuring and cost targets; and potential capital, liquidity, funding and reputational effects from adverse legal or market developments.
- Regulatory capital requirements increased in 2019: the ECB required a minimum CET1 ratio of 11.82%, excluding nonbinding Pillar 2 guidance. The bank also noted potential future costs and capital needs from European banking reforms, TLAC/MREL requirements and Basel 3 implementation.
Most important facts for investors to verify
- Confirm the distinction between €25.316bn of revenue before credit-loss provision and €24.791bn after provision, and assess the effect of IFRS 9 on period comparability.
- Track CET1 and leverage buffers against regulatory requirements, including the effect of capital deductions, risk-weighted assets and resolution-funding rules.
- Monitor liquidity and funding in light of €54.1bn of operating cash outflows, lower liquidity reserves and the bank’s disclosed stressed liquidity measures.
- Assess delivery of the 2019 cost, return, headcount and capital targets, plus the timing and cost of Postbank integration and other restructuring.
- Follow AML/KYC remediation and supervisory deadlines, investigations and litigation developments, including whether actual losses exceed provisions or disclosed estimates.
- Verify approval and payment of the proposed dividend and whether future earnings and regulatory conditions support distributions.