Original Source: FD (FAIR DISCLOSURE) WIRE
. Wolfram Schmitt, Deutsche Bank, Head of IR . Josef Ackermann, Deutsche Bank, CEO . Anthony di Iorio, Deutsche Bank, CFO . Hugo Banziger, Deutsche Bank, Chief Risk Officer . Mr. Heim, Analyst . Joachim Mueller, Cheuvreux, Analyst . Philip Seashank, UBS, Analyst . Carsten Werle, Sal Oppenheim, Analyst . Georg Kanders, WestLB, Analyst . Kinner Lakhani, ABN Amro, Analyst . Christopher Wheeler, Bear Stearns, Analyst . Joanna Nader, Lehman Brothers, Analyst . Matthew Clark, KBW, Analyst . Stuart Graham, Merrill Lynch, Analyst . Ivan Vatchkov, Credit Suisse, Analyst . Kian Abouhossein, JP Morgan, Analyst . John Pease, SPK, Analyst
Management reported that 4Q06 revenues were up 9% over 4Q05. Net income for 2006 was EUR6b, and 4Q06 was EUR1.8b. 2006 EPS was EUR10.86.
A. Key Data From Call 1. 2006 net income = EUR6b. 2. 4Q06 net income = EUR1.8b. 3. 2006 EPS = EUR10.86.
S1. Business Review (J.A.) 1. Trends Shaping Industry: 1. Those banks who will be the winners going forward should actually be strong in three areas: 1. They should be global, because globalization becomes more and more of importance. 1. Growth of emerging markets. 2. Geographical boundaries disappear. 2. 80% of the financing of emerging markets or industrial companies was done via bank lending. 1. Investment banking environment is one of the most consolidated one. 2. Reported not more than eight probably can claim to be global in investment banking. 3. Global asset growth. 2. Results:
1. Last year, DB had capital gains in revenues. 1. Otherwise, it would be up 15%. 2. Profit, DB is at this time having no reversals.
1. Has not sold any industrial holdings with the exception of
DB participated in 3Q06 in the capital increase of Linde and a few weeks later sold that. 2. Has over EUR2.5b after-tax gains on this holding. 3. After-tax looks a little bit better. 1. Taking tax rate for the Group, DB is a little bit closer to some of its neighboring countries' tax rate, still above. 2. Even with the tax credits, DB got a little bit closer to the competitive environment. 3. For Germany, has EUR350m tax credit, which helps the bottom line number. 4. ROE was up to 31%. 5. Dividend:
1. DB wants to grow a little bit. 2. Was at 36% last year, it's a minor step to 37%. 3. Dividend is also, in Germany, always a political issue. 3. Leveraging Global Platform for Accelerated Growth: 1. Cost, risk, capital, and regulatory discipline will not change. 2. Has added a lot of corporate finance people in the US. 1. A huge revenue potential already was realized last year and even more so this year. 2. Has increased platform, same is true for privatized management. 3. Has added about 400 private banks last year. 1. This is a buildup, takes about 12-18 months before DB sees the revenue stream. 2. On purpose, DB has done some investments. 4. It is part of DB's strategy to grow organically. 3. Problem loan ratio has come back. 4. Capital was strong. 1. Generates the return on EUR1.6b higher capital base. 5. Part of the organic growth was to grow risk-weighted assets.
1. Underlying return on these assets has grown up to EUR2.9b.
2. Added FTE. 1. Some of them are not expensive people, but some are also expensive people. 2. Hired some of the top performers from other banks. 4. Acquisitions: 1. Announced the Vietnam stake.
1. This has been part of one of the Asian tigers. 2. Some said this may be a ten-year speculation and that was right, but the investment is just small, very limited. 2. In China, with Huaxia Bank, DB has doubled already in this short period of time the value of its investment. 5. Stable Businesses: 1. Investment banking is more stable than most people think for two reasons:
1. There are only a few players. 2. Global universe is getting bigger and bigger, more and more new countries, more and more new clients groups. 1. Those who are meeting the requirements of these mega trends should benefit going forward. 2. Numbers are now EUR2.7b. 1. For 2008, DB would have EUR1.3b plus EUR1.3b plus EUR1b, so it would then be at EUR3.6b. 3. CB&S, so CIB excluding Transaction Banking, has been strong at EUR5.2b. 1. DB is not including private equity gains in that. 2. Top five in equities, assuming that UBS will show good numbers. 1. Otherwise, it would be number four. 3. Has seen strong momentum in many parts of the equities business. 6. 2008 Vision: 1. Even assuming not stellar developments in investment banking, DB can deliver EUR8.4b. 2. In Transaction Banking, EUR700m, now EUR1b. 1. Believes this is within the reach, but needs hard work in 2007 and 2008. 3. Asset & Wealth Management: 1. Asset management is doing well, benefiting a little bit from certain real estate gains.
2. Has had very good development, privatized management, good
asset flow, but DB is still or was in an investing mode. 1. This is now being corrected, because now DB wants to see the results for 2008. 3. DB has EUR190b. 4. If one has 100 BP margin and a cost/income ratio of 70 or over 500. 4. Private & Business Clients (PBC): 1. Good development, here DB has really invested.
2. Some of the cost buildup comes from the buildup in norisbank, Berliner Bank, India, and so on. 1. This is part of DB's strategy, but that is also something where it believes it can achieve its results in 2008. 5. Corporate investments, DB has zero. 1. Now has over EUR2.5b in reserves after-tax. 6. 2000 was the best year so far for DB when comparing with the numbers. 1. Taking out the capital gains, which DB had in 2000, the Co. has just doubled the profit from 2000 to 2006. 7. Consolidation & Adjustments, flat number. 1. Always depending on a little bit on accounting differences. 7. Trends: 1. Globalization: 1. Is very global, over 70 countries where DB is active. 2. Has a strong position now in all major markets. 3. Asia has done particularly well, up 40%. 4. The US has done well. 5. Germany was up, but not comparable to that. 6. In other European countries, it's up too. 1. Primarily US and Asia have been strong, and DB continues
to benefit from that. 2. Growth of Capital Markets: 1. In investment banking, DB continues to have tight risk management.
2. In asset growth, DB is now at almost EUR1t invested assets. 1. EUR966b with EUR30b net new money last year and the rest is currency and market impacts, one positive and the other one negative, almost offsetting each other. 3. Global Asset Growth: 1. Mutual funds business is showing good signs, as DB has started to globalize that. 2. In China, DB placed EUR4b within a short period of time. 3. US performance is better, and the same is true for
S2. Financial Review (T.I.) 1. Highlights: 1. Best ever 4Q on a pretax basis. 1. Best ever in origination and advisory.
2. Best ever in Sales & Trading (S&T). 3. Had outstanding results in Real Estate business, albeit influenced by performance fees. 2. 31% on avg. active equity on DB's target ROE. 1. Excludes any gains from industrial holdings sales and from any restructuring costs. 3. Wanted to separate from EPS the benefit it received from
dividend tax credit. 1. This is merely the acceleration, there was no cash savings, there will be no tax savings in the future over what economically would probably have happened. 2. It's the acceleration of the recognition of a benefit that would have accrued to DB over ten years, depending on payment of dividends.
3. Because of the change in law, it no longer became contingent
on the payment of dividends. 1. Had to recognize the benefit.
4. Stripping that out, EUR10.86 is a substantial increase.
5. Dividend on a reported basis, DB increased by 66%. 2. Group Results: 1. On a Group basis, 4Q06 pretax was EUR1.9b. 1. 4Q has traditionally been the weakest qtr. in the year. 2. Looking at last three quarters of the year, they were fairly stable in terms of pretax. 2. For the year, up a third to EUR8.1b. 1. Last year, numbers included almost EUR700m of gains on the sale of Daimler shares. 3. 4Q06 net income, EUR1.8b. 1. For the year, EUR6b.
4. Tax Rate: 1. On an underlying basis, tax rate guidance has probably not changed. 2. It's somewhere between 34-36%. 1. This is going to depend on mix of earnings by geographic region. 2. If DB earns more income in a high tax jurisdiction, effective rate is going to go up. 3. If DB earns less money in high tax jurisdictions, the rate is going to come down. 3. Still guiding to 34-36% rate. 4. Apart from EUR355m, DB concluded on some tax audits. 1. These were in different jurisdictions. 2. Had prudently established some provisions for tax examinations. 3. Once those audits are concluded, the accounting required to reverse them, so DB did. 4. On the income statement, DB broke out EUR355m from the rest of the tax effects. 5. Interest Release: 1. Was not a tax refund. 2. Did not collect any cash from a taxed authority.
3. Each year, if DB has set a provision aside for payment of tax on a tax audit, it accrues interest on it. 4. Every qtr. in the P&L, DB has a deduction in the revenue line for interest expense related to any tax provisions it has on the balance sheet. 1. When DB releases tax provisions if they are not needed, because the tax audits are completed, the Co, likewise releases the interest expense that it has accrued on that. 2. This interest expense goes back over many years, and accounting policy is to accrue the interest expense as revenue …