Noninterest Expenses

There are several general observations worth noting concerning the level and downward trend of noninterest expenses in all divisions:

• There are favorable exchange rates, entity deconsolidation, and business disposal effects.
  
  
• Cost containment measures are showing positive results in all major cost categories.

The following table sets forth information on our noninterest expenses:

Compensation and Benefits. All divisions reported a decline in expenses in this category in comparison to 2002. Corporate Investments’ compensation and benefit expenses declined by more than € 300 million due to headcount reductions related to the deconsolidation of EUROHYPO AG, the sale of the North American commercial and consumer finance business, and the divestment of much on the late-stage <% LINK TEXT=" " iEditPath="/en/servicepages/glossary/latestageprivateequity" skin="glossary" %> business to former management. CIB reported a reduction of € 308 million, despite an increase in performance-related bonuses, for the reasons noted in the general observations above. The remaining decrease in compensation and benefits was attributable to PCAM, despite an increase of € 257 million in severance payments compared to 2002. Included in the declines across all divisions were lower pension expenses. Pension expense decreased due to an increase in the expected return on plan assets component of pension expense. The expected return on plan assets increased because we contributed € 3.9 billion to a segregated pension trust in December 2002 to fund the majority of the German pension plans.

Other Noninterest Expenses. There were decreases across all major expense categories due to the aforementioned reasons. The significant decline in other expenses also reflected lower provisions for litigation and off-balance sheet credit exposure as well as reduced minority interest expenses. Reductions in net occupancy expense of premises due to the aforementioned reasons were largely offset by charges for sublease losses and other costs of eliminating excess space resulting from headcount reductions and the sale of businesses.

Goodwill Impairment. The current year included a charge of € 114 million in CI following decisions relating to the private equity fee-based businesses. In 2002, the charge was related to the management buyout of the late-stage private equity business.

Restructuring Activities. This year’s amount represents releases of restructuring provisions of € 29 million created in the first half of 2002 subsequent to the full implementation of the plans in CIB. In 2002, we recorded a net amount of € 583 million, which reflected restructuring initiatives in all divisions and affected approximately 4,100 staff. For further information on our restructuring activities, see Note [29] to the consolidated financial statements.

Income Tax Expense. Income tax expense in 2003 was € 1.5 billion, as compared to income tax expense of € 3.2 billion in 2002. The above difference is primarily attributable to the accounting for effects of German income tax rate changes that were enacted in 1999 and 2000, and 2003. In 2003 and 2002 there was tax expense of € 215 million and € 2.8 billion, respectively, as a result of the reversal of the deferred taxes accumulated in other comprehensive income at December 31, 2000, due to actual sales of equity securities. We expect further reversal of tax expense in future years as additional equity securities are sold. In addition, the German tax law changes in 2003 resulted in a tax expense of € 154 million. Excluding the effects of changes in German tax rates our effective tax rates were 43% in 2003 and 10% in 2002. The increase in the effective tax rate in 2003 was primarily due to an increase in non deductible write-downs on investments and a decrease of tax-exempt capital gains.

Cumulative Effect of Accounting Changes. The cumulative effect of accounting changes, net of tax, represented the effects from the implementation of the new accounting standards FIN 46 and SFAS 150 in 2003 and SFAS 141 and 142 in 2002. For further information on our cumulative effect of accounting changes, see Note [2] to the consolidated financial statements