Corporate Banking & Securities Corporate Division (CB&S)


in € m.

Three months ended

Change
in %

Six months ended

Change
in %

Jun 30, 2010

Jun 30, 2009

Jun 30, 2010

Jun 30, 2009

N/M – Not meaningful

Net revenues

3,633

4,646

(22)

9,625

8,904

8

Provision for credit losses

46

771

(94)

139

1,127

(88)

Noninterest expenses

2,801

3,066

(9)

6,097

5,650

8

Noncontrolling interests

7

(14)

N/M

21

(13)

N/M

Income before income taxes

779

823

(5)

3,368

2,141

57

2010 to 2009 Three Months Comparison

Sales & Trading (debt and other products) net revenues were € 2.1 billion in the second quarter, a decrease of € 190 million, or 8 %, compared to the second quarter 2009. Mark-downs were € 64 million in the second quarter, which mainly related to residential mortgage-backed securities, versus € 108 million in the prior year period. We recorded additional charges of approximately € 270 million related to Ocala Funding LLC, a commercial paper vehicle, in the second quarter. Despite challenging market conditions, revenues were a record for a second quarter in Foreign Exchange, and there were good results in Money Markets, Rates and Commodities. This performance was offset by lower revenues in Credit and Emerging Markets as the European sovereign debt crisis resulted in a reduction in investors’ appetite for risk. During July, we received a number of prestigious awards from Euromoney, including Best Investment Bank, Best Credit Derivatives House, Best at Risk Management in Europe and Best Debt House in Germany. For the first time ever, we were ranked number one in U.S. Fixed Income according to the industry benchmark client survey by Greenwich Associates for 2010, with a market share of 12.8 %, up from 10.7 % in 2009.

Sales & Trading (equity) generated revenues of € 642 million, a decrease of € 285 million, or 31 %, compared to the second quarter 2009. The decrease in revenues was due to more difficult market conditions and substantially lower primary market activity. Equity Trading revenues were solid and reflected good secondary market commissions. After the successful recalibration of the business, there were no losses in Equity Derivatives despite a challenging volatility and correlation environment. Although Prime Finance was impacted by spread compression during the quarter, client financing revenues remained stable and balances increased. We were voted number one Prime Broker in Global Custodian’s benchmark client survey for the third consecutive year. Equity Proprietary Trading revenues were broadly flat in the quarter and reflected historically low levels of risk taking.

Origination and Advisory generated revenues of € 543 million in the second quarter 2010, a decrease of € 182 million compared to the second quarter 2009. Debt Origination revenues decreased by € 161 million, or 36 %, driven by the non-recurrence of mark-to-market gains in the leveraged finance business. In Investment Grade we gained market share and retained a top five position despite reductions in market fee pool. Equity Origination revenues decreased by € 73 million, or 35 %, impacted by the lowest second quarter fee pool since 2005. However, we grew market share and improved our rank to fifth globally and number one in EMEA. In Advisory, revenues were € 124 million, up € 52 million from the second quarter 2009. The M&A business gained market share and improved its ranking to sixth globally. (Source for all rankings: Dealogic, Thomson Reuters)

Loan products revenues were € 350 million in the second quarter 2010, a decrease of € 190 million, or 35 %, from the same period last year. The decrease was primarily due to net mark-to-market losses on loans held at fair value.

Other products revenues were negative € 35 million in the second quarter, a decrease of € 164 million from the prior year quarter. The decrease was due to mark-to-market losses on investments held to back insurance policyholder claims in Abbey Life, which are offset in noninterest expenses.

In provision for credit losses, CB&S recorded a net charge of € 46 million in the second quarter 2010, compared to a net charge of € 771 million in the prior year quarter. The significant decrease was attributable to a number of events occurring in the previous year quarter that were not repeated in the current quarter, in particular € 508 million related to IAS 39 reclassifications, mainly from provisions taken against two specific counterparties.

Noninterest expenses were € 2.8 billion in the second quarter 2010, a decrease of € 265 million, or 9 %, compared to the second quarter 2009. The development was primarily driven by lower performance-related compensation expenses in the quarter and the aforementioned effects from Abbey Life.

Income before income taxes was € 779 million in the second quarter 2010, compared to € 823 million in the prior year quarter.

2010 to 2009 Six Months Comparison

In the first six months, Sales & Trading (debt and other products) revenues were € 5.9 billion, a decrease of € 258 million, or 4 %, compared to the first six months of 2009. The solid performance reflects a good diversification across businesses. The reduction was driven by lower revenues in Foreign Exchange, Money Markets and Rates due to lower volatility and tighter bid-offer spreads compared to the first half of 2009. These were partially offset by strong Credit Trading revenues and the non-recurrence of losses from legacy positions and lower mark-downs in the first half of 2010. In addition, Emerging Markets and Commodities had a solid performance.

In the first six months of 2010, Sales & Trading (equity) generated revenues of € 1.6 billion, an increase of € 444 million, or 39 %, versus the first six months of 2009. The increase in revenues compared to the first half 2009 reflects the non-recurrence of losses incurred in Equity Derivatives in the first quarter of the prior year. Prime Finance and Cash Equities showed a solid performance in an increasingly competitive environment.

Origination and Advisory generated revenues of € 1.1 billion in the first six months 2010, an increase of € 32 million compared to the first six months of 2009. In Advisory, revenues were € 256 million, up € 54 million from the first half of 2009. The Advisory business increased its market share and rank to fourth globally. In the Americas it tripled market share and achieved a ranking of fifth, a movement of seven positions over the prior year period. Debt Origination revenues increased by € 25 million, or 4 %. Investment Grade debt maintained its third position in ranking by volume in All International Bonds. High Yield/Leveraged Loans saw record global corporate high yield new issue volumes, and attained number one rank in EMEA. Equity Origination revenues decreased by € 47 million, or 16 %, reflecting lower deal activity over the prior year period. However, it managed to increase its rank to number one in EMEA and number five both globally and in the U.S. (Source for all rankings: Dealogic, Thomson Reuters)

Loan products revenues were € 863 million in the first six months of 2010, a decrease of € 267 million, or 24 %, from the same period last year. The decrease was primarily due to net mark-to-market losses on loans held at fair value.

Other products revenues were € 135 million in the first six months, an increase of € 770 million from the first half 2009. The increase was due to the non-recurrence of an impairment charge of € 500 million relating to The Cosmopolitan Resort and Casino property and private equity investment losses recorded in the first quarter 2009.

In provision for credit losses, CB&S recorded a net charge of € 139 million in the first six months of 2010, compared to a net charge of € 1.1 billion in the prior year period. The significant decrease was mainly attributable to a number of events occurring in the previous half year that were not repeated in the current half year, in particular € 726 million provisions for assets reclassified in accordance with IAS 39, mainly related to two specific counterparties.

Noninterest expenses were € 6.1 billion in the first six months of 2010, an increase of € 447 million, or 8 %, compared to the first six months of 2009. The development was primarily driven by increased amortization of deferred compensation expenses in the first quarter, which includes accelerated amortization of deferred compensation for employees eligible for career retirement and the U.K. bank payroll tax.

Income before income taxes was € 3.4 billion in the first six months 2010, compared to € 2.1 billion in the prior year first six months.

Amendments to IAS 39 and IFRS 7, “Reclassification of Financial Assets”

Under the amendments to IAS 39 and IFRS 7, issued in October 2008, certain financial assets were reclassified in the second half of 2008 and the first quarter 2009 from financial assets at fair value through profit or loss and the available for sale classifications into the loans classification.

The tables below show the net contribution of the reclassification accounting for CB&S. In the first half 2010 the reclassifications resulted in a € 488 million gain foregone to the income statement and a € 195 million gain foregone to net gains (losses) not recognized in the income statement. For the first half 2009, the reclassifications resulted in € 876 million gains to the income statement and € 48 million gains to net gains (losses) not recognized in the income statement. The consequential effect on credit market risk disclosures is provided under “Update on Key Credit Market Exposures” below.



 

Jun 30, 2010

Three months ended
Jun 30, 2010

Six months ended
Jun 30, 2010

 

Carrying value

Fair value

Impact on income before income taxes

Impact on net gains (losses) not recog-
nized in the income statement

Impact on income before income taxes

Impact on net gains (losses) not recog-
nized in the income statement

 

in € bn.

in € bn.

in € m.

in € m.

in € m.

in € m.

1

In addition to the impact in CB&S, income before income taxes in PBC decreased by € 1 million for the three and six months ended June 30, 2010.

Sales & Trading – Debt

 

 

 

 

 

 

Trading assets reclassified to loans

18.4

16.3

(60)

(398)

Financial assets available for sale reclassified to loans

9.7

8.7

8

(70)

12

(195)

Origination and advisory

 

 

 

 

 

 

Trading assets reclassified to loans

5.8

5.5

(30)

(102)

Loan products

 

 

 

 

 

 

Financial assets available for sale reclassified to loans

Total

33.9

30.5

(82)1

(70)

(488)1

(195)

of which related to reclassifications made in 2008

31.3

28.0

(134)

(70)

(491)

(195)

of which related to reclassifications made in 2009

2.6

2.5

52

3

 

Jun 30, 2009

Three months ended
Jun 30, 2009

Six months ended
Jun 30, 2009

 

Carrying value

Fair value

Impact on income before income taxes

Impact on net gains (losses) not recog-
nized in the income statement

Impact on income before income taxes

Impact on net gains (losses) not recog-
nized in the income statement

 

in € bn.

in € bn.

in € m.

in € m.

in € m.

in € m.

1

The negative amount shown as the six months movement in net gains (losses) not recognized in the income statement is due to an instrument being impaired in the first quarter 2009. If the financial instrument had not been reclassified, the decrease in fair value since reclassification that would have been recorded in gains (losses) not recognized in the income statement would have been recognized through the income statement. The income statement difference is due to differences between the impairment models for available for sale instruments compared to loans and receivables.

2

In addition to the impact in CB&S, income before income taxes in PBC increased by € 2 million and € 1 million for the three and six months ended June 30, 2009, respectively.

Sales & Trading – Debt

 

 

 

 

 

 

Trading assets reclassified to loans

18.8

16.1

(132)

760

Financial assets available for sale reclassified to loans

10.2

8.2

(19)

(357)

27

162

Origination and advisory

 

 

 

 

 

 

Trading assets reclassified to loans

6.7

5.5

(55)

66

Loan products

 

 

 

 

 

 

Financial assets available for sale reclassified to loans

0.1

0.1

(83)

23

(114)1

Total

35.8

29.9

(289)2

(357)

8762

48

of which related to reclassifications made in 2008

32.8

27.2

(429)

(357)

573

48

of which related to reclassifications made in 2009

3.0

2.7

140

303

Update on Key Credit Market Exposures

The following is an update on the development of certain key credit positions (including protection purchased from monoline insurers) of those CB&S businesses on which we have previously provided additional risk disclosures.

Mortgage related exposure in our CDO trading and origination, U.S. and European residential mortgage businesses1,2

 

in € m.

Jun 30, 2010

Mar 31, 2010

1

Disclosure above relates to key credit market positions exposed to fair value movements through the income statement.

2

Exposure is net of hedges and other protection purchased. Exposure represents our potential loss in the event of a 100 % default of securities and associated hedges, assuming zero recovery. Excludes assets reclassified from trading or available for sale to loans and receivables in accordance with the amendments to IAS 39 with a carrying value as of June 30, 2010 of € 2.0 billion (thereof European residential mortgage exposure € 1.1 billion, Other U.S. residential mortgage exposure € 399 million, CDO subprime exposure – Trading € 480 million) and as of March 31, 2010 of € 1.9 billion (thereof European residential mortgage exposure € 1.1 billion, Other U.S. residential mortgage exposure € 374 million, CDO subprime exposure – Trading € 449 million).

3

Classified as subprime if 50 % or more of the underlying collateral are home equity loans.

4

Analysis excludes both agency mortgage-backed securities and agency eligible loans, which we do not consider to be credit sensitive products, and interest-only and inverse interest-only positions which are negatively correlated to deteriorating markets due to the effect on the position of the reduced rate of mortgage prepayments. The slower repayment rate extends the average life of these interest-only products which in turn leads to a higher value due to the longer expected interest stream.

5

Thereof € (148) million Alt-A, € (36) million Subprime, € 14 million Other and € 388 million Trading-related net positions as of June 30, 2010 and € (6) million Alt-A, € (46) million Subprime, € 201 million Other and € 308 million Trading-related net positions as of March 31, 2010.

6

The reserves included in the ‘Other U.S residential mortgage business’ disclosure have been revised to factor in an updated calculation of credit risk and is intended to better reflect fair value. We have revised the exposure as of March 31, 2010, which results in a reduction in the net exposure of € 375 million to € 457 million. As of June 30, 2010, the exposure was also calculated on this basis.

7

Thereof U.K. € 150 million, Italy € 27 million and Germany € 8 million as of June 30, 2010 and U.K. € 138 million, Italy € 26 million and Germany € 8 million as of March 31, 2010.

Subprime and Alt-A CDO exposure in trading and origination businesses:

 

 

CDO subprime exposure – Trading3

108

286

CDO subprime exposure – Available for sale

45

32

CDO Alt-A exposure – Trading

38

24

Residential mortgage trading businesses:

 

 

Other U.S. residential mortgage business exposure4,5

219

4576

European residential mortgage business exposure7

185

172

Commercial Real Estate whole loans1

 

in € m.

Jun 30, 2010

Mar 31, 2010

1

Excludes our portfolio of secondary market commercial mortgage-backed securities which are actively traded and priced and loans that have been held on our hold book since inception.

2

Risk reduction trades represent a series of derivative or other transactions entered into in order to mitigate risk on specific whole loans. Fair value of risk reduction amounted to € 1.0 billion as of June 30, 2010 and € 1.0 billion as of March 31, 2010.

3

Carrying value.

4

Carrying value of vendor financing on loans sold since January 1, 2008. Please refer to “Special Purpose Entities” for more information.

Loans held on a fair value basis, net of risk reduction2

1,750

1,581

Loans reclassified in accordance with the amendments to IAS 393

5,320

5,184

Loans related to asset sales4

2,423

2,205

Leveraged Finance1

 

 

in € m.

Jun 30, 2010

Mar 31, 2010

1

Includes unfunded commitments and excludes loans transacted before January 1, 2007 which were undertaken before the market disruption and loans that have been held on our hold book since inception.

2

Carrying value.

3

Carrying value of vendor financing on loans sold since January 1, 2008. Please refer to “Special Purpose Entities” for more information.

Loans held on a fair value basis

1,969

909

thereof: loans entered into since January 1, 2008

1,942

876

Loans reclassified in accordance with the amendments to IAS 392

5,776

5,808

Loans related to asset sales3

6,624

6,072

Monoline exposure related to U.S. residential mortgages1,2

in € m.

Jun 30, 2010

Mar 31, 2010

Notional amount

Fair value prior to CVA3

CVA3

Fair value after CVA3

Notional amount

Fair value prior to CVA3

CVA3

Fair value after CVA3

1

Excludes counterparty exposure to monoline insurers that relates to wrapped bonds of € 73 million as of June 30, 2010 and € 93 million as of March 31, 2010, which represents an estimate of the potential mark-downs of wrapped assets in the event of monoline defaults.

2

A portion of the mark-to-market monoline exposure has been mitigated with CDS protection arranged with other market counterparties and other economic hedge activity.

3

Credit valuation adjustments (“CVA”) are assessed using a model-based approach with numerous input factors for each counterparty, including the likelihood of an event (either a restructuring or insolvency), an assessment of any potential settlement in the event of a restructuring and recovery rates in the event of either restructuring or insolvency.

4

Ratings are the lower of Standard & Poor’s, Moody’s or our own internal credit ratings as of June 30, 2010 and March 31, 2010.

AA Monolines4:

 

 

 

 

 

 

 

 

Other subprime

151

68

(6)

62

143

61

(6)

55

Alt-A

4,661

2,158

(432)

1,726

4,433

1,840

(368)

1,472

Total AA Monolines

4,812

2,226

(438)

1,788

4,576

1,901

(374)

1,527

Other Monoline exposure1,2



in € m.

Jun 30, 2010

Mar 31, 2010

Notional amount

Fair value prior to CVA3

CVA3

Fair value after CVA3

Notional amount

Fair value prior to CVA3

CVA3

Fair value after CVA3

1

Excludes counterparty exposure to monoline insurers that relates to wrapped bonds of € 55 million as of June 30, 2010 and € 54 million as of March 31, 2010, which represents an estimate of the potential mark-downs of wrapped assets in the event of monoline defaults.

2

A portion of the mark-to-market monoline exposure has been mitigated with CDS protection arranged with other market counterparties and other economic hedge activity.

3

Credit valuation adjustments (“CVA”) are assessed using a model-based approach with numerous input factors for each counterparty, including the likelihood of an event (either a restructuring or insolvency), an assessment of any potential settlement in the event of a restructuring and recovery rates in the event of either restructuring or insolvency.

4

Ratings are the lower of Standard & Poor’s, Moody’s or our own internal credit ratings as of June 30, 2010 and March 31, 2010.

AA Monolines4:

 

 

 

 

 

 

 

 

TPS-CLO

3,304

921

(84)

837

2,724

838

(77)

761

CMBS

1,176

51

(5)

46

1,064

57

(5)

52

Corporate single name/ Corporate CDO

698

1

1

1,944

1

1

Student loans

320

34

(3)

31

290

33

(3)

30

Other

1,102

280

(26)

254

942

261

(24)

237

Total AA Monolines

6,600

1,287

(118)

1,169

6,963

1,189

(109)

1,080

Non Investment Grade Monolines4:

 

 

 

 

 

 

 

 

TPS-CLO

1,000

264

(97)

167

919

251

(91)

160

CMBS

6,395

714

(327)

387

5,522

790

(346)

444

Corporate single name/ Corporate CDO

2,512

15

(7)

8

2,306

21

(10)

11

Student loans

1,430

760

(425)

334

1,294

649

(370)

279

Other

1,960

323

(133)

190

1,800

271

(96)

175

Total Non Investment Grade Monolines

13,297

2,076

(990)

1,086

11,841

1,982

(913)

1,069

Total

19,896

3,363

(1,108)

2,255

18,803

3,171

(1,022)

2,149

The following table shows the roll-forward of credit valuation adjustment held against monoline insurers from March 31, 2010 to June 30, 2010.

Credit valuation adjustment
in € m.

Three months ended
Jun 30, 2010

Balance, beginning of period

1,396

1

The increase is mainly due to exchange rate movements.

Increase

1491

Balance, end of period

1,545