Non-Core Operations Unit

Reducing risk, freeing up capital


During the fourth quarter of 2012, Deutsche Bank established its Non-Core Operations Unit (NCOU) as a major element of Strategy 2015+. The primary objective of the newly created unit is to accelerate the de-risking of assets not related to Deutsche Bank’s core activities in order to free up capital for the bank’s core business. To achieve this goal, a number of measures will be taken, including the sale of assets or hedging of positions. In addition, with the establishment of the NCOU, Deutsche Bank intends to improve transparency in the reporting of its non-core positions.

The NCOU operates as a separate corporate division alongside Deutsche Bank’s four core businesses. It manages assets with a value of € 97 billion and Basel 3 risk-weighted asset (RWA) equivalents of €106 billion as of December 31, 2012.

In carrying out targeted de-risking activities, the NCOU will prioritize the exiting of positions with less favorable capital and risk return profiles to enable the bank to strengthen its core Tier 1 capital ratio under Basel 3. During the fourth quarter of 2012, the bank already made significant progress in these targeted de-risking activities.

Governance

We have implemented separate sets of responsibilities to ensure that we maintain a clear segregation of business and control functions. Furthermore, in order to ensure that the management of the segment is autonomous from the core business units, representatives from the core businesses are not part of the NCOU Executive Committee.

Portfolio

The NCOU’s portfolio includes activities that will not form part of the bank’s core businesses in the future. Major components include securitized assets with large capital absorption and low returns; assets negatively affected by business, environmental, legal or regulatory changes; as well as businesses in run-off or for sale. Selected liabilities were also transferred to the NCOU according to comparable criteria. Examples of these liabilities include legacy bond issuance formats and various other short-term liabilities that are linked to reassigned assets.

Excerpt from segment reporting (Non-Core Operations Unit1)

The Non-Core Operations Unit Corporate Division recorded income before income taxes of € (2.9) billion in 2012 (2011: € (2.1) billion). Net revenues increased by € 179 million compared to 2011 and are driven by the timing and nature of specific items. In 2012, such specific items included negative effects related to refinements of the credit valuation adjustment (CVA) methodology of € 203 million, mortgage repurchase costs of € 233 million, losses from sales of capitalintensive securitization positions and various impairments. Revenues in 2011 were impacted by impairment charges of € 457 million related to Actavis Group as well as impairments on Greek Government bonds. Noninterest expenses increased by € 751 million compared to 2011, to € 3.3 billion. The increase was mainly driven by specific items such as litigation charges, settlement costs and impairments.

 

 

 

in € m.

2012

2011

1

Excerpt from segment reporting. For notes and other detailed information, see Financial Report 2012 (Management Report).

Net revenues

1,058

879

Total provision for credit losses

634

385

Noninterest expenses

3,305

2,554

Income before income taxes

(2,914)

(2,074)

Risk-weighted assets

80,295

103,810

Assets

97,265

134,712

The assets and liabilities of this business segment were clearly segregated from our core businesses with a one-time reassignment. Allocation to the respective group companies or legal entities, however, remains unchanged. The divisions that contributed assets and liabilities therefore maintain a strong interest in the success of the NCOU.

Pro-forma Basel 3 risk-weighted asset equivalents by assigning business

Pro-forma Basel 3 risk-weighted asset equivalents by assigning business (pie chart)

The bulk of the RWAs have been reassigned from Corporate Banking & Securities and include credit correlation trading positions, securitized assets, exposures to monoline insurers and assets reclassified under IAS 39. Assets reassigned from Private & Business Clients include Postbank commercial real estate assets outside of the bank’s core markets, Postbank capital-intensive structured credit products, selected foreign residential mortgages and other financial investments, such as the portfolios of structured loans and credit exposures to business partners in Greece, Italy, Ireland, Portugal and Spain, which have already been subject to de-risking for a number of years.

NCOU’s portfolio also contains all the assets previously booked and managed in the Corporate Investments division. These are the bank’s global principal investment activities that are not part of our core business activities. It includes our stakes in the port operator Maher Terminals, the Cosmopolitan of Las Vegas and BHF-Bank. During the fourth quarter of 2012, Deutsche Bank completed the sale of Actavis Group from the Corporate Investments division.

Successful launch

Accelerated de-risking

Accelerated de-risking (bar chart)

By December 31, 2012, Deutsche Bank was already able to reduce the risk-weighted asset equivalent within the NCOU to € 106 billion, and thus to free up a significant amount of capital for its core business activities. During the first quarter of 2013, we further reduced the non-core RWA equivalent to approximately € 90 billion through the sale of highly capital-intensive assets. Going forward, the reduction in non-core assets will continue, yet the pace of the reduction in assets and associated capital demand is anticipated to decline as the economic rationale of the early exit of assets with lower risk weights is less compelling. The NCOU will continually evaluate the rationale of exiting positions versus holding them in order to optimize shareholder value.