The Global Economy
The following section should be read in conjunction with the Outlook section in the Management Report provided in the Financial Report 2011 that outlined our expectations for 2012 and 2013.
In light of the reduced risks of a renewed substantial escalation of the European sovereign debt crisis, our expectations for world economic growth have improved slightly. We have increased our forecast for global economic growth from 3.25 % to 3.5 % for 2012. This reflects the slightly better growth prospects for the eurozone in which the recession, with GDP decreasing at 0.2 %, should be less pronounced than initially anticipated this year. For Germany we increased our forecast to 0.5 % for 2012. In addition, the U.S. may also be able to achieve a slightly higher growth rate of 2.7 % in 2012. Our expectations have changed most concerning Japan where the redevelopment program to rectify the damages caused by the catastrophe in March 2011 is now beginning to take effect and exports should receive some momentum from rising global demand in 2012. We are now forecasting significantly higher growth of 2.8 % for Japan this year.
We maintain our forecast that sustainable global economic growth will not be achieved until the second half of the year since economic confidence deteriorated slightly again at the end of the first quarter of 2012 according to the purchasing manager surveys. Moreover, even as the European sovereign debt crisis eases, it will probably continue to generate uncertainty. The situation in the Middle East poses a further risk to the global economy as the political tensions which heightened in the first quarter are likely to remain at this level. This contributed to the sharp rise in oil prices in the first quarter, which has led us to revise our global inflation forecast for 2012 slightly upwards from 3.5 % to 3.6 %, which is nevertheless well below the level of 4.5 % in 2011. In Germany we now expect inflation to be around 2 % in comparison to 2.3 % in the previous year.
The Banking Industry
In the further course of the year, the banking sector environment will be affected by macroeconomic and regulatory developments and by the further development of the European sovereign debt crisis. The ongoing economic recovery is likely to support banks in the U.S., but not in the eurozone, where many banks, particularly in Southern Europe, may experience even harder times.
On the global level, the most important regulatory changes will probably be the legal adoption of Basel 3 and the implementation of proposals for macro-prudential supervision. In Europe, the most important changes should result from the debate about organizational and structural aspects of the universal banking principle and a potential implementation of specific taxes on the financial sector. In the U.S., the focus may be on the further specification of rules under the Dodd-Frank Act.
A stronger revival of banks’ funding markets, investment banking and asset management operations will depend on the success of additional steps to resolve the European sovereign debt crisis. This will require not only noticeable reforms to strengthen growth potential and improve competitiveness, but also successful austerity measures in the countries affected by crisis.
If the European sovereign debt crisis can be successfully resolved, European banks might be able to proceed swiftly their restructuring efforts. These measures will be aimed at adapting to generally lower revenue levels through various means, including adjusting business models, reducing costs and raising capital ratios. The outlook remains much more positive for U.S. banks, despite substantial risks still resulting from similarly excessive public deficits as well as high private debt levels.
The Deutsche Bank Group
Deutsche Bank is still facing further sector specific challenges caused by the changing competitive landscape and a stricter regulatory environment. Due to growing capital and liquidity requirements, risk management, capital adequacy and balance sheet efficiency will remain increasingly important as competitive differentiators. Focused on sustaining high-quality liquidity and funding profile and maintaining high capital discipline, we believe that we are well prepared for the requirements of the European Banking Authority and Basel 3.
We have moved globally towards a more balanced, lower-risk business model. In 2012 and beyond, we should be able to further benefit from our strong set-up as a global investment bank and as a market leader in our home market with greater stability in revenues and a more balanced earnings mix. Additionally, we are also continuing to focus on our performance and improving efficiency.
Overall, we believe that Deutsche Bank is strongly positioned to exploit the competitive opportunities in the current environment.
The Business Segments
In Corporate Banking & Securities (CB&S), we expect the investment banking environment in 2012 and 2013 to be impacted by ongoing macro concerns over Europe’s sovereign debt crisis, a potential slowdown of emerging markets and the sustainability of the U.S. recovery. In Sales & Trading, we expect that revenues from flow products such as foreign exchange, money markets, interest rates and cash equities will be affected by ongoing volatility but should remain robust given our leading client market shares, notwithstanding market conditions. Assuming that market conditions continue to stabilize, we expect the corporate finance fee pool to increase. M&A activity is expected to be robust as a cyclical recovery continues, and debt issuance is expected to increase driven by M&A related activity and disintermediation. We anticipate equity issuance to further increase driven by the backlog of deals from 2011.
In Global Transaction Banking, low interest rate levels will likely continue to impact net interest income in the near- and medium-term. Additionally, the recently difficult market environment may continue to have an adverse impact on revenues. We expect these factors to be counterbalanced to some extent by the continued strong volumes of trade finance and cash management transactions.
In Asset and Wealth Management (AWM) we expect the Asset Management business to be influenced by platform re-engineering, cost efficiency efforts and the developments in the equity markets. While equity markets improved and showed signs of stabilization towards end of the year and throughout the first quarter, uncertainties about sustained economic momentum continue to be a major risk in the asset management industry. The adoption and implementation of multiple new regulatory reforms continues to be a major challenge, especially where uncertainty of the impact exists. We announced on February 28, 2012, that we are in exclusive negotiations with Guggenheim Partners on the sale of our Asset Management businesses that are subject to a previously-announced strategic review. The businesses include DWS Americas, the Americas mutual fund business; DB Advisors, the global institutional asset management business; Deutsche Insurance Asset Management, the global insurance asset management business; and RREEF, the global alternative asset management business. In Private Wealth Management (PWM), ongoing macroeconomic uncertainties and diminished transactional business may persist during the months ahead. We believe that our very close client coverage, our adequate product offerings and initial signs of market recovery will permit our general business outlook for PWM to remain positive.
The success of Private & Business Clients (PBC) is based on a solid business model: With the combination of advisory banking and consumer banking, PBC has built a leading position in its home market, Germany, accompanied by strong positions in other important European markets, and growth investments in key Asian countries. The overall macro-economic outlook for 2012 and 2013 for countries in which Private & Business Clients operates is mixed. GDP growth in the home market Germany has a slightly positive outlook, while the GDP outlook for most of the European countries in which PBC is present is rather flat or slightly negative. Asia, however, continues on its growth path. Postbank will further pursue its growth in Consumer Banking in Germany while further reducing non-core risk positions. We expect Deutsche Bank and Postbank to continue their successful realization of synergies on the revenue and cost side. The increased interest in Postbank and a potential domination agreement might support the delivery of synergies in 2012. PBC continues to face uncertainties in its operating environment, as a significant decline in economic growth, which in return would result in higher unemployment rates, could lead to increasing credit loss provision and lower business growth. The development of investment product markets depends especially on further progress of the European sovereign debt crisis. Additionally, continued low interest rates in 2012 might negatively affect revenues in PBC.