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.
We expect world economic growth to slow down in light of further exacerbation of the European sovereign debt crisis, growing uncertainty as to how the U.S. will handle the automatic expiry of tax concessions combined with public spending cuts (fiscal cliff), and the long-term fiscal challenges, as well as the slowdown in the emerging markets. We lowered our forecast for global economic growth for 2012 from 3.5 % to 3.2 % compared to our forecast in the first quarter 2012. We have made a slightly sharper downward adjustment to our growth forecast for the eurozone, which will likely decline by 0.5 %, whereas we expect the U.S. economic output to expand by just 2.3 % in 2012. In our previous forecast, we assumed a GDP decrease of 0.2 % for the eurozone and a growth of 2.7 % for the U.S. For Germany, we have slightly raised our forecast from 0.5 % to 0.8 % for 2012 in response to the relatively sharp quarter-on-quarter growth of 0.5 % in the first quarter of 2012. The most significant adjustment concerns the Asian emerging market economies. We now expect these to expand at a rate of 6.5 %, which is 0.6 % lower compared to our previous forecast. For Japan, we have raised our growth forecast in 2012 by 0.3 % to 3.1 % in light of temporary effects following the redevelopment program.
The slowdown in the global economy led to a significant decline in oil prices compared with the first quarter and we have lowered our inflation forecast for the current year from 3.6 % to 3.4 %. The anticipated rate of inflation is now well below the rate of 4.5 % seen in 2011. In Germany, we expect the inflation rate to be around 1.8 % this year, compared with 2.3 % in 2011.
For 2013, we expect a slight increase in global economic growth to 3.5 % partly driven by the recent decline in oil prices. However, this is well below the long-term trend growth of 4 % for the global economy and is 0.4 % less than our previous forecast. The European sovereign debt crisis and concerns about how the fiscal challenges in the U.S. will be managed are likely to provide ongoing uncertainty. This can be expected to have a negative impact on the emerging markets and developing countries due to the close integration of the financial and real economies. The tense situation in the Middle East continues to pose a risk to the global economy, especially uncertainty regarding Iran’s reaction to the oil embargo in place since July 1, 2012, and other sanctions imposed by the European Union and the U.S.
The Banking Industry
The banking industry’s performance in the further course of the year will depend especially on the macroeconomic development and potential progress in resolving the European debt crisis. In the U.S., it may become increasingly difficult to further improve bank profitability as revenue growth is likely to remain moderate and loan loss provisions have already fallen to low levels. In Europe, achieving a stabilization of the economy towards year-end will likely prove crucial. This could prevent a decline in lending volumes and also limit risk spreads in financial markets. At the same time, substantial downside risks persist in many countries in the eurozone. The banking sector itself may, among other things, focus further on raising capital ratios and, given continuing revenue pressure, implementing cost reduction programs.
In addition, banks have to face up to a number of decisive changes in regulatory requirements over the upcoming months. In this respect, the adoption of the new capital and liquidity regime of Basel 3 (targeted for 2013) is of particular importance. Meanwhile, the debate about the introduction of a financial transaction tax in certain EU countries and about possibly far-reaching structural changes in the European banking system continues, and it is largely unclear what concrete results this may finally yield. Furthermore, a growing burden for the banking industry is becoming apparent from legal disputes, which are partly due to a review of professional conduct in the years prior to and during the financial crisis and which negatively impact the sector’s perception by the public and policymakers.
The Deutsche Bank Group
The macroeconomic uncertainties such as concerns over Europe's sovereign debt crisis and recovery in the U.S. as well as legal risks also affect Deutsche Bank. The current environment continues to result in significantly lower levels of client activity, both in investment banking as well as certain parts of our retail business and we expect this to continue in the second half of the year. We intend to continue to run lower levels of risk in light of this environment and reduce expenses, while remaining focused on serving our clients in the best possible way.
We remain committed to the universal banking model and to our four business segments. We will strengthen this emphasis in Asset and Wealth Management (AWM) by further integrating our existing Asset Management and Wealth Management businesses.
In June 2012 we launched our strategy review and will provide details of the results in September. As an interim outcome of this ongoing process, we have identified cost savings of approximately € 3 billion compared to our noninterest expenses run-rate for the first half of 2012. These savings are net of investments to support business growth, and there will be substantial cost to achieve these savings. In order to achieve these savings, we will make changes to our business and revenue model, scale back some business ambitions in certain regions and countries and we will implement a reengineering program aimed at achieving world-class operating performance with flexibility, quality and robust controls. Measures also include the completion of the already announced activities related to the integration of Postbank, which will contribute approximately € 500 million of savings to the € 3 billion. We continually calibrate the size of our platform to the market environment. As an immediate action, we are reducing headcount by approximately 1,900, thereof 1,500 in CB&S and related infrastructure areas. All these headcount reductions are predominantly outside of Germany. These measures are expected to contribute savings of approximately € 350 million to the overall € 3 billion.
We remain committed to managing our capital to comfortably comply with all regulatory thresholds even in stress scenarios. The strengthening of Core Tier 1 capital remains a priority of management. We expect that at the beginning of 2013 our Core Tier 1 ratio, on a Basel 3 phased in basis, will be approximately 9 % which is equivalent to 7.2 % on a fully loaded basis. By the end of the first quarter 2013 we have an ambition of a Basel 3 Core Tier 1 ratio of approximately 10 % on a phased in basis, equivalent to at least 8% on a fully loaded basis. This will be supported by additional measures to reduce risk and to build capital organically, including managing down legacy positions and taking decisive action on specific sub-performing assets.
The Business Segments
In Corporate Banking & Securities (CB&S), we expect the investment banking environment in the second half of 2012 to continue to be negatively impacted by ongoing macroeconomic concerns over Europe’s sovereign debt crisis, a potential lack of sustainability of the recovery of the U.S. economy and a potential slowdown of the growth in emerging markets. We expect that this uncertainty, which could continue into 2013, will hit activity levels and hence revenues from flow products in Sales & Trading, especially in the money markets, interest rate and credit trading and cash equities businesses. Corporate finance activity levels are also expected to be negatively impacted with Equity Capital Markets issuance likely to remain muted as long as macro uncertainty persists, despite a currently strong pipeline. While the M&A environment is generally attractive given low valuations and high cash levels, companies are likely to remain unwilling to commit to deals given the uncertain environment.
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 division (AWM), we expect the Asset Management business to be influenced by integration, platform re-engineering and cost efficiency efforts and externally by the developments in the equity markets. Equity markets improved and showed signs of stabilization throughout the first quarter, however, markets declined during the second quarter amid renewed economic concerns. 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 June 20, 2012, that we had concluded exclusive negotiations with Guggenheim Partners regarding a potential sale of the RREEF business without reaching a sale agreement, bringing an end to the strategic review of the global Asset Management businesses initiated in November 2011. For Private Wealth Management (PWM), we expect that ongoing difficult market conditions will result in continuing pressure on margins. Nevertheless, PWM’s strong market position, traditional high customer loyalty and comprehensive product portfolio are a prerequisite for the business outlook remaining 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 increased interest in Postbank and the domination and profit and loss transfer agreement is expected to support the delivery of synergies in 2012 and especially in 2013. However, the overall macroeconomic 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. Economic growth in Asia is slowing down. 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 provisions and lower business growth. The development of investment product markets and the respective revenues depend especially on further development of the European sovereign debt crisis. Additionally, the continued low interest rates might negatively affect revenues in PBC.