Our Treasury function manages capital both at Group level and locally in each region. Treasury implements our capital strategy, which itself is developed by the Capital and Risk Committee and approved by the Management Board, including the issuance and repurchase of shares. We are fully committed to maintaining our sound capitalization both from an economic and regulatory perspective. We continually monitor and adjust our overall capital demand and supply in an effort to achieve the optimal balance of the economic and regulatory considerations at all times and from all perspectives. These perspectives include book equity based on IFRS accounting standards, regulatory and economic capital as well as specific capital requirements from rating agencies.
Regional capital plans covering the capital needs of our branches and subsidiaries across the globe are prepared on an annual basis and presented to the Group Investment Committee. Most of our subsidiaries are subject to legal and regulatory capital requirements. Local Asset and Liability Committees attend to those needs under the stewardship of our regional Treasury teams. Local Asset and Liability Committees further safeguard compliance with all requirements such as restrictions on dividends allowable for remittance to Deutsche Bank AG or regarding the ability of our subsidiaries to make loans or advances to the parent bank. In developing, implementing and testing our capital and liquidity, we take such legal and regulatory requirements into account.
Our core currencies are Euro, US Dollar and Pound Sterling. Treasury manages the sensitivity of our capital ratios against swings in core currencies. The capital invested into our foreign subsidiaries and branches in the other non-core currencies is largely hedged against foreign exchange swings. Treasury determines which currencies are to be hedged, develops suitable hedging strategies in close cooperation with Risk Management and finally executes these hedges.
Treasury is represented on the Investment Committee of the largest Deutsche Bank pension fund which sets the investment guidelines. This representation is intended to ensure that pension assets are aligned with pension liabilities, thus protecting our capital base.
Treasury constantly monitors the market for liability management trades. Such trades represent a countercyclical opportunity to create Common Equity Tier 1 capital by buying back our issuances below par.
During the reporting period, we have applied the internal capital allocation framework that was originally initiated in 2013. A new methodology will come into effect in January 2015.
Under the methodology that was started in 2013, we allocated the average active equity to the business segments reflecting the regulatory requirements under CRR/CRD 4, as well as the communicated capital and return on equity targets. Regulatory capital demand then exceeded the demand from an economic perspective. Under this methodology, our internal demand for regulatory capital was derived based on a Common Equity Tier 1 ratio of 10.0 % at a Group level in accordance with the fully loaded CRR/CRD 4 framework. Consequently, our book equity allocation framework under this methodology was driven by risk-weighted assets and certain regulatory capital deduction items pursuant to the fully-loaded CRR/CRD 4 framework. If our average active equity exceeded the higher of the overall economic risk exposure or the regulatory capital demand, this surplus was assigned to Consolidation & Adjustments.
The new methodology to be introduced in 2015 incorporates the growing importance of leverage requirements for the bank. Regulatory requirements will now be driven by the higher of CET1 ratio (solvency) and Leverage ratio (leverage) requirements. In terms of order for the internal capital allocation, solvency-based allocation comes first, then incremental leverage-driven allocation. The new methodology utilises a two step approach: Allocation of Average Active Equity solvency-based first until the externally communicated target of a 10 % CET1 solvency ratio (CRR/CRD 4 calculated on a fully loaded basis) is met, and then incremental leverage capital allocation based on pro-rata leverage exposure of divisions to satisfy the externally communicated target of a 3.5 % leverage ratio (CRR/CRD 4 calculated on a fully loaded basis). The allocation can be changed if the externally communicated targets for the CET1 and leverage ratio should be adjusted. The new methodology also applies different rates for the cost of equity for each of the business segments, reflecting in a more differentiated way the earnings volatility of the individual business models. This enables improved performance management and investment decisions.
The 2013 Annual General Meeting granted our Management Board the authority to buy back up to 101.9 million shares before the end of April 2018. Thereof 51.0 million shares can be purchased by using derivatives. These authorizations replaced the authorizations of the 2012 Annual General Meeting. During the period from the 2013 Annual General Meeting until the 2014 Annual General Meeting (May 22, 2014), 31.3 million shares were purchased, of which 9.4 million via derivatives. The shares purchased were used for equity compensation purposes in the same period.
The 2014 Annual General Meeting granted our Management Board the authority to buy back up to 101.9 million shares before the end of April 2019. Thereof 51.0 million shares can be purchased by using derivatives. These authorizations replaced the authorizations of the 2013 Annual General Meeting. We have received approval from the BaFin for the execution of these authorizations as required under new CRR/CRD 4 rules. During the period from the 2014 Annual General Meeting until December 31, 2014, we purchased 17.2 million shares. The shares purchased were used for equity compensation purposes and for the Global Share Purchase Plan (GSPP) for Deutsche Bank employees in the same period. Consequently, the number of shares held in Treasury from buybacks was 0.1 million as of December 31, 2014.
To take advantage of Deutsche Bank’s low share price in the third quarter 2014, Treasury unwound 8.9 million physically settled call options purchased between May 2012 and February 2014 and entered into 8.9 million new physically settled call options with significantly lower strike prices. These call options were purchased under the authorization from the 2014 Annual General Meeting. Of the 8.9 million call options, 2.3 million have a remaining maturity of more than 18 months.
The 2013 Annual General Meeting further replaced an existing authorized capital with a face value of € 230.4 million (90 million shares) by a new authorization in the same amount, but with broader scope also allowing for share issuance excluding pre-emptive rights. The total face value of available authorized capital amounted to € 922 million (360 million shares). In addition, the conditional capital available to the Management Board had a total face value of € 691 million (270 million shares).
On June 25, 2014, Deutsche Bank AG completed a capital increase from authorized capital against cash contributions with gross proceeds of € 8.5 billion. The number of shares of Deutsche Bank AG increased by 359.8 million, from 1,019.5 million to 1,379.3 million, and includes both the issuance of 59.9 million new shares without subscription rights to an anchor investor, and our fully underwritten public offering of 299.8 million new shares via subscription rights.
Prior to the launch of the fully underwritten rights offering, we issued 59.9 million new shares at a price of € 29.20 to Paramount Services Holdings Ltd., an investment vehicle ultimately beneficially owned and controlled by His Excellency Sheikh Hamad Bin Jassim Bin Jabor Al-Thani of Qatar, who intends to remain an anchor investor in Deutsche Bank. The transaction, which we structured as a capital increase excluding subscription rights, was not subject to the registration requirements of the U.S. Securities Act of 1933, and was not offered or sold in the United States. The gross proceeds of this offering were € 1.7 billion.
In the fully underwritten public offering with subscription rights, 299.8 million new registered no par value shares (common shares) were issued. The subscription price was € 22.50 per share. 99.1 % of the subscription rights were exercised. The remaining new shares that were not subscribed were sold in the market. The gross proceeds from the offering amounted to € 6.8 billion.
With the capital increase, the authorized capital available to the Management Board was reduced from € 922 million (360 million shares) to a total face value of € 0.6 million (0.2 million shares). In addition, the 2014 Annual General meeting authorized capital with a face value of € 256 million (100 million shares).
As mentioned, prior to the 2014 Annual General meeting, the conditional capital available to the Management Board was € 691 million (270 million shares). Following an authorization of new conditional capital of € 256 million (100 million shares) through a partial replacement of old authorizations, the conditional capital now stands at € 486 million (190 million shares). Moreover, the 2014 Annual General meeting authorized the issuance of “naked” participatory notes for the purpose of Additional Tier 1 (AT1) capital.
Deutsche Bank AG executed two transactions to issue AT1 notes with a total volume of € 4.7 billion, one in May and one in November 2014. These transactions materially complete the overall targeted volume of approximately € 5 billion of CRR/CRD 4 compliant Additional Tier 1 capital which were planned to be issued by the end of 2015.
On May 20, 2014, Deutsche Bank AG issued undated AT1 Notes with an equivalent value of € 3.5 billion. The offering consisted of three tranches: a € 1.75 billion tranche with a coupon of 6 %, a U.S.$ 1.25 billion tranche with a coupon of 6.25 % and a GBP 650 million tranche with a coupon of 7.125 %. All tranches were priced at an issue price of par (100 %) or greater. The denominations of the individual notes are € 100,000, $ 200,000 and GBP 100,000, respectively.
The AT1 Notes take the form of participatory notes with temporary write-down at a trigger level of 5.125 % phase-in Common Equity Tier 1 capital ratio. The AT1 Notes were issued with attached warrants, excluding shareholders’ pre-emptive rights. This decision is based on the authorization granted by the 2012 Annual General Meeting. Each AT1 Note carries one warrant, entitling the owner to purchase one common share in Deutsche Bank AG. Warrants to subscribe for a total of 30,250 shares from all three tranches, which had originally been attached to the notes, were detached by an initial subscriber. The warrants expired in the fourth quarter of 2014 and had not been exercised.
On November 18, 2014, Deutsche Bank placed undated Additional Tier 1 Notes with a principal amount of $ 1.5 billion (€ 1.2 billion equivalent). The denominations of the notes are $ 200,000. The notes are registered with the U.S. Securities and Exchange Commission. As with the AT1 Notes issued in May 2014, the securities are subject to a write-down provision if Deutsche Bank’s Common Equity Tier 1 capital ratio (under the phase-in rules) falls below 5.125 % and are subject to other loss absorption features pursuant to the applicable capital rules. The AT1 notes were issued under the new authorization of the 2014 Annual General meeting and did not have attached warrants.
Our legacy Hybrid Tier 1 capital instruments (substantially all noncumulative trust preferred securities) are no longer fully recognized under fully loaded CRR/CRD 4 rules mainly because they have no write-down or equity conversion feature. However, they are to a large extent recognized as Additional Tier 1 capital under CRR/CRD 4 transitional provisions, and can still be partially recognized as Tier 2 capital under the fully loaded CRR/CRD 4 rules. During the transitional phase-out period the maximum recognizable amount of Additional Tier 1 instruments from Basel 2.5 compliant issuances as of December 31, 2012 will be reduced at the beginning of each financial year by 10 % or € 1.3 billion, through 2022. For December 31, 2014, this resulted in eligible Additional Tier 1 instruments of € 14.6 billion (i.e. € 4.6 billion newly issued AT1 Notes plus € 10.0 billion of legacy Hybrid Tier 1 instruments recognizable during the transition period). Four Hybrid Tier 1 capital instruments with a notional of € 2.7 billion and an eligible equivalent amount of € 2.5 billion have been called in 2014. € 8.6 billion of the legacy Hybrid Tier 1 instruments can still be recognized as Tier 2 capital under the fully loaded CRR/CRD 4 rules.
The Tier 2 instrument types (subordinated debt, profit participation rights, cumulative preferred securities) and the categorization into Upper and Lower Tier 2 capital according to Basel 2.5 no longer apply under CRR/CRD 4.
The total of our Tier 2 capital as of December 31, 2014 recognized during the transition period under CRR/CRD 4 was € 4.9 billion. Thereof, € 0.4 billion were legacy Hybrid Tier 1 instruments that are counted as Tier 2 capital, representing the excess amount of the outstanding legacy Hybrid Tier 1 instruments above the respective cap during the transitional period (the so called ‘spill-over’). The gross notional value of the Tier 2 capital instruments was € 6.6 billion. The difference to the recognizable Tier 2 capital during the transition period under CRR/CRD 4 is mainly due to capital deductions for maturity haircuts, which provide for a straight proportional reduction of the eligible amount of an instrument in the last 5 years before maturity. Fifteen Tier 2 capital instruments with a total notional of € 3.3 billion have been called in 2014.