Overall Risk Assessment

Key risk categories for us include credit risk, market risk, operational risk (including legal risk), business risk (including tax and strategic risk), reputational risk, liquidity risk, model risk and compliance risk (MaRisk, i.e., minimum requirements for risk management). We manage the identification, assessment and mitigation of top and emerging risks through an internal governance process and the use of risk management tools and processes. Our approach to identification and impact assessment aims to ensure that we mitigate the impact of these risks on our financial results, long term strategic goals and reputation.

As part of our regular risk and cross-risk analysis, sensitivities of the key portfolio risks are reviewed using a bottom-up risk assessment and through a top-down macro-economic and political scenario analysis. This two-pronged approach allows us to capture not only risks that have an impact across our risk inventories and business divisions but also those that are relevant only to specific portfolios.

Current portfolio-wide risks on which we continue to focus include: the potential re-escalation of the European sovereign debt crisis, a potential slowdown in Asian growth, disruptive US monetary tightening and its impact in particular on Emerging Markets and the potential risk of a geopolitical shock including the ongoing tensions between Russia and Ukraine. These risks have been a consistent focus throughout recent quarters. In recent months we have also focused on the impact of lower oil prices on key producing countries and related industries. The assessment of the potential impacts of these risks is made through integration into our group-wide stress tests which assess our ability to absorb these events should they occur. The results of these tests showed that we currently have adequate capital and liquidity reserves to absorb the impact of these risks if they were to materialize in line with the tests’ parameters. Further information about the impact of these and other risks faced by our portfolios can be found in “Credit Exposures” section.

Consistent with prior years, the year 2014 continued to demonstrate the trend of increasing global regulation of the financial services industry, which we view as likely to persist through the coming years. We are focused on identifying potential political and regulatory changes and assessing the possible impact on our business model and processes.

The overall focus of Risk and Capital Management throughout 2014 was on maintaining our risk profile in line with our risk strategy, increasing our capital base and supporting our strategic management initiatives with a focus on balance sheet optimization. This approach is reflected across the different risk metrics summarized below.

For purposes of Article 431 CRR, we have adopted a formal risk disclosure policy aiming to support a conclusion that our risk disclosures are in compliance with applicable legal, regulatory and accounting risk disclosure standards. A Risk Disclosure Committee comprising senior representatives and subject matter experts from Finance and Risk governs our respective risk disclosure processes. Based upon our assessment and verification we believe that our risk disclosures presented throughout this risk report appropriately and comprehensively convey our overall risk profile.

Risk Profile

Our mix of various business activities results in diverse risk taking by our business divisions. We measure the key risks inherent to their respective business models through the undiversified Total Economic Capital metric, which mirrors each business division’s risk profile before taking into account cross-risk effects at the Group level.

In comparison to year-end 2013, the increase in our economic capital was mainly driven by CB&S reflecting increased credit and market risk levels partly due to foreign exchange effects and a higher economic capital usage for operational and strategic risk. Further increases are caused by Consolidation & Adjustments due to higher nontraded market risk for structural foreign exchange risk and methodology enhancements for pension risk. The observed RWA increase is to a large extent driven by transferring the RWA calculation from the Basel 2.5 framework to the new CRR/CRD 4 rules and further methodology updates. Further movements reflect changes in foreign exchange rates as well as increased risk taking off-set by NCOU de-risking.

Risk profile of our business divisions as measured by economic capital, risk weighted assets in comparison to performance metrics

 

Dec 31, 2014

in € m. (unless stated otherwise)

Corporate Banking & Securities

Private & Business Clients

Global Transaction Banking

Deutsche Asset & Wealth Management

Non-Core Operations Unit

Consoli-
dation & Adjustments

Total in € m.

Total in %

N/M – Not meaningful

1

Diversification benefit across credit, market, operational and strategic risk (largest part of business risk)

2

Book equity allocation framework driven by risk-weighted assets and certain regulatory capital deduction items pursuant to CRR/CRD 4 (fully-loaded). See Note 4 “Business Segments and Related Information” to the consolidated financial statements for a description of how average active equity is allocated to the divisions.

3

Risk weighted assets and capital ratios are based upon Basel 2.5 rules through December 31, 2013 and upon CRR/CRD 4 fully-loaded since January 1, 2014.

Credit Risk

5,799

3,547

2,302

323

868

46

12,885

40

Market Risk

5,153

3,200

185

1,987

1,308

3,020

14,852

47

Operational Risk

3,569

1,088

150

722

2,070

0

7,598

24

Business Risk

2,581

0

4

1

499

0

3,084

10

Diversification Benefit1

(3,441)

(1,095)

(262)

(611)

(1,087)

(59)

(6,554)

(21)

Total EC in € m.

13,661

6,740

2,379

2,420

3,658

3,008

31,866

100

in %

43

21

7

8

11

9

100

0

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

3,266

1,335

1,198

1,027

(2,851)

(859)

3,116

N/M

Pre-tax return on average active equity2

13 %

9 %

20 %

16 %

(37) %

N/M

5 %

N/M

Risk weighted assets3

175,561

79,571

43,265

16,597

58,538

20,437

393,969

N/M

 

Dec 31, 20131

in € m. (unless stated otherwise)

Corporate Banking & Securities

Private & Business Clients

Global Transaction Banking

Deutsche Asset & Wealth Management

Non-Core Operations Unit

Consoli-
dation & Adjustments

Total in € m.

Total in %

N/M – Not meaningful

1

Amounts allocated to the business segments have been restated to reflect comparatives according to the structure as of December 31, 2014.

2

Excluding strategic risk which was not included in the calculation of the diversification benefit for 2013.

3

Book equity allocation framework driven by risk-weighted assets and certain regulatory capital deduction items pursuant to CRR/CRD 4 (fully-loaded). See Note 4 “Business Segments and Related Information” to the consolidated financial statements for a description of how average active equity is allocated to the divisions.

4

Risk weighted assets and capital ratios are based upon Basel 2.5 rules throug December 31, 2013 and upon CRR/CRD 4 fully-loaded since January 1, 2014.

Credit Risk

4,597

3,742

1,900

373

1,392

9

12,013

44

Market Risk

4,658

2,967

193

1,535

1,565

1,820

12,738

47

Operational Risk

2,453

803

96

580

1,320

0

5,253

19

Business Risk

1,413

0

6

1

263

0

1,682

6

Diversification Benefit2

(1,945)

(842)

(156)

(478)

(974)

(120)

(4,515)

(17)

Total EC in € m.

11,175

6,671

2,039

2,010

3,566

1,710

27,171

100

in %

41

25

8

7

13

6

100

0

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

3,158

1,555

1,107

782

(3,402)

(1,744)

1,456

N/M

Pre-tax return on average active equity3

16 %

11 %

22 %

13 %

(33) %

N/M

3 %

N/M

Risk weighted assets4

114,729

73,001

36,811

12,553

52,443

10,832

300,369

N/M

Corporate Banking & Securities’ (CB&S) risk profile is dominated by its trading in support of origination, structuring and market making activities, which gives rise to market risk and credit risk. Further credit risks originate from exposures to corporates and financial institutions. Under CB&S’ current business model, the remainder is derived from operational risks and business risk, primarily from potential legal and earnings volatility risks, respectively. CB&S income before income taxes increased by € 108 million or 3 % in 2014 compared to 2013, however CB&S pre-tax return on average active equity decreased from 2013 by 3 percentage points to 13 % in 2014. This development is mainly driven by a higher average active equity allocation associated with our capital raise in May 2014 as well as RWA increases mainly from methodology changes which relate to a large extent to switching from Basel 2.5 framework to the CRR/CRD 4 rules.

Private & Business Clients’ (PBC) risk profile comprises of credit risk from retail and small and medium-sized enterprises (SMEs) lending as well as nontrading market risk from investment risk, modeling of client deposits and credit spread risk. While PBC’s risk profile stayed materially unchanged over the year, the reported income before income taxes declined significantly compared to 2013 driven by charges triggered by changes in German legal practice regarding loan processing fees in May and in October 2014, leading to a slightly lower pre-tax return on average active equity.

Global Transaction Banking’s (GTB) revenues are generated from various products with different risk profiles. The vast majority of its risk relates to credit risk in the Trade Finance business, while other businesses attract low to no credit risk. The relatively low market risk mainly results from derivative hedge positions. The pre-tax return on average active equity of 20 % in 2014 decreased slightly compared to 2013. While the profitability of GTB increased, the lower return on average active equity primarily relates to higher volumes in a highly competitive and low interest rate environment.

The main risk driver of Deutsche Asset & Wealth Management’s (Deutsche AWM) business are guarantees on investment funds, which we report as nontrading market risk. Otherwise Deutsche AWM’s advisory and commission focused business attracts primarily operational risk. Deutsche AWM’s return on average active equity has increased year over year, driven by improved P&L performance given lower cost to achieve, a reversal of intangible impairment, and lower litigation expense. The increased economic capital usage was mainly driven by a higher nontraded market risk for guaranteed funds.

The Non-Core Operations Unit (NCOU) portfolio includes activities that are non-core to the Bank’s future strategy; assets materially affected by business, environment, legal or regulatory changes; assets earmarked for de-risking; assets suitable for separation; assets with significant capital absorption but low returns; and assets exposed to legal risks. NCOU’s risk profile covers risks across the entire range of our operations comprising credit risks and also market and operational risks (including legal risks) targeted where possible for accelerated de-risking. The development of the pre-tax return on average active equity shows that the capital allocation induced by de-risking decreased more than the negative performance. Whilst the de-risking strategy was capital accretive, net income continues to be impacted by outflows related to legal and regulatory matters.

Consolidation & Adjustments mainly comprises non traded market risk for structural foreign exchange risk and pension risk.