Non-Core Operations Unit

Key element of Strategy 2015+ to reduce risk and strengthen capital

In brief

  • Non-core assets substantially reduced through sales
  • Sale of key operating assets completed
  • Significant amount of capital freed up since inception in 2012

Total IFRS assets

Total IFRS assets (pie chart)

The objectives of the Non-Core Operations Unit (NCOU) are to free up capital, reduce the balance sheet and protect shareholder value by reducing risks from non-core assets, liabilities and business activities. The NCOU is a key element of Strategy 2015+, as ensuring transparency as well as strict capital and balance sheet management were defined as critical success factors for Deutsche Bank in light of the continually evolving regulatory environment.

The NCOU was formed in the fourth quarter of 2012 through the transfer of approximately € 140 billion in assets in accordance with IFRS, equivalent to about the same amount of risk-weighted assets (RWAs) under full implementation of Basel 3. The NCOU’s portfolio comprises activities that are non-core to Deutsche Bank’s strategy, including assets materially impacted by business, legal or regulatory changes.

The NCOU operates under clearly defined divestment rules that are strictly adhered to. It reduces the balance sheet through disposals to third-party investors and aims to find optimal de-risking solutions for unwinding complex structures by working with multiple internal and external parties.

The NCOU’s strategic focus is fully aligned to Deutsche Bank’s overall strategic objectives. Initially, this entailed a strong emphasis on reducing capital demand to contribute to the material improvement in the capital ratio, while preventing a dilution for shareholders. Recently, an increasing focus has been placed on reducing balance sheet exposure to assist Deutsche Bank in meeting its leverage ratio target. Additional focal points are the resolution of material contingent liability risks and the reduction of the underlying cost base of the NCOU, while progress continues in de-risking.

Excerpt from segment reporting (Non-Core Operations Unit1)

The Non-Core Operations Unit recorded a loss before income taxes of € 2.9 billion in 2014, compared to € 3.4 billion in the prior year. The decrease was mainly due to lower revenues and lower credit losses reflecting the progress of de-risking. Noninterest expenses were lower but continued to be impacted by the nature and timing of specific items. Noninterest expenses decreased predominately due to lower litigation-related expenses as well as the benefit seen from execution of the bank’s de-risking strategy.

 

 

 

in € m.

2014

2013

Net revenues

211

964

Total provision for credit losses

259

818

Noninterest expenses

2,804

3,550

Income before income taxes

(2,851)

(3,402)

Risk-weighted assets

58,538

52,443

Assets

38,853

63,810

1 Excerpt from segment reporting. For notes and other detailed information, see Financial Report 2014 (Management Report). Regulatory capital amounts and risk weighted assets are based upon Basel 2.5 rules through Dec 31, 2013 and upon CRR/CRD 4 fully–loaded since Jan 1, 2014.

Progress made in a challenging environment

Continuing de-risking

Continuing de-risking (bar chart)

In 2014, the NCOU successfully delivered on its de-risking strategy, clearly evidenced by the 39 % reduction in total IFRS assets. As of December 31, 2014, IFRS assets stood at € 39 billion and the related Basel 3 fully loaded RWAs at € 59 billion, unchanged to 2013. As expected, the pace of de-risking slowed in 2014 compared to the prior year as the size of the portfolio was decreasing. At the same time, a heightened volatility in the risk-weighted asset equivalent calculations was observed. While de-risking activity during the period under review released € 12 billion in RWAs, this was materially offset by other factors including model-driven adjustments. Since its inception, the NCOU has generated a regulatory own funds capital accretion of € 4.8 billion on a post-tax basis, excluding litigation-related costs. This is equivalent to a 110 basis point rise in the Common Equity Tier 1 (CET1) ratio.

In 2014, the NCOU focused on the disposal of operating assets previously held in the former Corporate Investments division, leading to the successful completion of the sales of BHF-BANK and The Cosmopolitan of Las Vegas. These divestments were supplemented by the winding down of legacy banking assets, such as the early termination of some of the credit derivative hedges in the monoline portfolio and sale of the underlying bonds. A material notional reduction in the credit correlation portfolio also yielded a significant reduction in CRD 4 assets.

The legacy portfolio of the Special Commodities Group was transferred into the NCOU at the end of the first quarter 2014. This followed the decision made in December 2013 to scale back Deutsche Bank’s Commodities business. Risk-weighted assets at the time of the transfer amounted to € 3 billion. The reduction of these assets progressed ahead of schedule, and they had declined to less than € 1 billion by the end of the reporting period.

€25 billion

in assets scaled back in 2014

Overall, the NCOU generated a net gain on the divestments completed during the period. However, the financial performance of the division continues to be adversely impacted by provisions, impairments, for example, on Maher Terminals, and valuation adjustments made across the portfolio. In addition, the NCOU incurred the high costs of existing liabilities. Litigation-related charges, although lower than in 2013, significantly impacted noninterest expenses. In total this resulted in a loss of € 2.9 billion.

Outlook

The NCOU will continue to contribute to reducing risks through the disposal of assets. The pace of this will slow down with the decline in portfolio size, while there is potential for RWA volatility from model-driven effects, primarily for market and operational risk. In 2015, income before income taxes is likely to be impacted by factors similar to those specified above for the year under review.