in assets scaled back in 2014
- 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
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.
Progress made in a challenging environment
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.
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.
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.