Impairment Loss and Allowance for Loan Losses

If there is evidence of impairment the impairment loss is generally calculated on the basis of discounted expected cash flows using the original effective interest rate of the loan. If the terms of a loan are renegotiated or otherwise modified because of financial difficulties of the borrower without qualifying for a derecognition of the loan, the impairment loss is measured using the original effective interest rate before modification of terms. We reduce the carrying amount of the impaired loan by the use of an allowance account and recognize the amount of the loss in the consolidated statement of income as a component of the provision for credit losses. We record increases to our allowance for loan losses as an increase of the provision for loan losses in our income statement. Charge-offs reduce our allowance while recoveries, if any, are credited to the allowance account. If we determine that we no longer require allowances which we have previously established, we decrease our allowance and record the amount as a reduction of the provision for loan losses in our income statement. When it is considered that there is no realistic prospect of recovery and all collateral has been realized or transferred to us, the loan and any associated allowance for loan losses is charged off (i.e., the loan and the related allowance for loan losses are removed from the balance sheet).

While we assess the impairment for our corporate credit exposures individually, we assess the impairment of our smaller-balance standardized homogeneous loans collectively.

Our collectively assessed allowance for non-impaired loans reflects allowances to cover for incurred losses that have neither been individually identified nor provided for as part of the impairment assessment of smaller balance homogeneous loans.

For further details regarding our accounting treatment relating to impairment loss and allowance for credit losses please refer to Note 1 “Significant Accounting Policies and Critical Accounting Estimates” of our Financial Report 2013.

Overview of impaired loans, loan loss allowance and impaired loan coverage ratios by business divisions

 

Jun 30, 2014

Dec 31, 2013

2014 increase (decrease) from 2013

in € m.

Impaired loans

Loan loss allowance

Impaired loan coverage ratio in %

Impaired loans

Loan loss allowance

Impaired loan coverage ratio in %

Impaired loans

Impaired loan coverage ratio in ppt

Corporate Banking & Securities

705

330

47

818

344

42

(113)

5

Private & Business Clients

4,307

2,435

57

4,121

2,519

61

186

(5)

Global Transaction Banking

1,713

1,032

60

1,662

1,078

65

51

(5)

Deutsche Asset & Wealth Management

48

34

71

69

39

56

(21)

15

Non-Core Operations Unit

3,260

1,385

42

3,473

1,609

46

(213)

(4)

Thereof: assets reclassified to loans and receivables according to IAS 39

1,014

471

46

1,007

479

48

7

(1)

Total

10,033

5,216

52

10,143

5,589

55

(110)

(3)

Impaired loans by region

 

Jun 30, 2014

Dec 31, 2013

in € m.

Individually assessed

Collectively assessed

Total

Individually assessed

Collectively assessed

Total

Germany

1,730

1,943

3,673

1,586

1,675

3,261

Western Europe (excluding Germany)

3,097

2,458

5,555

3,469

2,363

5,832

Eastern Europe

83

177

260

77

175

252

North America

384

2

387

588

1

590

Central and South America

33

0

33

32

0

32

Asia/Pacific

119

5

124

170

4

175

Africa

0

1

1

0

1

1

Other

1

0

1

0

0

0

Total

5,447

4,586

10,033

5,922

4,221

10,143

Impaired loans by industry sector

 

Jun 30, 2014

Dec 31, 2013

in € m.

Individually assessed

Collectively assessed

Total

Individually assessed

Collectively assessed

Total

1

Includes mainly transportation and other services.

Banks and insurance

41

0

41

45

0

45

Fund management activities

81

0

81

92

1

93

Manufacturing

612

237

850

589

222

811

Wholesale and retail trade

387

230

617

441

220

661

Households

447

3,496

3,943

477

3,194

3,671

Commercial real estate activities

2,095

329

2,424

2,388

295

2,683

Public sector

45

0

45

39

0

39

Other1

1,738

294

2,032

1,849

289

2,139

Total

5,447

4,586

10,033

5,922

4,221

10,143

Development of Impaired Loans

 

Six months ended Jun 30, 2014

Full Year 2013

in € m.

Individually assessed

Collectively assessed

Total

Einzeln ermittelt

Kollektiv ermittelt

Total

1

Includes repayments.

2

Includes consolidated items because the Group obtained control over the structured entity borrowers by total € 598 million.

Balance, beginning of year

5,922

4,221

10,143

6,129

4,206

10,335

Classified as impaired during the year1

1,168

1,433

2,601

4,553

2,939

7,492

Transferred to not impaired during the year1

(813)

(835)

(1,648)

(2,618)

(2,134)

(4,752)

Charge-offs

(662)

(230)

(892)

(730)

(485)

(1,215)

Disposals of impaired loans

(175)

(9)

(184)

(744)

(293)

(1,037)

Exchange rate and other movements

7

6

13

(669)

(12)

(680)2

Balance, end of period

5,447

4,586

10,033

5,922

4,221

10,143

In the first half of 2014 our impaired loans decreased by € 110 million or 1.1 % to € 10.0 billion as a result of charge-offs of € 892 million largely offset by a net increase in impaired loans of € 769 million as well as exchange rate movements of € 13 million. The overall decrease mainly resulted from a € 475 million reduction in individually assessed impaired loans being partially offset by € 365 million increase in collectively assessed impaired loans. The reduction in individually assessed impaired loans included several large transactions in commercial real estate activities in Western Europe (excluding Germany) and North America recorded in NCOU. The increase in collectively assessed impaired loans was mainly driven by new defaults in Households recorded in our Private & Business Clients division.

The impaired loan coverage ratio (defined as total on-balance sheet allowances for all loans individually impaired or collectively assessed divided by IFRS impaired loans (excluding collateral)) decreased from 55 % as of year-end 2013, to 52 % which is mainly attributable to an alignment of processes in the first quarter of 2014 at Postbank, which is described further below in the “Movements in the Allowance for Credit Losses” section.

Our impaired loans included € 1.0 billion of loans reclassified to loans and receivables in accordance with IAS 39. This position increased by € 7 million, which is mainly attributable to one commercial real estate item in Western Europe (excluding Germany).