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).

We first assess whether objective evidence of impairment exists individually for loans that are individually significant. We then assess collectively for loans that are not individually significant and loans which are significant but for which there is no objective evidence of impairment under the individual assessment.

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

 

Sep 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

672

369

55

818

344

42

(146)

13

Private & Business Clients

4,295

2,392

56

4,121

2,519

61

174

(5)

Global Transaction Banking

1,664

1,038

62

1,662

1,078

65

2

(2)

Deutsche Asset & Wealth Management

42

35

82

69

39

56

(27)

27

Non-Core Operations Unit

2,856

1,317

46

3,473

1,609

46

(617)

0

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

1,031

511

50

1,007

479

48

24

2

Total

9,529

5,152

54

10,143

5,589

55

(614)

(1)

Impaired loans by region

 

Sep 30, 2014

Dec 31, 2013

in € m.

Individually assessed

Collectively assessed

Total

Individually assessed

Collectively assessed

Total

Germany

1,700

1,961

3,661

1,586

1,675

3,261

Western Europe (excluding Germany)

2,741

2,295

5,036

3,469

2,363

5,832

Eastern Europe

106

158

264

77

175

252

North America

421

2

423

588

1

590

Central and South America

14

0

14

32

0

32

Asia/Pacific

123

5

128

170

4

175

Africa

1

1

2

0

1

1

Other

1

0

1

0

0

0

Total

5,107

4,422

9,529

5,922

4,221

10,143

Impaired loans by industry sector

 

Sep 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

0

0

0

45

0

45

Fund management activities

41

0

41

92

1

93

Manufacturing

560

230

790

589

222

811

Wholesale and retail trade

388

233

621

441

220

661

Households

450

3,351

3,801

477

3,194

3,671

Commercial real estate activities

1,728

321

2,049

2,388

295

2,683

Public sector

48

0

48

39

0

39

Other1

1,891

288

2,179

1,849

289

2,139

Total

5,107

4,422

9,529

5,922

4,221

10,143

Development of Impaired Loans

 

 

 

 

 

 

 

Nine months ended Sep 30, 2014

Full Year 2013

in € m.

Individually assessed

Collectively assessed

Total

Individually assessed

Collectively assessed

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

1,481

1,832

3,314

4,553

2,939

7,492

Transferred to not impaired during the year1

(1,084)

(878)

(1,962)

(2,618)

(2,134)

(4,752)

Charge-offs

(789)

(508)

(1,297)

(730)

(485)

(1,215)

Disposals of impaired loans

(494)

(254)

(748)

(744)

(293)

(1,037)

Exchange rate and other movements

71

9

79

(669)

(12)

(680)2

Balance, end of period

5,107

4,422

9,529

5,922

4,221

10,143

In the first nine months of 2014 our impaired loans decreased by € 614 million or 6.1 % to € 9.5 billion as a result of charge-offs of € 1.3 billion and disposals of impaired loans totaling € 748 million largely offset by a net increase in impaired loans of € 1.4 billion, as well as exchange rate movements of € 79 million.

The overall decrease mainly resulted from a € 815 million reduction in individually assessed impaired loans being partially offset by € 201 million increase in collectively assessed impaired loans. The reduction in individually assessed impaired loans can be split mainly into the two regions Western Europe (excluding Germany) and North America and relates to, among others, several commercial real estate transactions. 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 slightly from 55 % as of year-end 2013 to 54 %.

Our impaired loans included € 1.0 billion of loans reclassified to loans and receivables in accordance with IAS 39. This position increased slightly by € 24 million.