Deutsche Bank

Annual Report 2017

Letter from the Chairman of the Management Board

Dear Shareholders,

It goes without saying that we on the Management Board are not satisfied that we ended up reporting another net annual loss for 2017. Nonetheless, a great deal was achieved in the year. Despite a difficult environment, we made good progress restructuring our bank.

Our results were actually better than they may seem at first glance. Although we reported a loss of 735 million euros after income taxes, on a pre-tax basis we earned income of 1.2 billion euros – the first such profit since 2014. The difference was largely driven by a write down in the carrying value of our deferred tax asset relating to our US operations. This in turn was driven by the tax reform enacted in the US at the end of December 2017. The good news about the tax reform is that it lowers our future corporate tax rate in the US, the effect of which will improve our results in the coming years. The Management Board and the Supervisory Board will propose a dividend of 11 cents per share to the Annual General Meeting.

While we improved our pre-tax profitability and made further progress in lowering our costs, we are not satisfied with our financial performance in 2017. Revenues declined 12 % year on year, reflecting the operating environment for our Corporate & Investment Bank, but also the conscious actions we took to sell a number of businesses, such as Abbey Life and the stake in Hua Xia Bank in line with our announcements in autumn 2015. Those sales drove costs lower but also eliminated revenues. Stripping out non-operating effects, such as business sales, revenues declined by 5 % year on year. Reasons for the decline include the effects of persistent low interest rates, historically low levels of market volatility and low client activity levels.

Nonetheless, in 2017 we gained ground in core businesses following a difficult 2016. Even more importantly, we successfully took major steps towards establishing the foundation for long-term growth:

  • We reorganized our business divisions to ensure that we serve our clients more effectively.
    • We retained Postbank and will combine it with Deutsche Bank's Private & Commercial Clients division in Germany. In so doing, we are creating a clear industry leader in our home market, serving more than 20 million clients. We intend to manage both brands from a single company by mid-year. We anticipate synergies to emerge gradually, generating around 900 million euros per year from 2022.
    • We continue to expand our German Wealth Management business following the integration of Sal. Oppenheim. We have also continued to extend our presence in key international markets, especially in Asia.
    • We are seeking a stock market listing of the shares in our asset manager DWS. This will make full use of the potential that increased autonomy will give this business. Following extensive preparations, we announced at the end of February that we are endeavoring to achieve the earliest possible date for the initial listing. Deutsche Bank plans to hold a long-term majority stake in the new company.
    • We reorganized our Corporate & Investment Bank – to combine corporate finance, transaction banking and capital markets under one umbrella. It now focuses more emphatically on the corporate sector and on our most important institutional clients. It is and will remain our ambition to be the leading European bank with an international network.
  • We have further improved our financial strength with the successful 8 billion euro rights offering last year. Our fully loaded Common Equity Tier 1 capital ratio increased from 11.8 to 14 percent over the course of the year; this has placed us among the leading group of large international banks.
  • We have further reduced legacy assets and have resolved significant litigation cases –15 of the 20 cases that accounted for the major share of our financial risk at the start of 2016 have now been largely or fully concluded.
  • We continue to withdraw from non-core businesses. For example, we reached an agreement to sell a significant portion of our retail business in Poland.
  • We continue to tighten controls, with additional staff in the Anti-Financial Crime (AFC) department and in Compliance. The task now is to focus on automating our control processes step by step.
  • We are modernizing our IT and pursuing the digitalization of our business. Today, our private clients can open an account online in a matter of minutes – and not seven days as before. Our mobile services are leaders in the German market. We have launched robo-advisers (WISE) in the asset management business and in the Private & Commercial Bank (ROBIN). WISE and ROBIN use algorithms to compile a suitable portfolio for our clients. In our other businesses, too, we are utilizing robotics and artificial intelligence to automate what were previously manual processes – this will minimize errors and lower costs.

The rebuilding is not yet over. Virtually everywhere in the bank there is still much to do, partly because of the constantly evolving regulatory landscape. As we look forward, the focus has to be trained squarely on revenues and profitability – without making any compromises in our risk management and controls. We have to achieve sustained earnings growth – in order to do this we have to continue investing, serve our existing clients better and win new clients for the bank.

Our business divisions all start 2018 from a position of strength, as illustrated by a number of examples from the past year:

  • Our Corporate Finance business continues to strengthen. According to Dealogic, we climbed from tenth place to sixth in the global announced mergers and acquisitions ranking for 2017.
  • In our home market Germany we have been the leading investment bank for over 15 years and grew our market share to 11.1 % in 2017 (source: Dealogic).
  • Our Transaction Banking business acquired numerous major mandates, especially in Europe and Asia, in the automotive sector and from large conglomerates.
  • In the Private & Commercial Bank we succeeded in keeping operating revenues roughly stable in spite of extremely low interest rates. Two of the contributory factors were increased retail lending and higher advisory revenues. Last year we acquired approximately 2,500 new commercial clients, due also to the fact that we expanded our range of services for mid-caps, for example, in interest rate and currency management.
  • Last year our clients worldwide entrusted a net 16 billion euros of new money to Deutsche Asset Management. In our home market, we remain the undisputed No.1 with a market share of about 27 percent in new business.

In this way, we have laid a strong foundation to continue to grow with our clients. The market environment for our business also improved at the beginning of the year. Although we expect low interest rates in Europe to persist in 2018, expectations for eurozone interest rates to begin to normalize in 2019 and expectations for further rate rises in the US this year suggest the unusually quiet period on the capital markets may be coming to an end. When market volatility accelerates, clients will then increase their activity – and we will benefit from it.

At the same time costs remain an important issue. We reduced our adjusted costs by 3 percent in 2017 and by 2.6 billion euros in the last two years – in 2015 many people thought this would be beyond us.

We must, however, improve our cost culture, as the fourth quarter of 2017 demonstrated. We were unable to maintain the positive trend of the first three quarters – largely due to a very deliberate decision to return to a normal compensation system in 2017 after not paying individual variable compensation to most of our employees for 2016.

I recognize that this decision was highly contentious for many given the reported net loss in 2017. We on the Management Board, however, are responsible for acting in the best interests of our bank and thus also in your interests as shareholders. If we want to live up to our claim of being the leading European bank with a global network, we have to invest in our employees so that we can continue to provide the best solutions for our clients. In the interests of the bank we could not repeat our previous decision not to pay any individual variable compensation to most of our senior staff for 2016.

In this context, it should be noted that a large portion of any variable compensation awarded is paid over a period of three to six years with legally enforceable claw-backs, to ensure long-term incentives are provided and to retain staff within the Group.

As the Management Board wanted to send a clear signal and ensure its own remuneration remains aligned to the bank’s net results, it decided unanimously to waive its variable compensation.

It is important to the Management Board to ensure that there is an appropriate balance between the interests of our employees and those of our shareholders. We therefore remain committed to our objective of delivering a net profit and a competitive dividend payout for 2018.

Dear shareholders, in autumn 2015 we said that the reorganization of our bank would not take two or three years, but longer. In the meantime we have established the basis for realizing the bank’s full potential. All our energies can now be deployed. That is why I am optimistic about the future and look forward to what lies ahead.

Best regards,

John Cryan
Chief Executive Officer of
Deutsche Bank AG

Frankfurt am Main, March 2018