Deutsche Bank Aktiengesellschaft (NYSE:DB) Q2 2022 Earnings Conference Call July 27, 2022 7:00 AM ET

Company Participants

Ioana Patriniche - Head of Investor Relations

Christian Sewing - Chief Executive Officer

James von Moltke - Chief Financial Officer

Conference Call Participants

Chris Hallam - Goldman Sachs

Tom Hallett - KBW

Adam Terelak - Mediobanca

Daniele Brupbacher - UBS

Nicolas Payen - Kepler Cheuvreux

Kian Abouhossein - JPMorgan

Magdalena Stoklosa - Morgan Stanley

Amit Goel - Barclays

Anke Reingen - RBC

Jeremy Sigee - BNP

Andrew Coombs - Citi

Andrew Lim - Societe Generale

Operator

Good afternoon ladies and gentlemen, thank you for standing by. I'm Franzi, your chorus call operator. Welcome, and thank you for joining the Deutsche Bank's Q2 2022 Analyst Call. Through our today's presentation all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions].

I would now like to turn the conference over to Ioana Patriniche, Head of the Investor Relations. Please go ahead.

Ioana Patriniche

Thank you for joining us for our second quarter 2022 results call. As usual, our Chief Executive Officer, Christian Sewing, will speak first. Followed by our Chief Financial Officer, James von Moltke. The presentation, as always, is available to download on the Investor Relations section of our website db.com.

Before we get started, let me just remind you that the presentation contains forward-looking statements, which may not develop as we currently expect. We therefore ask you to take notice of the precautionary warning at the end of our materials.

With that, let me hand over to Christian.

Christian Sewing

Thank you, Ioana. A warm welcome from me as well. It's a pleasure to be discussing our second quarter and first half 2022 results with you today. Since the end of our first quarter conditions for the global economy and the macro environment have become more challenging, not least as a result of the terrible war in the Ukraine that continues to be devastating for millions of people. And we, like other banks, are not immune to the associated pressures and impacts.

As you will have seen from our media release, they will impact our 2022 cost/income ratio target. We are continuing to work towards our return on tangible equity targets for both the Group and Core Bank, even though the path ahead of us is more challenging. Nonetheless, we are very proud that despite an unprecedented operating environment, we are transforming our bank and once again have proven our resilience.

Our franchise is more competitive, and the bank is more resilient than was thought possible three years ago. And we are proud of our achievements, particularly as we have now delivered the highest second quarter and first half post tax profit since 2011. The trends we saw in the first quarter continued in the second quarter, and we saw revenue growth across all four core businesses, driven by a mix of business momentum, market share gains and investments that will support sustainable growth in the second half of 2022 and beyond.

We delivered group revenues of €14 billion, an increase of 4% year-on-year. And our Core Bank operating businesses grew revenues by a very impressive 9% year-on-year. In the first half of this year, we generated an 8% return on tangible equity, up from 6.5% in the first six months of 2021. We also improved our profitability and efficiency. First half post-tax profit of €2.4 billion was up 31% year-on-year, driven by positive operating leverage.

Our cost/income ratio was 73% for the first six months, 5 percentage points lower than the comparable period. And finally, we continue to adhere to prudent risk management principles and processes. Provision for credit losses was 22 basis points of average loans in the first six months, including a management overlay, reflecting elevated market uncertainty. Our capital position remained stable. We finished the second quarter up compared to the first quarter, with a common equity Tier 1 capital ratio of 13%.

Now let me take you through the progress in our core businesses, on Slide 2. You can see that the momentum across our businesses, especially in the past six months, supports the delivery of our 2022 plans at the divisional level. In the Corporate Bank, business growth continued despite the more challenging market, as we diligently executed on our strategy. We saw this reflected in loan growth which, alongside interest rate tailwinds, contributed to an increase in interest income. This led to a 10% return on tangible equity.

In the Investment Bank, our leading FIC franchise saw strong client activity with growth across both institutional and corporate clients, which marked the highest first half FIC revenues in ten years. And despite the unfavorable environment for Origination & Advisory activities, M&A revenues were 65% higher year-on-year. All-in, the Investment Bank delivered a return on tangible equity of 14%. The Private Bank had a strong first half year result with a return on tangible equity above 9%. It captured net new business of €24 billion, across inflows into assets under management and loans supporting 4% revenue growth despite the more challenging environment. And it continued to optimize its distribution channels with the closure of more than 100 branches.

Asset Management delivered revenue growth of 6% year-on-year, driven by higher management fees, despite the volatile market environment. At the same time, the business continued to invest in growth initiatives and platform transformation and delivered a 22% return on tangible equity. Looking back at the progress of the Core Bank since the start of the transformation, we have improved profitability significantly. First half profit before tax of €3.7 billion more than doubled compared to the same period in 2020. As much of the momentum is driven by revenues, let me summarize our progress on slide 3.

Group revenues were the highest for the first half since 2016, despite business exits in 2019, as our transformation led to a stronger franchise with better revenue potential. These strong results include a revenue drag of around €700 million in corporate & other driven mainly by valuation and timing differences, as the market volatility in the first six months created temporary accounting asymmetries on derivatives used to hedge the bank's balance sheet.

Nonetheless, we have already delivered more than half of our expected revenue plan for the year and we are particularly encouraged to see strong growth rates in each division. These are either in line with or ahead of the compound annual growth rates we expected at the beginning of our transformation three years ago. Excluding revenues in C&O, the average divisional annual increase of revenues in the four core businesses was 9%. And we are especially pleased with the performance in our stable businesses, which contributed more than 60% of revenues over the last 12 months.

Moving to slide 4, we are encouraged by the performance in our Core Bank, which delivered a 10% return on tangible equity in the first half, up from 9.3% in 2021, clearly ahead of our 2022 target of 9%. On a pre-provision basis, we made significant progress on our profitability, as we diligently executed on our plans to make our divisions more focused, profitable, and efficient. While we benefited from market volatility, this also created some offsetting effects visible through our C&O line, so the majority of the improvement is due to the success of our business growth initiatives.

And as we just mentioned, we are especially pleased to see the improvements in our stable businesses, with Corporate Bank, Private Bank and Asset Management increasing their pre-provision profit contribution to 60%, while our Investment Bank continues to perform, driven by our FIC franchise. This is a clear evidence that our bank is now more balanced, thus resilient in a very complex and uncertain environment. Exactly what we promised three years ago when we introduced our compete to win strategy.

We expect many of these trends to remain in place and to be beneficiaries of interest rate hikes in the coming years. Overall, with Core Bank pre-provision profit of €4.3 billion in the first half, we believe that our shareholders can take comfort in the improved operating margins, as it creates stronger protection from a tougher macro-economic outlook.

Let me now turn to Slide 5 to take you through our journey to deliver improved operating margins and the progress we have made to-date, as well as our management actions. In 2019 we introduced a new strategy, which unlike prior years, included strict cost management and focused investments in our core businesses, particularly into technology and controls, to deliver efficiencies and just as importantly to grow the company over time. This plan and these investments helped us to significantly increase our return on tangible equity from being in negative territory just two years ago to 8%, and at the same time, to reduce our cost/income ratio by 14 percentage points to 73% for the first half of this year.

At the IDD in March, we shared the continued progress we have been making, with clear ongoing focus on further managing our cost base. However, the macro-economic environment changed materially, resulting in headwinds which impacted some of our planned reductions, most notably from inflation, high compensation and foreign exchange and are likely to stay with us for the balance of the year. At the same time, we also faced setbacks from uncontrollable items relating to higher-than-expected bank levies, litigation, and costs arising from the war in Ukraine.

And while the recent market volatility has been favorable for some of our businesses, we also saw offsets via the larger than expected drag from valuation and timing differences in C&O. These items generated an impact of around 2.9 percentage points on our cost/income ratio and 1.3 percentage points on our return on tangible equity in the first six months.

Given our cost discipline, our controllable expenses were contained, despite seeing some inflationary pressures and investments we decided to make, which were not in the initial plan. These higher costs are important to our business, as we want to continue to invest in technology, human capital, and controls to drive growth and efficiency, despite a more challenging revenue environment ahead. Together these items created a trade-off between our long-term strategic goals and year-end targets.

And as we stand here today, we have taken the decision to stick to our investment plans because we do not run the company on a one-year horizon, but with a long-term strategy and a vision for growth that will benefit us for the long-term. Exactly this underlying belief in our strategy is the reason and the key lever behind our successful transformation over the last three years. Reflecting this and using a conservative approach, achieving our cost/income ratio target for this year is no longer realistic without sacrificing long-term potential. Therefore, we have amended our cost/income ratio guidance for this year to mid to low 70s.

However, we are executing on our plans and considering the uncertain environment, we will work on additional measures to ease the pressures we are facing and are ready to take decisive actions where necessary. We are well prepared for different scenarios and we continue working towards our return on tangible equity target for this year. And we remain committed to our cost/income ratio target of less than 62.5% and our return on tangible equity target of more than 10% for 2025 and we are continuing to work towards reducing our run rate to the planned step off point at the end of this year, even if the path ahead is more challenging.

Let me now spend some time talking to our balance sheet, on Slide 6. Our balance sheet metrics are solid, which means that we enter a more challenging macro environment from a clear position of strengths. We have been managing our balance sheet conservatively and intend to keep doing so through this period of volatility. With a 13% CET1 ratio at the quarter end, we maintain a buffer of 253 basis points above regulatory requirements.

Our liquidity coverage ratio is at 133%, €51 billion above regulatory requirements. And our funding position is robust; we already completed majority of our planned issuance for 2022 and we will continue to fund our balance sheet through stable sources, predominantly our deposit base.

Moving to Slide 7, in 2020, as the pandemic caught the market by surprise, we went through our balance sheet to explain why we felt we were well positioned to navigate through that environment. And while the current crisis presents different challenges and many unknowns, what has not changed is our loan book, which is low risk and well diversified; nor have we changed our approach to risk management.

Let me remind you that around 79% of our lending is in the Private Bank and Corporate Bank, mainly consisting of retail mortgages in Germany. Concerns over the supply of gas could have a material impact on the German economy and we must of course be prudent and consider the impact this could have on our bank. However, we deem this potential impact as manageable and our improved pre-provision profitability means we are resilient.

Furthermore, on the items we can control, we have always managed our balance sheet conservatively and intend to continue to do so through this period of volatility. And as the outlook evolves, we will monitor the development of macro-economic forecasts and will update our allowances based on what we see in the environment and in our portfolios.

Next, let me briefly cover sustainability on Slide 8. ESG activity has been muted compared to previous quarters, reflecting several factors. These included lower overall capital market issuance activity, which also impacted sustainable finance volumes, more muted investment activity against a backdrop of lower asset valuations, and lower levels of sustainability activities as companies simply prioritized their responses to the war in Ukraine. We believe this is a temporary effect and assume that activity will pick up again. And nonetheless, we are pleased with the growth rates in all businesses, as you can see on the slide.

After finishing 2021 with cumulative ESG financing and investment volumes of €157 billion, excluding DWS, we have now reached a cumulative total of €191 billion and we are on track to exceed our €200 billion target by the end of this year. We reaffirm our target to generate at least €500 billion cumulatively by the end of 2025, which implies an average rate of at least €100 billion in ESG financing and investments per year from 2023 to 2025.

And we are on track to publish 2030 reduction targets for the carbon intensive sectors in our corporate loan portfolios, and our second Sustainability Deep Dive later this year. We will share further details on our net zero strategy at this event and describe how we are partnering with our clients in their decarbonization efforts.

Finally, Deutsche Bank will further strengthen its sustainability governance by creating the position of Chief Sustainability Officer with effect from September 1, 2022. Before I hand over to James, let me summarize our progress this year on Slide 9.

Thanks to our transformation, Deutsche Bank is on the right track strategically. Although the market continues to be challenging, our half year results show a substantial improvement in profitability. We are delivering on our strategy and our businesses saw strong revenue generation leading to material improvements in returns. So, while we achieved a robust and very satisfactory performance in the first half of the year, we -- as everyone else, are confronted with pressures from the extraordinary geopolitical and economic environment.

We will continue to work towards absorbing these shocks and executing on our strategy, towards our stated trajectory. Our loan book remains resilient, and we continue to have robust risk management. And we continue to execute on measures to deliver on our return on tangible equity objectives. And to be clear; our 2025 targets and capital distribution plans remain unchanged.

With that, let me now hand over to James.

James von Moltke

Thank you Christian. Let me start with a summary of our financial performance for the quarter, on Slide 10. Total revenues for the group were €6.6 billion, up 7% on the second quarter of 2021, despite negative revenues in C&O. Noninterest expenses of €4.9 billion were down 3% year-on-year including lower restructuring and severance and lower transformation charges. Adjusted costs excluding bank levies and transformation charges were up less than 2% year-on-year, mainly driven by FX movements and modestly higher compensation costs. I will detail these shortly.

Our provision for credit losses was €233 million or 19 basis points of average loans for the quarter. We generated a profit before tax of €1.5 billion and a net profit of €1.2 billion, an increase of 46% year-on-year. Tangible book value per share was €25.68, up €0.53 on the quarter, and 7% year-on-year. The return on tangible equity for the group was 7.9% including an effective tax rate of 22% for the quarter benefitting from a change in the geographic mix of income and as a result reflects higher positive deferred tax valuation adjustments related to our 2022 earnings. The effective tax rate for the first half of the year was 24%, which is broadly in line with the rate we now expect for the remainder of 2022.

Let's now turn to the Core Bank's performance on Slide 11. Core Bank revenues were €6.6 billion for the quarter, up 6% on the prior year quarter. Noninterest expenses were down 1% for the quarter and adjusted costs increased 3% year-on-year. We reported a profit before tax of €1.7 billion, up 21% on the prior year quarter. Our Core Bank post-tax return on tangible equity for the quarter was 9.5%, ahead of the full-year target of above 9%. And our cost/income ratio came in at 70%, down from 76% in the prior year period.

Let me provide some detail on the evolution of our net interest margin on Slide 12. The NIM increase was driven predominantly by short-term U.S. dollar interest rate rises in the first half of 2022, but it was also supported by higher longer-term euro rates that benefited the deposit books as we roll over hedge portfolios. The NIM increase was also driven by approximately six basis points and positive one-off effects, as it still includes a two basis point effect from the minus 1% TLTRO bonus rate. Normalizing for these one-offs, we expect NIM will continue to rise due to the favorable interest rate environment. Average interest earning assets were up modestly reflecting U.S. dollar strengthening and underlying loan growth offset by lower average cash balances.

Before we move on to costs. Let me briefly comment on our updated NII guidance. We now expect the revenue benefit from the interest rate curve relative to 2021 will be significantly higher than the €2 billion we previously guided for by 2025. Even accounting for increased issuance costs implied by current spreads, the environment is more favorable than the outlook we shared with you at the March IDD.

Let's now turn to costs on Slide 13. As we've previously outlined, and as Christian said, there are pressures on our cost base. This has impacted our 2022 cost income ratio target, as we look to absorb a series of uncontrollable items, and preserve necessary investments in controls and information technology.

Turning to the quarter more specifically, adjusted costs excluding transformation charges and bank levies, increased by €70 million or 2% year-on-year but declined by 2% excluding FX effects. Compensation and benefits costs increased by €155 million or €75 million excluding FX effects. On an FX neutral basis, the salary increases were almost entirely offset by lower headcount. Variable compensation accrual increased reflecting business performance, and we incurred about €20 million of costs associated with the opening of the Berlin Tech Center. IT costs were essentially flat on an FX neutral basis. And we saw a reduction in non-compensation costs.

If we look at the half year on Slide 14, adjusted costs, excluding transformation charges in bank levies, decreased by €65 million, down 1% compared to the prior-year or 3% excluding FX effects. All non-compensation categories declined in line with our expectations. But we saw an increase in compensation and benefit costs of €213 million or €83 million excluding FX effects. This reflects higher performance related compensation and the one-off costs associated with the Berlin Tech Center.

Now moving to a full-year review, let me give you some sense of the drivers that have caused us to change our guidance. First, as we talked about bank levies were nearly €180 million higher than we expected, contributing approximately 70 basis points to our cost income ratio. Second, litigation expenses have risen based on recent events, and we now expect them to be at least €100 million higher than planned, amounting to an additional 40 basis points. Third, we expect around €100 million, 40 basis points for the full-year related to our Berlin Tech Center from staff migration and real estate costs.

Thereafter, there are elements of our cost base which are mostly controllable where we've had to make management decisions. In the first quarter, we'd already flagged some higher variable costs as a result of good business performance, as well as expenses that relate to better future performance. The good business performance continues despite a somewhat more muted outlook for the second half of the year.

As previously communicated, we made strategic hires to support future growth in line with the growth plans we presented at the IDD.

Moving to investments, we consistently said that we will not sacrifice on controls, even though the related costs are higher than we expected and add to cost pressures. In addition, early in the year, we saw the opportunity to invest revenues into efficiency and growth initiatives. Focus areas of these investments are further front to back streamlining in the investment bank and corporate bank, as well as further upgrading our global payments infrastructure.

The front to back initiative will help us further reduce infrastructure costs, and the payments investments will support revenue growth and efficiencies in the Corporate Bank, while delivering an attractive marginal cost/income ratio. As Christian mentioned, we decided to continue with these investments despite some emerging revenue headwinds which may also weigh on our cost/income ratio this year, as we truly believe these are the right decisions for the bank in the long-term.

Provision for credit losses for the second quarter was 19 basis points of average loans on an annualized basis, or €233 million. The sequential decrease was driven by a lower level of new provisions on the Russia portfolio, while the second order effects have not yet materialized. Stage 1 and 2 provision of €52 million, compared to a net release of €36 million in the prior-year quarter, relate to a deterioration of macroeconomic parameters and a new management overlay to reflect macroeconomic uncertainties. This was partly compensated by otherwise positive portfolio developments, such as changes in the portfolio composition and improved collateralization.

Stage 3 provision increased to €181 million, compared to €111 million in the prior-year quarter. The increase was driven by a small number of incremental provisions on Russian and Ukrainian names in the Corporate Bank. The Investment Bank had a few new impairments, while the prior year quarter benefited from a large release. Private Bank provisions benefited from a portfolio sale.

Moving to capital on Page 16. Our Common Equity Tier 1 ratio ended 14 basis points higher compared to the previous quarter at 13%, in line with our previous full-year guidance for 2022. This ratio increase principally reflects higher CET1 capital from strong organic capital generation net of deductions for dividend and additional Tier 1 coupon payments and losses in other comprehensive income.

CET1 capital now includes a capital deduction for common share dividends of €450 million for 2022, a three basis point drag on our CET1 ratio came from FX translation effects, reflecting the significant Euro weakening over the quarter.

Risk weighted assets net of FX were marginally down compared to last quarter. Market Risk RWA increased, principally from an increase in the quantitative VaR and SvaR multiplier. This increase was more than offset by a reduction in credit and operational risk RWA. Our leverage ratio, including ECB cash, was 4.3%, a like-for-like increase of five basis points over the quarter.

Higher Tier 1 capital from strong quarterly earnings and the recognition of our €750 million AT1 issuance, which settled in early April, added 10 basis points to our ratio. This was partially offset by a three basis points impact of FX translation effects, reflecting the significant Euro weakening in the quarter and two basis points from higher leverage exposure, including Core Bank loan growth.

With that, let’s now turn to performance in our businesses, starting with the Corporate Bank on Slide 18. Corporate Bank revenues in the second quarter were €1.6 billion, 26% higher year-on-year. Continued revenue growth was driven by improvements in the interest rate environment, loan and deposit growth and higher fee income across all three segments. The Corporate Bank grew loans to €129 billion up by €4 billion compared to the prior quarter and by €12 billion compared to the prior-year quarter, mainly in Corporate Treasury Services.

Noninterest expenses of €1 billion declined by 4% year-on-year due to non-compensation initiatives and lower non-operating costs partly offset by FX movements. Higher revenues and lower noninterest expenses resulted in positive operating leverage of 30% year-on-year. Provision for credit losses increased year-on-year after a net release in the prior-year quarter, reflecting a more challenging macro-economic environment and impacts of the war in Ukraine.

Corporate Bank profit before tax was €534 million in the quarter, more than double the prior-year quarter, reflecting improvements in our profitability and efficiency. Return on tangible equity was 13.4% and the cost/income ratio came in at 62%, in line with our commitments presented at the Investor Deep Dive in December 2020. I will now turn to revenues by business segments in the second quarter on Slide 19.

Corporate Treasury Services revenues of €962 million increased by 30% year-on-year driven by strong operating performance, the improving interest rate environment and increased loan and deposit volumes. Institutional Client Services revenues of €394 million rose by 26%, benefitting from the improving interest rate environment and FX movements.

Business Banking revenues of €195 million grew by 9% year-on-year driven by benefits from deposit charging and account repricing. I’ll now turn to the Investment Bank on Slide 20. Revenues for the second quarter were higher year-on-year, both on a reported basis and excluding specific items. We saw strong revenue growth in Emerging Markets and the macro trading businesses. This was partially offset by significantly lower revenues in Origination & Advisory and credit trading, with Financing revenues broadly flat.

Noninterest expenses were higher driven by increased litigation costs due to a one-off item related to an industry wide matter, combined with a modest increase of compensation expense and the impact of FX movements.

Our loan balances increased year-on-year, primarily driven by higher loan originations across the Financing businesses and the impact of the U.S. dollar strengthening. We continue to maintain a well-diversified portfolio across regions and industries. Leverage exposure was higher, reflecting increased lending commitments and trading activities to support client flows. The year-on-year increase in risk weighted assets predominantly reflects the impact of FX movements.

Provision for credit losses was €72 million, or 30 basis points of average loans. The year-on-year increase was driven by a small number of impairment events, while the prior-year benefited from a larger Stage 3 release.

Turning to revenues by segment on Slide 21. Revenues in FIC Sales & Trading increased by 32% in the second quarter when compared to the prior-year. Strong performance across Emerging Markets and macro trading businesses was partially offset by significantly lower revenues in credit trading. Revenues across Rates and Foreign Exchange were significantly higher driven by market activity and client flows, and also benefiting from effective and disciplined risk management.

During the quarter, our Foreign Exchange business was ranked overall FX Market Leader by market share in the 2022 Euromoney FX Survey. Emerging Markets revenues more than doubled driven by strong performance across the regions. Financing revenues were essentially flat year-on-year. Credit trading revenues were significantly lower driven by materially reduced distressed revenues and a challenging environment. In Origination & Advisory, reported revenues were down 63% but included commitment markdowns. Excluding the markdowns, revenues declined 38%, as the industry fee pool reduced by approximately 45%.

Debt origination revenues were 95% lower due to materially reduced leveraged debt capital markets revenues. This was driven by the impact of commitment markdowns of approximately €150 million, in addition to the industry fee pool decline. Equity origination revenues were 60% lower, reflecting an industry fee pool reduction of approximately 70% versus the prior-year quarter.

Revenues in Advisory increased by 50% driven by market share gains in a reduced feel pool year-on-year. Turning to the Private Bank on Slide 22. Revenues were €2.2 billion, up 7% year-on-year, or 4% if adjusted for the net impact of the BGH ruling across the periods and specific items. Revenue growth was supported by FX movements and valuation impacts and also reflected higher business volumes. The year-on-year reduction of 16% in noninterest expenses was driven by a €71 million litigation provision release related to the BGH ruling, compared to litigation charges of €128 million in the prior-year quarter, as well as lower restructuring expenses.

Adjusted costs were down 1%. Negative impacts from exchange rate movements and higher compensation costs mostly offset lower internal service cost allocations and incremental savings from transformation initiatives including workforce reductions and branch closures. As a result, the Private Bank swung from a loss before tax of €15 million in the prior-year quarter, to a profit of €463 million. In the first half of 2022 the cost/income ratio improved to 75%, compared to 89% in the prior-year period and post-tax return on tangible equity rose to 9%. Assets under management declined by €20 billion in the quarter. A negative impact of €33 billion from market movements was partly offset by net inflows of €7 billion and beneficial exchange rate movements.

Risk weighted assets increased by 13% reflecting regulatory changes in the prior-year and a growing loan book. Provision for credit losses was €96 million or 15 basis points of average loans, down 17% year-on-year reflecting releases of credit loss allowances following non-performing loan sales, tight risk discipline and a high-quality loan book.

Turning to revenues by segment on Slide 23. Revenues in the Private Bank Germany were up 11% or 3% adjusted for the net impact of the BGH ruling across the periods. Valuation adjustments and higher net interest income more than offset lower fee income in a more challenging market environment. Business volumes grew with net inflows in Assets under Management of €2 billion mainly into investment products. In addition, net new client loans were €2 billion. In the International Private Bank, revenues were up 2%, or 6% excluding specific items. Starting this quarter, we have aligned our revenue disclosure with our client coverage model.

Revenues excluding specific items in Wealth Management & Bank for Entrepreneurs increased by 7% despite a more challenging market environment. The revenue increase was attributable to continued loan growth and higher revenues from deposits, supported by the recent interest rate increases. FX movements also had a positive impact. Premium Banking revenues were up 3%, mainly reflecting higher net interest income in deposits and volume growth in consumer finance in Italy.

The International Private Bank attracted net inflows in Assets under Management of €5 billion in the quarter, driven by €3 billion into investment products and €2 billion in deposits. Net new client loans were €2 billion, mainly in the Americas and Italy.

As you will have seen in their results, DWS produced a resilient performance compared to the prior-year despite the continued market turbulence. My usual reminder: the Asset Management segment on Slide 24 includes certain items that are not part of the DWS stand-alone financials.

Revenues grew by 5% versus the prior-year. Management fees grew by 6% reflecting consistent net inflows in the prior-year and higher valuations in illiquid products. Higher performance fees, combined with positive impacts from the fair value of guarantees, more than offset lower other revenues. Noninterest expenses increased 11%, with adjusted costs up 7%. This reflects higher compensation costs, including hiring and carried interest costs, partly offset by lower deferred compensation costs.

Higher non-compensation costs were led by professional service fees and increased marketing, regulatory enforcement matters and other costs as well as further investments into platform transformation. As a result, the cost/income ratio increased to 67% from 63% last year. Profit before tax of €170 million in the quarter declined by 6% over the same period last year, reflecting the higher expenses.

Assets under management of €833 billion have declined by €69 billion in the quarter, reflecting the negative impact from market performance and net outflows, partly mitigated by FX translation effects.

Net outflows of €25 billion in the quarter were almost exclusively due to outflows in low margin cash and passive products, partly offset by positive net flows in higher margin products such as active equity, Multi-Asset and Alternatives. Excluding cash, net flows were largely flat in the period with a positive revenue contribution.

The management fee margin has improved to 28.4 from 28.1 basis points in the prior-year period, reflecting outflows in lower-margin and inflows in higher-margin products.

Moving to Corporate & Other on Slide 25. Corporate & Other reported a pre-tax loss of €498 million in the second quarter of 2022, compared with a pre-tax loss of €39 million in the prior-year quarter. A significant driver of the results in this quarter was valuation and timing impacts of negative €185 million, compared to a positive contribution of €83 million in the prior-year quarter. These were driven by market volatility and interest rates, similar to the first quarter.

Valuation and timing differences arise on derivatives used to hedge the Group's balance sheet. These are accounting impacts, and the valuation losses are expected to be recovered over time as the underlying instruments approach maturity. In addition, funding and liquidity impacts were negative €126 million, versus negative €60 million in the prior-year quarter. These include certain transitional costs relating to the bank's internal funds transfer pricing framework as well as costs linked to legacy activities. Expenses associated with shareholder activities not allocated to the business divisions, as defined in the OECD Transfer Pricing guidelines were €120 million broadly flat to the prior-year quarter.

We can now turn to the Capital Release Unit on Slide 26. The Capital Release Unit recorded a loss before tax of €181 million in the quarter, an improvement of €76 million from the prior-year period, making this the lowest quarterly loss since the CRU's inception. Revenues for the quarter were €7 million, an improvement of €31 million from the prior-year period. This improvement was due to lower de-risking, risk management and funding impacts that more than offset the non-recurrence of the Prime Finance cost recovery in the prior-year.

Noninterest expenses declined by 26% year-on-year primarily driven by a 38% reduction in adjusted costs, reflecting lower internal service charges and lower compensation costs. CRU reduced leverage exposure by €42 billion year-on-year driven by the completion of the Prime Finance transfer and continued progress on deleveraging. CRU reduced Risk Weighted Assets by €7 billion year-on-year driven by lower operational risk and de-risking. In the second quarter, RWAs remained broadly flat as reductions from operational risk and other impacts were offset by market risk increases as financial markets became significantly more volatile.

Looking through to the remainder of 2022, we are confident of achieving the full-year target for adjusted costs excluding transformation charges of €800 million that we reaffirmed at the Investor Deep Dive in 2022. We will also aim to drive risk weighted assets and leverage down further opportunistically and expect to record a small negative revenue for the year.

Turning finally to the Group outlook for 2022 on Slide 27. The strong performance in the Core Bank is testament to the quality of our businesses and the strength of the franchise, despite the challenges ahead. Therefore, we can confirm our revenue guidance of €26 billion to €27 billion for 2022. However, as Christian noted, the current environment and uncertainty are unprecedented and we see pressures, including on expenses and credit costs. But we remain committed to our cost measures and we will continue to execute on our 2022 plan, as we believe our strategy is the right one for the Group and we are committed to its delivery, as we focus on the long-term.

Consistent with our previous guidance, our provision for credit losses remains at around 25 basis points of average loans, including the currently expected impact of the war in Ukraine, slowing growth in our core markets and other dislocations. We will continue to manage our balance sheet prudently and closely monitor the cost of risk, particularly with regards to a more adverse scenario on the potential disruption of gas supplies to Germany. And of course, we have analyzed the impact of potential downside scenarios, but we do not believe these scenario conditions are present today and based on detailed conversations with our clients, we do not see stress in our portfolios.

We remain confident in our full-year CET1 ratio target of greater than 12.5%. We remain confident we can deliver our 2025 targets and capital distribution path, as many of the management actions we have taken are in support of this trajectory. With that, let me hand back to Ioana and I look forward to your questions.

Ioana Patriniche

Thank you, James. And with that, operator, we're now ready to take questions.

Question-and-Answer Session

Operator

Ladies and gentleman, at this time we will begin the question-and-answer session. [Operator Instructions]. The first question is from Chris Hallam from Goldman Sachs. Please go ahead sir.

Chris Hallam

Yes, good afternoon, everybody. So two quick questions. First, on revenues. You've reiterated the €27 billion to €26 billion group guidance for the year. But I think before you've mentioned you saw a bias to the high end of that range. Is it fair to say you probably wouldn't see that upper end bias anymore. And perhaps if you could just talk through some of the divisional moving parts, that would be helpful?

And then secondly, Germany's clearly in the eye of the storm so to speak, when it comes to tail risk on gas. So could you speak to the tangible steps your corporate clients are taking to prepare themselves for an environments in which gas scarcity becomes a significant constraints on activity? And how would that -- how would you expect that to feed through to the cost of risk?

Christian Sewing

Well, let me take that one Chris's question. And thank you for your question. Look on the revenue side, when we gave the guidance with the bias to the higher end of the range, to be very honest, James and I actually saw a revenue number which crossed the €27 billion. And therefore I would not suggest that you now lower the number to the lower range of €26 billion to €27 billion, because all what we can see, from all the four businesses is clearly turning us that we remain in the higher range of that of the €26 billion to €27 billion.

And why do I think that, I mean, we have the €14 billion which was a really good result in the first half year very happy with that. And I mean, you have seen that we are getting more and more into the composition of revenues, we really would like to see and that is very strong corporate and private banking. And on both units, I actually see a further trend which continues the trajectory, which we have seen in Q1 and Q2, i.e., higher revenues going forward. That means for the Corporate Bank, I think, at least per quarter €1.5 billion.

To be honest, again, with the tailwinds, we have in interest rates with everything which we have invested since three years into this business with the client reaction, I see upside to the €1.5 billion per quarter. We see the Private Bank at least with €2.2 billion each quarter. That is for us, clearly the trajectory which we have seen over the last months and weeks. And again, looking into Q3, that is the number which we are very confident and that they does not take into account any extraordinary items, which we have talked about, and which will come in Q3 or Q4.

Asset management, I would say same continuity with €600 million each for the quarter. And I think we have always given you a range for the investment bank, which is in our view, around €2 billion to €2.5 billion. And given the resiliency of that business, this is a number where we can plan this, even if there are some volatilities in that business. I think overall, this is a number, which we can plan this.

If you put this all together and add it to the €14 billion if you also take the comments from James into account that part of the V&T symmetries is coming back, of course, there may be also some other volatility, then we clearly see our path to the upper range of €26 billion to €27 billion. And hence, in particular with the resilience and the strategy we see now coming through in the Private Bank and in the Corporate Bank very confident to be in the upper range there of the €26 billion to €27 billion.

On your loan loss provision or on your risk question. First of all, I have to say and obviously, being here in Germany, and having the possibility to talk to the corporate leaders being on DAX level, or the family owned and mid-cap clients, the attention to the gas situation is obviously very, very high. And what I seen as preparation of work across the industries on the production side, but also on the financial resilience side is impressive.

On top of that, we should also bear in mind that there is a great cooperation and coordination work done between the government and the corporates. So a lot of programs are running, what could we do in case we come to such a downside scenario, but the level of preparedness of the German corporates to think in alternative supplies is pretty high. And if you talk to the individual corporate leaders, actually you see a very high level of resilience.

And in this regard, again, also taking into account that I think, from all the experience we also had from past situations like the pandemic two years ago, how actively and proactively the government steps in UFC in a situation last week, where the government clearly stepped in. I have to say that while obviously always analyzing scenarios, I cannot see for this year, where we are right now, a scenario where we actually crossed through the €1.2 billion or €1.25 billion of loan loss provisions for this year.

Next to the preparedness of the corporates next to all the support, which is given by the German government. Obviously, we are also looking into very healthy corporate portfolio. We are looking into a portfolio with no concentration risk with a highly diversified portfolio, a high degree of investment grades, corporates. And if you really think about the German portfolio actually the majority of the German portfolio is residential mortgages with moderate ATVs. So everything what we can see from the actual development in the portfolio, this is not concerning.

And therefore, our base case is clearly in the range which we have given before. And in this regard, good preparedness, high level of attention on the corporate side, and in my view a first class portfolio on the Deutsche Bank side, and that makes me confident.

Chris Hallam

Very clear, thanks.

Operator

And the next question is from Tom Hallett from KBW. Please go ahead.

Tom Hallett

Hi, guys, thanks for taking my questions. Just following-up on the cost of risk, you've provided some pretty useful sensitivity because a complete shut off in Russian gas. Could you just give us a little bit more color on the timing of any 20 basis point impact over an 18 month period? Would it be front end or back end loaded? And could you also just tell us which sort of industries and parts of the corporate book is under most stressed under this scenario?

And then secondly, on the group targets, you've obviously revised higher the cost income ratio, but you've managed to also maintain the RFP target. I guess if I just take the revenue guidance, and the higher end of the cost income ratio, that that naturally implies some pretty hefty increases to costs. So could you just walk us through what would be happened to hit the lower or upper bands of that cost income ratio? And how you have confidence in your guidance next year and beyond? And then given that new guidance? How have you been able to keep the RFP target unchanged? Thank you.

James von Moltke

Sure. Thanks, Tom. It's James, I'll take both and Christian may want to add on the gas scenario. So look, as you saw on our IFRS 9 note, we provided a scenario. We've done as you can imagine a lot of work in the past several months looking at the portfolio, together with the risk team. This is really both bottoms up and top down, bottoms up meaning looking at the most exposed industries. And within that going, if you like client-to-client to have deep discussions about their situation, their resilience in the gas shutoff situation. And that's given us some of the confidence that Christian described a moment ago, up from a bottoms up level.

From an industry perspective, as you can imagine, there's a pretty broad list of potentially affected industries going through chemicals, automotive, other manufacturing, steel, energy and what have you. So we've been looking at a pretty broad swath of the portfolio and feel very good about what that's teaching us from a bottom up perspective. Top down, we of course, stressed the macroeconomic variables. And with that, FLI impacts in our ECL model. And we also looked at general downgrades that would both drive the Stage 1 and 2 provisions.

We think our variables are the stress that we put on our variables is reasonably conservative in the scenario conditions, more or less in line with the ECB scenario that was published in June. Obviously, it's hard to compare scenarios line-by-line, but we think it's similar in its severity, again, reflected in the MEVs and then the downgrades that we apply. To your question about timing. So that all gives us about 20 basis points, we think a rough measure would be half-half. So an increment of 10 basis points in '22, and an increment of 10 basis points in '23. But that's extremely conservative, both from a timing and an amount.

The scenario is just that it's a scenario. We don't see those conditions present today, they would have had to have started essentially in July. Consensus would need to reflect sort of the impact of that, as with the downgrades in order to produce the Stage 1 and 2 impacts that we're envisaging already in '22. So we would think that 10 basis points, while a good rough measure would be already conservative in what we think is a conservative scenario.

As Christian outlined, again, we don't see that today. And in fact, we think the guidance that we've given of 25 is itself prudent given what we see in the portfolio to date. So short answer a huge amount of work top down bottom up. In a scenario condition, you could simplify by saying half-half. But our view is that as every day goes by, the scenario becomes less likely and more of it shifts into '23.

In terms of group targets, let me start with the cost income ratio. We provided a range sort of deliberately. Essentially, is always a bit of a -- you live in a half world of providing absolute cost numbers or a cost income ratio, but mid to low 70s was chosen deliberately. We're working hard to manage our run rate, as flat as we possibly can. We've been talking about that now for several quarters.

In that run rate, we see some pressures, as we've talked about in our prepared remarks. And we also see some effects impact that that's been hitting us to the tune of call it €50 million a quarter given the development. But we're working hard to keep that that run rate in check. So given the range of revenue outcomes that that Christian talked to, and an expense number, where our guidance remains essentially flat to last year, that produces the cost income ratio range that we talked about.

Now, obviously, in an RoTE number, there are other variables. And we've talked about, what's going on in the tax line. Clearly, we had to incremented our provisions, although we do see some opportunity there. And we've been working on a series of measures that we think are supportive to the RoTE. So what we're communicating is management's determination. We're looking at every lever, every measure we can take to deliver on that target. But as you'd expect, we have to strike a more cautious note about the environment that we're operating in. So that's hopefully some color on how we're thinking about the cost income rate and the RoTE targets.

Christian Sewing

Yes, I only have to add one more item to the loan loss provision. Again, when it comes to the downside scenario, which I agree is, in my view, a very conservative downside scenario. Look, items like governments have poured packages are not part of that. And again, I think rightfully so we have to plan a scenario that this is not coming. But again, looking back what has happened. Also, knowing the discussions what's going on, and when I believe, again, from the experience in the past, and they would step in. I can only tell you, this is a real conservative scenario.

And I think what James just said is so important with each day going by either scenario and itself is too conservative. And by the way, the corporates in Germany use each and every day to prepare themselves better. From a production line, from a redistribution of their supply chains from a redistribution, also of their sourcing, and obviously, also financially prepared for that. And hence, again, I really do believe in our base case number.

Tom Hallett

Super, thank you.

Operator

The next question is from Adam Terelak from Mediobanca. Please go ahead.

Adam Terelak

Good afternoon. Thank you for the questions. One on revenues and one on cost, or cost income? Can we have a bit of an update on net interest income for this year? What sort of tailwind you expect, but also a bit more color about 2025? I know you said it will increase materially and for the NII support for the rest of this year. I mean is that all coming in the second half. So just a bit of a color of what's common -- what is become this year? And what that means. So the CBPB revenue trajectory, whether we can actually see NII driving revenues up on a sequential basis through the second half of this year?

And then secondly, on the cost income guidance, you've mentioned that it's kind of an output from where you're trying to manage costs and where you think revenues might go. Does that mean the top end of the cost income range implicitly is attached to the bottom end of the revenue range? So you're saying €27 billion is more likely on revenues? What is more likely on cost income? Thank you.

Christian Sewing

Yes, so Tom that's fair in terms of the second question that that is how we're thinking about it and obviously working to and managing to those outcomes. So yes, to the second part of the question. On revenues, look there's substantial support for our revenues, beginning really in the second quarter. We talked about €700 million in '22, compared to '21, and that's up from perhaps €400 million when the year started, to your point it is accelerating as the year goes by, we had some in Q2, we've perhaps recognized €250 million, at most €300 million of the €700 million. So more to come in the second half.

If I think about '25 on the same measure, we're cautious about that number, just because that, that forward curve needs to be realized. But that's now in the high twos. There is some offset that we'd expect from say issuance costs, credit spreads and that kind of thing, but you can see that the lifts, even from when we were in March is probably all in, in about a €1 billion range, just mathematically net for 25. So significant upside from the curve, if it's realized. One thing just in terms of the modeling in Q3, there's a little bit of an impact, as some of the you go from minus 50 to zero, there's some interesting dynamics in how tearing TLTRO, the front end and the long end of the curve all happen.

So, it might be a little plateau or less up in Q3, and then a quicker acceleration in Q4. So we might see a bit of a bend in the curve, but significant rate related upside that we're seeing in the forward.

Adam Terelak

But still up for Q3, just a small amount.

Christian Sewing

Yes, we gave you some NIM guidance, and there was a couple of unusual items in Q2, there may be a little bit of unusual stuff in Q3. But yes, an expanding NIM, I would expect in Q3 and an acceleration in Q4.

Adam Terelak

Great, very clear.

Operator

Your next question is from Daniele Brupbacher from UBS. Please go ahead.

Daniele Brupbacher

Good afternoon and thank you. Briefly again on cost. Thanks for the additional disclosure on some of these less well controllable items like Berlin Tech Center, et cetera. Can you talk a bit about the more controllable management decisions on the cost side, I assume is more like compensation. I think you mentioned that, can you quantify these for this year and at the right at the beginning of your prepared remarks, Christian, you mentioned that you might can implement additional cost measures, can you be a bit more specific on that in terms of timing, qualitatively what it is and probably even a quantification? And then secondly, the rate sensitivity obviously gets a lot of attention. I think you're also assuming a static balance sheet. How sensitive are these assumptions to changes in the balance sheet? So let's assume people change their behavior deposit base goes down 5%, 6%. So how would that impact this sensitivity? Thank you.

James von Moltke

So Daniele, a lot to go through there. Let me start with costs, and then hand it off to Christian and I'll come back on rate sensitivity. Look, I'm looking at a year-on-year schedule of our costs, excluding FX and every line is either flat or down year-on-year, with the exceptions that we've called out and perhaps one or two. So we talked about the Berlin Tech Center that is really the only thing in the salary and benefits line that has moved year-on-year, we've managed to keep it flat. Cash bonus, as we call it out is up a little over €50 million year-on-year excluding FX.

We have some expenses for third parties, mostly related to anti-financial crime, which we've talked about as our investment. That's an important investment to make. That's a line that's up. And then we have travel and entertainment that's up from an unusually low level last year. And so, we're demonstrating in both the compensation and the noncompliance, that control, the focus on execution. We talk about there being pressure, there is pressure and we can talk about lots of things including inflation, but as I look at just the year-on-year comparisons across these line items, you see real discipline and control.

Christian Sewing

Daniele, to your question, to my specific comment. Now, let me just reemphasize that what James is saying, I think our laser focus on cost has not changed, is not changed, and will not change. Otherwise, we wouldn't have been able in this situation after three years of bringing down the cost to do that. What we have done now, where revenue has actually increased significantly to show exactly that what James just said that in the controllable area, we are in line with our plan. And for most of the items except for compensation where we have shown, I think a good performance on the revenue side, we've actually reduced the cost.

But of course, we are always and have again, kicked off around where can we do more. And this is on the one hand that we are substantiating each and every plan, what we have given you on the IDD, we have shown you that there is a further cost reduction of €2 billion, which we also want to use to reinvest into the business. Every part of that is now obviously substantiated with a detailed plan, so that our cost efficiency is coming in '23, '24, and '25. On top of that, we are looking into each and every program we are running, not in order to stop it because we also said we have taken a deliberate long-term decision to invest into our business into our controls. But how we deliver that, that is the part where Rebecca Short, our CTO is going through each and every project.

And is actually questioning the number of people are on whether we are doing and completing the projects in the most efficient way. And this is exactly what we are doing right now. And I'm absolutely convinced that we will find further efficiencies there, then we are also talking whenever you have done the further restructuring or restructuring in your Head Office on infrastructure, whether you can actually with the automation of data, with the automation of processes, whether we can do more, that is again, another part of our review, which we have kicked off and which we're doing now in Q3. And last but not least of course, we always have other levers in hand, which we think we should not draw for the time being because we believe in the long-term investment of this company. And that was actually the underlying reason why we developed so well over the last three years.

But when it comes to situations of investment spend, investment spend is always on the table on a monthly basis. Same is obviously then how we accrue for our compensation. So I think we have the levers in our hand. But rest assured that continuously we are going through additional measures. And that makes me confident that we are developing to the guidance, we have given you in '22 but also that we are delivering to the target for '25.

James von Moltke

So Daniele, on the interest rate sensitivity disclosure, I just draw your attention to Slides 43 and 44 in the appendix of our deck, you know this shift that we're living through is actually fascinating in terms of just the numbers and the models, how they work, because there's so many dynamics around deposit charging around, Central Bank, the monetary policy tools and what have you. As you mentioned, the disclosure we gave and also the response to Adam's question about the upside, that related to the December 21 static balance sheet. Page 43 gives you an update about rate sensitivity, now bringing forward to a May balance sheet and the June forward rates.

So there's a bit of an update there. And we've given you the curves that we used on Page 44 at each of those disclosure dates that hopefully is also useful to you. It's an interesting time, we've looked at our plus 100 disclosure, and there's a lot of kind of confusing elements to it given those dynamics. The balance sheet change is an interesting question, you phrased the question in the sense that there's risk in there with a static balance sheet. And that's there, there's going to be changes in the value of certain products over time, in this interest rate cycle, as it begins, we also see that as an opportunity.

For the past several years, we've and banks in general have been attempting to suppress deposit growth, there's an opportunity now to drive more value from the deposit books in a rising rate environment. Equally, we're looking at the asset side of the balance sheet, and looking at the asset types that are most valuable to us from a shareholder value added perspective. So we think of it as upside in terms of both volume growth and also balance sheet composition. But it's something that we have to work to produce and we're working with the businesses accordingly to build some of that into our planning and if you like the pricing and the emphasis that we place on a different product growth in the different segments.

Daniele Brupbacher

Thank you very much. That's great.

Operator

The next question is from Nicolas Payen from Kepler Cheuvreux. Please go ahead.

Nicolas Payen

Yes, good afternoon. Thanks for taking my questions. Can we have an update please on the IT merger project in Germany, given the headline on potential delay there? And against that backdrop, how does it play on the developments of PB costs from here? Thank you very much.

Christian Sewing

Sure. Nicolas, thanks for the question. Look, as we disclosed, there has been a delay in one of the waves of transition, and what we call Project Unity, which is the merger, if you like of the IT infrastructure supporting our German businesses. And it was the result of a number of factors including the remediation steps we had to take after the High Court ruling last year to deal with customer consents both in the execution of that operational transition, where we've moved very quickly, I would add to repaper our agreements, but actually also in the Technology Transfer where there's some customer consents that are necessary around that as well.

So to the decision to delay into 2023 is really a risk based decision. We do not want to take risk with that transition. We're working incredibly hard on testing. And we think it was the right decision. As you'll see in our disclosure, we think that will cause us to incur about 150 more euros in expense in '23, essentially as we extend the life of that of these environments, the test environment and the second environment. But to answer your question, the ultimate destination is unchanged. We start to achieve the reduction expenses a little bit later in '23. But the €300 million that we called out for 2025 is absolutely unchanged, unchanged destination.

Nicolas Payen

Thank you.

Christian Sewing

Thank you.

Operator

The next question is from Kian Abouhossein from JPMorgan. Please go ahead.

Kian Abouhossein

Yes, thanks for taking my questions. I have two questions and maybe taking a step back in the Deep Dive of 2020, you clearly had different revenue and cost guidance, you're now looking at roughly €3 billion more revenues, but also €3 billion more costs. And clearly the marginal cost income is an issue because you're assuming the cost income is not just flat relative to the old target of around 70, but actually higher. So I'm just trying to understand a bit more where these investments are going into and how we should measure return on investment, because clearly your 2025 target and that's my second question is 62.5, your cost based on your guidance and revenues of €30 billion, the cost would be actually lower than what we're going to achieve this year, on a stated basis.

So I'm really trying to try to understand the deltas on why costs should go in line with revenues, and even higher than a relative basis. And secondly, why we should have confidence that cost on an absolute basis should be lower with higher revenues by 2025?

James von Moltke

Sure, Kian, I will start, it is James and then Chris, you may want to add, look, there it's significant increases in both revenues and expenses since July 19, and then the two investor Deep Dives in December '19 and December 2020. And it reflects, frankly that we're running a bigger company in revenue terms. And that speaks to the success of the transformation that we've driven, that were significantly ahead of where we thought we'd be at the time. And naturally, that's come with some higher expenses. So if I walk you all the way from the 16.7 that we talked about now approaching two years ago in the December 20 Deep Dive to a number that's essentially flat to this year, it's plus or minus €2.5 billion that you need to explain.

The first is FX, we talk about that a lot, but it impacts both the revenue and the expense line in this case, in the expense is about €600 million. And then we've also talked, as you know, at great length about the bank levies and the Single Resolution Fund, together with deposit insurance in Germany and that is about €400 million relative to our assumptions in December 2020. So a billion if you like on those two things that are just mechanical or outside of our control.

We would estimate another call at €400 million relative to the VAN assumptions on bonus and retention so variable compensation, that that also coheres with the revenue picture. As Christian's noted, that that it still depends on decisions we make for the year, the performance in the back half of the year, but broadly speaking is a driver of this difference. And then we've invested about a billion more than we expected in IT and controls. And that's where you see us really focused on the importance of these investments to the company going forward. We just -- and we started talking about this well over a year ago now, it's just would be the wrong decision for the future of the franchise to have been reducing those investments more than we have.

Now, that has been a surprise to us how far we needed to go, but we think it's the right investment for the future. And then plus or minus, we've had some additional savings that we've been able to identify, as you know, and we've invested some of that in business and revenue oriented investments in the front office. Actually, across a number of businesses you've heard us talk about that. So that's a rough picture of the movements. As I say, a lot of it is problematic with running a bigger company. And then the rest of it is IT and controls that we think are absolutely critical investments for the future.

Christian Sewing

And Kian, thanks for your question. And absolutely thoughtful. But let me also a little bit go to Page 2 of our presentation, because if you see the four businesses and compare that to the targets, which we have given out in the IDD in '20 and in '19, actually, you see that on the investment bank on the private bank in asset management, we are actually after six months from a cost income ratio, there where we wanted to be at the end of the year, where we are not yet fully there is in the corporate bank. But I deliberately said that I think after the 26% year-on-year revenue growth, I see a further trajectory in Q3 and Q4.

Also, based on the NIM comments from James, that I do believe we have a very fair chance to also get very close to that. So what you see is actually that what James just said that the costs which are so to say then above the 70% went into investments into controls, into regulatory remediation, which all will also result obviously in further automation. And that is then the next lever which is paying off in '23, '24, '25, that we come to the 62.5%. You see the businesses are already there with their divisional cost income ratio.

But the investments and the uncontrollable part, which falls away if you just think about the bank levy, something like that, for instance. But the other investments will fall away. And we'll get actually further automation. But Page 2 of the presentation, it's very important to see exactly on the right trajectory to get there where we want it to be.

Kian Abouhossein

It's very helpful. If I may just one more follow-up. Assuming that the revenues don't end up at €30 billion, but let's say significantly lower than what you're expecting this year. Let's say €25 billion. How much flexibility are you really having in the cost space?

Christian Sewing

I think we both want to answer that, because a -- but I understand also that hypothetical question. I cannot see based on the trajectory of the businesses, the regain market share the momentum. Honestly, the passion in this company that client feedback we have, I cannot see a scenario that we end up with €25 billion, but I mean, if we take that scenario, of course, we would react on the compensation side. I mean, more than 60% of our costs are at the end of the day FTE costs and compensation costs. And you will see then, obviously, that what we -- I think have done quite well with Project Cairo in 2019.

Of course, in case our revenues are so far away from that what we expect it, investments would be cutback and that is a significant amount. And at the same time, again, you will see the payoff of the other investments into our control functions into the front to back processes, which will also reduce the cost line. So I would say then we on a completely different scenario, which again, I cannot even see at all, but these two items James would be immediately prone to be cut back.

James von Moltke

The only thing I would add is the interest rate environment as we talked about earlier, is suggesting the opposite that the direction of travel on revenues is better than we anticipated in March now. There's maybe an offset in the near term in terms of volume growth, if the economy is weaker than then we were then thinking, but that's all going to depend on the length of a downturn and the severity of downturn and how quickly we get back to growth after such a thing.

But our starting point is basically a billion better than we then we thought in March, which is a lot of room to absorb some volume shortfall relative to our then assumptions.

Kian Abouhossein

I think it's just assuming potential dislocation, let's say in the fixed income markets, which clearly would impact your revenues. I was thinking more from that perspective, but by year your NII, hearing upside. Thank you.

James von Moltke

Thank you, Kian.

Operator

The next question is from Magdalena Stoklosa from Morgan Stanley. Please go ahead.

Magdalena Stoklosa

Thank you. Thank you very much. And good afternoon. I've got two questions. One is about your lending and another one FIC trading. So let's start with the lending side. Could you give us a sense? Where are your recent loan growth, particularly in the corporate and investment bank? Because you've been growing quite nicely quarter-on-quarter? Where's the demand coming from? Could you give us a sense either by sector or by product? And also, could you give us a sense, what sort of pricing are you commanding kind of more recently, and how the front book spreads are looking like literally across the book, if you could? So that's question number one.

And number two, on the FIC trading, kind of from a mix perspective. We have seen, literally here today, that kind of strength of the macro and affects business at the expense, of course of the credit trading. Do you believe that the second half of the year is likely to look similar in terms of just kind of trend? Thank you.

James von Moltke

Sure. Thanks, Magdalena. James, I'll start again. And Christian may add. So lending growth, you've seen has been actually strong across all three lending businesses, so Corporate Bank, Investment Bank and the Private Bank, something we would expect to continue certainly that those are the trends that we're seeing. In Corporate Bank, it's been in really trade finance. And we expect that to continue, obviously, that may be affected by macroeconomic conditions. But there's also some drivers in terms of just demand side from corporates longer supply chains, the need to bring manufacturing onshore, those types of things that have driven demand, and we think will continue.

In the investment bank in structured financing, we see real demand, our financing business, as you know, has been a leader in this market for a while and frankly, we see more demand, and we really are prepared to fill in terms of our risk appetite with good front book spread. So we think right now that that environment is very favorable.

The Private Bank has also been growing, remains a little bit more heavily related to mortgages than we would perhaps like. But the mortgage spreads have now recovered. You'll recall, there was a bit of a lag in the repricing and March through May, but in June, we look to have recovered that. We'd like to see that momentum continued. So, still healthy growth in all three within risk appetite and with front book spreads in frankly, still improving.

In fixed trading, from where we sit right now, we would expect those trends to continue into the second half. So we think, the macro environment will remain -- will drive volatility in the second half. We think that we'll probably see trends emerge as the market sort of takes a view on the direction of economic activity and monetary policy. And we do think credit remains weak for a while. That will stabilize or normalize at some point. The credit markets will adjust to the move in spreads. They'll be -- there's a lot of primary market, if you like by side demand out there. And so we would expect a normalization of the credit market, but not clear how long it takes for that to, to manifest itself.

Magdalena Stoklosa

So James, can I just confirm that, if we're going to see the continuation of the current lending trends, you're kind of going to end up depending on a division with a loan growth in 2020 to either high single-digits or kind of even teams and potentially even higher in the investment bank, which you effectively see as properly priced at the moment?

James von Moltke

Yes, I wouldn't say high single-digits, low teens. That I doubt Magdalena. We thought about sort of mid-single-digits, when we talked in March, and that would probably still be our view. And if there's softness, it would be 4% instead of 5% is our current view.

Magdalena Stoklosa

Okay, thank you.

James von Moltke

Yes, we feel good about the lending business.

Magdalena Stoklosa

Thanks very much for that. Thank you.

Operator

The next question is from Amit Goel from Barclays. Please go ahead.

Amit Goel

Hi, thank you. Just a follow-up question. I just want to check in the outlook section on the main report, it talks about the investment bank revenues being flat year-on-year, which is I guess previously at Q1, you said higher clearly have delivered more, and you're still talking about the 2 to 2.5 per quarter. So I just wanted to check if that's an intentional kind of change in tone there. And if so, what's driving it? Especially I would have thought the currency effects would have also been helping on that.

James von Moltke

Yes, Amit. So yes, intentional. There's -- it really reflects the ongoing softness in origination advisory. So that's continuing as we see it in the second half our earlier expectations had been, for recovery at some point this year. And also, obviously, leveraged debt capital markets is going through a cycle as we speak. And that impacts our view of the second half.

Remember that having taken that outlook down a little bit, it's still represents, it's something that's essentially flat to last year, a revenue in the call it high nines for IB. So, it remains a strong performance, but a little bit of softening relative to our views in earlier this year and April.

Christian Sewing

And let me also add, James. I mean, last year, we talked about the one specific transaction, which obviously some of you called out as an extraordinary one, which is not part obviously this year. And in this regard it -- I would say it's a very strong development of the investment bank. And I think this needs to be taken into account when you compare last year and this year.

Amit Goel

Okay, thanks. But so you'd be expecting less than €2 billion in revenues per quarter for the rest of this year?

James von Moltke

It's in the margin. We have to wait and see, Amit. But we are -- yes, it's in the margin of variation, if you like.

Amit Goel

Okay. Thank you.

Operator

The next question is from Anke Reingen from RBC. Please go ahead, ma'am.

Anke Reingen

Yes, thank you very much for taking my questions. The first is on just looking on the cost and the 2025 cost path, just looking beyond '22. And what you previously disclosed on the IDB about your 2025 expectations. I just wondered given you somewhat change in 2020 to start in base. Should we be thinking about the moving past the pass to 2025 being more back and loaded, given your term inflation and investments versus the cost savings coming through? And are we still the €18.5 billion and €19 billion you put on the slides? Is that still an absolute number that you still sort of like we should be focusing on or looking at or should the focus really just be on the cost income ratio of 62.5%?

And then secondly, on the gas shutoff. Thank you very much to putting a number out there. I just have 20 basis points just seems to be I mean, it's obviously good news, but seems like a very small impact. And I just wondered if you're willing to share your GDP assumptions to derive to the 20 basis points set. And if it's just really, I mean, I guess 20 basis points is €1 billion in absolute charge. So it's the focus more about the potential risk to revenues, as an consumer and business confidence slows down. And I was wondering if you're happy to share anything you're seeing in terms of the recent momentum indicators, obviously, you were more downbeat on in terms of confidence, if you're already seeing this and would use demand for loans, for example. Thank you very much.

James von Moltke

So Anke in terms of the forward to 2025, look we haven't done a drains up re-forecast of the next several years, look, there's probably going to be more pressure in the early years than we might have liked. We talked about the Unity issue in '23, perhaps the impact of inflation. But as Christian talked about, the structural cost measures that we're executing on are very tangible, we're investing in them and executing as we speak. So we feel very comfortable about the direction of travel there, much as I said about Unity, the destination is the same.

Remember, on the revenue side, we're looking at I think on the interest rate side alone, higher revenues. So from a cost to income ratio perspective, we see no need to change our views, higher revenues, particularly given an inflationary or higher rate environment would of course, support higher expenses. But again, it's early to talk about that on a drains up basis, we have already built in some conservatism in what we took in Q2, relative to the macroeconomic variables that we disclose in our interim report.

So our step off includes a slightly weaker environment, which I think is appropriate to the current view, we then stressed, all of our variables by two standard deviations, which we think is appropriately stressful, in particular, given that what we've done is taken a stress across all of the variables, whereas in fact, most of the stress will be in a handful of the variables that feed into our models. So we do think it is, it's appropriately stressful, it's not easy to translate into a simple GDP number. For the reason that there are so many macroeconomic variables that feed into it.

And it's sort of a global model rather than just Germany. As you say, it's a very manageable number for us in terms of this downside risk, which is why, A, we were forced to share it to share it, given some of the disclosure requirements this quarter, but we felt it was important to share it, because there was a whole lot of work that went into trying to assess this, and we think it's important information for our investors to share what we think the severity of this scenario is.

Christian Sewing

Let me, I think it's a good question on your consumer also demand side, also from the corporates, what we see for the time being, and James alluded to that, that actually we have more demand on the lending side than we are filling for the time being because it's not only the gas situation, the German corporates are actually dealing with they are reorganizing their supply chains. They are looking about how can they hedge themselves according to or to the volatilities, which we see on the right side on the FX side. And I have to say, and that's what I meant with the client feedback, we have the interaction we have on the clients in order to manage exactly those volatilities to help them to navigate their supply chains. I mean, that is I think our strengths from a product suite but also from a regional setup that if there is a German bank, which can actually provide the advice on reordering supply chains, it's us and therefore the magnitude of issues which are happening and provide certain uncertainties to our clients is actually an enabler for us in the business. And that we see on the private banking side in particular in the wealth management business, but in particular, also on the corporate side, asking actively for our advice. So to be honest, A more loan demand than we feel, B, the other advice activities we're doing is very, very active.

Anke Reingen

Okay, thank you very much.

James von Moltke

Thank you, Anke.

Operator

The next question is from Jeremy Sigee from BNP. Please go ahead.

Jeremy Sigee

Thank you. Two questions, please. First one very related to the last discussion. Are you seeing any interest from regulators relating to the gas stop scenario. For instance, to say, let's take your 20 bps scenario, and get the banks to provide for it on a precautionary basis so that we've got a strong banking system already provided for that scenario going into it. Did you have any discussions around that? And then my second question is a more standard regulatory question really was just about RWA's? Do you see any moving parts in the RWA's, particularly in the second half of this year, either from market risk RWAs normalizing down giving you some help or from any sort of inflation elements in RWAs?

James von Moltke

Okay, let me take the first question. And there is a clear no, I think there is the right level of interest of the regulators exactly to the scenarios we are running. And that is obviously normal. And we are in a close dialog with the regulators. And I think they appreciate our transparency, how we risk management our positions and what kind of scenarios we're calculating. But there is no such thing to kind of now book something upfront for a certain scenario.

I also do believe that when it comes to us, there is good experience with our risk management when it came to previous issues like the pandemic. And hence the transparency we provide, at least at this point in time, I can tell you is sufficient to the regulatory requirements we get.

Christian Sewing

And Jeremy it seems on RWA, as you know, whenever the markets gets dislocated, as they've done, you see a couple of impacts market risk RWA tends to go up as it did for us this quarter based on both volatility in the metrics and the outlier test. You also see pressure on capital from additional valuation adjustments from AVAs which have climbed altogether about €400 million this year so far. And then you see some rating migration impacts that come through, including in this case, obligors, like any Russian related credits that go into the calculation. So you do see pressures, as you saw in COVID, they alleviate over time, but it's hard to judge exactly when, so how much of that capital we get back and how soon is hard to judge.

But for now we're living with what I hope is the high point of the RWA impact of this environment. How much comes back, we'll see there's some organic growth that we expect in the second half, which we see as being funded from earnings. And then just to round out the picture, we've talked about Reg inflation, always as time goes by, you have a little bit more visibility. Right now we'd expect about 10 basis points in the back half of the year on that. And the rest of the model work that we're doing right now appears to us to be to be '23 events. So that's kind of how we're looking at the RWA and the capital picture in the back half of the year.

Jeremy Sigee

That's very clear. Thank you very much.

Christian Sewing

Thank you, Jeremy.

Operator

The next question is from Andrew Coombs from Citi. Please go ahead.

Andrew Coombs

Good afternoon. Two questions as well, please. Firstly, I thank you for doing the walk between the cost guidance you gave originally and the cost today. I was wondering if you could do something similar on headcount please. Because when you originally set the headcount target in 2019, I think it was to fall from 92 to 74,000. And you're still at 83,000 today, so should know what the delta is. I assume it's corporate and others that would be interested. And then the second question, just on net interest income, I believe the guidance that you gave include the impact of losing material and excess reserves, also includes the step change in deposit charging, but doesn't include the run-off of the TLTRA. So if you could just confirm that and also the current TLTRA contribution. Thank you.

Christian Sewing

So Andrew, thanks for the questions. On the last question, yes the disclosure on Page 44 now includes TLTRO. And the earlier disclosure in March I think excluded the impact. So a little bit of changes and how we're providing the data but hopefully that clarifies a little bit.

Andrew Coombs

And to guidance, you gave on a cumulative basis, was that including or excluding?

Christian Sewing

Well, TLTRO at the end by 25 is out anyway. So, that's only a factor into 23 and a little bit of run-off in '24. So at this point, the numbers I gave you the 700, and the high twos, those are both unaffected by TLTRO. But as I say, there's a lot of I mentioned, there's a lot of curious elements that are going on, because you have to trace through not just TLTRO, the peering deposit charging, and also the impact of our hedging, that has brought forward some of the impact of the rising curve in the sort of middle and long end. So lots of dynamics going on, but broadly, it's all beneficial.

Look on the headcount, we talked about this a little bit of the IDD and the answer is, one, we're running a bigger company, as we talked about earlier, to the walk on expenses. And I would argue that that represents maybe half of the miss. So we're missing by sort of 9,000 against right currently against the 74,000. And I would put it in two buckets, running a bigger company, we've had to make investments in controls and IT, that we've talked about. And the other half is that we essentially underestimated the amount of internalization that we assumed.

So since we started this, we've now internalized almost 5,000 positions. And that's why you see sort of a variance between what we might have thought originally was in compensation, cost reductions versus non-comp. And that's just been a swing, but I would attribute basically the 9,000 miss if you like to those two factors, call it 50:50.

Andrew Coombs

That's great. Thank you.

Christian Sewing

Thank you, Andy.

Operator

The next question is from Andrew Lim from Societe Generale. Please go ahead.

Andrew Lim

Hi, good afternoon. Thanks for taking my questions. So back to NII, on Slide 44, you can forecast, and I guess one observation is that the Fed Reserve curve, the peak there is higher. But thereafter, the markets factoring cuts in '23 onwards, and I was wondering how that translates into your NII expectations. So does that mean that your NII will peak at an early rate and then start maybe coming down in terms of margin compression as the Fed funds rate comes down? And then secondly, question on the scenario for Russia cutting off gas for Germany, it is helpful that you've given loan loss rate guidance there, but I was thinking more holistically, what would happen to your ROTE. Have you stressed, what would happen to loan growth and revenues? And how sticky costs would be and then how should we think about that scenario for your return on tangible asset value if that transpires?

Christian Sewing

So Andrew on the second one, no, we haven't looked at there's been a lot going on this quarter. So I couldn't tell you, all of the impacts of that scenario, we've been very focused on the managing the risk side of it over the past little while. So we'll have to come back to you in time on that question. On the first, yes, it's an interesting dynamic look, one thing that we talked a lot about back in March is our exposure is to the short dollar and the long euro in principle, so what you'd see in the scenario question that you outlined is, yes, we get a lift in the early stages of this cycle from the dollar, and then is that perhaps begins to wane, although not by much, if you look at the curve on Page 44, you would see I think, the Euro benefits beginning to kick through.

So that's how we would look at the dynamic here, you can see that a little bit on Page 43 as well in the 25 basis point versus the forward curve sensitivity that we show there. And you can see that it's almost no Euro sensitivity in the early days. But a lot at the back end and the opposite is true, the U.S. dollar is marginal and doesn't move much between 22 and 25.

Andrew Lim

That's great. Thank you.

Christian Sewing

It is pleasure.

Operator

There are no further questions at this time, and I would like to turn back to Ioana Patriniche for closing comments.

Ioana Patriniche

Thanks for joining us for our second quarter 2022 results call and for your questions. Please don't hesitate to reach out to the Investor Relations team with any follow-up as usual and with that, we look forward to speaking to you in our third quarter results in October. Thank you.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.