The third quarter of 2006 was a landmark for Deutsche Bank, both financially and strategically. Financially, we delivered very solid results, with record net income, despite market conditions which were less buoyant than in the third quarter last year. As a result, profits for the first nine months of this year have already surpassed the full-year total for 2005. Strategically, this quarter was further hallmarked by the launch of the third phase of our management agenda.

  During the quarter, the world’s financial markets saw a return to relative stability after the volatile conditions earlier in the year. Stock market indices, in both mature and emerging markets, reflected growing investor confidence, as slowing real growth in the U.S. economy and easing energy prices contributed to a more benign inflation outlook. Nevertheless, levels of market activity were lower in some areas, consistent with typical seasonal patterns for July and August, and in contrast to the exceptionally strong conditions of the third quarter of last year.

  Net revenues for the quarter were € 6.4 billion. Income before income taxes was € 1.8 billion, while net income rose 25% to € 1.2 billion, our best for any third quarter. Pre-tax return on average active equity, per our target definition, was 26%, while diluted earnings per share were € 2.45. This performance follows a very successful first half year, resulting in higher performance figures for the first nine months compared to those for the full year 2005. Nine-month income before income taxes reached € 6.3 billion, and net income was € 4.2 billion. Pre-tax return on average active equity, per our target definition, was 32% while diluted earnings per share were € 8.11.

  In the Corporate and Investment Bank (CIB), underlying pre-tax profits were € 1.1 billion. Revenues in Sales & Trading (Debt and other products) were the best ever for a third quarter, driven by strong performances in the structured Credit and Rates businesses as well as Money Markets. Revenues in Sales & Trading (Equity) were 32% lower than in the third quarter of 2005, primarily reflecting lower revenues in proprietary trading, which nevertheless returned to profitability after a loss in the second quarter this year. Origination and Advisory revenues were up 12% versus the third quarter last year, driven by our best-ever quarter in Advisory and strong growth in Debt Origination. Underlying pre-tax profits in Global Transaction Banking rose 25%, with solid revenue growth in both Cash Management and Trust & Securities Services.

  In Private Clients and Asset Management (PCAM), underlying pre-tax profits were € 436 million, slightly lower than in the third quarter 2005. PCAM’s invested assets rose by € 35 billion during the quarter including net new money of € 13 billion, our best net new money growth for six quarters. In Assetand Wealth Management (AWM), revenues were slightly below last year’s third quarter, primarily reflecting the sale of our UK business. However, the sale also reduced costs which partially offset investment spending in AWM. Private Wealth Management took a significant step forward in the important UK market with the acquisition of Tilney Group, which we announced in October.

  In Private & Business Clients (PBC), growth in revenues from loans and deposits was partly offset by lower brokerage revenues, while costs reflected PBC’s continued investments in both mature European and emerging markets. Our acquisition of norisbank, announced during the quarter, gives PBC a substantially-enhanced platform in consumer banking in Germany, with a strong secondary brand and access to approximately 300,000 new clients via a network of 98 branches. This acquisition, together with that of Berliner Bank, further underlines our commitment to profitable growth in our home market.

  During the third quarter we made progress on all dimensions of our capital management strategy which combines the funding of business growth and maintaining capital strength with generating attractive returns for our shareholders. Risk-weighted assets increased by € 9 billion to € 271 billion, but we also increased our Tier 1 capital ratio to 8.9%. We continued to repurchase shares, albeit in considerably lower volumes than in previous quarters, reflecting the capital requirements of our recent acquisitions.

  Since 2002, Deutsche Bank has followed a focused management agenda with clear financial targets. We have now successfully delivered on the first two phases of our strategy. The first phase by focusing our platform, while the second phase saw us growing our core businesses and achieving pre-tax return on equity of 25%.

  At the end of the quarter, we launched the next phase of our management agenda: leveraging our global platform for accelerated growth. Phase 3 of our management agenda has four core elements:

• We aim to maintain cost, risk, capital and regulatory discipline;
• we will continue to invest in our core businesses, both via organic growth and via incremental acquisitions;
• we will continue to grow our Global Transaction Banking and Private
• Clients and Asset Management businesses, whose earnings are valued highly by the capital markets; and
• we will build on our competitive edge in Corporate and Investment Banking.

  Above all, we will unlock the true value of Deutsche Bank’s business model by taking advantage of synergies across mutually-supporting businesses. This strategy plays to our existing strengths. We are one of the most global of any major bank, with a presence in 73 countries and a very strong franchise in fast-growing emerging markets. We are leading providers to some of the most important client groups in financial services, and our strong risk discipline gives us scope for business expansion.

  Phase 3 of our strategy also includes clear financial goals. Our vision for 2008 contemplates a pre-tax profit of € 8.4 billion, while at the same time delivering on our published over-the-cycle objectives of double-digit growth in diluted earnings per share, and a sustainable pre-tax return on average active equity of 25%. Achieving these targets will also enable us to continue with an attractive dividend policy.

  Looking forward, we have been encouraged to note that the acceleration of business activity which we saw in September continued into October. The corporate pipeline is strong. Global financial markets remain robust. Fundamental momentum in the world’s emerging financial markets has reasserted itself. In addition, we continue to strengthen our business with our private clients, and to reap returns on investments in our platform. We are confident that if the economic and financial market environment remains stable, we will sustain our profitable growth momentum, deliver on our financial targets, and continue to create superior value for our shareholders as we embark on this new phase of our strategy.

  Yours sincerely,

Josef Ackermann
Chairman of the Management Board and
the Group Executive Committee

 

Frankfurt am Main, November 2006