Funding Diversification

Diversification of our funding profile in terms of investor types, regions, products and instruments is an important element of our liquidity risk management framework. Our most stable funding sources are capital markets and equity, retail, and transaction banking clients. Other customer deposits and borrowing from wholesale clients are additional sources of funding. Unsecured wholesale funding represents unsecured wholesale liabilities sourced primarily by our Global Liquidity Management business. Given the relatively short-term nature of these liabilities, they are primarily used to fund cash and liquid trading assets.

To promote the additional diversification of our refinancing activities, we hold a Pfandbrief license allowing us to issue mortgage Pfandbriefe.

In 2014, we reduced our overall funding volume in line with the broader balance sheet de-leveraging. Total external funding declined by € 64 billion (6.5 %) during the year of which the majority came in our CB&S business, in particular we reduced secured funding and shorts by
€ 69 billion (46 %), other customers by € 23 billion (24 %) and unsecured wholesale funding by
€ 19 billion (26 %). We also saw smaller reductions from financing vehicles (€ 7 billion, 37 %). These reductions more than offset the increases in capital markets and equity (€ 29 billion, 16 %), retail clients (€ 19 billion, 7 %) and transaction banking (€ 6 billion, 4 %). The overall proportion of our most stable funding sources (comprising capital markets and equity, retail, and transaction banking) increased from 66 % to 76 %.

Unsecured wholesale funding comprises a range of unsecured products e.g. Certificates of Deposit (CDs),Commercial Paper (CP) as well as term, call and overnight deposits across tenors primarily up to one year. Asset-Backed Commercial Paper (ABCP) issued through conduits is included within Financing Vehicles.

The overall volume of unsecured wholesale funding and secured funding fluctuated between reporting dates based on our underlying business activities. These fluctuations are dependent on client-related securities financing activities as well as changes in liquid trading inventories during the quarter.

To avoid any unwanted reliance on these short-term funding sources, and to promote a sound funding profile at the short end, which complies with the defined risk appetite, we have implemented limit structures (across tenor) to these funding sources, which are derived from our monthly stress testing analysis. In addition, we are setting a limit on the total volume of unsecured wholesale funding to manage the reliance on this funding source as part of the overall funding diversification.

The following chart shows the composition of our external funding sources that contribute to the liquidity risk position, both in EUR billion and as a percentage of our total external funding sources.


Funding Matrix

We map all funding-relevant assets and all liabilities into time buckets corresponding to their economic maturities to compile a maturity profile (funding matrix). The funding matrix is compiled on an aggregated currency basis, as well as for selected individual currencies and legal entities. Given that trading assets are typically more liquid than their contractual maturities suggest, we determine individual liquidity profiles reflecting their relative liquidity value. We take assets and liabilities from the retail bank (mortgage loans and retail deposits) that show a behavior of being renewed or prolonged regardless of capital market conditions and assign them to time buckets reflecting the expected prolongation. Wholesale banking products are included with their contractual maturities.

The funding matrix identifies the excess or shortfall of assets over liabilities in each time bucket, facilitating management of open liquidity exposures. The funding matrix analysis together with the strategic liquidity planning process, which forecasts the funding supply and demand across business units, provides the key input parameter for our annual capital market issuance plan. Upon approval by the Management Board the capital markets issuance plan establishes issuing targets for securities by tenor, volume and instrument. We also maintain a stand-alone U.S. dollar funding matrix which limits the maximum short position in any time bucket (>1 year to >10 years) to € 10 billion. This supplements the risk appetite for our aggregate currency funding matrix which requires us to maintain a positive funding position in any time bucket (>1 year to > 10 years). Both funding matrices were in line with the respective risk appetite as of year ends 2014 and 2013. 

Funding Markets and Capital Markets Issuance

2014 was a relatively benign year for bank credit and funding conditions as evidenced by the development of the itraxx Senior Financial Index which peaked at 106 in January, averaged 92 bps over Q1, 75 bps over Q2 and closed the year at 69 bps. Our 5 year CDS traded within a range of 58 to 102 bps, peaking in February. Since then, the spread has declined and as of year-end was trading in the middle of the range for the year. The spreads on our bonds exhibited similar volatility. For example, our 9 year EUR benchmark (2.375 % coupon, maturing in January 2023) traded in a range of 27 to 60 bps, closing near its year lows.

Our 2014 funding plan of up to € 35 billion, comprising debt issuance with an original maturity in excess of one year, was fully completed and we concluded 2014 having raised € 44.1 billion in term funding. The overfulfillment of € 9.1 billion represents prefunding for 2015. This funding was broadly spread across the following funding sources: unsecured benchmark issuance (€ 17.1 billion), Additional Tier 1 benchmark issuance (€ 4.8 billion), unsecured retail-targeted issuance (€ 9.8 billion) and unsecured and secured private placements (€ 12.3 billion). Of the € 44.1 billion total, the majority was in U.S. dollar (€ 22.2 billion). We also issued € 17.8 billion in Euro and smaller amounts in JPY and GBP. In addition to direct issuance, we use long-termcross currency swaps to manage our funding needs outside of EUR. Our investor base comprised retail customers (25 %), banks (19 %), asset managers and pension funds (29 %), insurance companies (6 %) and other, including institutional investors (21 %). The geographical distribution was split between Germany (19 %), Rest of Europe (29 %), US (29 %), Asia/Pacific (16 %) and Other (6 %). Of our total capital markets issuance outstanding as of December 31, 2014, approximately 85 % was issued on an unsecured basis.

The average spread of our issuance over the relevant floating index (i.e., Libor) was 45 bps for the full year with an average tenor of 4.8 years. Our issuance activities were higher in the first half of the year with volumes decreasing in the second half of the year 2014. We issued the following volumes over each quarter: € 8.5 billion, € 16.3 billion, € 11.4 billion and € 7.9 billion, respectively.

In 2015, our base case funding plan is € 30 to 35 billion which we plan to cover by accessing the above sources, without being overly dependent on any one source. We also plan to raise a portion of this funding in U.S. dollar and may enter into cross currency swaps to manage any residual requirements. We have total capital markets maturities, excluding legally exercisable calls of approximately € 22 billion in 2015.

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