Funding Strategy

Funding

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 come from capital markets and equity, retail, and transaction banking clients. Other customer deposits and secured funding and short positions are additional sources of funding. Unsecured wholesale funding represents unsecured wholesale liabilities sourced primarily by our Treasury Pool Management. Given the relatively short-term nature of these liabilities, they are primarily used to fund liquid trading assets.

To promote the additional diversification of our refinancing activities, we hold a license allowing us to issue mortgage Pfandbriefe. In addition, we have established a program for the purpose of issuing Covered Bonds under Spanish law (Cedulas).

Unsecured wholesale funding comprises a range of unsecured products, such as Certificates of Deposit (CDs), Commercial Papers (CPs) as well as term, call and overnight deposits across tenors primarily up to one year.

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

Structural Funding

Deutsche Bank’s primary tool for monitoring and managing longer term funding risk is the Funding Matrix. The Funding Matrix assesses the Group’s structural funding profile for the greater than one year time horizon. To produce the Funding Matrix, all funding-relevant assets and liabilities are mapped into time buckets corresponding to their contractual or modeled maturities. This allows the Group to identify expected excesses and shortfalls in term liabilities over assets in each time bucket, facilitating the management of potential liquidity exposures.

The liquidity profile is based on contractual cash flow information. If the contractual maturity profile of a product does not adequately reflect the liquidity profile, it is replaced by modeling assumptions. Short-term balance sheet items (<1yr) or matched funded structures (asset and liabilities directly matched with no liquidity risk) can be excluded from the term analysis.

The bottom-up assessment by individual business line is combined with a top-down reconciliation against the Group’s IFRS balance sheet. From the cumulative term profile of assets and liabilities beyond 1 year, long-funded surpluses or short-funded gaps in the Group’s maturity structure can be identified. The cumulative profile is thereby built up starting from the greater than 10 year bucket down to the greater than 1 year bucket.

The strategic liquidity planning process, which incorporates the development of funding supply and demand across business units, together with the bank’s targeted key liquidity and funding metrics, provides the key input parameter for our annual capital markets issuance plan. Upon approval by the Management Board the capital markets issuance plan establishes issuance targets for securities by tenor, volume, currency and instrument. We also maintain a stand-alone U.S. dollar and GBP funding matrix which limits the maximum short position in any time bucket (more than 1 year to more than 10 years) to € 10 billion and € 5 billion respectively. This supplements the risk appetite for our global funding matrix which requires us to maintain a positive funding position in any time bucket (more than 1 year to more than 10 years).

Funding Markets and Capital Markets Issuance

2018 has been a challenging year for credit markets. The transition from Quantitative Easing to Quantitative Tightening combined with an increased macro uncertainty led to higher volatility and credit spreads.

Our 5 year CDS traded within a range of 65 to 224 basis points. The peak was observed in the beginning of December, since then, the spread has declined and as of year-end was trading at 208 basis points. The spreads on our bonds exhibited similar behavior . For example, our 2.375 % EUR benchmark maturing in January 2023 traded in a range of 51 to 259 basis points, closing at 230 basis points at year end 2018.

Our revised 2018 issuance plan of € 20-22 billion, comprising debt issuance with an original maturity in excess of one year, was completed and we concluded 2018 having raised €19.8 billion in term funding. This funding was broadly spread across the following funding sources: Senior non-preferred plain-vanilla issuance (€ 9.4 billion), senior preferred plain-vanilla issuance (€ 1.0 billion), covered bond issuance (€ 2.5 billion), and other senior preferred structured issuance (€ 6.9 billion). The (€ 19.8 billion) total is divided into Euro (€ 8.3 billion), US dollar (€ 9.7 billion), British Pound (€ 0.3 billion) and other currencies aggregated (€ 1.5 billion). In addition to direct issuance, we use long-term cross currency swaps to manage our non-Euro funding needs. Our investor base for 2018 issuances comprised asset managers and pension funds (40%), retail customers (19%), banks (8%), governments and agencies (5%), insurance companies (3%) and other institutional investors (18%). The geographical distribution was split between Germany (20%), rest of Europe (35%), US (25%), Asia/Pacific (15%) and Other (5%).

The average spread of our issuance over 3-months-Euribor (all non-Euro funding spreads are rebased versus 3-months Euribor) was 60 basis points for the full year and lower compared to 71 basis points average spread in 2017. The average tenor was 6.1 years. Our issuance activities were higher in the first half of the year. We issued the following volumes over each quarter: Q1: € 10.8 billion, Q2: € 3.0 billion, Q3: € 3.2 billion and Q4: € 2.8 billion, respectively.

In our Q1 2019 Fixed Income Call we announced a reduction for our issuance plan to € 15-20 billion (from originally € 20-25 billion published with the Annual Report 2018) 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 2019.
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