Funding Strategy

Funding

Funding Diversification

Diversification of our funding profile in terms of investor types, regions and products is an important element of our liquidity risk management framework. Our most stable funding sources for which the Bank has introduced a minimum risk appetite stem from capital markets issuances and equity, as well as from 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 team. Given the relatively short-term nature of these liabilities, they are predominantly used to fund liquid trading assets.

To promote the additional diversification of our refinancing activities, we hold a license to issue mortgage Pfandbriefe. We continue to run a program for the purpose of issuing Covered Bonds under Spanish law (Cedulas) and participate in the TLTRO III program. Additionally, we expanded in 2020 our potential investor base by introducing our Sustainable Finance Framework and issued a Green Bond in June 2020.

Unsecured wholesale funding comprises a range of institutional products, such as Certificate of Deposits (CDs), Commercial Papers (CPs) as well as Money Market deposits.

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.

Funding Risk Management

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) are 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.

Funding Markets and Capital Markets Issuance

2020 was dominated by the COVID-19 pandemic. Unprecedented circumstances and general uncertainties about the global economy’s trajectory added volatility to credit markets. Credit spreads peaked in March 2020 and have declined since then with the support of monetary policy and fiscal stimulus and trade roughly flat at the end of 2020 compared to the beginning of the year.

DB’s spreads exhibit a similar behavior, but were able to outperform peers’ credit spreads year on year. Our 5 year Credit Default Swap (referencing preferred debt) contract peaked on March 18, 2020 at 141bp and closed on December 31, 2020 at 57 bp, outperforming peers by 13 bp y-o-y. In the bond markets, our senior non-preferred 2.625 % EUR benchmark maturing in February 2026 closed at 107bp over Euro Mid Swaps at the end of 2020, 43bp tighter than one year before and outperforming peers by 40 bp.

Our revised 2020 issuance plan of € 10-15 billion, comprising debt issuance with an original maturity in excess of one year, was completed and we concluded 2020 having raised € 18.5 billion in term funding, already prefunding part of our 2021 issuance plan. This funding was broadly spread across the following funding sources: AT1 issuance (€ 1.0 billion), Tier 2 issuance (€ 1.7 billion) senior non-preferred plain-vanilla issuance (€ 11.6 billion), senior preferred plain-vanilla issuance (€ 1.0 billion), covered bond issuance (€ 0.5 billion), and other senior preferred structured issuance (€ 2.7 billion). The (€ 18.5 billion) total is divided into Euro (€ 8.8 billion), US dollar (€ 8.3 billion), British Pound (€ 0.7 billion) and other currencies aggregated (€ 0.7 billion). In addition to direct issuance, we use long-term cross currency swaps to manage our non-Euro funding needs. Our investor base for 2020 issuances comprised asset managers and pension funds (58 %), banks (12 %), retail customers (10 %), insurance companies (4 %) and other institutional investors (13 %). The geographical distribution was split between Germany (15 %), rest of Europe (45 %), US (23 %), Asia/Pacific (9 %) and Other (8 %).

The average spread of our issuance over 3-months-Euribor/Libor was 210 basis points for the full year. The average tenor was 6.9 years. Our issuance activities were slightly higher in the second half of the year. We issued the following volumes over each quarter: Q1: € 5.6 billion, Q2: € 3.3 billion, Q3: € 4.9 billion and Q4: € 4.7 billion, respectively.

In 2021, our issuance plan is € 15-20 billion and comprises capital instruments, senior non-preferred, senior preferred and covered bonds. 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 2021.

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