Deutsche Bank AG (NYSE: DB) Q1 2020 Earnings Call Transcript

Deutsche Bank AG (DB) Q1 2020 earnings call dated Apr. 29, 2020

Corporate Participants:

James Rivett — Head of Investor Relations

Christian Sewing — Chief Executive Officer

James von Moltke — Chief Financial Officer

Analysts:

Daniele Brubacher — UBS — Analyst

Jernej Omahen — Goldman Sachs — Analyst

Christoph Blieffert — Commerzbank — Analyst

Andrew Lim — Societe Generale — Analyst

Piers Brown — HSBC — Analyst

Adam Terelak — Mediobanca — Analyst

Magdalena Stoklosa — Morgan Stanley — Analyst

Kian Abouhossein — JP Morgan — Analyst

Stuart Graham — Autonomous Research — Analyst

Amit Goel — Barclays — Analyst

Andrew Coombs — Citi — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the Q1 2020 Analyst Call of Deutsche Bank. [Operator Instructions] The presentation will be followed by question-and-answer session. [Operator Instructions]

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

James Rivett — Head of Investor Relations

Thank you, Emma and thank you all for joining us. As usual on our call, our CEO, Christian Sewing will speak first followed by our Chief Financial Officer, James von Moltke. The presentation is always is available for download in the Investor Relations section of the — 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 — Chief Executive Officer

Thank you, James, and good afternoon and welcome from me. I hope that you and your families are all safe and healthy. This is an extremely difficult time for everyone. And at this stage, we do not have full visibility on how the situation will develop. This is the perfect Black Swan event, an event none of us has experienced in such a dimension before. But it is in times like these, that our bank can prove it’s resilience, it’s experience and moreover its value to society and all our stakeholders.

And I’m proud of the way the bank has responded. The investments that we have made into our technology have supported our operational resilience with the majority of our employees working from home. With our refocused strategy, we are now operating in businesses with leading positions providing industry-leading solutions. This means we are at the center of the dialog with our clients at a time when they need us most. We are very happy with our performance in the quarter and we outperformed our expectations for both revenues and costs, specifically in the core bank. Our client franchise is absolutely intact. We have not let the recent turbulence distract us and we have continued to execute in a disciplined manner against our cost targets.

As a result we reduced adjusted costs excluding transformation charges and bank levies for the ninth quarter in a row on a year-on-year basis. And we also made solid progress against the strategic priorities set out in July and at the Investor Deep Dive in December. The transformation is even ahead of the plan. We are benefiting from our conservative balance sheet management and this stability is enabling us to support our clients through these difficult times. They are at the center of what we do and the business is on the right track. We are regaining market positions.

The swift and decisive action that the German government has recently taken and the strong fiscal position of the public and private sectors mean that our home economy is well positioned to fight the crisis. We believe this further supports our mission, which we set out when we launched our strategy last year July, to be aligned with the strength of our home market economy. Ten 10 months after the announcements, we are absolutely convinced that our strategy is the right one. As a result we feel well positioned as the leading bank with a global network in Europe’s strongest economy.

Do we underestimate the severity of the challenge facing the global economy? Absolutely not, but with the right strategy, scale and leading franchises globally, a relentless focus on execution, strong balance sheet and with Germany as our home market we believe that Deutsche Bank can strengthen its competitive position in these difficult times. Let me briefly discuss these themes.

While James will go into the details a few words from me on the first quarter performance starting on Slide 2, overall I’m pleased with the progress that we have made in the quarter. Revenues were flat year-on-year with material growth in the Core Bank offsetting the exit of equity sales and trading in the Capital Release Unit. The CRU performed in line with our internal plans. Adjusted grew pre-tax profit increased as lower costs and higher Core Bank revenues offset the higher provisions for credit losses and the drag from the Capital Release Unit.

In the Core Bank, the combination of revenue growth and lower costs generated significant positive operating leverage in the quarter. Core Bank pre-tax profit grew by 32% year-on-year to EUR1.1 billion, excluding specific revenue items, restructuring and severance and transformation charges. This corresponds to a Core Bank pre-provision net revenue of EUR1.8 billion before bank levies. This performance demonstrates the resilience of this company and the progress we are making.

The management team and I are determined to not let the current environment disrupt the execution of our cost reduction plans. We delivered against our internal targets again in the first quarter as you can see on Slide 3. Excluding transformation charges and bank levies, adjusted costs declined by 7% year-on-year to EUR4.9 billion, our ninth quarter in a row of reductions. At the end of the first quarter, we have put 73% of our transformation-related effects behind us. We currently have more than 20 core transformation initiatives in flight and that the responsibility of our management board members, all overseeing and managed by the Chief Transformation Officer. These initiatives will continue despite current market conditions. The progress we have made in the first quarter and the projects underway put us on a good path to achieve or outperform our EUR19.5 billion target for 2020.

Turning now to the Core Bank starting on Slide 4. I’m happy with the progress that our business have made towards the strategic objectives we laid out in December. This progress makes us even more confident that the strategy is the right one. In the Corporate Bank revenues were flat as we offset the pressures from the interest rate environment. The team continue to actively reprice deposits in the first quarter and this puts us on a good track to pass-through negative interest rates to EUR25 billion of deposits in 2020 as part of our 2022 targets.

The Investment Bank grew revenues by 15% with revenues up in both Fixed Income and Origination & Advisory. The first quarter showed further stabilization and improvement in market share in our target segments. In Fixed Income excluding specific items, as well as movement in CVA and FVA, which we have booked in the businesses, FIC revenues would have increased by 25%. Our strategy to refocus our rates and emerging markets franchises in 2019 are working with revenues from our corporate clients growing 30% year-on-year. In Origination & Advisory our strategy is also paying off specifically in Debt Capital Markets where revenues were significantly higher. We increased market share in our European and German franchise to the highest level since 2017.

In the Private Bank, revenues increased by 3%, this growth was supported by the strong performance in Wealth Management, where strategic hiring in prior periods has started to pay off, again consistent with what we told you in December. And in our German and International businesses, we have continued to grow loans and volumes to broadly offset the ongoing interest rate headwinds, this includes the conversion of deposits into investment products with the EUR4 billion net inflow in the quarter. In Asset Management, growth in management fees was offset by interest rate driven changes in the fair value of certain guaranteed funds, despite the market conditions at the end of the quarter DWS has continued to grow assets in core areas, most notably through strategic partnerships and ESG funds. On the cost side, our core businesses also continue to implement their objectives.

Slide 5, shows our adjusted costs excluding transformation charges. In the Corporate Bank, we held costs largely stable in the quarter, excluding the impact of higher internal service cost allocations, which we have discussed in prior quarters. The changes in internal cost allocation are part of the control and technology investments we have made to better steer our businesses and to reduce costs over time. The Corporate Bank also made progress on its strategic initiatives and benefited from reorganization measures implemented last year with particular focus on efficiency optimization in Germany and across infrastructure functions.

In the Investment Bank, cost declined by 15% in part driven by the front office headcount reductions implemented in 2019, as well as lower internal service cost allocations. We made progress on reducing infrastructure cost without further compromising our front office capabilities. In the Private Bank, cost declined by 2% with further progress on the integration of Postbank and Deutsche Bank Retail operations with EUR70 million of run rate synergies now achieved. In Asset Management, cost declined by 7%, as they implement their cost efficiency programs.

Slide 6, to repeat the chart which we have shown you consistently. We have been managing our balance sheet conservatively and intend to keep doing so through this period of volatility. With the 12.8% CET1 ratio at quarter end, we are comfortably above our regulatory requirements, despite absorbing 30 basis points of regulatory headwinds at the start of the quarter. Our January guidance of above 13% for the first quarter would have been conservative, excluding the impact of COVID we would have been at 13.2%. And this sound capital position gives us now scope to continue to deploy resources to support clients in these challenging conditions. As we made clear in our release on Sunday night, it is our deliberate decision and Deutsche Bank’s priority to standby its clients without compromising on capital strength.

We kept our liquidity position strong at EUR205 billion comfortably above regulatory requirements, while providing an additional EUR25 billion in loans to our clients. And our funding position has rarely been stronger than today, we continue to fund our balance sheet through stable sources predominantly our low cost deposit base. Our results also show that we continue to operate with low risk levels, we continue to manage our market risk exposure tightly, our average value at risk of EUR24 million remains low. And we are focused on maintaining strong credit quality, provisions for credit losses increased, reflecting a normalization from historically low levels that we already anticipated in our outlook. We also absorbed the initial impacts of the COVID-19 pandemic. Our EUR4.3 billion of allowances for loan losses or 95 basis points of loans speak for that.

This represents a prudent level of cover relative to our conservative loan book, which we discuss on Slide 7. Our loan books are well diversified across our businesses, client segments and regions. Around half of our total loan portfolio is in the Private Bank, mainly German mortgages with conservative loan-to-value ratios and low delinquency rates. In Wealth Management, almost all our loans are secured typically by high quality liquid stocks and bonds with conservative loan to values. 90% of our commitments in the Corporate and Investment Bank are to clients rated investment grade. And from a regional perspective, our loan books are also well diversified, approximately half of our portfolios are in Germany with a further 20% in EMEA and the US. In short, our loan book has low risk and well diversified, the results of the EBA stress test in 2018 support us, so from a risk perspective, we feel well positioned to navigate the current environment.

Strategically to the core pillars of the mission we laid out last year are well matched to the current environment as you can see on Slide 8. The strategic changes we made in July are taking the bank back to the strategy, we were founded for 150 years ago. With the Corporate Bank at the center of our strategy, we have put German, European and Multinational companies at the heart of what we do. And we assess these clients with our market-leading positions and cash management, trade finance, foreign exchange, financing strategic advisory and investment advice. It was an extremely solid foundation we have there for our clients, as risk managers and advisers in difficult times. And these are the real strength of our bank, such strength have never been more crucial than today. When so much depends on how fast the global economy, trade and investment can recover.

And Germany is our home market, where we generate almost 40% of our revenues. And the Corporate Bank we are positioned to be the bank of choice for corporate treasurers, and that mission is even more valuable in times like these. As the house bank to nearly 1 million small and medium-sized companies in Germany, here too we are well positioned to have clients through the crisis. Year-to-date and for the first time since 2017 we have regained our position as the market leader in German Corporate Finance. And the Private Bank and DWS, we are helping our clients navigate through the turbulent conditions. We are the leading retail bank with 19 million customers and the leading retail asset manager.

We also believe that Germany is relatively well positioned, thanks to the strong and decisive actions of the government, the German support programs of around EUR730 billion amounting to around 22% of total GDP at the highest of any major country. Working in partnership with us there are now a series of well designed programs, which should provide support quickly to the broader economy. And given the strong fiscal position the German government is well positioned to take additional action if required. The German consumer and corporate sectors are relatively well-positioned to deal with the crisis too, consumer debt levels are among the lowest in the Eurozone and the developed world. German small and large corporate customers are also operating with the lowest level of leverage and the highest levels of liquidity in the last 30 years. We feel fortunate to have Germany as a home market in volatile times. As a bank, our core mission is to be there for our clients and provide a safe home for our employees, through good times, as well as challenging ones.

And as you can see on Slide 9, our employees have risen to the challenge and have continued to perform. Our people have coped with a major disruption in the work environment around 65,000 logging in remotely day-by-day. They have maintained the operational resilience of Deutsche Bank and have gone the extra mile for our clients. And all this at a time of concern for the health and well-being of the families and themselves. In December, I talked about reinvigorating the spirit of the bank with greater collaboration across our businesses. The last few weeks have shown what is possible here with staff helping out in other areas of the bank most notably in processing new client applications.

I’m also proud of the way that we have been able to help the communities in which we operate. And in our businesses, we have been active in helping our clients to access schemes implemented by the German government. In the Corporate Bank to-date, we are processing over 5,000 applications under the German Government’s KfW programme with the volume of EUR4.4 billion. In this regard, we are uniquely positioned to provide clients access to the services they need in a timely and efficient way.

Since mid-March the Investment Bank has helped corporate and government clients, raise EUR150 billion of debt to fund their financing needs. And we improved to a number two market share position in electronic US Treasuries helping to fund the federal government support programs. In the Investment Bank, the positive momentum has continued in April, particular in our trading business and Origination & Advisory. In the past four weeks, we have been involved in nearly half of all investment grade bond issuance for corporates in Europe. In Private Bank, we have continued to be there for customers, thanks to the dedication of our staff. We have kept more than 80% of Deutsche Bank and Postbank branches opened and our call centers have handled a 30% increase in inquiries. We have also seen a significant increase in securities transaction. And DWS as a fiduciary has continued to support clients when they need us most. DWS Direkt has seen a 50% increase in retail inbound sales and 25% more visits to the website. In all these examples, we are helping clients and the economy, deepening our relationships with clients, while growing our loan and earning fees.

In summary, we are proud of the way our people have performed in these difficult conditions. Deutsche Bank is on the right track strategically and financially as demonstrated by our first quarter results. Our refocused strategy means we are operating in businesses where we have a leading position with industry-leading products. It is our priority to stand by our clients and the community to navigate these challenging times together. Our balance sheet is strong enough to support growth in these turbulent times and we have a resilient and crisis-proven management team.

For this management team, our priority is simple. It’s all about execution, especially in conditions like these. In the first quarter of 2020, as in 2019, we have delivered on all our targets and objectives. Revenue momentum across the Core Bank continues to build. On costs, we are confident of reaching our adjusted cost target of beating it for this year and we are working on additional cost reduction measures. We also continue to manage our balance sheet conservatively and keep our capital and liquidity ratios well above our regulatory requirements. This positions us well to meet a temporary increase in client demand for balance sheet commitments over the next few quarters.

As Germany’s leading international bank, we also believe we operate from a solid macroeconomic and political backdrop. In short, we have positioned Deutsche Bank to be a core part of the solution to the current crisis.

With that, let me hand over to James.

James von Moltke — Chief Financial Officer

Thank you, Christian. Let me start with a summary of our financial performance on Slide 10. In the first quarter revenues were flat year-on-year with growth in the Core Bank offsetting the wind down of non-core businesses in the Capital Release Unit. Non-interest expenses of EUR5.6 billion, included EUR503 million of bank levies in the quarter, as well as approximately EUR190 million of restructuring and severance, litigation and transformation charges.

On a reported basis, the Group generated positive operating leverage of 5%. Provision for credit losses increased to EUR506 million or the equivalent of 44 basis points of loans on an annualized basis. We generated a pre-tax profit of EUR206 million with net income of EUR66 million after tax.

In the Core Bank, we generated a post-tax return on tangible equity of 6.6%, excluding bank levies. Tangible book value per share was EUR23.27, essentially flat to the fourth quarter. Our results in the quarter were impacted both by our ongoing actions to implement our transformation, as well as the initial impacts of the COVID-19 pandemic, the most material of which we detail starting on Slide 11.

In the first quarter, our provisions for credit losses included approximately EUR260 million of incremental charges, which I will discuss shortly. Our CET1 ratio was negatively impacted by around 40 basis points from COVID-19 driven effects. Our capital includes a net EUR400 million of incremental prudent valuation deductions, reflecting increased pricing dispersion and wider spreads, driven by the market volatility in the latter part of the quarter.

COVID-19 driven increases in risk-weighted assets of EUR7 billion, included higher credit risk RWA, due to ratings migrations and EUR5 billion from drawdowns on credit facilities. The drawdowns on credit facilities also reduced our liquidity reserves by EUR17 billion and were primarily in our corporate relationship lending portfolio and leverage debt capital markets. The movements in liquidity reserves and risk-weighted assets were well within the range of stress outcomes that we planned for. And finally Level 3 assets of EUR28 billion increased by EUR4 billion in the quarter, the increase was driven by a reclassification of some inventory into Level 3, due to the greater dispersion in market pricing towards the end of the quarter. This was mainly relating to derivative transactions, where the material components of the underlying risk are typically hedged.

We also saw higher carrying values on existing Level 3 derivative inventory, mainly driven by movements in interest rates. The increases were largely offset by equivalent increases in Level 3 liability. As conditions normalize some of the market-related effects should reverse and therefore reduce the current levels of prudent valuation deductions and Level 3 assets. That said, developments in the nearer term and difficult to predict and will depend on client behavior end-market dynamics. We would also expect for credit risk RWA to return to more normal levels as clients replaced drawn facilities with cheaper long-term funding.

Turning to provisions for credit losses on Slide 12. Provisions were EUR506 million or 44 basis points of loans in the first quarter. As I just mentioned roughly half of the provisions relate to COVID-19 impacts, principally against Stage 1 and Stage 2 performing loans, most of the increase was driven by updates to macroeconomic variables, changes in credit ratings in segments particularly impacted by the crisis, as well as higher drawdowns. We updated our approach this quarter, reflecting the ECB recommendation to moderate procyclicality.

Our forward looking indicators now incorporate a three year averaging of macroeconomic forecasts. Our forecasts were based on consensus estimates at the end of March, updating the assumptions to the current market views would have increased our provisions for credit losses by approximately EUR100 million. Our total Stage 3 provisions of EUR276 million in the quarter, included around EUR30 million related to COVID-19. Our Stage 3 provisions increased slightly and reflected a small number of specific events consistent with our prior guidance. Including the provisions taken in the first quarter, we ended the period with EUR4.9 billion of total allowances for credit losses. This amount includes EUR4.3 billion of allowance for loan losses, equivalent to 95 basis points of loans. And as shown on the next slide, we’re comfortable with our exposure to the industry’s most impacted by the initial impacts of COVID-19.

Slide 13, builds on the materials Stuart Lewis, our Chief Risk Officer, presented at the Investor Deep Dive in December. In commercial real estate, our exposure is predominantly first lien mortgage lending with an average 60% loan to value. Our portfolio is diversified across a broad range of high quality properties typically in gateway cities. Our oil and gas exposures are focused on the investment-grade majors and we have very modest exposure to non-investment grade exploration and production segments. In retail, we have contained our exposure to strong global names with very limited exposure to non-food retailers. Within the airline space, our exposures are secured at conservative loan to values with unsecured portfolios bias towards national flag carriers in developed markets.

And finally our Leisure portfolio is small and focused on large hospitality industry leaders with minimal exposure to cruise ships and tour operators. In summary, we believe that our loan book is low risk and well diversified with a manageable level of exposure to the most impacted industries. And our risk profile is supported by our comprehensive stress testing framework and proactive risk management.

Turning now to Capital on Slide 14. Our CET1 ratio was 12.8% at quarter end, down by roughly 80 basis points from the prior quarter. Approximately 30 basis points of the decline came from the impact of the new securitization framework we’ve discussed with you in previous calls. In line with our stated strategy, we also continue to fund our business growth, which consumed roughly 10 basis points of capital in the quarter. Our CET1 ratio was impacted by around 40 basis points as a result of COVID-19, which I described earlier. Our CET1 ratio at quarter end was approximately 240 basis points above our regulatory requirement, which now stands at 10.4%. The reduction in our CET1 ratio requirement principally reflects the recent decision — ECB decision to implement CRD V Article 104(a) with immediate effect. This allows banks to meet approximately 44% of their Pillar 2 capital requirements with AT1 and Tier 2 instruments. Our leverage ratio was 4% at quarter end, a decline of 21 basis points, principally from the COVID-19 related effects. Other increases and leverage exposure were broadly offset by the benefit of the AT1 issuance in February. Excluding Central Bank cash for leverage exposure, consistent with the European Commission’s proposal published yesterday would, if implemented, increase our leverage ratio by approximately 20 basis points.

Turning now to liquidity on Slide 15. We ended the quarter with liquidity reserves of EUR205 billion or roughly 20% of our funded balance sheet. With the liquidity coverage ratio of 133% at quarter end, we have a EUR43 billion surplus above the 100% LCR requirement. Liquidity reserves declined by EUR17 billion in the quarter, reflecting drawdowns on committed credit facilities. Given our excess liquidity, we believe that we are well positioned to maintain our liquidity raised coverage ratio comfortably above 100%, while supporting ongoing client drawdowns and new lending.

Overall, we are happy with the way that we have manage our liquidity through the recent period. This is a reflection of investments we have made in liquidity management and modeling in recent years. And our excess liquidity and stable sources of funding provide us with a solid foundation as we look forward.

As Christian has said, we continued our strategic transformation in the first quarter, as you can see on Slide 16, results in the quarter included EUR177 million of transformation effects, including EUR4 million of transformation-related charges, which form part of our definition of adjusted costs. These charges, principally relate to impairments and accelerated amortization of software intangibles, as well as real estate charges. As of the end of the first quarter we have now recognized 73% of our total planned transformation effects. We are committed to the disciplined execution of our transformation agenda, despite the challenging environment and our estimated transformation effects for 2020 and 2021 are unchanged from our previous guidance. In the remaining three quarters of this year we expect to take an incremental EUR800 million of pre-tax charges, including EUR200 million of accelerated software amortization, which is not relevant for capital purposes.

The progress we are making on our transformation agenda is increasingly visible in our cost performance as shown on Slide 17. In the first quarter, we reduced adjusted costs by around EUR500 million or 9% year-on-year, excluding the impact of foreign exchange translation and the transformation charges I described earlier. Adjusted costs included EUR98 million of expenses associated with the Prime Finance platform being transferred to BNP Paribas, which are reimbursable and therefore excluded from our target. We made progress in all major cost categories, compensation and benefits expenses fell in line with the reductions in internal workforce; IT costs declined reflecting the lower amortization given the impairments taken in 2019, while our cash IT spend was broadly stable and within our target range as we continue our investment program. Professional service fees declined as we further improve the efficiency of our internal — external spend. Other cost declined, reflecting reductions across a number of areas; including occupancy.

With that let us turn to our segments, starting with the Corporate Bank on Slide 19. Pre-tax profit of the Corporate Bank was EUR132 million in the quarter, excluding transformation charges and restructuring and severance, which we detailed by business on Slide 34 of the appendix. The Corporate Bank generated EUR168 million of pre-tax profit, this equates to a 5% post-tax return on tangible equity, excluding bank levies. Revenues of EUR1.3 billion or up 2% compared to the fourth quarter, but were essentially flat year-on-year. The Corporate Bank made further progress on it’s strategic priorities this quarter, including continued progress on deposit pricing measures to offset the challenging interest rate environment. At the end of the first quarter, we had charging agreements in place for approximately EUR40 billion of deposits, and are well on track to the targets we set at the Investor Deep Dive in December.

Non-interest expenses increased year-on-year, in part reflecting higher transformation charges. Adjusted costs excluding transformation charges also increased, mainly reflecting the change in internal service cost allocations that we discussed with you in the second half of last year. Provisions for credit losses were EUR106 million for the quarter and mainly related to a few single name events, as well as the updated macroeconomic environment. Risk-weighted assets and leverage exposure increased in the quarter, mainly reflecting client drawdowns on credit facilities.

Turning to the Corporate Bank revenue performance by business on Slide 20. Cash management revenues were essentially flat, as the impact of the negative interest rate environment was partly offset by the acceleration of deposit repricing measures and the benefit of ECB deposit tiering. Trade Finance and Lending revenues were stable reflecting the solid lending volumes and wider spreads at the end of the quarter. Securities Services revenues declined, reflecting the non-recurrence of a one-time gain in the prior year period, while Trust and Agency Services decreased as a result of US interest rate cuts and lower client activity. Commercial Banking revenues were essentially flat as higher volumes in commercial lending and payment fees were offset by lower deposit revenues.

Turning now to the Investment Bank on Slide 21. We were pleased with the financial performance in the Investment Bank in the first quarter, this builds on the momentum that we have seen since September 2019. The Investment Bank generated a pre-tax profit of EUR622 million with a 9.5% post-tax return on tangible equity, excluding bank levies. The Investment Bank, also made significant progress on its strategic objectives as we work to reduce costs in technology and infrastructure support and grow revenues. Revenues of EUR2.3 billion grew by 15% year-on-year, excluding specific items, driven by strong market conditions early in the quarter, as well as further growth in our client franchises. We saw further client engagement or re-engagement with revenues increasing by over 40% with our top 100 institutional clients.

Non-interest expenses of EUR1.5 billion declined by 15% year-on-year. Adjusted costs excluding transformation charges also declined by 15%, driven by lower service costs, as well as lower bank levies. Front office headcount also declined by 7% year-on-year, driven by the restructuring activities initiated last year. Provision for credit losses of EUR243 million or the equivalent of 111 basis points of loans increased in the quarter, driven by the deteriorating market outlook. Leverage exposure increased, reflecting seasonally higher pending settlements and higher trading activity. Revenues in Fixed Income Sales & Trading increased by 16% year-on-year, excluding specific items, as shown on Slide 22.

Strong performance in rates, FX and emerging markets offset the exceptionally challenging market conditions at the end of the quarter in credit. Unlike some peers our fixed income revenues include all valuation impacts relating to credit and funding valuation adjustments on our inventory. In rates revenues doubled from the prior year period, reflecting higher market activity. Foreign exchange, revenues were significantly higher, reflecting higher market volumes and higher volatility. Emerging market revenues increased significantly, principally in Asia with strong increases in corporate and institutional client flows and excellent risk management. Across rates FX and emerging markets, revenues were also supported by the benefits of our refocused strategy that we laid out in December with continued improvements in client engagement and strong growth in our institutional and corporate franchises.

In credit revenues declined, reflecting the challenging market conditions in March, which were only partly offset by effective risk management and a strong performance at the start of the year. Revenues in Origination & Advisory increased by 8%, due to strong growth in debt origination, driven by higher fees in both investment grade and leveraged finance, as well as the net impact of markdowns on commitments and associated hedges. At around EUR4 billion, our non-investment grade bridge exposure is significantly lower than in 2008. Across Origination & Advisory, we continue to regain market share, most notably in our core German and European markets.

Slide 23, shows the results of our Private Bank. The Private Bank reported a pre-tax profit of EUR132 million in the quarter, excluding specific revenue items, restructuring and severance, as well as transformation charges, pre-tax was EUR197 million with an adjusted post-tax return on tangible equity of 5% excluding bank levies. The Private Bank continued to execute on its strategic transformation, consistent with our strategy we continue to grow loans and fee income to offset the ongoing headwinds from negative interest rates.

Our new business generation continued in the quarter as we grew net new client loans by EUR2 billion and generated net inflows of EUR4 billion into investment products. We continue with the integration of our operations in Germany and expect to complete the legal entity merger as planned in the second quarter. PCB International is focused on rolling out the new core banking platform in Italy in the second quarter and continues its efficiency programs in its market. Revenues in the Private Bank increased in the quarter, principally driven by a strong performance in Wealth Management, where we benefited from increased client activity and our relationship manager hires in prior periods.

Non-interest expenses increased by 5% year-on-year, reflecting higher restructuring charges as we implement our cost reduction programs. We reduced adjusted costs excluding transformation charges by 2% year-on-year, offsetting higher internal cost allocations. Cost synergies related to the German merger amounted to approximately EUR70 million in the quarter. Provisions for credit losses were EUR139 million or 24 basis points of loans, reflecting the normalization of provisions we have previously discussed. Revenues of EUR2.2 billion increased by 2% on a reported basis and by 3% year-on-year, excluding specific items, as shown on Slide 24.

Revenues in Germany declined by 1%, reflecting the higher funding and liquidity costs that we discussed with you last quarter. As Manfred detailed in December, our strategy in Germany is to grow volumes and fees to offset the ongoing interest rate headwinds, while we continue to optimize the efficiency of our operations and technology. In the first quarter, we grew fee income from investment products, reflecting the success of targeted product initiatives and grew loans by EUR2 billion, notably in mortgages.

PCB International revenues increased by 3%, higher loan and investment product revenues combined with repricing measures more than offset interest rate headwinds and the initial impacts of the COVID-19 related slowdown in client activity, mainly in Italy and Spain, we grew revenues in wealth management by 17%, excluding workout activities. This growth was driven by a strong performance across all regions in particular, in capital markets products, in emerging markets in the first two months of the year.

As you will have seen in their results this morning DWS performed well in the challenging conditions as you can see on Slide 25. To remind you, the Asset Management segment includes certain items that are not part of the DWS standalone financials. Asset Management reported a pre-tax profit of EUR110 million in the quarter, an increase of 14% from the prior-year period, mainly driven by lower costs with revenues broadly flat. Non-interest expenses declined by 6% with adjusted costs, excluding transformation charges declining by 7%. The reduction in costs reflected ongoing efficiency initiatives, lower volume-related costs, as well as lower compensation expenses.

Compensation and benefits declined principally reflecting lower equity linked deferred compensation expenses given the decline in DWS share price over the quarter. As a result of the strong cost discipline Asset Management generated 5% operating leverage in the quarter. Assets under management of EUR700 billion declined significantly in the quarter, driven by the market disruption in March. Net flows were modestly negative with EUR2 billion of outflows as the strong inflows from January and February were more than offset by industry-wide outflows in March. By product net outflows in fixed income and passive in the quarter were partly offset by net inflows in cash, equity and alternatives.

As shown on Slide 26, Asset Management revenues were broadly flat to last year as the growth in management fees was offset by the change in fair value of guarantees, driven by the low interest rate environment. Management fees increased by 9%, reflecting higher average assets under management given the net inflows and strong market performance in 2019. Performance and transaction fees were EUR17 million in the quarter, primarily reflecting fees earned in our real estate business. Consistent with the guidance, the DWS management gave this morning, we would expect performance and transaction fees to normalize in 2020, compared to the elevated levels recorded principally in the second and fourth quarters of last year. Other revenues were negative EUR51 million, predominantly due to the negative change in fair value of guarantees.

Corporate & Other reported a pre-tax loss of EUR24 million in the quarter, compared with a pre-tax loss of EUR15 million in the same period last year. Positive movements in valuation and timing were offset by movements in a number of smaller items. Funding and liquidity charges also increased slightly consistent with the changes in funds transfer pricing we’ve discussed in prior quarters.

Let me now discuss the Capital Release Unit on Slide 28. The Capital Release Unit continue to implemented strategy in the first quarter, revenues in the first quarter were negative EUR59 million or negative EUR82 million, excluding debt-valuation adjustments. This was slightly better than the range we provided at the Investor Deep Dive, as we benefited from hedging and risk management gains, as stock markets declined and volatility increased. We also recognized the first full quarter of cost reimbursement from BNP Paribas. These benefits partly offset funding and credit valuation adjustments and derisking impacts. We made significant progress on reducing costs in the Capital Release Unit in the quarter, excluding bank levies and transformation charges; adjusted costs declined sequentially, driven by lower internal service cost allocations and lower non-compensation direct cost.

Total non-interest expenses of EUR694 million were essentially flat to the fourth quarter, as EUR247 million of bank levies in the quarter were partly offset by lower litigation, restructuring and severance, as well as transformation charges. Risk-weighted assets and leverage exposure were slightly lower in the quarter as the de-risking and the roll off of assets was partly offset by market-driven increases. In the first quarter of 2020 CRU continue to de-risk across the portfolio in line with plan, while also progressing novations from auctions completed in 2019. The team also laid the foundations for the pipeline of asset sales targeted for the remainder of the year. This approach is consistent with the strategy that we laid out at the Investor Deep Dive. We continue to target lower RWA and a significantly lower leverage exposure by the end of 2020. We do not see the current market conditions as a major impediment to our disposal plans. However, we will remain dependent on functioning Capital Markets and the active participation of clients and counterparties.

Before I close, a few words on our financial targets on Slide 29. We have set a series of short-term targets in previous years to help demonstrate our progress towards our longer-term goals, principally a post-tax return on tangible equity of 8% in 2022. For 2020, we had set three targets. First, as we disclosed on Sunday we are dealing with a great deal of uncertainty around the CET1 ratio path from here. We see opportunities to support clients, we have therefore taken the deliberate decision to allow our CET1 ratio to dip modestly and temporarily below our target of at least to 12.5%. We believe that this is the right decision for our shareholders and all our stakeholders. Over time as the temporary factors I referred to earlier normalize, we expect our CET1 ratio to return to the 12.5% level. The decision to remove this target in the short-term did not consider the potential for future regulatory changes that could benefit our ratio like yesterday’s EU Commission proposal. As a result, we reaffirm our 2022 CET1 ratio target.

Second on leverage ratio, assuming no changes in the definition of leverage exposure, for example to include cash, government securities or government guaranteed lending, we are now unlikely to reach our fully loaded leverage ratio target of 4.5% this year, as we continue to support our clients during this crisis. Over time as client demand normalizes and we execute on the deleveraging program in the Capital Release Unit, we believe that we will restore our glide path to a leverage ratio of around 5%.

Third, on adjusted costs. We are on track to reach or likely improve upon our EUR19.5 billion target, excluding transformation charges and the impact of the Prime Finance transfer. We’ve also updated our outlook statements in the earnings report to reflect our current expectations for revenues this year, both the Group and business line level. For the Group, our revenue expectations are now marginally lower than our earlier planning assumptions as the outperformance in the first quarter is offset by lowered expectations later in the year. Provisions for credit losses are now forecast to be in a range between 35 basis points and 45 basis points of loans in 2020. We expect the majority of these provisions to be taken in the first half of 2020 with a normalization later in the year. This reflects our expectations of the macroeconomic impact from COVID-19, including the effect of the government support programs. While the current environment is challenging, we will continue the disciplined execution that you’ve seen from this management team over the past two years. We are operating in a highly unpredictable environment, but at this stage we see no reason to change our 2022 post-tax return on tangible equity target of 8%. Consistent with our previous guidance, the largest driver of our improved returns will come from cost reductions. In this respect as I said earlier, we are at least on track to reach our objective.

With that, let me hand back to James and we look forward to your questions.

James Rivett — Head of Investor Relations

Emma, let’s open the line up for questions now.

Questions and Answers:

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from line of Daniele Brubacher with UBS. Please go ahead.

Daniele Brubacher — UBS — Analyst

Thank you. Good afternoon. I wanted to firstly ask about European Commission package announced yesterday you briefly mentioned it during your remarks. Is it already possible to somehow quantify the impact of that, and I’m really thinking about the IFRS 9, NPL dimension, the leverage ratio dimension and those are probably software intangibles. And on the leverage ratio side, I mean, I read that the release from the EC, it sounds like these are temporary measures. So how do you look at it? I mean, if Central Bank reserves are being taken out, but the ratio really the requirement goes up, what’s really then — how do you look at that? What’s the benefit of this?

And secondly you briefly mentioned Group revenues and the revised expectations as well. Do you expect the IV revenues to be up consensus for the Group. I think at this point is down 10% for the year. So there seems to be a bit of a different view there. And I was just wondering you obviously expect sequential declines, but what kind of market environment do you need to meet a flattish Group Revenue picture more qualitatively. I guess, and versus Q1 and probably just volatility levels and all that?

And then lastly, the MDA trigger level going from 11.6% to 10.4%, but you don’t really change the 12.5% target longer term. Why not? Why do you keep it at that level, do you disagree with this approach that you — that basically you can use some AT1 for P2R or do you want to just be at the reassuringly high level for your AT1 holders? Thank you.

James von Moltke — Chief Financial Officer

Thank you, Daniele. It’s James here, I’ll take the first and third questions on capital, and then ask Christian to speak to the IV revenue. So first of the — of all the EU package announced yesterday just to quantify the impact for us, we would see that as — and this is by the way would be a conservative estimate as delivering, say, 20 basis points to 30 basis points into our CET1 ratio. The largest part of that would be the treatment of software intangibles, and I think we’ve talked about that in the past, that’s a significant drag for us or a deduction in our ratio it’s about 80% today or 80 basis points, I’m sorry in our ratio today. So with the 20 basis points to 30 basis points, I’m giving you would only be about a quarter of those intangibles coming back into capital. It all depends on the — on how the EBA sets the regulatory technical standards.

There are two other items around reduced risk weighting factors and the reset of the transition to 100% that deliver maybe together 10 basis points into CET1. On leverage ratio, we talked about that being just the exclusion of cash about 20 basis points in our leverage ratio. As you say it’s temporary, I’m not sure it changes necessarily our strategic thinking about the balance sheet, but certainly it helps us report higher ratios and maybe look at the use of the leverage balance sheet a little bit differently, but obviously only over the temporary period. So in short we welcome this package if implemented it would certainly help the ratios.

Our announcement on Sunday night, anticipated that there may be some changes in definitions coming, but noted that we weren’t essentially building those into our outlook. So we think about the 12.5% ratio still as a good management level, a good target to hold. So I want to be clear, we’re not abandoning the 12.5%, but rather feel that it’s a sensible place, but we may dip as we say moderately and temporarily below. The regulatory changes would certainly help us to sustain a higher ratio. We think that will remain the case about the 12.5%, you mentioned with the wider gap to MDA, we simply view it as creating a better gap and at least for now, we would not contemplate changes in our targeting reflecting the 104(a). So with that, I’ll hand it over to Christian.

Christian Sewing — Chief Executive Officer

Yes. Thank you, Daniele for your question. Let me start with the Investment Bank, First of all, I’m confident that we have, kind of, at least flattish revenues in the Investment Bank, because that’s what we have seen now is the continued development since our restructuring in the third quarter. It started actually with management changes and the focus on the key businesses, be it in FIC or debt capital markets in September went through Q4 and the same development, we have seen through Q1, but also in April. And the key is really that this bank has decided to focus on its strengths in the Investment Bank, don’t forget, there we are operating, we are in 75% of our revenues, we are in the top five market positions. And hence we simply can see clients are reengaging, re-entering with us and that’s our focus.

And in this regard, I do believe with the basic understanding that I think the heat of the crisis, we will see, obviously in Q1 and Q2, but looking at the revenue development of the four — first four months, I’m confident that we can achieve the goal, which we outlined before. If I go for the overall Group, I do believe also there we have lot of resilience and also here let’s not forget we have 40% of our revenues in Germany. For the time we — for the time being, we are the, kind of, go-to place in Germany for corporate clients, for private lines. This is the time where it’s not all about only the digital capabilities we have, but in particular the advisory. We are talking actively to private clients about their investment advice, how we can do it better. The same on the corporate side.

And in this regard, I do believe that with the programs we have in place with the financial health we have in Germany. We have a very, very good chance of actually capturing market positions here. And that, overall with the the focus on these four businesses makes us confident that we can achieve flattish revenues or slightly below 2019. So I’m confident there.

Daniele Brubacher — UBS — Analyst

Thank you.

Operator

The next question comes from the line of Jernej Omahen with Goldman Sachs. Please go ahead.

Jernej Omahen — Goldman Sachs — Analyst

Yes. Hi, sorry, good afternoon from my side as well. I have three questions please. So Christian you kicked off the presentation by saying that the path of this public health crisis is not really known. But I got the sense that we continue the presentation by giving some pretty strong assurances on the outlook for credit losses and then the outlook for revenues as well. I would just like to take a step back and ask a broader question, so you have been in European banking for a long period of time. How likely is it in your mind, that the non-performing loan formation, and the credit loss cycle this time around will be better than what you’ve seen in 2008 and ’09 and ’11 and ’12? So that even with all the government support index, that would be my first question.

My second question would be just staying with the last guidance of 35 basis points to 45 basis points. So just looking at the EBA stress test estimate for Deutsche Bank, which was based on German GDP contracting 2% in year one, 3% in year two. They had the peak loss at 82 basis points. And your guidance, Deutsche Bank’s guidance seems to be targeting broadly half of that. Again, what gives you the confidence that, that will materialize?

And my last question is just on the ability to restructure into what seems to be a deep recession and a spike in unemployment. To what extent, do you feel that, particularly the headcount reduction that have already been agreed with your partners and stakeholders in the bank, still hold true, and you’ll be able to execute on that? Thank you very much.

Christian Sewing — Chief Executive Officer

Thanks, Jernej. Let me take number one and three, and James can talk about the details of the calculation of the 34 basis points to 45 basis points. Now, first of all, I do believe actually that, and I think I can speak for most of the banks, but obviously best for Deutsche Bank, we will see less lowness provisions then in the crisis of 2008 for three reasons. Number one, in particular in Germany, the program which has been done and the umbrella, which has been provided by the government is far stronger, because it actually contains two elements. Number one, immediate liquidity support; number two, there are programs in place, which actually already addresses the long-term solvency questions of corporates.

Also, when you look at how the take up of the — what is the English word for that, this short-term workers’ support, i.e., Kurzarbeitergeld, is actually taken up now by 4 million people, almost 4 million people, that provides actually a scheme that people are in the capable of controlling their financials, repaying their financials. Do we need to potentially also go for a one, two or three months of moratorium? Yes, we have for the time being 50,000 individual clients asking for that, but we have 19 million clients. So, overall, even after six weeks of times, that is a manageable number. And I feel with the robustness of this umbrella given by the government with KfW, structured also by ourselves in combination with the government, that is the first safety net.

Secondly, I think the entry point corporates went into this crisis is completely different one in 2008. When I was at that point in time, in the credit risk management team, the average equity position, the average liquidity, which was on the balance sheet of the corporates is not comparable to the one we see right now. So, overall, I would say the resilience of our clients is higher.

Number three, now the best person to answer that one is obviously Stuart Lewis. I think, we also learned our lesson from the times in 2007 and 2008. When I look at the structure of the portfolio, you have seen James references, but also my slide, with regard to concentration risk, with regard to active hedging, with regard to trying to actually allocating the risk out, we are doing a far better job. And in this regard, I do believe that these three items plus the healthier balance sheet of banks to absorb losses is a major difference at least for Deutsche Bank. And that makes me confident that the numbers which we have given out for the 2020 lowness provisions is a number, which we will and we can achieve.

With regard to the ability to restructuring, this is not impeding us at all to do that what we want. We are clearly discussing that with our partners. There is no stop at all in the discussions with the Workers Council on our restructuring plans, and that means we will continue. Therefore, James and I are so confident that we are achieving the EUR19.5 billion cost of gold for the end of the year. So, there is no stop to it. Also a journey, let’s not forget, the last four weeks have indicated to us where we can save costs on top. And we will do everything in Q2 and Q3 to implement that. And that is not only cutting costs in terms of FTE or personnel, that is cost with regard to travel, that is cost with regard to real estate. We will change the way we are working, absolutely. And hence, we even have further ammunition actually to reduce our costs. James?

James von Moltke — Chief Financial Officer

Thanks, Christian. So, taking the comparison with the EBA stress test, it’s always hard to compare, sort of, theoretical stress test scenarios to the real life stress we’re living through, but we’ll give it a little bit of try. If we focus on credit provisions, I think the starting point is actually picks up on two points that Christian just made. First of all, what’s different in this cycle? Government support is potentially a significant difference; secondly, we’re a different company, smaller balance sheet we’ve exited certain areas. And so some of the credit exposures that we would have taken losses on, if you go back to the December ’18 balance sheet, simply aren’t here anymore.

I think further, there are some just more technical differences in how that comparison works. To begin with, it’s a three year total loan loss or credit number. And we’re talking at this point about 35 basis points to 45 basis points this year. And there is also an ECB add-on to that number, so that goes beyond what we calculate our provisions to be — the ECB add-on represents 10%, 12% on top, so some real differences.

And I think the last point I’d make, I’d go back to a point Christian said. The stress tests essentially assume that management does nothing to manage, sort of, credit outcomes or the portfolio. So it takes what I would call a static balance sheet. And that’s also clearly not a real world scenario, so a lot of differences. We’re obviously alive to the comparison, but we think again, looking at our detailed modeling, they’re very good reasons to see this as quite different in terms of likely outcome relative to that stress test.

Jernej Omahen — Goldman Sachs — Analyst

Can I just maybe just ask one follow-on. So, the EBAs peak one-year loss is 82. The one that they’ve calculated, the one that you are guiding for is 34 to 45. I mean, EBA for that one year loss assumes GDP contraction of 2%. I mean, we’re looking for Eurozone GDP contraction of 10 plus this year. And I just want to say that optically, it just looks odd, but I think the question is different. So, the Deutsche Bank was breakeven this quarter on what is a very, very strong revenue. If I take the average revenue of the previous four quarters, the bank would have made a loss of broadly 400. So I was just wondering, let’s assume that you’re wrong, and the credit loss is not 45, but it’s closer to EBAs estimate of 80, what are those dynamic actions that the bank can take to offset this event?

James von Moltke — Chief Financial Officer

Yes. So, let me again just let me again start with the comparison. The environment that we’re dealing with, we would see as much more severe in the quarter one GDP decline than most scenarios that we do stress testing on, which typically are over much longer periods of time, with the recovery starting still in our estimation already in Q3. And so the length of this downturn is a critical determinant in what the ultimate credit losses will be. Of course, they will be a diminution in the credit position of most corporates, as they put on some debt to cover expenses in a period of time, while revenues are suppressed. But I think the length of this downturn is a significant difference to others.

I don’t want to go into lots of downside analysis. As you know, one of the benefits of all the work that has happened over last 10 years has been that banks are very capable of doing their downside work, and also understanding what mitigants are at our disposal to offset both profitability and capital impact of more severe downturns. So, it’s something that we’re very conscious of, that we keep well refreshed and we’re comfortable with our position navigating through this environment.

Christian Sewing — Chief Executive Officer

Jernej potentially one more sentence to that what James just said also on the mitigants we have. Don’t forget, if you quote the Q1 that this is the quarter of the majority of the bank levies. So that we also had to digest, plus the mitigating measures we have. I would say that there are — that there is cushion for us also to handle that situation.

Jernej Omahen — Goldman Sachs — Analyst

Thank you very much.

Operator

The next question comes from line of Christoph Blieffert with Commerzbank. Please go ahead.

Christoph Blieffert — Commerzbank — Analyst

Good afternoon. Two questions please from my side. There were articles in the press recently that foreign banks are pulling back from the German market. How much do you see this as an opportunity for German banks and for Deutsche Bank in particular to gain market share? And related to this what is your view on margins in corporate lending during the COVID-19 crisis?

Secondly on the KfW support scheme. Here, what we had full — if you could share the economics of the program from Europe P&L perspective. And here, in particular, whether, there’s a fee from KfW for banks passing through the loan to the client? Thanks.

Christian Sewing — Chief Executive Officer

Well, thank you. Let me take these questions. Obviously, as we said, that is an opportunity for us. A, it is our understanding that in particular in your home country with that background we have. We have to use this time and have to make sure that we are at our client side. And yes, we are seeing a certain development of other banks reducing their commitments also to German large caps, but also to mid caps, where we feel we have the understanding and is as long as our risk appetite is there, because we will not water down our risk standards for these clients, then we are there and we jump in and I have to tell you, it is not by incident that we are back number one in Corporate Finance in Germany, you’ve seen that also with regard to the DCM issuances.

If I look at the market share we have with the KfW applications, where in the usual programs 80% of the risk is with KfW or even more and the rest is with us. We have actually a market share, which is above our normal market share in the business, that means that clients are actually looking for advice from Deutsche Bank. And hence, I think, it’s an opportunity with the balance sheet we have, with the market positioning we have that we take the opportunity. And again I think in this regard, it’s fortunate that we are in Germany with the backdrop of the government support.

Secondly on the KfW program from a profitability point of view. These are actually well designed programs in terms of the margin set out. You can’t actually now do a one size fits all, because it depends on the underlying program, we have various programs. But overall, from a profitability point of view, this is not below our threshold and hence, actually we are supporting these things. And again it also shows that in the setup of the programs this was not only a program, which was set up by Berlin and KfW that were active participations of the German banks including us. And hence we are happy to support these programs also from a profitability point of view.

Christoph Blieffert — Commerzbank — Analyst

Thank you.

Operator

The next question is from the line of Jon Peace of Credit Suisse. Please go ahead. Mr. Peace, your line is open. Maybe your phone is muted. We’ll move on to the next question. The next question is from the line of Andrew Lim with Societe Generale. Please go ahead.

Andrew Lim — Societe Generale — Analyst

Hi, good morning. Thanks for taking my questions. So you talked about your capital ratios, but briefly wanted to focus on the leverage ratio, which does like to 3.5%. I was wondering if you had the same expectation with expansion in the balance sheet that this fall a bit further, and if what level? And I asked this question because back in early 2018, this ratio was only 3.36%, so not too different to where it is today. And at that point we had to undertake a restructuring plan at Deutsche Bank. So just wondering about your thoughts in that regard?

And then my second question is in your financial report, you talked about loans in moratoria. So I guess this is also one factor why maybe your loan loss guidance is maybe more benign than some people might expect. But could you give us a bit of color as to how much of those loans are in moratoria across the whole group. And then going forward, what would change your accounting treatment of those loans, such that they might be regarded as non-performing on the IFRS 9? Thank you.

James von Moltke — Chief Financial Officer

Sure, Andrew. Let me take — start with your leverage ratio question. So first of all, the ratio that you cited, I think, has to be in your planning or your modeling not ours. So we feel comfortable that even with the expansion in the balance sheet in the core businesses, we can sustain the leverage ratio more or less where it is now without changes in the definition. As the growth in core is offset by the deleveraging in the Capital Release Unit. So we feel comfortable with the stability of the ratio from here. Of course, the change in definition helps, it’s been a, sort of, ongoing question why clearly risk free assets should be part of that ratio. And I think the 20 basis point helps in measurement. Remember also the pending settlements comes out of the definition in — I think 2021, so within sort of a year, that’s — that part of our leverage exposure would also settled down. So again, we are comfortable, I think, we’ve often communicated our comfort or not only with where our leverage ratio is, but with the path and improvement over time.

So as it relates to moratoria, you’re correct. The guidance, in some cases, the way the programs are structured, we would not treat a — and otherwise creditworthy obligor as going into Stage 2 based on the indication of seeking the forbearance of a moratorium as the sole indicator, that does not mean that if there is credit deterioration otherwise that loan would not deteriorate from a staging perspective or a rating perspective. Certainly for a period of time this will help individuals and corporations, particularly small corporations, dealing with the cash flow implications of this crisis. And again, assuming the economy begins to recover in the third quarter, they would then reestablish their normal operating rhythm, normal cash flow profile. And you wouldn’t expect much deterioration in the credit quality of the obligor other than the additional debt that’s taken on over that three month period.

Frankly, it goes to the point that Christian made a moment ago about the design of the KfW or government support programs. It really provides from the individual all the way up to the large corporation. A, an ability to manage the cash flow implications of this crisis without a deterioration necessarily of their credit standing, including at the very low end. These are forgivable loans. They’re essentially grants to small businesses, which of course is very helpful to the economy. I hope that helps.

Andrew Lim — Societe Generale — Analyst

That was really helpful. Thanks for that.

Operator

The next question is from the line of Piers Brown with HSBC. Please go ahead.

Piers Brown — HSBC — Analyst

Yes, thank you for taking my call. Just coming back to the provision for credit loss. Just looking at the composition, I mean, you’ve obviously booked more in terms of Stage 3 loans and you’ve Stage 1 and 2, which I guess at this point in the cycle is sort of noteworthy. I wonder, if you can just share a little bit more in terms of the economic inputs into how you’ve assess the Stage 1 and 2 provisions? I think you’ve given some economic forecasts on Page 19 of the report, in the outlook statement, but I don’t know whether those are the same as what you’re actually using in terms of the ECL modeling. So maybe you could just expand on that?

And the second question is just around the restructuring and severance charge this quarter, which I think was EUR88 million. I’m going to hear everything you’re saying about not having any issues in terms of implementing the restructuring as you’d plan. But just in terms of that number being below the run rates of the EUR500 million full-year target, I wonder if you could just give a little bit of color on that. Should we just expect there to be catch up in coming quarters on — in terms of what you’re booking for restructuring and severance? Thanks very much.

James von Moltke — Chief Financial Officer

Sure. Thank you. So, a couple things. You mentioned Stage 3, we think it’s very natural, frankly, that the Stage 3 bucket is relatively moderate at this point in the cycle. And naturally as we see defaults in this credit cycle, you would expect there to be more Stage 3 exposures and hence, loan loss or the allowances traveling, migrating if you like from Stage 2 to Stage 3. There’s been, as you saw in our disclosure Page 12, is very little that we would see as COVID-related Stage 3 provisions taken this quarter, which we think is entirely natural for the very short-time elapse between the onset of the crisis and the end of the quarter.

To your question about the macro assumptions, we use consensus estimates in that, build those into our models. And as I mentioned, we use the 31 of March, a consensus estimates. Clearly, things have moved on since the end of March and the outlook today is more severe than it was then. And hence the — as I mentioned about a EUR100 million of additional provisions, had you walk that forward to the end of April. There is a difference between, therefore the — what is built into the model there, relative to our firm outlook. So, we think about our forward planning more bearing in mind the outlook that we described in our earnings report as distinct from what is built into the IFRS modeling.

Restructuring and severance. It’s actually often the case that you see much higher restructuring and severance charges towards the end of the year than the beginning. As we’re actually executing in many cases on the measures against, which we built reserves at the end of last year. And in some sense as the pipeline refills and then we recognize new reserves as new actions become essentially defined to the level where we can recognize them under the IFRS standard. In this quarter for example, the restructuring and severance was largely to do with the savings we expect to extract from the German legal entity merger, as an example. And we’ll continue to see some level. And I would think increasing towards the end of the year as more and more of the actions that we expect to take in ’21, are then reflected in the reserves that we take in 2020.

Piers Brown — HSBC — Analyst

Okay. That’s perfect. Could I just have a quick follow-up on the expected credit loss? I mean, you’ve talked in the report about following ECB guidance on deriving adjusted inputs, based on longer-term averages. I mean, could you just explain exactly how the mechanics around that work? And what sort of trough GDP numbers you might be using in terms of some of the more adverse scenarios you’d be running?

James von Moltke — Chief Financial Officer

So the scenario is the same. It just extended the horizon to three years and removed some of the — what I would have been significant procyclicality that would come from the early quarters of the event. So if you think about it this way, you’d look at an annual GDP number as the driver of the IFRS-9 provision rather than the very sharp first quarter event. We think that’s appropriate. We think the guidance from the ECB made perfect sense, particularly given the shape of this crisis and the expected path of GDP going forward.

Had you not done that? It would’ve brought in, I think, some excessive procyclicality that would have seen us build excess reserves or provisions in each one and the first-half of this year and then release them in the second-half of this year, which clearly makes no sense. So that’s how I think about the averaging as it was applied here. And again, we think that was a very sensible outcome. It didn’t suppress the reserves so much as make sure that the timing of the reserves makes more sense, against the likely path of both ratings’ migration and ultimately obligor defaults.

Operator

The next question comes from Adam Terelak with Mediobanca. [Operator Instructions] Please go ahead.

Adam Terelak — Mediobanca — Analyst

Yes, good afternoon. I had a couple of questions, one on capital and then back to reserving. On capital, I think a bit surprised by the lack of an increase in market risk RWA. I just want to know, whether that’s an averaging thing and whether that could come into the second quarter, and beyond? And then how sticky some of this RWA inflation is likely to be? I know there’s a lot of uncertainty involved, but whether we should really thinking about some more permanent COVID-19 impacts through the denominator of your capital, before you get some relief, it sounds from the commissions package from yesterday?

And then on the provisioning, I just wanted to understand a little bit more on the build and some of the moving parts. The Stage 2 assets have gone up by or doubled almost by EUR19 billion or so, but the provisioning attached to has been very, very modest. I just really want to understand what’s driving that? And why the number is so low at this stage? And what sort of forbearance is coming through on IFRS 9 guidance or what might be driving? Thanks.

James von Moltke — Chief Financial Officer

Sure, Adam. Thank you. So, on capital and this is why we pointed to the 40 basis points and the likelihood it comes back. You’re absolutely correct. On each of their own schedules, if you like, I would expect the components of the capital drawdown to come back. So, if you take the three major ones PruVal, market risk RWA and then committed facility drawdowns. Over two, three quarters we’d expect those drawdowns to get paid back. So, that comes back to us over time. The market risk RWA, as you point out did not move in the quarter. We do expect increases to come in Q2 as the volatility feeds into the averaging. And then that’ll wash out over a one year period after that. And equally PruVal will reflect as we’ve now done in the first quarter accounts will reflect the higher market dispersion. But that again will wash out of the PruVal and that should normalize the capital comeback over a period of time.

So, our view is that it is really almost all temporary. The only things that — as markets normalize, the only thing that wouldn’t be temporary would be those of the either the ratings that have migrated, that become non-performing over time or the new drawn facilities that potentially become non-performing over time. Incidentally, some of the provisions given the, kind of, forward-looking nature of IFRS 9, some of the provisions that we built in the quarter were provisions against the new lending that took place. So, there is, if you like, a forward look there as well. Can you just repeat your second question, so I make sure I cover it?

Adam Terelak — Mediobanca — Analyst

Yes. It was on Stage 2 loans up EUR19 billion, but the reserves attached to it kind of EUR100 million or so. So, just why that number is so small? Maybe it’s to do with the nature of the IFRS-9, three year averaging and pay down assumptions?

James von Moltke — Chief Financial Officer

Yes. So, one thing you need to remember as you think about the state, the asset sizes in each bucket and the related allowances is, as you are seeing a migration, you’re not just seeing migrations of assets into the Stage 2 bucket and the associated provisions. You’re also seeing a migration from Stage 2 to Stage 3. So, ultimately, you need to look at the net of those two things.

Operator

The next question comes from the line of Magdalena Stoklosa with Morgan Stanley. Please go ahead.

Magdalena Stoklosa — Morgan Stanley — Analyst

Thank you very much and good afternoon. I will come back to the previous question around market risk weighted assets, because I have to admit that I, kind of, struggle a little bit, with the lack of inflation in that particular line. Because, we’ve seen quite a significant inflation in market risk weighted assets in a couple of your peers. And so my question really is, have there been any kind of significant changes within the modeling of your market risk-weighted assets? Or would you be able to maybe quantify the relief that the, kind of, ECB has put through on April 16th on that calculation maybe? So that’s a question the question one.

And question two, I know, we’ve talked a lot about, kind of, revenue side expectations this year. But is there other risks that you see maybe particularly in the, kind of, retail commercial bank where the level of activity, the level of spend potentially the level of lending may actually fall off impacting revenues negatively. Given how huge the disruption is in the second quarter from a perspective of macro. Thank you.

James von Moltke — Chief Financial Officer

Sure. Thanks, Magdalena. So the market risk RWA is pretty simple. If you look at Page 47 of our deck, you can see that the increase in VAR driven by the volatility, so not portfolio, but volatility really only spiked at the end of the quarter, so it didn’t really feed into the averaging to a significant extent, that’s why we’d expect to see that now come through in Q2. And ultimately you’ve heard some talk about far outliers in the marketplace. And so for us, which may be different to peers. What happened is the ECB action to reduce the multiplier was offset by some increase in the multiplier that came from the bar outliers. So those two things offset, and all you had was the — was that relatively limited amount of volatility at the end of March in the averaging.

Christian Sewing — Chief Executive Officer

With regard to the Corporate Bank and the Private Bank on the revenue side. Overall, I think we have offsetting items, of course, in the Corporate Bank for instance, the reduction in the US dollar interest rate is an additional headwind for us. On the other hand, what I said before, in particular by our strategic growth initiatives. But in particular by the fees of the additional lending, which we are doing here in Germany also now the benefit of the ECB decisions from introducing the deposit tearing, the good work which has been done in actually repricing the deposits and we have done that throughout the first quarter and that program will continue in Q2 and Q3. We believe that this offsets actually obviously certain headwinds you have in some other sub parts of the business.

In the Private Bank, we do believe that in particular in the — in some areas that could be less engagement, for instance Italy and Spain, you will see that in the consumer finance business there is less demand. On the other hand, you will again see that the ask of people and the clients coming to us asking for investment advice reallocating their portfolios is one of the mitigants. Secondly, also they are obviously, the deposit tiering introduce at the end of Q4 helps, and hence we see also there good chances to mitigate the reduction of revenues in some parts. So overall, we believe that in both areas Corporate Bank, as well as the Retail Bank and Corporate Bank we can stay almost flattish and Retail Bank only a slight decrease.

Magdalena Stoklosa — Morgan Stanley — Analyst

Thank you.

Operator

The next question comes the line of Kian Abouhossein with JP Morgan. Please go ahead.

Kian Abouhossein — JP Morgan — Analyst

Yes. Thanks for taking my questions. First of all, I think, you have produced the best earnings report of any of your peers, because it had actually discussed the COVID-19 issues, which a lot of the peers don’t do. So thank you for that. And in respect to that, since you’re doing a more longer-term scenario of economics in your numbers — in your IFRS 9 numbers and you highlight clear on Page 19, the base case. Can you just tell us also since you’re doing its three -year rather than just one year. Can you tell us in that context what GDP exemptions you have for Eurozone and US, as well for ’21 and ’22? And in that context, I don’t fully understand why you provisions will change or sorry how a three-year scenario will impact your Stage 1 loans, because Stage 1 loans only assume 12 month forward-looking expected loss. So I don’t fully understand how that works, if you could just explain that?

The second question is on your leverage loan book, can you tell us on your bridge book or leverage loan book, whatever you want to focus on, what the markdown was? And also you mentioned in fixed income some credit write-down, if you could explain that?

James von Moltke — Chief Financial Officer

Sure. Kian, there’s a lot to go through. I’ll try to be as brief as I can. First of all again the — I’ll refer you to, sort of, Bloomberg at the end of March to see the economic assumptions over the three year period. They have annual GDP numbers that are down in the first two years, and then up. They’re clearly not as severe as I suspect what will go into the models this quarter. And hence the incremental provision number that I cited in my prepared remarks. An interesting point is brought out by your comment on Stage 1, interestingly, part of the procyclicality is in Stage 1, because they’re very sharp as a procyclicality of using individual quarters rather than an annual average, because they’re very sharp, you know, movements in GDP in the first period actually creates a significant multiplier of the probability to fall in the Stage 1 bucket that, suddenly even with that one year expected loss that you build for Stage 1, it actually creates some of the procyclicality in the earlier methodology. So interestingly and perhaps counter intuitively, the procyclicality is in the higher quality buckets.

In terms of leverage lending, as we noted we had about EUR4 billion, EUR4.1 billion commitments at the end of the quarter. We were, I think conservatively positioned. And in the leverage lending space our hedge is almost entirely offset the markdown on those, the mark-to-market, if you like or the bridge commitments. And when I say almost entirely I’d say four-fifths of the amount that was the initial mark-to-market loss. So I think it shows you how conservatively we were positioned going into the crisis. Thank you for the call out on the earnings report, we appreciate the feedback.

Operator

The next question is from the line of Stuart Graham with Autonomous Research. Please go ahead.

Stuart Graham — Autonomous Research — Analyst

Hello. Hi, thanks for squeezing me in. I had two questions, please. First, what’s your assumption for credit risk RWA inflation, due to ratings migration this year, please? And second, it’s another question on provisions, I’m afraid. What would your 35 basis points to 45 basis points guidance, be if you’d stuck with your old eight model and assumes government support measures were wholly ineffective? So basically no management overlays. You just let the models do their thing? Thank you.

James von Moltke — Chief Financial Officer

So, Stuart, I actually don’t have the — to hand the exact number of credit risk RWA increases that we see for the balance of the year. We do see some additional, sort of, inflation if you like coming from both book extension and further ratings migration. And we’ve built that into our forward look on the CET1 ratio. One thing that I just remind you of though as you think about both the credit risk and the market risk RWA increases that are coming at us, in our planning, they will now be offset by some of the changes that the ECB announced around reg inflation that’s no longer coming at us. So you’ll recall we had about 60 basis points, kind of, expected for the year, we’ve seen 30 basis points of that out of the gates. The RWA associated with the rest, which is sort of EUR8 or so billion. We don’t think any longer materializes, which is why you may wonder why our outlook is — shows a relatively moderate change in the RWA relative to our earlier expectations.

I don’t want to go into the extent of sensitivity, if you like of the loan loss provisions to all of these other assumptions. It’s frankly, sort of, irrelevant to the world we’re actually in, in the sense that, that government support does exist. And you know, the modeling, interestingly, as I say from a very granular bottoms-up approach that is — that IFRS essentially requires, what you do is, get a great deal of insight in terms of how the book is expected to perform over time. So we think that that central case is a good one for now. And again, I’d just point to the procyclicality that would otherwise have been created. I don’t think investors or frankly the clarity of bank capital ratios would have been helped by a strongly procyclical degree of build at this point in the cycle.

Stuart Graham — Autonomous Research — Analyst

No, I accept that point. I guess, what I don’t — what I struggled with, how do you know if the government support measures are worth 5 basis points, 10 basis points, 15 basis points? How do you know? I mean, there’s no precedent. How do you calibrate that?

James von Moltke — Chief Financial Officer

Well, they’re only — they’re built into the ratings that our credit officers assigned to each obligor. So, it’s again, very granular. It’s not a — an overlay that we applied to the determination of the provisions. But rather each credit officer in assigning ratings and looking at the migration, assessing the likelihood that each that, that obligor would benefit in some way from the government programs. I honestly think we’ve probably stayed on the conservative side of that in how we assigned those ratings changes. As you’d expect, the credit officers are minded to be conservative at the beginning of a crisis. And so I would think of that ratings migration or the — if you like, again, I’ll use the word suppression of ratings migration as having been moderate in our judgment at this point.

Stuart Graham — Autonomous Research — Analyst

Thank you.

Operator

The next question comes from the line of Amit Goel with Barclays. Please go ahead

Amit Goel — Barclays — Analyst

Hi, thank you. Thanks for the presentation. So, two questions. I guess, one just again, following on the asset quality point. So I guess, in my head what I’m trying to reconcile is still, you show the key kind of focus industry exposure, about EUR52 billion, and then the incremental provision being the EUR260 million, so roughly 50 bps on that. So, I mean, how are you managing that kind of key industry exposure?

And the second question I had was relating to the assets, which were reclassified to Level 3. And so I think that was about EUR2 billion. And so I just wanted to get a sense, I mean, if you had used the observable, I guess, parameters what would have been the potential marks on those assets? Thank you.

James von Moltke — Chief Financial Officer

So, let me go in reverse order just to hit the Level 3. So, it was EUR4 billion in total. The way you should think about our guidance here is that there was relatively little that happened in terms of portfolio changes over the quarter. The increase in that balance was mostly driven by changes in the environment, their fair value assets and liabilities. And so, the change in any evaluation is fully reflected in our accounts. I can’t speak too specific, what on that population of assets were the liabilities, were the gains and losses, but it’s really reflected in the first quarter results. So, the observability just had to do with the dispersion. And in some cases, the observability of parameters that go into those evaluations. And so, in our judgment assets were migrating from Level 2 to Level 3 in that, so they ensured they’re marked. Sorry, the first part of your question, Amit?

Christian Sewing — Chief Executive Officer

I can do this, James, if you like. I mean, I think actually Page 13 is in this regard to a good page to again through the sub pockets. First of all, that is as James laid out before, obviously, an individual name-by-name review we are doing in that portfolio, because these are the larger names, which are fully under the scrutiny of the credit officers. And if you then go into the individual sub-portfolios in the oil and gas 80% of the limits or net limits we have is to investment grade names.

We have on the other portfolios, for instance, in the commercial real estate, but also aviation when we talk about sub-investment grade ratings, you have a high-degree of collateral with loan to value, so where I would say, this is rather conservative. And then in sub-portfolios where I would agree with you where the biggest risk is like leisure. We are very small with hardly any concentration risk or towards absolute industry leaders. So, looking at that, and there I come back also to the times I know from my risk management time, I think this bank has really learned to deal how to manage concentration risk, how to actively hedge it or collateralize it. And hence, I think we have good handling on this EUR51 billion portfolio in total.

James von Moltke — Chief Financial Officer

And, one just thing to add to what Christian said. Remember that the expected credit loss which, frankly, moved relatively marginally in the quarter on our total portfolio of loans. And in fact, moved by less than our provision in the quarter, reflects also all of the credit mitigants that are in place whether that’s hedging, CLO cover in addition to the rating of the obligor and the collateral valuation. So, there’s a lot of protection here that just that goes beyond what we’re focused on the slide that Christian referenced to.

Amit Goel — Barclays — Analyst

Thank you.

Operator

We have time for one more question. The last question comes from the line of Andrew Coombs with Citi. Please go ahead.

Andrew Coombs — Citi — Analyst

Thank you. I’ll ask quick question on cost, and then just a follow-up on the reserve build, but from a bigger picture perspective. And on cost, you’re obviously very confident, that you can still hit the 2020 target or potentially even beat the target. And that’s despite some of the announcements about suspending redundancies in this environment. I know when you previously talked about the cost walk, the biggest component of that was coming from compensation. And I know when you drill down in Investment Bank at your Investor Day, of the EUR1.2 billion, I think only EUR0.2 billion was coming from the front office, kind of, duly done. The majority is coming from a back-office cut, still had to do. So could you just elaborate on what exactly give you the confidence on the cost save target? And what is substituting in for the lower compensation cost that you would have otherwise had, have you found cost saves elsewhere to achieve it? That would be the first question.

And the broader question on reserving. I appreciate everything you’ve said, I appreciate the position you’ve been put in between what the auditors request and what the EBA has requested. And I have a lot of sympathy for the point on avoiding procyclicality. But obviously, the approach you’ve adopted is very different to your peers, especially the UK and US bank, but also a number of European banks. So, given the huge amount of subjectivity we now have not only on scenario assumptions disclosure, but now even the approach that’s been adopted. Is there any discussion with the ECB, with the EBA about trying to get more consistency between the banks on this, because to some extent, showing the credibility of bank reporting at the moment? Thank you.

Christian Sewing — Chief Executive Officer

Andy, potentially I start with the cost one and then James is following. So, where do we take the confidence from? To be very honest, from various items; number one, we have achieved now for nine quarters of our costs target. And that tells you that we have full discipline, full control and a management visibility into comp cost, but also non-comp costs, which was simply not available 24 months ago. So, the work finance has done in order to allow deep dives to find where additional cost savings are, is brilliant and helps us actually to navigate, that’s number one.

Number two, I think we need to a little bit potentially clarify what we said with the pausing of the restructuring. We said that in the first phase of this crisis where everybody was personally affected, we don’t want to communicate, for that time, additional individual layoffs. We started that end of March, beginning of April, and we are now actively reviewing when we are actually regaining that, because with the lifting of the restrictions in the regions also here in the home country, where a lot of restructuring is done, we will also resume that. We are committed to this transformation and the restructuring.

Thirdly, we have 70 individual initiatives underway. Out of those only 30 initiatives are actually tailored at comp related issues, we have 30%. So, the remaining 70% are non-comp related. So, of course, even with a potential temporary pausing of new individual discussions, you are full steam on, and we are full steam on implementing the other cost measures.

Fourthly, the last four weeks have shown us, as I said before, have shown us opportunities to cut additional costs. If we look at our travel costs, if we look at our entertainment costs, if we look at the real estate costs, all this is underway. Therefore, we have a Chief Transformation Officer, who is doing nothing else and looking at the chances and opportunities of that what we have experienced over the last four weeks. And actually thinking about what can we implement now long-term and that will also result in cost reductions, and that combined with the track record this Management Board has build makes us confident to achieve the 19.5% or even be better than that.

James von Moltke — Chief Financial Officer

So — and I’ll take the question about reserving. Actually, I share your concern about the comparability and that’s something that we talked about both internally and with our regulators. It is interesting that this crisis came upon the industry at a point in time where US GAAP filers were switching to CECL. So the starting point is even the comparability across periods for some of our competitors was hard to establish. I think, if you go back to first principles, you’ve got to start with you compare each bank on the basis of the portfolio risks that they have. And a big starting point is, does the bank have a credit card portfolio. For us our consumer unsecured is a relatively small part of the book overall. And so I think it’s entirely natural that you’d expect significant differences in the total provision level that we would take relative to some of our peers. And I think also geographic spread is a piece of that, in addition to some of the things we pointed out about our portfolio, specifically related to the most affected sectors. So that would be the first point that I’d make.

I think, secondly it’s worth spending some time looking at the resulting allowance level. So, rather than looking at P&L provisions look at where banks have ended up in terms of their allowance for loan losses or their allowance for credit losses against the portfolio. And interestingly there, you would actually see us pretty well in line with a number of our peers once you exclude the credit card portfolios, suggesting in a way that if we are — if our underlying portfolio is in fact less risky as we think it is then at least some of the comparables. Our allowance is in fact on a relative basis, at least in line, if not relatively more conservative. So as I say share your view on the challenges thinking about accounting standards and changes in methodology. But I don’t think that undermines an ability to assess the appropriateness of both provisions and ultimately allowances.

Andrew Coombs — Citi — Analyst

Thank you. I appreciate your comments and all the details on the call. Thank you.

Operator

In the interest of time, we have to stop the Q&A session. And I hand back to James Rivett for closing comments.

James Rivett — Head of Investor Relations

Thank you, Emma, and thank you all for joining us today. We appreciate your interest. We’ve realized there’s also several questions that we didn’t get to. The Investor Relations team will reach out to follow-up. We look forward to hearing from you also — to speaking to you all soon. Be well.

Operator

[Operator Closing Remarks]