Stephan Engels - CFO

Benjamin Goy - Deutsche Bank Johannes Thormann - HSBC Britta Schmidt - Autonomous Research Riccardo Rovere - Mediobanca Daniele Brupbacher - UBS Kiri Vijayarajah - Barclays Guillaume Tiberghien - Exane Anke Reingen - RBC Nicholas Herman - Citigroup

Good morning, ladies and gentlemen, and welcome to the Commerzbank AG Conference Call. Please note that this call is being transmitted, as well as recorded by audio webcast and will subsequently be made available for replay in the internet. At this time, all participants have been placed on a listen-only mode. The floor will be opened for questions following the presentation. Let me now turn the floor over to Stephan Engels.

Good morning, ladies and gentlemen. After our preannouncement last week, I welcome you today to our quarterly conference call. Before I start to guide you through our Q2 figures, let me briefly comment on our EBA stress test results. An important key takeaway for me is that Commerzbank’s resilience to shocks as far as credit risks are concerned was made clear. Commerzbank's LLP impact was roughly 260 basis points but it’s 372 basis points on average for European banks. Another finding for me is that in our case, caps and floors on NII led to an NII impact of roughly minus €2 billion versus a significant positive contribution in our own simulations. And of course we take the results of the stress test seriously, especially when it comes to the importance of profitability. This is of course one of our key topics for our capital market update, in which we will focus on costs, revenues and digitalization, building on the progress we have been making over the last few years. Having said this, let me now talk you through our Q2 figures. Let me start with our summary on Page 1 and highlight the quarter in a nutshell. We see continuous growth in Private Customers and in CEE, with growing loan volumes and a further increasing customer base, proving the successful execution of our strategy. In Mittelstandsbank, we sustained our leading position in the German market with our very robust client-driven business model. Our benchmark low NPL ratio proves our healthy and diverse risk profile based on the stable German economy. Our Core Tier 1 ratio and our leverage ratio are solid and a robust foundation for our German base business model. However, and obviously not surprising, customer reluctance in overall weak markets driven by ongoing geopolitical news such as Brexit and the negative interest rate environment continued to weigh on our revenues also in Q2. Having said that, we achieved an operating result of €342 million in Q2 based on total Group revenues of €2.2 billion. Compared to Q2 2015, we again managed expenses flat amounting to €1.7 billion. Ongoing cost initiatives are continuously used to fund further investments, especially into digitalization initiatives and the regulatory robustness of our bank. Overall, the H1 operating return on tangible equity stands at 4.6% and the net return on tangible equity of the Group amounts to 2.9%. Besides our benchmark, low NPL ratio is only 1.4%. Also the low level of loan loss provisions with cost of risk in H1 of 15 basis points, underpin our healthy risk profile. As already announced last week, our fully phased-in Core Tier 1 ratio stands at solid 11.5% while the fully phased-in leverage ratio remains almost unchanged at comfortable 4.4%. The 50 basis points shift in Core Tier 1 ratio predominantly results from non-operating valuation and methodology effect, leading to €3.8 billion higher RWAs as well as around €600 million lower regulatory capital. While the increase in Group RWAs mainly stems from new external op risk cases, changes in capital can be attributed to OCI items. This mainly includes higher pension liability as a result from lower discount rates and lower revaluation and currency translation reserves, in particular driven by higher credit spreads for Italian sovereign debt. Q2 shows that corresponding to our past guidance volatility and temporary effect can impact the Core Tier 1 ratio in one or the other direction also at a quarterly basis. Consistent to last year, we have again accrued for a dividend. As of H1, the accrual amounts to €0.10 per share. Slide 2 summarizes the key financial figures of the Group. When you turn to Slide 3, we can have a look at the operating performance of the segment in Q2 2016. As we will look into the business segments later in my presentation, let me just spend a few words on our segment Others & Consolidation. Others & Consolidation showed an operating result of minus €135 million in Q2, well reflecting our run rate guidance of minus €100 million to €250 million per quarter. Lower costs in Q2 stem amongst others from the book bank levy in Q1 of €38 million, while Treasury revenues remained subdued also in Q2. Please turn to Slide 4, where we summarize the development of the Group P&L. Our Group operating results of €342 million in Q2 contributes to a half-year result of €615 million and compares to Q2 2015 result of €419 million. Main reason for the quarterly year-on-year development are lower revenues, which can be explained by three main drivers. Firstly, due to lower deposit margins, the negative interest rate environment weighed on NII of PC and Mittelstandsbank by €71 million. Secondly, our EMC business in Corporates & Markets has been affected by €156 million. Volatility has negatively affected our structured product business for institutional clients and customer reluctance, as well as the realignment of our business model and securities finance had also its impact. Thirdly, the fee business in PC and Mittelstandsbank was affected by €48 million lower net commission income. These effects exceed that Group-wide gain from the sale of VISA Europe, which amounts to €123 million. Loan loss provisions of €187 million in Q2 stay at a very favorable level due to the quality of our loan book and the stable German economy. In Q2, we have booked another €40 million restructuring charges, predominantly to fund back-office sourcing initiatives. €12 million will be used to further realign our Corporates & Markets operations, including the streamlining of the securities finance business. After tax and with a slightly higher minorities of €38 million due to Visa contributions of our subsidiaries M-Bank and Comdirect, the net result comes out at €209 million for Q2, €46 million higher than in the first quarter. Let us continue with Page 5 for more detailed look at our cost base. Expenses for the Group amounted to €1.7 billion in Q2 2016, including the Polish banking tax of €20 million. Please be reminded that Q1 included the European bank levy of €143 million, as well as two months of the Polish banking tax of €13 million. Personnel expenses decreased by almost €100 million year-on-year, benefiting from FTE reductions, sourcing initiatives on the back of efficiency programs, as well as lower accruals for variable compensation in Q2, reflecting our current results in the Group. These cost initiatives fund further investments on the operational cost side. Additional investments into our IT with focus on digitalization and investments into regulatory and compliance remain on top of our agenda. Loan loss provisions are shown on Page 6. LLPs remain at a very low level with €187 million in Q2, and a total amount of €335 million in H1. The benign provisioning level proves the high quality of our loan book, in particular in PC, that benefits from the very good solvency of German households. As expected, Mittelstandsbank has a slightly higher volume of impaired loans compared to last quarter. However LLPs still stand at low level reflecting the good portfolio quality and stable German economy. Loan loss provisions in our non-core unit, ACR, developed in different directions. On the one hand, commercial real estate benefits from a release of €26 million. On the other hand, Ship Finance continues to require high provisioning level of €99 million in Q2, and therefore €24 million higher than in Q1. The current economic conditions of the shipping markets remain very difficult, which explains the high cost of risk level of more than 500 basis points. This leads to Page 7 underpinning our very good risk profile of the Group. Our strong NPL ratio in the Group further decreased to 1.4% and stands out in the European peer comparison. Nevertheless, please be aware that due to challenging shipping markets, we will see a moderate increase in related NPLs. Another proof of our sound risk profile is so-called Texas ratio, which comes out at a strong 23%. This ratio measures NPLs as a percentage of tangible book value and stock of loan loss provisions. As of H1, the cost of risk persists at an exceptionally low level of 15 basis points. This is a positive side-effect of the current negative interest rate environment. Furthermore, 80% of our portfolios have investment grade ratings, which demonstrates our overall sound asset quality resulting from the German-centric business model. Let me focus now on the segments and start with Private Customers on Slide 8. PC again achieved a high level in operating result of €180 million in Q2. The growth track of our Private Customers division goes on. Our loan book is growing. The new business pipeline of mortgage and customer loans remains healthy as demonstrated by an ongoing strong demand for these products. Overall loan volumes increased by 8% year-on-year with persisting high demand for new consumer loans, well above 2015 volumes. Also our customer base grew further. We gained 62,000 new net customers over the last quarter and 940,000 since the beginning of 2013, therefore our strategic target of 1 million new customers until the end of this year is in striking distance. On the other hand, the current adverse market environment weighs on net commission income and the negative interest rate environment burdens NII. The ongoing negative geopolitical news flow and macroeconomic uncertainties spiking around the UK referendum, reinforce customer reluctance, especially in securities business, resulting in €17 million lower revenues compared to Q2. Let me point out that our strategy to focus on recurring revenue streams in the securities business pays off with a revenue increase of €12 million, thus the impact from lower transaction-related revenues of €29 million has been substantially mitigated. The declining NII from deposit margins related to the negative interest rate environment amounts to minus €45 million year-on-year. Those effects have been largely offset by the sale of VISA Europe, which contributed to €58 million to Q2. Let's carry on with Mittelstandsbank as shown on Page 9. Mittelstandsbank sustains a leading market position in SME banking. This can be seen especially in Mittelstand Germany where revenues increased compared to 2015. This comes along with stable loan volumes and increasing margins and provides evidence for our strong relationship-based business model in Germany. In large corporates and international clients, revenues increased due to a 4% growth in loan volumes quarter-on-quarter. Compared to Q2 2015, the decline in revenues results from lower net commission income, which can be explained by lower fees from client hedging activities, as well as documentary business. Financial institution saw less revenues compared to Q2 2015 as a result of the negative interest rate environment and the thorough optimization of our corresponding banking network worldwide. As you are aware, we took the decision to refocus the business model in order to cope with our again tightened compliance and risk framework. Overall, we have seen ongoing solid results in the corporate banking business, while negative interest rate continued to be a material and persistent NII burden due to lower deposit margins. Thus the operating result of the MSB for Q2 amounts to €215 million excluding FVA and net CVA/DVA effects. Let's take a deeper look at the NII impact, which negative interest rates had over the first half of the year. Therefore we have updated Slide 10, you certainly remember from our Q1 results. Looking at the development of the NII split by loan volumes and deposit margins in the year-on-year comparison, a difference between PC and MSB exist that becomes particularly obvious over the last 12 months. While loan growth in PC mitigates margin pressure on deposits, MSB faces virtually flat volumes due to the subdued loan demand in Germany. Let me give you a bit more details by explaining the consequences of low loan to deposit ratio. Generally the lower the loan to deposit ratio of the bank, the higher the exposure towards the current interest rate environment, as excess liquidity needs to be invested at prohibitively low Central Bank rates, whereas passing on these conditions to customers does not work to full extent. As one key measure to mitigate this issue, MSB has actively reduced its deposit base by €22 billion over the last six months, and thus increased its loan to deposit ratio to 92%. Furthermore, the negative impact of shrinking deposit margins is then and to the extent that substantial amount of sticky sight deposits are set against longer term fixed rate loans and are therefore protected against declining interest rates until the loans mature, but when the roll-over of our loan book into loans with lower customer rates takes place, this leads to a further pressure on bank’s NII in the current interest rate environment. While in principle this holds true for all European banks, German banks are especially impacted as they rely on a deposit-based funding model, given the German export surplus. We therefore expect an additional NII decrease of roughly €100 million each year from 2017 onwards. Please turn to Page 11, which highlights concrete measures of our broadened effort to mitigate the negative interest rate environment. This is a key priority of our divisional management teams. Let me stress the following aspects. Measures have to be implemented with care and need to complement our successful growth strategy in PC, as well as market leadership in SME banking. However, we expect the mitigating effect from the taken measures of more than €100 million in 2016. In PC, we have introduced fees for paper-based transactions. Repricing measures include higher fees for credit cards and securities accounts. Individually granted discounts for customers in the past are removed. Furthermore, successful loan growth initiatives and mortgages and consumer finance are pursued. In MSB, we have reduced deposit volume sharply by €22 billion as mentioned before. Also we are the first mover in introducing deposit facility fees to most of the relevant deposit base. Furthermore, we launched interest rate floors on variable loans to safeguard margins and have executed several pricing measures such as pricing of transactional services. In Central & Eastern Europe, as illustrated on Page 12, we achieved an operating result of €109 million, about €65 million from the VISA Europe transactions. Apart from this gain, revenues are driven by organic growth and management of the net interest margin in line with M-Bank’s ambition to be at the forefront of innovation and growth. Let me provide you with one data point. In Q2, M-Bank has originated as many consumer loans as never before, approximately plus 24% compared to the first half of 2015. M-bank has continued its prudent cost management, resulting in a stable underlying cost base. The overall slight cost increase quarter-on-quarter can be explained by continued regulatory headwinds, including the Polish banking tax which amounts to €20 million in Q2. Finally, I would like to point out that the depreciating Polish zloty leads to €9 million lower operating result contribution from M-Bank to Commerzbank compared to H1 2015. Let's carry on with Corporates & Markets on Page 13, which was burdened by a challenging environment for equities in the second quarter, while we saw solid performance in debt capital markets and the sound demand for FX products. In Advisory & Primary markets, we recorded a solid debt capital markets performance, reflecting our generally strong customer franchise. Our DCM bonds business once again presented strong revenues in Q2, and Commerzbank remained market leader in the German syndicated loan market by numbers of deals in the first two quarters of 2016. As in the last quarter, issuance volumes in equity capital markets remains subdued. Fixed income and currencies benefited from a continuous strong demand for FX products in the second quarter. Rates in credit products saw muted client activity due to the low interest rates and market liquidity, following expanded ECB bonds and credit purchases. Compared to an exceptionally strong second quarter 2015, revenues of equity and markets - equity markets and commodities revenues declined by €156 million. Ongoing concerns over global growth and the overall geopolitical situation lead to a very high level of volatility, negatively impacting our structured product business for institutional clients. The lower client activity in equity product also hurt our securities business. Our decision to discontinue parts of the security finance activities naturally had its impact on the revenue performance as well. Overall, Corporates & Markets delivered an operating result of €119 million in Q2, including effects from OCS, FVA and net CVA/DVA of €64 million. €12 million restructuring costs were booked for structural changes and respective FTE reductions mainly in back-office area in London and New York. We have carried out comprehensive realignment measures in the context of our centers of competence approach in Corporates & Markets since 2015. This will lead to increased front to back efficiency and a gradual relief of operating cost base starting to materialize in 2017 in order to offset rising regulatory as well as compliance-related costs. Now let's turn to Page 14 and have a look at the development of our segment assets and capital recovery that delivered an operating result of minus €134 million, in line with expectations. Year-on-year we achieved a significant rundown of commercial real estate in Ship Finance exposures. As expected, our asset disposals naturally leads to lower revenues of the division, and in Q2, volatile mark-to-market positions have led to some further revenues decline. Loan loss provisions continued to be dominated by difficult shipping markets, where there is still no sustainable turnaround in sight. Lastly I would like to highlight that Commerzbank has successfully completed the winding up of its wholly-owned subsidiary, Hypothekenbank Frankfurt AG in May. This is another milestone in our rundown strategy. Page 15 shows the development of our risk-weighted assets in Q2 2016. Fully phased-in Group RWAs came out at €198 billion. The increase of €3.8 billion compared to Q1 2016 explains roughly 20 basis points of the Core Tier 1 ratio decline and is primarily driven by operational risk. New and extended external losses added to the industry-wide operational risk database led to €2.2 billion higher operating risk - operational risk RWAs. The slight increase in market risk RWAs of €1 billion results from a method adjustment, while credit risk RWAs are almost stable with currency effects leveling out. Positive effects from weaker British pound and Polish zloty are compensated by stronger U.S. dollar and Japanese yen. On Slide 16, we provide you with the quarterly development of our fully phased-in Core Tier 1 ratio that came out at 11.5%, which still represents a very robust fundamental, also if you compare it to the 10.5% one year ago. Let me point out that the 50 basis points shift results from non-operating valuation and methodology effect, which had an impact on both RWAs and capital. As said in the past, mark-to-market valuation and temporary effect may impact Core Tier 1 as just seen in Q2. The negative contribution of the revaluation results amounted to €263 million. One part of this is the capital neutral rebooking of the effect of the VISA Europe transaction into P&L. The widen sovereign credit spreads are another main driver from our Italian exposure credit spreads increased after the UK referendum and around the recurring Italian banking crisis but tightened already a bit in line with easing markets over the last week. Lower discount rates for pension liabilities have led to a decrease in capital by €137 million in Q2 and by €378 million in H1 2016. The decrease of the discount rate from 2% to 1.7% in the second quarter stems from lower yield on corporate bonds and the current interest rate environment. Since Q2 2014, the discount rate has halved, and given the ECB corporate bond buying program, a further decrease cannot be ruled out. The currency translation reserve decreased by €56 million due to weaker Polish zloty and British pound. As already pointed out at the beginning of the call, our Core Tier 1 ratio of 11.5% includes a dividend accrual of €0.10 per share in line with last year. To conclude, let me provide you with our outlook for the financial year 2016 as shown on Page 17. First, we'll pursue our strategy to further increase our market share in PC and strengthen our number one position in MSB, while keeping our sound risk profile. Second, we expect the negative rate environment and the adverse markets to further weigh on revenues. Third, we aim to keep our cost base stable with exception of additional external burdens. Fourth, we expect a moderate increase in loan loss provisions due to lower releases from impaired loans and continuously challenging ship markets. Our ambition remains to keep our capital ratio under full application of Basel 3, about SREP requirements. Thank you for your attention and I'm now looking forward to your questions.

Thank you. [Operator Instructions]. The first question comes from Benjamin Goy from Deutsche Bank.

Good morning. Three questions please from my side on - all on NII actually. First to clarify the €100 million impact you mentioned for ‘17 and onwards. Is that pre-mitigation or is it basically a net number we should think about? And then secondly, Mittelstandsbank NII was actually up quarter-on-quarter. I was wondering going forward was it basically one-time effect due to the repricing of the loans and also your management of the deposit base, or is there potentially more to come? And then lastly, it looks like in Private Customers you continued to grow as in the last quarters rather strongly. I was wondering, in the German press, we can read a lot about savings banks complaining about new mortgage directive. Do you see any impact on your business growth going forward or don't see any major changes here? Thank you.

Yes. Good morning, Benjamin. The €100 million guidance for 2017 and onwards is the gross number so to speak, and there we will do, as we have been in the past, do our best to mitigate it as far as possible. But I think it is important to understand that there will be a continuous burden from the interest rate environment. The MSB NII uptick has a lot to do with the increased loan to deposit ratio of 92%, so that is following the measures they have taken. And in that sense, it's not a one-off but we have roughly addressed half of our deposit base in the MSB segment. So there is more to come, but it will slightly slowdown, a bit level out, and then I guess we will need to think about the next set of measures to fight against the continuous pressure on NII which we have, in all honesty, also seeing the last years, so there is already being a lot happening. PC, the new mortgage directive, yes, I think for a limited amount - for limited timeframe we have seen some movements in the market. My impression by now is that everybody now more or less has found its way to fulfill the mortgage directive. We have been fully compliant with the mortgage directive as of day one and that's why I think we have some above-average good weeks at least and I guess it will stay this way.

Perfect. Thank you.

The next question comes from Johannes Thormann, HSBC.

Good morning everybody. Johannes Thormann, HSBC. Three questions, if I may as well. First of all, can you break down the LLP in the Mittelstandsbank to help me understand why it has increased so much in the second quarter? Of course I know it’s still on low absolute levels having seen different levels years ago, but still it is a massive increase considering the economic situation in Germany and also in most of the other European countries. Secondly, a follow-up on Benjamin’s question. Do you think whether loan to deposit ratio of 100% in the Mittelstandsbank is possible and achievable? And then last but not least, previously you talked about pricing measures in shifting the fee income from more transaction-driven business to more like annual fee. Can you - we haven't seen this helping in the second quarter. Can you update on this, please?

LLP and MFB, I don’t think traditionally the second quarter is higher than the first quarter because the first quarter until basically the end of February is booked into the previous years. We all know so the movement from first to second quarter as such is normal. Secondly, as you said, the level as such still is benign, and also if you take one of releases off at historically low level. If you are extending €100 billion roughly of loans to the German market, I think you will see some activity, and in some cases, you see two or three big ones. One or two of them you wouldn't surprise to even find in the press, let me call it this way. Loan to deposit ratio of 100%, I'd say theoretically if this is obviously a desirable level because that is what kind of seems to be the best position to be in the current low interest rate or negative interest rate environment, but as I also said, we need to really balance this position with our customer franchise and need to make sure that we protect our position there as well. But I think, as I said in my speech as well, we have been the first-mover on such a broad scale in Germany to introduce these deposit facilities fees. Pricing, transaction versus recurring. This is mainly IPC discussion where we have been over the last four, five years really successfully moved our income or revenue stream substantially towards the recurring income part, and nevertheless even the recurring part produces so to speak a different revenue stream if the tax is at 11,000 or 9,600, so it is not totally stable, so there is a certain level of market reaction to it. But in general terms, I think the business model is a lot more stable as has been the strategy.

Okay. Thank you.

You're welcome.

And we have a further question coming from Britta Schmidt from Autonomous Research.

Yes, hi there. Good morning. I've also got three questions as well please. The first one is on capital. Can you maybe detail whether there are any sort of mitigation measures that you see that could perhaps improve the capital ratio by closer to 12%? And in relation to your comments on the EBA stress test, do you think that the drawdown in the stress test could lead to a higher SREP requirement? The second one would be on Brexit. Have you thought about your branch business in the U.K.? Have you got any contingency planning there? Would you consider applying for banking license or restructuring the business otherwise more cost could be involved? And then thirdly, could you comment a little bit on your revenue outlook in Corporates & Markets and the impact that the changes in the securities financing business have had?

Capital, as I’ve said already two, three minutes ago, part of the mark-to-market position have moved the other way around since the end of June. Keep in mind, end of June was really where we all were surprised by the Brexit and the Italian banking crisis, at least seem to be at the peak, so I expect some of that will basically flow-back or ease out to a certain extent and obviously - and that's what I’ve said before. We want to stay above our SREP requirement, and in that sense, we will, as we have done in the past very thoroughly and very effectively, try to manage and mitigate this capital positions. SREP and EBA, I guess, there will be a certain reflection of the stress test results in the SREP requirement, but I guess I am best advised to wait until I see what exactly the EBA/ECB will do with that and then I think we have a more solid base to discuss that. Currently my working assumption is I go on with the SREP requirement and the GSIP requirement that I have and that's what I can work against. Brexit and the U.K. branch, in all honesty, as long as the Brexit negotiation really hasn't started, I think it's hard to find out what is the best possible way and everything else, to a certain extent, is speculation. I guess we have been looking at these things but I think we are far too early to really take proper decisions until we understand how it really runs out. And the last question was? The securities finance business. Yes, we have seen an impact in the first and second quarter and we now have a lot of time to work on because revenues and tendency seem to disappear a lot faster than costs and now we need to work on adjusting the cost base. There will be a certain level that will be with us on the cost base maybe for another year or two especially on systems and other stuff, but the long-term goal is obviously to mitigate that as far as possible.

Thank you.

And the next question comes from Riccardo Rovere from Mediobanca.

Yes, good morning to everybody. Just a couple of questions from my side. First of all, is it possible if you have an idea when do you think shipping loan losses could start reducing a little bit or eventually what kind of coverage ratio do you think you need on that portfolio because what you are showing, it seems to be a little bit diverged around there, at least much more than what other banks having exposure in that segment has reported so far. The second question I have is just to get back on previous question one second. I'm not sure I understand it correctly if you expect an increase in your SREP ratio after the outcome of the stress test? And the last thing I just want, given that profitability is clearly under pressure, I just wonder whether you are changing maybe your mind on using TLTRO liquidity, not because of liquidity or funding issues just because this could be support the profitability if you manage [ph] to have a negative borrowing cost? Thanks.

Yes, starting with the shipping part. When will shipping have, let's call it, a turnaround at the industry? The simple answer is once we will see less new ships added to a market that already has an oversupply of ships and not very strong demand for further shipping capacity. So, as long as there are new ships build, then everybody needs, there will be substantial pressure on the markets. And from my personal perspective, this structural problem remains unsolved and I don't see this going away too soon or too fast and that is unchanged to our assumptions over the last years. We have roughly 60% coverage ratio on our impaired loans, which over the last years has served us well to run the portfolio at the speed that you have seen. Keep in mind we started with roughly €20 billion and we are now just a little bit over €5 billion. I guess the strategy will still be the same. Currently the markets have been a little bit slower but we'll see how that goes on. The SREP requirement, I’m just sorry that I phrased it probably not well enough. I do not expect the SREP requirement to go up. I have no indication for that. TLTRO, as said before, totally unchanged in the setup that we have at Commerzbank, including the strong funding base. We don't see any change to improve profitability with the TLTRO. Nevertheless as I said before, profitability is a key issue which we will have to address and will address in the capital markets update in the second half of the year.

All clear. Thank you.

And the further question comes from Daniele Brupbacher from UBS.

Good morning and thank you. Firstly just on the capital side. You mentioned during your remarks that there might be further negative impact coming from pension liabilities. Could you just elaborate a little bit on this in terms of if interest rates and the yield curves and spreads stay where they are now, would that mean further adjustments? And then - sorry again, back on that €100 million NII guidance from 2017 onwards. So just do I understand that correct, is it €100 million hit in ‘17 and then another €100 million in ‘18 et cetera? Is that what you expect? And then when I look at the famous Slides 10 in the Q2 presentation and then also Q1 presentation, the incremental worsening in the second quarter was something like €70 million alone. So if I had to compare that with €100 million guidance you gave, does it actually mean that you think the worst is soon over so it's basically the peak year this year and then that the additional worsening is seen “only €100 million from ‘17”. Is that a fair reading of this? And how comfortable are you about repricing efforts on Slide 11, given market structures competitive behavior. Why do you think this will be successful now? Thank you.

So hopefully I got all the questions. Let's start with the - on the capital and the pension liabilities. The pension liabilities are discounted on the basis of a basket of bonds to be really simple, and this basket of bonds interest rate have basically halved over the last, two years let's roughly call it that. And in that sense if we don't see any moves on the interest rate environment, that will not change. So whatever you see there - if interest rates stay where they are, there is no further easing. We have grabbed all these effects. A further move which obviously cannot be excluded, just keep in mind that the ECB still is keeping on buying corporate bonds, which to a certain extent obviously also influences this reference basket if they increase that or if there is a further change in interest rates that will have an effect, as I’ve said, at the point where we are, everything has been captured. The €100 million NII is that PA [ph] figure. So it's ‘17, it's ‘18, it's 19 and so on. In general, the mitigation part, I think we have at least seen most of the interest rate movements over the last years, so you can imagine that this effect has already been there over the last years and has been compensated. If we have very simple parts of it, obviously also on the deposit accounts where we’re basically having close to zero or zero for most customers by now, and for the institutionals and bigger corporates, as we have said, deposit fees. So if the interest rates stays where it is, that is also the number that we are seeing. If the interest rates moves further down again, the number will go up and we will need to mitigate further, which is what we have done over the last years. Now how optimistic am I on repricing? I think we all know that the German market has its specific in terms of how it's been working and it has been, given the fact that Germany is a net exporter of goods and thereby a net importer of cash, has been very much relying on stable deposit funding. Now this deposit funding with negative interest rates is obviously a very difficult business model which is also part of what we have seen in the stress test on the NII assumptions as I have mentioned very early. Nevertheless, the market has been repricing. Yes, we have been the first-mover, and yes, I think it will go on because the pressure is across the board strong and I see - I think you can see it on all the sectors that is not only talking about this, it's also branch closures and other stuff. The question is a little bit that of speed, but in principle I have no doubt that the German market will see these repricing initiatives. Weather and if I can fully compensate and when fully compensate? The interest rate environment is probably also a question of time, because as we have seen since the beginning of the year, if interest rates move down quickly, it obviously takes a while to reprice and work it through your customer base and is then the other geopolitical stuff comes on top of it, then you can see quarters like you have seen.

Thank you very much. Very useful.

The next question comes from Kiri Vijayarajah from Barclays.

Yes, good morning, gentlemen. Just going back to the stress test. Just trying to understand that the 7.4% in the adverse scenario, does that include the 50 basis points erosion in the starting point that occurred in the first half? So in other words, when you print the - when they calculate the 7.4%, does it look more like 6.9% when we take in account that 50 bps erosion in 2Q? And then still on capital, the IRB shortfall seems to have increased in the quarter by US$170 million. Can you tell us which portfolios that IRB [ph] shortfall relates to and why that's increased in the quarter? Thank you.

Yes, the question - simply speaking, does the stress test already includes the market movements of Q2? I would say by design it doesn't because the stress test is based on the end 2015 figures and what has happened in the markets in Q2 is obviously, at least not explicitly, part of the stress test. So these two things do not relate to each other and are basically in two totally different worlds to a certain extent. You can discuss whether part of the operational risk external database update reflects part of the conduct risk charge which goes through all the banks’ P&L, like for example we have been paying our U.S. settlement in 2015 and that has basically been rolling through the stress test as well, but the basic view is these things are totally different timeframe. The IRB shortfall discussion has a lot to do with the migration of the Hypothekenbank Frankfurt AG portfolios from their systems into our core bank systems. That has had some bits and pieces led to, let's say, final adjustments that we will need to review and look, and my expectation is that some of them will be compensated going forward in the upcoming quarters.

Okay. So when you say compensated, that means flowing through the P&L?

Yes, that will probably more the shortfall discussion [ph] rather than the P&L part. It's more valuation.

Okay, understood. Thank you.

It’s systems, techniques and other stuff that would drive the shortfall down.

The next question is Guillaume Tiberghien from Exane.

Yes, good morning. Two questions. One again on net interest income. So understandably the €100 million pressure is per annum. How long is the duration of the loan book? So in other words, how many years should we expect this €100 million drag, so is it five years for example? And the second question is on capital. If I - I understood the comments you made on the Italian spread in the quarter to-date, but if I take the 10.25% of SREP and I add the DC [ph] above 1.5%, you’re obviously not even at the 11.75% that is required. So are you changing your stance potentially on potential disposal of M-Bank in order to boost capital, so as not to have to raise again?

Let me start with the second question first. The SREP requirement for 2019 indeed is 10.25% plus 1.5%, which is 11.75% at the minimum fully loaded. And indeed our current ratio is not above that level and indeed our ambition and our clear focus is to get it back up against this level. Legally speaking, we are still in the phase-in part of the decent part, so technically speaking, I’m at 10.25% plus 0.5% which is 10.75%, so legally I don't have a problem whatsoever, and again the view of the management team here is that we need to obviously get back up above the 11.75% including whatever we call them, appropriate managed buffer. And in that context, the disposal of the M-Bank is definitely not on the agenda. Indeed the €100 million is a PA [ph] number, so it basically piles up so to speak. So it's the €100 million, then it's another €100 million plus the original €100 million minus whatever mitigation can be done. And please keep in mind that is what we have been seeing over the last years also and we have had a lot of mitigating measures this is why not all of the numbers that you can theoretically think of has been hitting our P&L in a visible level. I would think that at least for the next three years is my assumption is what you will - what you can basically stick in your Excel sheets.

Thank you very much.

And we have a further question from Anke Reingen from RBC.

Yes, good morning. Three questions please. First on net interest income in the second half. Should we expect a similar trend to first half-first half on 12% decline in underlying net interest income? And on costs, obviously are flat but doing better on costs, is that one of the areas where you think you will focus on, especially at the strategic update but obviously you have to wait, but is this something where you could think you can do better? And then lastly on capital. You said 11.75% plus management buffer. Given, when will we find out where you see your management buffer? I mean, 50 basis points is quite low, that's the buffer given the volatility only this quarter. Can you maybe talk a bit more where you could potentially see a buffer? Thank you very much.

NII in the second half. I think if you compare on Mittelstandsbank, the impact out of the NII from the low interest rate environment between Q1 and Q2, you can already see an NII that the measures that have been taken at the Mittelstandsbank team are starting to pay off. And in that sense, if we assume that the interest rate environment and everything else is somewhat stable, which maybe a too optimistic assumption but nevertheless, then we will hopefully get better with our mitigating measures quarter-on-quarter. And back to the €100 million guiding, the basic pressure on revenues will be with us for quite a while. Costs flat. Keep in mind that cost flat means that we are doing a lot on our cost base to achieve pockets of opportunities to invest in digitalization and other stuff, so the total cost base is flat but there has been a lot of initiatives going on and at the end of the day even the restructuring charge, which you have been more or less seeing every quarter is basically reflecting our ongoing initiatives to get better here. On a possible capital markets update, I wouldn't want to speculate, but as we have said, it's obviously revenue, cost and digitization. On capital, what will be appropriate management buffer in 2019? I think it’s a discussion which we will probably have rather in 2018 or 2019 as we are approaching the numbers if we get a better understanding how the SREP logic will develop going forward. If we do understand how IFRS 9, fundamental review of the trading book and all the other stuff which is on the agenda works, and then I guess we will update you.

Okay. Thank you.

And the last question comes from Nicholas Herman from Citigroup.

Good morning. Well, most of my questions have been asked, so I will just one follow-up question and one small little [ph] question. The smaller one is the headcount in Others & Consolidation increased this quarter, so the average of the first six months was by 18,000 versus less than about 17.7% in the first quarter. What's driving that, and your outlook on how that headcount should trend, would be useful. The second question is clearly your - I mean, the revenue environment is not great. What kind of ROE do you think Commerzbank should be generating? Thank you.

Yes, the headcount question. Again, the headcount representation in Others & Consolidation, follows management responsibility along our HR systems. The allocation of these costs, except for a small corporate headquarter function, is with the segments, so as much as you find the headcount number for these purposes, it is cost-wise in the segment. With respect to the number of headcount, looking at the numbers, the Q2 number is 58 lower than in Q1. So I'm not sure whether we are talking - or whether you got your question right.

I was just saying that the…

Sorry.

So I was just referring to Page 16 of your second quarter report, which says the average headcount for six months was just shy about by 18,000 whereas in the first quarter the average headcount was 17,700.

Okay, maybe because that probably has some technical background. I suggest that you call the IR guys and then they’ll guide you to put up the number. With respect to the ROE guidance, I would prefer to wait answering these questions until we have our capital markets updates somewhere in the second half of this year.

Got it.

Okay. Thank you very much for this very lively conference call. I wish you all a nice day and I'm looking forward to see you in Q3. Thank you.