20-F 1 y18643e20vf.htm FORM 20-F 20-F
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As filed with the Securities and Exchange Commission on March 23, 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 20-F

     
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
    or
 
   
X
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 
   
 
  or
 
   
 
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
 
  or
 
   
 
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report.

Commission file number 1-15242

Deutsche Bank Aktiengesellschaft

(Exact name of Registrant as specified in its charter)
Deutsche Bank Corporation
(Translation of Registrant’s name into English)
Federal Republic of Germany
(Jurisdiction of incorporation or organization)
Taunusanlage 12, 60325 Frankfurt am Main, Germany
(Address of Registrant’s principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Title of each class   Name of each exchange on which registered
Ordinary Shares, no par value   New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares, no par value          505,557,676
(as of December 31, 2005)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  X          No

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes          No  X

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X          No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non- accelerated filer.

     See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

                     
Large accelerated filer   X   Accelerated filer       Non-accelerated filer    

     Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17          Item 18  X

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes          No  X

 


 

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Deutsche Bank Aktiengesellschaft, which we also call Deutsche Bank AG, is a stock corporation organized under the laws of the Federal Republic of Germany. Unless otherwise specified or required by the context, in this document, references to “we”, “us”, and “our” are to Deutsche Bank Aktiengesellschaft and its consolidated subsidiaries.

Due to rounding, numbers presented throughout this document may not add up precisely to the totals we provide and percentages may not precisely reflect the absolute figures.
Our registered address is Taunusanlage 12, 60325 Frankfurt am Main, Germany, and our telephone number is +49-69-910-00.

Cautionary Statement Regarding Forward-Looking Statements

We make certain forward-looking statements in this document with respect to our financial condition and results of operations. In this document, forward-looking statements include, among others, statements relating to:
  our implementation of our strategic initiatives and management agenda;
  the development of aspects of our results of operations;
  our expectations of the impact of risks that affect our business, including the risks of loss on our credit exposures and risks relating to changes in interest and currency exchange rates and in asset prices; and
  other statements relating to our future business development and economic performance.
In addition, we may from time to time make forward-looking statements in our periodic reports to the United States Securities and Exchange Commission on Form 6-K, annual and interim reports, invitations to Annual General Meetings and other information sent to shareholders, offering circulars and prospectuses, press releases and other written materials. Our Management Board, Supervisory Board, officers and employees may also make oral forward-looking statements to third parties, including financial analysts.
Forward-looking statements are statements that are not historical facts, including statements about our beliefs and expectations. We use words such as “believe”, “anticipate”, “expect”, “intend”, “seek”, “estimate”, “project”, “should”, “potential”, “reasonably possible”, “plan” and similar expressions to identify forward-looking statements.
By their very nature, forward-looking statements involve risks and uncertainties, both general and specific. We base these statements on our current plans, estimates, projections and expectations. You should therefore not place too much reliance on them. Our forward-looking statements speak only as of the date we make them, and we undertake no obligation to update any of them in light of new information or future events.
We caution you that a number of important factors could cause our actual results to differ materially from those we describe in any forward-looking statement. These factors include, among others, the following:
  changes in general economic and business conditions;
  changes and volatility in currency exchange rates, interest rates and asset prices;
  changes in governmental policy and regulation, and political and social conditions;
  changes in our competitive environment;
  the success of our acquisitions, divestitures, mergers and strategic alliances;
  our success in implementing our management agenda and realizing the benefits anticipated therefrom; and
  other factors, including those we refer to in “Item 3: Key Information – Risk Factors” and elsewhere in this document and others to which we do not refer.

Use of Non-GAAP Financial Measures

This document contains non-U.S. GAAP financial measures. Non-U.S. GAAP financial measures are measures of our historical or future performance, financial position or cash flows that contain adjustments that exclude or include amounts that are included or excluded, as the case may be, from the most directly comparable measure calculated and presented in accordance with U.S. GAAP in our financial statements. Examples of our non-U.S. GAAP financial measures are: operating cost base,

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underlying pre-tax profit, underlying cost/income ratio, average active equity and underlying pre-tax return on equity. For descriptions of these non-U.S. GAAP financial measures and the adjustments made to the most directly comparable U.S. GAAP financial measures to obtain them, please refer to Note [27] to our consolidated financial statements, which is incorporated by reference herein.

Use of Internet Addresses

This document contains inactive textual addresses of Internet websites operated by us and third parties. Reference to such websites is made for informational purposes only, and information found at such websites is not incorporated by reference into this document.

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PART I

Item 1: Identity of Directors, Senior Management and Advisers

Not required because this document is filed as an annual report.

Item 2: Offer Statistics and Expected Timetable

Not required because this document is filed as an annual report.

Item 3: Key Information

Selected Financial Data

We have derived the data we present in the tables below from our audited consolidated financial statements for the years presented. You should read all of the data in the tables below together with the consolidated financial statements and notes included in “Item 18: Financial Statements” and the information we provide in “Item 5: Operating and Financial Review and Prospects.” Except where we have indicated otherwise, we have prepared all of the consolidated financial information in this document in accordance with generally accepted accounting principles in the United States (which we refer to as U.S. GAAP). Our group division and segment data come from our management reporting systems and are not necessarily based on, or prepared in accordance with, U.S. GAAP. For a discussion of the major differences between our management reporting systems and our consolidated financial statements under U.S. GAAP, see “Item 5: Operating and Financial Review and Prospects – Results of Operations by Segment.”

In reading our income statement data, you should note that the financial accounting treatment under U.S. GAAP for changes in German income tax rates results in a negative impact on our results of operations in the years 2001 through 2005. These tax rate changes, which were enacted in 2000 and 1999, were:
  significant reductions, effective in 1999 and 2001, in the corporate income tax rate; and
  the reduction to zero, effective in 2002, of the tax rate applicable to capital gains on the sale of certain equity securities.
These reductions in tax rates resulted in significant decreases in our deferred taxes payable, with a corresponding reduction in our income tax expense for 2000. In the years 2001 through 2005, when we sold securities that had accumulated deferred tax provisions within other comprehensive income, we reversed such deferred tax provisions, which resulted in a significant increase in income tax expense.
We more fully explain the financial accounting treatment of these tax rate changes in “Item 5: Operating and Financial Review and Prospects – Effects of 1999/2000 German Tax Reform Legislation and Accounting for Income Taxes.”
Due to sales of equity securities for which there were accumulated deferred tax provisions in other comprehensive income, it was necessary to reverse 544 million, 120 million, 215 million, 2.8 billion and 995 million of those provisions as income tax expense in 2005, 2004, 2003, 2002 and 2001, respectively. During these years, our net income was 3.5 billion, 2.5 billion, 1.4 billion, 397 million and 167 million, respectively. Without the additional income tax expense we describe above, and also without the cumulative effect of accounting changes we describe below, our net income would have been 4.1 billion, 2.6 billion, 1.4 billion, 3.2 billion and 1.4 billion in 2005, 2004, 2003, 2002 and 2001, respectively. We recommend that you consider our net income excluding the impact of the changes in income tax rates and the reversing effect and the cumulative effect of

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accounting changes when you compare the years 2001 through 2005 to one another and to earlier and future periods.
In 2003, as a result of the application of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), we recorded a 140 million gain, net of tax, as a cumulative effect of a change in accounting principles in our Consolidated Statement of Income. Also in 2003, we adopted SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”) and recorded an after-tax gain of 11 million. The requirements of SFAS 150 also resulted in a reduction in shareholders’ equity of 2.9 billion during 2003. Upon adoption of the requirements of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) as of January 1, 2002, we discontinued the amortization of goodwill with a net carrying amount of 8.7 billion and we recognized a 37 million tax-free gain as a cumulative effect of a change in accounting principles in our Consolidated Statement of Income. In addition, in 2001, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and in that year recorded an expense of 207 million, after tax, as a cumulative effect of a change in accounting principles in our Consolidated Statement of Income.

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Income Statement Data

                                                       
     
  in m. and U.S.$ m. (except per share data)   2005 1     2005     2004     2003     2002     2001    
           
 
Net interest revenues
  $ 7,106         6,001       5,182       5,847       7,186       8,620    
           
 
Provision for loan losses
  $ 443         374       372       1,113       2,091       1,024    
           
 
Net interest revenues after provision for loan losses
  $ 6,663         5,627       4,810       4,734       5,095       7,596    
           
 
Commissions and fee revenues
  $ 11,947         10,089       9,506       9,332       10,834       10,727    
           
 
Trading revenues, net
  $ 8,798         7,429       6,186       5,611       4,024       6,031    
           
 
Other noninterest revenues
  $ 2,512         2,121       1,044       478       4,503       4,163    
           
 
Total net revenues
  $ 29,920         25,266       21,546       20,155       24,456       28,517    
           
 
Compensation and benefits
  $ 13,018         10,993       10,222       10,495       11,358       13,360    
           
 
Goodwill impairment2/impairment of intangibles
                  19       114       62       871    
           
 
Restructuring activities
  $ 908         767       400       (29 )     583       294    
           
 
Other noninterest expenses
  $ 8,756         7,394       6,876       6,819       8,904       12,189    
           
 
Total noninterest expenses
  $ 22,682         19,154       17,517       17,399       20,907       26,714    
           
 
Income before income tax expense and cumulative effect of accounting changes
  $ 7,238         6,112       4,029       2,756       3,549       1,803    
           
 
Income tax expense
  $ 2,415         2,039       1,437       1,327       372       434    
           
 
Income tax expense from the 1999/2000 change in effective tax rate and the reversing effect
  $ 644         544 3     120 3     215 3     2,817 3     995 3  
           
 
Income before cumulative effect of accounting changes, net of tax
  $ 4,179         3,529 3     2,472 3     1,214 3     360 3     374 3  
           
 
Cumulative effect of accounting changes, net of tax
                        151       37       (207 )  
           
 
Net income
  $ 4,179         3,529 3     2,472 3     1,365 3     397 3     167 3  
           
 
Basic earnings per share4
                                                   
           
 
Income before cumulative effect of accounting changes, net of tax
  $ 9.02         7.62 3     5.02 3     2.17 3     0.58 3     0.60 3  
           
 
Cumulative effect of accounting changes, net of tax
                        0.27       0.06       (0.33 )  
           
 
Net income
  $ 9.02         7.62 3     5.02 3     2.44 3     0.64 3     0.27 3  
           
 
Diluted earnings per share5
                                                   
           
 
Income before cumulative effect of accounting changes, net of tax
  $ 8.23         6.95 3     4.53 3     2.06 3     0.57 3     0.60 3  
           
 
Cumulative effect of accounting changes, net of tax
                        0.25       0.06       (0.33 )  
           
 
Net income
  $ 8.23         6.95 3     4.53 3     2.31 3     0.63 3     0.27 3  
           
 
Dividends paid per share6
  $ 2.01         1.70       1.50       1.30       1.30       1.30    
           
1   Amounts in this column are unaudited. We have translated the amounts solely for your convenience at a rate of U.S.$ 1.1842 per , the noon buying rate on December 30, 2005 (the last business day of 2005).
 
2   Goodwill amortization in 2001.
 
3   These figures reflect the income tax expense (benefit) from changes in 1999 and 2000 effective tax rates pursuant to German tax law and the reversing effect. We describe these changes and their effects in “Item 5: Operating and Financial Review and Prospects – Effects of 1999/2000 German Tax Reform Legislation and Accounting for Income Taxes.”
 
4   We calculate basic earnings per share for each period by dividing our net income by the weighted average number of common shares outstanding.
 
5   We calculate diluted earnings per share for each period by dividing our net income by the weighted average number of common shares and potential dilutive common shares outstanding.
 
6   Dividends we declared and paid in the year.

Balance Sheet Data

                                                       
     
  in m. and U.S.$ m.   2005 1     2005     2004     2003     2002     2001    
           
 
Total assets
  $ 1,174,917         992,161       840,068       803,614       758,355       918,222    
           
 
Loans, net
  $ 179,235         151,355       136,344       144,946       167,303       259,838    
           
 
Deposits
  $ 450,928         380,787       320,796       299,335       323,541       373,578    
           
 
Long-term debt
  $ 134,471         113,554       106,870       97,480       104,055       166,908    
           
 
Common shares
  $ 1,682         1,420       1,392       1,490       1,592       1,591    
           
 
Total shareholders’ equity
  $ 35,450         29,936       25,904       28,202       29,991       40,193    
           
 
Tier I risk-based capital (BIS*)
  $ 25,932         21,898       18,727       21,618       22,742       24,803    
           
 
Total risk-based capital (BIS*)
  $ 40,128         33,886       28,612       29,871       29,862       37,058    
           
*   Bank for International Settlements.
 
1   Amounts in this column are unaudited. We have translated the amounts solely for your convenience at a rate of U.S.$ 1.1842 per , the noon buying rate on December 30, 2005 (the last business day of 2005).

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Certain Key Ratios and Figures

The post-tax return on average total shareholders’ equity, adjusted average total shareholders’ equity (which we call “average active equity”), post-tax return on average total assets and price/earnings ratio appearing below are based on our net income, which includes the effects of the financial accounting treatment under U.S. GAAP for the aforementioned income tax rate changes as well as the cumulative effects of accounting changes, net of tax.
                                 
     
        2005       2004     2003    
                 
 
Return on average total shareholders’ equity (post-tax)1
      12.51 %2       9.09 %2     4.72 %2  
                 
 
Return on average active equity (post-tax)3
      14.04 %2       9.98 %2     4.99 %2  
                 
 
Return on average total assets (post-tax)4
      0.35 %2       0.28 %2     0.16 %2  
                 
 
Equity to assets ratio5
      2.82 %2       3.08 %2     3.31 %2  
                 
 
Cost/income ratio6
      74.7 %       79.9 %     81.8 %  
                 
 
Employees7:
                             
 
In Germany
      26,336         27,093       29,878    
 
Outside Germany
      37,091         38,324       37,804    
                 
 
Branches:
                             
 
In Germany
      836         831       845    
 
Outside Germany
      752         728       731    
                 
 
Market price:
                             
 
High
    85.00       77.77     66.04    
 
Low
    60.90       52.37     32.97    
 
End of year
    81.90       65.32     65.70    
                 
 
Price/earnings ratio8 (at year-end)
      11.78 2       14.42 2     28.44 2  
                 
1   Net income as a percentage of average month-end shareholders’ equity.
 
2   These figures reflect income tax expense of 544 million in 2005, income tax expense of 120 million in 2004, and income tax expense of 215 million in 2003 resulting from the reversal of 1999/2000 credits for tax rate changes pursuant to German tax law. We describe these changes and their effects in “Item 5: Operating and Financial Review and Prospects – Effects of 1999/2000 German Tax Reform Legislation and Accounting for Income Taxes.” The table at the bottom of this page presents these figures excluding these effects.
 
3   Net income as a percentage of adjusted average month-end shareholders’ equity. We calculate this adjusted measure of our return on average total shareholders’ equity to make it easier to compare us to our competitors. We refer to this adjusted measure as our “post-tax return on average active equity.” This is not a measure of performance provided for in U.S. GAAP, however, and you should not compare our ratio to other companies’ ratios without considering the differences in calculation of these ratios. The items for which we adjust our ratio result primarily from our portfolio of shareholdings in publicly-listed industrial companies. We have held most of our larger participations for over 20 years, and are reducing these holdings over time. For further information on our industrial holdings, see “Item 4: Information on the Company – Our Group Divisions – Corporate Investments Group Division.” We realize gains or losses on these securities only when we sell them. These securities are also responsible for most of the accounting effects of the income tax rate changes we describe above. Accordingly, the adjustments we make to our average total shareholders’ equity to derive our average active equity are to exclude average unrealized net gains on securities available for sale, net of applicable tax effects. In addition we adjust our average total shareholders’ equity for the effect of expected dividend payments to our shareholders. The following table shows the adjustments we make to our average total shareholders’ equity to calculate our average active equity:
                         
in m.   2005     2004     2003  
 
Average total shareholders’ equity
    28,201       27,194       28,940  
Average unrealized net gains on securities available for sale, net of applicable tax effects
    (2,023 )     (1,601 )     (810 )
Average dividends
    (1,048 )     (815 )     (756 )
 
Average active equity
    25,130       24,778       27,374  
4   Net income as a percentage of average total assets.
 
5   Average shareholders’ equity as a percentage of average total assets for each year.
 
6   Total noninterest expenses as a percentage of net interest revenues before provision for loan losses, plus noninterest revenues.
 
7   Number of full-time equivalent employees as of the end of each period.
 
8   Market price per share at year-end divided by diluted earnings per share.

Our net income included the material effects of reversing income tax credits related to 1999 and 2000 tax law changes, as described in “Item 5: Operating and Financial Review and Prospects – Effects of 1999/2000 German Tax Reform Legislation and Accounting for Income Taxes”, and the cumulative effect of accounting changes as described in Note [2] to our consolidated financial statements. The following table shows our net income excluding these effects.

                                                                                     
     
  in m.     2005       Per share       Per share       2004     Per share     Per share     2003     Per share     Per share    
  (except per share amounts)               (basic)       (diluted)               (basic)     (diluted)             (basic)     (diluted)    
                             
 
Net income
      3,529         7.62         6.95         2,472       5.02       4.53       1,365       2.44       2.31    
                             
 
Add (deduct):
                                                                                 
 
Reversal of 1999/2000 credits for tax rate changes
      544         1.18         1.07         120       0.24       0.23       215       0.39       0.36    
 
Cumulative effect of accounting changes, net of tax
                                                (151 )     (0.27 )     (0.25 )  
                             
 
Net income before reversal of 1999/2000 credits for tax rate changes and cumulative effect of accounting changes, net of tax
      4,073         8.80         8.02         2,592       5.26       4.76       1,429       2.56       2.42    
                             

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Dividends

The following table shows in euro and in U.S. dollars the dividend per share for the years ended December 31, 2005, 2004, 2003, 2002 and 2001. We declare our dividends at our Annual General Meeting following each year. Our dividends are based on the nonconsolidated results of Deutsche Bank as prepared in accordance with German accounting principles. Because we declare our dividends in euro, the amount an investor actually receives in any other currency depends on the exchange rate between the euro and that currency at the time the euros are converted into that currency.

The table does not reflect German withholding tax that will apply to payments made to non-German residents. These are the German withholding tax rates that apply to our dividend payments made to German taxpayers or to non-German residents:
  dividends that we paid before 2002 were subject to German withholding tax at an aggregate rate of 26.375% (consisting of a 25% withholding tax and a 1.375% surcharge); and
  dividends that we paid in 2002 and thereafter have been subject to, as a result of changes in German tax law, German withholding tax at an aggregate rate of 21.1% (consisting of a 20% withholding tax and a 1.1% surcharge).
Residents of countries that have entered into an income tax convention with Germany may be eligible to receive a refund from the German tax authorities of a portion of the amount withheld. For dividends paid before 2002, residents of the United States who are fully eligible for benefits under the income tax convention entered into between the United States and Germany were entitled to receive a refund from the German tax authorities equal to 16.375% of those dividends. For dividends paid in 2002 and thereafter, those U.S. residents have been entitled to receive a refund equal to 6.1% of those dividends.
For dividends we paid before 2002, U.S. residents who received a refund from the German tax authorities were treated for U.S. federal income tax purposes as though they had received an additional dividend of 5.88% of the dividend we actually paid. For example, for a declared dividend of 100, U.S. residents were treated for U.S. federal income tax purposes as though they received a dividend of 105.88. For dividends paid in 2002 and thereafter, U.S. residents have not been treated as though they received the additional dividend.
For U.S. federal income tax purposes, the dividends we pay are not eligible for the dividends received deduction generally allowed for dividends received by U.S. corporations from other U.S. corporations.
See “Item 10: Additional Information – Taxation” for more information on the tax treatment of our dividends beginning in 2002.
                             
     
      Dividends per     Dividends per     Payout ratio 2, 3  
      share 1   share          
     
 
2005 (proposed)
  $ 2.96     2.50       33 %  
     
 
2004
  $ 2.30     1.70       33 %  
     
 
2003
  $ 1.89     1.50       61 %  
     
 
2002
  $ 1.36     1.30       203 %  
     
 
2001
  $ 1.16     1.30       481 %  
     
1   For your convenience, we present dividends in U.S. dollars for each year by translating the euro amounts at the noon buying rate described below under –“Exchange Rate and Currency Information” on the last business day of that year.
 
2   We define our payout ratio as the dividends we paid per share in respect of each year as a percentage of our basic earnings per share for that year.
 
3   In reading our payout ratios for each year, you should note the effects we describe above on our net income of the financial accounting treatment under U.S. GAAP for income tax rate changes and also of the cumulative effects of accounting changes. We describe the tax rate changes and their effects in “Item 5: Operating and Financial Review and Prospects – Effects of 1999/2000 German Tax Reform Legislation and Accounting for Income Taxes.” We describe the accounting changes and their cumulative effects in Note [2] to our consolidated financial statements.

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Exchange Rate and Currency Information

Germany’s currency is the euro. For your convenience, we have translated some amounts denominated in euro appearing in this document into U.S. dollars. Unless otherwise stated, we have made these translations at U.S.$ 1.1842 per euro, the noon buying rate for euros on December 30, 2005 (the last business day of 2005). The “noon buying rate” is the rate the Federal Reserve Bank of New York announces for customs purposes as the buying rate for foreign currencies in the City of New York on a particular date. You should not construe any translations as a representation that the amounts could have been exchanged at the rate used on December 31, 2005 or any other date.

The noon buying rate for euros on December 30, 2005 may differ from the actual rates we used in the preparation of the financial information in this document. Accordingly, U.S. dollar amounts appearing in this document may differ from the actual U.S. dollar amounts that we originally translated into euros in the preparation of our financial statements.
Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro price of our shares quoted on the German stock exchanges and, as a result, are likely to affect the market price of our shares on the New York Stock Exchange. These fluctuations will also affect the U.S. dollar value of cash dividends we may pay on our shares in euros. Past fluctuations in foreign exchange rates may not necessarily be predictive of future fluctuations.
The following table shows the period-end, average, high and low noon buying rates for the euro. In each case, the period-end rate is the noon buying rate announced on the last business day of the period.
                                     
     
  in U.S.$ per   Period-end     Average 1   High     Low    
     
 
2006:
                                 
 
March (through March 17)
    1.2197             1.2197       1.1886    
 
February
    1.1925             1.2092       1.1860    
 
January
    1.2158             1.2276       1.1842    
     
 
2005:
                                 
 
December
    1.1842             1.2041       1.1699    
 
November
    1.1790             1.2067       1.1667    
 
October
    1.1995             1.2148       1.1914    
 
September
    1.2058             1.2538       1.2011    
     
 
2005
    1.1842       1.2400       1.3476       1.1667    
     
 
2004
    1.3538       1.2478       1.3625       1.1802    
     
 
2003
    1.2597       1.1411       1.2597       1.0361    
     
 
2002
    1.0485       0.9499       1.0485       0.8594    
     
 
2001
    0.8901       0.8909       0.9535       0.8370    
     
1   We calculated the average rates for each year using the average of the noon buying rates on the last business day of each month during the year. We did not calculate average exchange rates within months.

On March 17, 2006, the noon buying rate was U.S.$ 1.2197 per euro.

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Long-Term Credit Ratings

We believe that maintaining our credit quality is a key part of the value we offer to our clients, bondholders and shareholders. Below are our long-term credit ratings.

                                 
     
        Dec 31, 2005       Dec 31, 2004     Dec 31, 2003    
                 
 
Moody’s Investors Service, New York1
    Aa3       Aa3     Aa3    
                 
 
Standard & Poor’s, New York2
    AA-       AA-     AA-    
                 
 
Fitch Ratings, New York3
    AA-       AA-     AA-    
                 
1   Moody’s defines the Aa3 rating as denoting bonds that are judged to be high quality by all standards. Moody’s rates Aa bonds lower than the best bonds (which it rates Aaa) because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat greater than Aaa securities. The numerical modifier 3 indicates that Moody’s ranks the obligation in the lower end of the Aa category.
 
2   Standard and Poor’s defines its AA rating as denoting an obligor that has a very strong capacity to meet its financial commitments. The AA rating is the second-highest category of Standard and Poor’s ratings. Standard and Poor’s notes that an AA rated obligor differs from the highest rated obligors only in small degree. The minus sign shows relative standing within the AA rating category.
 
3   Fitch Ratings defines its AA rating as very high credit quality. Fitch Ratings uses the AA rating to denote a very low expectation of credit risk. According to Fitch Ratings, AA-ratings indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. Category AA is Fitch Ratings second-highest rating category.

As of the date of this document, there has been no change in any of the above ratings.

Each rating reflects the view of the rating agency only at the time it gave us the rating, and you should evaluate each rating separately and look to the rating agencies for any explanations of the significance of their ratings. The rating agencies can change their ratings at any time if they believe that the circumstances so warrant. You should not view these long-term credit ratings as recommendations to buy, hold or sell our securities.

Capitalization and Indebtedness

Not required because this document is filed as an annual report.

Reasons for the Offer and Use of Proceeds

Not required because this document is filed as an annual report.

Risk Factors

An investment in our shares involves a number of risks. You should carefully consider the following information about the risks we face, together with the other information in this document when you make investment decisions involving our shares.

Market declines and volatility can materially adversely affect our revenues and profits.

In recent years we have increased our exposure to the financial markets as we have emphasized growth in our investment banking activities, including trading activities. Accordingly, we believe that we are more at risk from adverse developments in the financial markets than we were when we derived a larger percentage of our revenues from traditional lending activities. Market declines can cause our revenues to decline, and, if we are unable to reduce our expenses at the same pace, can cause our profitability to erode. Volatility can sometimes also adversely affect us.
An overall market downturn can adversely affect our business and financial performance. Market downturns can occur not only as a result of purely economic factors, but also as a result of war, acts of terrorism, natural disasters or other similar events.

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We may incur significant losses from our trading and investment activities due to market fluctuations.

We enter into and maintain large trading and investment positions in the fixed income, equity and currency markets, primarily through our Corporate Banking & Securities Corporate Division. We describe these activities in “Item 4: Information on the Company – Our Group Divisions – Corporate and Investment Bank Group Division.” We also have made significant investments in individual companies through our Corporate Investments Group Division, which we describe in “Item 4: Information on the Company – Our Group Divisions – Corporate Investments Group Division”. We also maintain smaller trading and investment positions in other assets. Many of these trading positions include derivative financial instruments.
In each of the product and business lines in which we enter into these kinds of positions, part of our business entails making assessments about the financial markets and trends in them. The revenues and profits we derive from many of our positions and our transactions in connection with them are dependent on market prices. When we own assets, market price declines can expose us to losses. Many of the more sophisticated transactions we describe in our discussions of our Corporate Banking & Securities Corporate Division are designed to profit from price movements and differences among prices. If prices move in a way we have not anticipated, we may experience losses. Also, when markets are volatile – characterized by rapid changes in price direction – the assessments we have made may prove to lead to lower revenues or profits, or losses, on the related transactions and positions.
In addition, we sometimes commit capital and take market risk to facilitate certain capital markets transactions and doing so can result in losses as well as income volatility.

Protracted market declines can reduce liquidity in the markets, making it harder to sell assets and possibly leading to material losses.

In some of our businesses, protracted market movements, particularly asset price declines, can reduce the level of activity in the market or reduce market liquidity. These developments can lead to material losses if we cannot close out deteriorating positions in a timely way. This may especially be the case for assets we hold for which there are not very liquid markets to begin with. Assets that are not traded on stock exchanges or other public trading markets, such as derivatives contracts between banks, may have values that we calculate using models other than publicly-quoted prices. Monitoring the deterioration of prices of assets like these is difficult and could lead to losses we did not anticipate.

Even where losses are for our clients’ accounts, they may fail to repay us, leading to material losses for us, and our reputation can be harmed.

While our clients would be responsible for losses we incur in taking positions for their accounts, we may be exposed to additional credit risk as a result of their need to cover the losses. Our business may also suffer if our clients lose money and we lose the confidence of clients in our products and services.

Our investment banking revenues may decline in adverse market or economic conditions.

Our investment banking revenues, in the form of financial advisory and underwriting fees, directly relate to the number and size of the transactions in which we participate and are susceptible to adverse effects from sustained market downturns. These fees and other revenues are generally linked to the value of the underlying assets and therefore decline as asset values decline. In particular, our revenues and profitability could sustain material adverse effects from a significant reduction in the number or size of debt and equity offerings and merger and acquisition transactions.

We may generate lower revenues from brokerage and other commission- and fee-based businesses.

Market downturns are likely to lead to declines in the volume of transactions that we execute for our clients and, therefore, to declines in our noninterest revenues. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management and private banking businesses.

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Even in the absence of a market downturn, below-market performance by our mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue we receive from our asset management business.

Our nontraditional credit businesses materially add to our traditional banking credit risks.

Like other banks and providers of financial services, we are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. Many of the businesses we engage in beyond the traditional banking businesses of deposit-taking and lending also expose us to credit risk.
In particular, many of the businesses we have engaged in through our Corporate Banking & Securities Corporate Division entail credit transactions, frequently ancillary to other transactions. Nontraditional sources of credit risk can arise, for example, from:
  holding securities of third parties;
  entering into swap or other derivative contracts under which counterparties have obligations to make payments to us;
  executing securities, futures, currency or commodity trades that fail to settle at the required time due to nondelivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries; and
  extending credit through other arrangements.
Parties to these transactions, such as trading counterparties, may default on their obligations to us due to bankruptcy, political and economic events, lack of liquidity, operational failure or other reasons. We describe our credit risk and the methods we use to monitor it in “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk – Risk Management – Credit Risk.”

If we are unable to implement our management agenda, we may be unable to sustain our return on equity or achieve growth in our earnings per share, and our share price may be materially and adversely affected.

Beginning in 2002, we undertook a variety of measures that have enabled us to reduce costs, lower our risk profile, increase efficiency and raise our profitability. To further pursue these objectives, we announced the Business Realignment Program (BRP) in the fourth quarter of 2004. The BRP covers five key initiatives: aligning our sales and trading platforms, aligning our corporate banking efforts, reorganizing our Asset Management Business Division, adding regional focus in Germany and other regions as well as streamlining our infrastructure. The BRP made significant progress in 2005 and the majority of BRP-related restructuring measures were completed by year-end, with the remainder to be completed in 2006 as originally scheduled. In 2005, we reached our published financial target of 25% pre-tax return on average active equity (our target definition of pre-tax return excludes restructuring charges and substantial gains on the sale of our industrial holdings from our income before income taxes). Our ratios of income before income taxes to average active equity and average total shareholders equity were 24% and 22%, respectively.
Going forward, we aim to deliver similar levels of pre-tax return on average active equity (using our target definition) across the business cycle, together with double-digit growth in earnings per share. We also aim to grow all our core businesses, both organically and by targeted, incremental acquisitions, while maintaining a sound capitalization and returning excess capital to our shareholders.
We may be unable to sustain our return on equity or achieve our earnings per share growth objective, and our share price may be materially and adversely affected, should we fail to implement our management agenda or growth initiatives or should such initiatives that are implemented fail to produce the anticipated benefits. A number of internal and external factors could prevent the implementation of these initiatives or the realization of their anticipated benefits, including changes in the markets in which we are active, global, regional and national economic conditions and increased competition for business and employees.
We describe our management agenda and its anticipated benefits, as well as factors that could affect the success of this agenda, in ''Item 4: Information on the Company – Business Overview – Our

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Business Strategy’’ and ''Item 5: Operating and Financial Review and Prospects – Operating Results – Executive Summary.’’

Operational risks may disrupt our businesses.

We face operational risk arising from errors made in the execution, confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted for. Derivative contracts, particularly for credit derivatives, are not always confirmed with the counterparties on a timely basis; while the transaction remains unconfirmed, we are subject to heightened credit and operational risk and in the event of a default may find it more difficult to enforce the contract.
Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. Consequently, we rely heavily on our financial, accounting and other data processing systems. If any of these systems do not operate properly, or are disabled, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage.
In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business, terrorist activities or disease pandemics.

The size of our clearing operations exposes us to a heightened risk of material losses should these operations fail to function properly.

We have very large clearing and settlement businesses. While many other banks and financial institutions operate large clearing businesses, we believe that the sheer scope of ours heightens the risk that we, our customers or other third parties could lose substantial sums if our systems fail to operate properly for even short periods. This will be the case even where the reason for the interruption is external to us. In such a case, we might suffer harm to our reputation even if no material amounts of money are lost. This could cause customers to take their business elsewhere, which could materially harm our revenues and our profits.

Our risk management policies, procedures and methods may leave us exposed to unidentified or unanticipated risks, which could lead to material losses.

We have devoted significant resources to developing our risk management policies, procedures and assessment methods and intend to continue to do so in the future. Nonetheless, our risk management techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate. Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. See “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk” for a more detailed discussion of the policies, procedures and methods we use to identify, monitor and manage our risks. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits.

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We may have difficulty in identifying and executing acquisitions, and both making acquisitions and avoiding them could materially harm our results of operations and our share price.

We consider business combinations from time to time. Even though we review the companies we plan to acquire, it is generally not feasible for these reviews to be complete in all respects. As a result, we may assume unanticipated liabilities, or an acquisition may not perform as well as expected. Were we to announce or complete a significant business combination transaction, our share price could decline significantly if investors viewed the transaction as too costly or unlikely to improve our competitive position. In addition, we might have difficulty integrating any entity with which we combine our operations. Failure to complete announced business combinations or failure to integrate acquired businesses successfully into ours could materially adversely affect our profitability. It could also affect investors’ perception of our business prospects and management, and thus cause our share price to fall. It could also lead to departures of key employees, or lead to increased costs and reduced profitability if we felt compelled to offer them financial incentives to remain.
If we avoid entering into additional business combination transactions or fail to identify attractive companies to acquire, market participants may, especially in the current climate of consolidation, perceive us negatively. We may also be unable to expand our businesses, especially into new business areas, as quickly or successfully as our competitors if we do so through organic growth alone. These perceptions and limitations could cost us business and harm our reputation.

We may have difficulties selling noncore assets at favorable prices, or at all.

As part of our efforts to focus on our core businesses, we may seek to sell certain noncore assets. Unfavorable business or market conditions may make it difficult for us to sell such assets at favorable prices, or may preclude such a sale altogether.

Events at companies in which we have invested may make it harder to sell our holdings and result in material losses irrespective of market developments.

We have made significant investments in individual companies, primarily through our Corporate Investments Group Division. Where we have done so, the effect of losses and risks at those companies may restrict our ability to sell our shareholdings and may reduce the value of our holdings considerably, including the value thereof reflected in our financial statements, or require us to take charges to our earnings, even where general market conditions are favorable. Our larger, less liquid interests are particularly vulnerable given the size of these exposures.

Intense competition, in our home market of Germany as well as in international markets, could materially hurt our revenues and profitability.

Competition is intense in all of our primary business areas in Germany and the other countries in which we conduct large portions of our business, including other European countries and the United States. If we are unable to respond to the competitive environment in Germany or in our other major markets with attractive product and service offerings that are profitable for us, we may lose market share in important areas of our business or incur losses on some or all of our activities. In addition, downturns in the German economy could add to the competitive pressure, through, for example, increased price pressure and lower business volumes for us and our competitors.
In recent years there has been substantial consolidation and convergence among companies in the financial services industry, particularly in Europe. This trend has significantly increased the capital base and geographic reach of some of our competitors and has hastened the globalization of the securities and other financial services markets. In order to take advantage of some of our most significant challenges and opportunities, we will have to compete successfully with financial institutions that are larger and better capitalized than us and that may have a stronger position in local markets.
As mentioned above, we sometimes commit capital and take market risk to facilitate certain capital markets transactions. We have experienced, and expect to continue to experience, competitive pressure to retain market share by committing capital to businesses or transactions on terms that offer returns that may not be commensurate with their risks. In particular, corporate clients sometimes seek

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such commitments (such as credit commitments) from financial services firms in connection with investments banking and other assignments. We have also experienced intense price competition in some of our businesses in recent years.

We operate in an increasingly regulated and litigious environment, potentially exposing us to liability and other costs, the amounts of which may be difficult to estimate.

The financial services industry has historically been and continues to be among the most highly regulated industries. Our operations throughout the world are regulated and supervised by the central banks and regulatory authorities in the jurisdictions in which we operate. Regulation and supervision includes requirements regarding our structure and function, as well as requirements relating to the conduct of our business. In recent years, regulation and supervision in a number of areas has increased, and regulators, counterparties and others have sought to subject financial services providers to increasing responsibilities and liabilities. As a result, we may be subject to an increasing incidence or amount of liability or regulatory sanctions and may be required to make greater expenditures and devote additional resources to address potential liability.
Due to the nature of our business, we and our subsidiaries are involved in litigation, arbitration and regulatory proceedings in Germany and in a number of jurisdictions outside Germany, including the United States. Such matters are subject to many uncertainties, and the outcome of individual matters is not predictable with assurance.
We may settle litigation or regulatory proceedings prior to a final judgment or determination pursuant to which our liability is established and quantified. We may do so to avoid the cost, management efforts or negative business, regulatory or reputational consequences of continuing to contest liability, even when we believe we have valid defenses to liability. We may also do so when the potential economic, business, regulatory or reputational consequences of failing to prevail would be disproportionate to the costs of settlement. Furthermore, we may, for similar reasons, reimburse counterparties for losses incurred by them even in situations where we do not believe that we are legally compelled to do so. See “Item 8: Financial Information – Legal Proceedings” and Note [34] to our consolidated financial statements for information on our judicial, regulatory and arbitration proceedings.
The financial impact of legal risks might be considerable but may be hard or impossible to estimate and so to quantify, so that amounts eventually paid may exceed the amount of reserves set aside therefore. See “Item 5: Operational and Financial Review and Prospects – Significant Accounting Policies and Critical Accounting Estimates – Legal, Regulatory and Tax Contingencies”.

Transactions with counterparties in countries designated by the U.S. State Department as state sponsors of terrorism may lead some potential customers and investors in the U.S. and other countries to avoid doing business with us or investing in our shares.

We engage in a limited amount of business with counterparties in Iran, Libya and Sudan, including counterparties owned or controlled by the governments of such countries, and have a representative office in Tehran, Iran. The U.S. State Department has designated such countries as state sponsors of terrorism, and U.S. law generally prohibits U.S. persons from doing business with such countries. We are a German bank and our activities with respect to such countries have not involved any U.S. person in either a managerial or operational role and have been subject to policies and procedures designed to ensure compliance with United Nations, European Union and German embargoes.
Our business with counterparties of such countries consists mostly of arranging large trade finance facilities to finance the export contracts of exporters in Europe and Asia, which exporters are primarily multinational corporations supplying goods, equipment and related services in the petrochemical and hydrocarbon processing industries. Other business activities include correspondent banking services to banks located in such countries and private banking loans to nationals of such countries. We do not believe our business activities with counterparties of such countries are material to overall business, with our outstandings to borrowers of such countries representing less than 0.1% of our total assets as of December 31, 2005 and our revenues from all such activities representing less than 0.1% of our total revenues for the year ended December 31, 2005.

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We are aware, through press reports and other means, of initiatives by governmental entities in the U.S. and by U.S. institutions such as universities and pension funds, to adopt laws, regulations or policies prohibiting transactions with or investment in, or requiring divestment from, entities doing business with such countries. It is possible that such initiatives may result in our being unable to gain or retain entities subject to such prohibitions as customers or as investors in our shares. In addition, our reputation may suffer due to our association with these countries. Such a result could have significant adverse effects on our business or the price of our shares.

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Item 4: Information on the Company

History and Development of the Company

The legal and commercial name of our company is Deutsche Bank Aktiengesellschaft. The original Deutsche Bank was founded in Berlin in 1870 as a joint stock company principally dedicated to financing foreign trade. To support this business, after its founding, Deutsche Bank expanded by opening branches in Bremen, Yokohama, Shanghai, Hamburg and London. This international growth was supported by Deutsche Bank’s establishment of the German Overseas Bank (Deutsche Ueberseeische Bank) in 1886 and by Deutsche Bank’s taking a stake in the newly created German Asian Bank (Deutsch-Asiatische Bank) in 1889. To complement its international activities, Deutsche Bank developed a strong domestic presence in Germany by accepting cash deposits and developing relationships with large corporations. Beginning in the 1880s, Deutsche Bank began underwriting securities of these large corporations, with particular emphasis on the electrical engineering and steel industries. In the 1890s, Deutsche Bank expanded its domestic presence by opening new branches and acquiring smaller regional banks.

In 1929, following a long period of retrenchment after World War I, Deutsche Bank merged with the second largest bank in Germany, Disconto-Gesellschaft. The merged company operated under the name Deutsche Bank und Disconto-Gesellschaft until 1937, at which time it reverted to the Deutsche Bank name.
In 1952, Deutsche Bank disincorporated and split into three separate institutions (Norddeutsche Bank Aktiengesellschaft, Rheinisch-Westfälische Bank Aktiengesellschaft, and Süddeutsche Bank Aktiengesellschaft) pursuant to a 1952 law limiting the scope of credit institutions. These three institutions later reunified. Deutsche Bank Aktiengesellschaft, as it is known today, is a stock corporation organized under the laws of Germany.
The merger of the three institutions and our corporate name were entered into the Commercial Register of the District Court in Frankfurt am Main on May 2, 1957. We operate under the German Stock Corporation Act (Aktiengesetz). We are registered under registration number HRB 30 000. Our registered address is Taunusanlage 12, 60325 Frankfurt am Main, Germany, and our telephone number is +49-69-910-00. Our agent in the United States is: Peter Sturzinger, Deutsche Bank Americas, c/o Office of the Secretary, 60 Wall Street, Mail Stop NYC60-4006, New York, NY 10005.
We have made the following significant capital expenditures or divestitures since January 1, 2005:
  Sale of 3.5% in DaimlerChrysler AG to institutional investors on July 28, 2005 with a total value of 1.4 billion and a further sale of 2.5% in DaimlerChrysler to institutional investors on November 22, 2005 with a total value of 1.1 billion.
  Agreement to sell our entire holding of 37.72% in EUROHYPO AG to Commerzbank AG, which was signed on November 16, 2005, for a total consideration of 2.6 billion. The sale of the first tranche with a total value of  0.7 billion was closed on December 15, 2005. Our remaining holding is expected to be sold in the first quarter of 2006.
  Acquisition of the remaining 60% in United Financial Group, Russia, signed on December 5, 2005 and closed on February 27, 2006.
Since January 1, 2005, there have been no public takeover offers by third parties with respect to our shares and we have made no public takeover offers in respect of other companies’ shares.

Business Overview

Our Organization

Headquartered in Frankfurt am Main, Germany, we are the largest bank in Germany, and one of the largest financial institutions in Europe and the world, as measured by total assets of 992 billion as of December 31, 2005. As of this date, we employed 63,427 people on a full-time equivalent basis, operating in 73 countries out of 1,588 facilities worldwide, of which 53% were in Germany. We offer a wide

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variety of investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world.
In order to best serve our clients and manage our own investments, we are organized into three group divisions, two of which are further sub-divided into corporate divisions. As of December 31, 2005, our group divisions were:
  The Corporate and Investment Bank (CIB), comprising two corporate divisions:
    Corporate Banking & Securities (CB&S)
    Global Transaction Banking (GTB)
  Private Clients and Asset Management (PCAM), comprising two corporate divisions:
    Asset and Wealth Management (AWM)
    Private & Business Clients (PBC)
  Corporate Investments (CI)
Our organization also includes an infrastructure group into which we centralized our business support areas (which were formerly part of our group divisions) and our Corporate Center. Additionally, we created a regional management function that covers regional responsibilities worldwide.
We have operations or dealings with existing or potential customers in almost every country in the world. These operations and dealings include:
  subsidiaries and branches in many countries;
  representative offices in many other countries; and
  one or more representatives assigned to serve customers in almost every other country.
The following table shows our net revenues by geographical region, based on our management reporting systems.
                                 
     
  in m.     2005       2004 1   2003 1  
                 
 
Germany:
                             
 
CIB
      2,437         2,363       2,558    
 
PCAM
      4,606         4,393       4,309    
                 
 
Total Germany
      7,043         6,756       6,867    
                 
 
Rest of Europe:
                             
 
CIB
      6,145         4,514       5,019    
 
PCAM
      2,539         2,171       2,169    
                 
 
Total Rest of Europe2
      8,684         6,685       7,188    
                 
 
North America (primarily U.S.):
                             
 
CIB
      4,996         4,437       4,669    
 
PCAM
      1,182         1,196       1,468    
                 
 
Total North America
      6,177         5,634       6,136    
                 
 
South America:
                             
 
CIB
      233         70       139    
 
PCAM
              1       1    
                 
 
Total South America
      233         71       141    
                 
 
Asia-Pacific:
                             
 
CIB
      2,107         2,029       1,908    
 
PCAM
      267         262       253    
                 
 
Total Asia-Pacific3
      2,374         2,291       2,161    
                 
 
Corporate Investments
      1,229         621       (920 )  
                 
 
Consolidation & Adjustments
      (102 )       (140 )     (305 )  
                 
 
Consolidated net revenues4
      25,640         21,918       21,268    
                 
1   Restated to conform to the 2005 management structure.
 
2   The United Kingdom accounted for over one-half of these revenues in 2005, 2004, and 2003. Rest of Europe also includes our African operations.
 
3   Asia-Pacific also includes the Middle East.
 
4   Consolidated total net revenues comprise interest revenues, interest expense and total noninterest revenues (including net commission and fee revenues). Revenues are attributed to countries based on the location in which the Group’s booking office is located. The location of a transaction on our books is sometimes different from the location of the headquarters or other offices of a customer and different from the location of our personnel who entered into or facilitated the transaction. Where we record a transaction involving our staff and customers and other third parties in different locations frequently depends on other considerations, such as the nature of the transaction, regulatory considerations and transaction processing considerations.

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Management Structure

We operate the three group divisions and the Infrastructure functions under the umbrella of a “virtual holding company”. We use this term to mean that, while we subject the group divisions and infrastructure areas to the overall responsibility of our Management Board, which is supported by the Corporate Center, we do not have a separate legal entity holding these three group divisions and we nevertheless allocate substantial managerial autonomy to them. To support this structure, key governance bodies function as follows:
The Management Board has the overall responsibility for the management of Deutsche Bank, as provided by the German Stock Corporation Act. Its members are appointed and removed by the Supervisory Board which is a separate corporate body. Our Management Board focuses on strategic management, corporate governance, resource allocation, risk management and control.
The Group Executive Committee (GEC), established in 2002, comprises the members of the Management Board and the Business Heads of our two client-facing group divisions, CIB and PCAM. Following a change to the responsibilities of the Business Heads of our group divisions in September 2004, one GEC member represents the management of our regions. The GEC is a body that is not required by the Stock Corporation Act. It serves as a tool to coordinate our businesses and regions. We believe this underscores our commitment to a virtual holding structure.
Within each group division, coordination and management functions are handled by Operating Committees at the group division level and Executive Committees for each of the individual business divisions. Functional Committees assist the Management Board in the management across businesses of specific support and control areas.

Our Business Strategy

Deutsche Bank has a clearly defined business strategy, which encompasses all dimensions of our practice: our corporate identity; our mission and values; our brand; and the program of transformation and profitable growth initiatives which the Bank has implemented in recent years.
Our identity. We are a leading global investment bank with a strong and successful private clients franchise. These are mutually reinforcing businesses; taking full advantage of the synergy potential between these businesses is a strategic priority for us. We are a leader in Europe, with powerful and growing positions in North America, Asia, and key emerging markets. Given the strong positions we enjoy in our core businesses, our focus is on organic and incremental growth initiatives.
Our mission and values. We compete to be the leading global provider of financial solutions for demanding clients, creating exceptional value for our shareholders and people. We are committed to our core values of customer focus, teamwork, innovation, performance and trust.
Our brand. Deutsche Bank’s brand is synonymous with strength and quality throughout the world and our logo is one of the best-recognized brand symbols in the global financial industry as confirmed by Global B2B Brand Monitor. Our brand campaign leverages a distinctive logo, significant business achievements, and a unique, innovative offering to our clients. This campaign has further strengthened our profile in established markets and built awareness in new growth markets.
Transformation. Since 2002, Deutsche Bank has pursued an ambitious and far-reaching ‘transformation’ strategy. Our management agenda focused on four fundamental priorities: capitalizing on global leadership in Corporate and Investment Banking (CIB); achieving profitable growth in Private Clients and Asset Management (PCAM); maintaining strict cost, capital and risk discipline; and establishing Deutsche Bank as the most reputable brand. The success of our ‘transformation’ strategy has given Deutsche Bank significant strategic advantages. We have made significant gains in profitability; we command leading positions in our chosen core businesses; we have substantially reduced credit risk, market risk and alternative asset risk; and we have a clear, balanced capital management strategy, which has allowed us to maintain core capital strength while simultaneously investing in business growth and rewarding shareholders.
Profitable growth. Having created a strong and focused platform, Deutsche Bank pursues a strategy of profitable growth. Our objective is to consolidate our leadership position in Europe; expand our business in the important North American market; and take advantage of growth opportunities in the Asia-Pacific region and other key emerging markets. We aim to grow all our core businesses, both

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organically and by targeted, incremental acquisitions. Growth initiatives are carefully assessed for their strategic and financial logic, and for their potential to create shareholder value. During 2005 we made significant investments in future growth of our core businesses in all major regions. With growth, we also aim to deliver profitability. In 2005, we successfully reached our published financial target, of 25% pre-tax return on average active equity (our target definition of pre-tax return excludes restructuring charges and substantial gains on the sale of our industrial holdings from our income before income tax). Our ratios of income before income tax to average active equity and to average total shareholders’ equity were 24% and 22%, respectively.
Going forward, we aim to deliver similar levels of pre-tax return on average active equity (using our target definition) across the business cycle, together with double-digit growth in earnings per share. We gained added impetus from our Business Realignment Program, or BRP, which made significant progress during 2005 and was largely executed by year-end, with the remainder to be completed in 2006. This plan produced both revenue and cost synergies by streamlining our business structure, and significantly improved our delivery to our clients.
Growth strategies in our CIB businesses:
In Corporate Banking & Securities, our overall aim is to consolidate and develop our position as a world-leading investment bank (based upon publicly available revenue information). We seek to expand our leading position in Europe (source: Dealogic), and reach top-5 positions in the U.S. and Asia-Pacific. In Sales & Trading, we aim to leverage our commanding share in ‘market access’ products, such as our world no. 1 position in foreign exchange (source: Euromoney) and cash equities, where we rank no. 1 in Europe by volume according to Thomson AutEx. Additionally, we aim to expand in sophisticated, high-value ‘intellectual capital’ products such as derivatives, where our pre-eminent position was reflected in the awards for ‘Derivatives House of the Year’ in both International Financing Review and Risk magazine. We also plan to exploit synergies across our debt and equity platforms and selectively take advantage of profitable proprietary trading opportunities. We aim to expand our presence in the U.S. market by growth in key businesses, such as equity derivatives and mortgage-backed securities. In Asia-Pacific, we aim to capitalize on our strong platforms in all key markets across the region to take advantage of the rapid growth and increasing sophistication of local capital markets. In our corporate finance businesses, we aim to consolidate a strong position in Europe with further gains in market share in the Americas and Asia, by investing in product and industry specialist capabilities, capitalizing on leading franchises in key segments such as financial sponsors and commercial real estate, and deepening our client relationships by means of an integrated corporate coverage model. During 2005, we signaled our determination to expand in the world’s fast-growing corporate banking and securities markets by acquiring leading local capital markets businesses in Russia, Turkey and Mexico, and sealing partnership agreements or joint ventures in China, Saudi Arabia and Australia.
In Global Transaction Banking, we aim to grow revenues by expanding our strong positions in Cash Management in U.S. dollar and euro clearing for both corporate clients and financial institutions, and in Trade Finance, where we aim to build on successful cross-selling collaboration with our colleagues in the Global Markets Business Division. We will expand our Trust and Securities Services business by acquiring the UK Depository and Clearing Centre business from JP Morgan Chase, a transaction which is expected to close in the first half of 2006 subject to regulatory approvals. We aim to further boost earnings by means of recent cost savings initiatives.
Growth strategies in our PCAM businesses:
In Asset and Wealth Management, we aim to further develop Deutsche Bank’s global investment management business, which already has a significant global presence as reflected by invested assets of 704 billion at the end of 2005 and is a substantial contributor to Group revenues. In the Asset Management Business Division, we aim to expand our global mutual funds business, creating an integrated, global platform which leverages the European strength of our DWS unit. We aim to further expand DWS in Europe, reposition Scudder Investments as DWS Scudder in North America, and extend DWS’s distribution reach into Asian markets. We aim to develop our institutional asset management business by expanding in the fast-growing and profitable area of alternative investments, building our presence in Absolute Return Strategies and consolidating our global leadership in Real Estate Asset Management (source: Euromoney) through our RREEF unit. We aim to expand our traditional

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institutional asset management business by leveraging key areas of strength, such as our global leadership in the insurance sector where Pensions & Investments identified us as no. 1 manager of non-affiliated insurance assets. In 2005, we signaled our determination to fix or sell unprofitable or non-core business units with the sale of a substantial part of our UK- and Philadelphia-based asset management business to Aberdeen Asset Management PLC. In Private Wealth Management, we aim to grow our business with high net worth individuals and families by further refining our fully-integrated, ‘holistic’ offering of wealth management services, collaborating with product specialists in CIB and Asset Management to further develop sophisticated investment options, and hiring experienced client advisors in markets with significant growth potential.
In Private & Business Clients, we pursue a multi-country strategy to expand our business in investment management, consumer financing and traditional banking products. We aim to consolidate and build on our positions in our core European markets – Germany, Italy and Spain – while simultaneously opening new avenues of growth in emerging Europe and Asia. In Germany, we aim to grow business by adopting innovative approaches to new client segments. We aim to leverage our package of student banking services, launched in 2005, and our distribution agreement with ADAC, Germany’s largest automobile club, which gives us access to 15 million club members. We also aim to capitalize on investments in our distribution network in 2005, which included hiring new client-facing staff, building up our independent sales force, and modernizing and expanding our network of investment and finance centers. We aim to expand our pan-European consumer finance business through our hub in Italy. We also aim to expand in the most important Asian markets – through our branch network in India, which was the focus of investment during 2005, and through our equity stake in Hua Xia Bank in China, as well as our partnership agreement with Hua Xia Bank to develop credit cards, investment products, and other services. We further aim to expand our presence in emerging Europe through the expansion of our branch network in Poland.
Regional management. Our Regional Management is a worldwide management function across businesses and infrastructure areas, whose aim is to provide our clients with the local support they need, ensure effective regional governance, local implementation of our growth strategies, consistent performance management, and to respond to continuously changing market and regulatory requirements. The Regional Management function is represented in the Group Executive Committee (GEC) by the Head of Regional Management worldwide who also chairs the global Regional Management Executive Committee where the six regional CEOs (Germany, Europe, Americas, Asia, Japan/Australia and New Zealand, Middle East/North Africa) are represented. To continue the growth momentum of our operations in our home market Germany, we have implemented various initiatives to drive growth through product innovation, improved client coverage and utilization of cross-divisional revenue and cost synergies. The coordination lies with the Management Committee Germany, which is chaired by the Head of Regional Management worldwide in his role as CEO Germany and further comprises the Business Heads of our Group Divisions, CIB and PCAM, and selected central functions in Germany.
Capital management strategy. We aim to maintain tight management of our risks and capital. Our main capital management objective is to sustain a sound capitalization, both from a regulatory and economic perspective, while supporting profitable business growth. To this end, protection of our strong credit ratings is key. The target is to keep our BIS Tier I capital ratio between 8 and 9%. Our risk position and regulatory capitalization are either directly denominated in foreign currencies or exhibit foreign exchange-sensitive components. The U.S. dollar is particularly important in this regard. The impact of U.S. dollar movements on our risk position is almost completely offset by U.S. dollar-sensitive capital components, such as hybrid Tier I instruments. As a result, our BIS Tier I capital ratio is not adversely impacted by fluctuations in the exchange rate of the euro versus the U.S. dollar.
Our significantly improved profitability has resulted in strong capital formation, which supports our sound capital position. In addition, issuing innovative capital instruments and subordinated debt are among the tools we use to support our regulatory capital. This allows us to reinvest capital into profitable business growth, thus creating sustainable future value for our shareholders – either by supporting increases in risk positions as we grow organically, or by funding the impact on regulatory capital of goodwill/intangible assets in instances where we grow by making incremental acquisitions. As we deploy the capital we generate, however, we will continue to strike a balance between growing our busi-

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nesses and rewarding our shareholders. We are committed to return capital in excess of our regulatory and economic capital requirements to our shareholders via both share buy-back programs and dividend payments. In doing so, our shareholders benefit, directly and substantially, from our financial success. In addition, we use shares bought back to hedge equity-based compensation plans.

Our Group Divisions

Group division is a term we use to describe the three highest-level divisions of our firm, which are the Corporate and Investment Bank Group Division (CIB), the Private Clients and Asset Management Group Division (PCAM) and the Corporate Investments Group Division (CI). The CIB and PCAM Group Divisions are divided into several corporate divisions, each of which may have several business divisions. The CI Group Division has several business divisions and does not use the intermediate corporate division designation.

In the first quarter 2005, the Group implemented structural changes associated with the Business Realignment Program. Most of the revisions related to organizational changes below the corporate division level. Since January 1, 2005, the business support areas formerly reported as part of CIB, PCAM and CI were centralized into one infrastructure group (which also covers the Corporate Center functions). As a group-internal service provider, the infrastructure group acts on a non-profit basis and allocates its total noninterest expenses to the recipients of the services (i.e., the corporate divisions) as part of their non-compensation expenses.

Corporate and Investment Bank Group Division

The Corporate and Investment Bank Group Division primarily serves large and medium-sized corporations, financial institutions and sovereign, public sector and multinational organizations. This group division generated 62% of our net revenues in 2005, 61% in 2004 and 67% in 2003 (on the basis of our management reporting systems).

The Corporate and Investment Bank Group Division’s operations are predominantly located in the world’s primary financial centers, including London, New York, Frankfurt, Tokyo, Singapore and Hong Kong.
The businesses that comprise the Corporate and Investment Bank Group Division seek to reach and sustain a leading global position in corporate and institutional banking services, measured by financial performance, market share, reputation and customer franchise, while making optimal usage of, and achieving optimal return on, our economic capital. The division also continues to exploit business synergies with the Private Clients and Asset Management Group Division and the Corporate Investments Group Division. The Corporate and Investment Bank Group Division’s activities and strategy are primarily client driven. Teams of specialists in each business division give clients access not only to their own products and services, but also to those of our other businesses.

At December 31, 2005, this group division included two corporate divisions, comprising the following business divisions:

  Corporate Banking & Securities Corporate Division
    Global Markets
    Corporate Finance
  Global Transaction Banking Corporate Division
    Trade Finance and Cash Management Corporates
    Trust and Securities Services and Cash Management Financial Institutions
Corporate Banking & Securities includes our combined debt and equity sales and trading businesses, both of which are housed in our Global Markets Business Division. Global Markets has nine primary business lines and three horizontally-integrated client-facing groups (Debt Capital Markets / Corporate

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Coverage, the Institutional Client Group, and Research), unified at a local level by strong regional management. In addition, Corporate Banking & Securities includes the Corporate Finance Business Division, which focuses on providing advisory, equity and debt financing and structuring services to corporates and financial institutional clients. CIB’s client coverage functions are also a key part of the division.

Global Transaction Banking is closely aligned with Corporate Finance, but is a separately managed corporate division, providing trade finance, cash management and trust and securities services. Corporate Finance and Global Transaction Banking are together named Global Banking.

In addition, Corporate Banking & Securities and Global Transaction Banking are supported by the Loan Exposure Management Group (LEMG). LEMG has responsibility for a range of loan portfolios, actively managing the risk of these through the implementation of a hedging regime on a selective basis. LEMG manages credit risk of loans and lending-related commitments within:
  the investment-grade portfolio of our Corporate and Investment Bank Group Division where original maturities are greater than 180 days, and
  the medium-sized German companies’ portfolio where original maturities are greater than 360 days, excluding legacy business booked prior to April 2004.
From 2006 onwards, we have expanded the above scope to include previously uncovered maturities and the aforementioned legacy business.

Corporate Banking & Securities Corporate Division
Corporate Division Overview

Corporate Banking & Securities is made up of the business divisions Global Markets and Corporate Finance. These businesses offer financial products worldwide ranging from the underwriting of stocks and bonds to the tailoring of structured solutions for complex financial requirements.
In August 2004, we signed an agreement with Berkshire Mortgage Finance L.P., a subsidiary of the Boston-based Berkshire Group, to acquire substantially all of their origination and servicing assets. The acquisition was closed in October 2004.
In March 2005 we signed a definitive agreement to acquire the remaining 60% of Bender Menkul Degerler Anonim Sirketi (“Bender Securities”) in Turkey, after we initially acquired a 40% equity stake in 2000. The transaction was closed in May 2005.
In April 2005 we signed a Joint Proposal with Al Azizia Commercial Investment Company for the establishment of an investment banking joint venture to provide equities brokerage and other financial services in Saudi Arabia.
In January 2004 we closed on the purchase of a 40% stake in United Financial Group, a Moscow investment bank. In December 2005, we signed definitive agreements to acquire the remaining 60% of the Group, and the acquisition was completed on February 27, 2006.

Products and Services

The Global Markets Business Division is responsible for origination, sales, structuring and trading activities across a wide range of debt, equity, equity-linked, convertible bond, foreign exchange, commodities, derivatives, money market and prime services products. The division aims to deliver creative solutions to the capital-raising, investing and hedging needs of customers, by being able to price and hedge any market risk that clients anywhere in the world may wish to assume or avoid.
Within our Corporate Finance Business Division, our clients are offered not only mergers and acquisitions and general corporate finance advice, together with leveraged debt and equity origination services, but also a variety of credit products and financial services. In addition, we also provide a variety of financial services to the public sector. Corporate Finance also includes coverage functions related to corporate, financial and institutional clients globally.
Within Corporate Banking & Securities, in addition to providing products and services to customers, we conduct proprietary trading, or trading on our own account. Most trading activity is undertaken in the normal course of facilitating client business. For example, to facilitate customer flow business, traders will maintain long positions (accumulating securities) and short positions (selling securities we do not yet own) in a range of securities and derivative products, reducing this exposure by hedging transac-

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tions where appropriate. While these activities give rise to market and other risk, we do not view this as proprietary trading. However, we also use our capital to exploit market opportunities, and this is what we term proprietary trading.
We undertake designated proprietary trading in foreign exchange, fixed income, credit and equity products. Some of this proprietary trading activity takes the form of arbitrage. For example, in index arbitrage we identify differences between the prices of exchange-traded derivatives (such as futures contracts on an equity index) and the underlying prices on the stock exchange of the individual stocks in the index. In convertible arbitrage, we identify volatility-related pricing differences between the market for convertible debt instruments and the cash and derivatives markets. In credit and equity arbitrage, we use statistics-driven trading strategies based on short-term market movements and indicators to manage our trading book so that the market value of our long positions remains roughly equal to the market value of our short positions. We also undertake risk-arbitrage, which is generally related to mergers and acquisitions, involving, for example, transactions such as buying a target company’s shares at the same time as selling the bidding company’s shares.
All our trading activities, including proprietary trading, are covered by our risk management procedures and controls which are described in detail in “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk – Risk Management – Market Risk – Value-at-Risk Analysis.”

Distribution Channels and Marketing

In the Corporate Banking & Securities Corporate Division the focus of our corporate and institutional coverage bankers and sales teams is on our client relationships. We have structured our client coverage model so as to provide varying levels of standardized or dedicated services to our customers depending on their needs and level of complexity.

Global Transaction Banking Corporate Division
Corporate Division Overview

Global Transaction Banking is primarily engaged in the gathering, moving, safeguarding and controlling of assets for its clients throughout the world. It provides processing, fiduciary and trust services to corporations, financial institutions and governments and their agencies and comprises the following business divisions:
  Trade Finance and Cash Management Corporates
  Trust and Securities Services and Cash Management Financial Institutions
In January 2003 we closed the sale of substantial parts of our Global Securities Services business to State Street Corporation, with the completion of the sale of the Italian and Austrian parts of the business following in the third quarter of 2003. In January 2004, we completed the acquisition of Dresdner Bank AG’s German domestic custody business which we successfully integrated by December 2004.
In January 2006, we signed a definitive agreement to acquire the UK Depository and Clearing Centre business from JP Morgan. This acquisition is expected to close in the first half of 2006, subject to regulatory approvals.

Products and Services

Trade Finance provides comprehensive solutions along the client’s trade value chain by combining international trade risk mitigation products and services with custom-made solutions for structured trade and export finance as well as – in a continuously growing number of regions – cross-selling of interest and currency risk products.
Cash Management caters to the needs of a diverse client base of corporates and financial institutions. With the provision of a comprehensive range of innovative and robust solutions, we handle the complexities of global and regional treasury functions including customer access, payment and collection services, liquidity management, information and account services and electronic bill presentation and payment solutions.
Trust and Securities Services provides a range of trust, payment, administration and related services for selected securities and financial transactions, as well as domestic securities custody in more than 25 markets.

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Distribution Channels and Marketing

The Global Transaction Banking Corporate Division develops and markets its own products and services in Europe, Asia and the Americas. The marketing is carried out in conjunction with the coverage functions both in this division and in the Corporate Banking & Securities Corporate Division.
Customers can be differentiated in two main groups: financial institutions, such as banks, mutual funds and retirement funds, broker-dealers, fund managers and insurance companies, as well as multinational corporations. In Germany we also focus on middle-market corporations.

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Private Clients and Asset Management Group Division

The Private Clients and Asset Management Group Division primarily serves retail and small corporate customers as well as affluent and wealthy clients and provides asset management services to retail and institutional clients. This group division generated 34% of our net revenues in 2005, 37% of our net revenues in 2004, and 39% in 2003 (on the basis of our management reporting systems).

At December 31, 2005, this group division included the following corporate divisions:

  Asset and Wealth Management (AWM)
  Private & Business Clients (PBC)

The Asset and Wealth Management Corporate Division is comprised of the Asset Management Business Division (AM) and the Private Wealth Management Business Division (PWM).

The Private & Business Clients Corporate Division serves retail and affluent clients as well as small corporate customers in our key markets of Germany, Italy and Spain, as well as in Belgium, Portugal and Poland. This is complemented by our newly established market presence in India and China.
In June 2004 our wholly-owned subsidiary, european transaction bank ag (etb), which had been managed within the infrastructure groups of the Private Client and Asset Management Group Division, was deconsolidated in the course of entering into a securities processing partnership with Xchanging Holdings. The etb continues to provide securities, funds and derivatives processing. Our holding as well as the operational management of etb was transferred to Xchanging etb GmbH (formerly Zweite Xchanging GmbH), an equity method investment under the infrastructure service group.
In July 2004, we sold our wholly-owned subsidiary DB Payment to a subsidiary of Deutsche Postbank AG. Prior to the sale, DB Payment had been managed within the infrastructure groups of the Private Client and Asset Management Group Division.

Asset and Wealth Management Corporate Division
Corporate Division Overview

The Asset and Wealth Management Corporate Division operates our global asset management and private wealth management businesses and is among the leading asset managers in the world based on total invested assets. The division serves a range of retail, private and institutional clients, the latter including:
  insurance companies
  pension funds
  corporations
  governments
  charities
Starting January 1, 2005, our AM Business Division is organized into three distinct global product lines: Institutional Fixed Income and Equity, Mutual Funds including all DWS and Scudder mutual funds, and Alternative Investments, including Hedge Funds, Quantitative Strategies, Real Estate and Structured Products. This product-centric focus divided the prior traditional asset management into its already existing products with slight modifications. The alternative investments of Hedge Funds and Real Estate remain primarily unchanged, while the emphasis on Quantitative Strategies and Structured Products has been increased with those two becoming a new alternative product offering. During 2005, we saw the implementation of key elements of our realignment program transforming the division from being a collection of regional businesses to a strategically positioned entity with integrated global product lines. We integrated Scudder Investments, the U.S. mutual fund business into the DWS global branding as DWS Scudder effective February 1, 2006 creating a worldwide investment platform of approximately 700 investment professionals. DWS Scudder will focus on the advisor-driven channel in the U.S., with an emphasis on servicing the needs of financial advisors. In Asia-Pacific, DWS launched its first series of mutual funds in Singapore, developing products for the Chinese market through a joint venture with Harvest Asset Management, which was created in March 2005. In October, we closed

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Trust Bank in Japan and integrated two separate units into a single entity, DeAM Japan. Also in 2005, we integrated all insurance-related functions – including fixed income management, distribution and advisory services – into a single global unit, creating the no. 1 manager of insurance assets globally (according to “Pensions & Investment”, October 2005), and launched a Specialty Fixed Income business in the U.S.

Our PWM Business Division includes private banking activities for high net worth clients, their families and selected institutions, as well as the Private Client Services (PCS) business in the U.S.
Private Wealth Management (excluding PCS) is organized into regional teams specialized in their respective regional markets. In the U.S., our two PWM franchises, with their specific offering of private banking and brokerage for high net worth individuals, were brought closer together in 2005, which we believe created beneficial synergies for our clients and our businesses due to improved service offering and cost efficiency.
In July 2005, AM announced the sale of a substantial part of its UK- and Philadelphia-based business to Aberdeen Asset Management PLC. The first tranche of the transaction closed on September 30, 2005 and included the UK-based institutional Equity, Fixed Income, Global Equity and Multi-Asset businesses and the UK retail DWS business. In December 2005, AM completed this transaction by selling a substantial part of its UK- and Philadelphia-based business. Excluded from the sale was the Philadelphia-based high yield business, which remains an integral part of AWM’s global platform.
In January 2005, PWM acquired investment manager Wilhelm von Finck AG. The company continues to operate under its own name and offers specific investment solutions for large-scale private and family wealth portfolios.
In 2004, AM merged three Australian trusts – Deutsche Diversified Trust, Deutsche Office Trust and Deutsche Industrial Trust – into a new trust, DB RREEF Trust, creating Australia’s fourth largest listed property trust. In connection with this transaction we also transferred our Australian fiduciary real estate trust management and property management business into a subsidiary, renamed DB RREEF Holdings, subsequently selling a 50% interest in DB RREEF Holdings.
Later in 2004, PWM sold a portion of the private client unit of Scudder, Scudder Private Investment Counsel (PIC), to Legg Mason. In addition AM completed the acquisition of the remaining minority interests in DWS Holding & Service GmbH. Also in 2004 we transferred a London based PCS business unit from AWM to CB&S.
In 2003, we acquired Rued, Blass & Cie AG Bankgeschaeft, a Swiss private bank. In addition, we sold most of our Passive Asset Management business to Northern Trust Corporation and transferred a substantial part of our direct real estate private equity portfolio to a third-party fund.

Products and Services

AWM’s portfolio/fund management products include active fund management, passive/quantitative fund management, alternative investments and discretionary portfolio management.
AM’s active fund management service offers management of client funds via mutual funds, commingled accounts, and separately managed accounts. Our fund managers invest in equity, fixed income and balanced products that are global, regional, country or industry-specific.
The passive/quantitative fund management services in AM provide a full suite of products, including those of a passive nature, to our customers through a preferred provider agreement with Northern Trust Corporation. We still pursue the passive business within our German Passive Asset Management business, which was not part of the 2003 sale to Northern Trust Corporation, and with specialized passive products that we have chosen strategically to continue as investment management services.
Alternative Investments within AM covers our real estate and hedge fund activities. We manage all of our real estate activities through DB Real Estate, which acquires and manages investments in institutional grade properties and real estate securities on behalf of our institutional and private clients worldwide. We specialize in managing core, value-enhancing and high-yield property investments as well as investments in publicly traded real estate securities and mezzanine loans. We offer several types of structures through which our clients may invest, including commingled funds, both closed and open-end, as well as investment programs that can be customized to meet an individual client’s specific needs. Our hedge fund activities are managed through DB Absolute Return Strategies (DB ARS),

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whose platform provides access to both Deutsche Bank and third-party hedge fund strategies, and offers both single-manager and multi-manager funds. Our selection process is designed to produce a pool of qualified managers in a range of sectors, strategies and styles. As an asset class, hedge funds are designed to provide attractive risk-adjusted returns in most market environments and offer portfolio diversification benefits to investors. We distribute our products globally to institutions and high net worth individuals.
PWM offers discretionary portfolio management, in which our specialized fund managers have discretion to manage clients’ investments within the clients’ general guidelines. The fund managers invest client funds in various investment products, such as stocks, bonds, mutual funds, hedge funds and other alternative investments including derivatives, where permitted.
AWM also provides brokerage services in which our relationship managers and client advisors provide investment advice to clients where we do not exercise investment discretion. Our services also include advice on wealth management and growth, including tax-optimized investments and estate planning. Our investment advice covers stocks, bonds, mutual funds, hedge funds and other alternative investments, including derivatives where permitted. The relationship managers also advise their clients on the products of third parties in all asset classes.
We further expanded our offering of alternative investments in 2005, especially with respect to innovative solutions within the private equity asset class. We continued to successfully generate foreign exchange products as well as structured investment products in cooperation with the Global Markets Business Division.
Our loans/deposits products include traditional deposit products (including current accounts, time deposits and savings accounts) and more specialized secured and unsecured lending. We offer our clients both standardized and more specialized finance and savings products.
We also offer payment, account & remaining financial services, processing and disposition of cash and non-cash payments in local currency, international payments, letters of credit, guarantees, and other cash transactions.
AWM generates revenues from other products, including direct real estate investments included in our alternative investments business, rental revenues and gains and losses earned on real estate deal flows and revenues that are not part of our core business, specifically, the gain on sale of businesses.

Distribution Channels and Marketing

In AM we market our retail products in Germany and other Continental European countries, generally through our established internal distribution channels, and Private & Business Clients Corporate Division’s distribution channels. We also distribute our funds through other banks, insurance companies and independent investment advisors. We market our retail funds outside Europe via our own Asset and Wealth Management distribution channels and through third-party distributors. DWS Scudder Investments distributes its retail products to U.S. investors primarily through financial representatives, including brokers at regional firms, independent financial advisors and registered investment advisors. In addition, we distribute our funds directly to members of the American Association of Retired Persons (AARP) Investment Program.
We distribute products for institutional clients through our substantial sales and marketing network within AM and through third-party distribution channels. We also distribute these products through our other businesses, notably the Corporate and Investment Bank Group Division.
Within the traditional retail and institutional businesses, we have in place strong regional investment teams and businesses that understand the needs of their clients and the dynamics of their specific markets. While these teams are led by regional Chief Investment Officers, we remain committed to our global investment platform.
We distribute our alternative investment products predominantly to high net worth clients, institutions and retail customers worldwide through our sales and marketing network within Asset and Wealth Management and through third-party distribution channels.
Within our alternative investments business, we employ global investment management teams that understand the needs of their clients and the dynamics of their specific markets. Within DB Absolute Return Strategies, the investment management teams are divided between single-manager and multi-

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manager strategies. DB Real Estate relies on direct client relations staff to provide clients and brokers with access to real estate investment options.
PWM pursues an integrated holistic business model to cater to the complex needs of high net worth clients, their families and selected institutions. Our financial solutions are part of an integrated offering, which includes real estate investment advice as well as advice on philanthropic activities. We tailor our offering to the unique risk-return profile of each client. The relationship managers work within target customer groups, assisting clients in developing individual investment strategies and creating enduring relationships with our clients.
In our Private Wealth Management onshore business, wealthy customers are served via our relationship manager network in the respective countries. Our customers also have access to our retail branch network and other general banking products we offer through our Private & Business Clients Corporate Division. The offshore business encompasses all of our clients who establish accounts outside their countries of residence. These customers are able to use our offshore services to access financial products that may not be available in their countries of residence.
In addition, the client advisors of the Private Client Services business focus on traditional brokerage offering and asset allocation, including a wide range of third party products.

Private & Business Clients Corporate Division
Corporate Division Overview

The Private & Business Clients Corporate Division established a single business model across Europe with a focused, sales-driven management structure under the Deutsche Bank brand. PBC serves retail and affluent clients as well as small corporate customers.
In 2005 we expanded our presence in selected European and Asian emerging markets. We invested into the growth of the branch network in Poland with the objective to double our presence in this country.
Also in 2005, we established market presence in India and China. We opened our first branches in major Indian cities to participate in the rapid growth of this important emerging Asian market. In China, we signed a contract to buy, together with Sal. Oppenheim, a participation of 14% in Hua Xia Bank. In parallel, Hua Xia Bank and Deutsche Bank agreed on a long-term strategic cooperation.
Additionally, in 2005, we sold our Private Banking business in the Netherlands to Theodoor Gilissen Bankiers N.V.

Products and Services

Generally, similar banking products and services are offered throughout Europe, except that there are some variations from country to country to meet local market, regulatory and customer requirements.
In offering portfolio/fund management and brokerage services, we provide investment advice, brokerage services, discretionary portfolio management and securities custody services to our clients.
We provide loan and deposit services, with the most significant being building financing (including mortgages) and consumer and commercial loans, as well as traditional current accounts, savings accounts and time deposits. The building finance business, which includes mortgages and construction finance, is our most significant lending business. We provide building finance loans primarily for private purposes, such as home financing. Most of our mortgages have an original fixed interest period of five or ten years. In 2005 we also started several initiatives to foster our consumer finance business. For example, in Italy we continued to expand our successful Consumer Finance Platform “Prestitempo”, and we introduced a special student loan program in Germany. Loan and deposit products also include the home loan and savings business in Germany, offered through our subsidiary Deutsche Bank Bauspar AG.
PBC’s payments, account & remaining financial services comprise administration of current accounts in local and foreign currency as well as settlement of domestic and cross-border payments on these accounts. They also comprise the purchase and sale of payment media and the sale of insurance products, home loan and savings contracts and credit cards. In Italy, Private & Business Clients issues credit cards and processes credit card payments under the Bankamericard brand.
Other products include primarily activities related to asset and liability management.

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Distribution Channels and Marketing

To achieve a strong brand position internationally, we market our services consistently throughout Europe. In order to make banking products and services more attractive to clients, we are seeking to optimize the accessibility and availability of our services. To do this, we look to self-service functions and technological advances to supplement our branch network with an array of access channels to its products and services. These channels consist of the following in-person and remote distribution points:
  Investment and Finance Centers. Investment and Finance Centers offer the entire range of products and advice. In 2005, we launched the so-called ‘Branch of the future – Q 110’ in Berlin, a pilot new branch concept to serve private and business clients.
  Financial Agents. In most countries, we market our retail banking products and services through self-employed financial agents. In 2005, we invested in our mobile sales force network in Germany, opening new offices and hiring additional sales representatives.
  Call Centers. Call centers provide clients with remote services supported by automated systems. Remote services include access to account information, securities brokerage and other basic banking transactions.
  Internet. On our website, we offer clients brokerage services, account information and product information on proprietary and third-party investment products. These offerings are complemented with services that provide information, analysis tools and content to support the client in making independent investment decisions.
  Self-service Terminals. These terminals support our branch network and allow clients to withdraw and transfer funds, receive custody account statements and make appointments with the Bank’s financial advisors.
In addition to our branch network and financial agents, we also enter into country-specific distribution arrangements. In Germany, for example, we have a cooperation agreement with Deutsche Vermögensberatung AG (referred to as DVAG) whereby we distribute our mutual funds and other banking products through DVAG’s independent distribution network. We also entered into an exclusive sales co-operation with ADAC (Germany’s largest automobile club with more than 15 million members) in 2005. In order to complement our product range, we have signed distribution agreements, whereby PBC distributes the products of reputable product suppliers. These include an agreement with Zurich Financial Services for insurance products, and a strategic alliance with nine fund companies for the distribution of their investment products.

Corporate Investments Group Division

The Corporate Investments Group Division manages the majority of our alternative assets portfolio and certain other debt and equity positions. The portfolio includes our industrial holdings, certain private equity and venture capital investments, private equity fund investments, certain corporate real estate investments, our holdings in EUROHYPO AG and Atradius N.V., certain credit exposures and certain other non-strategic investments. Historically, its mission has been to provide financial, strategic, operational and managerial capital to enhance the values of the portfolio companies in which the group division has invested.

We believe that the group division enhances the bank’s portfolio management and risk management capability. The group division is in the course of reducing its equity and other exposure significantly. In this context a number of significant transactions were entered into during 2005, including the agreement to sell our stake in EUROHYPO AG.
Corporate Investments holds interests in a number of manufacturing and financial services corporations (our “Industrial Holdings”). The largest two of these Industrial Holdings, by market value at December 31, 2005, were interests of 4.4% in DaimlerChrysler AG and 2.4% in Allianz AG. Currently, over 98% of our Industrial Holdings are in German corporations.

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In 2005, our investment in DaimlerChrysler AG was reduced from 10.4% to 4.4%, our investment in DEUTZ AG was reduced from 4.5% to 2.0%, our investment in Deutsche Beteiligungs AG was reduced from 15.0% to 11.9% and we sold our remaining stake in Südzucker AG.

In 2004, our investment in DaimlerChrysler AG was reduced from 11.8% to 10.4%, our investment in DEUTZ AG was reduced from 10.5% to 4.5% and our investments in Fresenius AG and Motor-Columbus AG were sold.
In 2003, our investment in Allianz AG was reduced from 3.2% to 2.5%, and our investments in mg technologies ag and HeidelbergCement AG were sold.
Rather than engaging in proprietary trading, which involves buying and selling securities on a day-to-day basis, Corporate Investments usually holds our investments in listed securities for several years. The majority of the larger shareholdings in listed companies have been in the portfolio for more than 20 years.
The total market value of these holdings was 4.1 billion at December 31, 2005. See “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk – Risk Management – Market Risk – Market Risk in Our Nontrading Portfolios” for further information.
Corporate Investments also holds certain private equity type investments that have been transacted both on behalf of clients and for our own account, in private equity directly and through private equity funds, including venture capital opportunities and leveraged buy-out funds.
Morgan Grenfell Private Equity (MGPE) funds allow a number of external investors to invest in selected companies. MGPE actively acquires investments in companies and places them with the funds, which generally keep their investments for a period of years until the company is deemed fit for a public offering or a resale to an unrelated party. The Private Equity business is also an investor in the MGPE funds. Since April 2003, management and administration services in relation to the MGPE business have been provided by MidOcean Partners UK Advisors LLP, a partnership formed by certain members of the former Corporate Investments management team under the terms of a secondment and services agreement.
In July 2005, the merger of our investment in Memec Group Holdings Limited with Avnet Inc. was closed, resulting in a 2.4% stake in Avnet Inc.
In 2005 we continued to reduce our Private Equity on-balance sheet exposure by approximately 100 million in CI. In particular, several fund investments were sold in the U.S. and Germany.
In 2004, we closed several transactions, reducing our Private Equity on-balance sheet exposure by approximately  700 million.
In 2003, the major divestiture was the sale of much of our late-stage portfolio to MidOcean Partners LP, in a  1.5 billion transaction. Less significant transactions included the sale of our investment in Tele Columbus GmbH and in Tele Columbus Ost GmbH (formerly SMATcom GmbH), the reduction of our on-balance sheet exposure by approximately 110 million by securitization of Private Equity funds, approximately 350 million by the sale of certain fund investments, and several transactions which further reduced our venture capital exposure.
The Corporate Investments’ portfolio additionally covers certain real estate holdings in Germany, many of which are occupied by Deutsche Bank AG. In 2005 a small number of buildings were sold to various investors.
In 2004 the major real estate transaction was the sale of a German real estate portfolio, which the Group will continue to partly occupy on a medium- to long-term basis, to Eurocastle Investment Limited, an investment company managed by Fortress Investment Group LLC. In 2003 the major transaction was the sale of a real estate portfolio to The Blackstone Group. Due largely to these sales, real estate exposure decreased by approximately 500 million in 2004 and  800 million in 2003.
At December 31, 2005, Corporate Investments’ largest equity method investment was a 27.99% stake in EUROHYPO AG. In November 2005, we entered into a sale and purchase agreement to sell our entire 37.72% stake in EUROHYPO AG to Commerzbank AG for a total consideration of 2.6 billion. In December 2005, the first tranche of this transaction was completed, reducing our stake to 27.99%. The remaining tranche of the transaction is expected to be completed in the first quarter of 2006.
In 2005 our stake in HCL Technologies Limited was reduced from 6.1% to 3.6% in a partial sale.

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In 2004 we closed the sale of our interest in the operations of maxblue Americas to Banco do Brazil, our joint venture partner in this investment. maxblue Americas is a brokerage providing a variety of advisory and investment management products and services through internet-based technology, investment centers and personal consultants.

In 2003 we signed contracts to divest our 34.6% stake in Gerling-Konzern-Versicherungs-Beteiligungs-AG (GKB) and to restructure, simultaneously with Swiss Re, Sal. Oppenheim and GKB, the ownership of Atradius N.V. (formerly Gerling NCM Credit and Finance AG), a global credit insurer. When the deal closed in 2003 our stake in Atradius N.V. was 38.4%. After a capital increase by Compañia Española de Seguros y Reaseguros de Crédito y Caucion and Seguros Catalan Occidente in 2004, our stake in Atradius N.V. was diluted to 33.9%. In December 2005, we agreed to sell 21.2% out of our 33.9% stake in Atradius N.V. to Compañia Española de Seguros y Reaseguros de Crédito y Caucion and Seguros Catalan Occidente. This transaction is expected to be completed in the first quarter 2006.
In 2003 we also sold a 2.7% stake in SES Global S.A. and our entire stake in Greek EFG Eurobank Ergasias S.A.

Infrastructure and Regional Management

Effective January 1, 2005 we centralized our business support areas, which were formerly part of our group divisions, and our Corporate Center into one infrastructure group. The business support areas comprise control and service functions for the businesses which mainly relate to CIB and PCAM. The Corporate Center comprises those supra-divisional functions that support the Management Board in its management of the Group.

This infrastructure group is organized along the Management Board members’ areas of responsibilities into COO functions (e.g., information technology, operations and global sourcing), CFO functions (e.g., controlling, tax, risk management and corporate security), CAO functions (e.g., human resources, legal, audit and compliance), and CEO functions (e.g., corporate development and treasury).
The Regional Management function covers regional responsibilities worldwide. Country heads and management committees are established in the regions to enhance client-focused product coordination across businesses and to ensure compliance with regulatory and control requirements, both from a local and Group perspective. Additionally, in a global context, the Regional Management function represents regional interests at the Group level and enhances cross-regional coordination.
All expenses and revenues incurred within the Infrastructure and Regional Management areas are fully allocated to the Group Divisions CIB, PCAM and CI.

Competitive Environment

Competitors, Markets and Competitive Factors

The financial services industry – and all of our businesses – are intensely competitive, and we expect them to remain so. Our main competitors are other commercial banks, savings banks, other public sector banks, brokers and dealers, investment banking firms, insurance companies, investment advisors, mutual funds and hedge funds. We compete with some of our competitors globally and with some others on a regional, product or niche basis. We compete on the basis of a number of factors, including transaction execution, our products and services, innovation, reputation and price.
In Germany, our wholesale and retail business is influenced by a significant fragmentation of the banking sector into three pillars: private sector banks like us, public sector banks (Landesbanken and savings banks), and cooperative banks. In particular for the wholesale business, foreign banks also have become important competitors. The public sector banks and the cooperative banks cooperate closely with other banks within their respective pillar and thus operate as networks for most products. Consolidation in the German banking sector has therefore predominantly taken place within the three pillars. In addition, the different legal form of private sector banks, public sector banks and mutual

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banks impedes cross-pillar consolidation. By virtue of their legal form as public-law institutions, public sector banks were only permitted to be owned by municipalities and other public bodies and were able to rely on unlimited state guarantees in the form of a business continuation obligation (Anstaltslast) and a statutory ultimate guarantee obligation (Gewährträgerhaftung) by the public body or bodies that created them (mainly the German Länder and municipalities). Following an agreement of the European Commission and the German government, these mechanisms have generally been discontinued after July 18, 2005, subject to transition rules for liabilities existing on that date. In the meantime, a discussion has evolved as to whether the traditional boundaries between the private sector banks, the public sector banks and the cooperative banks should be abandoned in whole or in part in order to improve the competitiveness of German banks within Europe and globally.
In Europe, wholesale and, even more so, retail banking is characterized by regional fragmentation. Consolidation in the banking industry has mainly taken place within countries. Following a number of acquisitions of European banks by banks from other European countries and technical advice of the Committee of European Banking Supervisors (CEBS) to the European Commission on the review of bank mergers and acquisitions under bank regulatory laws, a discussion has evolved as to how banks within Europe should consolidate also across country borders in order to improve the competitiveness of European banks globally. We monitor these discussions closely and analyze carefully any potential business opportunities or challenges that might emerge in this context.
Our performance is largely dependent on the talents and efforts of highly-skilled individuals. Competition for qualified employees in the banking, securities and financial services industries is intense. We also compete for employees with companies outside of the financial services industry. Our continued ability to compete effectively in our businesses depends on our ability to attract new employees as necessary and to retain and motivate our existing employees.
Our reputation for financial strength and integrity is vital to our ability to attract and maintain customers. To keep our well-established reputation we have to adequately promote and market our brand. The loss of business that would result from damage to our reputation could affect our results of operations and financial condition.
We have generally experienced intensifying price competition in recent years. We are observing this pressure on pricing of loans, trading commissions, management fees, transaction spreads and many other areas. We believe that we may experience pricing pressure in these and other areas in the future as some of our competitors seek to obtain market share by reducing prices.

Consolidation and Globalization

In recent years there has been substantial consolidation and convergence among companies in the financial services industry. In particular, a number of large commercial banks, insurance companies and other broad-based financial services firms have merged with other financial institutions. Many of these firms have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage, asset management and investment banking services, which may enhance their competitive position. They also have the ability to support investment banking and securities products with commercial banking, insurance and other financial services revenues in an effort to gain market share, which could result in pricing pressure in our businesses.
In the United States, one of our major markets, consolidation was further facilitated and accelerated by the passage of the Gramm-Leach-Bliley Act of 1999, which allowed commercial banks, securities firms and insurance firms to consolidate.
As indicated by a rebound in industry-wide mergers and acquisitions, especially in the banking, securities and financial services industries, the trend toward consolidation and convergence is expected to continue. This trend has significantly increased the capital base and geographic reach of our competitors and has hastened the globalization of the securities and other financial services markets. As a result, we have committed capital to support our international operations and to execute large global transactions for our clients.

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Competition in Our Businesses
Corporate and Investment Bank Group Division

Our investment banking operation competes in domestic and international markets directly with numerous investment banking firms, investment advisors, brokers and dealers in securities and commodities, securities brokerage firms and certain commercial banks. Within Germany and other European countries, our main competitors include German private universal banks, public state banks and foreign banks.

Private Clients and Asset Management Group Division

In the retail banking business we face intense competition from savings banks and cooperative banks, other universal banks, insurance companies, home loan and savings companies and other financial intermediaries. In Germany, savings and cooperative banks are our biggest group of competitors. These banks generally operate regionally. In other European countries, private universal banks and savings banks are our main competitors.
Our private wealth management business faces intensifying competition from the private banking and wealth management units of other global financial service companies and from investment banks.
Our main competitors in the asset management business are asset management subsidiaries of major financial services companies, mutual fund managers and institutional fund managers in Europe and the United States.

Regulation and Supervision

Our operations throughout the world are regulated and supervised by the central banks and regulatory authorities in each of the jurisdictions where we conduct operations. As we have operations in almost every country in the world, ranging from subsidiaries and branches in many countries down to representative offices in other countries, or employee representatives assigned to serve customers in yet others, we are regulated and supervised in virtually every country. Local authorities impose certain organizational, reserve and reporting requirements and controls (such as capital adequacy, depositor protection, activity limitations and other types of prudential supervision) on our banking and nonbanking operations. In addition, a number of countries in which we operate impose additional limitations on (or which affect) foreign or foreign-owned or controlled banks and financial services institutions, including:

  restrictions on the opening of local offices, branches or subsidiaries and the types of banking and nonbanking activities that may be conducted by those local offices, branches or subsidiaries;
  restrictions on the acquisition of local banks or requirements of specified percentages of local ownership or specified numbers of local management personnel; and
  restrictions on investment and other financial flows in and out of the country.
Changes in the regulatory and supervisory regimes of the countries where we operate will determine, to some degree, our ability to expand into new markets, the services and products that we will be able to offer in those markets and how we structure specific operations.
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, referred to as BaFin) is our principal supervisor on an unconsolidated (Deutsche Bank AG only) and on a consolidated basis (Deutsche Bank AG and the entities consolidated with it for German regulatory purposes). Additionally, many of our operations outside Germany are regulated by local authorities. Within countries that are member states of the European Union or other contracting states of the Agreement on the European Economic Area (Iceland, Liechtenstein and Norway), our branches generally operate under the so-called “European Passport.” Under the European Passport, our branches are subject to regulation and supervision primarily by the BaFin. The authorities of the host country are responsible for the regulation and supervision of the liquidity requirements and the markets of the host country. In the United States, our New York branch, as well as our principal U.S. subsidiary bank (Deutsche Bank Trust Company Americas (DBTCA), formerly Bankers Trust Company), are principally supervised by the New York State Banking Department and the Board of Governors of the Federal Reserve System.

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In the following sections, we present a description of the supervision of our business by the authorities in Germany and the United States, which we view as the most significant for us, and more generally with respect to the other jurisdictions in which we operate. Beyond these countries, and the European Economic Area member states where the European Passport applies, local country regulations generally have limited impact on our operations that are unconnected with these countries.

Regulation and Supervision in Germany

We are authorized to conduct general banking business and to provide financial services under, and subject to the requirements set forth in, the German Banking Act (Kreditwesengesetz).
We are subject to comprehensive regulation and supervision by the BaFin and the Deutsche Bundesbank (referred to as Bundesbank, the German central bank). The European Central Bank regulates us in regard to minimum reserves on deposits and issued securities. We are materially in compliance with the German laws that are applicable to our business.

The German Banking Act

The German Banking Act contains the principal rules for German banks, including the requirements for a banking license, and regulates the business activities of German banks. The Banking Act defines a “banking institution” (Kreditinstitut) as an enterprise that engages in one or more of the activities defined in the Act as “banking business.” The Banking Act also applies to “financial services institutions” (Finanzdienstleistungsinstitute), which are enterprises that engage in one or more of the activities defined in the Act as “financial services”. Banking institutions and financial services institutions are subject to the licensing requirements and other provisions of the Banking Act.
The Banking Act and the rules and regulations adopted thereunder implement certain recommendations of the Basel Committee on Banking Supervision (which we refer to as the Basel Committee) the secretariat of which is provided by the Bank for International Settlements (which we refer to as the BIS), as well as certain European Union directives relating to banks. These directives address issues such as accounting standards, regulatory capital, risk-based capital adequacy, consolidated supervision, the monitoring and control of large exposures, and the creation of a single European Union-wide banking market with no internal barriers to banking and financial services. The Agreement on the European Economic Area extends this single market to Iceland, Liechtenstein and Norway.
In June 2004, the Basel Committee adopted revised recommendations for international capital adequacy standards widely referred to as the Basel II capital framework. The two principal features of the new framework are (1) to align capital requirements more closely with the underlying risks and (2) to introduce a capital charge for operational risk (comprising, among other things, risks related to certain external factors, as well as to technical errors and errors of employees). The framework has to be implemented in the various countries that participate in the Basel Committee by year-end 2006. Legislation to that effect has been proposed both on a European Union level and in Germany in 2005. We may have to maintain higher levels of capital for bank regulatory purposes, which could increase our financing costs.

The German Securities Trading Act

Under the German Securities Trading Act (Wertpapierhandelsgesetz), the BaFin regulates and supervises securities trading in Germany. The Securities Trading Act prohibits, among other things, insider trading with respect to securities admitted to trading or included in the over-the-counter market at a German exchange or the exchange in another country that is a member state of the European Union or another contracting state of the Agreement on the European Economic Area.
The Securities Trading Act also contains rules of conduct. These rules of conduct apply to all businesses that provide securities services. Securities services include, in particular, the purchase and sale of securities or derivatives for others and the intermediation of transactions in securities or derivatives. The BaFin has broad powers to investigate businesses providing securities services to monitor their compliance with the rules of conduct and the reporting requirements. In addition, the Securities Trading Act requires an independent auditor to perform an annual audit of the securities services provider’s compliance with its obligations under the Securities Trading Act. The Directive on markets in financial

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instruments of 2004 (commonly referred to as the MiFiD) aims to further integrate the securities markets and improve competition within the European Union and the European Economic Area by harmonizing rules of conduct. Under the present stage of legislative process we are required to implement such rules by October 2007.

Regulation by the BaFin

The BaFin is a federal regulatory authority and reports to the German Federal Ministry of Finance. The BaFin issues regulations and guidelines that implement German banking laws and other laws affecting German banks.
The BaFin supervises the operations of German banks on an unconsolidated and a consolidated basis to ensure that they are in compliance with the Banking Act and other applicable German laws and regulations. It places particular emphasis on compliance with capital adequacy and liquidity requirements, large exposure limits and restrictions on certain activities imposed by the Banking Act and related regulations.

Regulation by the Bundesbank

The Bundesbank supports the BaFin and closely cooperates with it. The cooperation includes the ongoing review and evaluation of reports submitted by us and of our audit reports as well as examinations to assess the adequacy of our capital base and risk management systems. In this supervisory role the Bundesbank follows the guidelines issued by the BaFin acting in conjunction with the Bundesbank. The Bundesbank is also responsible for the collection and analysis of statistics and reports from German banks.
Nevertheless, these two institutions have distinct functions. While the BaFin has the sole authority to issue administrative orders (Verwaltungsakte) binding on German banks, it is required to consult with the Bundesbank before it issues general regulations (Verordnungen). In addition, the BaFin must obtain the Bundesbank’s consent before it issues any general regulations or guidelines that would affect the Bundesbank’s operations, such as the Principles on Own Funds and Liquidity of Credit Institutions (Grundsätze über die Eigenmittel und Liquidität der Kreditinstitute), which relate to capital adequacy (Grundsatz I or “Principle I”) and liquidity (Grundsatz II or “Principle II”).

The European Central Bank Minimum Reserve Requirements

The European Central Bank sets the minimum reserve requirements for institutions that engage in the customer deposit and lending business. These minimum reserves must equal a certain percentage of the institutions’ liabilities resulting from certain deposits, plus the issuance of bonds and money market instruments. Liabilities to European Monetary Union national central banks and to other European Monetary Union banking institutions that are themselves subject to the minimum reserve requirements are not included in this calculation.

Capital Adequacy Requirements

German capital adequacy principles are based on the principle of risk assessment. German capital adequacy principles, as set forth in Principle I, address capital adequacy requirements for both counterparty risk (Adressenausfallrisiko) and market price risk (Marktrisiko). German banks are required to cover counterparty and market risks with Tier I capital (Kernkapital or “core capital”) and Tier II capital (Ergänzungskapital or “supplementary capital”) (together, haftendes Eigenkapital or “regulatory banking capital”). They may also cover market price risk with Tier III capital (Drittrangmittel) and (to the extent not required to cover counterparty risk) with regulatory banking capital. The calculation of regulatory banking capital and Tier III capital is set forth below.
Principle I requires each German bank to maintain a solvency ratio (Eigenkapitalquote) of regulatory banking capital to risk-weighted assets (gewichtete Risikoaktiva) of at least 8%. Risk-weighted assets include financial swaps, financial forward transactions, options and other off-balance sheet items. We further explain the calculation of risk-weighted assets below. The solvency ratio rules implement European Union directives, which in turn, are based on the recommendations of the Basel Committee.

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Regulatory Banking Capital and Risk-Weighted Assets

Regulatory banking capital, the numerator of the solvency ratio, is defined in the Banking Act for banks, such as ourselves, that are organized as stock corporations, as consisting principally of the following items:

Tier I capital:

  Paid-in Subscribed Capital (not including capital with respect to preferred shares with cumulative dividend rights).
  Capital Reserves.
  Earnings (Revenues) Reserves.
  Fund for General Banking Risks. A bank may record this fund on the liability side of its balance sheet to reflect special risks inherent in the banking business. A bank must use its reasonable commercial judgment in making this determination.
  Silent Partnership Interests (stille Beteiligungen). Silent partnership interests are hybrid participations in the business of a bank. Such interests are subject to certain conditions, including a minimum term of five years (or ten years for purposes of BIS capital rules), noncumulative dividends, participation in the bank’s losses and subordination to the rights of all creditors in the event of insolvency or liquidation of the bank.
Own shares held by the bank, losses and certain intangible assets are subtracted from the Tier I capital calculation.

Tier II capital (limited to the amount of Tier I capital):

  Preferred Shares (Vorzugsaktien) with cumulative dividend rights.
  Profit-participation Rights (Genussrechte). These rights are subject to certain conditions, including a minimum term of five years, participation in the bank’s losses and subordination to the rights of all nonsubordinated creditors in the event of insolvency or liquidation of the bank.
  Longer-term Subordinated Debt. (Limited to 50% of the amount of Tier I capital) This debt is subject to certain criteria, including a minimum term of five years and subordination to the rights of all nonsubordinated creditors in the event of insolvency or liquidation of the bank.
  Reserves Pursuant to Section 6b of the German Income Tax Law (Einkommensteuergesetz). A bank may include 45% of these reserves in regulatory banking capital. However, any reserves included in regulatory banking capital must have been created from the proceeds of the sale of real property, property rights equivalent to real property or buildings.
  Reserves for General Banking Risks. A bank may record certain receivables on its balance sheet at a lower value than would be permitted for industrial and other nonbanking entities. Such receivables include loans and securities that are neither investment securities nor part of the trading portfolio. The bank may record these receivables at a lower value if the use of a lower value is advisable, in its reasonable commercial judgment, to safeguard against the special risks inherent in the banking business. Reserves for general banking risks may not exceed 4% of the book value of the receivables and securities recorded.
  Certain Unrealized Reserves. These may include up to 45% of the difference between the book value and the lending value (Beleihungswert) of land and buildings, and up to 35% of the difference between the book value of unrealized reserves (including provisioning reserves) and the sum of the market value of securities listed on a stock exchange and the published redemption price of shares issued by certain securities or real estate funds. A bank may include these reserves in Tier II capital only if its Tier I capital amounts to at least 4.4% of its risk-weighted assets. Reserves may be included in Tier II capital only up to a maximum amount of 1.4% of risk-weighted assets.

Capital components that meet the above criteria and which a bank has provided to another bank, financial services institution or financial enterprise which is not consolidated with the bank for regulatory purposes, are subtracted from the bank’s regulatory banking capital if the bank holds more than 10% of the capital of such other bank, financial services institution or financial enterprise or to the extent the aggregate book value of such investments exceeds 10% of the bank’s regulatory banking capital.

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The calculation of risk-weighted assets, the denominator of the solvency ratio, is set forth in Principle I. Assets are assigned to one of five basic categories of relative credit risk based on the debtor and the type of collateral, if any, securing the respective assets. Each category has a risk-classification multiplier (0%, 10%, 20%, 50% and 100%). The balance sheet value of each asset is then multiplied by the risk-classification multiplier for the asset’s category. The resulting figure is the risk-weighted value of the asset.

Off-balance sheet items, such as financial guarantees, letters of credit, swaps and other financial derivatives, are subject to a two-tier adjustment. First, the value of each item is determined. The value of each item is multiplied by one of three risk-classification multipliers (20%, 50% and 100%) depending on the type of instrument. In the second step, the off-balance sheet item is assigned to one of the five credit risk categories set forth above for balance sheet items. Selection of an appropriate risk multiplier is based on the type of counterparty or debtor and the type of collateral, if any, securing the asset. The adjusted value of the off-balance sheet item is then multiplied by the risk multiplier to arrive at the risk-weighted value of the off-balance sheet item.

Tier III Capital and Market Price Risk

Principle I also sets forth the principles governing capital adequacy requirements for market price risk. The market price risk positions of a bank include the following:
  foreign exchange net positions;
  commodities net positions;
  certain trading book positions, including those involving counterparty risk, interest rate risk and share price risk; and
  options positions.
The net risk-weighted market price risk positions must be covered by Own Funds (Eigenmittel) that are not required to cover counterparty risk. Own Funds consist of regulatory banking capital (Tier I plus Tier II capital) and Tier III capital. The calculation of risk-weighted market price risk positions must be made in accordance with specific rules set forth in Principle I or, at the request of a bank, in whole or in part in accordance with the bank’s internal risk rating models approved by the BaFin.
At the close of each business day, a bank’s total net risk-weighted market price risk positions must not exceed the sum of:
  the difference between the bank’s regulatory banking capital and 8% of its aggregate amount of risk-weighted risk assets; and
  the bank’s Tier III capital.

Tier III capital consists of the following items:

  Net Profits. Net profits are defined as the proportionate profit of a bank which would result from closing all trading book positions at the end of a given day minus all foreseeable expenses and distributions and minus losses resulting from the banking book which would likely arise upon a liquidation of the bank, unless such losses must be deducted from the bank’s regulatory banking capital pursuant to an order of the BaFin.
  Short-term Subordinated Debt. This debt must meet certain criteria, including a minimum term of two years, subordination to the rights of all nonsubordinated creditors in the event of insolvency or liquidation of the bank and suspension of the payment of interest and principal if such payment would result in a breach of the Own Funds requirements applicable to the bank.
Net profits and short-term subordinated debt qualify as Tier III capital only up to an amount which, together with the supplementary capital not required to cover risks arising from the banking book (as described below), does not exceed 250% of the core capital not required to cover risks arising from the banking book.
The Banking Act defines the banking book as all positions and transactions that are not part of the trading book. The trading book is defined as consisting primarily of the following:
  financial instruments that a bank holds in its portfolio for resale or that a bank acquires to exploit existing or expected spreads between the purchase and sale price or price and interest rate movements;

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  positions and transactions for the purpose of hedging market price risks arising from the trading book and related refinancing transactions;
  transactions subject to the designation of the counterparty (Aufgabegeschäfte);
  payment claims in the form of fees, commissions, interest, dividends and margins directly linked to trading book positions; and
  repurchase, lending and similar transactions related to trading book positions.
Banks must set internal criteria according to which they allocate positions and transactions to the trading book and notify such criteria to the BaFin and the Bundesbank.

Consolidated Regulation and Supervision

The Banking Act’s provisions on consolidated supervision require that each group of institutions (Institutsgruppe) taken as a whole meets the Own Funds requirements. Under the Banking Act, a group of institutions consists of a bank or financial services institution, as the parent company, and all other banks, financial services institutions, financial enterprises and bank service enterprises in which the parent company holds more than 50% of the capital or voting rights or on which the parent company can otherwise exert a controlling influence. Special rules apply to joint venture arrangements that result in the joint management of another bank, financial services institution, financial enterprise or bank service enterprise by a bank and one or more third parties.
Financial groups which offer services and products in various financial sectors (banking and securities business, insurance and reinsurance business) are subject to supplementary supervision as a financial conglomerate (Finanzkonglomerat) once certain thresholds have been exceeded. The supervision on the level of the conglomerate is exercised by the BaFin. It comprises requirements regarding Own Funds, risk concentration, risk management, transactions within the group and organization. We are not a financial conglomerate but we would become subject to such supplementary supervision once certain the assets attributed to the insurance sector exceed certain thresholds as the result of an acquisition or organic growth.

Capital Requirements under the Basel Capital Accord

We have agreed with the BaFin to calculate and report our consolidated capital adequacy ratios in direct application of the recommendations made by the Basel Committee in 1988 (which we call the Basel Capital Accord) in addition to the calculation and reporting requirements in accordance with the Banking Act as described above. The Basel Capital Accord provides that banks shall maintain (on a consolidated basis) a risk-based core capital ratio of at least 4% and a risk-based regulatory banking capital ratio of at least 8%. In some respects (for example, for the treatment of goodwill and commercial real estate loans), the calculation of these ratios is different from the calculation under the Banking Act.

Liquidity Requirements

The Banking Act requires German banks and certain financial services institutions to invest their funds so as to maintain adequate liquidity at all times. Principle II prescribes these specific liquidity requirements applicable to banks and to certain financial services institutions. The liquidity requirements set forth in Principle II are based on a comparison of the remaining terms of certain assets and liabilities. Principle II requires maintenance of a ratio (Liquiditätskennzahl or “one-month liquidity ratio”) of liquid assets to liquidity reductions expected during the month following the date on which the ratio is determined of at least one. German banks and certain financial services institutions are required to report the one-month liquidity ratio and estimated liquidity ratios for the next eleven months to the BaFin on a monthly basis. The liquidity requirements set forth in Principle II do not apply on a consolidated basis.

Limitations on Large Exposures

The Banking Act and the Large Exposure Regulation (Grosskredit- und millionenkreditverordnung) limit a bank’s concentration of credit risks on an unconsolidated and a consolidated basis through restrictions on large exposures (Grosskredite). We are subject to the large exposure applicable to banks and groups of institutions with more than minor trading book positions (trading book institutions).

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These rules contain separate restrictions for large exposures related to the banking book (banking book large exposures) and aggregate large exposures (aggregate book large exposures) of a bank or group of institutions.

Banking book large exposures are exposures incurred in the banking book and related to a single client (and clients affiliated with it) that equal or exceed 10% of a bank’s or group’s regulatory banking capital. Individual banking book large exposures must not exceed 25% of the bank’s or group’s regulatory banking capital (20% in the case of exposures to affiliates of the bank that are not consolidated for regulatory purposes).
Aggregate book large exposures are created when the sum of banking book exposures and the exposures incurred in the trading book related to a client, and clients affiliated with it, (trading book large exposures) equals or exceeds 10% of the bank’s or group’s Own Funds. The 25% limit (20% in the case of unconsolidated affiliates), calculated by reference to a bank’s or group’s Own Funds, also applies to aggregate book large exposures. Exposures incurred in the trading book include:
  the net amount of long and short positions in financial instruments involving interest rate risk (interest net positions);
  the net amount of long and short positions in financial instruments involving equity price risk (equity net positions); and
  the counterparty risk arising from positions in the trading book.
In addition to the above limits, the total of all banking book large exposures must not exceed eight times the bank’s or group’s regulatory banking capital, and the total of all aggregate book large exposures must not exceed in the aggregate eight times the bank’s or group’s Own Funds.
A bank or group of institutions may exceed these ceilings only with the approval of the BaFin and subject to increased capital requirements for the amount of the large exposure that exceeds the ceiling.
Furthermore, total trading book exposures to a single client (and clients affiliated with it) must not exceed five times the bank’s or group’s Own Funds, to the extent such Own Funds are not required to meet the capital adequacy requirements with respect to the banking book. Total trading book exposures to a single client (and clients affiliated with it) in excess of the aforementioned limit are not permitted.

Limitations on Significant Participations

The Banking Act places limitations on the investments of deposit-taking banks, such as ourselves, in enterprises outside the financial and insurance industry, where such investment (called a “significant participation”):
  directly or indirectly amounts to 10% or more of the capital or voting rights of an enterprise; or
  would give the owner significant influence over the management of the enterprise.
Participations that meet the above requirements are not counted as significant participations if the bank does not intend for the participation to establish a permanent relationship with the enterprise in which the participation is held. For purposes of calculating significant participations, all indirect participations held by a bank through one or more subsidiaries are fully attributed to the parent bank.
The nominal value (as opposed to book value or price paid) of a bank’s significant participation in an enterprise must not exceed 15% of the bank’s regulatory banking capital. Furthermore, the aggregate nominal value of all significant participations of a bank must not exceed 60% of the bank’s regulatory banking capital. A bank may exceed those ceilings only with the approval of the BaFin. The bank is required to support the amount of the significant participation or participations that exceed a ceiling with regulatory banking capital on a one-to-one basis.
The limitations on significant participations also apply on a consolidated basis.

Financial Statements and Audits

As required by the German Commercial Code (Handelsgesetzbuch), we prepare our non-consolidated financial statements in accordance with German GAAP. German GAAP for banks primarily reflect the Commercial Code and the Regulation on Accounting by Credit Institutions and Financial Services Institutions (Verordnung über die Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute) which in turn implement EU Directives on accounting. The Regulation on Accounting by Credit Institu-

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tions and Financial Services Institutions requires a uniform format for the presentation of financial statements for all banks.
Compliance with the capital adequacy requirements of the German Banking Act, the liquidity requirements, large exposure rules and other requirements of the German Banking Act are based on financial statements prepared in accordance with German GAAP.
Pursuant to the German Commercial Code, exchange-listed companies, such as us, are permitted to prepare their consolidated financial statements in accordance with certain internationally recognized accounting principles, such as International Accounting Standards, or IAS, now called International Financial Reporting Standards, or IFRS, and U.S. GAAP. In July 2002, the European Union issued a Regulation which requires companies governed by the law of a European Union member state to prepare their financial statements from and including the financial year 2005 onwards in accordance with IFRS, if their securities are admitted to trading on a regulated market in the European Union. The member states may postpone the application of this Regulation until 2007 for companies like us which have their securities also listed outside the European Union and apply other internationally recognized accounting standards like U.S. GAAP.
Compliance with the capital adequacy ratios pursuant to the Basel Capital Accord (see “Capital Adequacy Requirements – Capital Requirements under the Basel Capital Accord”) is based on financial statements prepared for consolidation purposes. Therefore, our compliance with such capital adequacy ratios is based on financial statements prepared in accordance with U.S. GAAP. We anticipate that such compliance will be based on financial statements prepared in accordance with IFRS once we apply the EU Regulation of July 2002.
Under German law, we are required to be audited annually by a certified public accountant (Wirtschaftsprüfer). The accountant is appointed at the shareholders’ meeting. However, the supervisory board mandates the accountant and supervises the audit. The BaFin must be informed of and may reject the accountant’s appointment.
The Banking Act requires that a bank’s auditor informs the BaFin of any facts that come to the accountant’s attention which would lead it to refuse to certify or to limit its certification of the bank’s annual financial statements or which would adversely affect the financial position of the bank. The auditor is also required to notify the BaFin in the event of a material breach by management of the articles of association or of any other applicable law.
The auditor is required to prepare a detailed and comprehensive annual audit report (Prüfungsbericht) for submission to the bank’s supervisory board, the BaFin and the Bundesbank.

Reporting Requirements

The BaFin and the Bundesbank require German banks to file comprehensive information in order to monitor compliance with the German Banking Act and other applicable legal requirements and to obtain information on the financial condition of banks.

Internal Auditing

The BaFin requires every German bank to have an effective internal auditing department. The internal auditing department must be adequate in size and quality and must establish adequate procedures for monitoring and controlling the bank’s activities.
Banks are also required to have a written plan of organization that sets forth the responsibilities of the employees and operating procedures. The bank’s internal audit department is required to monitor compliance with the plan.

Enforcement of Banking Regulations; Investigative Powers
Investigations and Official Audits

The BaFin conducts audits of banks on a random basis, as well as for cause. It may require banks to furnish information and documents in order to ensure that the bank is complying with the Banking Act and its regulations. The BaFin may conduct investigations without having to state a reason for its investigation.

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The BaFin may also conduct investigations at a foreign entity that is part of a bank’s group for regulatory purposes in order to verify data on consolidation, large exposure limitations and related reports. Investigations of foreign entities are limited to the extent that the law of the jurisdiction where the entity is located restricts such investigations.

The BaFin may attend meetings of a bank’s supervisory board and shareholders’ meetings. It also has the authority to require that such meetings be convened.

Enforcement Powers

The BaFin has a wide range of enforcement powers in the event it discovers any irregularities. It may remove the bank’s managers from office, transfer their responsibilities in whole or in part to a special commissioner or prohibit them from exercising their current managerial capacities. If a bank’s Own Funds are inadequate or if a bank does not meet the liquidity requirements and the bank fails to remedy the deficiency within a certain period, then the BaFin may prohibit or restrict the bank from distributing profits or extending credit. This prohibition also applies to the parent bank of a group of institutions in the event that the Own Funds of the group are inadequate on a consolidated basis. If a bank fails to meet the liquidity requirements, the BaFin may also prohibit the bank from making further investments in illiquid assets.
If a bank is in danger of defaulting on its obligations to creditors, the BaFin may take emergency measures to avert default. These emergency measures may include:
  issuing instructions relating to the management of the bank;
  prohibiting the acceptance of deposits and the extension of credit;
  prohibiting or restricting the bank’s managers from carrying on their functions; and
  appointing supervisors.
If these measures are inadequate, the BaFin may revoke the bank’s license and, if appropriate, order the closure of the bank.
To avoid the insolvency of a bank, the BaFin may prohibit payments and disposals of assets, close the bank’s customer services, and prohibit the bank from accepting any payments other than payments of debts owed to the bank. Only the BaFin may file an application for the initiation of insolvency proceedings against a bank.
Violations of the German Banking Act may result in criminal and administrative penalties.

Deposit Protection in Germany
The Deposit Guarantee Act

The Law on Deposit Insurance and Investor Compensation (Einlagensicherungs- und Anlegerentschädigungsgesetz, the Deposit Guarantee Act) provides for a mandatory deposit insurance system in Germany. It requires that each German bank participate in one of the licensed government-controlled investor compensation institutions (Entschädigungseinrichtungen). The investor compensation institutions are supervised by the BaFin. Entschädigungseinrichtung deutscher Banken GmbH acts as the investor compensation institution for private sector banks such as us.
The investor compensation institutions collect and administer the contributions of the member banks and settle the compensation claims of investors in accordance with the Deposit Guarantee Act. In the event a bank’s financial condition leaves the bank permanently unable to repay deposits or perform its obligations under securities transactions, the Deposit Guarantee Act authorizes creditors of the bank to make claims against the bank’s investor compensation institution. Certain entities, such as banks, financial institutions (Finanzinstitute), insurance companies, investment funds, the Federal Republic of Germany, the German federal states, municipalities and medium-sized and large corporations, are not eligible to make such claims.
Investor compensation institutions are liable only for obligations resulting from deposits and securities transactions that are denominated in euro or the currency of a contracting state to the Agreement on the European Economic Area. Investor compensation institutions are not liable for obligations represented by instruments in bearer form or negotiable by endorsement. Investor compensation institutions’ liabilities for failed banks are limited to 90% of the aggregate value of each creditor’s deposits

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with the bank and to 90% of the aggregate value of obligations arising from securities transactions. The maximum liability of an investor compensation institution to any one creditor is limited to 20,000.
Banks are obliged to make annual contributions to the investor compensation institution in which they participate. An investor compensation institution must levy special contributions on the banks participating therein or take up loans, whenever it is necessary to settle compensation claims by such institution in accordance with the Deposit Guarantee Act. The investor compensation institution may exempt a bank from special contributions in whole or in part if full payments of such contributions are likely to render such bank unable to repay its deposits or perform its obligations under securities transactions. The amount of such contribution will then be added proportionately to the special contributions levied on the other participating banks.

Voluntary Deposit Protection System

Liabilities to creditors that are not covered under the Deposit Guarantee Act may be covered by one of the various protection funds set up by the banking industry on a voluntary basis. We take part in the Deposit Protection Fund of the Association of German Banks (Einlagensicherungsfonds des Bundesverbandes deutscher Banken e.V.). The Deposit Protection Fund covers liabilities to customers up to an amount equal to 30% of the bank’s core capital and supplementary capital (to the extent that supplementary capital does not exceed 25% of core capital). Liabilities to other banks and other specified institutions, and obligations of banks represented by instruments in bearer form, are not covered. To the extent the Deposit Protection Fund makes payments to customers of a bank, it will be subrogated to their claims against the bank.
Banks that participate in the Deposit Protection Fund make regular contributions to the fund based on their liabilities to customers, and may be required to make special contributions up to the amount of their regular contributions to the extent requested by the Deposit Protection Fund to enable it to fulfill its purpose.

Regulation and Supervision in the United States

Our operations are subject to extensive federal and state banking and securities regulation and supervision in the United States. We engage in U.S. banking activities directly through our New York branch. We also control U.S. banking subsidiaries, including DBTCA, and U.S. broker-dealers, such as Deutsche Bank Securities Inc., U.S. nondeposit trust companies and nonbanking subsidiaries.

Regulatory Authorities

Deutsche Bank AG is a bank holding company under the U.S. Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act), by virtue of, among other things, our ownership of DBTCA. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Federal Reserve Board as our U.S. “umbrella supervisor”.
DBTCA is a New York state-chartered bank and a member of the Federal Reserve System, and its deposits are insured by the Federal Deposit Insurance Corporation (the FDIC). As such, DBTCA is subject to regulation, supervision and examination by the Federal Reserve System and the New York State Banking Department and to relevant FDIC regulation. Deutsche Bank Trust Company Delaware is an FDIC-insured Delaware state-chartered bank, but is not a member of the Federal Reserve System. As a state non-member bank, it is subject to regulation, supervision and examination by the FDIC and the Delaware Office of the State Banking Commission. Our New York branch is supervised by the Federal Reserve System and the New York State Banking Department, but its deposits are not insured (or eligible to be insured) by the FDIC. Our federally-chartered nondeposit trust companies are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency. Certain of our subsidiaries are also subject to regulation, supervision and examination by state banking regulators of certain states in which we conduct banking operations, including New Jersey.

Restrictions on Activities

Federal and state banking laws and regulations restrict our ability to engage, directly or indirectly through subsidiaries, in activities in the United States.

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We are required to obtain the prior approval of the Federal Reserve Board before directly or indirectly acquiring the ownership or control of more than 5% of any class of voting shares of U.S. banks, certain other depository institutions, and bank or depository institution holding companies. Under the Bank Holding Company Act and Federal Reserve Board regulations, our U.S. banking operations (including our New York branch and DBTCA) are also restricted from engaging in certain “tying” arrangements involving products and services.

Our two U.S. insured bank subsidiaries are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of these subsidiaries.
Under U.S. law, our activities and those of our subsidiaries are generally limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve Board determines to be a proper incident to banking or managing or controlling banks. Following the Gramm-Leach Bliley Act of 1999 (the GLB Act), however, qualifying bank holding companies and foreign banks that become financial holding companies may engage in a substantially broader range of nonbanking activities in the United States, including securities, merchant banking, insurance and other financial activities, in many cases, without prior notice to, or approval from, the Federal Reserve Board or any other U.S. banking regulator. We became a financial holding company in March 2000 and, so long as we maintain that designation, we are able to engage in this broader range of activities. As a non-U.S. bank, we are generally authorized under the Bank Holding Company Act and Federal Reserve Board regulations to acquire a non-U.S. company engaged in nonfinancial activities provided that the company’s U.S. operations do not exceed thresholds specified in Federal Reserve Board regulations. In addition, under the merchant banking authority granted by the GLB Act and Federal Reserve Board regulations, we and our nonbank subsidiaries may invest in companies that engage in activities that are not financial in nature, as long as we intend to limit the duration of the investment and do not routinely manage any such portfolio company and do not engage in any cross-marketing with our U.S. branch or bank subsidiaries.
Our status as a financial holding company, and resulting ability to engage in the broader range of activities permitted under the GLB Act, are dependent on Deutsche Bank AG and our two insured U.S. depository institutions remaining “well capitalized” and “well managed” and upon our insured U.S. depository institutions meeting certain requirements under the Community Reinvestment Act. In order to meet the “well capitalized” test, we and our U.S. depository institutions are required to maintain capital ratios comparable to those of a well-capitalized U.S. bank, including a Tier I risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%. If we or one of our U.S. depository institutions cease to be well-capitalized or well-managed, or otherwise fail to meet any of the requirements for financial holding company status, then, depending on which requirement we fail to meet, we may be required to discontinue activities and investments authorized under GLB or terminate our U.S. banking operations.
The GLB Act and Federal Reserve Board regulations contain other provisions that could affect our operations and the operations of all financial institutions. One of these provisions requires us to disclose our privacy policy to consumers and to offer them the ability to opt out of having their non-public information disclosed to third parties. In addition, the states are permitted to adopt more extensive privacy protections through legislation or regulation.
In addition, the so-called “push-out” provisions of the GLB Act narrow the exclusion of banks (including U.S. branches of foreign banks, such as our New York branch) from the definitions of “broker” and “dealer” under the Securities Exchange Act of 1934. The rules of the Securities and Exchange Commission narrowing the exclusion of banks from the definition of “dealer” became effective on September 30, 2003, while those narrowing the exclusion of banks from the definition of “broker” are proposed to become effective on September 1, 2006. As a result of these rules, certain securities activities conducted by DBTCA and our New York branch have been or will be restructured or transferred to one or more U.S. registered broker-dealer subsidiaries.

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Additionally, under U.S. federal banking laws, state-chartered banks (such as DBTCA) and state-licensed branches and agencies of foreign banks (such as our New York branch) may engage only in activities that would be permissible for their federally chartered or licensed counterparts, unless the FDIC (in the case of DBTCA) or the Federal Reserve Board (in the case of our New York branch) determines that the additional activity would pose no significant risk to the FDIC’s Bank Insurance Fund (in the case of DBTCA) and is consistent with sound banking practices (in the case of DBTCA and our New York branch). United States federal banking laws also subject state branches and agencies to the same single-borrower lending limits that apply to federal branches or agencies, which generally are the same as the lending limits applicable to national banks. These single-borrower lending limits are based on the worldwide capital of the entire foreign bank.

Under the International Banking Act of 1978, as amended, the Federal Reserve Board may terminate the activities of any U.S. office of a foreign bank if it determines that the foreign bank is not subject to comprehensive supervision on a consolidated basis in its home country (unless the home country is making demonstrable progress toward establishing such supervision), or that there is reasonable cause to believe that such foreign bank or its affiliate has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result of such violation or practice, the continued operation of the U.S. office would be inconsistent with the public interest or with the purposes of federal banking laws.
There are various legal restrictions on the extent to which we and our nonbank subsidiaries can borrow or otherwise obtain credit from our U.S. banking subsidiaries or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities and must be secured by designated amounts of specified collateral. In addition, certain transactions, such as certain extensions of credit by a U.S. bank subsidiary to, or purchases of assets by such a subsidiary from, us or our nonbank subsidiaries are subject to volume limitations. These restrictions also apply to transactions of our New York Branch with our U.S. broker-dealer and certain of our other affiliates.

Our New York Branch

Our New York branch is licensed by the New York Superintendent of Banks to conduct a commercial banking business. Under the New York State Banking Law and regulations, our New York branch is required to maintain eligible high-quality assets with banks in the State of New York in an amount equal to 1% of its liabilities (excluding liabilities to other offices and our subsidiaries), as security for the protection of depositors and certain other creditors. The amount of assets required to be pledged is subject to a maximum of U.S.$400,000,000 in the case of foreign banking corporations that have been designated as “well-rated” by the New York State Superintendent of Banks, as our New York branch has been. Should our New York Branch cease to be “well-rated” by the New York State Superintendent of Banks we may need to maintain substantial additional amounts of eligible assets with banks in the State of New York.
The New York State Banking Law also empowers the Superintendent of Banks to establish asset maintenance requirements for branches of foreign banks, expressed as a percentage of each branch’s liabilities. The presently designated percentage is 0%, although the Superintendent may impose additional asset maintenance requirements upon individual branches on a case-by-case basis. No such requirement has been imposed upon our New York branch.
The New York State Banking Law authorizes the Superintendent of Banks to take possession of the business and property of a New York branch of a foreign bank under circumstances involving violation of law, conduct of business in an unsafe manner, impairment of capital, suspension of payment of obligations, or initiation of liquidation proceedings against the foreign bank at its domicile or elsewhere. In liquidating or dealing with a branch’s business after taking possession of a branch, only the claims of creditors which arose out of transactions with a branch are to be accepted by the Superintendent of Banks for payment out of the business and property of the foreign bank in the State of New York, without prejudice to the rights of the holders of such claims to be satisfied out of other assets of the foreign bank. After such claims are paid, the Superintendent of Banks will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.

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Under the New York State Banking Law, our New York branch is generally subject to the same limits on lending to a single borrower, expressed as a ratio of capital, that apply to a New York state-chartered bank, except that for our New York branch such limits are based on our worldwide capital.

Deutsche Bank Trust Company Americas

DBTCA, like other FDIC-insured banks, is required to pay assessments to the FDIC for deposit insurance under the FDIC’s Bank Insurance Fund (calculated using a risk-based assessment system). These assessments are based on deposit levels and other factors.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (referred to as FDICIA) provides for extensive regulation of depository institutions (such as DBTCA and its direct and indirect parent companies), including requiring federal banking regulators to take “prompt corrective action” with respect to FDIC-insured banks that do not meet minimum capital requirements. For this purpose, FDICIA establishes five tiers of institutions: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”. As an insured bank’s capital level declines and the bank falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorized (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the bank (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or payment of a management fee to its holding company if the bank would thereafter be undercapitalized. If an insured bank becomes undercapitalized, it is required to submit to federal regulators a capital restoration plan guaranteed by the bank’s holding company. The guarantee is limited to 5% of the bank’s assets at the time it becomes undercapitalized or, should the undercapitalized bank fail to comply with the plan, the amount of the capital deficiency at the time of failure, whichever is less. If an undercapitalized bank fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized”. Significantly undercapitalized banks may be subject to a number of restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. Since the enactment of FDICIA, both of our U.S. insured banks have been categorized as “well capitalized” under Federal Reserve Board regulations.

Other

In the United States, our U.S.-registered broker-dealers are regulated by the Securities and Exchange Commission. Broker-dealers are subject to regulations that cover all aspects of the securities business, including:
  sales methods;
  trade practices among broker-dealers;
  use and safekeeping of customers’ funds and securities;
  capital structure;
  recordkeeping;
  the financing of customers’ purchases; and
  the conduct of directors, officers and employees.
In addition, our principal U.S. SEC-registered broker dealer subsidiary, Deutsche Bank Securities Inc., is a member of and regulated by the New York Stock Exchange and is regulated by the individual state securities authorities in the states in which it operates. The U.S. government agencies and self-regulatory organizations, as well as state securities authorities in the United States having jurisdiction over our U.S. broker-dealer affiliates, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or its directors, officers or employees.

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Regulation and Supervision in Other Jurisdictions

Our operations elsewhere in the world are subject to regulation and control by local supervisory authorities, including local central banks and monetary authorities, which supplement the home country supervision exercised by the BaFin.
For our branches within the European Economic Area, our primary regulator remains the BaFin pursuant to the “European Passport” we summarize above. Where we operate a branch outside the European Economic Area we do so under two licenses: our German banking license and a license from the host country. We may conduct businesses in the host country only to the extent that our German banking license and the host country’s license both permit them. When we operate a subsidiary outside Germany, the subsidiary holds whichever license is required by local law.

Organizational Structure

We operate our business along the structure of our three group divisions. Deutsche Bank AG is the direct or indirect holding company for our subsidiaries. The following table sets forth the significant subsidiaries we own, directly or indirectly. We used the three-part test for significance set out in Section 1-02 (w) of Regulation S-X under the U.S. Securities Exchange Act of 1934. We do not have any other subsidiaries we believe are material based on other, less quantifiable, factors, except that we have provided information on Taunus Corporation’s principal subsidiaries to give you an idea of Taunus’ business and on DB Capital Markets (Deutschland) GmbH’s principal subsidiary. We have also included Deutsche Bank Privat- und Geschäftskunden Aktiengesellschaft, which was just below the quantifiable factors in 2005, but was a significant subsidiary in previous years. We own 100% of the equity and voting interests in these significant subsidiaries.

             
     
  Subsidiary   Place of Incorporation    
     
 
Taunus Corporation1
  Delaware, United States  
 
Deutsche Bank Trust Company Americas2
  New York, United States  
 
Deutsche Bank Securities Inc.3
  Delaware, United States  
     
 
Deutsche Bank Privat- und Geschäftskunden Aktiengesellschaft4
  Frankfurt am Main, Germany  
     
 
DB Capital Markets (Deutschland) GmbH5
  Frankfurt am Main, Germany  
 
DWS Investment GmbH6
  Frankfurt am Main, Germany  
     
 
DB Investments (GB) Limited7
  London, United Kingdom  
     
 
DB Value GmbH8
  Soessen-Gostau, Germany  
     
1   This company is a holding company for most of our subsidiaries in the United States.
 
2   This company is a subsidiary of Taunus Corporation. Deutsche Bank Trust Company Americas is a New York State-chartered bank which originates loans and other forms of credit, accepts deposits, arranges financings and provides numerous other commercial banking and financial services.
 
3   This company is a subsidiary of Taunus Corporation. Deutsche Bank Securities Inc. is a U.S. SEC-registered broker dealer and a member of, and regulated by, the New York Stock Exchange. It is also regulated by the individual state securities authorities in the states in which it operates.
 
4   The company serves private individuals, affluent clients and small business clients with banking products.
 
5   This company is a German limited liability company and operates as a holding company for a number of European subsidiaries, mainly institutional and mutual fund management companies located in Germany, Luxembourg, France, Austria, Switzerland, Italy, Poland and Russia.
 
6   This company, in which DB Capital Markets (Deutschland) GmbH indirectly owns 100% of the equity and voting interests, is a limited liability company that operates as a mutual fund manager.
 
7   This company principally acts as an investment holding company. It is a direct subsidiary of Deutsche Bank AG and is the holding company for most of our subsidiaries in the United Kingdom providing financial services in the United Kingdom and to clients outside the United Kingdom (principally centered around the international equities business). Its subsidiaries also provide equity capital for unlisted companies and arrange purchases of interests in companies by their managements.
 
8   DB Value GmbH is the holding company for DB Equity S.à r.l., Luxembourg, which is the holding company for our major industrial shareholdings (Allianz Aktiengesellschaft, DaimlerChrysler Aktiengesellschaft, and Linde Aktiengesellschaft).

Property, Plant and Equipment

On December 31, 2005, we operated in 73 countries out of 1,588 facilities around the world, of which 53% were in Germany. We lease a majority of our offices and branches under long term agreements.

On December 31, 2005, we had premises and equipment with a total book value of approximately 5.1 billion. Included in this amount were land and buildings with a carrying value of approximately

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3.5 billion, of which approximately 2.0 billion was for our own operations and approximately 1.5 billion was held for investment purposes.

We continue to review our property requirements worldwide taking into account cost containment measures as well as growth initiatives in selected businesses.
See Note [35] to our consolidated financial statements regarding the damage to our property resulting from the September 11 terrorist attacks.

Information Required by Industry Guide 3

Please see “Item 3: Key Information”, “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk – Credit Loss Experience and Allowance for Loan Losses”, Note [5] to the consolidated financial statements and pages S-1 through S-11 of the supplemental financial information, which pages are incorporated by reference herein, for information required by Industry Guide 3.

Item 4A: Unresolved Staff Comments

We have not received written comments from the Securities and Exchange Commission regarding our periodic reports under the Exchange Act, as of any day 180 days or more before the end of the fiscal year to which this annual report relates, which remain unresolved.

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Item 5: Operating and Financial Review and Prospects

Overview

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes to them included in Item 18 of this document, on which we have based this discussion and analysis. Our consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 have been audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, as described in the “Report of Independent Registered Public Accounting Firm” on page F-3.

Significant Accounting Policies and Critical Accounting Estimates

We have prepared our consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies, as described in Note [1] to the consolidated financial statements, are essential to understanding our reported results of operations and financial condition. Certain of these accounting policies require critical accounting estimates that involve complex and subjective judgments and the use of assumptions, some of which may be for matters that are inherently uncertain and susceptible to change. Such critical accounting estimates could change from period to period and have a material impact on our financial condition, changes in financial condition or results of operations. Critical accounting estimates could also involve estimates where management could have reasonably used another estimate in the current accounting period. Actual results may differ from these estimates if conditions or underlying circumstances were to change.

We review the selection of these policies and the application of these critical accounting estimates with our Audit Committee. We have identified the following significant accounting policies that involve critical accounting estimates. The impact and any associated risks related to these policies on our business operations is discussed throughout “Item 5: Operating and Financial Review and Prospects” where such policies affect our reported and expected financial results.

Fair Value Estimates
Certain of our financial assets and liabilities are carried at fair value, including trading assets and liabilities, derivatives held for nontrading purposes, securities available for sale and investments held by designated investment companies. In addition, nonmarketable equity investments and investments in venture capital companies, in which the Group does not have a controlling financial interest or significant influence, are carried at historical cost net of declines in fair value below cost that are deemed to be other than temporary. Loans held for sale are carried at the lower of cost or market (LOCOM).

Fair value is defined as the price at which an asset or liability could be exchanged in a current transaction between knowledgeable unrelated willing parties, other than in a forced or liquidation sale. Since the fair value determined might differ from actual net realizable values, the fair value estimates are considered critical accounting estimates for our Corporate Banking & Securities Corporate Division, which trades certain over-the-counter derivatives, some of which may have long terms or complex structures that are valued using financial models. Fair value estimates are also critical for our Corporate Investments Group Division, which holds investments that are not actively traded.

Methods of Determining Fair Value
Quoted market prices in active markets are the most reliable measure of fair value. The majority of our securities carried at fair value are based on quoted market prices. However, quoted market prices for certain instruments, investments and activities, such as loans held for sale, non-exchange traded contracts and venture capital companies and nonmarketable equity securities may not be available.

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When quoted market prices are not available, values for financial assets and liabilities are determined based upon discounted cash flow analysis, comparison to similar observable market transactions, or the use of financial models. Discounted cash flow analysis is dependent upon estimated future cash flows and the discount rate used. Valuation using financial models is dependent upon parameters including time value, yield curve, volatility factors, correlation factors, prepayment speeds, default rates, loss severity, current market prices and transaction prices for underlying financial instruments. The valuation process to price financial instruments at fair value includes making adjustments to prices and financial model outputs to consider factors such as close out costs, liquidity and counterparty credit risk.
Where valuation of financial instruments is subjective due to the lack of observable market prices or inputs, management must apply judgment to make estimates and certain assumptions. For example, if prices or inputs to financial models are used for similar financial instruments, judgment is applied to make appropriate adjustments for differences in credit risk, liquidity or other factors. Where fair value is not based upon observable market prices or inputs we defer any trade date profit or loss.

Internal Controls Over Fair Value
To ensure the accuracy of our valuations, we have established certain internal control procedures over the valuation process. The price and parameter input verification process is a primary control over the front office valuation of financial instruments, which is performed either through independent pricing, independent price verification or alternative procedures.

Independent pricing occurs where the prices or parameter inputs are sourced directly from the market. This is the preferred method of valuation control and Controlling performs checks on the ongoing data quality including automated checks for stale and missing prices.
Where prices and parameters are input by the front office, Controlling performs independent price verification of these inputs against available independent market sources.
The majority of the Group’s trading portfolio (including securities and derivatives) and available for sale portfolio are subject to independent pricing or independent price verification procedures.
Where prices or parameter inputs are not observable the appropriateness of fair value is subject to alternative procedures. Such procedures include assessing the valuations against appropriate proxy instruments, performing sensitivity analysis and considering other benchmarks. These procedures require the application of management judgment.
Other valuation controls include review and analysis of daily profit and loss, validation of valuation through close out profit and loss and Value-at-Risk back-testing. For further discussion on our Value-at-Risk Analysis, see “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk – Market Risk – Value-at-Risk Analysis.” Where fair value is based on financial models, the assumptions and techniques within the models are independently validated by a specialist group within Group Market Risk Management.

Allowance for Loan Losses
We maintain an allowance for loan losses that represents our estimate of probable losses that have occurred in our loan portfolio. Determining the allowance for loan losses requires significant management judgments and assumptions. The components of the allowance for loan losses are a specific loss component and an inherent loss component consisting of the country risk allowance, the smaller-balance standardized homogeneous loan loss allowance and the other inherent loss allowance. We believe that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because the underlying assumptions used for both the specific and inherent loss components of the allowance can change from period to period. Such changes may materially affect our results of operations. The estimate for the allowance for loan losses is a critical accounting estimate for our Corporate Banking & Securities and Private & Business Clients Corporate Divisions.

The specific loss component is the allowance for losses on loans for which management believes that it is probable that we will be unable to collect all of the principal and interest due under the loan agreement. This component comprises the largest portion of our allowance and requires consideration of various underlying factors which include, but are not limited to, the financial strength of our custom-

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ers, the present value of expected future cash flows, including cash flows that may result from foreclosure less costs for obtaining and selling the collateral, or the market price of the loan. We regularly re-evaluate all credit exposures that have already been specifically provided for, as well as all credit exposures that appear on our watchlist. Our assumptions are either validated or revised accordingly based on our re-evaluation.
Some of the underlying factors used in determining the inherent loss component, include, but are not limited to, historical loss experience and political, economic and other relevant factors. We determine our country risk allowance based on historical loss experience and current market data affecting a country’s financial condition. Our smaller-balance standardized homogeneous portfolio is evaluated for inherent loss on a collective basis and an allowance is established based on analyses of historical loss experience for each product type according to criteria such as past due status and collateral recovery values. The other inherent loss allowance represents our estimate of losses inherent in the portfolio that have not yet been individually identified and reflects the imprecisions and uncertainties in estimating our loan loss allowances.
Significant changes in any of these factors could materially affect our provision for loan losses. For example, if our current assumptions about expected future cash flows used in determining the specific loss component differ from actual results, we may need to make additional provisions for loan losses. In addition, the forecasted financial strength of any given customer may change due to various circumstances, such as future changes in the global economy or new information becoming available as to financial strength that may not have existed at the date of our estimates. This new information may require us to adjust our current estimates and make additional provisions for loan losses.
Our provision for loan losses totaled 374 million, 372 million and 1.1 billion for the years ended December 31, 2005, 2004 and 2003, respectively.
For further discussion on our allowance for loan losses, see “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk – Risk Management – Credit Loss Experience and Allowance for Loan Losses” and Notes [7] and [8] to the consolidated financial statements.

Impairment of Assets other than Loans
Certain assets, including equity method and other direct investments (including venture capital companies and nonmarketable equity securities), securities available for sale, goodwill and other intangible assets, are subject to impairment review. We record impairment charges when we believe an asset has experienced an other-than-temporary decline in fair value, or its cost may not be recoverable. Based on our impairment reviews related to these assets, we recorded total impairment charges of 26 million in 2005, 135 million in 2004 and 1.5 billion in 2003. Future impairment charges may be required if triggering events occur, such as adverse market conditions, suggesting deterioration in an asset’s recoverability or fair value. Assessment of timing of when such declines become other than temporary and/or the amount of such impairment is a matter of significant judgment.

Equity method investments, other equity interests and securities available for sale are evaluated for impairment on a quarterly basis, or more frequently if events or changes in circumstances indicate that these investments are impaired. For example, indications that these investments are impaired could include specific conditions in an industry or geographical area or specific information regarding the financial condition of the company, such as a downgrade in credit rating. If information becomes available after we make our evaluation, we may be required to recognize an other-than-temporary impairment in the future. Because the estimate for other-than-temporary impairment could change from period to period based upon future events that may or may not occur, we consider this to be a critical accounting estimate. Our impairment reviews for equity method investments, other equity interests and securities available for sale resulted in impairment charges of 13 million in 2005, 96 million in 2004 and 1.3 billion in 2003. For additional information on securities available for sale, see Note [5] to the consolidated financial statements and for equity method investments and other equity interests, see Note [6] to the consolidated financial statements.
Goodwill and other intangible assets are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate, indicate that these assets may be impaired. The fair value determination used in the impairment assess-

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ment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, necessitating management to make subjective judgments and assumptions. Because these estimates and assumptions could result in significant differences to the amounts reported if underlying circumstances were to change, we consider this estimate to be critical. As of December 31, 2005 and 2004, goodwill had a carrying amount of 7.0 billion and 6.4 billion, respectively, and other intangible assets had a carrying amount of 1.2 billion and 1.1 billion, respectively. Evaluation of impairment of these assets is a significant estimate for multiple divisions. In 2005, no impairment charge was deemed necessary. In 2004, an impairment charge of 19 million was recorded related to intangible assets in Asset and Wealth Management Corporate Division following the termination of certain investment agreements. In 2003, a goodwill impairment loss of 114 million related to the Private Equity reporting unit was recorded following decisions relating to the private equity fee-based business including the transfer of certain businesses to the Asset and Wealth Management Corporate Division. For further discussion on goodwill and other intangible assets, see Note [12] to the consolidated financial statements.

Deferred Tax Assets Valuation Allowance
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards and tax credits. At December 31, 2005 and December 31, 2004 our consolidated gross deferred tax assets were 13.0 billion and 20.1 billion, respectively, and our consolidated gross deferred tax liabilities were 10.4 billion and 17.7 billion, respectively. Amounts for 2004 have been restated to conform to current year presentation, see Note [25] to the consolidated financial statements. A valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable based on available evidence at the time the estimate is made. Determining the valuation allowance requires significant management judgments and assumptions. In determining the valuation allowance, we use historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. Each quarter, we reevaluate our estimate related to the valuation allowance, including our assumptions about future profitability. At December 31, 2005 and December 31, 2004 our valuation allowance was 955 million and 888 million, respectively.

We believe that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. If we were not able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets valuation allowance would be charged to income tax expense in the period such determination was made.
As a result of reviews of the factors discussed above related to the adequacy of the valuation allowance, our income tax expense for the years ended December 31 included a credit of 9 million for 2005, a credit of 7 million for 2004 and a charge of approximately 99 million for 2003. The credit in 2005 was due mainly to an increase in expected realization of operating loss carryforwards and tax credits available to reduce future tax expense.
For further discussion on our deferred taxes and valuation allowance, see Note [25] to the consolidated financial statements.

Legal, Regulatory and Tax Contingencies
The use of estimates is important in determining provisions for potential losses that may arise from litigation and regulatory proceedings and tax audits. We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings and tax audits to the extent that such losses are probable and can be estimated, in accordance with SFAS No. 5, “Accounting for Contingencies.” Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.

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Our total liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case, our experience and the experience of others in similar cases, and the opinions and views of legal counsel. Given the inherent difficulty of predicting the outcome of our litigation matters, particularly in cases in which claimants seek substantial or indeterminate damages, we cannot estimate losses or ranges of losses for cases where there is only a reasonable possibility that a loss may have been incurred. See “Item 8: Financial Information – Legal Proceedings” and Note [34] to our consolidated financial statements for information on our judicial, regulatory and arbitration proceedings.

Effects of 1999/2000 German Tax Reform Legislation and Accounting for Income Taxes

You should note in reviewing our results of operations that the financial accounting treatment under U.S. GAAP for income tax rate changes resulted in a negative impact on our results of operations in 2005, 2004, 2003 2002 and 2001. These impacts totaled an expense of 544 million in 2005, 120 million in 2004, 215 million in 2003, 2.8 billion in 2002 and 995 million in 2001. We therefore recommend that you also consider our net income for the years 2001 through 2005, excluding the effect of the impact of changes in income tax rates when you compare these years to one another and to earlier and future periods.

Two important tax law changes occurred in 1999 and 2000 that affected and will continue to affect our net income. In 1999, the German government reduced the corporate income tax rate on retained profits from 45% to 40%. In October 2000, the German government enacted comprehensive tax reform legislation.
The comprehensive tax reform legislation in 2000 contained two major changes relevant to our corporate taxation:
  The corporate income tax rate declined, beginning on January 1, 2001, to 25% for all corporate profits. Until the end of 2000, the rates were 40% for retained profits and 30% for distributed profits.
  The tax rate applicable to capital gains on the sale of equity securities eligible under the legislation was, beginning on January 1, 2002, reduced to zero. Until that date, the tax rate that applied to capital gains on these sales was the same as the tax rate applicable to ordinary income.
The following is a description of the accounting treatment for the 1999/2000 income tax rate changes and their effects on our results of operations.
U.S. GAAP requires us to record all unrealized gains on available for sale securities, net of the related deferred tax provisions, in other comprehensive income. The deferred tax provisions are based on the excess of the fair value of these securities over our tax basis in them. At the end of each reporting period, we record deferred tax provisions and related deferred taxes payable based on the change in the unrealized gain for that period using the effective income tax rate we expect will apply in the period we expect to realize the gain. Since both the unrealized gains and the related deferred tax provision are recorded in other comprehensive income, neither the unrealized gains nor the deferred tax provision affects net income in that period.
U.S. GAAP also requires that, in a period that includes the date on which new tax rates are enacted, companies must adjust all of the deferred tax assets and liabilities they have recorded. These adjustments to deferred tax assets and liabilities reflect the new effective tax rates that will apply in the periods in which the temporary differences that led to the creation of the deferred items are expected to be reversed. The changes in tax law we describe above required us to make these types of adjustments in 1999 and 2000. Because our available for sale securities included an extensive portfolio of eligible equity securities that had appreciated substantially in value, we had a significant amount of related deferred tax liabilities. These deferred tax liabilities were substantially reduced as a result of this 2000 legislation. The elimination of the German tax on capital gains on sales of eligible equity securities was responsible for the majority of a 9.3 billion income tax benefit we recognized in 2000.
Our industrial holdings represent most of the eligible equity securities. We acquired many of these industrial holdings, most of which we classify as available for sale securities under U.S. GAAP, many

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years ago, and most of them have appreciated in value considerably over that time. Since we intend to sell these industrial holdings in the most tax-efficient and commercially prudent manner possible, the estimated effective tax rate we applied to these unrealized gains when the new tax rate changes were enacted was essentially zero. As a result, most of the reductions in deferred tax liabilities associated with unrealized gains on our eligible equity securities related to our industrial holdings.
Although we recorded the deferred tax provisions directly to other comprehensive income for unrealized gains on available for sale securities, U.S. GAAP nevertheless required that this adjustment to the related deferred tax liabilities for a change in expected effective income tax rates be recorded as an adjustment of income tax expense in the period the tax rate change is enacted.
The adjustments to deferred tax liabilities related to eligible equity securities, however, did not result in an adjustment to the deferred tax provisions that had accumulated in other comprehensive income. These accumulated provisions remain in other comprehensive income until the related securities are sold, and they are then recognized as tax expense in the period of the sale. As such, certain possible effects of our accounting for income tax rate changes related to our eligible equity securities on our results of operations are as follows:
  When we sell each eligible equity security, we recognize tax expense in the period of its sale equal to that investment security’s share of the deferred tax provisions that had accumulated in other comprehensive income on the tax rate change dates. The amount we had accumulated in other comprehensive income related to our eligible equity securities was approximately 2.1 billion on December 31, 2005 and 2.7 billion on December 31, 2004.
  This means that, regardless of the size of the realized gains, if any, on subsequent sales of these eligible equity securities, there will be significant income tax expense in the periods of the sales. This expense will offset part or all of that gain or add to any loss when calculating net income.
  Although we recognized in 2000 a significant deferred tax benefit as a result of the tax rate changes related to eligible equity securities and will record significant deferred tax expense in the years these securities are sold, realized gains on sales of these securities in the years 2001 through 2005 have not resulted in any taxes actually payable in cash. In other words, all of the deferred tax benefit and expense amounts were noncash items. In addition, when we reverse the related deferred tax provisions through the income tax expense line item, there will be no effect on our total shareholders’ equity. This is because the deferred tax provisions, which we accumulate in other comprehensive income, and retained earnings, where the income tax expense will have its effect, are both components of shareholders’ equity.
The following table presents the level as of year-end of unrealized gains and related effects in available for sale equity securities of DB Investor, which held most of our portfolio of industrial holdings and which reflects both the significant reductions in market prices since the effective date of the tax rate change and dispositions of industrial holdings. Since the deferred tax amount relating to the securities not sold has been frozen based on the level of market prices in 1999 and 2000, the deferred tax amount relating to the tax rate changes in Germany currently exceeds the amount of related unrealized gains of the available for sale equity securities of DB Investor.
                                               
     
  in bn.     2005     2004     2003     2002     2001    
           
 
Market value
      4.1       5.4       6.3       5.3       14.1    
           
 
Cost
      2.2       4.0       4.6       5.0       5.7    
           
 
Unrealized gains in other comprehensive income
      1.9       1.4       1.7       0.3       8.4    
           
 
Less: deferred tax relating to 1999 and 2000 tax rate changes in Germany
      2.1       2.7       2.8       2.9       5.5    
           
 
Other comprehensive income (loss), net
      (0.2 )     (1.3 )     (1.1 )     (2.6 )     2.9    
           

As a consequence, the accounting for income tax rate changes related to eligible equity securities may result in significant impacts on our results of operations in periods in which we sell these securities. This effect is illustrated in the years 2001 through 2005, when we sold portions of our eligible equity securities. The gains resulting from most of these sales were not subject to tax. We reversed the deferred taxes which had accumulated in other comprehensive income, through December 31, 2000, in

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respect of these securities. We recognized these reversals as tax expense of 544 million in 2005, 120 million in 2004, 215 million in 2003, 2.8 billion in 2002 and 995 million in 2001.
Neither the release of the deferred tax liability with an impact on the income statement nor the reversal of the offset amount in other comprehensive income with an impact on the income statement has an economic effect. They do not affect the bank’s tax position vis-à-vis the tax authorities. The initial release did not lead to a tax refund from the tax authorities and likewise, the sale and the reversal of the offset amount will not create a tax liability to the tax authorities. The only tax payable is on 5% of any gain as a result of the 2004 Tax Reform Act which was enacted in December 2003. Under the Act, effective starting in 2004, corporations effectively became subject to tax on 5% of capital gains from the disposal of foreign and domestic shareholdings irrespective of holding percentage and holding period; losses from a shareholding disposal continue to be non-tax deductible.
Neither the initial release of the deferred tax liability nor the unrealized gains and losses from securities available for sale is included in regulatory core capital or in the calculation of our adjusted return on equity. The entire procedure is a U.S. GAAP specific accounting requirement. We believe that the economic effects of the tax rate changes are not appropriately reflected in the individual periods up to and including the period of the sale.

Operating Results

You should read the following discussion and analysis in conjunction with the consolidated financial statements.

Executive Summary
The world economy proved to be quite robust in 2005, growing by 4.5%. GDP growth was 3.5% in the United States, almost 10% in China and 2.5% in Japan. In the European Union the economy grew by 1.5%, however Germany, against a backdrop of weak consumer spending, lagged significantly behind the other countries with a growth rate of only 0.9%. The capital markets developed better than expected in 2005 and confidence in the international financial markets increased. The Nikkei Index and the DAX gained 40% and 27%, respectively. The Dow Jones, with a loss of 0.6%, did not reach these levels, partly reflecting continued interest rate increases by the Federal Reserve. Thanks to our strong global presence, especially in corporate and investment banking and our investment management businesses, we took advantage of the generally favorable economic and market environment. We generated higher revenues in most business areas which, combined with some expense growth and a similar level of loan loss provisions, resulted in significant bottom-line profit growth.

Income before income tax expense increased from 4.0 billion in 2004 to 6.1 billion, including restructuring charges of 767 million related to the Business Realignment Program (similar charges in 2004 amounted to 400 million). We reported a pre-tax return on average active equity of 24% in 2005 – a substantial improvement over 16% in 2004 (pre-tax return on average total shareholders’ equity was 22% and 15%, respectively, for these years). Net income for 2005 increased 43% to 3.5 billion compared to 2.5 billion in 2004, and diluted earnings per share grew 53% to 6.95.
Compared to 2004, total net revenues excluding the provision for loan losses increased by 3.7 billion, or 17%, to 25.6 billion. Revenues grew in all major categories. Net interest and trading revenues were up 819 million, or 16%, and 1.2 billion, or 20%, respectively. This growth was primarily attributable to our Sales & Trading businesses, which achieved total revenues (net interest, trading, fee and other revenues) of 10.6 billion, up 21% from 2004 to a new record level. Our business model, which emphasizes high-value ‘intellectual capital’ products and customized solutions, performed strongly – in both the good and challenging market conditions in 2005. Commission and fee revenues improved by 582 million to 10.1 billion in 2005, driven by strong results in both our origination/advisory and investment management businesses. Also contributing to higher revenues in 2005 was an increase of 821 million in gains on sales from our portfolio of securities available for sale, mainly reflecting gains from the further reduction of our stake in DaimlerChrysler AG.

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Our total noninterest expenses were 19.2 billion compared to 17.5 billion in 2004. Noninterest expenses reflected restructuring expenses of 767 million in 2005 and 400 million in 2004, increased provisions in 2005 related to legal exposures for legacy issues, and 203 million in 2005 related to grundbesitz-invest, an open-end property fund sponsored and managed by a German subsidiary of ours. Declines in noninterest expenses due to headcount reductions and other additional measures were offset by higher performance-related bonuses, in line with strong business results, as well as by investments in growth businesses.
In 2005 the provision for loan losses was 374 million compared to 372 million in 2004. The level in 2005 partly reflects growth in our consumer lending business, consistent with our stated strategy. At the end of 2005, problem loans were 3.9 billion, down 20% from 4.8 billion at the end of 2004, reflecting the quality of our loan book, tight credit risk management, the positive results of workout processes and the overall benign credit environment.

Financial Results
The following table presents our condensed consolidated statement of income for 2005, 2004 and 2003.

                                                               
     
                              2005 increase     2004 increase    
                              (decrease) from 2004     (decrease) from 2003    
  in m.     2005     2004     2003     in     in %     in     in %    
           
 
Net interest revenues
      6,001       5,182       5,847       819       16       (665 )     (11 )  
           
 
Provision for loan losses
      374       372       1,113       2       1       (741 )     (67 )  
           
 
Net interest revenues after provision for loan losses
      5,627       4,810       4,734       817       17       76       2    
           
 
Commissions and fee revenues
      10,089       9,506       9,332       582       6       174       2    
           
 
Trading revenues, net
      7,429       6,186       5,611       1,243       20       575       10    
           
 
Net gains on securities available for sale
      1,055       235       20       821       N/M       215       N/M    
           
 
Net income (loss) from equity method investments
      418       388       (422 )     30       8       810       N/M    
           
 
Other noninterest revenues
      648       421       880       227       54       (459 )     (52 )  
           
 
Total noninterest revenues
      19,639       16,736       15,421       2,903       17       1,315       9    
           
 
Total net revenues
      25,266       21,546       20,155       3,719       17       1,391       7    
           
 
Compensation and benefits
      10,993       10,222       10,495       771       8       (273 )     (3 )  
           
 
Goodwill impairment/impairment of intangibles
            19       114       (19 )     N/M       (95 )     (83 )  
           
 
Restructuring activities
      767       400       (29 )     367       92       429       N/M    
           
 
Other noninterest expenses
      7,394       6,876       6,819       518       8       57       1    
           
 
Total noninterest expenses
      19,154       17,517       17,399       1,637       9       118       1    
           
 
Income before income tax expense and cumulative effect of accounting changes
      6,112       4,029       2,756       2,083       52       1,273       46    
           
 
Income tax expense
      2,039       1,437       1,327       602       42       110       8    
           
 
Reversal of 1999/2000 credits for tax rate changes
      544       120       215       424       N/M       (95 )     (44 )  
           
 
Income before cumulative effect of accounting changes, net of tax
      3,529       2,472       1,214       1,056       43       1,258       104    
           
 
Cumulative effect of accounting changes, net of tax
                  151                   (151 )     N/M    
           
 
Net income
      3,529       2,472       1,365       1,056       43       1,107       81    
           
N/M – Not meaningful

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Our net income included the effects of reversing income tax credits related to 1999 and 2000 tax law changes, as described in “Effects of 1999/2000 German Tax Reform Legislation and Accounting for Income Taxes” and the cumulative effect of accounting changes as described in Note [2] to our consolidated financial statements. The following table shows our net income excluding these effects.

                                                                                   
     
        2005       Per share       Per share     2004     Per share     Per share     2003     Per share     Per share    
  in m. (except per share amounts)             (basic)       (diluted)           (basic)     (diluted)           (basic)     (diluted)    
                       
 
Net income
      3,529         7.62         6.95       2,472       5.02       4.53       1,365       2.44       2.31    
                       
 
Add (deduct):
                                                                               
 
Reversal of 1999/2000 credits for tax rate changes
      544         1.18         1.07       120       0.24       0.23       215       0.39       0.36    
 
Cumulative effect of accounting changes, net of tax
                                              (151 )     (0.27 )     (0.25 )  
                       
 
Net income before reversal of 1999/2000 credits for tax rate changes and cumulative effect of accounting changes, net of tax
      4,073         8.80         8.02       2,592       5.26       4.76       1,429       2.56       2.42    
                       

Net income above included pre-tax gains of 750 million in 2005, 140 million in 2004 and 222 million in 2003 on sales of securities that generated the reversal of the 1999/2000 credits for tax rate changes.

Net Interest Revenues
The following table sets forth data related to our net interest revenues.

                                                               
     
                              2005 increase     2004 increase    
                              (decrease)     (decrease)    
                              from 2004     from 2003    
  in m. (except percentages)     2005     2004     2003     in     in %     in     in %    
           
 
Total interest revenues
      41,708       28,023       27,583       13,685       49       440       2    
           
 
Total interest expenses
      35,707       22,841       21,736       12,866       56       1,105       5    
           
 
Net interest revenues
      6,001       5,182       5,847       819       16       (665 )     (11 )  
           
 
Average interest-earning assets1
      866,750       751,557       736,046       115,193       15       15,511       2    
           
 
Average interest-bearing liabilities1
      809,321       695,094       683,127       114,227       16       11,967       2    
           
 
Gross interest yield2
      4.81 %     3.73 %     3.75 %   1.08 ppt     29     (0.02) ppt     (1 )  
           
 
Gross interest rate paid3
      4.41 %     3.29 %     3.18 %   1.12 ppt     34     0.11 ppt     3    
           
 
Net interest spread4
      0.40 %     0.44 %     0.57 %   (0.04) ppt     (9 )   (0.13) ppt     (23 )  
           
 
Net interest margin5
      0.69 %     0.69 %     0.79 %               (0.10) ppt     (13 )  
           
ppt – Percentage points
 
1   Average balances for each year are calculated based upon month-end balances.
 
2   Gross interest yield is the average interest rate earned on our average interest-earning assets.
 
3   Gross interest rate paid is the average interest rate paid on our average interest-bearing liabilities.
 
4   Net interest spread is the difference between the average interest rate earned on average interest-earning assets and the average interest rate paid on average interest-bearing liabilities.
 
5   Net interest margin is net interest revenues expressed as a percentage of average interest-earning assets.

Net interest revenues in 2005 were 6.0 billion, an increase of 819 million from 2004. Average interest-bearing volumes of assets and liabilities each increased by approximately 115 billion, the overall net interest spread narrowed by 4 basis points and our net interest margin stood at 69 basis points in both years. Much of the increase in net interest revenues was related to our trading activities. Factors in this increase include a 49 billion increase in interest-earning trading assets outstanding (mainly in non-German offices) and the effect of a larger increase in noninterest-bearing trading liabilities than noninterest bearing trading assets. Interest revenues from loans remained nearly unchanged as strong competition held down interest yields and our average loans outstanding changed little year-to-year, though lending picked up later in the year primarily in our retail and wealth management businesses. Our overall funding costs rose by 112 basis points due primarily to the higher rates in the U.S. as the Federal Reserve continued its policy of rate increases.

     The development of our net interest revenues is also influenced to a significant extent by the accounting treatment of some of our derivatives transactions. We enter into nontrading derivative transac-

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tions as economic hedges of the interest rate risks of our nontrading assets and liabilities. Some of these derivatives qualify as hedges for accounting purposes while others do not. When derivative transactions qualify as hedges for accounting purposes, the interest arising from the derivatives appear in interest revenues and expense, where they offset the interest flows from the assets and liabilities they are intended to hedge. When derivatives do not qualify for hedge accounting treatment, the interest flows that arose from the derivatives during any period all appear in trading revenues for that period.

Trading revenues, net
The following table sets forth data related to our trading revenues.

                                                               
     
                              2005 increase (decrease)     2004 increase (decrease)    
                              from 2004     from 2003    
  in m. (except percentages)     2005     2004     2003     in     in %     in     in %    
           
 
CIB – Sales & Trading (equity)
      3,273       2,192       2,491       1,081       49       (298 )     (12 )  
           
 
CIB – Sales & Trading (debt and other products)
      3,725       3,666       3,481       59       2       185       5    
           
 
Other trading revenues
      431       328       (361 )     103       31       689       N/M    
           
 
Total trading revenues, net
      7,429       6,186       5,611       1,243       20       575       10    
           
N/M – Not meaningful

Trading revenues from CIB – Sales & Trading (equity) increased 1.1 billion, mainly driven by substantial growth in our equity derivatives business and to a lesser extent greater results from our proprietary activity.

The increase in other trading revenues was mainly due to higher mark-to-market results from credit default swaps used to hedge our investment-grade loan exposure, to a loss of 13 million in 2005 from a loss of 231 million in 2004. This development was partly offset because mark-to-market gains related to AWM’s guaranteed-value mutual funds business were reflected in the 2004 results but not in 2005 following its deconsolidation pursuant to the adoption of FIN 46(R).
Our trading and risk management businesses include significant activities in interest rate instruments and related derivatives. Under U.S. GAAP, interest revenues earned from trading assets (e.g., coupon and dividend income), and the costs of funding net trading positions are part of net interest revenues. Our trading activities can periodically shift revenues between trading revenues and interest revenues, depending on a variety of factors, including risk management strategies. In order to provide a more business-focused commentary, we discuss the combined net interest and trading revenues by group division and by product within the Corporate and Investment Bank, rather than by type of revenues generated.

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     The following table sets forth data relating to our combined net interest and trading revenues by group division and product within Corporate and Investment Bank.

                                                               
     
                              2005 increase (decrease)     2004 increase (decrease)    
                              from 2004     from 2003    
  in m.     2005     2004     2003     in     in %     in     in %    
           
 
Net interest revenues
      6,001       5,182       5,847       819       16       (665 )     (11 )  
           
 
Trading revenues, net
      7,429       6,186       5,611       1,243       20       575       10    
           
 
Total net interest and trading revenues
      13,430       11,368       11,458       2,062       18       (90 )     (1 )  
           
 
 
                                                           
           
 
Breakdown by Group Division/CIB product1:
                                                           
           
 
Sales & Trading (equity)
      2,465       1,594       2,288       871       55       (694 )     (30 )  
 
Sales & Trading (debt and other products)
      6,433       5,368       5,369       1,065       20       (1 )        
 
Total Sales & Trading
      8,899       6,963       7,658       1,936       28       (695 )     (9 )  
           
 
Loan products2
      766       698       659       68       10       40       6    
           
 
Transaction services
      913       828       830       85       10       (2 )        
           
 
Remaining products3
      (20 )     (135 )     (222 )     115       85       88       39    
           
 
Total Corporate and Investment Bank
      10,558       8,354       8,924       2,204       26       (570 )     (6 )  
           
 
Private Clients and Asset Management
      2,818       2,923       2,814       (105 )     (4 )     109       4    
           
 
Corporate Investments
      37       118       (10 )     (81 )     (69 )     128       N/M    
           
 
Consolidation & Adjustments
      17       (26 )     (270 )     43       N/M       243       90    
           
 
Total net interest and trading revenues
      13,430       11,368       11,458       2,062       18       (90 )     (1 )  
           
N/M – Not meaningful
 
1   Note that this breakdown reflects net interest and trading revenues only. For a discussion of the group divisions’ total revenues by product please refer to “Results of Operations by Segment”.
 
2   Includes the traditional net interest spread on loans as well as the results of credit default swaps used to hedge our investment-grade loan exposure.
 
3   Includes origination, advisory and other products.

Corporate and Investment Bank (CIB). The significant increase in combined net interest and trading revenues from sales and trading products of 1.9 billion to 8.9 billion reflected our results in commodity, credit, equity and interest rate derivatives and emerging markets. Strong gains from the proprietary business additionally contributed to this development. In loan products, net interest and trading revenues were higher by 68 million due to lower trading losses on credit risk hedge positions. This was partly offset by a decrease in net interest revenues from our corporate loan book reflecting lower interest margins. The increase of 85 million in transaction services was due to higher interest revenues from Cash Management products and from Trust and Securities Services. Net interest and trading revenues from remaining products were 115 million higher than in 2004 mainly due to foreign currency effects on certain corporate liabilities and lower goodwill funding costs.

Private Clients and Asset Management (PCAM). Combined net interest and trading revenues were 2.8 billion in 2005, a decrease of 105 million compared to 2004. Net interest and trading revenues in 2004 included 155 million attributable to the aforementioned deconsolidation of AWM’s guaranteed-value mutual funds business. This deconsolidation impact was partly offset by higher net interest revenues in 2005 resulting from increased loan volumes in the retail and wealth management business.
Corporate Investments (CI). The decrease of 81 million to 37 million included lower dividend income from our downsized industrial holdings portfolio.

Provision for Loan Losses
Our provision for loan losses reflects charges to and releases from the allowance we carry for credit losses on loans. The allowance consists of a specific loss component, which relates to specific loans, and an inherent loss component. The inherent loss component consists of a country risk allowance, an allowance for smaller-balance standardized homogeneous loans and an inherent loss component to cover losses in our loan portfolio that have not yet been individually identified, and reflects the imprecisions and uncertainties in estimating our loan loss allowance.

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Our provision for loan losses in 2005 was 374 million, nearly unchanged from the prior year ( 372 million), reflecting tight credit risk management, positive results of workout processes as well as the overall benign credit environment. Exposure in our smaller-balance standardized homogeneous loan portfolio accounted for 98% of our total loan loss provision in 2005.
For further information on the provision for loan losses see “Item 11: Quantitative and Qualitative Disclosures about Credit, Market and Other Risk – Credit Loss Experience and Allowance for Loan Losses”.

Noninterest Revenues, Excluding Trading Revenues

                                                               
     
                              2005 increase (decrease)     2004 increase (decrease)    
                              from 2004     from 2003    
  in m.     2005     2004     2003     in     in %     in     in %    
           
 
Commissions and fee revenues1
      10,089       9,506       9,332       582       6       174       2    
           
 
Net gains on securities available for sale
      1,055       235       20       821       N/M       215       N/M    
           
 
Net income (loss) from equity method investments
      418       388       (422 )     30       8       810       N/M    
           
 
Other noninterest revenues
      648       421       880       227       54       (459 )     (52 )  
           
 
Total noninterest revenues, excluding trading revenues
      12,210       10,550       9,810       1,660       16       740       8    
           
                                                         
N/M – Not meaningful
                                                       
1 Includes
    2005       2004       2003     in     in %     in     in %  
 
Commissions and fees from fiduciary activities:
                                                       
Commissions for administration
    396       281       240       115       41       41       17  
Commissions for assets under management
    3,009       2,847       2,968       163       6       (121 )     (4 )
Commissions for other securities business
    151       83       65       67       81       18       28  
 
Total
    3,556       3,211       3,273       345       11       (62 )     (2 )
Commissions, broker’s fees, markups on securities underwriting and other securities activities:
                                                       
Underwriting and advisory fees
    2,059       1,793       1,638       266       15       155       9  
Brokerage fees
    1,998       1,918       1,926       80       4       (8 )      
 
Total
    4,057       3,711       3,564       346       9       147       4  
Fees for other customer services
    2,476       2,584       2,495       (108 )     (4 )     89       4  
 
Total commissions and fee revenues
    10,089       9,506       9,332       582       6       174       2  

Commissions and Fee Revenues. Total 2005 commissions and fee revenues were 10.1 billion, an increase of 582 million, or 6%, compared with 2004. The increase of 345 million in commissions and fees from fiduciary activities mainly resulted from higher assets under management in our mutual funds business and higher performance fees in AM’s Real Estate business. Underwriting and advisory fees increased by 266 million, mainly attributable to improved results from Origination (equity) and Advisory in CIB. The decrease of 108 million in fees for other customer services was driven by higher sales of insurance products in 2004, due largely to changes in German tax legislation.

Net Gains on Securities Available for Sale. Results in 2005 included 666 million from gains on sales of DaimlerChrysler AG shares in our industrial holdings portfolio. Additionally, the gains from the disposal of our interest in Südzucker AG and from the partial disposal of HCL Technologies Ltd. contributed to the 2005 profit. In 2004, results included several disposal gains of which the most significant was a 118 million net gain related to sales of DaimlerChrysler AG shares.
Net Income (Loss) from Equity Method Investments. The key contributors to net income from equity method investments in 2005 and in 2004 were structured transactions in CIB’s sales & trading areas as well as CI’s equity method investments. Both years also include income related to real estate investments in AWM.
Other Noninterest Revenues. Total other noninterest revenues increased by 227 million in 2005 compared to 2004. The improvement primarily arose because 2004 included provisions for the beneficial interest of the investors in AWM’s guaranteed value mutual funds business. Also contributing to the increase was higher income from other investments in CI and in AWM’s real estate business. These positive factors were partly offset by lower returns from loans held for sale subsequent to interest rate increases, predominantly in the U.S.

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Noninterest Expenses
The following table sets forth information on our noninterest expenses.

                                                               
     
                              2005 increase (decrease)     2004 increase (decrease)    
                              from 2004     from 2003    
  in m.     2005     2004     2003     in     in %     in     in %    
           
 
Compensation and benefits
      10,993       10,222       10,495       771       8       (273 )     (3 )  
           
 
Other noninterest expenses1
      7,394       6,876       6,819       518       8       57       1    
           
 
Goodwill impairment/impairment of intangibles
            19       114       (19 )     N/M       (95 )     (83 )  
           
 
Restructuring activities
      767       400       (29 )     366       92       429       N/M    
           
 
Total noninterest expenses
      19,154       17,517       17,399       1,637       9       118       1    
           
                                                         
N/M – Not meaningful
                                                       
1 Includes:
    2005       2004       2003     in     in %     in     in %  
 
Net occupancy expense of premises
    1,014       1,258       1,251       (244 )     (19 )     7       1  
Furniture and equipment
    169       178       193       (9 )     (5 )     (15 )     (8 )
IT costs
    1,539       1,726       1,913       (187 )     (11 )     (187 )     (10 )
Agency and other professional service fees
    895       824       836       72       9       (12 )     (1 )
Communication and data services
    599       599       626                   (27 )     (4 )
Other expenses
    3,178       2,291       2,000       886       39       291       15  
 
Total other noninterest expenses
    7,394       6,876       6,819       518       8       57       1  

Compensation and Benefits. The increase of 771 million in 2005 compared to 2004 reflected several partly offsetting factors:

  Performance-related compensation increased in 2005 driven by improved operating results across all of our businesses.
  Severance payments of 51 million in 2005 decreased by 231 million compared to 2004, with almost 60% of the decline attributable to CB&S.
  Salaries and benefits showed net decreases reflecting headcount reductions related to the BRP and sales of non-core businesses, partly offset by the effects of headcount increases in selected growth businesses.

Other Noninterest Expenses. Total other noninterest expenses increased by 518 million in 2005. The increase of 886 million in the category “Other expenses” was mainly attributable to two factors: higher provisions for legal exposures, including provisions related to legacy issues included in Consolidation & Adjustments, and provisions of 203 million related to grundbesitz-invest, an open-end property fund sponsored and managed by a German subsidiary of ours. In December 2005, the issuance and redemption of fund share units was temporarily suspended pending an extraordinary revaluation of assets. The provisions of 203 million represented the estimated costs of direct and indirect compensation to certain share unit holders. The direct compensation would be paid to certain investors who, taking into account the purchase price of their share units and earnings distributions received, would incur a loss due to the revaluation of the properties. Other noninterest expenses also increased due to volume-driven expense increases for payment and clearing services. Declines in net occupancy and IT costs were a modest offset to the increased expenses. Net occupancy expenses decreased in 2005 primarily because 2004 included costs related to the elimination of excess space and sublease losses. Both net occupancy and IT costs also decreased because of ongoing cost containment efforts.

Goodwill Impairment/Impairment of Intangibles. The previous year included an impairment loss of 19 million in Asset and Wealth Management following the termination of certain investment management agreements in the UK.
Restructuring Activities. During 2005 we continued our BRP which included restructuring charges of 767 million in 2005 and 400 million in 2004. For further information on restructuring activities see Note [28] to our consolidated financial statements.

Income Tax Expense
Income tax expense was 2.6 billion in 2005 compared to 1.6 billion in 2004, primarily attributable to the increase of operating income and an increase of the reversal, required under U.S. GAAP, of 1999/2000 credits for tax rate changes due to sales of equity securities that are exempt from German income taxes. The reversal of 1999/2000 credits for German tax rate changes was 544 million in 2005 and 120 million 2004. The actual effective tax rates were 42% in 2005 and 39% in 2004. Ex-

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cluding the effect of the reversal, our effective tax rates were 33% in 2005 and 36% in 2004, with the lower effective tax rate in 2005 mainly due to greater tax-exempt capital gains.

Results of Operations by Segment (2005 vs. 2004)

The following is a discussion of the results of our business segments. See Note [27] to the consolidated financial statements for information regarding

  our organizational structure;
  effects of significant acquisitions and divestitures on segmental results;
  changes in the format of our segment disclosure;
  a discussion of the framework of our management reporting systems;
  consolidating and other adjustments to the total results of operations of our business segments;
  definitions of non-GAAP financial measures that are used with respect to each segment, and
  the rationale for excluding items in deriving the measures.
The criterion for segmentation into divisions is our organizational structure as it existed at December 31, 2005. For further discussion of our business segments, see “Item 4: Information on the Company” and Note [27] to the consolidated financial statements. Segment results were prepared in accordance with our management reporting systems.
                                                     
     
      Corporate and     Private Clients     Corporate     Total     Consolidation &     Total    
  2005   Investment     and Asset     Investments     Management     Adjustments     Consolidated    
  in m. (except percentages)   Bank     Management           Reporting                
     
 
Net revenues2
    15,918       8,594       1,229       25,741       (102 )     25,640    
     
 
Provision for loan losses
    32       342             374             374    
     
 
Provision for off-balance sheet positions
    (22 )     (2 )           (24 )           (24 )  
     
 
Total provision for credit losses
    10       340       (1 )     350                    
     
 
Operating cost base1
    11,120       6,342       181       17,642                    
     
 
Policyholder benefits and claims
          49             49       3       52    
     
 
Minority interest
    37       30       (2 )     66       (11 )     55    
     
 
Restructuring activities
    418       347       2       767             767    
     
 
Goodwill impairment/impairment of intangibles
                                     
     
 
Total noninterest expenses3
    11,575       6,768       181       18,524       654       19,178    
     
 
Income (loss) before income taxes4
    4,333       1,485       1,049       6,867       (756 )     6,112    
     
 
Add (deduct):
                                                 
 
Net (gains) from businesses sold/held for sale
          (90 )           (90 )                  
 
Significant equity pick-ups/net (gains) from investments
                (156 )     (156 )                  
 
Net (gains) on securities available for sale/industrial holdings including hedging
                (801 )     (801 )                  
 
Net (gains) on the sale of premises
                (57 )     (57 )                  
 
Restructuring activities
    418       347       2       767                    
 
Goodwill impairment/impairment of intangibles
                                         
     
 
Underlying pre-tax profit
    4,751       1,742       37       6,531                    
     
 
Cost/income ratio in %
    73       79       15       72       N/M       75    
     
 
Underlying cost/income ratio in %
    70       75       84       72                    
     
 
Assets5
    881,643       123,785       15,025       984,318       7,843       992,161    
     
 
Risk-weighted positions (BIS risk positions)
    167,742       74,074       7,448       249,264       1,938       251,202    
     
 
Average active equity6
    14,385       6,700       3,047       24,132       998       25,130    
     
 
Return on average active equity in %
    30       22       34       28       N/M       24    
     
 
Underlying return on average active equity in %
    33       26       1       27                    
     
                                                 
N/M – Not meaningful
                                               
1     Includes:
                                               
 
Severance payments
    17       22             38       13       51  
2   Net interest revenues and noninterest revenues.
 
3   Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
 
4   Before cumulative effect of accounting changes.
 
5   The sum of corporate divisions does not necessarily equal the total of the corresponding group division because of consolidation items between corporate divisions, which are to be eliminated on the group division level. The same approach holds true for the sum of group divisions compared to Total Management Reporting.
 
6   See Note [27] to the consolidated financial statements for a description of how average active equity is allocated to the divisions.

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  2004   Corporate and     Private Clients     Corporate     Total     Consolidation &     Total    
      Investment     and Asset     Investments     Management     Adjustments     Consolidated    
  in m. (except percentages)   Bank     Management           Reporting                
     
 
Net revenues2
    13,414       8,023       621       22,058       (140 )     21,918    
     
 
Provision for loan losses
    89       264       19       372             372    
     
 
Provision for off-balance sheet positions
    (65 )     (1 )           (65 )           (65 )  
     
 
Total provision for credit losses
    24       263       19       307                    
     
 
Operating cost base1
    10,327       6,206       414       16,948                    
     
 
Policyholder benefits and claims
          50             50       210       260    
     
 
Minority interest
    5       1       (1 )     4       (1 )     3    
     
 
Restructuring activities
    299       98       3       400             400    
     
 
Goodwill impairment/impairment of intangibles
          19             19             19    
     
 
Total noninterest expenses3
    10,631       6,373       416       17,420       162       17,582    
     
 
Income (loss) before income taxes4
    2,759       1,386       186       4,331       (302 )     4,029    
     
 
Add (deduct):
                                                 
 
Net (gains) from businesses sold/held for sale
    (31 )     (8 )     (38 )     (76 )                  
 
Significant equity pick-ups/net (gains) from investments
                (148 )     (148 )                  
 
Net (gains) on securities available for sale/industrial holdings including hedging
                (176 )     (176 )                  
 
Net (gains) on the sale of premises
                (20 )     (20 )                  
 
Restructuring activities
    299       98       3       400                    
 
Goodwill impairment/impairment of intangibles
          19             19                    
     
 
Underlying pre-tax profit (loss)
    3,027       1,496       (194 )     4,329                    
     
 
Cost/income ratio in %
    79       79       67       79       N/M       80    
     
 
Underlying cost/income ratio in %
    77       78       174       79                    
     
 
Assets5
    729,872       113,818       16,442       832,933       7,135       840,068    
     
 
Risk-weighted positions (BIS risk positions)
    139,124       65,677       10,242       215,044       1,742       216,787    
     
 
Average active equity6
    12,860       6,715       3,933       23,507       1,271       24,778    
     
 
Return on average active equity in %
    21       21       5       18       N/M       16    
     
 
Underlying return on average active equity in %
    24       22       (5 )     18                    
     
     
 
N/M – Not meaningful
                                                 
 
1 Includes:
                                                 
     
 
Severance payments
    170       101       1       272       10       282    
2   Net interest revenues and noninterest revenues.
 
3   Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
 
4   Before cumulative effect of accounting changes.
 
5   The sum of corporate divisions does not necessarily equal the total of the corresponding group division because of consolidation items between corporate divisions, which are to be eliminated on the group division level. The same approach holds true for the sum of group divisions compared to Total Management Reporting.
 
6   See Note [27] to the consolidated financial statements for a description of how average active equity is allocated to the divisions.

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      Corporate and     Private Clients     Corporate     Total     Consolidation     Total    
  2003   Investment     and Asset     Investments     Management     & Adjustments     Consolidated    
  in m. (except percentages)   Bank     Management           Reporting                
     
 
Net revenues2
    14,294       8,199       (920 )     21,572       (305 )     21,268    
     
 
Provision for loan losses
    752       324       36       1,113             1,113    
     
 
Provision for off-balance sheet positions
    (45 )     (3 )     (2 )     (50 )           (50 )  
     
 
Total provision for credit losses
    708       321       35       1,063                    
     
 
Operating cost base1
    10,060       6,683       681       17,424                    
     
 
Policyholder benefits and claims
          21             21       89       110    
     
 
Minority interest
    13       15       (31 )     (3 )           (3 )  
     
 
Restructuring activities
    (29 )     (1 )           (29 )           (29 )  
     
 
Goodwill impairment
                114       114             114    
     
 
Total noninterest expenses3
    10,045       6,718       764       17,526       (78 )     17,449    
     
 
Income (loss) before income taxes4
    3,541       1,160       (1,719 )     2,983       (226 )     2,756    
     
 
Add (deduct):
                                                 
 
Net (gains) losses from businesses sold/held for sale
    (583 )     (51 )     141       (494 )                  
 
Significant equity pick-ups/net losses from investments
                938       938                    
 
Net losses on securities available for sale/industrial holdings including hedging
                184       184                    
 
Net losses on the sale of premises
                107       107                    
 
Restructuring activities
    (29 )     (1 )           (29 )                  
 
Goodwill impairment
                114       114                    
     
 
Underlying pre-tax profit (loss)
    2,929       1,108       (236 )     3,801                    
     
 
Cost/income ratio in %
    70       82       N/M       81       N/M       82    
     
 
Underlying cost/income ratio in %
    73       82       152       78                    
     
 
Assets5
    681,722       124,606       18,987       795,818       7,796       803,614    
     
 
Risk-weighted positions (BIS risk positions)
    137,615       63,414       13,019       214,048       1,625       215,672    
     
 
Average active equity6
    14,186       7,225       4,900       26,311       1,063       27,374    
     
 
Return on average active equity in %
    25       16       (35 )     11       N/M       10    
     
 
Underlying return on average active equity in %
    21       15       (5 )     14                    
     
     
N/M – Not meaningful
                                                 
1
 Includes:                                                  
     
 
Severance payments
    260       395       20       675       27       702    
2 Net interest revenues and noninterest revenues.  
 
3 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).  
 
4 Before cumulative effect of accounting changes.  
 
5 The sum of corporate divisions does not necessarily equal the total of the corresponding group division because of consolidation items between corporate divisions, which are to be eliminated on the group division level. The same approach holds true for the sum of group divisions compared to Total Management Reporting.  
 
6 See Note [27] to the consolidated financial statements for a description of how average active equity is allocated to the divisions.  

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Group Divisions

Corporate and Investment Bank Group Division
The following table sets forth the results of our Corporate and Investment Bank Group Division for the years ended December 31, 2005, 2004 and 2003, in accordance with our management reporting systems.

                               
     
  in m. (except percentages)     2005     2004     2003    
           
 
Net revenues:
                           
           
 
Sales & Trading (equity)
      3,312       2,489       3,119    
           
 
Sales & Trading (debt and other products)
      7,336       6,299       6,081    
           
 
Origination (equity)
      647       499       485    
           
 
Origination (debt)
      1,017       916       806    
           
 
Advisory
      604       488       465    
           
 
Loan products
      1,256       1,139       1,187    
           
 
Transaction services
      1,971       1,863       1,915    
           
 
Other
      (225 )     (277 )     236    
           
 
Total net revenues
      15,918       13,414       14,294    
 
Therein: Net interest and trading revenues
      10,558       8,354       8,924    
           
 
Provision for credit losses:
                           
           
 
Provision for loan losses
      32       89       752    
           
 
Provision for off-balance sheet positions
      (22 )     (65 )     (45 )  
           
 
Total provision for credit losses
      10       24       708    
           
 
Noninterest expenses1:
                           
           
 
Operating cost base
      11,120       10,327       10,060    
           
 
Minority interest
      37       5       13    
           
 
Restructuring activities
      418       299       (29 )  
           
 
Goodwill impairment
                     
           
 
Total noninterest expenses1
      11,575       10,631       10,045    
 
Therein: Severance payments
      17       170       260    
           
 
Income before income taxes
      4,333       2,759       3,541    
           
 
Add (deduct):
                           
 
Net (gains) from businesses sold/held for sale
            (31 )     (583 )  
 
Restructuring activities
      418       299       (29 )  
 
Goodwill impairment
                     
           
 
Underlying pre-tax profit
      4,751       3,027       2,929    
           
 
Cost/income ratio in %
      73%       79%       70%    
           
 
Underlying cost/income ratio in %
      70%       77%       73%    
           
 
Assets
      881,643       729,872       681,722    
           
 
Risk-weighted positions (BIS risk positions)
      167,742       139,124       137,615    
           
 
Average active equity2
      14,385       12,860       14,186    
           
 
Return on average active equity in %
      30%       21%       25%    
           
 
Underlying return on average active equity in %
      33%       24%       21%    
           
1   Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
 
2   See Note [27] to the consolidated financial statements for a description of how average active equity is allocated to the divisions.

The following paragraphs discuss the contribution of the individual corporate divisions to the overall results of the Corporate and Investment Bank Group Division.

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Corporate Banking & Securities Corporate Division
The following table sets forth the results of our Corporate Banking & Securities Corporate Division for the years ended December 31, 2005, 2004 and 2003, in accordance with our management reporting systems.

                               
     
  in m. (except percentages)     2005     2004     2003    
           
 
Net revenues:
                           
           
 
Sales & Trading (equity)
      3,312       2,489       3,119    
           
 
Sales & Trading (debt and other products)
      7,336       6,299       6,081    
           
 
Origination (equity)
      647       499       485    
           
 
Origination (debt)
      1,017       916       806    
           
 
Advisory
      604       488       465    
           
 
Loan products
      1,256       1,139       1,187    
           
 
Other
      (225 )     (308 )     (347 )  
           
 
Total net revenues
      13,947       11,520       11,796    
           
 
Provision for credit losses:
                           
           
 
Provision for loan losses
      25       79       751    
           
 
Provision for off-balance sheet positions
      3       (66 )     8    
           
 
Total provision for credit losses
      28       14       759    
           
 
Noninterest expenses1:
                           
           
 
Operating cost base
      9,675       8,752       8,317    
           
 
Minority interest
      37       5       13    
           
 
Restructuring activities
      331       272       (23 )  
           
 
Goodwill impairment
                     
           
 
Total noninterest expenses1
      10,043       9,028       8,307    
 
Therein: Severance payments
      18       154       194    
           
 
Income before income taxes
      3,877       2,478       2,730    
           
 
Add (deduct):
                           
 
Net (gains) losses from businesses sold/held for sale
                     
 
Restructuring activities
      331       272       (23 )  
 
Goodwill impairment
                     
           
 
Underlying pre-tax profit
      4,207       2,750       2,707    
           
 
Cost/income ratio in %
      72%       78%       70%    
           
 
Underlying cost/income ratio in %
      69%       76%       71%    
           
 
Assets
      871,941       720,557       693,794    
           
 
Risk-weighted positions (BIS risk positions)
      155,467       128,066       127,807    
           
 
Average active equity2
      13,070       11,479       12,785    
           
 
Return on average active equity in %
      30%       22%       21%    
           
 
Underlying return on average active equity in %
      32%       24%       21%    
           
1   Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
 
2   See Note [27] to the consolidated financial statements for a description of how average active equity is allocated to the divisions.

Comparison between 2005 and 2004
Income before income taxes increased by 1.4 billion to 3.9 billion for the year ended December 31, 2005. The improvement was driven by revenue growth of 21%, spread across most business units, together with continued tight cost management, with the increase of 11% in noninterest expenses driven by performance-related compensation. Underlying pre-tax profit, at 4.2 billion, increased by 1.5 billion compared to 2.8 billion in 2004.

Net revenues of 13.9 billion in 2005 were 2.4 billion higher than net revenues of 11.5 billion in 2004.
Sales & Trading (debt and other products) revenues were a record 7.3 billion in 2005 and increased by 1.0 billion compared to 2004. Sales & Trading (equity) revenues were 3.3 billion, 823 million higher than 2004.

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Improved earnings in our Debt and Equity franchises reflected sustained leadership in high-value structured products in commodity, credit, equity and interest rate derivatives, emerging markets and securitized products. Customer demand for these products remained robust throughout the year. Equity derivatives in particular showed substantial growth, benefiting from synergies arising from closer integration with our institutional fixed income sales force.
Margin compression remained a significant factor in the performance of more mature ‘flow’ businesses such as foreign exchange, money markets and cash equities. Despite this compression, we nonetheless succeeded in making modest earnings gains in most of these businesses by growing market share. In cash equities, however, difficult conditions in program trading marginally reduced overall performance versus 2004.
Market conditions presented a number of attractive proprietary trading opportunities throughout the year. While remaining committed to a customer-centric business model, we took selective advantage of these opportunities, and together with the re-engineering of the equities proprietary trading unit at the beginning of the year, generated strong gains versus 2004.
Revenues from Origination and Advisory were 2.3 billion, 366 million higher than in 2004. Origination (equity) increased market share in both the U.S. and Europe, and regained the no. 1 position in European equity/equity-linked issuance as measured by fees according to Dealogic. In Origination (debt), high-yield issuance rose to the global no.1 position in the fee league table in 2005 according to Dealogic, and we acted as bookrunner on the three largest leveraged buyouts of 2005 in the North American market. In Advisory, the mergers and acquisitions environment continued to gain momentum throughout the year and we improved our fee league table position in 2005 as a result of market share gains in the U.S. and Europe. We ranked no. 8 globally as an M&A advisor, as measured by fees according to Dealogic, compared to no. 10 in 2004. In Europe, we advised on ten of the twenty largest transactions announced in 2005 (source: Thomson Financial).
Revenues from Loan Products were 1.3 billion, 118 million higher than in 2004. The main driver was an increase in mark-to-market gains on credit default swaps used to hedge the bank’s investment-grade loan exposure. While credit spreads tended to tighten, reflecting the continuing overall benign credit environment, the credit spreads that particularly impacted CIB’s hedge portfolio widened.
The provision for credit losses remained low at 28 million in 2005, compared to 14 million in 2004, reflecting the continued benign credit environment and tight credit discipline.
Noninterest expenses in 2005 were 10.0 billion, an increase of 1.0 billion compared to 9.0 billion in 2004, driven by an increase in performance-related compensation consistent with improved operating results. Also contributing to the increase were charges of 331 million for restructuring activities related to the Business Realignment Program. In 2004, similar charges amounted to 272 million.
The cost income ratio improved by 6 percentage points in 2005 to 72%, resulting from the increased revenues and continued tight cost management. After adjusting for the restructuring activities, the underlying cost income ratio improved by 7 percentage points from 76% to 69%.

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Global Transaction Banking Corporate Division
The following table sets forth the results of our Global Transaction Banking Corporate Division for the years ended December 31, 2005, 2004 and 2003, in accordance with our management reporting systems.

                               
     
  in m. (except percentages)     2005     2004     2003    
           
 
Net revenues:
                           
           
 
Transaction services
      1,971       1,863       1,915    
           
 
Other
            31       583    
           
 
Total net revenues
      1,971       1,894       2,498    
           
 
Provision for credit losses:
                           
           
 
Provision for loan losses
      7       9       2    
           
 
Provision for off-balance sheet positions
      (25 )     1       (53 )  
           
 
Total provision for credit losses
      (18 )     11       (51 )  
           
 
Noninterest expenses1:
                           
           
 
Operating cost base
      1,445       1,576       1,744    
           
 
Minority interest
                     
           
 
Restructuring activities
      87       28       (6 )  
           
 
Goodwill impairment
                     
           
 
Total noninterest expenses1
      1,532       1,603       1,738    
 
Therein: Severance payments
      (1 )     16       66    
           
 
Income before income taxes
      457       280       811    
           
 
Add (deduct):
                           
 
Net (gains) from businesses sold/held for sale
            (31 )     (583 )  
 
Restructuring activities
      87       28       (6 )  
 
Goodwill impairment
                     
           
 
Underlying pre-tax profit
      544       277       222    
           
 
Cost/income ratio in %
      78%       85%       70%    
           
 
Underlying cost/income ratio in %
      73%       85%       91%    
           
 
Assets
      17,966       16,636       16,329    
           
 
Risk-weighted positions (BIS risk positions)
      12,275       11,058       9,808    
           
 
Average active equity2
      1,315       1,381       1,401    
           
 
Return on average active equity in %
      35%       20%       58%    
           
 
Underlying return on average active equity in %
      41%       20%       16%    
           
1   Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
 
2   See Note [27] to the consolidated financial statements for a description of how average active equity is allocated to the divisions.

Comparison between 2005 and 2004
Income before income taxes increased by 176 million to 457 million for the year ended December 31, 2005.

Net revenues increased by 4% to almost 2 billion in 2005. Trust and Securities Services improved its revenues significantly through new business and expanded its lead as the no. 1 trustee for U.S. asset-backed securities and mortgage-backed securities. Cash Management earned higher interest revenues across all customer segments while Trade Finance increased its revenues due to Structured Export Finance deals in Europe and sales of interest and currency risk products. Net revenues in 2004 included a gain of 55 million following the sale of a substantial part of our Global Securities Services (GSS) business to State Street Corporation in 2003 and a charge of 24 million, representing GTB’s share of the loss on the sale of DB Payments. Excluding the net gains on sales, net revenues increased in 2005 by 108 million, or 6%, compared to 2004.
The provision for credit losses amounted to a net release of 18 million in 2005, compared to a charge of 11 million for 2004 reflecting the continued benign credit environment and tight credit discipline.

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Noninterest expenses of 1.5 billion decreased by 71 million from 2004, although charges for restructuring activities, which represent GTB’s share of the Business Realignment Program, increased by 59 million from 28 million in 2004 to 87 million in 2005. The savings in noninterest expenses reflected ongoing gains in cost efficiency and the fact that 2004 expenses included some costs related to the sold GSS business, partly offset by higher performance-related compensation in 2005 in line with improved operating results.
The cost income ratio of 78% was 7 percentage points lower than in 2004. After adjusting for the net gains on sales and the restructuring activities, the underlying cost income ratio improved by 12 percentage points from 85% to 73%, reflecting the aforementioned improvements in revenues and noninterest expenses.

Private Clients and Asset Management Group Division
The following table sets forth the results of our Private Clients and Asset Management Group Division for the years ended December 31, 2005, 2004 and 2003, in accordance with our management reporting systems.

                               
     
  in m. (except where indicated)     2005     2004     2003    
           
 
Net revenues:
                           
           
 
Portfolio/fund management
      2,718       2,526       2,615    
           
 
Brokerage
      1,847       1,657       1,588    
           
 
Loans/deposits
      2,415       2,359       2,330    
           
 
Payments, account & remaining financial services
      857       915       823    
           
 
Other
      757       565       843    
           
 
Total net revenues
      8,594       8,023       8,199    
 
Therein: Net interest and trading revenues
      2,818       2,923       2,814    
           
 
Provision for credit losses:
                           
           
 
Provision for loan losses
      342       264       324    
           
 
Provision for off-balance sheet positions
      (2 )     (1 )     (3 )  
           
 
Total provision for credit losses
      340       263       321    
           
 
Noninterest expenses1:
                           
           
 
Operating cost base
      6,342       6,206       6,683    
           
 
Policyholder benefits and claims
      49       50       21    
           
 
Minority interest
      30       1       15    
           
 
Restructuring activities
      347       98       (1 )  
           
 
Goodwill impairment/impairment of intangibles
            19          
           
 
Total noninterest expenses1
      6,768       6,373       6,718    
 
Therein: Severance payments
      22       101       395    
           
 
Income before income taxes
      1,485       1,386       1,160    
           
 
Add (deduct):
                           
 
Net (gains) losses from businesses sold/held for sale
      (90 )     (8 )     (51 )  
 
Restructuring activities
      347       98       (1 )  
 
Goodwill impairment/impairment of intangibles
            19          
           
 
Underlying pre-tax profit
      1,742       1,496       1,108    
           
 
Cost/income ratio in %
      79%       79%       82%    
           
 
Underlying cost/income ratio in %
      75%       78%       82%    
           
 
Assets
      123,785       113,818       124,606    
           
 
Risk-weighted positions (BIS risk positions)
      74,074       65,677       63,414    
           
 
Average active equity2
      6,700       6,715       7,225    
           
 
Return on average active equity in %
      22%       21%       16%    
           
 
Underlying return on average active equity in %
      26%       22%       15%    
           
 
Invested assets (in bn.)3
      867       828       865    
           
1   Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
 
2   See Note [27] for a description of how average active equity is allocated to the divisions.
 
3   We define invested assets as (a) assets we hold on behalf of customers for investment purposes and/or (b) client assets that are managed by us. We manage invested assets on a discretionary or advisory basis, or these assets are deposited with us.

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The following paragraphs discuss the contribution of the individual corporate divisions to the overall results of Private Clients and Asset Management Group Division.

Asset and Wealth Management Corporate Division
The following table sets forth the results of our Asset and Wealth Management Corporate Division for the years ended December 31, 2005, 2004 and 2003, in accordance with our management reporting systems.

                               
     
  in m. (except where indicated)     2005     2004     2003    
           
 
Net revenues:
                           
           
 
Portfolio/fund management (AM)
      2,199       2,040       2,195    
           
 
Portfolio/fund management (PWM)
      303       300       281    
           
 
Total portfolio/fund management
      2,501       2,339       2,476    
           
 
Brokerage
      769       667       651    
           
 
Loans/deposits
      165       133       128    
           
 
Payments, account & remaining financial services
      15       18       12    
           
 
Other
      431       332       557    
           
 
Total net revenues
      3,881       3,488       3,825    
           
 
Provision for credit losses:
                           
           
 
Provision for loan losses
            (6 )     2    
           
 
Provision for off-balance sheet positions
                  (3 )  
           
 
Total provision for credit losses
            (6 )     (1 )  
           
 
Noninterest expenses1:
                           
           
 
Operating cost base
      2,984       2,923       3,090    
           
 
Policyholder benefits and claims
      49       50       21    
           
 
Minority interest
      30       1       13    
           
 
Restructuring activities
      220       88          
           
 
Goodwill impairment/impairment of intangibles
            19          
           
 
Total noninterest expenses1
      3,284       3,080       3,124    
 
Therein: Severance payments
      4       51       78    
           
 
Income before income taxes
      597       414       702    
           
 
Add (deduct):
                           
 
Net (gains) losses from businesses sold/held for sale
      (81 )     (32 )     (55 )  
 
Restructuring activities
      220       88          
 
Goodwill impairment/impairment of intangibles
            19          
           
 
Underlying pre-tax profit
      736       489       647    
           
 
Cost/income ratio in %
      85%       88%       82%    
           
 
Underlying cost/income ratio in %
      80%       86%       82%    
           
 
Assets
      37,269       34,945       48,138    
           
 
Risk-weighted positions (BIS risk positions)
      13,811       11,424       12,170    
           
 
Average active equity2
      4,993