Fitch has downgraded Deutsche Bank to BBB+ from A- due to continued pressure on earnings, combined with concerns over the prolonged implementation of its recovery strategy.
Moody's and S&P remain at A3 and A- respectively (on a like for like rating basis), and while DB bond yields had fallen to the lowest levels since March 2015, the last few weeks have seen risk picking back up (yields now at 2-month wides) and the stock remains near its recent lows…
Full Statement:
Fitch Ratings has downgraded Deutsche Bank AG's (Deutsche Bank) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'A-' and Short-Term IDR to 'F2' from 'F1'. The Outlook on the Long-Term IDR is Stable. At the same time, Fitch has downgraded the bank's Viability Rating (VR) to 'bbb+' from 'a-'. All debt and deposit ratings have also been downgraded by one notch.
The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUB), which comprises 12 large and globally active banking groups.
KEY RATING DRIVERS: IDRS, VR, DCR, DEPOSIT AND SENIOR DEBT RATINGS
The downgrades reflect continued pressure on Deutsche Bank's earnings, combined with prolonged implementation of its strategy. We no longer expect revenue to demonstrate any clear signs of franchise recovery this year and we expect necessary further restructuring costs to continue to erode net income.
Deutsche Bank's strategic restructuring came later than those of most of its GTUB peers'. In addition, the scale and scope of what it has to do plus strategic revisions earlier this year mean that Deutsche Bank has further to go to complete its business restructuring than any of the other GTUBs.
Consequently, we expect it to take some time before the bank will be able to deliver on earnings targets, including a post-tax return on tangible equity (RoTE) of around 10% in a more supportive interest rate environment.
Revenue is suffering from low capital market volatility combined with persistently low interest rates, particularly in Europe, where the bank is strongest. Franchise erosion in capital markets, notably in prime services, in 4Q16 has been reversed to some extent, but it will take time for client demand to return fully in light of intense competition and due to subdued client trading activity given low market volatility. We expect additional restructuring costs from the integration of Deutsche Postbank AG (Postbank) and from further necessary expenses on IT systems.
Positively for the ratings, capitalisation was boosted by the bank's rights issue in April, and the planned IPO of a minority stake in its asset management division together with further asset disposals during the next 12-18 months gives it flexibility to add a further EUR2 billion to common equity. Deutsche Bank's end-June 2017 fully loaded Common Equity Tier 1 (CET1) ratio was 14.1%, and the bank's leverage ratio was 3.8%, with management targeting to maintain the CET1 ratio "comfortably above" 13% and achieve a leverage ratio of 4.5%.
The strategic reorientation announced in March towards a more balanced universal banking business model should improve earnings stability, but Fitch will look for evidence that it can achieve healthy profitability out of its large domestic deposit base, and that it can draw on its franchise strengths of a solid German private and corporate customer base extended to global corporate banking and debt capital markets solutions.
Despite notable widening of spreads on unsecured market funding in 2016 and some institutional deposit outflows in 4Q16, we believe that Deutsche Bank retains strong, well-diversified funding by geography, product and customer, and maintains ample liquidity. It reported liquidity reserves of EUR285 billion as at end-June 2017, a large proportion of which were in cash or deposits with major central banks.
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Successful completion of Deutsche Bank's restructuring together with sustainable improvement in earnings could result in an upgrade of the ratings provided risk appetite does not increase or the bank's liquidity profile does not weaken significantly to achieve this. This would demonstrate franchise improvement and would likely require higher market share in targeted markets.
Given the rating level, we do not expect a further downgrade of the ratings unless implementation of the strategic plan meets notable setbacks, particularly around the integration of Postbank. New, substantial litigation or restructuring costs that prevent the bank from retaining capitalisation on target would also be negative for the ratings.
Deutsche Bank's DCRs, deposit and debt ratings are primarily sensitive to changes in the Long-Term IDR. In addition, Deutsche Bank's DCRs, deposit rating and senior preferred debt ratings are sensitive to the amount of subordinated and non-preferred senior debt buffers relative to the recapitalisation amount likely to be needed to restore viability and prevent default on more senior derivative obligations, deposits and structured notes.
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