DBRS Confirms Deutsche Bank’s A (low) Rating, Revises Trend to Negative

DBRS, Inc. (DBRS) has today confirmed the ratings of Deutsche Bank (DB or the Bank), including its Senior Unsecured Debt & Deposits rating of A (low), Short-Term Debt & Deposits rating of R-1 (low), and its A (high) / R-1 (middle) Critical Obligations Ratings. At the same time, the trend on all ratings has been revised to Negative, with the exception of the Short-Term Debt & Deposits rating where the trend remains Stable. The Bank’s Intrinsic Assessment (IA) of A (low) has also been confirmed.

The ratings reflect DBRS’s view that DB’s global franchise remains resilient, with solid revenue generation across core businesses despite ongoing headwinds. Also supporting the current rating level is DBRS’s view that management is taking the appropriate steps to manage through another period of market stress. The ratings also factor in the notable challenges the Bank faces in generating solid, sustainable returns, at a time when its regulatory capital levels have fallen to the low end of the global peer group.

Revising the trend to Negative reflects DBRS's perception of added pressure on DB’s credit fundamentals, being driven by weakened investor, counterparty and client confidence, which DBRS sees as resulting from the cumulative impact of various stress events during 2016 that have intensified in recent weeks. Given the Bank’s relatively large use of wholesale funding, as well as its prominent position in the wholesale markets, DB’s business activities are susceptible to disruption in an environment of weakened market confidence. Importantly, deposit funding has remained largely stable and DB continues to maintain a strong liquidity profile, with sizable liquidity reserves. With significant uncertainties around the ultimate size of DB’s settlement with the Department of Justice (DoJ) and the potential impact on capital, DBRS expects that the Bank will remain susceptible to market disruption. Furthermore, other uncertainties remain that could also impact market confidence, such as the timing of the Hua Xia stake sale and other litigation issues. These uncertainties have the potential to impact DB’s franchise momentum, constrain its earnings generation ability, and increase pressure on its funding and liquidity profile.

DBRS will continue to observe the ongoing events, some of which are expected to be resolved over the near-term, and assess what impact these may have on the Bank’s capital position. DBRS will also continue to monitor closely the Bank’s funding and liquidity profile, which could come under further pressure, especially if negative headlines persist. While DBRS expects that earnings will remain challenged in the current operating environment, DBRS will look for any outsized impact of the current uncertainties on DB’s revenues or its franchise.

RATING DRIVERS
Substantial litigation/reputational issues, or sizable settlements beyond current expectations, could result in negative rating action, especially if their scale were to be significantly detrimental to the Bank’s capital position. Furthermore, a material change in DB’s funding profile from stable, term funding towards shorter-term funding could add negative pressure. Any other notable pressure on the Bank’s funding and liquidity profile, evidenced by deposit outflows, a notable reduction in liquidity reserves or severely challenged funding markets could also pressure the rating.

As DB continues to take the appropriate steps to maintain its capital position while demonstrating progress with its strategic initiatives, DBRS would view success with these actions as supportive of the rating. The trend could revert back to Stable, if the heightened level of market concern were to be reduced as a result of continued progress in reducing legacy issues (litigation, noncore assets), while maintaining franchise momentum and sustaining/increasing regulatory capitalization.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Critical Obligations Rating (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 27 February 2015
Most Recent Rating Update: 7 July 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.