DBRS Confirms Deutsche Bank’s A (low) Rating, Trend Revised to Stable

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 Stable from Negative. The Bank’s Intrinsic Assessment (IA) of A (low) has also been confirmed.

In confirming the ratings, DBRS considers the resiliency of DB’s powerful global franchise, which has experienced some loss of market share as a result of restructuring efforts, but continues to benefit from strength across diverse products and geographies. While revenues have come down with DB’s reduced scope and the continued challenging operating environment, DBRS sees DB as having the ability to improve revenues over time, while also enhancing profitability as it makes progress with cost management efforts. Also supporting the current rating level is DBRS’s view that management has taken the appropriate steps to manage through various periods of market stress and position the Bank well for future growth. The ratings also consider the notable challenges the Bank faces in successfully executing on its strategic initiatives, particularly given the scale of the restructuring task which includes significant expenditure on technology systems and enhancements.

In revising the trend to Stable, DBRS acknowledges the diminished pressure on DB’s credit fundamentals following its successful capital raise. The Bank weathered various stress events in 2016 resulting in weakened market confidence. DBRS sees the Bank’s improved capital position, now at the upper end of the global peer group, as contributing to improved market confidence, while also better positioning DB to allocate capital to businesses where it intends to grow. Furthermore, the Stable trend reflects the elimination of significant uncertainties around various litigation settlements, particularly the US RMBS case.

Under its revised strategy, DB has moved to three business divisions: Corporate & Investment Bank (CIB), where the Bank is looking to become a more corporate-client focused investment and transaction bank; Private & Commercial Bank (PCB), which houses the Bank’s private & business clients and wealth management businesses, as well as Postbank which will be fully integrated; and Deutsche Asset Management (DeAM), a stand-alone division, focusing solely on institutional clients. Demonstrating the considerable progress made relating to legacy issues, DB has completed numerous strategic disposals and it has wound down its Non-Core Operations Unit (NCOU) on schedule at the end of 2016, following a 72% decrease in RWAs during the year.

The Bank’s profitability has been significantly challenged in recent years by the low interest environment, legacy conduct costs, restructuring charges, and the wind-down/disposal of legacy portfolios. As a result, DBRS views the Bank’s earnings as below the franchise potential. DB expects that 2016 was its peak year for technology expenditure, the primary driver of restructuring charges, which should provide some earnings relief going forward. Additionally, DB has largely settled its outstanding conduct-related issues and legacy portfolios have been wound-down, so this should also benefit earnings. Potentially offsetting this, variable compensation was much reduced following DB-specific pressure in 2016, and this will likely increase to more normalized levels.

DB maintains a strong credit risk profile and manages its market risk well, though operational risk remains challenging. Given prior conduct-related issues, DBRS remains concerned about the Bank’s operational risk controls, but recognizes the significant progress made in advancing systems and technology to prevent these types of issues from re-occurring. DBRS notes that introducing and enforcing a conservative culture across its organization will likely be challenging, and will take time.

DB benefits from a funding and liquidity profile that has proven to be resilient despite severely challenging market conditions. The Bank has a substantial customer deposit base totaling EUR 434 billion at end-2016, or 110% of loans, and a diversified wholesale funding profile. DB reported a Stressed Net Liquidity Position (sNLP) of EUR 43 billion as of 1Q17, indicative of the Bank’s net excess liquidity under a liquidity stress scenario. This sNLP has improved substantially from the EUR 18 billion reported as of 3Q16, during a period when DB was under significant funding and liquidity stress. DBRS views positively the Bank’s ability to manage through this period and return its funding profile and liquidity reserves to a more normalized position.

The Bank has significantly improved its capitalization with a EUR 8 billion rights issue completed in 2Q17, which has increased DB’s fully-loaded Common Equity Tier 1 (CET1) ratio to 14.1% on a pro-forma basis at the end of 1Q17. This ratio is now at the upper end of the global peer group and exceeds DB’s internal CET1 target of 12.5% by 2018. DBRS continues to view the leverage ratio as constraining for DB, given its asset mix which generally carries lower risk weights. DB’s leverage ratio improved to 4.0% on a pro-forma basis at the end of 1Q17, as compared to an internal target of 4.5% by 2018.

RATING DRIVERS
Downward pressure on the rating could arise if i) DB is unable to successfully execute on its strategic plan, which could provoke another period of weakened market confidence; or ii) the Bank is unable to make timely progress with its systems and technology enhancements, resulting in further regulatory scrutiny.

Over the longer-term, if DBRS notes a trend in declining business positioning, market share or credit fundamentals, the rating could be downgraded.

Upward pressure on the rating could arise if the Bank demonstrates progress in successfully executing its strategic initiatives, by meeting targets related to cost reductions, profitability and capitalisation, whilst maintaining a solid risk profile.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). 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, Coalition, Dealogic 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, Senior Vice President - Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President – Global Credit Policy
Initial Rating Date: 27 February 2015
Most Recent Rating Update: 7 March 2017

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.