Press Release

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

Banking Organizations
May 09, 2018

DBRS, Inc. (DBRS) confirmed the ratings of Deutsche Bank (DB or the Bank), including its Long-Term Issuer Rating of A (low) and Short-Term Issuer Rating of R-1 (low). At the same time, the trend on all long-term ratings has been revised to Negative from Stable. The trend on DB’s short-term ratings remains Stable, with the exception of the Short-Term Critical Obligations Rating where the trend has also been revised to Negative. The Intrinsic Assessment (IA) for the Bank is A (low), while its Support Assessment remains SA3. Full ratings details at the end of this press release.

KEY RATING CONSIDERATIONS
DBRS has revised the trend to Negative to reflect the significant challenges that DB faces in meeting strategic targets, at a time when execution risk remains elevated due to the scale of its restructuring task, and the need to demonstrate management stability and cohesiveness going forward.

While DBRS sees DB as having achieved notable progress with legacy issues, including settling numerous litigation issues, running down its noncore portfolio, and strengthening its balance sheet, profitability continues to be significantly challenged. Over the medium-term, the Bank needs to absorb still sizable restructuring costs and significant expenditure on systems and process enhancements, while balancing the need to compensate its employees in order to retain top talent and improve morale.

In addition, recent senior management changes have raised some red flags, as the manner in which these changes were carried out raises questions about the cohesiveness of senior management and its ability to execute on its plans. DBRS sees DB’s successful execution of its strategy over the coming year as critical.

RATING DRIVERS
Downward pressure on the rating could arise, if DB is unable to successfully execute on its strategic plan, which could provoke another period of weakened market confidence, or if the Bank is unable to make timely progress with its systems and technology enhancements, which is necessary in order to successfully compete with global peers. DBRS has also noted a decline in business positioning and will monitor trends over the coming year; if DBRS sees continuing declines in market share in areas considered to be strategically important, this would put pressure on the rating.

The trend could revert back to Stable, if the Bank demonstrates progress in successfully executing its strategic initiatives by meeting targets related to cost reductions, profitability and capitalisation, while maintaining a solid risk profile. Additionally, demonstrating an ability to maintain and/or improve business positioning in key strategic areas would be supportive of the current rating level.

RATING RATIONALE
The current rating level considers the resiliency of DB’s strong global franchise, which has experienced some loss of market share as a result of its restructuring efforts, but continues to benefit from strength across diverse products and geographies. DBRS sees the Bank as having business diversity, with sizable businesses that provide generally stable and resilient revenues, including retail and commercial banking, asset management, and transaction banking. This business strength and diversity adds support to the current rating level. Despite this diversity, DBRS has some concerns that issues within the CIB may become overwhelming to the franchise, despite its significant depth and range of businesses. Refocusing and reinforcing the businesses within the CIB under the new strategy will require continued investment in both people and technology. DBRS sees DB as facing the challenge of balancing the need to reduce expenses and improve profitability against the need to invest in the franchise.

A consideration when assessing franchise strength is management quality and depth. While DBRS sees DB as having strong individuals within its management teams, DBRS sees that new management will need to demonstrate stability and cohesiveness going forward. Recent management changes and the manner in which they were carried out – very publicly and without a clearly signaled plan – raised some questions about the cohesiveness of senior management and its ability to execute on its plans. Furthermore, DBRS is wary of continued strategic changes and the adverse impact these shifts can have on employee morale and retention.

The Bank’s profitability has been significantly challenged in recent years with headwinds to revenues coupled with an elevated expense base. Specifically, in 2017, DB reported net revenues of EUR 26 billion, down 12% year-on-year (YoY), with revenue declines across all business segments. This trend of declining revenues across segments continued in 1Q18, with net revenues of EUR 7 billion down 5% YoY. DB reported a very high cost/income ratio of 93% in the quarter, and an ROE of only 0.8%. Driving the cost/income ratio down is a key component of DB’s plan. DB will need to reduce expenses by about EUR 800 million over the coming year in order to meet its EUR 23 billion adjusted cost target. DBRS sees this as a significant challenge, particularly when DB is working to demonstrate franchise momentum and improve its revenue generation capabilities. DBRS notes that introducing and enforcing a conservative cost culture across its organization will likely be challenging, and will take time.

DB maintains a strong credit risk profile and manages its market risk well, though operational risk issues persist. Given prior conduct-related issues, DBRS will look for a further track record of improved operational risk controls, but recognizes the significant progress made in advancing systems and technology to prevent these types of issues from re-occurring.

DB benefits from a funding and liquidity profile that has proven to be resilient. The Bank has a substantial customer deposit base totaling EUR 571 billion at end-2016, or 148% of loans, and a diversified wholesale funding profile. DB reported a Stressed Net Liquidity Position (SNLP) of EUR 36 billion as of 1Q18, indicative of the Bank’s net excess liquidity under a liquidity stress scenario. Furthermore, the Bank’s liquidity coverage ratio (LCR) was a strong 147% as of 1Q18.

DBRS sees the Bank’s strong risk-adjusted regulatory capital position, with a fully-loaded Common Equity Tier 1 (CET1) ratio of 13.4% as supportive of the rating. DB’s CET1 ratio is at the upper end of the global peer group and provides DB with a buffer to allocate capital to businesses where it intends to grow. DBRS continues to view the leverage ratio as constraining for DB, given its asset mix that generally carries lower risk weights. DB’s leverage ratio was 3.7% as of 1Q18, at the low end of the global peer group.

The Grid Summary Scores for DB are as follows: Franchise Strength – Good; Earnings Power – Good/Moderate; Risk Profile – Strong/Good; Funding & Liquidity –Strong; Capitalisation – Good/Moderate.

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: Roger Lister, Managing Director – Global FIG
Initial Rating Date: 27 February 2015
Most Recent Rating Update: 14 July 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.

DBRS rating definitions and the terms of use of such ratings are available at www.dbrs.com

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

Ratings

Deutsche Bank AG
Deutsche Bank Trust Company Americas
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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