MOODY'S LOWERS LONG-TERM RATINGS OF DEUTSCHE BANK (SENIOR TO Aa3) AND OF ITS SUBSIDIARIES
Moody's Investors Service downgraded to Aa3 from Aa1 and to B from B+, respectively, the long-term deposit rating and the financial strength rating of Deutsche Bank (DB). Also lowered were the long-term deposit ratings and financial strength ratings of DB's subsidiaries Europ„ische Hypothekenbank der Deutschen Bank - to Aa3 from Aa2 and to C+ from B, respectively -- and Morgan Grenfell & Co -- to A1 from Aa2 and to C from C+, respectively. At the same time, Moody's made a separate press announcement on the conclusion of the rating review for Bankers Trust, with senior ratings for both Bankers Trust Company and Bankers Trust Corporation converging at A1. All these rating actions conclude a review initiated in November 1998, at the time when DB announced its intention of a cash merger with Bankers Trust. DB's short-term ratings were not on review and were confirmed at Prime-1.
The rating actions reflect Moody's view that DB's effort to strengthen the profitability of its core franchise in the highly fragmented German banking market will remain an uphill challenge. Similar to many of its domestic peer banks, DB's earning power is being affected by structural changes in the German banking market - reflected by lower net interest margins and a slower buildup of fee and commission income. DB's earning power has also been hurt by an eroding cost-income ratio and by high credit costs arising from its emerging-market exposures and from the restructuring of its businesses.
Against these trends, and recognising the asset disintermediation trend in Europe and the related shift of traditional wholesale banking towards investment banking and capital markets activities, DB has focused its efforts in recent years on an ambitious international diversification strategy. This diversification, which has occurred both in Europe and elsewhere around the world, has seen as its single largest step so far the cash merger with Bankers Trust.
In doing so, noted Moody's, the group has been responding to the need to remain competitive in a German and European banking environment increasingly driven by the new dynamics of shareholder value-creation - a development affecting a majority of Europe's financial institutions in the mid- and late 1990's. At the same time, the integration of Bankers Trust extends the scope of its commitment to more volatile income sources.
Moody's also said that it views DB as an universal banking powerhouse, especially in Europe. The group enjoys a good franchise in a number of its target growth areas, including domestic funds management and European fixed income, areas in which it should remain a market leader. Following the merger with Bankers Trust, the bank should also be a major player in custody and in clearing services, as well as in global asset management - among other things.
At the same time, the consolidation of Bankers Trust should be a difficult and more uncertain process for DB, primarily because of the challenge of integrating successfully banking cultures that are inherently quite different. This integration challenge will occur at a time when DB's management resources are also focused on moving ahead with expansion plans in a variety of European markets and in new product areas. Moody's added that, postmerger, the enlarged DB should still lag some "bulge bracket" competitors in many of the more strategic and profitable investment banking segments.
In its comments on the conclusion of the rating review, Moody's added that it continues to consider DB as one of Europe's better placed and more forward-looking financial institutions, poised to take advantage of the changing banking landscape in the single-currency market. As such, DB should remain one of the beneficiaries of the pan-European banking consolidation likely to shape up in the years to come.
The following ratings were downgraded:
Deutsche Bank AG-senior long-term debt, issuer rating and deposit ratings to Aa3 from Aa1; and bank financial strength rating to B from B+. The bank's Prime-1 rating for short-term deposits and commercial paper was confirmed.
Deutsche Bank Australia Limited-- guaranteed senior debt rating to Aa3 from Aa1. The Prime-1 rating of the company for short term-debt was confirmed.
Deutsche Bank Finance N.V. -- guaranteed senior debt rating to Aa3 from Aa1, and guaranteed subordinated debt rating to A1 from Aa2;
Deutsche Bank Financial, Inc.-- guaranteed senior debt rating to Aa3 from Aa1, and guaranteed subordinated debt rating to A1 from Aa2. The rating of the company for commercial paper was confirmed at Prime-1.
Deutsche Bank Finance (Netherlands) BV-- guaranteed senior debt rating to Aa3 from Aa1.
Deutsche Bank (Canada)-- guaranteed senior debt rating to Aa3 from Aa1
Morgan Grenfell & Co. Ltd.--the rating of the company for long-term deposits and the issuer rating to A1 from Aa2, and bank financial strength rating to C from C+. The rating of the company for short-term deposits at Prime-1 was confirmed.
Europ„ische Hypothekenbank der Deutschen Bank AG (EUROHYPO)-- long-term debt, issuer rating and deposit ratings to Aa3 from Aa2, subordinated debt rating to A1 from Aa3, and bank financial strength rating to C+ from B. The rating of the company for short-term deposits at Prime-1 was confirmed. The Aaa ratings for Public Sector Pfandbriefe and Mortgage Pfandbriefe were confirmed.
Headquartered in Frankfurt, Deutsche Bank is the largest banking group in Europe, with consolidated assets at March 31, 1999 totalling EURO 677 billion (US$ 731 billion).
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