MOODY'S LOWERS LONG-TERM RATINGS OF DEUTSCHE BANK (SENIOR TO Aa1) AND OF ITS SUBSIDIARIES
New York, 12-23-96 -- Moody's Investors Service downgraded to Aa1 and to B+, respectively, the long-term deposit rating and the financial strength rating of Deutsche Bank, and also lowered the long-term ratings of its subsidiary Morgan Grenfell & Co (senior to Aa2). These rating actions, which conclude a review initiated on September 25, 1996, reflect Moody's belief that the changing dynamics of Germany's very fragmented banking market in the coming years -- along with the increasingly fierce competition in the global markets in which the group has sought to strengthen its strategic presence, such as investment banking – are adding elements of uncertainty to Deutsche Bank's fundamentals that are not compatible with the highest ratings.
Nevertheless, Moody's said that it continues to view Deutsche Bank as one of the world's strongest and better managed financial institutions, and that this opinion remains reflected in the bank's superior credit ratings. Deutsche Bank will most likely continue to grow as a universal banking group with a sound and well-positioned domestic franchise, good and predictable financial fundamentals, and a strategic cohesiveness greater than that of many of its international peers.
A key element of uncertainty for Deutsche Bank's future performance is generated by the bank's increasing challenges in its highly-fragmented domestic market, in which, despite its position as Europe's largest banking group and one of the biggest in the world, it has an overall market share of approximately 5%. Lower lending yields and higher funding costs – both being the result of growing competition among banks – along with flattening loan demand (with the post-unification volume effect waning out), and gradual savings disintermediation have limited Deutsche Bank's ability to grow its revenues from traditional net interest income sources. A relatively high cost structure – although the bank is pursuing various efficiency-generating initiatives more extensively than most of its German peers – and to the fact that future credit-provisioning in a more uncertain market is likely to remain higher than historic levels may also affect negatively Deutsche Bank's domestic earning power, Moody's said.
This evolution, while far from being unique to Deutsche Bank, occurs at a time when the need to respond to increasing shareholder value-creation demands affects management strategies to a larger extent than in the past, added the rating agency. To some degree recognizing these realities, but primarily to preserve and enhance its strengths in market segments that it rightly perceives as increasingly global – such as large-scale investment banking and financial-market activities -- Deutsche Bank has in recent years pursued an ambitious international expansion strategy, often through acquisitions and active high-end recruitment. The rapid building of its Deutsche Morgan Grenfell global investment banking operation is the most visible example of this strategy.
Moody's said that this international growth -- which has generally been well managed so far -- will likely lead to a more diversified revenue mix and to higher earnings as well, especially if the high expenditures associated with these various initiatives will be better contained. Nevertheless, the addition of several new business segments in a relatively short period of time has inherently introduced new elements of incertitude in Deutsche Bank's overall business and balance-sheet profile, aside from traditional credit risk – such as market risk, operating risk, reputation risk, etc.
Against such risks, Deutsche Bank's core capitalization remains less strong by international standards. In this context, Moody's noted its long-expressed view that "hidden reserves" -- often in the form of large unrealized capital gains in various equity participations -- substantially enhance Deutsche Bank's true economic capitalization. It also cited, however, their more reduced role as timely protection against risks, owing to the uneconomic value of realizing such capital gains at short notice.
The following ratings were downgraded:
Deutsche Bank AG-- long-term debt, counterparty and deposit ratings to Aa1 from Aaa; and bank financial strength rating to B+ from A. The bank's Prime-1 rating for short-term deposits and commercial paper was confirmed.
Deutsche Bank Australia Limited-- guaranteed senior debt rating to Aa1 from Aaa;
Deutsche Bank Finance N.V. -- guaranteed senior debt rating to Aa1 from Aaa;
Deutsche Bank Financial, Inc.-- guaranteed senior debt rating to Aa1 from Aaa, and guaranteed subordinated debt rating to Aa2 from Aa1;
Deutsche Bank Finance (Netherlands) BV-- guaranteed senior debt rating to Aa1 from Aaa.
Morgan Grenfell & Co. Ltd.--the rating of the company for long-term deposits and the counterparty rating to Aa2 from Aa1. The rating of the company for short-term deposits at Prime-1 and the bank financial strength rating of C+ were confirmed.
Deutsche Bank Financial, Inc. -- rating of the company for commercial paper was confirmed at Prime-1.
Headquartered in Frankfurt, Deutsche Bank is the largest banking group in Europe, with consolidated assets at September 30, 1996 totaling DM 879 billion (US$ 550 billion).
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