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Rating Action:

Moody's assigns negative outlook to Deutsche Bank AG and subsidiaries

19 Dec 2013

New York, December 19, 2013 -- Moody's Investors Service has today changed the outlook to negative from stable on the long-term ratings of Deutsche Bank AG (deposits at A2 and baseline credit assessment at baa2) as well as some of its subsidiaries. Concurrently, all ratings were affirmed. A full list of affected entities is included at the end of this press release.

The change in outlook reflects Moody's view of (1) the ongoing execution challenges the bank faces to complete the three-year re-engineering plan on time and within cost over the next two years; and (2) the bank's more limited strategic flexibility and challenges in satisfying its regulators and shareholders.

RATINGS RATIONALE

Moody's notes that Deutsche Bank is partway through an ambitious three-year re-engineering effort intended to clean up the balance sheet, improve capitalization, raise profitability, rebalance the business mix and change the corporate culture. The negative outlook reflects Moody's view of the ongoing execution challenges facing Deutsche Bank's management over the next two years to complete the re-engineering plan on time and within cost.

Thus far, the bank has made the greatest progress in strengthening its risk-based capital ratios from a weak position relative to peers and in shrinking the Non-Core Operations unit and the bank's Basel III Tier One Common Equity ratio stood at 9.7% at 30 September 2013.

Deutsche Bank is targeting an 18% reduction from the 2012 expense base -- one of the most aggressive cost savings targets among European banks who are not contemplating a complete exit from a line of business. Management has made some progress on reducing operating expenses within Deutsche Bank's core operations. However, much of the savings has been offset by the investment required to achieve them as well as rising litigation expense (including its recently announced EUR725 million settlement regarding LIBOR submissions). Although the Non-Core Operations unit has been shrunk, losses from the unit continue to weigh on financial performance. As a result, the overall profitability of the bank remains challenged -- as evidenced by the reported cost income ratio of 82% through the first nine months of 2013.

Moody's said the level and the mix of Deutsche Bank's earnings in 2014 and beyond remains uncertain, as does the ability of the firm to reduce the volatility of its earnings. Reduced earnings volatility will be a function both of the firm's success in diversifying its earnings streams, and the effectiveness of risk and cultural change initiatives.

"Our negative outlook reflects Deutsche Bank's more limited strategic flexibility to manage a changing environment, compared to some other universal banks with larger earnings streams from more stable businesses, as well as the challenges management will face in satisfying both regulators and shareholders," said Peter Nerby, a Moody's Senior Vice-President and lead analyst for Deutsche Bank.

Within universal banks, Moody's views diversified earnings streams as a source of strategic flexibility. Deutsche Bank is targeting substantial profit improvement in all of its more stable business lines: Global Transaction Banking, Private and Business Clients and Asset and Wealth Management. Earnings from more stable businesses can also protect bondholders by acting as a "shock absorber" against the normal volatility of capital markets earnings.

Moody's believes the greatest re-engineering challenge rests within Deutsche Bank's Asset and Wealth Management unit. The unit has improved its profitability, with a four percentage point improvement in its cost income ratio to 83% through the first nine months of 2013. However, Moody's believes the size and stability of earnings from this business at Deutsche Bank remains uncertain. This may leave Deutsche Bank with a thinner and less diversified shock absorber than its other baa2 baseline credit assessment peers. This would limit management's strategic flexibility to achieve its return objectives, while complying with new regulations.

Deutsche Bank is also undertaking a program of cultural change to better align compensation with risk-taking and strengthen the control environment. If successful and enduring, these changes can protect bondholders against large concentration and conduct risks that tend to emerge through the industry cycle. "Enhancing a risk culture is one of the most credit positive actions management can take, but is also one of the hardest things to implement and to observe," Mr. Nerby said.

While undertaking this multi-faceted re-engineering effort, Deutsche Bank also faces new regulatory headwinds, including the Basel III leverage ratio. The proposed EU rule may require the reduction of lower-yielding assets that contributed to risk-weighted profitability (and achievement of cost-income targets), but can no longer be accommodated within tighter balance sheet constraints. In addition, rules aimed at facilitating recovery and resolution are being proposed that would increase regulatory subsdiarization and restrict the free flow of capital and liquidity within the group making capital allocation less efficient.

The new regulatory constraints will make it more difficult for Deutsche Bank management to deliver satisfactory shareholder returns. This could eventually require changes to the reengineering plan, further changes to the business mix or pursuit of new avenues of risk-taking in search of higher returns.

AFFECTED RATINGS

The ratings of the following entities were affirmed while the outlook was changed to negative from stable. Please refer to www.moodys.com for a detailed list of affected credit ratings.

- Deutsche Bank AG

- DB UK Bank Limited

- Deutsche Bank National Trust Company

- Deutsche Bank Trust Company Americas

- Deutsche Bank Trust Company Delaware

- Deutsche Bank AG, London Branch

- Deutsche Bank AG, New York Branch

- Deutsche Bank AG, New Zealand

- Deutsche Bank AG, Paris Branch

- Deutsche Bank AG, Singapore Branch

- Deutsche Bank AG, Sydney Branch

- Deutsche Bank Capital Finance Trust I

- Deutsche Bank Capital Funding Trust I

- Deutsche Bank Capital Funding Trust IV

- Deutsche Bank Capital Funding Trust IX

- Deutsche Bank Capital Funding Trust V

- Deutsche Bank Capital Funding Trust VI

- Deutsche Bank Capital Funding Trust VII

- Deutsche Bank Capital Funding Trust VIII

- Deutsche Bank Capital Funding Trust X

- Deutsche Bank Capital Funding Trust XI

- Deutsche Bank Capital Trust III

- Deutsche Bank Capital Trust V

- Deutsche Bank Contingent Capital Trust II

- Deutsche Bank Contingent Capital Trust III

- Deutsche Bank Contingent Capital Trust V

- Deutsche Bank Financial LLC

- Deutsche Finance (Netherlands) BV

- Deutsche Bank Trust Corporation

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Deutsche Bank is a global universal bank that reported EUR3.2 billion in pre-tax income for the first nine months of 2013

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peter E Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns negative outlook to Deutsche Bank AG and subsidiaries
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