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Rating Action:

Moody's changes outlook on Deutsche Bank's ratings to negative

05 Dec 2008

Prime-1 short-term rating unaffected

London, 05 December 2008 -- Moody's Investors Service today changed the outlook on Deutsche Bank AG's Aa1 long-term debt and deposit ratings and B bank financial strength rating (BFSR) to negative from stable. The Prime-1 short-term deposit rating was affirmed. The outlook on the ratings of Deutsche Bank's subordinated debt and hybrid capital securities, as well as on certain subsidiaries, was also changed to negative from stable.

The outlook change reflects Moody's expectation that the persistent turmoil in international capital markets is likely to continue to have a negative impact on Deutsche Bank's revenue and earnings streams in the coming quarters so that weaker efficiency and profitability measures would no longer be consistent with those Moody's typically expects to see at the bank's current rating level. The rating agency also noted that Deutsche Bank's still sizable, albeit decreasing and manageable, exposures to those asset classes most affected by the crisis could still potentially have a further impact on its asset quality and capital adequacy.

Despite the tension in international capital markets, Deutsche Bank has not so far experienced any significant signs of franchise impairment in its well-established and broad-based international investment banking and growing domestic retail banking activities.

Guido Versondert, Moody's lead analyst for Deutsche Bank, noted that: "Deutsche Bank has demonstrated its ability to identify, manage, exit and bear considerable risk at a time of great stress for financial institutions globally. Nonetheless, the bank has suffered significant valuation adjustments on leveraged finance and structured credit exposures in recent quarters, highlighting the risk management challenges in investment banking, where the bank was exposed to positions well in excess of those it has traditionally been willing to take in its banking book. In sum, however, Deutsche Bank has been able to bear these market, credit and liquidity risks on its own, without the need for external financial assistance."

David Fanger, a key member of Moody's analytical team, added: "Going forward, it will be important for Deutsche Bank to provide enhanced, more comprehensive transparency about exposures, risks and risk management practices in order to underpin its creditworthiness and current rating levels."

Were it not for its use of the IAS 39 look-back option, Deutsche Bank would have reported a small loss for the first nine months of 2009. However, even incorporating this small loss, Deutsche has outperformed many of its global bank peers, some of whom reported massive losses, suffered catastrophic risk management failures and misguided management actions. The bank has benefited from robust generation of cash revenues in all major business lines, including in Corporate Banking & Securities; has demonstrated flexibility to adjust its operating expenses; and has actively worked to decrease its exposures to critical asset classes. Nonetheless, Moody's cautioned that adverse market conditions have depressed the bank's recurring earnings power and profitability measures, albeit temporarily, thereby reducing its flexibility to absorb potential additional mark-downs on risky exposures, for instance to commercial real estate, leveraged finance or US financial guarantors.

Moody's expects the bank's financial results for 2008 and, possibly, 2009 to be weaker than those typically required for a B BFSR. However, it believes that -- across a broad range of stress scenarios -- Deutsche Bank should be able to protect and preserve its sound funding, liquidity, asset quality and capital measures, which would effectively mitigate the downward pressure on ratings. As market conditions improve, Deutsche Bank should be able to restore its operating efficiency and profitability relatively quickly.

Moody's cautioned that key to this are the strategic changes under way at the bank. Deutsche Bank's greater strategic emphasis on retail banking, with its more granular and annuity-like revenues and earnings streams, should have positive implications for the quality and predictability of its earnings in the medium term. In this context, the planned acquisition of Deutsche Postbank (rated Aa2/P-1/C+) represents an important, positive strategic step that not only adds significantly to Deutsche Bank's more stable earnings but also provides the bank with ample additional retail deposits, thereby strengthening further its well-diversified funding profile.

In Moody's opinion, the main drivers of future positive rating changes include: (i) a restoration of Deutsche Bank's revenue and earnings dynamics and associated efficiency and profitability measures to levels that fully support the B BFSR and Aa1 senior unsecured ratings, (ii) an improvement in the granularity of the firm's wholesale risk positions and a reduction in its sensitivity to swings in capital markets, (iii) success in achieving a better balance between comparatively stable businesses -- for example, retail and transaction banking, wealth and asset management -- and the more volatile and less predictable performance in investment banking, and (iv) greater transparency on its risks, positions and risk management practices.

Conversely, increased downward pressure on Deutsche Bank's ratings would most likely result from a combination of the following factors: (i) an inappropriate alignment of the bank's appetite for market or credit risks, e.g. for large concentration risks in leveraged finance, with its recurring capacity to bear such risks, (ii) a failure to provide greater transparency on risky exposures, (iii) weaker levels of economic or regulatory capitalisation, or the disproportionate use of low-quality hybrid capital securities to the detriment of retained earnings, and (iv) a persistent preponderance of investment banking in terms of revenues, earnings and allocated economic capital.

Moody's previous rating action on Deutsche Bank AG was on 11 May 2007, when the senior unsecured rating was raised to Aa1 and the BFSR to B.

The principal methodologies used in rating Deutsche Bank AG are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found on www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating Deutsche Bank AG can also be found in the Credit Policy & Methodologies directory.

Deutsche Bank AG is domiciled in Frankfurt, Germany. At the end of September 2008, it had total consolidated assets of EUR2,061 billion and equity of EUR36.6 million pursuant to IFRS. The group's Tier 1 ratio reached 10.3%. For the first nine months of 2008, Deutsche Bank reported consolidated pre-tax profits of EUR481 million and a net income of EUR918 million.

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Guido Versondert
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Deutsche Bank's ratings to negative
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