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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
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
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.
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
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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