March 13, 2017 / 4:25 PM / 4 months ago

Fitch Affirms Deutsche Bank at 'A-', Outlook Negative

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(The following statement was released by the rating agency) LONDON, March 13 (Fitch) Fitch Ratings has affirmed Deutsche Bank AG's ratings and removed them from Rating Watch Negative (RWN) , including the 'A-' Long-Term Issuer Default Rating (IDR), 'F1' Short-Term IDR and 'a-' Viability Rating (VR). The Outlook on the Long-Term IDR is Negative. A full list of rating actions on the bank and its affected subsidiaries is at the end of this rating action commentary. The rating actions follow the EUR8 billion capital raising and revised strategy, including the retention of Deutsche Postbank (Postbank), announced on 5 March. KEY RATING DRIVERS IDRS, VR. DCR DEPOSIT AND SENIOR DEBT The removal from RWN and affirmation of the ratings reflect our expectation of significantly improved capitalisation following completion of the rights issue in early April and strategic reorientation towards a more balanced universal banking business model. However, the Negative Outlook reflects that the ratings will be downgraded if we believe that the franchise weakening in 2016 has not been reversed. This would be signalled, for example, by lower revenue or loss of market share. Execution of the new strategic plan without any notable setbacks will also be key to maintaining the ratings. The capital raising will initially bring the fully loaded end-2016 pro-forma Common Equity Tier 1 (CET1) ratio to 14.1% on a risk-weighted basis and the leverage ratio to 4.1%, with management targeting to maintain the CET1 ratio "comfortably above" 13% and achieve a leverage ratio of 4.5% thereafter. The bank has also announced the intention to IPO a minority stake in its asset management division over the next two years, as well as further asset disposals, which add flexibility to generate a further EUR2 billion capital. The targeted business model should be able to draw from the bank's franchise strengths of a solid German private and corporate customer base extended to global corporate banking and debt capital markets solutions. Earnings will remain a weakness in comparison with most other large global banking groups, but Fitch believes that downside risk has substantially reduced. Management has successfully lowered the bank's operating cost burden and plans further efficiencies, but the revised strategy will carry substantial restructuring costs, most of which will be frontloaded over the next two years. The target of a post-tax return on tangible equity (RoTE) of around 10% "in a normalised operating environment" will be challenging. However, we believe it will be achievable in the medium term if the strategy is executed fully and franchise with large global corporates, which has been less in focus in recent years, is regained. In the meantime, lower earnings can be sufficient at the rating level given management's commitment to maintaining a higher capital buffer and our expectation that the reshaped business model will improve earnings stability. A normalised operating environment means an at least moderately higher and steepened euro yield curve, which management expects will materialise in the next year or so, following the US. This will improve earnings potential from Deutsche Bank's large deposit base, especially in its corporate transaction banking business and Postbank. Low RoTE from Postbank had been a key reason for previous plans to sell the bank, but can be partly combatted by the regulatory rein-back on leverage requirements, favouring risk-based capitalisation for European banks. Postbank's future earnings should also gain from positive momentum towards digital banking in Germany, where management is optimistic it can benefit from economies of scale. Revenue in 2016 suffered from a combination of management focus on cost reduction and restructuring and from some client withdrawals relating to market noise in 4Q16 around the RMBS settlement with the US Department of Justice (DoJ) and Russian money laundering trades. Management has said that revenue lost from negative sentiment around these events was "a good EUR1 billion", and that many, but not all, clients that left returned in 1Q17, both in prime services and asset management. RoTE should also improve as legacy long-dated fixed income assets, which now absorb higher capitalisation requirements than when they were initiated, run off. We expect the capital released from these to be redeployed primarily in corporate banking. The bank's renewed focus on business growth in its core global corporate segment should enable it to better compete with other European-based global players, which have been able to gain more momentum than Deutsche Bank in the past one to two years. Despite notable widening of spreads on unsecured market-based funding in 2016 and some institutional deposit outflow in 4Q16, we believe that Deutsche Bank retains strong, well-diversified funding by geography, product and customer, and maintains ample liquidity. To reflect this, its Short-Term IDR and short-term debt rating have been affirmed at 'F1', the higher of the two Short-Term IDRs that map to a 'A-' Long-Term IDR on our rating scale. The retention of Postbank's strong domestic deposit franchise will support group funding if it can be made fungible around the group over time. Deutsche Bank AG's DCR, deposit rating and senior market-linked notes are rated one notch above the IDR because derivatives and deposits have preferential status over the bank's large buffer of qualifying junior debt and statutorily subordinated senior debt. SUBSIDIARIES' IDRs AND SENIOR DEBT The IDRs and debt ratings of Deutsche Bank's rated subsidiaries in the US and Australia are equalised with Deutsche Bank's to reflect their core roles within the group, especially Deutsche Bank's capital markets activities, and their high integration with the parent bank or their role as issuing vehicles. Deutsche Bank Financial LLC's Short-Term IDR and commercial paper programme rating have been withdrawn because the entity has ceased to exist. SUPPORT RATING AND SUPPORT RATING FLOOR Deutsche Bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect our view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that it becomes non-viable. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital instruments issued by Deutsche Bank and its subsidiaries are all notched down from Deutsche Bank's VR in accordance with our assessment of each instrument's respective non-performance and relative loss severity risk profiles. Legacy Tier 1 securities are rated four notches below the VR, reflecting higher-than-average loss severity (two notches), as well as high risk of non-performance (an additional two notches) given partial discretionary coupon omission. High and low trigger contingent additional capital Tier 1 (AT1) instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be converted to equity or written down well ahead of resolution. In addition, they are notched down three times for high non-performance risk, reflecting fully discretionary coupon omission. Available Distributable Items (ADIs) referenced for AT1 securities are calculated annually under German GAAP for the parent bank and reference primarily cumulative retained earnings. Management announced on Sunday that the Management Board had approved payment of AT1 coupons coming due in 2017. Non-payment of AT1 coupon would also be triggered by any breach of the bank's maximum distributable amount (MDA) requirement, which stands at 9.51% for 2017, combining CET1 and the Pillar 2 add-on requirement resulting from the ECB's Supervisory Review and Evaluation Process (SREP). Even before the capital raising, Deutsche Bank has a substantial buffer above this threshold. RATING SENSITIVITIES IDRs, VR, DCR, DEPOSIT AND SENIOR DEBT RATINGS Failure to complete the rights issue substantially in April would be a significant negative rating driver, as in addition to the capital deficit, it would signal the market's lack of confidence in management and the bank. Consequently, it would likely result in a downgrade of more than one notch. Assuming successful completion of the rights issue, the ratings will be sensitive to the bank's ability to regain market share in its targeted sales and trading operations and grow its revenue line. It will also need to demonstrate successful execution of the new strategic plan during the next few years, particularly of the Postbank integration. Any notable setbacks, including for example unforeseen costs or failure to fully integrate Postbank, would be negative rating drivers. Failure to retain capitalisation on target for example due to any large litigation or conduct costs would also be negative. Successful transformation of the business model in line with strategy and achievement of higher, more balanced and stable earnings over time could bring positive rating momentum. However, we do not envisage such a scenario within our two-year Outlook horizon. Deutsche Bank's DCRs, deposit and debt ratings are primarily sensitive to changes in the Long-Term IDR. In addition, Deutsche Bank's DCRs, deposit rating and ratings of the senior structured notes with embedded market risk are also sensitive to the amount of subordinated and senior vanilla debt buffers relative to the recapitalisation amount likely to be needed to restore viability and prevent default on more senior derivative obligations, deposits and structured notes with embedded market risk. SUBSIDIARIES' IDRs AND SENIOR DEBT Deutsche Bank's subsidiaries' ratings reflect the parent bank's and the ratings would move in line with Deutsche Bank's. They are further sensitive to changes in our assumptions around the propensity of Deutsche Bank to provide timely support. SR AND SRF An upgrade of Deutsche Bank's SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support banks' senior creditors in full. While not impossible, this is highly unlikely, in our view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid securities are primarily sensitive to a change in Deutsche Bank's VR. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the respective issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. For AT1 instruments, non-performance risk could increase and the instruments notched further from the VR if available distributable items reduce significantly or if the MDA buffer tightens considerably as a result of a heightened Pillar 2 binding requirement or CET1 erosion from losses. The rating actions are as follows: Deutsche Bank AG Long-Term IDR affirmed at 'A-' removed from RWN, Outlook Negative Short-Term IDR affirmed at 'F1' removed from RWN Viability Rating affirmed at 'a-' removed from RWN Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: affirmed at 'A(dcr)' removed from RWN Deposit ratings: affirmed at 'A'/'F1' removed from RWN Senior debt, including programme, ratings: affirmed at 'A-'/'F1' removed from RWN Senior market-linked securities: affirmed at 'A(emr)'/'F1(emr)' removed from RWN Subordinated market-linked securities: affirmed at 'BBB+(emr)' removed from RWN Subordinated Lower Tier II debt: affirmed at 'BBB+' removed from RWN Additional Tier 1 notes: affirmed at 'BB' removed from RWN Deutsche Bank Securities Long-Term IDR affirmed at 'A-' removed from RWN, Outlook Negative Short-Term IDR affirmed at 'F1' removed from RWN Support Rating affirmed at '1' removed from RWN Derivative Counterparty Rating affirmed at 'A-(dcr)' removed from RWN Deutsche Bank Trust Company Americas Long-Term IDR affirmed at 'A-' removed from RWN, Outlook Negative Short-Term IDR affirmed at 'F1' removed from RWN Support Rating affirmed at '1' removed from RWN Senior debt ratings affirmed at 'F1' removed from RWN Deutsche Bank Trust Corporation Long-Term IDR affirmed at 'A-' removed from RWN, Outlook Negative Short-Term IDR affirmed at 'F1' removed from RWN Support Rating affirmed at '1' removed from RWN Senior programme ratings affirmed at 'A-'/'F1' removed from RWN Deutsche Bank Australia Ltd. Commercial paper short-term rating affirmed at 'F1' removed from RWN Deutsche Bank Financial LLC Short-Term IDR affirmed at 'F1', removed from RWN and withdrawn Commercial paper short-term rating affirmed at 'F1' removed from RWN and withdrawn Deutsche Bank Contingent Capital Trust II preferred securities rating affirmed at 'BB+' removed from RWN Deutsche Bank Contingent Capital Trust III preferred securities rating affirmed at 'BB+' removed from RWN Deutsche Bank Contingent Capital Trust IV preferred securities rating affirmed at 'BB+' removed from RWN Deutsche Bank Contingent Capital Trust V preferred securities rating affirmed at 'BB+' removed from RWN Contact: Primary Analyst Bridget Gandy Managing Director +44 20 3530 1095 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ioana Sima Associate Director +44 20 3530 1736 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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