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Fitch Maintains Deutsche Bank's Ratings on Watch Negative
December 13, 2016 / 9:49 PM / 8 months ago

Fitch Maintains Deutsche Bank's Ratings on Watch Negative

(The following statement was released by the rating agency) LONDON, December 13 (Fitch) Fitch Ratings is maintaining Deutsche Bank AG's ratings, including the 'A-' Long-Term Issuer Default Rating (IDR), 'F1' Short Term IDR and 'a-' Viability Rating (VR), on Rating Watch Negative (RWN). Fitch expects to resolve the RWN at the latest after the bank's 1Q17 earnings are published. The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Bank (GTUB), which comprises 12 large and globally active banking groups. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRs, VR, DCR, DEPOSIT AND SENIOR DEBT RATINGS The RWN reflects our view that the challenges posed by a sluggish business environment, particularly in Europe but also in Asia Pacific, will make it harder for Deutsche Bank to build revenue and, therefore, capital during 2017 in line with its 2020 strategy. At the same time, vulnerable customer sentiment and staff morale during the restructuring phase, and prolonged negative publicity around the bank's litigation risk, are making it more difficult for Deutsche Bank to compete effectively against peers, which have less restructuring to do to adapt business models and improve efficiency, or have made more progress in resolving legacy litigation. Deutsche Bank's business model is more focused on capital markets businesses than those of the other Europe-based GTUBs, which makes the bank more sensitive to the business environment. Deutsche Bank has made good progress at implementing an ambitious, intensive restructuring programme. This is demonstrated by agreed or completed business disposals, progress in running down the Non-Core Operating Unit (NCOU) to EUR18bn risk-weighted assets (RWAs) at end-9M16, and further to below EUR10bn by year-end, and agreements with the works council over reducing staff in Germany. Deleveraging has allowed the bank to maintain acceptable leverage and CET1 ratios (end-September 2016: 3.5% and 11.1% respectively, both on a fully loaded basis), although the stock of CET1 capital has declined. Completion of the sale of Hua Xia Bank, which was approved by the Chinese regulators, should add around 10 and 50 basis points to the leverage and CET1 ratios, respectively, according to the bank's pro-forma calculations. As the bulk of restructuring expenses is front-loaded, earnings are likely to remain weaker than peers' for 2016 as a whole. Improvements should be visible from 1Q17, as the benefits of cost-cutting efforts feed through and earnings are less distorted by losses related to deleveraging. Management indicated that net income for 2016 could be negative, depending on the timing and amount of litigation and misconduct charges. Maintaining the corporate and capital markets franchises is paramount for Deutsche Bank's ratings. Performance in 9M16 has been weaker than in the past and market shares in some capital markets businesses have declined. This decline partly relates to the strength and improvement of US fixed income versus sluggishness in Europe. It also reflects Deutsche Bank's decision to exit some markets, such as US securitisation trading, which performed well in 3Q16. However, we expect some franchise erosion this year from the bank's focus on restructuring, coupled with headline "noise" around the DoJ settlement. We expect European capital markets to remain challenging well into 2017, which will make it even more important for Deutsche Bank to demonstrate its franchise strength. The private banking, wealth and asset management businesses are smaller contributors to earnings. Deutsche Bank plans to spin off its domestic retail banking subsidiary, Deutsche Postbank (BBB+/Stable), which will boost its CET1 and especially its leverage targets. However, although the bank has been separated from the rest of the business operationally, the sale may be delayed because of unfavourable market pricing. Deutsche Bank's Short-Term IDR and short-term debt rating of 'F1', the higher of the two Short-Term IDRs that map to an 'A-' Long-Term IDR on our rating scale, reflect our view of a solid liquidity profile, ample liquidity reserves and a funding profile that is well-diversified by geography, product and customer base. However, the cost of wholesale funding has increased in 2016 and the bank has experienced some, but not substantial, deposit outflows related to the negative publicity around its DoJ settlement. The short-term ratings are on RWN because a downgrade of the Long-Term IDR to 'BBB+' would map to a Short-Term IDR of 'F2'. Deutsche Bank AG's DCR, deposit rating and senior market-linked notes are rated one notch above the IDR because derivatives and deposits will have preferential status over the bank's large buffer of qualifying junior debt and statutorily subordinated senior debt from 1 January 2017. KEY RATING DRIVERS - 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. 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 these securities are calculated annually under German GAAP for the parent bank. ADIs at end-2015 were EUR1.09bn and Deutsche Bank paid an AT1 coupon in April 2016. We understand from the bank that its coupon distribution capacity for 2017 can benefit from EUR1.9bn remaining German GAAP reserves and a EUR1.6bn pro-forma positive effect from the Hua Xia Bank sale. Conversely, a settlement on outstanding litigation could trigger impairment of goodwill at the parent bank, which would negatively impact ADIs. However, we believe that management has sufficient flexibility to ensure that AT1 coupons will remain current for the foreseeable future. Non-payment of Deutsche Bank's AT1 coupon would also be triggered if the bank breaches its Maximum Distributable Amount (MDA) requirement, which in 2016 refers to the 10.76% combined CET1 and buffers requirement, including the Pillar 2 add-on resulting from the ECB's Supervisory Review and Evaluation Process (SREP). Deutsche Bank had a 184bp CET1 ratio buffer over this threshold at end-9M16. We expect the MDA threshold to fall in 2017, so the buffer of capital held above this will increase. The increased buffer will result from a recent change to how SREP is set for EU banks, which splits the Pillar 2 amount between a binding requirement and non-binding guidance, and the guidance part is excluded from the MDA. This benefit will to some extent be counterbalanced by a decreasing buffer resulting from the bank's declining transitional CET1 ratio as it moves through the transitional phases until 2019 and from the increasing required GSIB add-on. The net effect of these moving parts will depend on the new Pillar 2 requirement for the bank set by the ECB, which we expect Deutsche Bank to disclose at the latest with its end-2016 results. We expect the bank to maintain a comfortable buffer above the ECB's MDA threshold. RATING SENSITIVITIES IDRs, VR, DCR, DEPOSIT AND SENIOR DEBT RATINGS The RWN signals our view that Deutsche Bank's IDRs, VR and senior debt ratings will be downgraded if one of the following occurs: significant revenue reduction in 4Q16; failure to achieve sufficient improvement in underlying earnings in 1Q17 to demonstrate a competitive position and ability to build capital to required levels; incremental litigation and misconduct settlement charges that cannot be easily absorbed by underlying earnings. The IDRs would most likely be downgraded by one notch to 'BBB+'/'F2' and VR to 'bbb+', the DCR to 'A-(dcr)', deposit ratings to 'A-'/'F2' and senior market-linked securities to 'A-'. However, more severe downgrades could occur if the bank's performance worsens materially beyond expectations or litigation and regulatory charges are substantially more than provision levels and earnings capacity. 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. SUBSIDIARY AND AFFILIATED COMPANIES The RWN on Deutsche Bank subsidiaries' ratings reflect the RWN on the parent bank's ratings and the ratings would move in line with Deutsche Bank's. The SRs would be downgraded to '2' from '1' if the parent's ratings are downgraded, reflecting a weakened ability to support. They are further sensitive to changes in our assumptions around the propensity of Deutsche Bank to provide timely support. SUPPORT RATING AND SUPPORT RATING FLOOR 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 its banks. 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 the MDA buffer tightens considerably as a result of a heightened Pillar 2 binding requirement or CET1 erosion from losses. The latter would also likely reduce ADI. The rating actions are as follows: Deutsche Bank AG Long-Term IDR of 'A-' maintained on RWN Short-Term IDR of 'F1' maintained on RWN Viability Rating of 'a-' maintained on RWN Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: 'A(dcr)' maintained on RWN Deposit ratings: 'A'/'F1' maintained on RWN Senior debt, including programme, ratings: 'A-'/'F1' maintained on RWN Senior market-linked securities: 'A-(emr)'/'F1(emr)' maintained on RWN Subordinated market-linked securities: 'BBB+(emr)' maintained on RWN Subordinated Lower Tier II debt: 'BBB+' maintained on RWN Additional Tier 1 notes: 'BB' maintained on RWN Deutsche Bank Securities Long-Term IDR of 'A-' maintained on RWN Short-Term IDR of 'F1' maintained on RWN Support Rating of '1' maintained on RWN Derivative Counterparty Rating of 'A-(dcr)' maintained on RWN Deutsche Bank Trust Company Americas Long-Term IDR of 'A-' maintained on RWN Short-Term IDR of 'F1' maintained on RWN Support Rating of '1' maintained on RWN Senior debt, including programme, ratings of 'F1' maintained on RWN Deutsche Bank Trust Corporation Long-Term IDR of 'A-' maintained on RWN Short-Term IDR of 'F1' maintained on RWN Support Rating of '1' maintained on RWN Senior debt, including programme, ratings of 'A-'/'F1' maintained on RWN Deutsche Bank Australia Ltd. Commercial paper short-term rating of 'F1' maintained on RWN Deutsche Bank Financial LLC Short-Term IDR of 'F1' maintained on RWN Commercial paper short-term rating of 'F1' maintained on RWN Deutsche Bank Contingent Capital Trust II preferred securities rating of 'BB+' maintained on RWN Deutsche Bank Contingent Capital Trust III preferred securities rating of 'BB+' maintained on RWN Deutsche Bank Contingent Capital Trust IV preferred securities rating of 'BB+' maintained on RWN Deutsche Bank Contingent Capital Trust V preferred securities rating of 'BB+' maintained on 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 Analyst +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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