Deutsche Bank Long-Term Rating Lowered To 'BBB+' On Elevated Strategy Execution Risks; Outlook Stable
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- On May 24, Deutsche Bank announced further details of its planned
multi-year restructuring, focusing notably on its U.S. equities sales and
trading business.
- We consider that management is taking tough actions to cut the cost base
and refocus the business in order to address the bank's currently weak
profitability.
- However, we see significant execution risks in the delivery of the
updated strategy amid a continued unhelpful market backdrop, and we think
that, relative to peers, Deutsche Bank will remain a negative outlier for
some time.
- We are lowering to 'BBB+' from 'A-' our long-term issuer credit rating on
Deutsche Bank and its core operating subsidiaries.
- We are affirming our ratings on Deutsche Bank's subordinated debt issues,
including our 'BBB-' rating on its senior subordinated (also known as
senior non-preferred) instruments.
- The stable outlook reflects our view that management will execute its
strategy in earnest and, over time, will show progress against its 2019
financial objectives and so achieve its longer-term objective of a more
stable and better-functioning business model. Our central scenario
assumes that cost-cutting measures will be tailored and targeted enough
to preserve the bank's capital markets franchise, in particular in
Europe, and avoid substantial revenue loss.
LONDON (S&P Global Ratings) June 1, 2018--S&P Global Ratings today lowered its
long-term issuer credit ratings (ICR) on Deutsche Bank AG and its core
subsidiaries to 'BBB+' from 'A-'. The outlook is stable.
We removed the ratings from CreditWatch negative.
At the same time, we affirmed our 'A-2' short-term ICRs and our 'trAAA/A-1'
Turkish national scale ratings on Deutsche Bank. We also affirmed our issue
credit ratings on all the hybrid instruments issued or guaranteed by the bank,
including our 'BBB-' rating on the bank's senior subordinated debt
instruments.
The lowering of our long-term issuer credit rating reflects that Deutsche
Bank's updated strategy envisages a deeper restructuring of the business model
than we previously expected, with associated non-negligible execution risks.
While we consider management is taking tough, although likely inevitable,
actions and proposes a logical strategy to successfully restore the bank to
more solid, sustainable profitability over the medium to long term, the bank
appears set for a period of sustained underperformance compared with peers,
many of whom have now finished restructuring. Over the coming 18 months, we
will look in particular for robust delivery against 2019 objectives, such as
the €22 billion cost target, and evidence that the bank retains the solid
support of its clients, something that would help underpin the revenue base in
the CIB division amid a period of downsizing. While we regard capital markets
earnings as inherently more volatile than retail and commercial banking, we
consider a well-balanced blend of profitable businesses to be supportive of
the bank's creditworthiness. Therefore the bank's ability to preserve its
global capital markets franchise, focused in particular on Europe, underpins
our stable outlook.
Our removal of the CreditWatch follows a three-month period during which
Deutsche Bank has been under intense scrutiny, which culminated in it parting
company with former CEO John Cryan (on April 8). Then, new CEO Christian
Sewing delivered a high-level communication of the updated strategy on April
26, with further elaboration on May 24, and ultimately won shareholder support
for that strategy at the annual general meeting the same day. This is the
latest iteration in the bank's longer-term restructuring story that started
under John Cryan in 2015 and which has already yielded some key actions to
strengthen the bank. This includes the rundown and divestment of noncore
assets and businesses, a substantial capital raising, and an operational
overhaul to reduce complexity and control risk and improve efficiency. The
gradual resolution of outstanding litigations has reduced some earnings-event
risk, but so far management has not delivered any marked upturn in financial
performance, which remains burdened by a high cost base.
By 2021, the bank targets a sustainable revenue share of approximately 50%
from the Private & Commercial Bank and the DWS asset management business.
Adding the revenues of Global Transaction Banking, the share of more stable
revenues would be around 65%, which we view positively, especially compared
with Deutsche Bank's historical earnings dependence on more volatile markets
businesses. Likely coinciding with this, management targets a post-tax return
on tangible equity (ROTE) of about 10% in a normalized operating
environment--that is, assuming a modest rise in central bank base interest
rates and moderately higher market volatility and activity after the nadir of
2017. Aside from one-off restructuring costs of up to €800 million in 2018,
the Management Board has committed to keep the adjusted cost base at €23
billion for 2018 and bring it to €22 billion by 2019. The execution of the
strategy notably includes:
Comunque è senz'altro un bel posto, ma anche qui nell'Italia bolscevica ci sono dei luoghi di mare mica male (conosci Positano?).
