Deutsche Bank (DB) Under Review for Downgrade by Moody's

The ratings of Deutsche Bank AG DB along with its subsidiaries have been kept under review for a possible downgrade by Moody's Investors Service, a rating arm of Moody's Corporation MCO. Moreover, the rating agency will review the German bank's long-term deposit rating of A2, senior unsecured debt rating of Baa1, standalone baseline credit assessment BCA of baa3 and counterparty risk assessment of A2(cr) along with short-term ratings and short-term counterparty risk assessment of Prime-1 and Prime-1(cr), respectively.

Rationale behind the Review

Consistent problems in the implementation of the moves to stabilize profitability over the next three years faced by Deutsche Bank are the main rationale behind the review for downgrade by Moody's. Following the weak capital markets operations' performance in the fourth quarter of 2015, Deutsche Bank gave dismal performances in the first two months of 2016 as well. "Deutsche Bank's diminished performance in the most recent two periods is a function of both environmental and firm-specific factors," said Peter Nerby, a Moody's Senior Vice-President.

"The beginning of 2016 has seen volatility in the world's financial markets," Cryan who succeeded co-CEO Anshu Jain last June and co-CEO Juergen Fitschen said in a note to Deutsche Bank's shareholders. He continued, "This has impacted the banking sector. The seasonally strong first quarter might turn out to be challenging for the sector overall. Deutsche Bank is no exception to this."

Cryan inherited the task of executing the bank's "Strategy 2020." Notably, Strategy 2020, which was unveiled in Apr 2015, contains several measures including initiatives to reposition Investment Banking, reorganize the retail business and trim down the geographic footprint, with the aim of achieving net savings of €1-1.5 billion by 2018.

According to Moody's, amid ongoing revenue and expense headwinds, achieving the target of cost-to-income ratio of about 70% for 2018 seems unachievable for Deutsche Bank. Moody's will review the bank's execution plans for 2016 and 2017 along with its adaptation of new technology.  Further, the bank's Additional Tier 1 securities (Ba3) will also be reviewed by Moody's to ensure interest payments on time.

Cryan is expediting efforts to revamp the bank. In a Jul 1 memo, Cryan emphasized the need to simplify the bank's business model, reduce costs and pull back unprofitable businesses. We believe that gradual execution of the restructuring moves should support the company's growth prospects. Notably, Cryan expects sorting out most of the legal issues by the second or third quarter of 2016. Moreover, strong capital and litigation reserve position along with its asset risk profile supports the bank's creditworthiness and caters to its financial flexibility.

Conclusion
 
The rating outlook is valuable for firms since these preserve investors' confidence in the stock and boost its creditworthiness in the market. However, a downgrade in the same lessens investors' confidence and reflects the company's weak financials.

Though the new CEO of Deutsche Bank appears proactive, it is really difficult to predict the extent to which the bank will benefit from his leadership, more so in the face of the current headwinds. Though Strategy 2020 is encouraging and we expect the initiative to improve operating efficiency, since the European economy is yet to stabilize, we do not foresee a favorable change in the near term.
 
Some well-placed foreign stocks include Grupo Financiero Galicia S.A. GGAL and Shinhan Financial Group Company Limited SHG.

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