Deutsche Bank Faces Headwinds from US-Based Credit Ratings Agency…….

Moody’s Investors Service – the US-based credit ratings agency officially slashed Deutsche Bank’s debt rating to Baa2, from Baa1. This marks the second such cut for Deutsche Bank by Moody’s in 2016. The reason for the credit cut is linked to what Moody’s perceives to be increased challenges within Deutsche Bank’s turnaround strategy. At its current level of Baa2, Deutsche Bank’s unsecured senior debt is essentially 2 rungs above junk status rating. Of equal importance was the downgrade to Deutsche Bank long-term deposit rating to A3 from A2. In late 2015, Deutsche Bank embarked upon a 5-year strategic plan which was geared towards increasing profitability and the company’s capital position. This was brought about by several years of lacklustre performance, and exorbitant legal costs faced by the bank. According to the strategic blueprint, Deutsche Bank is committed to exiting multiple countries, cutting 9,000 positions, as well as reducing nonessential costs and underperforming business assets.

Moody’s is of the opinion that until such time as substantive progress has been made by Deutsche Bank in achieving strategic objectives, the risk profile would remain in effect. Moody’s Investors Service is seeking conservative leverage at Deutsche Bank, balanced earnings and a stable outlook. The ratings cut was announced on Monday, May 23, and it is significant as Deutsche Bank AG is one of the major players in the European capital markets. The ratings cut will impact not only Deutsche Bank AG but also all of its affiliates. These include its standalone baseline credit assessment, otherwise known as BCA which gets the chop from baa3 to ba1. Additionally, Deutsche Bank AG’s counterparty risk assessment will get cut from A2(cr) to A3(cr).Moody’s Investors Service also moved swiftly to downgrade Deutsche Bank Trust Corporation (a US-based entity) as well as its trust company affiliates. Their long-term credit ratings received a downgrade score of A2, from a prior rating of A1. Deutsche Bank AG has a 5-year strategic plan which Moody’s Investors Service perceives as stable off to the downgrades. Provided the plan can be put into effect through 2020, and the bank is able to retain liquidity levels and preserve its capital assets, the restructuring will likely go off unhindered.