Downgrade Risk Deutsche Bank’s Rating in Danger Again

There’s more bad news for Deutsche Bank. It could face another ratings downgrade, and with markets in the doldrums, its restructuring is proving harder than expected.
John Cryan, Deutsche's co-chief executive, has had a tough start to the job.

Rating agency Moody's is concerned about the future of Deutsche Bank, and its fears were confirmed by reports on Tuesday that the restructuring is not progressing according to plan. The bank’s share price fell 2.5 percent, making it the worst performer in the DAX index of 30 blue-chip stocks on Tuesday.

Ever since last week, when co-chief executive, John Cryan, gave a gloomy business outlook and said he did not expect to make a profit this year, investors have become more pessimistic again. The share price, which had clawed back some ground after the dramatic slump in the first weeks of 2016, began to slip again.

To make matters worse, Moody's is now warning of a possible further downgrade of Deutsche Bank’s credit rating, saying it had placed the bank on review for a possible further cut. “Since the change of management last June and the recalibration of its strategic plan, the operative environment has deteriorated for Deutsche Bank,” Moody's announced in a statement late on Monday.

The headwind the bank is facing in terms of costs and earnings could delay the bank’s plan to boost profitability and to reach its goal of a 70 percent cost ratio by 2018, the agency added.

In the banking sector, the two first months of this year were the worst January and February I have ever experienced. Marcus Schenck, Deutsche Bank CFO

Moody's grading of Deutsche Bank's unsecured senior bonds at “Baa1” is three levels above junk category. And its long-term deposit rating of “A2” is just two levels higher.  That makes Deutsche Bank as creditworthy as Commerzbank, Germany’s second-largest bank.

Moody's said a potential downgrade to Deutsche’s Baa1 senior debt and A2 deposit ratings would be limited to one notch.

The agency is also checking the creditworthiness of high-risk so-called contingent convertible bonds, also known as CoCo bonds, to see whether the growing challenges facing Deutsche might force the bank to suspend coupon payments on the bonds.

Fears about this had arisen at the start of the year, prompting the bank to stress that it was willing and able to pay the coupons. Nevertheless, the agency Standard & Poor’s reacted at the time by downgrading its rating one notch.

Moody’s is at pains to avoid spreading panic and declared “despite short-term challenges the general solvency and liquidity profiles of the bank support its creditworthiness and flexibility to adjust the plan to changed market conditions." It added that the bank was profiting from a solid capital base and access to liquid funds, including the provisions needed for legal costs.

At the same time, lower ratings make refinancing more expensive for Deutsche Bank.  The banks's chief financial officer, Marcus Schenck, said in an interview published in financial newspaper Börsen-Zeitung on Tuesday that the bank needed to climb back to “A” ratings again in the longer term.

Mr. Schenk also indicated that Moody's concerns were justified. He  conceded that the bank’s restructuring was faltering and that the downturn in capital markets had hit the bank hard. “In the banking sector, the two first months of this year were the worst January and February I have ever experienced,” said Mr. Schenck. “Of course that has also taken its toll on us.”

All business activities linked to capital markets were affected, such as trading and asset management. “We have a clear decline compared with last year there,” he said.

Investor caution had also prevented the bank from slimming down its balance sheet, he added. “In the market environment of the first two months of this year we saw that it just was not possible to implement certain transactions and bring them to a satisfactory conclusion for us.”

A sale or a stock exchange listing of retail banking unit Postbank would probably not be realistic this year, Mr. Schenck said.  “It is more likely to be 2017.  We would have to make such price concessions that selling it in today’s market environment would not make sense.”

He said no further writedowns were planned for Postbank this year. Some investors had already shown an interest in the bank, he said, adding that it was fewer than 20.

 

Laura de la Motte covers the banking sector in Frankfurt. To contact her: [email protected]