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Deutsche Bank (DB) Ratings Lifted by Fitch, Outlook Retained

Deutsche Bank's (DB) ratings have been upgraded by Fitch Ratings on success of its restructuring plans, sound business model, strong asset quality and...

This story originally appeared on Zacks

Deutsche Bank’s DB credit ratings have been upgraded by a notch by Fitch Ratings. The company’s long-term issuer default rating (IDR) has been bumped up to BBB+ from BBB. Moreover, the rating agency retains its positive outlook.

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The bank’s efforts to successfully execute its transformation program support the upgrade of the credit profile. Also, the upgrade reflects the company’s progress trajectory and increasingly manageable challenges arising from the restructuring commenced in 2019. The rating agency expects the progress on its transformation to continue in the second half of 2021 and 2022 as well.

However, the German banking sector’s structural deficiencies are expected to prevail and complicate the bank’s efforts in driving profitability of its domestic corporate bank (CB) and private bank (PB) units.

The positive outlook on the company’s profile score highlights the potential to further strengthen its market shares in the investment bank (IB) unit and boost the weak cost/income ratio of the domestic operations.

Rating Upgrade Rationale

Deutsche Bank has a fortified business model, sound asset quality, ample funding and liquidity and sufficient capitalization. Per Fitch, significant revenue improvement and franchise stabilization at the IB unit have also aided in this upgrade.

Christian Sewing, the CEO of Deutsche Bank, remarked, “This is well-deserved recognition for the efforts of our people, who are delivering a historic transformation of Deutsche Bank in challenging conditions. The right business model, a strong client franchise, conservative balance sheet management and a strong risk profile have all contributed to this result. We appreciate Fitch’s confidence that we will now complete our transformation successfully.”

Deutsche Bank has attested a good history of managing credit risk, a fairly controlled market risk appetite despite its large trading operations, and moderate penchant for growth. While it still lags behind peers’ non-financial risk controls, large multi-year investments, tight inspection from relevant regulators as well as consistent management focus on bolstering the anti-financial crime controls have facilitated significant improvements in the past few quarters. Litigation costs are reducing, and the bank encounters fewer demands from regulators for corrective measures than a few years ago.

The German lender’s profitability is enhancing but its four-year average operating return on risk-weighted assets (RWAs) is much weaker than the global trading and universal banks (GTUB) peers’ and weighs on its ratings. However, the bank’s profitability has been upgraded since the operating return/RWA is expected to be close to 1% in 2021 and 1.5% in 2022.

The positive outlook also portrays the rating agency’s anticipation that the majority of revenues and cost measures will feed through the bank’s income statement by 2023. However, both the CB and PB units will continue to press significantly on the group's profitability in the short term.

The progress in executing Deutsche Bank's restructuring is also underpinned by management and strategic stability over the past two years, both at the group level and in the most confidence-sensitive IB and CB divisions.

According to Fitch, by the end of 2021, Deutsche Bank is likely to have executed about 70% of the cost reduction targeted by its restructuring plan by the end of 2022, with only moderate net restructuring charges to be slated in 2022. Through further staff reduction, real-estate disposals post-pandemic and streamlined processes, the bank should be able to ward off volume-driven incremental costs and the implementation of anti-financial crime controls.

The rating strength also highlights the resilience in the bank’s loan quality throughout the pandemic.

Its Common Equity Tier (CET) 1 ratio offers ample allowance over management's 12.5% floor to contain an expected 20 basis point (bps) impact from further regulatory RWA inflation in second half of 2021, as well as unexpected adverse earnings developments or RWA volatility. The bank has sustained a solid and higher-than-expected CET1 ratio through the pandemic. The 270-basis point buffer over the total capital requirement (currently the most stifling) at end of the first half of 2021 gives sufficient capacity over distribution-relevant needs.

What Can Trigger an Upward/Downward Move?

The ratings can be upgraded if Fitch is of the opinion that Deutsche Bank could durably bolster its franchise and business model, avoid revenue erosion at the core bank, and retrieve its lost ground relative to its GTUB peers in the IB segment in the second half of 2021 and 2022.

Beside achieving management's restructuring targets in 2022, the bank’s operating profit/RWA of close to 1.5% in 2022, and sustainably keeping the CET1 and leverage ratios of at least 12.5% and 4.5%, respectively, will lead to higher ratings.

An outlook downgrade can occur if the bank fails to move toward its cost-reduction milestones, or if it significantly misses its revenue targets for the key business lines, or if an evidence of franchise erosion in core businesses relative to peers is observed by the agency.

The rating pressure would also arise if economic impediments dampen adequate profits in the medium term, potentially eroding the CET1 ratio materially below 12.5% without any prospects for recovery in sight.

Shares of Deutsche Bank have gained 6.3% on the NYSE over the past six months, outperforming 2.7% growth recorded by the industry.

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Currently, the stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ratings on Other Finance Stocks

Some of the other finance stocks whose ratings/outlook have been reviewed are discussed below.

Ally Financial Inc.’s ALLY issuer as well as senior long-term unsecured ratings have been upgraded to Baa3 from Ba1 by Moody’s Investors Service. The rating agency had placed the company’s ratings under review for upgrade in May.

In April, Moody's Investors Service had lowered the outlook of both Credit Suisse Group AG CS and Nomura Holdings, Inc. NMR to negative from stable. The rating agency took this action as a result of potential deficiencies in the companies’ risk management processes.

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Credit Suisse Group (CS): Free Stock Analysis Report


Deutsche Bank Aktiengesellschaft (DB): Free Stock Analysis Report


Nomura Holdings Inc ADR (NMR): Free Stock Analysis Report


Ally Financial Inc. (ALLY): Free Stock Analysis Report


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