Scope Ratings has today changed to Stable from Positive the Outlook for Deutsche Bank AG’s A- Issuer Credit Strength Rating (ICSR) and senior unsecured debt ratings following the announcement of the group’s Strategy 2020. The outlook on Deutsche Bank’s additional Tier 1 (AT1) securities was also moved to Stable from Positive (see details at the end of this press release). Deutsche Bank AG’s S-1 short-term ratings and their Stable Outlook were not changed.

Scope had raised the Outlook of Deutsche Bank’s long-term ratings to Positive from Stable on 20 May 2014 on the back of the bank’s EUR 8.5bn capital raising exercise. The agency said that one of the positive rating drivers underpinning Deutsche Bank’s A- rating since the first rating assignment had been the acquisition of Postbank between 2008 and 2010, which had increased the weight of retail in the bank’s revenue mix from around 20% in 2009 to around 30% in 2014. Scope notes that between 2012 and 2014, Postbank has accounted for about 11% of Deutsche Bank’s revenues (and 10% of the bank’s adjusted pre-tax profits as of Q1 2015). The agency believes that the deconsolidation of Postbank (with an IPO planned before YE 2016) is somewhat affecting the balance of the bank’s business mix and is also reducing the weight of retail deposits in the bank’s funding mix (from 26% to 18% on a pro-forma basis in 2014).

Scope added that Deutsche has the medium-term ambition of raising its Tier 1 leverage ratio to 5% (versus 3.4% reported as of Q1 2015), but the agency notes that this target is dependent on further deleveraging efforts that the group has estimated at EUR 200bn gross in the Corporate Banking & Securities (CB&S) division (EUR 130-150bn net of redeployment and reinvestment in the business). Scope welcomes the more conservative leverage ratio target but warns about the execution risks attached to this objective.

The rating agency also noted that Deutsche Bank’s Strategy 2020 aims at increasing the efficiency of the bank through another cost reduction program of EUR 3.5bn, representing a reduction of 15% of group-adjusted costs by 2020 – ultimately leading to a cost-income ratio target of 65%. This ambitious target is yet to be elaborated upon at product and divisional level (Deutsche has committed to a more detailed disclosure within the next 90 days).

At the same time, Scope pointed out that Deutsche Bank’s long-term ratings are well-anchored at A-, as reflected by the Stable Outlook, as the bank continues to display best-in-class performance in its investment bank and very reliable and strong risk management capabilities to support this performance. Deutsche can also rely on its Asset and Wealth Management business, now fully restructured and performing strongly.

Scope also notes that the performance of the bank in Q1 2015 was very strong, even if net profits were penalized by litigation expenses of EUR 1.5bn. We expect conduct risk to remain a major feature of the bank’s earnings in the near future and we continue to flag this as a negative rating driver.

The Outlook of the following ratings was changed:

- Issuer credit-strength rating (ICSR) of A-, Outlook changed to Stable from Positive (Deutsche Bank AG).
- Senior unsecured debt ratings of A-, Outlook changed to Stable from Positive (Deutsche Bank).
- AT1 securities ratings of BB, Outlook changed to Stable from Positive (Deutsche Bank AG).

Deutsche Bank AG’s S-1 short-term ratings and their Stable Outlooks were not changed.