Scope Ratings has today placed Deutsche Bank AG’s ratings on review for possible downgrade. These ratings, all currently with a Negative Outlook, are A- for senior unsecured debt, A Issuer Credit Strength Rating (ICSR), S-1 short-term rating, and BB for additional Tier 1 (AT1). This rating action follows the recent publication of Deutsche Bank’s second-quarter results, which highlight the bank’s ongoing difficulties to remain profitable while aiming to recalibrate its business model and financial characteristics. Particularly, the situation surrounding the sale of Postbank has become more uncertain for the time being and could result in further pressure on the bank’s plans to achieve a targeted fully loaded CET 1 ratio of 12.5% by 2018.

Scope recognises the positive impact of the changing management culture in Deutsche Bank towards increased cost awareness and faster decision-making processes. Also, the agency commented positively on the new top management team’s willingness to be publicly open about the several challenges along the way, which is invariably an essential first step towards successfully addressing them.

The rating review nevertheless reflects Scope’s view that Deutsche Bank’s business-model and financial recalibration, while already under way, may lead to less clear-cut outcomes in the short- to medium-term. Challenging market dynamics in Europe and beyond, which in the agency’s view are not going to improve materially any time soon, could raise hurdles for the timely execution of strategic decisions and could eventually lead to further adjustments of management’s restructuring plans. Furthermore, recent results indicate that the bank could already experience loss of market shares. Ongoing headline risk might also put strain on the bank’s franchise value.

Regarding the potential business-model recalibration of Deutsche Bank, Scope said that a relative redeployment into domestic banking and financial services would be a logical step for the group as it gradually descales global activities. This may however prove challenging given the excess capacity, low profitability and high competitiveness of the German banking sector in general.

Scope’s review will focus on the following areas of concern:

• The bank’s ability to pursue its organic capital formation
• Impact of a non-sale of Postbank within a short- to medium-term timeframe
• Revenue generation with a view on market share
• Review the bank’s leverage ratio targets in light of further deleveraging plans
• Management’s efforts to portray and communicate on a clear business strategy and model
• Governance concerns related to recent US stress tests, as well as still ongoing litigations

Scope expects its review to have one of the following possible outcomes:

• Confirmation of long-term ratings with their current Negative Outlook
• One-notch downgrade of long-term ratings (with a Stable or Negative Outlook)
• Two-notch downgrade of long-term ratings (with Stable or Negative Outlook) and one-notch downgrade of short-term ratings (with Stable Outlook)
• Wider notching down of AT1 rating (compared to senior unsecured debt rating)

While initiating the rating review, Scope Ratings pointed out that it continues to view Deutsche Bank as a significant player in its core markets – although desirably at a more reduced scale.

The following ratings are under review for possible downgrade:

• Senior unsecured debt ratings: A-
• Issuer Credit-Strength Rating (ICSR): A
• AT1 ratings: BB
• Short-term ratings: S-1

Regulatory Disclosures

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund and Dr. Sven Janssen.
The rating analysis has been prepared by Michaela Seimen Howat, Executive Director
Responsible for approving the rating: Sam Theodore, Managing Director.

Rating history for ICSR:
Date; Rating action; Rating
02.04.2014; First assignment; A-
20.05.2014; Outlook change - Positive; A-
30.04.2015; Outlook change - Stable; A-
15.04.2016; Outlook change – Negative; A-
09.06.2016; Upgrade; A
11.08.2016; Review for possible downgrade; A

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings without a mandate (unsolicited rating) and without participation of the issuer.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Website of the rated entity/issuer, Annual reports/quarterly reports of the rated entity/issuer, Current performance record, Detailed information provided on request, Data provided by external data providers, Interview with the rated entity, External market reports, Press reports / other public information,
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodologies applicable for this rating “Bank Rating Methodology” (May 2016) & “Bank Capital Instruments Rating Methodology” (May 2016) are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s credit rating, definitions of rating symbols and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability
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