Scope Ratings has today downgraded Deutsche Bank AG’s Issuer Credit Strength Rating (ICSR) to A- from A and the senior unsecured debt rating to BBB+ from A-, following the completion of its review for possible downgrade initiated on 11 August 2016. Ratings on the bank’s Additional Tier 1 (AT1) securities were also downgraded to B+ from BB, incorporating a one-notch additional gap for the bank’s AT1 securities with a total differentiation of six notches from the level of the senior unsecured rating. Deutsche Bank’s short-term ratings have been confirmed at S-1. The Negative Outlook, which has been in place for some time, continues for all ratings.

The rating action reflects Scope’s belief that the bank’s current restructuring efforts and recalibration of its business model will continue in the short- to medium-term to put strains on Deutsche Bank’s profitability. Scope has noted in the past the growing degree of uncertainty regarding the desired sale of Postbank, which, in addition to reduced revenue-growth opportunities and future litigation-related costs, could result in further pressure on the bank’s plans to achieve a targeted fully loaded CET 1 ratio of at least 12.5% by 2018 (the ratio was 10.8% in June 2016).

Scope noted that, in its view, Deutsche Bank’s future competitive strengths, should the strategic recalibration advance in its implementation, are not yet sufficiently clear to the market. The rating agency continues to believe that the European banking market will remain constrained by lack of sufficient economic growth – despite ultra-low rates – and, specific to Deutsche Bank, further reducing opportunities in wholesale and investment banking – mostly in secondary market activities in which the bank has historically been actively present.

At the same time, the new ratings continue to reflect Deutsche Bank’s strong brand recognition in selected market segments – both in Germany and globally – as well as its generally balanced financial fundamentals, including acceptable asset-quality and funding indicators. Scope also noted the positive impact of the changing management culture at Deutsche Bank towards increased transparency and realism, higher cost awareness, and faster decision-making processes. In the agency’s view, top management’s heightened openness and realism is of particular importance given the bank’s still outstanding and unresolved litigations, as well as the recently raised concerns related to the US stress tests. The new management culture in the bank should also, in Scope’s view, help offset the ongoing headline risk which is not likely to materially subside for the near term.

With regard to the rating downgrade for the AT1 securities, which includes a one-notch widening of the gap from the new level of the bank’s senior unsecured debt ratings – now at six notches – Scope noted the relatively lower levels of ‘Available Distributable Items’ (ADIs) compared to other large European and global banks, as well as the relatively tighter distance to the Combined Buffer Requirement (CBR). That being said, and especially in light of the latest regulatory developments (softer Pillar 2 guidance vs requirement, prioritisation of AT1 coupons vs dividends), Scope expects Deutsche Bank to remain financially capable to service its AT1 coupons on time and in full.

With respect to the rating outlook, Scope highlighted that plausible expectation of underlying revenue sustainability over several quarters would be a decisive factor to revert to a Stable Outlook. A clear positive would also be the favorable settlements of ongoing litigations.

The following ratings were downgraded, all with Negative Outlook:

• Issuer Credit-Strength Rating (ICSR) to A- from A
• Senior unsecured debt ratings to BBB+ from A-
• AT1 securities to B+ from BB

The following ratings were confirmed, with Negative Outlook:

• Short-term ratings of 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 - positive; stable A-
15.04.2016; Outlook change - negative; A-
09.06.2016; Upgrade; A
11.08.2016; Review for possible downgrade; A
01.09.2016; Downgrade

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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