Rating action

Scope Ratings GmbH (Scope) has affirmed and published Deutsche Bank AG’s (Deutsche Bank) issuer rating of A- and preferred senior unsecured debt rating of A-, and revised the Outlooks to Positive, from Stable. The ratings were previously only available to investors on a subscription basis.

The full list of rating actions and rated entities is included at the end of this rating action release.

The revision of the Outlook to Positive reflects the anticipated structural progress on Deutsche Bank’s business model. This includes improved efficiency and profitability in the Corporate and Private Bank segments, robust revenue growth in the Investment Bank, in particular in Advisory & Origination, and continued focus on containing costs to improve efficiency metrics, in line with the bank’s strategy until YE 2025. This is further underpinned by broadly stable asset quality, with overall contained cost of risk, and adequate financial metrics.

Deutsche Bank’s reliance on revenues from the Investment Bank segment remains relatively elevated, at 36% of total net revenues in 9M 2024. These are relatively more volatile in certain Investment Bank segments than earnings in the bank’s other business segments, weighing on revenue predictability to some extent. At the same time, sustained progress on the profitability in other business segments and on streamlining the Investment Bank contribute to an improved earnings mix.

Key rating drivers

Business model assessment: Resilient (Low). Deutsche Bank’s issuer rating is anchored by the Resilient (Low) business model assessment. The bank operates a universal, international business model with four business segments. As the ’Global Hausbank’, the bank serves corporates, in particular large multinationals, with the full range of banking services and foreign exchange. In the Investment Bank, Deutsche Bank has a large international footprint in Fixed Income & Currencies operations as well as a growing revenue contribution from Advisory & Origination. Third, the bank operates a retail segment (Private Bank) under the Deutsche Bank and Postbank brands, serving a diversified range of customers with potential for cross-selling. Finally, the business model is rounded off by the bank’s Asset Management offerings. The bank’s business model is diversified across segments and geographies, with some concentration on its home market in the Corporate and Private Bank. With total assets of EUR 1.38trn as of Q3 2024, the bank is Germany’s largest bank. However, its domestic market share is still relatively moderate, given Germany’s fragmented banking sector with large market shares in the savings and cooperative sectors.

The bank’s streamlined ‘Global Hausbank’ strategy, and its track record of implementation, supports the ratings. With a focus on boosting and diversifying revenue streams, containing costs and improving capital efficiency, the bank’s business model has strengthened over recent years. Implementation was supported by higher interest margins from mid-2022 and the bank’s interest-rate hedging strategy, which provides sound visibility on net interest income through 2025 and income stability in coming years. For net commission income, the bank’s potential for cross selling and its enlarged footprint in Advisory & Origination should support robust revenue growth in coming years. On cost, the bank targets operational gross cost savings of EUR 2.5bn until YE 2025, with around 70% of savings realised or expected as of Q3 2024, as well as a stable non-interest cost base of around EUR 20bn in 2025. This, coupled with a compound annual growth rate for revenue of a targeted 5.5%-6.5% between 2021-25, should lead to a declining cost-to-income ratio, however the bank’s targeted rate of below 62.5% in 2025 appears ambitious, with the rate at 69% in Q3 2024 (excluding the release of Postbank litigation provisions). Finally, with optimisation of risk-weighted assets and a target payout ratio of 50% from 2025, the bank targets a CET1 ratio of around 13% or 200bps above MDA, against 13.8% as of Q3 2024.

Operating environment assessment: Supportive (High). The assessment reflects Scope’s blended view of the different markets where Deutsche Bank operates.

Germany (Supportive High) accounts for the majority of the bank’s exposure and revenues, especially in the Corporate and Private Banks. As Europe’s largest economy, with high wealth levels, economic resilience is very high, although the country’s export-oriented manufacturing sector is facing multiple headwinds, leading to stagnant growth. The fiscal position remains a strength, with manageable fiscal deficits and a low debt-to-GDP ratio pointing to sizeable fiscal space. The German banking sector is fragmented, with large market shares of cooperative and saving banking groups, and aggregate profitability is low. The national legislative framework is predictable and stable.

The Americas, primarily the United States (Supportive High), account for a sizeable share of Deutsche Bank’s net revenues (17% in 2023, mainly from the Corporate and Investment Bank). Aggregate economic resilience in the US is exceptionally strong. At the same time, large fiscal deficits and a high debt-to-GDP ratio weigh on the fiscal profile. Finally, economic policies under President-elect Donal Trump point to more protectionism and trade restrictions, which could impact operations. Deutsche Bank has a sizeable corporate real estate (CRE) portfolio in the US. Given macroeconomic and financial headwinds on the portfolio, Deutsche Bank runs stress tests on its CRE subsegment. The tested, higher risk portfolio amounted to around EUR 30bn at Q3 2024 or 6% of total loans, 52% of which is in the US. The stress test indicated overall manageable additional provisioning for credit losses in coming quarters. Provisioning for US CRE exposures has contributed to relatively higher cost of risk in 2024.

Finally, around 14% of net revenues were from the United Kingdom (Supportive High) in 2023, predominantly from the Investment Bank. The UK has a large, wealthy and diversified economy. The country benefits from strong institutions, including robust financial, economic and monetary governance frameworks and an independent monetary policy.

Germany is part of the European Banking Union, which has brought about a significant strengthening and harmonisation in bank regulation and supervision under the ECB’s Single Supervisory Mechanism, which Scope considers to be supportive of financial stability. The European Central Bank also shares with national central banks the role of lender of last resort, which limits illiquidity risks to the banks. Similarly, the US and UK benefit from highly advanced banking regulation and supervision.

Scope arrives at an initial mapping of a- based on a combined assessment of the issuer’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing. The assessment reflects Scope’s view that Deutsche Bank is actively embracing changes to ensure the long-term sustainability of its business model. While progress made may be tangible it does not warrant further credit differentiation.

Deutsche Bank is committed to improving its digital banking capabilities. Its Private Bank brand Postbank is positioned as a digital bank for younger customers. As regards the migration of IT systems of Postbank into Deutsche Bank’s systems, the bank cleared the backlog of client critical processes identified in the German Federal Financial Supervisory Authority’s (BaFin) order.

On sustainability, Deutsche Bank has committed to EUR 500bn in cumulative financing for sustainable projects from 2020 to 2025. However, also given a slowdown in related lending in Germany in 2024, there is a risk that this target could be missed, with cumulative financing standing at EUR 352bn as of Q3 2024. The bank’s initial transition plan provides a stock-take of the bank’s decarbonisation efforts and lays out decarbonisation goals for financed emission for 2030 and net-zero by 2050 for seven sectors of its corporate loan book with high carbon intensity.

Governance considerations include Deutsche Bank’s inherent exposure to legal and litigation risks, given its large footprint in international payments, including in USD. Further, a provision of around EUR 1.3bn in Q2 2024 for legal risks for lawsuits related to the bank’s voluntary takeover offer for Postbank in 2010 and the associated share price, significantly weighed on net results. At the same time, the provision fully covers potential costs, and the bank released EUR 440m of the provision in Q3 2024 following settlements. Finally, the bank has progressed on addressing regulatory concerns related to money laundering and terrorist financing. In November 2024, media statements indicated that the mandate for a representative installed by BaFin to monitor progress on these measures was not extended.

The long-term sustainability assessment leads to an adjusted rating anchor of a-.

Earnings capacity and risk exposures assessment: Neutral. The assessment reflects Scope’s view that the group’s earnings capacity may be variable over economic cycles but is sufficient to cover expected losses. Asset quality is broadly in line with peers. Risks are unlikely to generate losses capable of undermining the issuer’s viability.

Deutsche Bank's significantly improved profitability is the result of progress in the more stable Corporate and Private banking businesses, coupled with contained risk costs. The bank aims to achieve a post-tax return on tangible equity of over 10% in 2025, from 7.8% in 9M 2024 (excluding Postbank litigation provisions), up from 7.0% in the prior year period. Scope expects revenue to remain supportive, given net interest income remaining broadly stable at the currently relatively higher levels, given the bank’s hedging approach and some support from volume growth. In addition, earnings capacity should be strengthened by net commission income. While some cost savings have been realised and the bank is on track to meet its target for non-interest expense of around EUR 20bn in 2025, materially improved from 2024, the cost base is still relatively elevated, and the bank’s efficiency metrics compare unfavourably with domestic and international peers.

Deutsche Bank’s asset quality is adequate, with a gross non-performing exposure ratio of 3.1% as of Q3 2024 (Stage 3 loans at amortized cost over total gross carrying amount of loans at amortized cost). Going forward, Scope expects asset quality to remain broadly stable. Asset quality has slightly weakened due to the weakening economic environment, cyclical impacts from its CRE exposure, larger corporate events and the temporary effects of the Postbank lending book integration. The bank’s capacity to absorb credit impairments is satisfactory. Given macroeconomic uncertainties and high refinancing costs, particularly in CRE, credit loss provisions amounted to EUR 1.5bn (31 bp of average gross loans) in FY 2023 and EUR 1.4bn (39 bp of average gross loans) in 9M 2024. Full-year 2024 provision for credit losses are expected at around EUR 1.8bn, reflecting around 38bps in cost of risk.

Financial viability management assessment: Adequate. The assessment reflects Scope’s view that financial management provides some buffer and, under a base case scenario, could not imminently push any metric close to minimum requirements or jeopardise the issuer’s financial viability.

Deutsche Bank’s capitalisation is adequate, with a CET1 ratio of 13.8% reported as of Q3 2024. With a payout ratio of 50% of net profit for financial year 2024, the bank’s target CET1 ratio is at around 13%, which provides around 200bps to the bank’s minimum requirement of 11.2% as of Q3 2024. As part of its 2025 strategy, the bank has realised around EUR 22bn in risk-weighted assets reductions, against a target of EUR 25bn-30bn by YE 2025. Deutsche Bank’s funding and liquidity are robust, with a liquidity coverage ratio of 135% and a net stable funding ratio of 122% in Q3 2024.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Positive Outlook reflects Scope’s view that the risks to the current rating are tilted to the upside.

The upside scenarios for the ratings are (individually or collectively):

1. A further strategic rebalancing of the business mix towards less volatile activities, and/or further evidence that the derisking of the business perimeter under current management’s stewardship will lead to more stable earnings and risk performance, leading to an upgrade in the business model assessment.
    
2. Continued progress on structural cost efficiency and through-the-cycle profitability, combined with robust asset quality leading to an upgrade in the earnings capacity and risk exposure assessment.
    
3. Sustained strengthening of capitalisation, in particular with respect to buffers against regulatory requirements, while maintaining a solid funding and liquidity profile, triggering a more favourable assessment of financial viability management.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. A weaker-than-expected implementation of the bank’s strategy with regard to a more balanced and stable earnings mix leading to a less benign assessment of the business model.
    
2. A significant deterioration in profitability or slippage on cost reduction efforts and associated efficiency gains triggering a negative revision of our earnings capacity and risk exposure assessment.
    
3. A material weakening in capitalisation and/or in the bank’s funding or solvency position leading to a less favourable assessment of financial viability management.

Debt ratings

Preferred senior unsecured debt: A-/Positive. The rating is aligned with the issuer rating and applies to senior unsecured debt ranking above other classes of senior unsecured debt.

Non-preferred senior unsecured debt: BBB+/Positive. The rating is one notch lower than the issuer rating, reflecting statutory subordination. The rating also applies to legacy senior debt issued by German banks prior to the introduction of the senior non preferred debt class in 2018.

Short-term debt: S-1/Stable. Deutsche Bank’s S-1 short-term credit rating is derived from the long-term issuer credit rating. The rating is consistent with Scope’s long-term/short-term rating correspondence table. The choice of the highest possible short-term rating (S-1 given the A- issuer rating) reflects the strength of the liquidity profile of the group and access to central bank funding (lender of last resort, ECB).

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

Deutsche Bank AG

Issuer rating: A-/Positive, affirmed and Outlook change

Preferred senior unsecured debt rating: A-/Positive, affirmed and Outlook change

Non-preferred senior unsecured debt rating: BBB+/Positive, affirmed and Outlook change

Short-term debt rating: S-1/Stable, affirmed

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodology used for these Credit Ratings and Outlooks, (Financial Institutions Rating Methodology, 6 February 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation     YES
With access to internal documents                                   NO
With access to management                                            NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Associate Director
Person responsible for approval of the Credit Ratings: Marco Troiano, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 2 April 2014. The Credit Rating/Outlook was last updated on 23 April 2024.
The short-term Credit Rating/Outlook was first released by Scope Ratings on 22 May 2014. The Credit Rating/Outlook was last updated on 23 April 2024.
The non-preferred senior unsecured Credit Rating/Outlook was first released by Scope Ratings on 27 July 2018. The Credit Rating/Outlook was last updated on 23 April 2024.
The preferred senior unsecured Credit Rating/Outlook was first released by Scope Ratings on 2 April 2014. The Credit Rating/Outlook was last updated on 23 April 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.