The Strategist

S&P downgrades Deutsche Bank's rating to BBB +

06/01/2018 - 12:12

International rating agency Standard & Poor's (S&P) lowered the long-term credit rating of Deutsche Bank issuer from "A-" to "BBB +"; the forecast is "stable".

The ratings of Germany's largest bank are withdrawn from the list for revision with the possibility of downgrading. The bank was placed on the list on April 12.

"The renewed strategy of Deutsche Bank provides for a deeper restructuring of the business model than we had expected earlier," S&P said in a statement.

As the management is taking "tough" actions to restore profitability, the bank "seems to have a period of sustained lagging behind competitors, many of whom have already completed restructuring," the agency noted.

On April 9, Christian Sewing became the new chief executive officer of Deutsche Bank. He replaced British John Cryan, who could not reach the target cost indicator.

Sewing said in a letter to employees after the rating downgrade that the bank's financial strength "is unquestionable," although it must "quickly and unswervingly" carry out its strategy, writes Bloomberg. Regarding corporate and investment banking, "we have a clear strategic direction, and we are on track to realizing what we recently announced," added Sewing.

S&P questioned ability of the new CEO of Deutsche Bank to implement a plan to reduce its global investment banking. As part of this plan, the bank should reorient to Europe and its domestic market after three years of losses in a row.

The agency initiated a review of the ratings after the appointment of Sewing, saying that repeated changes in the bank's management raise questions about its long-term direction amid a chronically low profitability.

S&P said that the outlook on the S&P rating is "stable." This reflects the analysts' opinion that the bank's management "will faithfully fulfill its strategy and in time will demonstrate progress in achieving its financial goals for 2019 and, thus, will achieve its long-term goal of more stable and efficient functioning of the business model."

As a rule, downgrade of the credit rating raises the cost of borrowing and, consequently, its overall financing costs and can affect long-term transactions such as interest rate swaps, notes Bloomberg.

On Thursday, Deutsche Bank's shares fell by almost 10% and ended the day at a historic low.

This happened after reports that the Federal Deposit Insurance Corporation (FDIC) contributed the American division of Deutsche Bank, whose assets are estimated at about $ 42 billion, to the list of banks with serious threats to financial solvency.


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