Deutsche Bank cut by S&P in latest blow for Sewing's revamp

[FRANKFURT] Deutsche Bank AG's new chief executive officer, Christian Sewing, suffered a fresh setback in his efforts to reinvigorate Europe's largest investment bank as S&P Global Ratings cut the lender's credit rating.

"Deutsche Bank's updated strategy envisages a deeper restructuring of the business model than we previously expected," S&P said in a statement Friday, lowering the rating by one notch to BBB+, the third-lowest investment grade. While management is taking "tough" actions to restore profitability, the bank "appears set for a period of sustained underperformance compared with peers, many of whom have now finished restructuring".

Mr Sewing said in a letter to staff following the downgrade that the bank's financial strength is "beyond doubt", though it has to deliver on its strategy "speedily and rigorously". In the Corporate & Investment Bank "we have a clear strategic direction and we're well on the way to implementing what we recently announced."

The decision could raise the bank's cost of doing business, increasing the stakes for Mr Sewing, who replaced John Cryan in April with a mandate to accelerate a plan to refocus on Deutsche Bank's European home market and away from Wall Street. S&P had initiated its review after Mr Sewing's appointment, saying that the repeated changes of leadership at the bank pose questions over its long-term direction, against a background of chronically low profitability.

Shares of the lender closed at a record low on Thursday after reports that US regulators had Deutsche Bank's operations in the country on a list of problem banks.

Stable Outlook

S&P said the rating outlook is stable, reflecting its view that management will "execute its strategy in earnest and, over time, will show progress against its 2019 financial objectives and so achieve its longer-term objective of a more stable and better-functioning business model."

The cost of insuring against a default in Deutsche Bank's senior debt, as reflected in its 5-year credit default swap, has jumped to well over 150 basis points on Thursday, from just above 70 at the beginning of the year. By comparison, the spreads for BNP Paribas SA and Barclays Plc, two of its biggest regional rivals, were 53 and 103 basis points respectively.

The rating agencies "are looking for the restructuring of activities to happen quickly and decisively," Deutsche Bank chief financial officer James von Moltke said on an analyst call in late April. "The goal clearly is to grow our margins and improve the sustainable profitability which we think overall is a positive from a credit perspective."

A reduced credit rating typically raises a bank's cost of borrowing and thus its overall funding costs and can affect long-term deals such as interest-rate swaps. Firms like Deutsche Bank rely on strong balance sheets to underpin their trading and derivatives businesses. Goldman Sachs Group analysts led by Jernej Omahen recently argued that losing the A- rating at S&P would cost the bank dearly.

"Further counterparty aversion could follow in the event of a downgrade, especially with those clients that have 'automatic rating triggers' within their risk policies," according to the Goldman Sachs report. That in turn may hurt Deutsche Bank's market share further and weaken the company's ability to generate revenue, the analysts argued. On the plus side, they had argued, the bank still has an exceptionally strong liquidity reserve.

S&P's downgrade brings its rating more closely into line with that of rivals Moody's Investor Service. Moody's long-term senior unsecured debt rating for Deutsche Bank is Baa2. At the time of Sewing's appointment, Moody's had affirmed all of its ratings on Deutsche Bank's debt, but had changed the rating on its A3 deposit and senior debt ratings to negative, from stable.

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