Deutsche Bank drops as Moody's signals risk of cut amid overhaul

[BERLIN] Deutsche Bank AG declined after Moody's Investors Service signaled it may cut the German lender's credit rating amid concern that it will struggle to restructure its businesses and boost profitability.

"Since changing leadership last June and recalibrating its strategic plan last November, the operating environment has worsened for Deutsche Bank," the ratings firm said in a statement late Monday.

"This is increasing the already high level of execution challenges the group faces in addressing its structural cost issues and achieving its new strategic plan."

Deutsche Bank co-chief executive officer John Cryan, 55, said last week that he doesn't expect the lender to report a profit this year as he pushes forward with the plan to eliminate thousands of jobs and dispose of assets.

Record-low interest rates, slumping energy prices, cooling emerging-market growth and mounting legal charges tied to past misconduct have undermined his efforts, sapping equity reserves and contributing to the first annual loss since 2008 last year.

Moody's rates the Frankfurt-based bank's senior unsecured debt Baa1, three levels above junk, and its long-term deposits two rungs higher at A2. Each might be lowered one level, according to the statement.

The shares fell 1.7 per cent to 16.64 euros at 9:05 am in Frankfurt. They have dropped about 26 per cent this year, reaching a low of about 13 euros last month.

Renee Calabro, a Deutsche Bank spokeswoman, declined to comment.

Chief financial officer Marcus Schenck told Boersen-Zeitung in an interview published on Tuesday that the lender needs to move back into A ratings "over the longer term."

Moody's also said it's reviewing the bank's riskiest debt, known as additional Tier 1 notes, to evaluate whether the mounting challenges might lead the company to defer paying coupons to investors.

Those instruments could be downgraded as much as two levels. Standard & Poor's reduced its grade on those securities one level last month.

The so-called Tier 1 notes, also known as CoCos, were introduced after the financial crisis to meet new rules intended to shift the burden of bank failure from taxpayers to investors.

They are the first debt securities to take losses when a bank runs into trouble, and coupon payments are switched off if capital levels fall too low.

Mr Cryan last week reiterated that he feels confident the bank will be able to pay the coupons, echoing remarks in February, when Deutsche Bank was at the center of a selloff. The lender has since purchased back debt to reassure investors about capital levels.

The bank's most actively traded bond, the US$1.5 billion of 4.5 per cent subordinated notes due April 2025, has declined nearly 4 US cents this year to trade Monday at 88.3 US cents on the dollar, according to Trace, the price-reporting system of the Financial Industry Regulatory Authority.

The obligation has fallen about 2.9 US cents since Mr Cryan commented on the unlikelihood of a profit. The company's New York-listed shares slipped 0.9 per cent to US$18.92 in extended trading Monday.

Some of Europe's largest banks are shrinking their securities units as regulators toughen scrutiny of riskier activities. Since taking over from Anshu Jain last year, Mr Cryan has pledged to boost profitability by shrinking parts of the firm's debt-trading business.

At Credit Suisse Group AG, Switzerland's second-largest bank, new CEO Tidjane Thiam has also announced plans to shrink the investment banking businesses including macro trading and prime services, cutting thousands of jobs in London, while focusing on wealth management.

Moody's praised the goals and simpler structure Mr Cryan has laid out for the company, including a pullback from capital-intensive markets businesses and a focus on stabler sources of revenue, such as transaction banking and wealth management.

Still, it isn't clear how the lender will make up for revenue lost by shrinking the balance sheet and narrowing its focus to clients who generate the most income, according to the firm.

"The scale of the firm's re-engineering task, the potential for further weak revenue, and the risk of incremental litigation charges also create uncertainty," the ratings company said.

Moody's also said the bank is benefiting from solid capital and access to cash, including money set aside to resolve legal matters.

"Despite the near-term earnings challenges, the firm's overall solvency and liquidity profiles support its creditworthiness and provide the firm time and flexibility to adjust the plan as conditions warrant," Moody's said.

BLOOMBERG