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S&P cuts Deutsche Bank's credit rating in latest blow to new CEO's revamp

Ratings agency sees "significant execution risk" after several management changes and strategy updates

In a letter to staff following the downgrade, Mr Sewing said that the bank's financial strength is "beyond doubt", though it has to deliver on its strategy "speedily and rigorously".


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.

S&P reduced the rating by one notch to BBB+, the third-lowest investment grade, citing "significant execution risk" after several management changes and strategy updates in past years. Shares of the lender rebounded from a record low as the credit rating company said Deutsche Bank has good capital and liquidity buffers.

"Deutsche Bank's updated strategy envisages a deeper restructuring of the business model than we previously expected," S&P said in a statement on Friday. 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".

The decision, a day after reports that US regulators had put the lender on a list of problem banks, 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.

S&P had initiated its review after Mr Sewing's appointment, saying that repeated leadership changes pose questions over its long-term direction, against a background of chronically low profitability.

Mr Sewing, in a letter to staff following the downgrade, said 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".

In a separate blow, Deutsche Bank faces cartel charges over its role as underwriter for a A$2.5 billion (S$2.52 billion) share sale by Australia & New Zealand Banking Group Ltd in 2015. Citigroup Inc also faces the same charges.

S&P said the ratings 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 European Central Bank also sees Deutsche Bank's liquidity as being at a good level and the lender has made significant progress regarding its responses to any concerns of the ECB supervisors, Reuters reported, citing an unidentified person familiar with the ECB's view.

"This is nothing that keeps us awake at night," Deutsche Bank spokesman Joerg Eigendorf said about the ratings downgrade. "We have refinanced ourselves this year at quite or very good conditions, so that's not a worry at all for us. And we are able to react if necessary."

Still, the cost of insuring against a default in Deutsche Bank's senior debt, as reflected in its five-year credit default swap, jumped to 179 basis points on Friday, 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 104 basis points respectively.

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 Inc analysts led by Jernej Omahen recently argued that losing the A- rating at S&P could 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.

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 Mr 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. BLOOMBERG

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