Moody’s Investor Services today announced upgrades to all of Deutsche Bank’s ratings. Deutsche Bank’s Counterparty Rating and Long-Term Deposit Rating have been upgraded to A2, from A3, and the Non-Preferred Senior Unsecured Debt Rating moves from Baa3 to Baa2. Our short-term deposit and counterparty ratings are upgraded from P2 to P1. Additionally, all of Deutsche Bank ratings are placed on positive outlook again.
This is Deutsche Bank’s first performance-driven ratings upgrade from Moody’s since 2007, and one of the few ratings upgrades of any major European bank by a leading agency in 2021. Since November 2020, the outlook on Deutsche Bank’s ratings has been raised by all leading agencies and Moody’s placed Deutsche Bank on Review for Upgrade on May 17.
Moody’s said: “Deutsche Bank has made substantial strides to cut costs, solidify its revenue base and raise its underlying profit potential. Stronger, more diverse earnings, if sustained, will buffer the more volatile results of DB's capital markets business in adverse markets and – together with the bank's meaningfully lower expense base – equip the bank to achieve the financial targets set out in its strategic overhaul just two summers ago. This prospect, along with DB's existing credit strengths of sound capital and liquidity, are reflected in our upgrade of the bank’s ratings with a positive outlook.”
Christian Sewing, Chief Executive Officer, commented: “Moody’s decision to upgrade our ratings is highly appreciated and a great recognition for the outstanding efforts of our people, who are transforming Deutsche Bank in a very challenging environment. Together, we have built a robust business model supported by strong capital and liquidity as well as disciplined cost and risk management. Our first half 2021 results with profit improvements in all four business areas underscore the progress we have made on the path to sustainable profitability.”
James von Moltke, Chief Finance Officer, added: “This is a milestone on our transformation journey. This move by Moody’s, a key stakeholder, validates the progress Deutsche Bank has made since we launched our new strategy two years ago. Upgrades across both long- and short-term ratings help us fund our client activities on more competitive terms. A positive outlook is a great encouragement for us to make further progress in transforming Deutsche Bank.”
What’s behind this move? Key factors driving the upgrade
Successful execution of a unique transformation. Moody’s commented: “Since announcing its strategic overhaul in summer 2019, DB has regained earnings strength; reduced capital and leverage exposure consumption; significantly lowered its operating costs; maintained strong liquidity; and reduced its dependence on […] market funding. These achievements have enabled DB to finance its strategic overhaul without significantly lowering its key capital ratios, leaving it on firmer ground than was achieved through previous, less fundamental restructurings”.
Refocusing on core strengths pays off. Moody’s noted: “A central element of DB's strategic transformation has been the refocus of its capital markets activities, and revenue mix, on less capital-intensive businesses critical to growing its corporate client base, which will be the core of its new business model. DB's ability to grow revenue during its restructuring has it ahead of schedule to meet its 2022 revenue goals.”
Well-positioned core businesses. The agency added: “DB's refocus on higher-margin businesses within fixed-income and currencies has caused no visible client or revenue attrition… the revenue mix is still reasonably well diversified. Therefore, a slowdown in one or more areas should not inordinately reduce the IB's restored revenue base, allowing it to sustain good earnings even in a more normalised market. Moreover, rising global interest rates, in particular in the US, will improve results in the Corporate Bank (CB) and Private Bank (PB) segments from 2022 onward.”
Strong progress on Sustainability. For Moody’s, Deutsche Bank’s sustainability strategy, is ahead of peers in key aspects. Deutsche Bank, as Moody’s notes, “has recently accelerated initiatives related to its Sustainable Finance Taxonomy to serve the growing needs of global corporates to adapt business models for sustainability goals. Early adoption of ESG policies and strategies will help DB adapt its solutions to clients' sustainability targets. The bank has already introduced ring-fenced sustainable transactions in trade and supply chain finance. These include financing structures with ESG-linked incentives and penalties if sustainability targets, based on measurable key performance indicators, are not met. This revenue growth opportunity … is just one example of how DB is ahead of the competition in developing and bearing the costs of ESG products and risk-management capabilities.”
Conservative balance sheet management reaps rewards. Moody’s commented that “Deutsche Bank’s sound capital and strong liquidity provide sturdy buffers against losses.” The agency noted: “The bank expects to maintain a Common Equity Tier 1 (CET1) capital ratio of around 13% for 2021 and beyond, providing a good capital base to absorb anticipated asset quality deterioration and resulting negative rating migration. DB's substantial pool of high-quality liquid assets remains a comparative credit strength of the group and has significantly reduced its refinancing risk.”
Strong risk management. Moody’s explained, “the bank’s loan book is well diversified, with moderate risk concentrations. DB's €445 billion loan book is well spread across regions, segments and asset classes. About half of its lending is directed to German retail and corporate customers, and we estimate exposures to riskier commercial real estate (CRE) and leveraged debt capital markets (LDCM) account for only a combined 9% of total gross loans. DB also has low exposure to unsecured consumer lending.”
Sustained cost discipline drives returns to shareholders. Moody’s commented: “In the second quarter of 2021, DB's adjusted costs declined 6% to €4.6 billion, once again reflecting workforce reductions and other cost efficiency gains. But this restructuring has also delivered revenue gains, not attrition, so the cost cuts will translate to materially improved operating leverage. This progress, if sustained, puts DB on track to achieve its ambition of an 8% post-tax return on equity by 2022.”
After this move, Deutsche Bank’s principal ratings with leading agencies are as follows:
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Moody’s Investor Services today announced upgrades to all of Deutsche Bank’s ratings. Deutsche Bank’s Counterparty Rating and Long-Term Deposit Rating have been upgraded to A2, from A3, and the Non-Preferred Senior Unsecured Debt Rating moves from Baa3 to Baa2. Our short-term deposit and counterparty ratings are upgraded from P2 to P1. Additionally, all of Deutsche Bank ratings are placed on positive outlook again.
This is Deutsche Bank’s first performance-driven ratings upgrade from Moody’s since 2007, and one of the few ratings upgrades of any major European bank by a leading agency in 2021. Since November 2020, the outlook on Deutsche Bank’s ratings has been raised by all leading agencies and Moody’s placed Deutsche Bank on Review for Upgrade on May 17.
Moody’s said: “Deutsche Bank has made substantial strides to cut costs, solidify its revenue base and raise its underlying profit potential. Stronger, more diverse earnings, if sustained, will buffer the more volatile results of DB's capital markets business in adverse markets and – together with the bank's meaningfully lower expense base – equip the bank to achieve the financial targets set out in its strategic overhaul just two summers ago. This prospect, along with DB's existing credit strengths of sound capital and liquidity, are reflected in our upgrade of the bank’s ratings with a positive outlook.”
Christian Sewing, Chief Executive Officer, commented: “Moody’s decision to upgrade our ratings is highly appreciated and a great recognition for the outstanding efforts of our people, who are transforming Deutsche Bank in a very challenging environment. Together, we have built a robust business model supported by strong capital and liquidity as well as disciplined cost and risk management. Our first half 2021 results with profit improvements in all four business areas underscore the progress we have made on the path to sustainable profitability.”
James von Moltke, Chief Finance Officer, added: “This is a milestone on our transformation journey. This move by Moody’s, a key stakeholder, validates the progress Deutsche Bank has made since we launched our new strategy two years ago. Upgrades across both long- and short-term ratings help us fund our client activities on more competitive terms. A positive outlook is a great encouragement for us to make further progress in transforming Deutsche Bank.”
What’s behind this move? Key factors driving the upgrade
Successful execution of a unique transformation. Moody’s commented: “Since announcing its strategic overhaul in summer 2019, DB has regained earnings strength; reduced capital and leverage exposure consumption; significantly lowered its operating costs; maintained strong liquidity; and reduced its dependence on […] market funding. These achievements have enabled DB to finance its strategic overhaul without significantly lowering its key capital ratios, leaving it on firmer ground than was achieved through previous, less fundamental restructurings”.
Refocusing on core strengths pays off. Moody’s noted: “A central element of DB's strategic transformation has been the refocus of its capital markets activities, and revenue mix, on less capital-intensive businesses critical to growing its corporate client base, which will be the core of its new business model. DB's ability to grow revenue during its restructuring has it ahead of schedule to meet its 2022 revenue goals.”
Well-positioned core businesses. The agency added: “DB's refocus on higher-margin businesses within fixed-income and currencies has caused no visible client or revenue attrition… the revenue mix is still reasonably well diversified. Therefore, a slowdown in one or more areas should not inordinately reduce the IB's restored revenue base, allowing it to sustain good earnings even in a more normalised market. Moreover, rising global interest rates, in particular in the US, will improve results in the Corporate Bank (CB) and Private Bank (PB) segments from 2022 onward.”
Strong progress on Sustainability. For Moody’s, Deutsche Bank’s sustainability strategy, is ahead of peers in key aspects. Deutsche Bank, as Moody’s notes, “has recently accelerated initiatives related to its Sustainable Finance Taxonomy to serve the growing needs of global corporates to adapt business models for sustainability goals. Early adoption of ESG policies and strategies will help DB adapt its solutions to clients' sustainability targets. The bank has already introduced ring-fenced sustainable transactions in trade and supply chain finance. These include financing structures with ESG-linked incentives and penalties if sustainability targets, based on measurable key performance indicators, are not met. This revenue growth opportunity … is just one example of how DB is ahead of the competition in developing and bearing the costs of ESG products and risk-management capabilities.”
Conservative balance sheet management reaps rewards. Moody’s commented that “Deutsche Bank’s sound capital and strong liquidity provide sturdy buffers against losses.” The agency noted: “The bank expects to maintain a Common Equity Tier 1 (CET1) capital ratio of around 13% for 2021 and beyond, providing a good capital base to absorb anticipated asset quality deterioration and resulting negative rating migration. DB's substantial pool of high-quality liquid assets remains a comparative credit strength of the group and has significantly reduced its refinancing risk.”
Strong risk management. Moody’s explained, “the bank’s loan book is well diversified, with moderate risk concentrations. DB's €445 billion loan book is well spread across regions, segments and asset classes. About half of its lending is directed to German retail and corporate customers, and we estimate exposures to riskier commercial real estate (CRE) and leveraged debt capital markets (LDCM) account for only a combined 9% of total gross loans. DB also has low exposure to unsecured consumer lending.”
Sustained cost discipline drives returns to shareholders. Moody’s commented: “In the second quarter of 2021, DB's adjusted costs declined 6% to €4.6 billion, once again reflecting workforce reductions and other cost efficiency gains. But this restructuring has also delivered revenue gains, not attrition, so the cost cuts will translate to materially improved operating leverage. This progress, if sustained, puts DB on track to achieve its ambition of an 8% post-tax return on equity by 2022.”
After this move, Deutsche Bank’s principal ratings with leading agencies are as follows:
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