Moody’s Investors Service has downgraded two of Deutsche Bank’s credit ratings, saying the firm is facing “substantial operating headwinds” as it seeks to execute a five-year restructuring plan.
The rating agency said Monday it had cut the rating for Deutsche’s unsecured senior debt to “Baa2” from “Baa1,” two notches above junk status, and also downgraded the lender’s long-term deposit rating one notch from “A2” to “A3.”
In October, Germany’s largest bank launched a plan to streamline its business and strengthen its balance sheet after years of meager returns and high legal costs. Moody’s expects that accomplishing the plan’s objectives will be positive for Deutsche’s creditors, but warned of continuing shorter-term challenges.
“The rating downgrade reflects increased risks to Deutsche Bank’s ability to successfully execute this ambitious, creditor-friendly plan,” Moody’s said in a news release. “Deutsche Bank’s performance over the last several quarters has been weak, and substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm.”
Revenue weakness in Deutsche’s retail, asset management, and institutional franchises, Moody’s said, “could hinder or delay Deutsche Bank’s ability to make progress on its plan, as this would be contingent on the firm’s ability to balance the impact of plan-related expenses on its internal capital generation against the firm’s growing regulatory capital requirements.”
“Deutsche Bank’s new management team is executing in a disciplined way, but the headwinds have stiffened, reducing the firm’s operating flexibility,” said Peter Nerby, a Moody’s senior vice president.
The bank last year posted its first annual loss since 2008. For the first quarter of 2016, net income fell 58% to 236 million euros ($263 million) while group revenue was down 22%.
“The firm is unlikely to achieve its targeted profitability improvements unless there is a material and sustained improvement in the operating environment,” Moody’s predicted, noting that its current ratings “incorporate the possibility for a modest loss and substantial litigation costs in 2016.”
Deutsche CFO Marcus Schenck said in a statement that all key ratings remain investment grade with the bank’s counterparty risk assessment and long-term deposit rating remaining in the A territory, which indicates low credit risk.