Fitch Ratings has signaled that it may cut the credit ratings of struggling Deutsche Bank, citing doubts over the bank’s ability to increase revenue in a sluggish business environment.
The credit rating agency announced Thursday it had placed Deutsche Bank’s ratings on negative watch. They include the A- rating for the bank’s long-term senior debt, the F1 rating for short-term senior debt, and the a- viability rating.
“A sluggish business environment, particularly in Europe but also in Asia Pacific, will make it harder for Deutsche Bank to build revenue and, therefore, capital during 2017” in line with its restructuring strategy,” Fitch said in a news release. “The bank needs to demonstrate its ability to improve revenue generation to maintain its ‘A-‘ long-term issuer default rating.”
Fitch expects to resolve the negative watch at the latest after Deutsche Bank releases its first-quarter 2017 earnings.
“We expect the first quarter of next year to bring some transparency into the effectiveness of the bank’s cost-cutting and restructuring measures,” it said, adding, “We also believe that the bank could have resolved some of its significant outstanding misconduct and litigation by then.”
In October 2015, Germany’s largest bank launched its “Strategy 2020” to streamline its business and strengthen its balance sheet after years of meager returns and high legal costs. As part of the plan, it is closing down 188 of its smaller branches in Germany before the end of this year, ultimately leaving it with 535 branches.
Last week, Deutsche Bank reported better-than-expected third-quarter earnings results. But Fitch noted that its business model is more focused on capital markets businesses than that of other large European banks, making it more sensitive to the business environment.
“At the same time, vulnerable customer sentiment and staff morale during the restructuring phase are making it more difficult for Deutsche Bank to compete effectively against [its] peers,” Fitch said.
Deutsche Bank’s legal troubles include a demand by the U.S. Department of Justice that it pay $14 billion to settle to settle a number of investigations related to mortgage-backed securities.