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Deutsche Bank's Ratings Downgraded by Fitch, Outlook Evolving

Zacks Equity Research

Deutsche Bank AG’s DB long-term Issuer Default Rating (IDR) has been cut to 'BBB', Viability Rating (VR) to 'bbb' and Derivative Counterparty Rating (DCR) to 'BBB+(dcr)', by Fitch Ratings. However, the bank's short-term IDR has been maintained at ‘F2’. Moreover, the outlook has been changed to ‘evolving’ from ‘negative’.

Reason for Downgrade

“The downgrade of Deutsche Bank reflects its continued difficulty and limited progress in improving its profitability and stabilizing its business model,” Fitch stated. In addition, being among the largest European banks, Deutsche Bank’s market value has slipped substantially on lack of stable management, unsuccessful restructuring activities and failed merger discussions with Commerzbank AG.

Further, the revision in outlook by Fitch comes on the heels of expectations of improving business operations of Deutsche Bank, backed by successful streamlining measures. On the contrary, surge in bank's weaknesses might further result in a rating downgrade.

Per Fitch, Deutsche Bank missed its earnings expectations which were discussed at the 2018 strategic review and return on tangible equity (RoTE) target of 4% in 2019 will also be likely underperformed by the bank on soft revenues and other macro headwinds.

Additionally, though the cost-reduction target of EUR21.8 billion for this year seems to be achievable by the rating agency, the bank's dismal revenue performance and lagged efficiency compared to peers are matters of concern.

Also, Fitch opines the extent of Deutsche Bank’s internal capital generation will decide upon the impact of new regulations on the bank’s capital position. Notably, it expects fully loaded CET1 ratio to remain above management's target of 13%, despite modest earnings recorded by the bank.

Deutsche Bank is working hard to stabilize its business model to generate returns. The bank is planning to make 'tough cutbacks' and strategically deal with strong performing businesses in the corporate and investment bank (CIB), focused on speeding up the private and commercial bank's (PCB) business integration process and work on cost-reduction targets. The bank is also working on reduction in leverage exposure. Therefore, such moves might benefit the bank with a positive rating.

Nevertheless, difficulty in implementing further streamlining processes will not be able to help the bank in generating adequate returns and boost its capital position which might lead to a further downgrade in ratings.

“We acknowledge the challenges identified by Fitch as they align with our own areas of focus,” Deutsche Bank noted in a statement Friday. “Management is committed to growing our core business and improving profitability. We are pleased that Fitch acknowledges Deutsche Bank’s strong capitalization, funding, liquidity and asset quality,” mentioned the bank.

Shares of Deutsche Bank on the NYSE have lost around 18.9%, in the last six months, as against the industry’s growth of 6.8%.

The rating outlook is valuable for firms since these preserve investors’ confidence in the stock and boost its creditworthiness in the market. However, a downgrade in the same lessens investors’ confidence and reflects the company’s weak financials. Though Deutsche Bank’s restructuring efforts, including cost-saving measures, look encouraging, it is really difficult to determine how much the bank will gain, considering the lingering headwinds. Furthermore, dismal revenue performance remains another concern.

Deutsche Bank currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Macro Bank Inc. BMA has been witnessing upward estimate revisions for the past 60 days, with the company’s shares on the NYSE rising nearly 34.7%, in three months’ time. It sports a Zacks Rank of 1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

DBS Group Holdings Ltd DBSDY has been witnessing upward estimate revisions for the past 60 days. Over the past three months, this Zacks #1 Ranked company’s shares on the NYSE have been up more than 4%.

Banco Santander Brasil SA BSBR has been witnessing upward estimate revisions for the past 60 days. In the past three months, this Zacks Rank #2 company’s shares on the NYSE have been up more than 7%.

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