Deutsche Bank Ratings Raised To ‘AA’

Standard & Poor’s Ratings Services said today it raised its long-term counterparty credit rating on Germany-based Deutsche Bank AG and various core operating entities to ‘AA’ from ‘AA-‘. The outlook is stable. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term ratings.

The upgrade reflects major and sustained improvements in Deutsche Bank’s operating performance across all business lines and in its credit and market risk profile since the beginning of its “Management Agenda” in 2002.

“While we recognize that current capital-markets nervousness-–precipitated by the U.S. subprime mortgage and leveraged corporate finance sectors–could herald a period of much-less-favorable market conditions, we believe these structural improvements leave Deutsche Bank well-positioned to withstand a more challenging environment of increased volatility and market uncertainty,” said Standard & Poor’s credit analyst Bernd Ackermann. In combination with the relatively high flexibility of major investment banks to adjust their operations to changing market conditions, Deutsche Bank is now structurally far more robust than a few years ago.

“We believe, however, that profits from the investment bank are set to decline from recent very strong levels, as global capital markets are weakening from prior extremely attractive levels,” said Mr. Ackermann.

The ratings on Deutsche Bank are based on its excellent, very diversified investment-banking franchise globally; a favorable view of management, which has successfully executed its focused growth strategy; and overall sound earnings. The ratings are constrained by the cyclical sensitivity of profitability to capital markets conditions; and still middling earnings levels in parts of its asset- and wealth-management activities.

The outlook is stable. Financial markets are currently undergoing a rapid sentiment change with a dramatic repricing of risk.

While we are less concerned about any direct credit or market risk exposures borne by Deutsche Bank, there could be a broader effect on the revenues of the industry, at least in the short term.

“Although its financial performance should undoubtedly weaken from recent record levels and we might see more quarterly volatility, Deutsche Bank should demonstrate satisfactory financial performance even if difficult market conditions persist,” said Mr. Ackermann. This would reflect its diversified revenue streams including enhanced earnings from more stable businesses, cost flexibility, and the strengths of its franchises.

“Similar to investment-banking peers, the ratings could come under pressure in the case of an unexpected precipitous decline in profitability, or material setbacks in its business lines,” said Mr. Ackermann. Negative factors would also include a substantially more aggressive risk appetite, a material weakening of our view on the bank’s risk management, a departure from its consistent strategy, or a weakening of capitalization.

We regard a further upgrade as a remote possibility, given the relatively high earnings cyclicality and exposure to the various credit, market, and operational risks that Deutsche Bank faces in line with peers in the global investment bank industry. Conditions for a higher rating would include transformational long-term success in the build-out of its more stable businesses.