Deutsche Bank May Have Rating Cut by S&P as Legal Costs Rise

Deutsche Bank AG, Germany’s biggest bank, may have its credit rating cut by Standard & Poor’s after the lender reduced its reported profit for 2012 amid rising legal costs.

Deutsche Bank’s A+ long-term rating was placed on CreditWatch negative, S&P said today in a statement. The Frankfurt-based firm said last week it had set aside additional money to cover costs linked to U.S. mortgage lawsuits and other regulatory probes, lowering 2012 profit by about 400 million euros ($514 million) to 291 million euros.

The world’s biggest banks are facing regulatory probes and lawsuits linked to the alleged manipulation of benchmark interest rates as well as the improper sale of products such as interest-rate derivatives. Deutsche Bank, led by co-Chief Executive Officers Anshu Jain and Juergen Fitschen, also said in October it’s a defendant in “numerous” civil suits as an issuer or underwriter in residential mortgage-backed securities.

“Ongoing economic, regulatory, and legal risks will continue to hurt the bank’s performance,” S&P said in the statement.

The bank’s ability to generate capital amid Europe’s economic turmoil, including “recent tensions” in Cyprus, faces “substantial risks,” S&P said. “Deutsche Bank’s capitalization is still below peers’ in our view, despite a significant improvement on the second half of 2012.”

The lender’s investment-banking operation also faces regulatory changes and “legal and operational risks,” the ratings company said. The Federal Reserve seeks to subject the biggest foreign banks to stricter U.S. capital rules, which could significantly increase the cost of doing business in the U.S. for European banks, S&P said.

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