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S&P Cuts Deutsche Bank Rating in Latest Blow for Sewing’s Revamp

Updated on
  • CEO says in response that financial strength ‘beyond doubt’
  • Shares rebound from record low as S&P highlights liquidity
Deutsche Bank needs to be "a little bit more boring" according to spokesperson Joerg Eigendorf.

Deutsche Bank AG’s new chief executive officer, Christian Sewing, suffered a fresh setback in his efforts to reinvigorate Europe’s largest investment bank as S&P Global Ratings cut the lender’s credit rating.

S&P reduced the rating by one notch to BBB+, the third-lowest investment grade, citing “significant execution risk” after several management changes and strategy updates in past years. Shares of the lender rebounded from a record low as the credit rating company said Deutsche Bank has good capital and liquidity buffers.

Christian Sewing

Photographer: Krisztian Bocsi/Bloomberg

“Deutsche Bank’s updated strategy envisages a deeper restructuring of the business model than we previously expected,” S&P said in a statement Friday. While management is taking “tough” actions to restore profitability, the bank “appears set for a period of sustained underperformance compared with peers, many of whom have now finished restructuring.”

The decision, a day after reports that U.S. regulators had put the lender on a list of problem banks, could raise the bank’s cost of doing business, increasing the stakes for Sewing, who replaced John Cryan in April with a mandate to accelerate a plan to refocus on Deutsche Bank’s European home market. S&P had initiated its review after Sewing’s appointment, saying repeated leadership changes pose questions over its long-term direction, against a background of chronically low profitability.

Sewing, in a letter to staff following the downgrade, said that the bank’s financial strength is “beyond doubt,” though it has to deliver on its strategy “speedily and rigorously.” In the Corporate & Investment Bank “we have a clear strategic direction and we’re well on the way to implementing what we recently announced.”

Deutsche Bank rose 2.7 percent to 9.40 euros as of 11:00 a.m. in Frankfurt. Shares of the lender hid a record low Thursday after reports that U.S. regulators added it to a group of troubled lenders they monitor. The firm said it’s overhauling the operations at issue, and that there are “no concerns” about its financial stability.

In a separate blow, Deutsche Bank faces cartel charges over its role as underwriter for a A$2.5 billion ($1.9 billion) share sale by Australia & New Zealand Banking Group Ltd. in 2015. Citigroup Inc. also faces the same charges.

S&P said the rating outlook is stable, reflecting its view that management will “execute its strategy in earnest and, over time, will show progress against its 2019 financial objectives and so achieve its longer-term objective of a more stable and better-functioning business model.”

Good Liquidity

The European Central Bank also sees Deutsche Bank’s liquidity as being at a good level and the lender has made significant progress regarding its responses to any concerns of the ECB supervisors, Reuters reported, citing an unidentified person familiar with the ECB’s view.

“This is nothing that keeps us awake at night,” Deutsche Bank spokesman Joerg Eigendorf said about the ratings downgrade. “We have refinanced ourselves this year at quite or very good conditions, so that’s not a worry at all for us. And we are able to react if necessary."

Still, the cost of insuring against a default in Deutsche Bank’s senior debt, as reflected in its 5-year credit default swap, jumped to 179 basis points on Friday, from just above 70 at the beginning of the year. By comparison, the spreads for BNP Paribas SA and Barclays Plc, two of its biggest regional rivals, were 53 and 104 basis points respectively.

Read more: Deutsche Bank Cuts Fail to Inspire as CEO Races to Fix Firm

A reduced credit rating typically raises a bank’s cost of borrowing and thus its overall funding costs and can affect long-term deals such as interest-rate swaps. Firms like Deutsche Bank rely on strong balance sheets to underpin their trading and derivatives businesses. Goldman Sachs Group Inc. analysts led by Jernej Omahen recently argued that losing the A- rating at S&P could cost the bank dearly.

“Further counterparty aversion could follow in the event of a downgrade, especially with those clients that have ‘automatic rating triggers’ within their risk policies,” according to the Goldman Sachs report. That in turn may hurt Deutsche Bank’s market share further and weaken the company’s ability to generate revenue, the analysts argued.

S&P’s downgrade brings its rating more closely into line with that of rivals Moody’s Investor Service. Moody’s long-term senior unsecured debt rating for Deutsche Bank is Baa2. At the time of Sewing’s appointment, Moody’s had affirmed all of its ratings on Deutsche Bank’s debt, but had changed the rating on its A3 deposit and senior debt ratings to negative, from stable.

— With assistance by Nick Baker, and Tom Beardsworth

(Updates with spokesman’s comment in 10th paragraph.)
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