Moody’s Downgrades Deutsche Bank to Aa3

Moody’s Investors Service (MCO) Thursday said it notched down Deutsche Bank’s (DB) long-term deposit and senior debt ratings from Aa1 to Aa3. “The continuing preponderance of capital market activities and the ensuing challenges for risk management which potentially expose the bank to earnings volatility that would be inconsistent with the bank’s previous ratings.” The ratings agency also downgraded the banks long-term debt ratings of its rated branches and most of its subsidiaries.

Here are some excerpts from the announcement:

“Additionally, the ratings on the bank’s senior subordinated debt were downgraded to A1 from Aa2, and as a result of Moody’s revised Guidelines for Rating Bank Hybrids and Subordinated Debt, the bank’s trust preferred debt was downgraded to Baa1 from Aa3 (for cumulative instruments) and to Baa2 from Aa3 (for non-cumulative instruments). The Prime-1 short-term ratings for the bank and its rated subsidiaries and branches were affirmed. The rating outlook for all ratings is now stable. Today’s rating action concludes the review for downgrade that Moody’s had initiated on 19 November 2009.

According to Moody’s, the downgrade of Deutsche Bank’s ratings primarily reflects a combination of three factors:

1.) The continuing preponderance of capital market activities and the ensuing challenges for risk management which potentially expose the bank to earnings volatility that would be inconsistent with the bank’s previous ratings.

2.) The delay in the acquisition of Deutsche Postbank AG (rated D+/A1) is set to defer the possible benefits of this acquisition beyond what was initially anticipated at the time when the rating agency changed the outlook to negative in December 2008.

3.) Deutsche Bank’s other businesses, which had been expected to provide a more stable earnings anchor, have shown a greater degree of earnings volatility than Moody’s had previously expected.

However, Moody’s notes that the resulting Aa3 rating is well positioned given Deutsche Bank’s strong franchise, market position and resilience against any further major transition risk in its ratings, as reflected in the stable outlook. ”

Moody’s also said in its announcement that “as competition in the capital markets business re-intensifies, it will be more difficult for Deutsche Bank to meet its ambitious earnings objectives. Moody’s is therefore concerned that the bank could choose to add more leverage and risk to counter these pressures, thereby potentially putting creditors at greater risk. Identifying such increases in risk-taking, and in particular tail risks, in a timely manner may be difficult given the opacity constraints described above.”

[emphasis added]

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