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Deutsche (DB) Ratings Affirmed by Moody's, Outlook Upgraded

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Ratings of Deutsche Bank AG (DB - Free Report) have been affirmed by Moody's Investors Service. Notably, outlook of the company has been upgraded from negative to stable on account of A3 long-term deposit and senior unsecured debt ratings. The ratings agency has also affirmed Deutsche’s Baa3 junior senior unsecured debt ratings.

Reasons Behind Outlook Upgrade

The ratings agency is of opinion that the company’s efforts to restructure operations and business model have been encouraging. Also, Deutsche’s plans to focus more on capital markets operations is expected to make the journey to achieving a more balanced and sustainable business model quicker.

Further, Deutsche’s “sustained solid capital and liquidity buffers” led Moody’s to upgrade the outlook. Another factor that made ratings agency change outlook to stable was the company’s long-term deposit and senior unsecured debt ratings. This reflects Moody's opinion that the shortcomings in corporate governance and execution of earlier restructuring plans as well as overcoming structural and cultural issues have declined post change of management in 2018.

Reasons Behind Ratings Affirmation

Deutsche’s progress on achieving medium-term targets are seen to support earnings stability, lower capital and leverage exposure consumption and its reliance on wholesale funding. Also, the company’s restructuring strategies have helped in freeing capital for reinvestment and self-financing.

The ratings agency was also impressed by the company’s strategy to keep capitalization metrics stable, despite incurring restructuring and transformation expenses along with making additional provisions.

Also, Moody’s feels that Deutsche will successfully execute its proposed plans, including sustaining its revenue base in its fixed income-related businesses, reducing the drag of the newly formed non-core asset unit and sustaining its corporate banking franchise against competition.

Moreover, Moody's believes that given the bank's current capitalization level, bondholders will remain protected. Further, its “granular and highly collateralized loan book” will help contain asset quality deterioration and Deutsche's solid liquidity metrics.

Per the Moody’s article, the affirmation also considers the rating agency’s unchanged Loss Given Failure analysis in assessing the bank's “existing bail-in-able debt cushion and resulting loss severity for its different debt classes”.

Factors That Can Lead to Ratings Upgrade or Downgrade

Deutsche Bank’s ratings will be upgraded if the bank keeps making steady progress toward its medium-term targets and improvement in earning sustainably while continuing to invest to strengthen its technology platform and control infrastructure as well as maintaining a prudent and well controlled risk appetite. Further, improving leverage ratio and maintaining solid capital and liquidity metrics around current levels, as well as continued sound asset quality, could result in upward ratings.

On the flip side, ratings could be downgraded if Deutsche does not make remarkable progress in delivering its overhaul strategies, particularly regarding revenue attrition, realized cost saves and CRU-related de-risking costs.

Also, downward pressure will be created if the company faced additional market headwinds or litigation costs beyond those covered by existing reserves.

Shares of this Zacks Rank #3 (Hold) firm have gained 42.3% over the past six months compared with the industry’s growth of 15.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past few months, Moody’s Investors Service has affirmed ratings and outlook for many finance sector companies. Amid the coronavirus pandemic and the resultant economic uncertainties, the rating agency has affirmed the ratings and maintained stable outlooks for Eaton Vance , FirstCash (FCFS - Free Report) and SLM Corporation (SLM - Free Report) .

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