Deutsche Bank’s credit rating was lowered by Moody’s, citing difficulties with the lender’s plan to stabilise itself in a world of low growth and low interest rates.
The bank’s credit rating for senior unsecured debt, which is not backed by collateral but is ahead of junior debt in the queue for assets in the event of bankruptcy, was lowered to two notches above junk.
Moody’s gave it a Baa2 rating, down from Baa1, and also downgraded the lender’s long-term deposit rating from A3 to A2.
Moody’s said: “Deutsche Bank’s performance over the last several quarters has been weak, and substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm.”
“These forces will likely result in periods of subdued customer volumes and revenues within Deutsche Bank’s retail, asset management and institutional franchises, in Moody’s view.
Deutsche Bank has tried to simplify its business, cut costs and reduce litigation and fines from poor conduct, as part of a plan started in October last year.
The firm has scaled back on businesses that use a lot of regulatory capital, such as trading and markets, to free up resources. But CEO John Cryan has had poor luck with timing, according to Moody’s, because sluggish economic growth and low interest rates have made it harder for the bank to generate profit during its restructuring.
“Deutsche Bank’s new management team is executing in a disciplined way, but the headwinds have stiffened, reducing the firm’s operating flexibility.” said Peter Nerby, a Moody’s senior vice president.
Net income at Deutsche Bank fell 58% in the first quarter of 2016 to €236 million (£183 million) from €559 million in the same period (January to March) last year. Group revenue was down 22% and key investment banking areas of debt and equity sales and trading suffered 29% drops.
John Cryan said: “Financial markets were challenging during the first quarter, largely reflecting concerns about the outlook for the global economy.”
“This uncertainty led to a decline in client activity in the capital markets, and our revenues fell from the prior year, most notably in our trading and corporate finance businesses,” Cryan said last month.