Deutsche Bank's credit rating is only 3 notches above JUNK

RubbishbinGettyRubbish spills onto the street from an overflowing bin in the city centre on November 12, 2013 in Madrid, Spain.

A number of European banking stocks are trading lower in the market open after ratings agency Standard & Poor’s downgraded a whole heaps of banking shares last night.

However, Germany’s largest lender Deutsche Bank bore the worst brunt from the ratings action, after its credit rating was cut to “BBB positive,” which is only three notches above junk territory.

S&P assesses the credit worthiness of corporations with AAA (excellent) and AA+ all the way to C and D. A rating below BBB- is considered to be junk. A low credit rating indicates that there is a high probability that the institution would default on its debt.

S&P, the rating arm of McGraw Hill Financial, said the lack of certainty over government support for a number of British and German banks led to the ratings downgrades.

Deutsche Bank, Barclays and Royal Bank of Scotland was downgraded to just “stable” while Germany’s Commerzbank’s rating was cut to “negative.”

However, S&P affirmed its ratings on Lloyds Bank and HSBC Bank and said the outlooks are stable.

Shares in Barclays, Lloyds, and RBS are all trading slightly to the downside within the first hour of trading.

Meanwhile, Deutsche Bank’s stock is down around 1% this morning, and down over 5.4% over the past three months.

Deutsche Bank is going through a massive change at the moment. It purged its leadership and appointed a new CEO. On Sunday, Deutsche Bank revealed that it was replacing co-CEOs Anshu Jain and J├╝rgen Fitschen with John Cryan.

However, analysts point out that the German lender has much bigger problems than leadership issues. Those issues include the lack of a highly profitable private bank, and a historically poor return on equity (ROE), the amount of net income a bank returns as a percentage of shareholder equity.

Furthermore, Deutsche Bank is still under great legal scrutiny and yesterday the group’s offices in Frankfurt were searched by German prosecutors seeking evidence related to client securities transactions.

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