Deutsche Bank suffers new setback with S&P downgrade

Germany’s troubled lender Deutsche Bank suffered more bad news Friday with a Standard and Poor’s downgrade, despite its efforts to emerge from years of crisis with a new CEO and dramatic cost cuts.

S&P lowered Deutsche’s long-term credit rating from A- to BBB+, a day after the US Federal Deposit Insurance Commission classified it among “problem banks” which are judged to have “financial, operational, or managerial weaknesses that threaten their continued financial viability”.

Further darkening the outlook, the US Federal Reserve has also branded the bank as being in “troubled condition”.

The bank’s share price Thursday plunged to near its all-time low on the Frankfurt stock exchange — by 7.2 percent to 9.07 euros — before clawing back about 3.5 percent Friday.

Analysts at ING said they saw “a high likelihood of another downgrade by Moody’s”, another ratings agency.

The string of bad news has raised troubling questions about the long-term viability of what has traditionally been seen as the too-big-to-fail bank of Europe’s top economy.

In January, Union Investment fund manager Ingo Speich warned that if earnings don’t recover in coming years, “something that is unthinkable today could occur, the breaking up of Deutsche and its merger with other large European companies”.

He followed up with a warning at the annual general meeting last week about the bank’s “worrying” state, saying that “what went wrong in the past 20 years can’t be corrected in two”.

Philipp Haessler, an analyst at Equinet Bank, said he considered fears of an eventual break-up of the financial behemoth as exaggerated.

“The bank can recover, I do not see the danger of it being dismantled,” he told AFP.

Refocus on European roots
Deutsche’s woes stem back largely to its bold attempt to compete with the major Wall Street investment banks in the giddy years leading up to the financial crisis.

Playing in the global top league left the financial giant saddled with a toxic legacy of risky assets and costly legal challenges.

Deutsche’s newly appointed chief executive Christian Sewing, who unexpectedly replaced John Cryan in early April, last week sought to reassure investors that the bank is ready to do what it takes to return to profitability.

Deutsche announced it would slash 7,000 jobs around the world as part of its revamp, especially in the US and Asian investment banking businesses, to refocus on its European roots.

S&P acknowledged the bank’s tough actions and “logical strategy”, but also said the lender would still have to work hard to recover its edge over its competitors.

For now, it warned, “the bank appears set for a period of sustained underperformance compared with peers, many of whom have now finished restructuring,” S&P said.

S&P however also appeared confident that Deutsche will eventually manage to pull itself back from the brink.

It removed Deutsche from CreditWatch negative — effectively a warning for further downgrade in the future — and said the ratings outlook was now stable.

Global volatility
At the same time, it said it was unlikely to upgrade its long-term issuer credit rating in the next 18 months, because it did not expect the efforts being made to start paying off until 2019.

“Notably, while much of the heavy-lifting should be completed in 2018, Deutsche Bank’s restructuring will likely only start bearing fruit in 2019, and only fully by 2021,” it said.

Making matters harder for Deutsche, but also for its rivals, is growing global volatility, with a trade war looming after the United States announced steep tariffs on steel and aluminium imports from key partners around the globe.

The banking sector could get relief if the European Central Bank raised its rates, but some analysts fear this may be postponed after a populist and eurosceptic government took power in Italy Friday.