Deutsche Bank gets key investor backing as rating cut casts doubt

June 2, 2018

Deutsche Bank and its biggest investor sought to reassure shareholders and staff of its financial strength after a ratings downgrade cast doubts on its turnaround plans.

Shares in Deutsche Bank closed at an all-time low on Thursday as the fallout from past misadventures in investment banking haunted chief executive Christian Sewing’s attempt to return the lender to its corporate banking roots.

A source familiar with the thinking of the European Central Bank, which regulates Deutsche Bank, and its top shareholder HNA Group Co Ltd of China, said on Friday they supported management in efforts to restore long-term profitability.

This followed a report in the Wall Street Journal on Thursday that the US regulator viewed the lender as “troubled” last year, and on Friday a Standard & Poor’s downgrade of Deutsche Bank’s credit rating to BBB+ from A-.

Meanwhile in Australia, federal prosecutors were preparing criminal cartel charges against Deutsche, as well as the country’s third-largest bank and Citigroup, over a $2.3 billion share issue. All deny wrongdoing.

Sewing, a Deutsche Bank ‘lifer’ appointed in April after the removal of former CEO John Cryan, said in a letter to staff: “At group level, our financial strength is beyond doubt”.

But he admitted that the newsflow was “not good”.

S&P questioned Sewing’s ability to get Deutsche Bank back to profit by scaling back its global investment bank and focusing on Europe and Germany after three years of losses.

“We see significant execution risks in the delivery of the updated strategy amid a continued unhelpful market backdrop, and we think that, relative to peers, Deutsche Bank will remain a negative outlier for some time,” S&P said Credit ratings are especially crucial for a bank such as Deutsche, whose perceived health is important in winning business. Deutsche Bank is a big issuer of debt securities whose cost is highly reliant on credit ratings.

S&P had rated Deutsche Bank’s long-term credit at A-, on negative credit watch. That was one or two notches below most European competitors. By comparison, S&P rates Switzerland’s UBS at A+ with a stable outlook.