FEARS that Deutsche Bank will have to add more leverage and risk to reach ambitious earnings targets led Moody’s Investors Service to cut its investment-grade rating by two notches to Aa3 yesterday.
Moody’s placed Deutsche ‘s ratings on review in December, shortly after the bank unveiled ambitious targets of achieving €10bn (£9bn) in profit before taxes by 2011.
Moody’s cut Deutsche’s long-term and senior debt ratings to Aa3, the fourth highest, from Aa1, the second highest. Moody’s also cut the bank’s financial strength rating to C-plus from B. The rating outlook for all ratings is stable, Moody’s said.
A spokesman for Deutsche Bank said the downgrade had no material impact on funding costs.
Analysts have questioned Deutsche’s ability to meet its targets, amid intensifying competition among investment banks and given a move by global regulators to curb risk taking by banks. Although Deutsche along with many of its capital markets peers benefited from unusually wide trading margins thanks to stimulus measures, margins would shrink as competition intensifies, analysts say.
Earlier this week Deutsche Bank’s finance director told analysts that business in February normalised, in a sign that earnings momentum was coming down from record levels in January.
In its report, released yesterday, Moody’s said in an environment of shrinking margins it was concerned, “the bank could choose to add more leverage and risk”, to meet its ambitious earnings goals. “Moreover Deutsche Bank remains exposed to additional potential losses on its legacy assets, most notably commercial real estate, leveraged finance, and financial guarantor receivables,” Moody’s said.
Aside from highlighting Deutsche’s vulnerability to changes in the outlook for investment banking, Moody’s said Deutsche’s other businesses, including asset management, have shown more earnings volatility than expected.