Deutsche Bank AG sees the global regulator's decision to assign it a lower systemic score as evidence that its new strategy is effective, even though the main goal of its restructuring is improved profitability and the group is far from achieving that, according to analysts.
Deutsche Bank was the only lender to drop a rank in the list of global systemically important banks, or G-SIBs, released in November 2019, by the Financial Stability Board, an international consortium of bank regulators. The list compares G-SIBs by five categories: size, interconnectedness, substitutability, complexity and cross-jurisdictional activity, which have equal weighting on the final score that determines how much additional capital a bank should hold.

Regulatory relief but no profit
Deutsche Bank declined in all five categories and recorded the biggest year-over-year drop of all G-SIBs with its systemic risk score falling 68 basis points. The FSB cut the group's additional capital requirement to 1.5% from 2%. The new score also implies Deutsche's leverage ratio requirement, effective from 2022, will be lower, at 3.75% instead of 4%. There is also a potential for another cut in the FSB requirements in 2020 as the latest score is based on 2018 data and does not take into account the resizing of Deutsche Bank's investment bank in 2019, when the group decided to exit its equities sales trading business.
The lower requirements show regulators are crediting Deutsche Bank "for the changed business mix, for the clear structure and strategy," CEO Christian Sewing said at the German group's investor day in December 2019.
Analysts see the situation a little differently: While the lower score is good news, it is too early to judge whether the business mix and structure have been successful. Deutsche Bank's restructuring has contributed to reducing its size, complexity, and connectedness to the global system.
Deutsche Bank deserves credit for derisking its franchise "but its main issue is not capital or liquidity, it is profitability," Laurie Mayers, associate managing director in Moody's European banking team, said in an interview.
Lowest rated
Even with a lower score, Deutsche Bank remains a large systemic institution and still has enough complexity to cause concern. The group is scaling down its "significant exposure" to capital markets in a time when the capital markets wallet itself is shrinking and the products they are most exposed to, such as fixed income and currencies, have seen some of the lowest levels of clients activity in recent years, Mayers said.
Unlike peers, Deutsche Bank did not have "much of a non-cap markets franchise to pull back on," she said. There are also a number of factors outside the bank's control, including low interest rates, which can prevent it from growing revenues in targeted businesses and expanding in areas it aims to in the future, Mayers said.
Deutsche is the lowest-rated global investment bank from Moody's point of view and if profitability ends up much below expectations, it would put further pressure on the bank, she said.
S&P Global Ratings could lower the long-term issuer credit rating of Deutsche Bank and its core subsidiaries within 12 to 24 months if "we see material setbacks in the delivery of the updated strategy, including significant doubt that management will hit its profitability targets through 2022," Giles Edwards, senior director, financial services ratings at S&P Ratings, said in an October note.
"One of our concerns is that Deutsche Bank's business model does not generate sufficient profitability," Ioana Sima, director bank ratings at Fitch Ratings, said in an interview. "Shrinking its interconnectedness and size does not automatically improve this."

Earnings outlook
Fitch will be looking for signs of progress in the group's profits and capital generation from profits in upcoming and future results, she said. Key will be to see improvement in Deutsche's core bank business, meaning the success of cost efficiency measures at the investment bank and private bank divisions, and the growth of strategically important businesses such as the corporate bank and core investment bank.
The capital release unit, containing leverage and risk-weighted assets the group wants to wind down, remains important for the restructuring, but will be less relevant for capital generation from 2020, Sima said. That is because the CRU losses will consume any capital freed up by RWA reduction at the unit, making its impact on group capital virtually zero, she said.
In Sima's view, it is down to the core investment bank to pull Deutsche out of the restructuring.
Deutsche will release its 2019 earnings report Jan. 30. It is expected to post an annual loss of €2.2 billion and total net revenues of €23.1 billion, according to a consensus forecast of equity analysts covering the bank. For 2018, Deutsche Bank posted a net profit of €341 million and total net revenues of €25.3 billion.
