Scope Ratings on May 28 downgraded Deutsche Bank AG's issuer rating and senior preferred debt rating to BBB from BBB+, reflecting the agency's view that high costs and regulatory scandals have left the German bank facing a steep path on the road to achieving sustainable profitability.
The agency also downgraded the German bank's senior nonpreferred debt rating to BBB- from BBB, Tier 2 rating instruments to BB from BB+, and Additional Tier 1 rating instruments to B- from B.
Despite Deutsche's cost-cutting measures, Scope said the bank's cost to income ratio has not improved due to the erosion of its revenue base, which leaves it little buffer to absorb volatile investment banking revenues, with the downgrades reflecting the lender's weak profitability and limited internal capital generation. The agency further said the bank is yet to reach incoming leverage ratio requirements, even though its risk-based capital ratios are stable.
The outlook on all the long-term ratings has been changed to stable from negative, which reflects the agency's expectation that Deutsche maintains a minimum level of recurring profits in line with management targets.
Scope identified Deutsche's restructuring of its retail banking franchise, investment bank and asset management unit as positive change drivers that could help improve the bank's ratings in the medium to long-term, provided it attains profitability gains in the low-margin German market.