Deutsche Bank's Outlook Cut by Fitch on Turnaround Concerns

(Bloomberg) -- Deutsche Bank AG had the outlook for its credit rating lowered to negative from stable by Fitch Ratings, which cited risks tied to the German lender’s turnaround plan.

The move “reflects the substantial execution risk Deutsche Bank faces in implementing its restructuring and Fitch’s view that failure to strengthen its business model would result in the bank’s downgrade,” the rating company said in a statement late Thursday. It confirmed the lender’s BBB+ long-term issuer default rating and all other debt ratings.

Deutsche Bank Chief Executive Officer Christian Sewing, who took over in April, is accelerating cost cuts and a pull-back from various investment banking activities around the globe. Investors appear skeptical that he can deliver, with the bank’s share price down more than 16 percent since Sewing took office.

A recent downgrade by S&P Global Ratings has compounded the problem as it removed the bank’s last remaining A- rating. Spreads on its credit default swaps, products that offer insurance against bond defaults, have doubled since the beginning of the year.

Relief Coming?

Chief Financial Officer James von Moltke has previously singled out rising funding costs as a particular problem for Deutsche Bank. However, he and Group Treasurer Dixit Joshi also said on a call with bond investors in early May that planned measures will help offset the effect. He focused on the recent approval from its supervisors to use its retail deposits more widely within the group, as well a change to German law, expected in July, that will enable the bank to issue debt effectively immune from so-called “bail-in risk”.

Deutsche Bank shares rose 1.3 percent to 9.50 euros by 12:45 p.m. in Frankfurt on Friday. That was in line a broader market advance across Europe, after a week overshadowed by threats of a trade war between the U.S. and China.

The bank’s new plan should “address the key weaknesses of its strategy in the past” and lead to a “more balanced business model over time,” according to Fitch.

However, the bank’s longer-term profitability target -- a return of 10 percent on tangible equity -- may be tricky to achieve because it hinges on higher central bank interest rates, a turnaround of the investment bank and cost reductions from the merger of its domestic retail units, which will be “challenging,” Fitch said.

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