Fitch Rates Deutsche Bank's Additional Tier 1 Securities 'BB+(EXP)'

Fri May 2, 2014 12:31pm EDT

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(The following statement was released by the rating agency) LONDON, May 02 (Fitch) Fitch Ratings has assigned Deutsche Bank AG's (A+/Negative/a/F1+) upcoming issue of undated non-cumulative fixed to reset rate additional tier 1 securities of 2014 an expected rating of 'BB+(EXP)'. The final rating is contingent on the receipt of final documentation conforming to information already received. KEY RATING DRIVERS The notes are additional Tier 1 (AT1) instruments with fully discretionary coupon payments and are subject to a write-down if Deutsche Bank breaches a 5.125% Basel III common equity tier 1 (CET1) ratio. The trigger ratio is calculated on a 'phased-in' basis under the EU capital requirement regulations (CRR). The notes are rated five notches below Deutsche Bank's 'a' Viability Rating (VR), in accordance with Fitch's criteria for "Assessing and Rating Bank Subordinated and Hybrid Securities". The notes are notched down twice for loss severity to reflect the write-down on breach of the trigger, and three times for relative non-performance risk. The notching for relative non-performance risk reflects the notes' fully discretionary coupons, which Fitch considers the most easily activated form of loss absorption. The issuer will not make an interest payment if the payment, together with payments made on other Tier 1 instruments, exceeds available distributable items adjusted for interest expense on Tier 1 instruments, or if the authorities or legislation prohibit the bank from making payments. The bank calculates its available distributable items under German GAAP for the parent bank. The available distributable items include net income and movements from capital reserves ('balance sheet profit') and free capital reserves and retained earnings. Under the German commercial code, certain amounts related to intangible assets, deferred tax assets and pension assets cannot be distributed, reducing the available distributable items. At end-2013, the amount available to Deutsche Bank for distribution to AT1 holders amounted to about EUR2.7bn. German accounting standards allow the issuer to influence the amount of distributable items somewhat (e.g. through dividends upstreamed from subsidiaries), and Fitch expects the bank to manage its balance sheet profit to ensure that sufficient amounts are available to make interest payments on the AT1 instruments. The 5.125% trigger is on a phased-in basis, but even on a fully applied basis the bank has a sizeable buffer above this trigger. Deutsche Bank's fully applied Basel III CET1 ratio stood at 9.5% at end-March 2014 providing a EUR16.2bn buffer above 5.125%. However, we believe that loss absorption would occur before a breach of the 5.125% trigger in the form of non-payment of coupon, which under Fitch's criteria would be considered as non-performance. The agency expects Deutsche Bank to become subject to capital regulations' restrictions on distributions, including distributions on AT1 instruments, if and when it breaches its combined buffer requirements. The requirement for Deutsche Bank to maintain capital buffers above the CRR minimum requirements will be phased in from 2016 and is likely to result in a combined CET1 ratio requirement of at least 9% by 2019. At end-March 2014, Deutsche Bank's buffer to a 9% fully applied CET1 ratio was a fairly low EUR1.7bn, but we expect the bank to increase this buffer significantly given its commitment to achieve a 10% CET1 ratio by end-March 2015. We also believe that the combined buffer requirements for banks could change over time and that additional buffers, for instance in the form of counter-cyclical buffers, could be introduced. Fitch expects Deutsche Bank to maintain sound capital ratios that provide a sufficient buffer to avoid restrictions on interest payments on AT1 instruments given these instruments' importance for the bank. The bank has stated that it remains committed to achieving its target fully applied Basel III CET1 ratio of above 10% by end-March 2015 and that it would not exclude a capital increase to achieve its target. The agency also expects that the bank will manage the amount of available distributable items, which can be affected by management's decision on dividend payments from subsidiaries, so that coupon payments will not be prohibited if sufficient free capital resources are available within the group. Fitch has assigned 50% equity credit to the securities. This reflects their full coupon flexibility, the permanent nature and the subordination to all senior creditors. RATING SENSITIVITIES As the notes are notched down from Deutsche Bank's VR, their rating is primarily sensitive to any changes to this rating. Failure to improve underlying earnings in 2014 would put Deutsche Bank's VR under pressure (for more details on the main sensitivities see 'Fitch Revises Deutsche Bank's Outlook to Negative on Support Expectations; Affirms at 'A+'', dated 26 March 2014 and available on www.fitchratings.com). The notes' rating is also sensitive to any changes in notching, which could arise if Fitch changes its assessment of the notes' non-performance risk relative to that captured in Deutsche Bank's VR. This may reflect a change in capital management, including capital management under German GAAP at the parent bank, or an unexpected shift in regulatory buffers, for example. Contact: Primary Analyst Michael Dawson Kropf Senior Director +49 76 80 76 113 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Anna Deineko Associate Director +44 3530 1538 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014, and "Global Financial Institutions Rating Criteria," dated 31 January 2014, are available at www.fitchratings.com. Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828597 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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