(Repeat for additional subscribers)
May 23 (The following statement was released by the rating agency)
Fitch Ratings has assigned Deutsche Bank AG's (A+/Negative/a/F1+) undated non-cumulative fixed to reset rate additional Tier 1 securities of 2014 a final rating of 'BB+'.
The rating is in line with the expected rating assigned on 2 May 2014.
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 offered in three tranches: a EUR1.75bn 6% tranche (ISIN DE000DB7XHP3), a USD1.25bn 6.25% tranche (ISIN XS1071551474) and a GBP650m 7.125% tranche (ISIN XS1071551391).
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. The recently announced capital increase of EUR8bn (see 'Fitch: Capital Increase to Aid Deutsche Bank's Manoeuvrability') will improve Deutsche Bank's fully applied Basel III CET1 ratio to 11.8% from 9.5% at end-March 2014, providing a sizeable buffer of around EUR25bn 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 regulation restrictions on distributions, including distributions on AT1 instruments, if and when it breaches its combined buffer requirements.
The announced capital increase will also result in a stronger buffer to a 9% fully applied CET1 ratio of around EUR10bn. The ratio will face further pressure in 2014 as new regulations are implemented and due to uncertainty around the potential impact from ECB's upcoming asset quality review as well as any other capital requirements potentially to come from European Banking Authority's stress test. However, Fitch expects Deutsche Bank to maintain sound capital ratios that provide a sufficient buffer to avoid restrictions on interest payments on AT1 instruments.
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.
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 at 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.