Deutsche Bank Rating Put on Review at Moody’s on Profit Drop

May 06, 2014 6:19 am ET

(Updates with Moody’s comment in sixth paragraph.)

May 6 (Bloomberg) -- Deutsche Bank AG, Europe’s biggest investment bank, was put on review for a possible downgrade by Moody’s Investors Service, which cited challenges over profitability after first-quarter net income slid.

Any downgrade would probably be limited to one level, Moody’s said in a statement today. The company said it’s studying Deutsche Bank’s A2 supported long-term debt and deposit ratings, its C- bank financial strength rating as well as subordinated debt and short-term ratings.

Deutsche Bank is contending with a slowdown in trading revenue and said last week that profit this year will be sapped as it pays regulatory fines and settles lawsuits against the company. Those legal costs have also slowed the bank’s efforts to raise its capital levels to meet demands from investors and regulators.

“Deutsche Bank faces considerable execution challenges in strengthening and stabilizing its profitability and generating acceptable shareholder returns, particularly given our view that its reliance on capital markets’ businesses leaves it with limited strategic flexibility,” New York-based analyst Peter Nerby said in the statement.

The bank’s shares extended earlier declines in Frankfurt, dropping 1.4 percent to 30.84 euros at 12:15 p.m. The 43-member Bloomberg Europe Banks and Financial Services Index fell 0.2 percent.

Moody’s said its review will focus on Deutsche Bank’s efforts to reduce costs, boost capital levels and wind down assets the bank doesn’t consider to be central to its business. The firm’s plan to increase its financial strength by shrinking assets could “impede its ability to generate earnings growth” and make it harder to reach its profit goals, Moody’s said.

Deutsche Bank said last week that first-quarter net income fell 34 percent to 1.08 billion euros ($1.5 billion) as revenue from trading fixed income, currencies and commodities declined.

Standard & Poor’s Ratings Services last week cut the outlook of Deutsche Bank and 14 other European banks on the prospect that governments are less likely to provide financial support.

--With assistance from Tom Kohn in Frankfurt.