Banks. Deutsche Bank AG. Germany. Full Rating Report. Key Rating Drivers. Rating Sensitivities. Ratings

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1 Germany Full Rating Report Ratings Long-Term IDR A- Short-Term IDR F1 Viability Rating a- Derivative Counterparty Rating A(dcr) Deutsche Bank Securities, Inc. Long-Term IDR A- Short-Term IDR F1 Deutsche Bank Trust Company Americas Long-Term IDR A- Sovereign Long-Term IDR F1 Deutsche Bank Trust Corporation Long-Term IDR A- Short-Term IDR F1 Deutsche Postbank AG Long-Term IDR A- Short-Term IDR F1 Sovereign Risk Germany Long-Term IDR Outlooks Long-Term IDRs Sovereign Long-Term IDR Financial Data 30 Jun 17 AAA Negative Stable 31 Dec 16 Total assets (USDbn) 1, ,676.5 Total assets (EURbn) 1, ,590.5 Total equity (EURbn) Operating profit/rwas (%) ROE (%) FCC ratio (%) CET 1 ratio, FL (%) 14.1 a 11.8 CRD IV leverage, 3.8 a 3.5 FL (%) NPL ratio (%) NPL coverage Loans/total deposits LCR a Pro-forma including capital increase Related Research Fitch Affirms Deutsche Bank at 'A-', Outlook Negative (March 2017) - Ratings Navigator (April 2017) European GTUBs Quarterly Update (April 2017) Analysts Bridget Gandy bridget.gandy@fitchratings.com Ioana Sima ioana.sima@fitchratings.com Key Rating Drivers Strategic Reorientation Drives Ratings: s (DB) Long-Term Issuer Default Rating (IDR) and Viability Rating (VR) reflect our expectation that the strategic reorientation towards a more balanced universal banking business model should, if executed successfully, make earnings and capital less vulnerable to capital market volatility and market sentiment. But reversing franchise damage experienced in 2016 and executing the new strategy will be challenging, and the Negative Outlook reflects a high potential for delay or failure. Weak Earnings: The bank s earnings are likely to remain a weakness in comparison with most global peers over the next one to two years. Any improvement depends on DB s ability to regain lost clients and market shares, in particular in the Corporate and Investment Bank (CIB). We expect costs to remain high as additional restructuring expenses offset efficiency gains. Further conduct provisions may be added, but we expect these to be less significant than in 2016 given progress with resolving major cases. Rights Issue Boosts Capitalisation: The EUR8 billion capital raising completed in 2Q17 has increased DB s regulatory capital ratios and relieved the pressure from weak internal capital generation. Management has committed to maintaining the common equity Tier 1 (CET1) ratio above 13% and increasing the leverage ratio to 4.5%, broadly in line with European peers. Retail Presence Maintained: Management has shelved plans to sell DB s retail subsidiary Deutsche Postbank AG (Postbank) and is planning to integrate it fully into its other domestic retail and commercial banking business, which is likely to involve a merger of the legal entities. The lack of a leading domestic franchise and failure to utilise Postbank s deposits for more lucrative lending is a weakness for the bank s earnings compared with peers based in other countries, and a successful repositioning will be challenging. Diversified Funding Despite Setbacks: DB s funding profile remains well-diversified and the bank retains a large and high quality liquidity reserve. The bank experienced a notable widening of spreads on unsecured market-based funding in 2016 and some institutional deposit outflows, from which it subsequently recovered. DCR and Structured Debt Uplift: Statutory subordination of plain vanilla senior bonds to other senior liabilities in Germany applied retroactively since 1 January 2017 means the bank already has sufficient loss absorbing liabilities to meet Total Loss Absorbing Capital (TLAC) requirements when they are first due in Fitch believes the resulting buffer of junior debt is sufficient to afford protection to derivative counterparties, depositors and preferred senior debtholder in resolution. Rating Sensitivities Loss of Franchise: Ratings could be downgraded if we believe that the franchise weakening in 2016 has not been reversed. This would be signalled, for example, by lower revenue or loss of market share in DB s core businesses. Execution Risks: Notable setbacks to the execution of the new strategic plan could also lead to a downgrade of DB s ratings. These may include failure to fully integrate Postbank, significant delays, unforeseen costs or failure to retain capitalisation on target for example due to large litigation or conduct costs. Upside Beyond Outlook Horizon: Successful transformation of the business model and achievement of higher, more balanced and stable earnings could bring positive rating momentum in the longer term. We do not envisage such a scenario within the next two years. 14

2 Pre-Tax Profit Split (1H17) PCB 26% AM 15% CIB 59% Operating Environment DB is headquartered in Germany (AAA/Stable) and most of its corporate and retail operations are based there, benefitting from the country s stable economic environment. The bank operates globally through its capital markets business, which has sizeable operations in the US (AAA/Stable), and in the United Kingdom (AA/Negative), though business booked in its London branch and local staff numbers are set to decrease following the UK s decision to leave the European Union. The bulk of DB s business is undertaken in sophisticated and well-regulated markets. The operating environment has a low importance for DB s rating. Note: Ex. DVA, goodwill impairment, litigation, restructuring, and Consolidation & Adjustments segment RWA Split (End-1H17) PCB 25% DeAM 3% C&A 4% German Retail Banks Number of retail clients in Germany (m) SFG GFG PoBa + DB CBK ING-Diba Santander Targobank CIB 68% Source: Banks' data, Fitch's estimate Related Criteria Global Bank Rating Criteria (November 2016) Global Non-Bank Financial Institutions Rating Criteria (March 2017) Company Profile Reliant on Fixed-Income Franchise; Retail Presence Maintained DB is Germany s largest privately owned bank by total assets and one of the largest and most complex banks worldwide, with businesses spanning across Europe, America and Asia Pacific. The bank has a strong franchise in investment banking globally, especially in fixed income, a modest presence in the highly fragmented German retail market, a leading position in corporate and transaction banking, good domestic market share in asset management and a growing wealth management business. The high weight of capital markets and in particular sales and trading businesses, which we view as a more volatile source of earnings, negatively influences our assessment its business model. Management expects that the combination of DB s sales and trading, corporate finance and transaction banking businesses into one Corporate and Investment Bank (CIB) unit from end- 1H17 will facilitate a more integrated approach to client management and cross-selling opportunities. DB s franchise in CIB is geared towards fixed-income, credit and foreign currency sales and trading, where the bank maintains top-three league table positions in EMEA and APAC (Source: Coalition League Tables FY16). It also maintains a healthy franchise in debt capital markets, ranking eighth in debt capital markets globally and sixth in EMEA in 7M17, according to Dealogic. DB is an active participant in the leveraged finance markets, including trading leveraged loans and high-yield bonds. It has a meaningful presence in US commercial real estate, including Commercial Mortgage-Backed Securities (CMBS) origination, distribution and advisory. Transaction banking including trade finance, cash management and securities services, benefits from DB s corporate customer base. DB ranked fifth in transaction banking worldwide and within the top three in EMEA according to Coalition league tables published in April 2017, and the division remains of key importance to the bank's strategy and an area of growth. DB s combined retail and wealth management presence through Postbank, Private and Commercial Clients (PCC) and wealth management (WM), together managed as the segment Private and Commercial Bank (PCB), serves over 20 million customers and accounted for 26% of adjusted profit before tax in 1H17. Despite a strong national branch network and brand recognition, Postbank s market penetration and pricing power are limited. PCC typically targets affluent customers to compete in a highly fragmented retail market where savings banks, Landesbanken and cooperatives together capture leading market shares in deposits and loans. The lack of a leading domestic franchise and failure to utilise Postbank s strong deposit base for more lucrative lending opportunities thus far, is a comparative weakness for the bank s earnings in relation to peers based in other countries. DB s asset management business is considered an attractive growth business. It currently enjoys good market shares in Germany and to a lesser extent wider Europe. It is a leading provider of retail funds in Germany and the second-largest ETF provider in Europe. Invested assets mainly relate to Germany with the remainder well diversified across the rest of the world. 2

3 DB s organisational structure is complex as a result of the breadth of its operations which results in a large number of subsidiaries, in line with other global trading and universal bank (GTUB) peers. DB has a meaningful presence in the US, where it generated EUR6.6 billion in revenue in 2016 through 10,500 employees (full time equivalent). It operates through its New York branch (USD158 billion of assets at end-2016) and subsidiaries held via an intermediate holding company, Deutsche Bank USA Corporation, which was created in Its main US operating subsidiary is its broker-dealer, DB Securities Inc, and it has a bank insured by the Federal Deposit Insurance Corporation, Deutsche Bank Trust Company Americas. In the UK, where the group had more than 8,500 employees (full time equivalent) and generated EUR5 billion of revenue in 2016, it operates mainly through London branch. We understand that the UK presence could be reduced significantly in preparation for Brexit and depending on the conditions agreed between the UK and EU. Management and Strategy Strategic Rethink is Creditor Friendly but Execution Risks Remain Revenue weakness in 2016 and unfavourable conditions for achieving a sale of Postbank meant that the bank had to turn to shareholders for fresh capital and rethink some of the Strategy 2020 targets in early Fitch views the decisions to retain a retail presence and increase the focus on corporate customers positively. But execution risks relating to restoring DB s reputation with its stakeholders, including its workforce and prime customer base, turning around a barely profitable mass retail operation and resolving legacy misconduct cases remain substantial, in our view. Management decided to shelve plans to sell Postbank, opting instead for a medium-term plan to integrate it into its existing private and commercial clients business. Low return on tangible equity (RoTE) from Postbank had been a key reason for previous plans to sell. But expectations of a return to a normalised interest rate environment, potential cost synergies from integrating IT platforms, simplifying product offering, increasing digitalisation, as well as the regulatory rein-back on leverage requirements for European banks swayed the decision. DB s Financial Targets Post-tax RoTE of about 10% in a normalised operating environment Adjusted costs of EUR 22 billion by 2018 and EUR21 billion by 2021 CET1 ratio comfortably above 13% Leverage ratio 4.5% DB s Business Targets Origination and advisory: regain market leadership position in Europe, strong franchises in US and APAC Transaction banking: improve profitability and cross sell Financing: leading credit financing and solutions Fixed income and FX trading: top five globally, top three in Europe and selected businesses Equities sales and trading: regain prime brokerage market share At the same time, DB s management is planning to increase the importance of the bank s corporate client-led franchises, by continuing to run-down legacy exposures and recycling released capital into corporates-focused origination, advisory, transaction banking and financing businesses. Progress with other targets set out in the Strategy 2020 appears on track. These include the disposal of smaller non-strategic businesses, exiting its onshore presence from earmarked countries, reducing the domestic branch network and simplifying the complexity of DB s IT systems. However we expect it will take many years until the impact of such measures, in particular of strengthened risk culture and more robust IT systems, is tested and translates into financial performance. Management Turnover Consistent with Strategy Nearly all of the current management board members, including the chief executive officer, have been appointed during the past two years, reflecting the previous management team s difficulties in meeting financial objectives. We view further top management changes announced in 2Q17 as consistent with the strategy and succession planning. Changes include creating two deputy CEO positions by promoting internally the previous chief financial officer and the head of PWCC, replacing the CFO with a strong external hire and appointing cobusiness heads for the two new main divisions CIB and PCB. 3

4 Risk Appetite Sound Underwriting Standards DB is exposed to complex financial instruments, mainly because of its sales and trading operations. The bank s moderate risk appetite in domestic retail banking comprises mortgage loans typically extended at low loan-to-value ratios, and a low share of short-term uncollateralised consumer finance loans. We do not expect DB s targeted growth in corporatesdriven businesses to result in weaker underwriting standards. But we expect the importance of credit risk to increase, and large exposures will need to be closely monitored. Weaknesses in Risk Controls Being Addressed Our assessment of the bank s risk controls factors in weaknesses uncovered in past years, which the bank is addressing. It is investing in digitalisation, streamlining systems and processes and exiting some countries (such as from Russia where controls weaknesses have been the root of lengthy and expensive regulatory investigations). Management is also seeking to improve the risk culture within the organisation. In the US, the establishment of an intermediate holding company subject to tight regulatory supervision and stress tests should over time also contribute to improved risk controls. Conduct Costs Significant Burden Conduct and litigation costs have been a high burden to earnings in recent years. They have translated into higher capital requirements for operational risk. The bank has reached costly settlements in 2016 and early 2017, notably with the US Department of Justice (DoJ) investigation into DB s past residential mortgage backed security dealings, which resulted in a fine of USD3.1 billion, and the obligation to engage in USD4.1 billion worth of consumer relief actions. It has also settled with the UK Financial Conduct Authority, the New York Department of Financial Services and the Federal Reserve over anti money laundering deficiencies related to equity trades booked in Moscow and London, resulting in USD629 million fines. The bank booked litigation costs of EUR7.6 billion (including loan processing fees but likely excluding any impact of consumer relief) between 2015 and 1H17. At end-1h17 DB had EUR2.5bn reserves against future penalties arising from civil litigation cases and regulatory enforcement on balance sheet. Its numerous outstanding investigations and court cases, including the DoJ s investigation into London/Moscow trades, could result in further fines, the amount of which is difficult to predict. Material Traded and Non-Traded Market Risk Traded market risk, which uses 11% of DB s 1H17 economic capital, arises through marketmaking in debt and equity securities, derivatives and foreign-exchange products. The bank uses a variety of measures to monitor traded market risk, including value-at-risk (VaR), stressed VaR, incremental risk charge and comprehensive risk measures using historical data and Monte Carlo simulation. Economic capital and VaR utilisation under the bank s internal stress-testing scenarios are subject to board-approved limits. Interest Rate Risk (EURbn) -200bp +200bp Economic Value Net Interest Income Note: Impact on banking book across all currencies; decline floored at zero. Source: DB s 2016 annual report Average VaR utilisation declined to EUR31.8 million in 1H17. However, the undiversified sum of asset class maximum VaRs incurred in 2016, scaled up by a factor of five (Fitch Stressed VaR) as a percentage of the latest Fitch Core Capital (FCC) of 4% remains one of the higher of the European GTUBs, reflecting the relatively high allocation of capital to sales and trading. Trading unit revenues were positive in 87% of the trading days in 2016 and in 97% of trading days in 1H17. In 2016 the bank had one back-testing exception when the buy-and-hold loss exceeded the value-at-risk during the market volatility seen in February Back testing exceptions occurred in 2015 following removal of the euro-swiss franc floor and in the non-core unit, which have been run-down to target. 4

5 Sound Loan Quality (%) 1H NPLs/gross loans NPL reserves/npls LICs/av. gross loans Net charge-offs/avg gross loans Gross loans growth Loan Quality by Sector Outer ring: End-2016 gross loans Inner ring: End-1H17 impaired loans Households Other FIs Manufacturing CRE Fund mgt Trade Public sector 4% 4% 6% 7% 7% 12% 10% 5% 9% 45% 37% 2% 37% 15% Impaired Loans by Region (End-1H17) APAC 4% North America 7% Eastern Europe 3% Germany 36% Other 1% Western Europe 49% Non-traded market risk represents a substantial 22% of DB s economic capital usage before diversification at end-1h17. Within this, interest rate risk in the banking book is related to mismatches in the maturities and repricing of assets and liabilities; the majority of this risk is managed by DB through maturity transformation and internal risk transfers to the trading book, while Postbank and PWCC manage interest rate risk separately. The remaining net interest rate risk position in the banking book is a manageable 4% (end-2016) of economic capital usage before diversification. Foreign exchange risk is largely transferred to Global Markets or mitigated through match funding. Structural foreign exchange exposure arises from local capital (including retained earnings) with different currencies. The exposure to core currencies US dollar and sterling remains unhedged so that fluctuations in risk-weighted assets (RWA) broadly offset those in CET1 capital, while exposures in non-core currencies are fully hedged. Other non-traded market risks relate to credit spread risk in the banking book, equity risk from strategic and non-strategic investments, market risk related to asset management products as well as risks not related to client business such as pension and equity compensation risks. Financial Profile Asset Quality Strong Loan Quality in German Retail and Corporate Lending DB s strong asset quality benefits from its focus on investment-grade corporate exposures and German retail loans, which together accounted for about 71% of its EUR403 billion gross loans at end-1h17. Exposure to more volatile sectors such as shipping, metals and mining, oil and gas, leveraged finance and commercial real estate have driven loan impairment charges in recent years and could pose a risk in future, but their impact is mitigated by a well-diversified and mostly high quality loan-book. DB s impaired loans/gross loans ratio continued to improve to 1.66% at end-1h17 and the volume of impaired loans fell to a low EUR6.7 billion, 10% below end Structurally the decline was supported by write-offs and disposals in the non-core unit and by write-offs related to portfolio sales in Spain. The deterioration of the shipping loan book seen in 2016 seemed to stabilise in 1H17, though the sector continues to face challenges. Reserve coverage decreased slightly to 59% of impaired loans at end-1h17. The retail loan book benefits from well performing German mortgages and SME loans, which together accounted for 80% of gross retail loans at 1H17. Loans outside Germany are extended mainly in Italy, Spain, Belgium, Portugal, Poland and India, and have weaker asset quality (3.75% are more than 90 days past due) in particular in the EUR14.7 billion SME and small business loan book. The quality of the Spanish and Italian portfolios improved due to NPL sales in 1H17. Despite its small size (EUR5 billion), the shipping portfolio accounted for the bulk of loan impairment charges (LIC) in 2016 (EUR346 million). Lower LICs associated to the CIB (EUR113 million, 63% yoy decline) suggested some stabilisation in 1H17, although additional losses are possible later in the year if the market does not recover sustainably and collateral values weaken again. Impaired loan coverage of 43% in the shipping segment at end-2016 was below some German peers. The sectors most affected by weak market dynamics and supply overhang, the container and bulker segment, accounted for nearly half of Deutsche Bank s portfolio while non-recourse financing to German KG structures accounted for just below 10%. Although the bank reversed some provisions to oil, gas, metals and mining in 1H17, these sectors continue to pose a risk due to high share of non-investment grade borrowers and vulnerability to macro developments. About 25% of loan exposure to the oil and gas industry 5

6 CIB PCB DeAM Banks (EUR8 billion at end-2016) was to non-investment-grade exploration and production and services and equipment segments. The bank is targeting reduction of its EUR6 billion metals, mining and steel portfolio, which is largely non-investment grade and to emerging market counterparties. DB is also significantly active in leveraged finance markets and has in the past incurred valuation losses. Deal inflows are sensitive to lower M&A activity and competition from financial institutions not subject to regulatory leverage restrictions. Fewer, less granular deals can expose the bank s asset quality to idiosyncratic industry shocks. DB s EUR37 billion credit exposure to commercial real estate (CRE) included a small residual non-core share (3%) at end Exposure is typically more concentrated in the US where the bank is a leader in CMBS. Postbank s CRE exposure is predominantly to German real estate and includes a small amount of junior tranches. CRE loans are generally secured by first mortgages and are subject to LTV limits of less than 75%. Sizeable Non-Loan Exposures The bank s non-loan corporate credit exposures are sizeable, reflective of its business model. Corporate exposures include irrevocable lending commitments and contingent liabilities (together EUR210 billion) of which 70% extended to investment grade counterparties; EUR35 billion OTC derivative counterparties, net of collateral and netting agreements, of which 83% to investment grade counterparties and EUR53 billion debt securities, 99% investment-grade (according to the bank s internal classification system) at end 1H17. Level 3 fair-valued assets totalled EUR22.4 billion at end-1h17 (15% lower compared to end- 2016) and include derivative instruments, trading securities (illiquid emerging market corporate bonds and highly structured corporate bonds, notes issued by securitisation entities) and other illiquid instruments such as leveraged loans and residential and commercial mortgage loans. The bank s sensitivity analysis reveals a possible fair value loss of EUR0.93 billion if the bank were using more conservative but reasonable alternative valuation inputs for these assets. Earnings and Profitability Earnings to Remain Weak DB s earnings are likely to remain weak compared to most other large global banking groups over the next one to two years. We believe that the downside within this horizon has reduced as a consequence of progress with resolving major conduct cases in Our expectation of meagre earnings assumes operating cost reductions will to a large extent be offset by further restructuring and litigation costs and that the revenue will not decline further from its 2016 level of around EUR29 billion (excluding completed disposals). Failure to contain the revenue decline could lead to a rating downgrade if we believe that it signals franchise weakness and will derail the bank from reaching longer term profitability goals. Net Revenue Split (EURbn) Equity S&T Debt S&T (1H16) Loan products (1H16) GTB PoBa DeAm FIC S&T (1H17) Financing (1H17) Origination, advisory PCC WM NCOU, C&A, other -1 1H17 1H16 Note: As reported, ex.huaxia, Abbey Life Operating Profit/RWA H H H (%) Note: Based on pre-tax profit excl. DVA and impairment of goodwill; 1H17 annualised Pre-Tax RoTE Breakdown (%) Other non-core Impairment "Underlying" RoTE Restructuring Litigation Pre-tax RoTE H17 Note: Excluding CVA/DVA/FVA; 1H17 annualised and including impact of residual non-core 6

7 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Banks In the longer term, the bank expects that the implementation of its revised strategy and a more supportive interest rate environment should enable it to achieve a long term return on tangible equity of 10%. Among the new segments only Deutsche Asset Management s returns met the group s overall 10% target in 1H17, helped by a balance-sheet light business model. Further profitability improvement is needed from the CIB division (3.9% RoTE in 1H17) especially concerning the capital intensive sales and trading businesses and the reintegrated non-core businesses. In PCB (6.5% RoTE in 1H17), a high cost base and the low-risk/low-return German retail banking business models of Postbank and PCC also cause it to fall short of profitability targets. The profitability ambition is lower than previous targets. Fitch believes that lower earnings can be sufficient at its rating level given management s commitment to maintain a higher capital buffer and our expectation that the reshaped business model will improve earnings stability. Cost Reductions Remain in Focus Reaching the new profitability targets assumes the bank will achieve a leaner adjusted cost base (which DB defines as excluding litigation, restructuring and severance, impairments of goodwill and intangibles and policyholder claims and benefits) of approximately EUR22 billion by 2018 and EUR 21 billion by In 2016, adjusted costs declined to EUR24.7 billion, but benefited from unsustainably lower variable compensation costs. The EUR2.7 billion cost reduction targeted in should result from planned and completed business disposals (EUR1.5 billion), infrastructure streamlining (EUR1.7 billion) and further cost cuts in the core businesses, including from staff cuts (EUR1.6 billion), which will in part be offset by investments in front office, compliance and controls. While not unrealistic, we believe the target is subject to substantial risk of delays and overruns, especially with respect to timing of staff reductions and amount and timing of IT savings net of required investments. Management has indicated that progress with IT and systems simplification is on track and that the bank had achieved about one third of its 2018 targeted actions by July On top of adjusted costs, the integration of Postbank and continued effort to close branches and reduce headcount will add substantial restructuring costs, which are set to rise to around EUR2 billion by end-2021, most of which frontloaded over the next two years. Restructuring and severance costs amounted to EUR0.7 billion in 2016 and a low EUR 0.1billion in 1H17. Revenue Growth Uncertain; Franchise Resilience Is Key Sustainable revenue improvement is contingent on DB s ability to regain lost clients and market share. This is particularly true for the CIB division where revenue generation was affected by outflows following concerns over DB s creditworthiness in late 2016 and by strategic business exits. Revenue From Capital Markets Businesses (EURbn) Equity sales and trading Fixed income sales and trading Financing Debt underwriting Equity underwriting Advisory Other Note: Financing is reported separately from sales and trading businesses as of end-2q17; prior quarters' restatements are not reflected in the chart 7

8 Capitalisation (%) 1H FCC/RWA CET1 ratio (fully-loaded) CET1 ratio (phased-in) CRDIV leverage TCE/TA Note: Regulatory capital ratios are pro-forma including the capital increase Source: Bank, Fitch RWA-Based Requirements (%) 2017 F/L a CET1 (pillar 1) AT Tier P2R CET1 buffers o/w CCB o/w CcyB o/w GSIB Total CET1 requirement Total capital requirement a Requirements as of 2017 excluding transitional arrangements Source: Bank, Fitch Revenue development in 1H17 was weighed down by low volatility and client engagement, which particularly affected the CIB in 2Q17, interest margin pressure in retail and transaction banking and in a yoy comparison by the impact of business reductions. In FIC, performance of sales and trading was weighed down by low volatility in the second quarter. Foreign exchange trading also performed poorly compared to 1H16 when Brexit-related volatility boosted volumes. Management has indicated that revenue lost from negative sentiment in 2016 was a good EUR1 billion for the bank as a whole. Although some clients returned in 1H17, the associated revenue has not recovered to the same extent. Equity sales and trading revenue, for instance, declined 18% yoy in 1H17, due to lower and less lucrative prime finance balances and higher funding costs. We view underlying revenue in transaction banking and PCB as more stable, but pressure from low interest rates and business reductions are taking a toll. Revenue stands to benefit from a moderately higher and steepened euro yield curve. This would improve the earnings potential from DB s large deposit base, especially in its corporate transaction banking business and Postbank. However Fitch does not expect the ECB to increase the policy rate in 2H17 or 2018, and the benefit to DB s earnings, if any, would fall beyond the ratings outlook horizon. Capitalisation and Leverage Rights Issue Improves Capitalisation Fitch s assessment of DB s capitalisation is based on the expectation that its CET1 ratio will remain in excess of 13%, as guided by DB s management. The bank completed a EUR8 billion rights issue in April. This increased its pro-forma fully loaded CET1 ratio as at end-1h17 to a solid 14.1% from 11.8% at end From this level, we expect some downward pressure to reflect RWA growth from increasing business activity and risk density. At the same time, zero interim profit retention assumed for regulatory capital calculation will prevent internal capital generation until the dividend pay-out from the 2017 result is decided. The announced intention to sell a minority stake in the asset management division through an initial public offering and selected business disposals add flexibility to generate EUR2 billion CET1 capital, or 56bp of end-1h17 fully loaded RWAs, which can help mitigate pressure from low earnings. These measures are set to take place over the next couple of years, but the IPO of the asset management division is unlikely to take place in 2017, according to management. At end-1h17 RWAs of EUR355 billion were broadly stable compared with year-end balancing the impact of a weaker dollar against RWA growth from model updates and the incorporation of operational risk loss data associated with the last conduct settlements into DB s operational risk advanced measurement approach model. AT1 Coupon Payment Capacity ADIs (EURbn) Interest expense on AT1 The bank still benefits from low risk density compared to peers, but in the longer term, credit RWA floors and market risk RWA reforms could have a substantial impact on risk weighted capitalisation. The bank had quantified the potential impact of increasing risk-weights due to changing regulation at around EUR100 billion RWA by 2020 in 4Q15. The actual impact may differ from this initial estimate subject to softer agreements being reached and because the bank s balance sheet is likely to be different at the time of implementation compared to what was assumed at the time. For instance the retention of Postbank may expose it to higher impact from mortgage floors while the run-down of legacy derivatives could potentially ease the impact on counterparty credit risk RWA. DB s phased-in CET1 ratio is well in excess the CET1 regulatory requirements applicable in 2017, which stand at 9.52%, combining CET1 Pillar 1, Pillar 2 add-on resulting from the ECB's Supervisory Review and Evaluation Process (SREP) and buffer requirements. DB has not disclosed the Pillar 2 Guidance add-on the ECB expects it to maintain in addition to the combined CET1 requirement. 8

9 Leverage Ratio Weaker than Peers The decision to retain and integrate the low-risk-density Postbank assets means that DB s leverage ratio will continue to be a relative weakness. DB targets a fully-loaded CRD IV leverage ratio of 4.5% in the medium term, which is broadly in line with European peers, but at end-1h17 the pro-forma ratio stood at 3.8%, which is fairly low. We expect the leverage ratio to be steered primarily through the denominator and to a lesser extent through Tier 1 capital accretion or issuance. Restrictive rules for calculating Available Distributable Items (ADIs) from which coupons on additional Tier 1 (AT1) securities can be paid make this instrument unattractive for DB as long as uncertainty over internal capital generation persists. ADIs are calculated annually under German GAAP for the parent bank and reference primarily cumulative retained earnings. Funding Mix Unsecured wholesale Other 5% customers 6% Secured funding and shorts 17% Capital markets, equity Retail deposits 30% Transaction bk deposits 22% 20% Excluding derivatives and settlement balances, margin and prime brokerage balances and other non-funding liabilities Source: DB Wholesale Debt Maturity (EURbn) Capital instruments CB Senior structured Senior non-preferred DB s DCR, long-term deposit rating, senior market-linked notes and senior preferred debt are rated one notch above its Long-Term IDR The uplift reflects the benefit conferred by the bank's large buffer of qualifying junior debt and nonreferred senior debt Full Pay-out Assumed in Regulatory Capital The bank is not including interim profits in regulatory capital, applying an assumed 100% common equity dividend pay-out ratio. This is required by the ECB because the bank has paid common share dividends from the positive German GAAP result for The pay-out was imposed by a court despite the bank having posted an IFRS loss, and despite management s prior intentions to not pay out any dividends. For 2017, management s guidance is that dividends of at least EUR 0.11 per share will be paid out. However, it indicated that the requirement to pay out the notional dividends may no longer apply. The bank aims to return to paying a competitive dividend in 2018, which we expect will be subject to an improvement in earnings. Funding and Liquidity Diversified Funding Profile We view DB s funding profile as well diversified. At end-1h17, total external funding (excluding derivatives and settlement balances, margin and prime brokerage balances and other nonfunding liabilities) amounted to EUR1.033 trillion, around half of which consists of deposits from retail, wealth management and transaction banking clients. Sources of wholesale funding include unsecured, secured funding and short trading positions, and funding from fiduciary deposits, prime brokerage cash balances. The group s loan book was funded by 75% of customer deposits (mainly retail and transaction banking) at end-1h17. DB s wholesale funding plan of EUR25 billion for 2017 includes EUR13 billion senior nonpreferred unsecured senior debt and a relatively high amount of senior structured (EUR10 billion) debt, which is preferred in Germany in insolvency and resolution. The bank had completed 53% of its funding plan by end-1h17. Although deposit-rich, Postbank does not make material funding contributions to the wider group, given regulatory constraints. The merger of Postbank with DB s private and commercial clients business could lead to improved fungibility of funding and liquidity within the group. Postbank s total deposits were EUR119 billion at end-2016, 86% of which funded loans on Postbank s balance sheet. Market Sensitive Outflows and Funding Cost Increase in 2016 The negative market perception of DB since the announcement of the initial settlement offer by the US Department of Justice led to outflows across both stable and less stable funding sources. We understand that negative publicity played a role in the EUR19.6 billion decline in retail deposits, reflecting a loss of wealth management balances, and EUR20 billion reductions in prime brokerage payables at end-2016 though at the peak the reductions were likely larger. 9

10 Liquidity Reserves (EURbn) % -58% Cash and Highly liquid equivalents securities 1H17 End-2016 End % Other CBeligible securities The bank s wholesale funding costs increased substantially in 2016, due to a combination of market concern about its creditworthiness and a change in the insolvency hierarchy in Germany, which rendered its plain vanilla senior debt subordinated to other senior liabilities. The bank paid an average spread of 95bp above Euribor for an average tenor of 6.5 years on its wholesale funding raised in 1H17, which remains high compared to historical levels (in 2015 the bank raised EUR39 billion at an average spread of 57bp and a tenor of 6.3 years). Well Positioned to Meet TLAC Requirements The new German statutory resolution regime in force since January 2017 subordinates banks outstanding vanilla senior unsecured debt to deposits, derivatives and structured liabilities. The new regime s retroactive application limits DB s need to issue unsecured debt to meet TLAC requirements. The eligible volume of vanilla senior debt (EUR54.1 billion) with a maturity of over one year, together with subordinated debt and capital amounted to 34% of the bank s RWAs and 8.4% of leverage exposure at end-1h17, well in excess of the FSB s requirement of 18% of RWAs/6.75% of leverage exposure plus CET1 buffers by Ample Liquidity DB s available liquidity is ample as reflected by its large EUR285 billion reserve consisting 80% of cash and cash equivalents and a liquidity coverage ratio of 144% at end-1h17 (128% at end- 2016). A high 81% of the liquidity reserve is held by the parent bank and its branches. This mitigates the risk that liquidity held at subsidiaries such as Postbank, or at the US IHC, cannot be repatriated in case of stress. The bank calculates a stressed net liquidity position representing the surplus of liquidity reserves and other business inflows over liquidity needs in a severe market and idiosyncratic stress situation. This surplus was estimated at EUR47.5 billion at end-1h17 across all currencies. At end-2016 the bank maintained a surplus of EUR69 billion over US dollar stressed liquidity needs and EUR10 billion over sterling stressed needs. Outflows related the DoJ settlement led to a decline of the stressed net liquidity position to EUR18 billion at end- 9M16, which prompted the bank to take corrective actions. Support DB s Support Rating (SR) of 5 and Support Rating Floor (SRF) of No Floor reflect our view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that DB becomes non-viable. Debt Ratings DB is a regular issuer of senior debt in various forms. Fitch rates non-preferred senior debt in line with DB s IDRs. Preferred senior debt and market linked notes are rated one notch higher, reflecting our expectation that they would be protected from default in a resolution scenario by large buffers of junior and non-preferred senior debt. Subordinated debt and other hybrid capital instruments issued by DB and its subsidiaries are all notched down from DB's VR in accordance with our assessment of each instrument's respective non-performance and relative loss severity risk profiles. Legacy Tier 1 securities are rated four notches below the VR, reflecting higher-than-average loss severity (two notches), as well as high risk of non-performance (an additional two notches) given partial discretionary coupon omission. CRR/CRD IV AT1 instruments are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be converted to equity or written down well ahead of resolution. In addition, they are notched down three times for high non-performance risk, reflecting fully discretionary coupon omission. 10

11 Peer Analysis Financials Deutsche Bank (a-) Barclays (a) BNP Paribas (a+) Credit Suisse Group (a-) HSBC Holdings (aa-) Societe Generale (a) UBS Group (a) Jun17 Dec 16 Jun 17 Dec 16 Jun 17 Dec 16 June 17 Dec 16 Jun 17 Dec 16 Jun 17 Dec 16 Jun 17 Dec 16 Asset quality Impaired loans/gross loans NPL reserve coverage ratio LICs/avg. gross loans Net charge-offs/gross loans n.a. 0.4 n.a. n.a n.a. n.a. n.a. n.a. Growth of gross loans Earnings & profitability OpRoRWA NII/earning assets Cost-income ratio LICs/pre-imp OpProfit Net RoE Capitalisation & leverage FCC/RWA CET1 ratio (fully loaded) Leverage ratio (fully loaded) n.a Tang. equity/tang. assets Unreserved imp. loans/fcc Internal capital generation Funding & liquidity Loans/customer deposits Client dep/funding excl derivs Liquidity coverage ratio n.a Structural indicators (USDbn) Total assets 1, , , , , , , , , , Total equity Fitch core capital Net income (m) 1,188-1, ,479 5,158 8, ,660 8,048 3,446 2,393 4,573 2,597 3,329 Source: Banks, Fitch 11

12 BNP SG BARC DB BARC CS DB SG CS DB CS CS CS DB UBS BARC SG BARC BNP DB SG UBS BARC DB SG UBS BARC BNP SG BARC BNP CS DB SG HSBC BNP BNP HSBC UBS HSBC CS HSBC UBS BNP HSBC HSBC UBS UBS BARC BNP SG CS DB UBS HSBC HSBC Banks Peer Analysis Navigator Scores aaa aa+ aa aa- a+ a a- bbb+ bbb bbb- Source: Fitch Operating environment Company profile Management Risk appetite Asset quality Earnings & profitability Capitalisation & leverage Funding & liquidity 12

13 Income Statement 30 Jun Dec Dec Dec Dec Months - Interim Year End Year End Year End Year End EURm EURm EURm EURm EURm Reviewed - Unqualified Audited - Unqualified Audited - Unqualified Audited - Unqualified Audited - Unqualified 1. Interest Income on Loans n.a. 12, , , , Other Interest Income 11, , , , , Dividend Income n.a Gross Interest and Dividend Income 11, , , , , Interest Expense on Customer Deposits n.a. 2, , , , Other Interest Expense 5, , , , , Total Interest Expense 5, , , , , Net Interest Income 6, , , , , Net Gains (Losses) on Trading and Derivatives 2, , , , Net Gains (Losses) on Other Securities Net Gains (Losses) on Assets at FV through Income Statement (560.0) (32.0) (108.0) Net Insurance Income n.a. (285.0) (148.0) (148.0) (270.0) 13. Net Fees and Commissions 5, , , , , Other Operating Income , , , , Total Non-Interest Operating Income 8, , , , , Personnel Expenses 6, , , , , Other Operating Expenses 5, , , , , Total Non-Interest Expenses 12, , , , , Equity-accounted Profit/ Loss - Operating Pre-Impairment Operating Profit 2, , , , Loan Impairment Charge , , , Securities and Other Credit Impairment Charges Operating Profit 2, (345.0) 3, , Equity-accounted Profit/ Loss - Non-operating n.a. n.a. n.a. n.a. n.a. 25. Non-recurring Income n.a. n.a. n.a Non-recurring Expense 6.0 1, , Change in Fair Value of Own Debt (513.0) (127.0) (22.0) 28. Other Non-operating Income and Expenses n.a. n.a. n.a. n.a. n.a. 29. Pre-tax Profit 1,701.0 (810.0) (6,097.0) 3, , Tax expense , Profit/Loss from Discontinued Operations n.a. n.a. n.a. n.a. n.a. 32. Net Income 1,041.0 (1,356.0) (6,772.0) 1, Change in Value of AFS Investments (104.0) (573.0) (405.0) 1,825.0 (249.0) 34. Revaluation of Fixed Assets n.a. n.a. n.a. n.a. n.a. 35. Currency Translation Differences (1,679.0) , ,958.0 (949.0) 36. Remaining OCI Gains/(losses) 59.0 (993.0) (372.0) (627.0) 37. Fitch Comprehensive Income (683.0) (2,721.0) (4,278.0) 6,102.0 (1,144.0) 38. Memo: Profit Allocation to Non-controlling Interests n.a. 39. Memo: Net Income after Allocation to Non-controlling Interests 1,018.0 (1,402.0) (6,793.0) 1, Memo: Common Dividends Relating to the Period n.a n.a. n.a. n.a. 41. Memo: Preferred Dividends Related to the Period n.a n.a. n.a. n.a. 13

14 Balance Sheet 30 Jun Dec Dec Dec Dec Months - Interim Year End Year End Year End Year End EURm EURm EURm EURm EURm Assets A. Loans 1. Residential Mortgage Loans n.a. 150, , , , Other Mortgage Loans 154, , , , , Other Consumer/ Retail Loans 35, , , , , Corporate & Commercial Loans 212, , , , , Other Loans n.a. 168, , , , Less: Reserves for Impaired Loans 3, , , , , Net Loans 398, , , , , Gross Loans 402, , , , , Memo: Impaired Loans included above 6, , , , , Memo: Loans at Fair Value included above n.a. n.a. n.a. n.a. n.a. B. Other Earning Assets 1. Loans and Advances to Banks 9, , , , , Reverse Repos and Cash Collateral 87, , , , , Trading Securities and at FV through Income 225, , , , , Derivatives 396, , , , , Available for Sale Securities 53, , , , , Held to Maturity Securities 3, , n.a Equity Investments in Associates , , , , Other Securities n.a. n.a. n.a. n.a. n.a. 9. Total Securities 766, , , ,054, , Memo: Government Securities included Above 3, , , , , Memo: Total Securities Pledged n.a. 65, , , , Investments in Property n.a. n.a. n.a. n.a. n.a. 13. Insurance Assets n.a. n.a. n.a. n.a. n.a. 14. Other Earning Assets , , Total Earning Assets 1,175, ,261, ,395, ,469, ,460,548.0 C. Non-Earning Assets 1. Cash and Due From Banks 227, , , , , Memo: Mandatory Reserves included above n.a. n.a. n.a. n.a. n.a. 3. Foreclosed Real Estate n.a. n.a. n.a. n.a. n.a. 4. Fixed Assets 2, , , , , Goodwill n.a. 4, , , , Other Intangibles 8, , , , , Current Tax Assets 1, , , , , Deferred Tax Assets 7, , , , , Discontinued Operations n.a. n.a. n.a. n.a. n.a. 10. Other Assets 145, , , , , Total Assets 1,568, ,590, ,629, ,708, ,611,400.0 Liabilities and Equity D. Interest-Bearing Liabilities 1. Customer Deposits - Current 350, , , , , Customer Deposits - Savings 89, , , , , Customer Deposits - Term 141, , , , , Total Customer Deposits 581, , , , , Deposits from Banks n.a. n.a. n.a. n.a. n.a. 6. Repos and Cash Collateral 80, , , , , Commercial Paper and Short-term Borrowings 20, , , , , Total Money Market and Short-term Funding 681, , , , , Senior Unsecured Debt (original maturity > 1 year) 114, , , , , Subordinated Borrowing 6, , , , , Covered Bonds n.a. n.a. n.a. n.a. n.a. 12. Other Long-term Funding 43, , , , , Total LT Funding (original maturity > 1 year) 165, , , , , Derivatives 371, , , , , Trading Liabilities 79, , , , , Total Funding 1,298, ,351, ,367, ,431, ,373,536.0 E. Non-Interest Bearing Liabilities 1. Fair Value Portion of Debt n.a. n.a Credit impairment reserves n.a. n.a. n.a. n.a. n.a. 3. Reserves for Pensions and Other 5, , , , , Current Tax Liabilities 1, , , , , Deferred Tax Liabilities , , Other Deferred Liabilities n.a. n.a. n.a. n.a. n.a. 7. Discontinued Operations n.a. n.a. n.a. n.a. n.a. 8. Insurance Liabilities n.a. n.a. n.a. n.a. n.a. 9. Other Liabilities 186, , , , , Total Liabilities 1,491, ,519, ,554, ,624, ,544,508.0 F. Hybrid Capital 1. Pref. Shares and Hybrid Capital accounted for as Debt 5, , , , , Pref. Shares and Hybrid Capital accounted for as Equity 4, , , ,619.0 n.a. G. Equity 1. Common Equity 64, , , , , Non-controlling Interest Securities Revaluation Reserves , , Foreign Exchange Revaluation Reserves , , (2,713.0) 5. Fixed Asset Revaluations and Other Accumulated OCI (101.0) 6. Total Equity 66, , , , , Total Liabilities and Equity 1,568, ,590, ,629, ,708, ,611, Memo: Fitch Core Capital 54, , , , ,