Deutsche Bank AG Long-Term 'A-' Rating Placed On Watch Negative As Management Change Highlights Strategic Challenges

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1 Research Update: Long-Term 'A-' Rating Placed On Watch Negative As Management Change Highlights Strategic Challenges Primary Credit Analyst: Giles Edwards, London (44) ; Secondary Contact: Harm Semder, Frankfurt (49) ; Table Of Contents Overview Rating Action Rationale CreditWatch Related Criteria Related Research Ratings List APRIL 12,

2 Research Update: Long-Term 'A-' Rating Placed On Watch Negative As Management Change Overview On April 8, Deutsche Bank announced a change of CEO, following a fortnight of board-level tensions over a perceived lack of progress in executing the group's multi-year restructuring. We anticipate that this could lead to adjustment in the existing strategy or to how it is executed, although we do not currently anticipate any radical change. We are placing our 'A-' long-term issuer credit rating on Deutsche Bank and its core operating subsidiaries on CreditWatch with negative implications as we consider that a prolonged, deepened, or more costly restructuring would lead the bank to remain a negative outlier for an extended period. We are affirming our ratings on Deutsche Bank's subordinated debt issues, including our 'BBB-' rating on its senior subordinated (also known as senior non-preferred) instruments. We plan to resolve the CreditWatch placement by end-may at the latest, at which point we expect more details on the strategy to have been unveiled. Rating Action On April 12, 2018, S&P Global Ratings placed its 'A-' long-term issuer credit rating (ICR) on, and its core subsidiaries, on CreditWatch with negative implications. At the same time, we affirmed our 'A-2' short-term ICR and our 'traaa/tra-1' Turkish national scale ratings on Deutsche Bank. We also affirmed our issue credit ratings on all the hybrid instruments issued or guaranteed by the bank, including our 'BBB-' rating on the bank's senior subordinated debt instruments. Rationale The CreditWatch placement reflects our view that Deutsche Bank might be subject to a longer lasting and/or significantly more costly restructuring of the business model than we currently expect. This could lead to deeper underperformance compared with peers, from a financial and customer franchise APRIL 12,

3 Research Update: Long-Term 'A-' Rating Placed On Watch Negative As Management Change point of view. It also reflects our expectation that we will be better placed to assess the implications of the management change on strategy and execution in the coming weeks, once more details on the new CEO's priorities are known. The appointment of Christian Sewing, previous co-deputy CEO and head of the personal and commercial banking (PCB) division, as CEO ends a fortnight of speculation and tensions played out in the media. In our view, the circumstances surrounding the change of leadership--notably the apparent dissatisfaction among key stakeholders on the speed of progress--imply a mandate for a possible update to strategy, particularly relating to the corporate and investment banking (CIB) division, or regarding how it is executed. We believe that Mr. Sewing and his new leadership team have the expertise and the intimate knowledge of the company and its various businesses to lead this long and complex task. Therefore, this change could still act as a springboard for the bank to move more rapidly toward a sustainable, solidly profitable business model. However, in our view, it also implies that the bank may need to broaden the restructuring effort. Deutsche Bank is not alone in this restructuring task; key peers such as Barclays, Commerzbank, Credit Suisse, and the Royal Bank of Scotland (RBS) have all been wrestling with a similar, often difficult restructuring and business model optimization. However, we see the breadth of Deutsche Bank's restructuring--across both key divisions--as substantial. We also note that most of the peers have almost reached the end of this transition, whereas it could take until 2020 before Deutsche Bank sees the full benefits of its restructuring. While we do not rule out revising down Deutsche Bank's 'bbb' stand-alone credit profile (SACP), we continue to see less pressure on it than on the 'A-' ICR as the relativities versus peers look less strained. This is why we have not placed the bank's subordinated and capital instruments on CreditWatch negative; under our methodology we notch these instruments from the SACP to reflect our view that they would likely default if the bank became nonviable. The SACP remains underpinned by the actions that management took in 2017 to strengthen the balance sheet (in terms of capitalization, liquidity, and asset quality). It is also supported by the progress that management has demonstrated regarding the now-completed partial IPO of DWS and the important Postbank integration, which appears on track for completion in the second quarter of It also reflects our continued view that management can build on Deutsche Bank's existing franchise strengths and mould them to achieve sufficient and balanced profitability between German PCB, global CIB, and to a lesser extent, asset management. While litigation risks remain--the main outstanding case, in our view, is a US Department of Justice investigation into mirror trades in Russian equities--we see them as having reduced significantly and no longer a source of material downside risk. The 'bbb' SACP is on a par with that of RBS, albeit RBS is on an improving trend, and one notch below Commerzbank's and Barclays' SACPs. We anticipate that Deutsche Bank will demonstrate modestly supportive APRIL 12,

4 Research Update: Long-Term 'A-' Rating Placed On Watch Negative As Management Change profitability in the first quarter of 2018 amid somewhat improved market conditions, although only a low-single-digit return on equity for the full year. We assume that asset quality will remain robust, liquidity buffers strong, and the bank's capitalization--whether measured on a regulatory basis or our risk-adjusted capital (RAC) methodology--will be little-changed on end The bank reported a fully-loaded Common Equity Tier 1 ratio of 14.0% at end-2017, and we estimate a RAC ratio of around 9.5% at the same date. In terms of execution, we particularly look for the completion of the Postbank integration in the coming months and, over the course of the coming 12 months, a strong sense that the PCB division is well on track to deliver much-enhanced profitability in the German retail market. This will be no mean feat in what will likely remain a highly competitive environment, marked by sustained ultra-low interest rates. We continue to consider a well-performing CIB division as ultimately supporting Deutsche Bank's creditworthiness. However, the task is already complex, and we anticipate that the division would be the main focus of any further refinements to strategy. Following the action on Deutsche Bank, we have also placed on CreditWatch with negative implications our long-term ICRs on the bank's rated subsidiaries in Luxembourg and the U.S. Our ratings on the bank's Mexican subsidiaries are unaffected. CreditWatch The CreditWatch negative placement of the long-term ICR reflects our view that these managerial changes demonstrate the difficulty for Deutsche Bank to sustainably improve its earnings profile, a task which is probably more complex than previously anticipated. Still, we believe we will be better placed to assess the implications of the management change on strategy and execution in the coming weeks, once more details are known about the group's first key initiatives, and so to resolve the placement before the end of May. Downside scenario We could lower the ICR, most likely through a negative adjustment notch, if, in our view, Deutsche Bank appears set for a period of significantly deeper or longer underperformance in its core businesses compared with peers than we currently anticipate. While far less likely, we could also lower the ICR (though not our ratings on the senior subordinated debt and regulatory capital instruments) if we reduce the current two-notch uplift for additional loss-absorbing capacity (ALAC). This would happen if we anticipate that the bank's ALAC ratio will fall below our 8.5% threshold. At this stage, we expect that if we were to lower the ICR, it would be limited to one notch. While less likely, we could revise downward the SACP and also APRIL 12,

5 Research Update: Long-Term 'A-' Rating Placed On Watch Negative As Management Change lower the ICR if, for example, Deutsche Bank comes under renewed market pressure or if litigation charges significantly exceed our already cautious expectations. A downward revision of the SACP would lead us to lower the issue ratings on senior subordinated debt and regulatory capital instruments. Upside scenario We could affirm the ratings if we gain greater confidence in Deutsche Bank's execution such that it appears set to achieve a more stable and predictable business model, thereby narrowing the gap with its global peers in terms of revenue generation and cost control. Notably, we look for evidence not only of delivery against our expectations above, but also of strong support from key stakeholders (management, the board, key shareholders, and key clients). Related Criteria General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables, Aug. 14, 2017 Criteria - Financial Institutions - General: Risk-Adjusted Capital Framework Methodology, July 20, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 General Criteria: Guarantee Criteria, Oct. 21, 2016 Criteria - Financial Institutions - Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015 Criteria - Financial Institutions - Banks: Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015 General Criteria: Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 General Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Financial Institutions - Banks: Assessing Bank Branch Creditworthiness, Oct. 14, 2013 Criteria - Financial Institutions - Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Criteria - Financial Institutions - Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Criteria - Financial Institutions - Banks: Banking Industry Country Risk APRIL 12,

6 Research Update: Long-Term 'A-' Rating Placed On Watch Negative As Management Change Assessment Methodology And Assumptions, Nov. 9, 2011 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Financial Institutions - Banks: Commercial Paper I: Banks, March 23, 2004 Related Research Chasing Shadows Or Rainbows? Sustainable Profitability Still Eludes Some Major European Banks, March 15, 2018 The Top Trends Shaping Major European Banks In 2018, Jan. 25, 2018, Nov. 15, 2017 Ratings List Ratings Placed On CreditWatch To From Deutsche Bank Trust Corp. Deutsche Bank Trust Co. Delaware Deutsche Bank Trust Co. Americas Deutsche Bank National Trust Co. Deutsche Bank Luxembourg S.A. (Milan Branch) (Madrid Branch) (London Branch) (Cayman Islands Branch) (Canada Branch) Counterparty Credit Rating A-/Watch Neg/A-2 A-/Negative/A-2 Certificate Of Deposit Long-Term Foreign Currency A-/Watch Neg A- Deutsche Bank Securities Inc. Counterparty Credit Rating Local Currency A-/Watch Neg/A-2 A-/Negative/A-2 Senior Unsecured A-/Watch Neg A- Senior Unsecured A-p/Watch Neg A-p Certificate Of Deposit A-/Watch Neg A- (London Branch) Senior Unsecured A-/Watch Neg A- Ratings Affirmed APRIL 12,

7 Research Update: Long-Term 'A-' Rating Placed On Watch Negative As Management Change Counterparty Credit Rating Turkey National Scale traaa/--/tra-1 (Cayman Islands Branch) Commercial Paper A-2 (London Branch) Senior Subordinated Deutsche Bank Capital Finance Trust I Preferred Stock Senior Subordinated BBB- Subordinated BB+ Subordinated BB+p Junior Subordinated B+ Certificate Of Deposit A-2 Commercial Paper A-2 BBB- BB- Deutsche Bank Contingent Capital Trust II Deutsche Bank Contingent Capital Trust III Deutsche Bank Contingent Capital Trust IV Deutsche Bank Contingent Capital Trust V Preferred Stock B+ Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@spglobal.com Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on the S&P Global Ratings' public website at Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) APRIL 12,

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