Deutsche Bank AG · for our assessment of the following bank-specific factors: •An adequate...

Deutsche Bank AG

Primary Credit Analyst:

Richard Barnes, London (44) 20-7176-7227; [email protected]

Secondary Contact:

Harm Semder, Frankfurt (49) 69-33-999-158; [email protected]

Table Of Contents

Major Rating Factors

Outlook

Rationale

Additional Rating Factors

Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 5, 2016 1

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Major Rating Factors

Counterparty Credit Rating

BBB+/Negative/A-2

Greater China Regional ScalecnA+/--/--

Turkey National ScaletrAAA/--/trA-1

Strengths: Weaknesses

• Diversified franchise serving retail, corporate, and

institutional clients.

• Senior management has initiated a five-year

strategic plan to address shortcomings in the bank's

earnings, business model, and balance sheet.

• Good track record in credit risk management in

traditional retail and corporate banking.

• Material execution risks as the bank implements a

far-reaching restructuring program while many

competitors are more focused on business as usual.

• Challenging economic and market environment

characterized by a prolonged period of ultra-low

interest rates and generally subdued client activity.

• Litigation and restructuring charges and poor cost

efficiency will likely continue to weigh on capital

generation through earnings over our rating horizon.


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Outlook

The negative outlook reflects S&P Global Ratings' view of the execution challenges Deutsche Bank faces over our

two-year rating horizon as it restructures its business model and balance sheet. We regard 2016-2017 as the most

demanding phase of its five-year strategic plan (known as Strategy 2020) and we see a risk that generally

unfavorable operating conditions could challenge the achievement of its goals. In assessing Deutsche Bank's

progress, we intend to focus on its capital generation prospects for 2017 and beyond, its performance versus peers,

and its ability to defend its market position in its core businesses.

Downside scenario

We could lower the long-term issuer credit and senior unsecured issue ratings if we consider that Deutsche Bank is

falling behind its announced schedule for strengthening its business position and risk position. In that scenario, we

would likely remove the one-notch positive adjustment that we currently include in the 'BBB+' long-term rating.

Higher-than-expected litigation charges or material losses on disposal of non-core businesses could also lead to a

downgrade if they materially erode capital.

If we were to lower the long-term rating to 'BBB', we would likely maintain the short-term rating at 'A-2' due to

Deutsche Bank's satisfactory liquidity profile. The issue ratings on Additional Tier 1 and Tier 2 regulatory capital

instruments would be unaffected if the stand-alone credit profile (the starting point for these ratings) remains 'bbb'.

Upside scenario

We could revise the outlook to stable if Deutsche Bank executes Strategy 2020 well, maintains a resilient business

position, and demonstrates progress toward its balance sheet targets.

Rationale

The starting point for our ratings on Deutsche Bank is its 'bbb+' anchor, which is based on our view of economic risks

across the countries in which it operates and industry risks in its home market of Germany. We then adjust the anchor

for our assessment of the following bank-specific factors:

• An adequate business position that balances our view of Deutsche Bank's diversified franchise across its core

markets with the significant business model restructuring currently in progress and its material capital markets

activities.

• Adequate capital and earnings because our base-case projection is that Deutsche Bank will maintain a RAC ratio

above our 7% threshold over our two-year rating horizon.

• A moderate risk position due to the inherent complexity of parts of Deutsche Bank's capital markets business, and

the elevated litigation and execution risks that we see over our rating horizon.

• Average funding and adequate liquidity because we consider the bank to have a solid profile that is further

underpinned by its deleveraging process.

Finally, although we consider that Deutsche Bank has high systemic importance, we consider that the tendency of

Germany to support private sector commercial banks is uncertain under the country's resolution law, which is


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consistent with the EU Bank Recovery and Resolution Directive (BRRD). We therefore do not factor potential

extraordinary government support into the ratings. In addition, we do not raise the ratings under our additional

loss-absorbing capacity (ALAC) criteria because we believe Deutsche Bank's ALAC ratio is unlikely to exceed our

5.25% threshold over our projection period.

Anchor: 'bbb+', reflecting German home market and geographic mix of total credit exposure

The 'bbb+' anchor draws on our BICRA methodology and our view of the weighted-average economic risk across the

countries in which Deutsche Bank operates, based on the geographic distribution of its total credit exposure. We view

total credit exposure as a better measure of Deutsche Bank's business and risk profiles than loans because it also

captures the material trading and available-for-sale securities portfolios. Although it makes no difference to the anchor

outcome, we adjust the geographic distribution for planned changes under the bank's strategic plan, such as the

intended deconsolidation of German retail and commercial bank subsidiary Deutsche Postbank AG. The resulting

distribution is approximately 20% in Germany, 30% in the rest of Western Europe, 35% in North America (primarily

the U.S.), 10% in Asia-Pacific, and 5% in the rest of the world. The weighted-average economic risk score rounds to '3'

on a scale of 1 to 10 ('1' representing the lowest risk and '10' the highest), which compares to '1' for a bank operating

solely in Germany.

The industry risk score of '3' is based solely on Deutsche Bank's home market. Industry risk benefits from Germany's

extensive funding market and banks' domestic funding surpluses from low domestic credit growth and high savings

rates. However, the banking sector's competitive dynamics result in relatively low profitability, which is fueled by

significant disparities in banks' commercial targets and the business and risk profiles of market players.

Table 1

Deutsche Bank AG Key Figures

--Year-ended Dec. 31--

(Mil. €) 2016* 2015 2014 2013 2012

Adjusted assets 1,793,383 1,619,052 1,693,752 1,597,468 1,998,110

Customer loans (gross) 418,481 418,594 386,622 357,071 374,126

Adjusted common equity 44,292 45,941 46,967 37,604 36,833

Operating revenues 15,335 33,214 31,637 31,539 33,540

Noninterest expenses 12,801 26,724 25,595 24,419 26,042

Core earnings 1,239 4,859 2,714 2,406 3,330

*Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful.

Business position: Material execution risks in implementing the new strategy

Our assessment of Deutsche Bank's business position as adequate balances its diversified franchise in its core markets

with the material strategic and execution challenges we see at present and the relatively high contribution to group

revenues of cyclical capital markets activities (see chart 1).


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Chart 1

We believe Deutsche Bank faces more strategic challenges than many peers in delivering a business model that meets

the expectations of its various stakeholders. This view reflects its overweight position in capital markets businesses,

particularly fixed income, and its lack of a major, profitable franchise in other markets to support group earnings. In

retail and commercial banking, we consider that Deutsche Bank's performance is hampered by Germany's relatively

fragmented, low margin industry, as well as internal cost inefficiencies and negative interest rates. We believe its asset

and wealth management and transaction banking businesses have performed reasonably well, but require further

development to become genuine profit engines for the group. We conclude that Deutsche Bank faces an extended

restructuring period and requires strong strategic execution to overcome its challenges.

Deutsche Bank announced a new CEO, John Cryan, in June 2015 and confirmed the scope of Strategy 2020 in

October. This plan is particularly aimed at making the bank simpler and less risky, more cost efficient, better

capitalized and less leveraged, and better managed. We consider that Deutsche Bank was historically less decisive

than many peers in adjusting its business model to the changed regulatory and market environment following the

global financial crisis, and we view Strategy 2020 as its initiative to catch up. There are six high-level objectives

underpinning Strategy 2020:

• Reposition the investment banking business by exiting legacy and unprofitable products, clients, and countries. It


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has made early progress in these areas and continues to shrink assets managed by its non-core operations unit

(NCOU).

• Reshape the retail banking business by deconsolidating German subsidiary Deutsche Postbank, restructuring the

cost base of the remaining retail network, and completing the agreed sale of its minority stake in China's Hua Xia

Bank. We assume the difficult operating environment for German retail and commercial banks is likely to influence

the timing and pricing of the planned Postbank transaction. Deutsche Bank recently reached an agreement with its

workers' council on cost-cutting measures across its own-branded German retail network and will now start to

implement these changes.

• Invest in digitalization to enhance customer service and improve internal efficiency and controls.

• Target growth opportunities in capital-efficient transaction banking and asset management businesses.

• Rationalize countries, products, and client segments where risk-adjusted returns are inadequate. For example, it is

reducing its geographic footprint from 70 countries to 60 and cutting client numbers in the Global Markets and

Corporate & Investment Banking divisions by up to 50%.

• Transform the operating model by reducing complexity in decision making, modernizing the IT infrastructure, and

improving the control environment.

By 2018, these initiatives are intended to reduce annual costs by about €3.8 billion on a gross basis (about €1.0

billion-€1.5 billion net of reinvestment), lower the cost-to-income ratio to about 70%, and raise the post-tax return on

tangible equity above 10%. In our view, these are ambitious targets in current economic and market conditions. That

said, we believe it is credit-positive that Deutsche Bank is now more decisively addressing the weaknesses it has

diagnosed in its business model.

Capital markets activities remain a material part of Deutsche Bank's targeted business profile under Strategy 2020, but

they are intended to become more profitable, more liquid, and less complex than hitherto. We consider that European

investment banks face competitive disadvantages relative to U.S. peers due to, among other factors, the lack of a large

domestic market and their greater historical reliance on balance sheet leverage. We see U.S. banks gaining further

market share but we believe there is scope for a couple of European players to hold on to sustainable positions in the

market, and Deutsche Bank is aiming to be among them.

We principally compare Deutsche Bank's business position with other diversified banks headquartered in countries

with similar BICRA industry risk assessments as Germany. We particularly focus on peers with large capital markets

activities and/or material restructuring programs. They include European peers Barclays, BNP Paribas, Commerzbank,

Credit Suisse, RBS, and UBS, and U.S. peers Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. We

mostly assess the business positions of these banks as adequate or strong. Those with strong business position

assessments generally exhibit greater business and strategic stability than Deutsche Bank.

Table 2

Deutsche Bank AG Business Position


(%) 2016* 2015 2014 2013 2012

Total revenues from business line (currency in millions) 15,335.0 33,268.0 31,660.0 31,539.0 33,540.0

Commercial banking/total revenues from business line 36.5 17.2 16.9 14.4 15.2

Retail banking/total revenues from business line 35.0 26.8 30.4 30.3 28.4

Commercial & retail banking/total revenues from business line 71.5 43.9 47.3 44.7 43.7


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Table 2

Deutsche Bank AG Business Position (cont.)


(%) 2016* 2015 2014 2013 2012

Trading and sales income/total revenues from business line 21.8 39.5 39.6 41.7 43.4

Asset management/total revenues from business line 9.1 16.3 14.9 15.0 13.3

Other revenues/total revenues from business line (2.4) 0.3 (1.8) (1.4) (0.4)

Investment banking/total revenues from business line 21.8 39.5 39.6 41.7 43.4

Return on equity 0.7 (10.4) 2.7 1.2 0.4

*Data as of June 30.

Capital and earnings: Targeting a CET1 ratio of at least 12.5% from 2018

We assess Deutsche Bank's capital and earnings as adequate because we expect our risk-adjusted capital ratio to

remain above our 7% threshold through year-end 2018. Under Strategy 2020, Deutsche Bank is targeting a regulatory

CET1 ratio of at least 12.5% from 2018 and a leverage ratio of at least 4.5%, which are some way above the current

levels. Due to lackluster core earnings and material exceptional charges, the bank has historically struggled to generate

capital organically and it issued equity in both 2013 and 2014 to underpin its balance sheet. However, we note that it

has a few years to achieve its targets through planned RWA cuts and retained earnings, and we take note in our

projections of senior management's intention not to raise further equity. To preserve capital, it is not paying equity

dividends in respect of its 2015 and 2016 earnings.

Deutsche Bank reported a 10.8% fully-loaded CET1 ratio at June 30, 2016 and stated that the ratio would be about

11.2% including the agreed sale of its Hua Xia Bank stake, which is due to complete in the second half of this year. At

12.2%, the phased-in CET1 ratio was more comfortably above the 10.76% minimum regulatory requirement for 2016

according to the European Central Bank's Supervisory Review and Evaluation Process (SREP). The SREP minimum is

due to increase by 50 basis points per year--eventually reaching 12.25% in January 2019--as Deutsche Bank's 2%

Global Systemically Important Bank buffer is phased in. The reported fully-loaded leverage ratio was 3.4% at June 30,

2016.

By 2018, under Strategy 2020, Deutsche Bank plans to reduce regulatory RWAs by about €90 billion (20%-25% of the

starting point) and its leverage exposure by about €170 billion (10%-15%). Most of these savings are intended to come

from the planned deconsolidation of Postbank and the rundown of non-core assets and unprofitable Global Markets

activities. We expect that adverse market conditions may challenge the achievement of these cuts, but completing

them is fundamental to the achievement of Deutsche Bank's CET1 and leverage ratio targets for 2018. By 2020, the

bank expects that the RWA cuts will have been broadly offset by inflation from Basel III reforms (sometimes known as

"Basel IV") such as floors on credit RWAs based on a revised standardized approach. The scope and timing of these

reforms are highly uncertain, but they are mostly expected to occur in 2019-2020. If Deutsche Bank's regulatory RWAs

in 2020 are close to the current level of €400 billion (as inflation offsets its planned cuts), it would need to generate

about €6 billion-€8 billion of CET1 by 2019-2020 to achieve a 12.5% ratio. This capital gap would be smaller if the

regulatory RWA reforms are less onerous. We consider that Deutsche Bank is unlikely to generate material capital in

2016-2017, but has potential to perform better thereafter if it executes its strategy well and operating conditions offer

more support. Although it is not management's intention and therefore does not form part of our base-case financial


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projections, we do not exclude the possibility of a further equity issue once Deutsche Bank is more advanced in

resolving outstanding litigation cases.

Our RAC ratio was 8.6% at year-end 2015, down from 9.3% a year earlier, primarily as a result of Deutsche Bank's net

loss for 2015 (see table 4). We project the RAC ratio in the 8.5%-9.0% range at year-end 2017 as planned cuts in RWAs

mitigate poor core earnings and continued material litigation and restructuring charges. Eligible Additional Tier 1

(AT1) capital instruments represented a relatively high 19% of Deutsche Bank's total adjusted capital, the numerator of

our RAC ratio, at year-end 2015. In its Strategy 2020 announcement, the bank assumed a further €3 billion-€4 billion of

AT1 issuance by 2018 to support its leverage ratio. However, in light of recent volatility in the secondary pricing of

Deutsche Bank's outstanding AT1s, our RAC ratio projection assumes no issuance over the coming 18 months due to

uncertainty over market appetite.

Table 3

Deutsche Bank AG Capital And Earnings


(%) 2016* 2015 2014 2013 2012

Tier 1 capital ratio 12.0 12.3 12.9 16.9 15.1

S&P RAC ratio before diversification N.M. 8.6 9.3 7.2 6.7

S&P RAC ratio after diversification N.M. 10.3 11.2 9.1 8.4

Adjusted common equity/total adjusted capital 80.8 81.4 77.3 79.8 78.7

Net interest income/operating revenues 49.7 47.8 45.1 47.0 47.4

Fee income/operating revenues 37.8 38.4 39.2 39.0 34.3

Market-sensitive income/operating revenues 13.6 11.9 14.3 13.6 18.2

Noninterest expenses/operating revenues 83.5 80.5 80.9 77.4 77.6

Preprovision operating income/average assets 0.3 0.4 0.4 0.4 0.4

Core earnings/average managed assets 0.1 0.3 0.2 0.1 0.2


Table 4

Deutsche Bank AG RACF [Risk-Adjusted Capital Framework] Data

(Mil. €) Exposure* Basel II RWA

Average Basel II

RW (%)

Standard & Poor's

RWA

Average Standard &

Poor's RW (%)

Credit risk

Government and central

banks

206,725 14,825 7 10,988 5

Institutions 60,263 14,825 25 17,727 29

Corporate 348,345 120,675 35 262,991 75

Retail 211,349 47,238 22 65,858 31

Of which mortgage 166,472 27,913 17 37,673 23

Securitization 75,755 15,675 21 28,709 38

Other assets 9,502 8,000 84 9,740 103

Total credit risk 911,939 221,238 24 396,014 43

Market risk

Equity in the banking book¶ 8,450 19,850 434 84,664 1,002


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Table 4

Deutsche Bank AG RACF [Risk-Adjusted Capital Framework] Data (cont.)

Trading book market risk -- 49,550 -- 100,531 --

Total market risk -- 69,400 -- 185,195 --

Insurance risk

Total insurance risk -- -- -- 0 --

Operational risk

Total operational risk -- 89,925 -- 74,562 --

(Mil. €) Basel II RWA

Standard & Poor's

RWA

% of Standard & Poor's

RWA

Diversification adjustments

RWA before diversification 381,500 655,771 100

Total adjustments to RWA -- (106,929) (16)

RWA after diversification 381,500 548,842 84

(Mil. €) Tier 1 capital Tier 1 ratio (%)

Total adjusted

capital

Standard & Poor's RAC

ratio (%)

Capital ratio

Capital ratio before

adjustments

58,222 15.3 56,443 8.6

Capital ratio after

adjustments§

58,222 14.7 56,443 10.3

*Exposure at default. ¤Securitisation Exposure includes the securitisation tranches deducted from capital in the regulatory framework. ¶Exposure

and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. §Adjustments

to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight.

RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31, 2015, Standard & Poor's.

Deutsche Bank's recent earnings have been characterized by declining core profits and material goodwill impairments,

litigation provisions, and restructuring charges (see chart 2). In the first half of 2016, core revenues were adversely

affected by low client activity, the growing impact of ultra-low interest rates, and the bank's decision under Strategy

2020 to exit various clients and products. Although we expect capital generation through earnings to remain relatively

weak in 2016-2017, we believe that the bank's underlying franchise remains in reasonable shape and it has potential to

improve its performance once exceptional charges eventually abate and the operating environment offers more

support.


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Chart 2

Risk Position: Elevated execution and litigation risks

We assess Deutsche Bank's risk position as moderate, reflecting the elevated execution and litigation risks we see at

present and the inherent complexity and volatility of parts of its large capital markets business. The sophisticated

nature of many of Deutsche Bank's trading risks are difficult to model and may not be fully reflected in our RAC

framework, in our view. We believe that these risks remain elevated despite the bank's continued progress in

deleveraging its non-core assets and simplifying its Global Markets division, and are only partly mitigated by its good

track record in credit risk management in its retail and commercial banking activities.

Deutsche Bank held €5.5 billion of litigation reserves at June 30, 2016 plus $0.3 billion of reserves against $2.4 billion

of potential U.S. mortgage repurchase demands. Under IFRS, companies can make provisions only when a loss is

considered probable and can be reasonably estimated. Deutsche Bank identified a further €1.7 billion of unreserved

contingent litigation liabilities, which are defined as obligations that can be estimated and where a loss is considered

less than probable but more than remote. Our RAC ratio forecasts anticipate the crystallization of this contingent

liability with additional charges on top. In our view, the main outstanding litigation cases include regulatory and civil

cases concerning U.S. mortgage-backed securities, U.K. and U.S. investigations into suspicious trades in Russian

equities, investigations regarding compliance with U.S. sanctions and embargoes, and civil cases concerning interbank

interest rate benchmarks. Deutsche Bank reported that it concluded some smaller legal cases in the last two quarters at


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a cost that was generally lower than the associated provisions.

Under the European Banking Authority's stress test published in July 2016, Deutsche Bank's fully-loaded CET1 ratio at

year-end 2018 was 12.1% under the baseline scenario and 7.8% under the adverse scenario. The latter was in the

bottom quartile of the 51 banks included in the exercise and we see this outcome as consistent with our moderate

assessment of Deutsche Bank's risk position. The exercise assumed that balance sheets remain static over the scenario,

which is relatively harsh for institutions such as Deutsche Bank that are actively shrinking higher risk assets. Like our

RAC ratio projection, the capital ratio under the adverse stress test also appears to assume material litigation charges.

On the other hand, the assumption of rising interest rates in the adverse scenario was relatively favorable for revenues

despite a cap on the projected improvement in net interest income.

In June 2016, Deutsche Bank's U.S. subsidiary Deutsche Bank Trust Corporation (DBTC) failed the qualitative part of

the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) for the second successive year. DBTC is a

relatively small part of Deutsche Bank's U.S. activities; it holds the majority of the U.S. commercial banking and asset

management activities but excludes the large U.S. broker-dealer Deutsche Bank Securities Inc. DBTC is strongly

capitalized and comfortably passed the quantitative stress test. The CCAR result likely reflects Deutsche Bank's

ongoing, multi-year program to strengthen systems and controls. Deutsche Bank's aggregate U.S. businesses, which

are headed by new U.S. intermediate holding company Deutsche Bank USA Corporation, are due to be reviewed under

CCAR in 2018.

Through deleveraging and derisking, the NCOU has managed down its regulatory RWAs to €27 billion at June 30,

2016 from €142 billion when it was established in mid-2012. It is aiming to reduce them below €10 billion by year-end

2016 and appears on track to achieve this. Accordingly, we see latent risks from the NCOU as much more contained.

The assets that Deutsche Bank is looking to remove from its balance sheet under Strategy 2020 are predominantly

held by the customer-facing divisions, not NCOU.

We consider that Deutsche Bank has a good track record in traditional credit risk management, and its asset quality

metrics have steadily improved as economies have recovered and low interest rates support debt affordability. At June

30, 2016, impaired loans represented 1.7% of its €433 billion gross loan portfolio and were 61% covered by balance

sheet provisions. Residential mortgages accounted for 36% of the total portfolio, and were mostly to German

borrowers with relatively conservative loan-to-value ratios. Of loans and other exposures to corporates, 71% carried

investment grade internal ratings.

Deutsche Bank's lending exposures to the oil and gas; metals, mining, and steel; and shipping sectors appear relatively

contained at about €19 billion in aggregate, or about 8% of outstanding corporate loans. It incurred about €220 million

of individually-assessed impairment charges on these sectors in the first half of 2016, which caused the overall credit

loss charge to increase but remain below the long-run average.

At June 30, 2016, Deutsche Bank reported a €30.4 billon net exposure to the so-called eurozone periphery, principally

through its retail and corporate banking subsidiaries in Italy and Spain. We consider that Deutsche Bank's risk

management standards in these markets have been conservative relative to most local competitors, and its exposures

have not had a material impact on the group's overall asset quality performance.


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According to its value-at-risk (VaR) and stressed VaR models, Deutsche Bank has maintained its trading risks at

relatively low levels by historic standards, reflecting subdued client activity and the rationalization of parts of the

Global Markets division. We expect Deutsche Bank will continue to look for revenue opportunities when client

volumes pick up but its need to cut RWAs means it is unlikely to increase market risk significantly.

Deutsche Bank reported €28.9 billion of level 3 financial assets at June 30, 2016, which is close to one-half of its total

adjusted capital (the numerator of the RAC ratio). The level 3 designation means the assets are valued based on

unobservable inputs and the valuations could be vulnerable to adverse changes in the underlying assumptions.

Deutsche Bank reported that reasonably possible alternative parameters for valuing the level 3 assets could raise or

lower their fair values by €1.6 billion and €1.1 billion, respectively. Like its overall balance sheet, Deutsche Bank's

reported level 3 assets would be smaller under U.S. generally accepted accounting principles (GAAP) due to greater

recognition of netting agreements.

Table 5

Deutsche Bank AG Risk Position


(%) 2016* 2015 2014 2013 2012

Growth in customer loans (0.1) 8.3 8.3 (4.6) (1.9)

Total diversification adjustment / S&P RWA before diversification N.M. (16.3) (16.4) (20.8) (20.6)

Total managed assets/adjusted common equity (x) 40.7 35.5 36.4 42.9 54.6

New loan loss provisions/average customer loans 0.3 0.2 0.3 0.6 0.5

Net charge-offs/average customer loans 0.5 0.3 0.4 0.3 0.3

Gross nonperforming assets/customer loans + other real estate owned 2.0 2.3 2.9 2.8 2.8

Loan loss reserves/gross nonperforming assets 53.6 52.6 47.1 55.1 45.4


Funding and liquidity: Improved profile but still confidence-sensitive elements

We assess Deutsche Bank's funding position as average and its liquidity as adequate. Like peers, its profile has

strengthened since before the financial crisis as it has significantly reduced dependence on less stable sources such as

discretionary short-term wholesale funding. For example, the contribution from secured funding and short positions

fell to 14% at June 30, 2016 from about 40% at year-end 2007. We see transaction banking deposits as more stable

than typical short-term wholesale funding since they relate to custody, clearing, and cash-management services, but

still less reliable than insured retail deposits. The planned deconsolidation of Postbank is set to reduce the share of

retail deposits in the funding base by about one-third (see chart 3). However, we note that Postbank is a self-funding

entity that transfers no material resources to the rest of the group, and that the Global Markets division's continued

deleveraging should further reduce usage of short-term wholesale market funding.


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Chart 3

Our stable funding ratio stood at 91% at year-end 2015, little changed from a year earlier. Deutsche Bank does not yet

disclose its regulatory net stable funding ratio. Our measure indicates that long-term and less liquid assets are largely

but not fully funded by stable funding sources. We do not consider Deutsche Bank an outlier compared with peers and

we anticipate that funding gaps are likely to reduce steadily further. Its latest wholesale funding plan calls for about

€30 billion of issuance in 2016 and it had completed €20.2 billion by June 30. As a show of strength, it offered to

repurchase senior unsecured bonds following volatility in the secondary market pricing of AT1s in the first quarter. It

accepted about €2 billion of offers, realizing a gain of about €55 million.

Our broad liquid assets-to-short-term wholesale funding ratio stood at 145% at year-end 2015 and indicates that

Deutsche Bank maintains a buffer of liquid assets in excess of its short-term wholesale funding. Under our

methodology for this ratio, we include liquid trading book assets in the numerator, but we recognize that some of these

are hedges or other positions that may not be easily monetized, and our ratio therefore likely overstates Deutsche

Bank's underlying liquidity position. The bank disclosed a 124% liquidity coverage ratio at June 30, 2016 and we

expect the Postbank deconsolidation would have no material impact on this metric. It reported liquid assets with a

carrying value of €223 billion, over one-half of which was cash and cash equivalents.


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Table 6

Deutsche Bank AG Funding And Liquidity


(%) 2016* 2015 2014 2013 2012

Core deposits/funding base 49.9 51.7 52.1 46.9 42.9

Customer loans (net)/customer deposits 92.7 92.3 89.8 85.0 85.3

Long term funding ratio 69.5 72.0 72.4 63.0 58.4

Stable funding ratio 84.5 90.8 89.8 90.6 86.3

Short-term wholesale funding/funding base 32.6 30.0 29.8 39.1 43.6

Broad liquid assets/short-term wholesale funding (x) 1.4 1.5 1.5 1.3 1.2

Net broad liquid assets/short-term customer deposits 24.9 26.7 28.9 26.7 18.5

Short-term wholesale funding/total wholesale funding 63.7 60.6 60.2 72.1 75.1

Narrow liquid assets/3-month wholesale funding (x) 1.5 1.6 1.8 1.4 N/A

*Data as of June 30, based on S&P Global Ratings estimates of certain input data. N.A.--Not available. N/A--Not applicable. N.M.--Not

meaningful.

External Support: No government support or ALAC notches in the ratings

Since June 2015, we have regarded the prospect of extraordinary government support for German banks as uncertain

in view of the country's well-advanced and effective resolution regime, which is based on the BRRD. Therefore,

although we consider Deutsche Bank to have high systemic importance in Germany, we do not factor potential

extraordinary government support into our ratings. We do not completely exclude the possibility that support may be

provided in a stress scenario, but we believe the prospect of government intervention is lower and less predictable

than previously.

We do not include notches in the long-term rating on Deutsche Bank under our ALAC criteria because we believe its

ALAC ratio is unlikely to exceed our 5.25% threshold over our projection period. We calculate that Deutsche Bank's

ALAC was 2.2% of S&P Global Ratings' RWAs at year-end 2015. We include in this assessment Tier 1 and Tier 2

capital instruments that were issued under German law or feature contractual recognition of bail-in. We believe these

issues have capacity to absorb losses without triggering a default on senior obligations. We consider that the ALAC

ratio is likely to rise to about 3% over our projection period as more jurisdictions implement resolution regimes we

deem effective under our criteria and Deutsche Bank refinances maturing and called capital instruments. It is

conceivable that Deutsche Bank might choose to issue subordinated bonds to increase the cushion under senior claims

but this is not the base-case assumption in our ALAC projection.

An important factor in our ALAC analysis is the German law that, with effect from January 2017, will subordinate term,

non-structured, senior unsecured bonds to other senior claims in resolution. Deutsche Bank has indicated that it will

rely materially on these senior instruments to meet the regulatory TLAC requirements applicable from 2019. Indeed,

thanks to the German law, Deutsche Bank already has a comfortable surplus of TLAC-eligible instruments over the

minimum requirements (see chart 4). We would not view senior unsecured bonds as ALAC under the German law

because we would revise the issuer credit rating to 'D' or 'SD' (selective default) if an issuer were in default on any

instrument other than hybrid capital instruments. We would not view senior unsecured obligations as hybrid capital

instruments even if they could potentially be bailed-in as part of a resolution. In the unlikely event that the law reduces

German banks' access to senior unsecured debt markets, we could review our assessment of Deutsche Bank's funding


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profile.

Chart 4

Consistent with our criteria, we raised the threshold for one notch of ALAC uplift by 25 basis points to 5.25% because

Deutsche Bank operates through multiple regulated legal entities worldwide and we believe TLAC prepositioning

requirements might constrain the flexible deployment of ALAC in a stress scenario.

Additional Rating Factors

Since November 2015, we include a one-notch positive adjustment in the long-term issuer credit rating and the

long-term issue ratings on senior unsecured debt. This is because, if it executes the new strategy well, we believe

Deutsche Bank is in a transition toward improved stand-alone creditworthiness over the medium term if the bank

achieves a more stable and predictable operating model. However, we believe the difficult economic and market

environment could increasingly challenge progress toward Deutsche Bank's objectives. The negative outlook indicates

that we could remove the positive adjustment from the ratings if operating conditions have a deeper effect on the

bank's ability to execute its capital, derisking, and cost-cutting plans than we expect under our base-case projections.


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Group structure and rated subsidiaries

Deutsche Bank AG is both a significant operating entity and the top-most legal entity in the group. Unlike Swiss, U.K.,

and U.S. peers, there is no ultimate non-operational holding company and we do not expect Deutsche Bank to create

one.

We rate Deutsche Bank's branches in Canada, the Cayman Islands, London, Milan, and Madrid at the same level as

Deutsche Bank. We also rate a number of Deutsche Bank's subsidiaries:

• We view six subsidiaries as core to Deutsche Bank and therefore equalize the ratings with those on their ultimate

parent. These subsidiaries are Deutsche Bank Luxembourg S.A., Deutsche Bank National Trust Co., Deutsche Bank

Securities Inc., Deutsche Bank Trust Co. Delaware, Deutsche Bank Trust Co. Americas, and Deutsche Securities

Inc.

• The ratings on the U.S. non-operational bank holding company DBTC are also equalized with those on Deutsche

Bank because we expect parental support for DBTC's subsidiaries would be routed through DBTC.

• We view two Mexican subsidiaries--Deutsche Bank Mexico SA and Deutsche Bank Securities, S.A. de C.V., Casa de

Bolsa--as nonstrategic because Mexico is one of the countries that Deutsche Bank is exiting. We rate these

subsidiaries 'mxBBB+/A-2' under our Mexico national scale.

We also maintain 'cnA+' Greater China regional scale and 'trAAA/trA-1' Turkey national scale issuer credit ratings on

Deutsche Bank AG.

Hybrid issue ratings

The ratings on hybrid instruments (Tier 1 and Tier 2 regulatory capital issues) issued by Deutsche Bank AG and related

special-purpose entities are notched down from the 'bbb' stand-alone credit profile. If we were to lower the issuer

credit rating by removing the one-notch positive adjustment, the issue ratings on the hybrids would not be affected.

In February 2016, we lowered the ratings on Tier 1 and perpetual Tier 2 capital instruments by one notch due to

constrained Available Distributable Items (ADIs). We understand that interest cancellation is compulsory if, among

other circumstances, aggregate interest payments on Tier 1 instruments in a financial year exceed adjusted ADIs on an

unconsolidated basis under German GAAP. This relatively narrow definition results in a lower level of ADIs than in the

bank's consolidated IFRS accounts.

Our central expectation is that Deutsche Bank will be able to maintain sufficient ADIs to support continued Tier 1

interest payments. For example, it reported that there was no material difference between its IFRS and German GAAP

net income for the first half of 2016. However, we consider that the bank's future unconsolidated German GAAP

earnings prospects are somewhat difficult to foresee due to likely litigation and restructuring charges and choppy

market conditions. In recognition of that uncertainty, we deduct one notch from the issue ratings on Deutsche Bank's

Tier 1 and perpetual Tier 2 capital instruments under step 2b of our hybrid rating methodology. The Tier 1 issues are

accordingly rated 'B+'.

Deutsche Bank's ultimate 12.25% fully loaded CET1 SREP includes a 3.25% Pillar 2 add-on that the European Central

Bank intends to split into two parts, known as Pillar 2 requirements and Pillar 2 guidance (P2G). The P2G element will

no longer be included in the combined buffer requirement that banks must meet to continue servicing hybrid capital

instruments. This reduces the risk that a dip in capital ratios could trigger a cancellation of hybrid coupons, although


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Deutsche Bank AG

the ADIs test still applies.

Related Criteria And Research

Related criteria

• S&P Global Ratings' National And Regional Scale Mapping Tables, June 1, 2016

• Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015

• Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015

• Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014

• National And Regional Scale Credit Ratings, Sept. 22, 2014

• Group Rating Methodology, Nov. 19, 2013

• Assessing Bank Branch Creditworthiness, Oct. 14, 2013

• Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013

• Guarantee Criteria--Structured Finance, May 7, 2013

• Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012

• Banks: Rating Methodology And Assumptions, Nov. 9, 2011

• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

• Bank Capital Methodology And Assumptions, Dec. 6, 2010

• Use Of CreditWatch And Outlooks, Sept. 14, 2009

• Commercial Paper I: Banks, March 23, 2004

Related research

• Deutsche Bank Outlook Revised To Negative As Operating Conditions May Challenge Strategy Execution; Ratings

Affirmed, July 19, 2016

• Deutsche Bank Tier 1 Issue Ratings Lowered To 'B+' From 'BB-' On Narrow Definition Of Available Distributable

Items, Feb. 11, 2016

• Deutsche Bank AG, Aug. 21, 2015

Ratings Detail (As Of August 5, 2016)

Deutsche Bank AG

Counterparty Credit Rating BBB+/Negative/A-2

Greater China Regional Scale cnA+/--/--

Turkey National Scale trAAA/--/trA-1

Certificate Of Deposit

Foreign Currency BBB+/A-2/A-2

Commercial Paper A-2

Junior Subordinated B+

Senior UnsecuredGreater China Regional Scale cnA+

Senior Unsecured BBB+

Short-Term Debt A-2

SubordinatedGreater China Regional Scale cnBBB+

Subordinated BB+

Counterparty Credit Ratings History

19-Jul-2016 BBB+/Negative/A-2


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Deutsche Bank AG

Ratings Detail (As Of August 5, 2016) (cont.)

09-Jun-2015 BBB+/Stable/A-2

03-Feb-2015 A/Watch Neg/A-1

29-Apr-2014 A/Negative/A-1

02-Jul-2013 A/Stable/A-1

26-Mar-2013 A+/Watch Neg/A-1

25-Jan-2012 A+/Negative/A-1

07-Dec-2011 A+/Watch Neg/A-1

29-Nov-2011 A+/Negative/A-1

09-Jun-2015 Greater China Regional Scale cnA+/--/--

03-Feb-2015 cnAA+/Watch Neg/--

02-Jul-2013 cnAA+/--/--

17-Apr-2013 cnAAA/Watch Neg/--

08-Jul-2016 Turkey National Scale trAAA/--/trA-1

Sovereign Rating

Germany (Federal Republic of) AAA/Stable/A-1+

Related Entities

Deutsche Bank AG (Canada Branch)

Issuer Credit Rating BBB+/Negative/A-2

Deutsche Bank AG (Cayman Islands Branch)


Commercial Paper

Foreign Currency A-2

Deutsche Bank AG (London Branch)


Deutsche Bank AG (Madrid Branch)


Deutsche Bank AG (Milan Branch)


Deutsche Bank Capital Finance Trust I

Preferred Stock BB-

Deutsche Bank Capital Funding Trust VII

Preferred Stock B+

Deutsche Bank Luxembourg S.A.


Deutsche Bank Mexico S.A.

Issuer Credit Rating

CaVal (Mexico) National Scale mxBBB+/Stable/mxA-2

Deutsche Bank National Trust Co.


Deutsche Bank, S.A.E.

Senior Secured A+

Senior Secured A+/Stable


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Ratings Detail (As Of August 5, 2016) (cont.)

Deutsche Bank Securities Inc.


Local Currency BBB+/Negative/A-2

Deutsche Bank Trust Co. Delaware


Deutsche Bank Trust Corp.


Senior Unsecured A-2

Senior Unsecured BBB+

Subordinated BB+

Deutsche Securities Inc.


Deutsche Securities, S.A. de C.V., Casa de Bolsa


CaVal (Mexico) National Scale mxBBB+/Stable/mxA-2

*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable

across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and

debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

Additional Contact:

Financial Institutions Ratings Europe; [email protected]


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Deutsche Bank AG

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