ACRA affirms credit rating of Deutsche Bank Ltd. at AAA(RU), outlook Stable

The credit rating reflects the high probability of support to Deutsche Bank Ltd. (hereinafter, the Bank) from its sole participant, Deutsche Bank AG, which has a strong financial profile. The Bank’s standalone creditworthiness assessment at ‘a+’ reflects its adequate capital adequacy as well as its strong risk profile and adequate funding and liquidity position.

Deutsche Bank Ltd. is a wholly owned subsidiary of Deutsche Bank AG (hereinafter, the Supporting Institution, or SI), one of the largest financial corporations in Europe and headquartered in Frankfurt. The specialization of Deutsche Bank Ltd. is to provide integrated services and lending to large multinational companies operating in Russia as well as to Russian “blue chip” corporates.

Key rating assessment factors

High likelihood of extraordinary support from the sole participant. In ACRA’s opinion, Deutsche Bank AG, if needed, will provide Deutsche Bank Ltd. with long-term and short-term financing and capital injections. ACRA’s opinion is based on the following factors:

  • Deutsche Bank AG statements regarding its full support of the Bank’s compliance with its obligations;
  • Strategic importance of the Russian market for Deutsche Bank AG;
  • Explicit operational integration between Deutsche Bank Ltd. and Deutsche Bank AG, which performs strategic and, to a large extent, operational control over the Bank’s activities;
  • Possible reputational risks for the SI resulting from a potential default of the Bank.

In view of the above, the degree of relationship between the Bank and its sole participant is assessed as very strong.

The resulting assessment of the country risk of jurisdiction of Deutsche Bank AG as the SI, as compared to the country risk of Russia, is generally determined by ACRA as strong. ACRA assesses the creditworthiness of the Supporting Institution as strong in view of its loan portfolio, business efficiency, as well as capital adequacy and liquidity levels.

Therefore, the credit rating of the Bank is determined as on par with the Russian Federation.

The Bank’s business profile reflects its medium position in the Russian banking system. Among Russian banks, Deutsche Bank Ltd. ranked 61st in terms of capital and 80th in terms of assets as of October 1, 2018. The Bank has a strong brand: being a subsidiary of Deutsche Bank AG allows it acquire quality Russian and international clients, with some of them doing business with both the Russian subsidiary and the parent bank.

The Bank’s business is moderately diversified: the Herfindahl-Hirschman Index, which ACRA uses to assess operating level diversification, stood at 0.22 at the end of 2017. The Bank’s strategy is part of the strategy of Deutsche Bank for the Russian market, which involves maintaining focus on cash management and trade finance services while organically growing its corporate lending business. The strategy assumes retaining a conservative approach to risk-taking.

ACRA assesses the Bank’s capital adequacy as adequate. The Bank’s core capital adequacy ratio under RAS (N1.2) equaled 27.2% as of July 1, 2018 and 23.8% as of October 1, 2018, which ensures a high capacity to absorb credit risks. According to ACRA’s stress test results, the Bank’s capital is capable of withstanding provisioning of a substantial share of the loan portfolio and off-balance sheet liabilities without descending to the minimum regulatory ratios.

ACRA notes the relatively stable profitability indicators of the Bank: the averaged capital generation ratio (ACGR) amounted to 260 bps from 2013 through 2017. At the same time, the ACGR minus dividend payouts equaled -13 bps in the same period. ACRA points to the fact that the amount of dividends is not fixed. If required, net income may be used by the SI at its discretion to strengthen the capital position of Deutsche Bank Ltd. Overall, the capital adequacy management policy of the Bank is implemented as part of the SI’s policy.

The risk profile assessment is strong due to the combination of a small, quality loan portfolio, small-scale securities portfolio, and no counterparty risk in interbank lending. According to IFRS reporting data as of July 1, 2018, the Bank had no impaired or overdue loans. This situation is typical of Deutsche Bank Ltd. and results from its adequate risk management policy, allowing it to finance companies of high credit quality. While being a part of the single risk management system of the SI, the Bank’s risk management system incorporates risk practices accepted by Deutsche Bank AG.

At the same time, the concentration of the Bank’s loan portfolio is high: the top ten groups of related borrowers accounted for more than 85% of the portfolio as of July 1, 2018. The potential influence of concentration-related risks on the capital of Deutsche Bank Ltd. is largely offset by the low share of the loan portfolio in its total assets (around 14.4% as of July 1, 2018).

The funding and liquidity factor is assessed as adequate, stemming from the Bank’s short-term liquidity surplus in both the baseline and stress scenarios, sustainable short-term liquidity position, and its independence from regulatory funding.

At the same time, ACRA points to the fact that the Bank’s liabilities structure has a high concentration on funds of legal entities (as of July 1, 2018, they exceeded 80% of total liabilities). In addition, the funding structure has a moderate concentration on funds of the top ten groups of the Bank’s clients.

Key assumptions

  • Maintaining the ownership structure and relationship with the sole participant within the 12 to 18-month horizon;
  • Maintaining the current business model within the 12 to 18-month horizon;
  • Maintaining sustainably low levels of problem assets.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • Decrease in the strategic importance of the Russian market for Deutsche Bank AG;
  • Significant decrease in the creditworthiness of Deutsche Bank AG.

Rating components

Standalone creditworthiness assessment (SCA): a+.

Adjustments: none.

Support: on par with RF.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation.

The credit rating assigned to Deutsche Bank Ltd. was published by ACRA for the first time on December 28, 2017. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 19, 2018).

The credit rating was assigned based on the data provided by Deutsche Bank Ltd., information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of Deutsche Bank Ltd., and the financial statements of Deutsche Bank Ltd. drawn up in compliance with Bank of Russia Ordinance No. 4212-U of November 24, 2016. The credit rating is solicited, and Deutsche Bank Ltd. participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by Deutsche Bank Ltd. in its financial statements have been discovered.

ACRA provided no additional services to Deutsche Bank Ltd. No conflicts of interest were discovered in the course of credit rating assignment.

Disclosure of deviations from approved methodologies. Deviation from the methodology in assessing the loan portfolio quality with respect to the concentration on the top ten borrowers reflects their high credit quality coupled with the low share of the loan portfolio in assets.

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