FINANCIAL INSTITUTIONS

ISSUER IN-DEPTH Deutsche AG 8 July 2019 Sweeping revamp of business model will be credit positive when and if achieved

On 7 July, (DB; A3/A3 negative, ba11) announced a deep overhaul of its capital RATINGS markets operations and repositioning of its business model, moving corporate banking to the Deutsche Bank AG LT/ST Counterparty Risk A3/P-2 core. DB's global equity sales and trading businesses will be essentially closed, and the trading Ratings of interest rate products will be significantly reduced. DB will also create a new 'non-core' LT/ST Bank Deposit A3/P-2 2 Ratings Capital Release Unit (CRU ) to facilitate the rundown and help achieve better, more balanced LT Junior Senior Baa3 and sustainable profitability. DB expects a large part of the transformation, which will lead Unsecured Debt Rating to a 20% cut in the bank’s workforce, to be substantially concluded within the next 12-18 Baseline Credit ba1 Assessment months. Following the announcement, we affirmed all of the bank’s ratings and maintained LT ratings outlook Negative our negative outlook.

Source: Moodys.com » More radical shift in strategy highlights DB’s persistent challenges. The announcement represents a more fundamental reassessment of DB’s capital markets aspirations and is a positive step toward achieving a more balanced and sustainable business model. In light of ongoing challenges for the global capital markets industry, Contacts this may be the most realistic of DB’s various recalibrations. However, the more radical Michael Rohr +49.69.70730.901 reconfiguration of the bank’s and capital markets franchise remains a Senior Vice President [email protected] daunting work in progress. Peter E. Nerby, CFA +1.212.553.3782 » An accelerated transformation would be credit positive if well executed. Achieving Senior Vice President [email protected] the communicated targets would improve earnings stability and predictability, as well as free up capital for reinvestment. Our continued negative outlook reflects the significant Yana Ruvinskaya +44.20.7772.1618 Associate Analyst challenges DB faces in swiftly executing on the proposed plans, in particular with regard [email protected] to sustaining its revenue base in the remaining fixed income-related businesses, quickly Laurie Mayers +44.20.7772.5582 reducing the drag of the CRU as well as growing its corporate banking franchise against Associate Managing Director fierce competition. Fast and steady progress in achieving the new goals and repositioning [email protected] DB’s business model will be important to maintaining its current credit strength. Ana Arsov +1.212.553.3763 MD-Financial Institutions » Adequate capital and solid liquidity will help alleviate restructuring burden. DB’s [email protected] clean balance sheet and solid capital and liquidity metrics will protect bondholders during execution and underpin the affirmation of DB’s ratings. Continued strength in these underlying credit drivers will be critical to sustaining DB’s ba1 Baseline Credit Assessment.

» External factors could derail success. DB will have to continue dealing with various litigation cases, which in an adverse scenario could lead to additional settlement costs and reputational risk. DB's fundamental creditworthiness relies on customer and counterparty confidence, and a sudden or extended decline in either would be negative for the bank's franchise and potentially its revenue and liquidity. MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

More radical shift in strategy highlights DB’s persistent challenges Since 2012, a series of significant realignment initiatives has helped Deutsche Bank to increase capital and liquidity, reduce leverage, solidify its asset- and wealth-management businesses and shrink its legacy portfolios, all positive changes for bondholders. However, DB's profitability has been weak and inconsistent over this period (Exhibit 1).

Largely in reaction to persistent below-par profitability, the leadership of the bank has undertaken a more fundamental reassessment of Deutsche Bank’s capital markets aspirations, leading to the presentation of another ambitious plan to simplify and meaningfully downsize DB's investment banking (IB) operations and to reposition the corporate bank (CB) at the core of the go-forward business model. The plan makes substantially deeper and more definitive cuts to some of DB’s trading businesses, in particular global equity sales and trading as well as the bank’s rates businesses, and further adjustments in the investment banking operations now designed to support the corporate banking franchise's success.

Exhibit 1 Profitability has been weak and volatile despite repeated strategic realignments € million

Corporate & Investment Bank Private & Corporate&Other* GROUP PTP (RHS) 8,000 8,000

6,000 6,000

4,000 4,000

2,000 2,000

0 0

-2,000 -2,000

-4,000 -4,000

-6,000 -6,000

-8,000 -8,000 2011 2012 2013 2014 2015 2016 2017 2018 DB Target 2022

*Includes non-core operating unit (NCOU) for 2012-17. Policyholder claims not adjusted in Asset Management segment for 2007-11. DB target according to DB definition of 'IBIT'. Sources: Company reports, Moody's Investors Service

The significant cost and execution risk, as well as the potential disruptiveness of this latest, more radical strategic revamp highlights the persistent profitability and business model challenges facing Deutsche Bank and will continue to constrain the firm’s credit strength over the next 12-18 months. High costs to achieve will be a significant burden on earnings, and it will be daunting to reach such ambitious downsizing targets while also limiting franchise erosion. However, the strategic endpoint will be credit positive, placing DB on firmer ground than previous, less fundamental restructurings.

The revised plan goes far beyond earlier exercises to reduce the high cost base in the investment bank by just slicing front-office staff in response to low client turnover and activity. Now DB will refocus its market activities to focus on increasing revenue from less capital- intensive businesses deemed critical for supporting the growth of its corporate client base. Compared with previous plans, the cuts will extend deeper and more swiftly into middle- and back office functions, reducing ongoing infrastructure costs for exited business lines and products. At the same time, DB must still absorb the expense of legacy risk positions acquired in part before 2012 that no longer fit its revised strategy, as well as the associated cost of exiting these businesses.

These and other efforts to shrink the bank’s footprint, rationalize and refocus the customer base, simplify product offerings and enhance IT platforms will be critical to reducing DB’s tail risk and stabilizing profitability in support of a more sustainable business model. However, even if management executes on the factors within its control, including an accelerated reduction of the CRU assets, success will depend on the bank's ability to grow its corporate banking franchise against fierce competition and continued challenging market conditions, in particular the low interest-rate environment in Europe and global macroeconomic uncertainties.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

2 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Deutsche Bank retains a firm strategic commitment to a universal banking model DB will tackle its high structural costs more aggressively and head on by pruning capital markets operations to a sustainable size and business mix. Management also decided to separate the corporate bank from the IB division, placing it in the center of the future business model, with the IB now providing capital market access and support to the corporate banking core. We estimate the share of IB-related revenue will fall to below 30% of total group revenue from about 36% in 2018 (Exhibit 2), reducing the bank’s reliance on volatile earnings streams and lowering the capital intensity of its business mix. These changes will entail the reorganization of business units (from three to four), appointing new line-of-business leadership, and the departure of some very senior personnel.

Exhibit 2 DB's revenue mix will shift away from capital markets businesses

ECM, DCM, Advisory CIB Sales & Trading DB Transaction Banking Private Clients Asset Management 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Before (2018) Post downsizing Sources: Company reports, Moody's Investors Service estimates

To stabilize revenue within the remaining, now separated, CB and IB segments, management will continue shifting focus toward corporate clients instead of institutional investors. DB will build on its core payment and hedging capabilities and increase emphasis on primary and transaction services revenue, with a particular aim to increase cross-selling to single-product customers. This shift toward more transaction banking and client-based based revenue will help reduce resource consumption, and we anticipate DB's capital markets-oriented IB businesses (excluding the Corporate Bank) will consume approximately one-third of group risk- weighted assets (RWAs) and leverage exposures post downsizing, reducing the bank's exposure to and reliance on capital markets activities and bringing it in line with many of its global investment banking (GIB) peers.

However, even DB's significantly reduced global investment banking activities will continue to pose material risks for creditors because of their volatile revenue streams; inherent risk-management and risk-governance challenges; opaque risk taking; intrinsic market, counterparty and operational risks; and the embedded high confidence-sensitivity of the customer and funding franchises.

DB’s strategic goals remain largely bondholder friendly When and if ultimately achieved, DB’s proposed business model changes will result in a more balanced and sustainable business mix, resulting in a more efficient and profitable banking group. In light of persistent challenges for the global capital markets industry, this may therefore be the most realistic of DB’s various recalibrations. The key goals of the strategy (Exhibit 3) include:

» Achieving and maintaining a 5.0% leverage ratio, a minimum 12.5% Common Equity Tier 1 (CET1) capital ratio (net of the impact of future regulatory changes) and 8% return on tangible equity by 2022

» Approximately €5.8 billion of net cost-saving initiatives together with €2.3 billion of additional restructuring and severance costs split over the next four years, and largely booked during 2019 and 2020

» Additional costs to achieve (deferred tax asset valuation adjustment, impairments, existing restructuring and severance charges and other effects) of €5.1 billion, over the next four years, and largely booked during 2019

» A 70% cost-income ratio target by 2022 and an interim target of 80% in 2021

» €13 billion investment into IT and an additional €4 billion in controls and processes

3 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 3 DB's targets have constantly been adjusted and proved difficult to achieve Original targets (2012 plan) Revisions 2015-2017 2018 plan NEW 2022 targets Credit implications CET1 capital ratio >10% 'Around' 11% to >12.5% >13% 12.5% minimum Neutral Leverage ratio 3.50% 4.5% to 5.0% 4.5% 5.0% Positive Adjusted costs No target <€23 billion <€21.8 billion (2019) €17 billion Positive Cost/Income ratio 65% 65%-70% No target 70% Neutral Post-tax RoE/RotE 'Around' 12% (RoE; by 2016) >10% mid-term 'Around' 10% 8% Neutral

Sources: Company reports, Moody's Investors Service estimates

As part of the plan, the bank will transfer and largely run off a legacy portfolio of non-core or poorly performing assets that amount to about €74 billion in total RWAs (including €36 billion in operational risk RWAs) and to about €280 billion in leverage exposure. Raising the profitability and balance sheet-efficiency of the separated CB and IB businesses will be critical to the ultimate success of the strategy since those accounted for €988 billion of the firm’s €1.37 trillion CRD IV leverage exposure and €236 billion of €350 billion in group RWAs as of year-end 2018. We estimate that the new strategy will ultimately lower the firm’s CRD IV leverage exposure by approximately €250 billion and its RWA exposure by €75 billion, significantly reducing future regulatory-driven inflation of these metrics in light of the upcoming revisions to the Basel capital framework, commonly known as Basel IV.

The assets in the CRU will largely consist of short-dated prime finance balances from the bank's equities sales and trading businesses, rates positions, as well as former nonstrategic IB assets and longer-dated legacy derivatives no longer coherent with the bank's revised business model, as well as non-core trading positions. In addition to shrinking the bank's RWAs and leverage exposures, this will help lower the bank's share of Level 3 assets3, which has historically been high compared with global investment banking peers (Exhibit 4).

Exhibit 4 New Capital Release Unit (CRU) will help accelerate cleanup Level 3 assets will also decline to a level more commensurate with peers

Equities Fixed Income Former non-strategic Other Operational risk 100% 15 90% 25

80% 36 70% 79

60%

50% 5 € billion 40% 7

30% 170 15 20%

10% 11 0% Risk-weighted assets Leverage exposure Sources: Company reports, Moody's Investors Service estimates

4 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

An accelerated transformation would be credit positive if well executed Deutsche Bank’s revised strategic plan is a welcomed recalibration of the previous plan. It deepens and continues management’s pursuit of less volatile and more balanced profitability and a more sustainable business model. Nonetheless, it is clear that the re- engineering of Deutsche Bank’s business model still has years to run. Given the steep execution challenges, steady progress during this period will be important to maintaining the bank’s credit strength and the confidence of counterparties, while conclusive achievement of the plan would be a clear and substantial credit positive.

Assuming the plan is executed according to plan, we estimate a post-restructuring revenue yield (total revenue over RWAs) for DB of around 7% (essentially maintaining the firm’s average revenue yield achieved during the 2015-18 period) on group RWAs of around €350 billion, as well as (normalized) credit costs of €1.3 billion. We forecast an operating expense base of around €18 billion in 2021 and €17 billion in 2022, and group revenue of roughly €24 billion once the plan is fully executed. This scenario results in a cost-income ratio of 73% and a return on tangible equity (RoTE) of around 7%, leaving the firm close to achieving its long-run 8% target RoTE. Our estimates exclude any potential earnings benefit from rising interest rates and incorporate only a small cumulative reduction in the cost of funding the bank's smaller balance sheet.

If achieved and sustained, a steady, predictable RoTE of around 6%-8% would likely stabilize DB’s credit strength at the ba1 BCA level, provided the bank maintains its sound asset quality and risk profile, keeps strong liquidity, and displays comparatively stronger regulatory capital metrics than its global investment bank peers that have lower-risk business models or credit profiles.

Deutsche Bank’s structural profitability problem remains one of its greatest challenges Long-standing issues limit the profitability of German in general, and DB must also contend with the expense of maintaining its fixed-income capital markets footprint, as well as growing its corporate banking franchise against fierce competition. Persistently low interest rates and extended periods of low volatility that suppress net interest and trading revenue will continue to constrain DB’s earnings during this more fundamental business model overhaul.

To illustrate, since the bank announced its strategic revamp under former CEO in 2015, core revenue has dropped €8.2 billion, or 24%, to €25.3 billion in 2018. Most of this drop occurred within the bank's CIB segment, in which revenue fell to €13.0 billion in 2018 from €18.6 billion in 2015. Revenue yields on RWAs have been declining over this period despite a slight rundown in regulatory RWAs, underlining the low capital efficiency of the capital markets operations and their drag on group earnings (Exhibit 5).

Exhibit 5 Deutsche's Corporate and Investment Bank has been a persistent earnings underperformer Revenue yield (over RWAs) by segment

Corporate & Investment Bank Private & Commercial Bank GROUP 18.0%

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sources: Company reports, Moody's Investors Service

The cost-management side of DB’s profitability puzzle has come together more quickly since new management took over in April 2018. The bank's (adjusted) cost base declined 6% year-over-year to below €23 billion at year-end 2018, reflecting faster-than-anticipated progress in running down the bank's staff base. DB looks to be on track to achieve its €21.8 billion adjusted cost target for 2019, even before any additional effects from the newly announced restructuring plans (Exhibit 6).

5 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 6 Progress has come quicker on the cost side of the profitability puzzle

Revenues* Costs^ 6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

-8.0%

-10.0%

-12.0%

-14.0% 2012 2013 2014 2015 2016 2017 2018 * As reported by DB. ^Excluding restructuring, costs and other significant charges. Sources: Company reports, Moody's Investors Service

However, despite these credit-positive efforts on the cost side, DB has yet to demonstrate that it will be able to generate positive operating leverage following this latest deep business model overhaul. Through its prior, less fundamental, restructuring programs since 2012, DB has remained less profitable than most of its European banking peers (Exhibit 7), with a cost-to-income ratio of 92.7% as of year-end 2018 (EU peers average: 74.7%).

Exhibit 7 DB has been persistently less profitable than global investment bank peers

Deutsche Bank BNP Paribas Societe Generale HSBC UBS 130%

120%

110%

100%

90%

80%

70%

60%

50% Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Sources: Company reports, Moody's Investors Service

The announced revamp of DB's business model aims to achieve greater shock absorption capacity in the form of earnings from other more stable business lines to tackle its long-standing profitability issue. Indeed, many of DB’s peers were able to afford and sustain more effective restructurings (and investments) because of the support from their stable earnings contributors, such as multi-local retail and universal banking as well as global asset and operations.

It will require a delicate balancing act for DB to make deep cuts to its equities and rates businesses while avoiding greater than desired revenue attrition in its remaining fixed-income-oriented franchise. In addition, DB’s decision to largely exit equity sales and trading, as well as parts of the global rates business, will increase its reliance on fixed income sales and trading, a problem exacerbated by the continuing shrinkage in global fixed income fee pools and related client activity. DB already depends more on fixed income-related revenue streams than global peers, increasing the importance of stabilizing them during and post restructuring, in particular because low interest rates in Europe will continue to constrain revenue (Exhibit 8).

6 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 8 DB's fee pool depends more on fixed income and credit than many of its peers

Fixed income Equities Investment Banking

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Global fee pool 2018 DB fee pool 2018 Global fee pool 2022E DB fee pool 2022E Sources: Company reports, Moody's Investors Service

Moreover, it is unclear whether the forecast revenue attrition will remain limited to the closed or shrunk businesses, or if clients will also retreat from other (trading) activities with the bank. As a result, revenue attrition associated with the planned balance sheet reductions within CB and IB may be greater than our estimate of €3.0 billion of (gross) run-rate revenue losses. DB aims to offset part of the anticipated revenue strain by refocusing on higher-margin businesses within fixed income and currencies, in particular credit and securitized products, as well as foster its strong global transaction banking franchise. The bank will also focus on less capital-intensive earnings streams and on non-institutional clients within the reorganized segments4, retreating further from serving lower margin and more counterparty risk-sensitive clients, such as hedge funds. In addition to exiting select businesses, these perimeter adjustments will reduce the bank's diversification in fixed income and currency flow business. In turn, this may reduce the necessity to significantly invest into technology to be able to compete with larger flow franchises such as JPMorgan Chase & Co. or Inc., yet does not free DB from having to maintain best-in-class platforms to be able to defend its remaining franchise in fixed income.

Over time, this should help improve the low return on capital of DB’s capital markets operations. It will also make the business easier to control and run, with reallocated capital and resources helping to defend the bank’s remaining franchises. Together with the planned strengthening and stabilization of the retail and asset management businesses, this would help protect bondholders against the cyclical volatility of DB’s substantially condensed capital markets businesses. Based on DB's medium-term targets of achieving a net RoTE of around 8% at group level, as well as cutting the overall balance sheet toward €1.0 trillion, returns on assets and RWAs would exceed 2011 levels, following which the bank's multiyear plan iterations began (Exhibits 9 and 10).

At this point, however, the execution risks of the revised strategy remain high and many questions remain. We believe quickly achieving the communicated efficiency goals – and thus consistently generating the capital to fund necessary investments – will be difficult over the next two years as DB digests more than €7 billion of costs related to this strategic plan revision.

Exhibit 9 Exhibit 10 Pretax return on assets by segment Pretax return on risk-weighted assets by segment

Corporate & Investment Bank Private & Commercial Bank Corporate & Investment Bank Private & Commercial Bank GROUP GROUP 0.8% 4.0%

0.6% 3.0% 0.4% 2.0% 0.2%

0.0% 1.0%

-0.2% 0.0% -0.4% -1.0% -0.6% -2.0% -0.8%

-1.0% -3.0%

-1.2% -4.0% 2011 2012 2013 2014 2015 2016 2017 2018 Target 2011 2012 2013 2014 2015 2016 2017 2018 Target Note: Target means DB group-level target as implied by current guidance. Note: Target means DB group-level target as implied by current guidance. Sources: Company reports, Moody's Investors Service estimates Sources: Company reports, Moody's Investors Service

7 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Adequate capital and solid liquidity will help alleviate restructuring burden Liquidity remains a comparative and credit positive strength of DB, which has significantly reduced its refinancing risk through a series of prior de-risking and restructuring programmes to build a more liquid balance sheet. As DB’s extensive re-engineering proceeds, it will be critical for the bank to maintain its capital adequacy and liquidity profile.

The revised strategic plan will substantially lower the bank’s funding requirements Post downsizing, we expect DB's wholesale funding requirements to decline materially. The proportion of deposits and other stable funding sources will increase, and we deem it likely the bank will issue longer-term senior unsecured (preferred) debt rather than just replace costly junior senior unsecured (non-preferred) debt instruments. Given the significantly lower cost of the former, DB would be able to further extend its term structure and reduce future refinancing risk, a credit positive.

In addition, DB's lower dependence on confidence-sensitive wholesale funding will give it greater flexibility to manage refinancing costs, safeguarding its ability to execute the announced plans over the next 12-18 months. Since these funds will no longer be needed to underlie the closed businesses and, therefore, meet associated regulatory requirements, there will be opportunities to partially reinvest excess cash to shore up profitability, while at the same time maintaining a sizable credit positive buffer well over minimum regulatory requirements, such as the minimum bail-inable volumes stipulated under the EU's MREL (Q1 2019 excess: €19 billion).

DB's funding largely consists of €576 billion of customer deposits (of which some 55% were granular retail deposits), constituting 54% of its net liabilities (including equity) as of 31 March 2019 (Exhibit 11). Debt capital market funds outstanding totaled €166 billion, equal to around 16% of net liabilities. During 2018, DB issued €20 billion of capital market funding with longer tenors of slightly above six years on average (equal to about 1.5% of its average total balance sheet) to fund business growth and replace maturing senior (mostly 'non-preferred') debt. The remainder of the funds was sourced in the interbank markets and is mostly used to finance assets of similar tenors, as well as to support the bank's (currently) large trade finance and market making activities.

Exhibit 11 DB's balance sheet will remain highly liquid, a credit positive

€1,063 billion €1,063 billion

184 Trading liabilities Cash and 203 Derivatives equivalents Liquidity reserves 76 Brokerage payables Highly liquid securities Trading assets Reverse repos and 331 securities borrowed 576 Derivatives Deposits Brokerage recievables

77% loan-to-deposit ratio Loans to 415 customers 52 Other liabilities

166 Long-term debt

Other Assets 57 65 Equity

Sources: DB Fixed Income Investor Presentation Q1 2019, Moody's Investors Service

DB also continues to display strong on-balance-sheet liquidity, with a reported liquidity reserve of €260 billion as of the end of the first quarter, largely comprising central bank cash and other highly liquid securities. This compares with €90 billion of unsecured wholesale funding outstanding as of 31 March 20195 and a strong liquidity coverage ratio of 141% as of 31 March 2019. As stated above, we expect the proposed balance sheet reduction will free up excess liquidity and reduce the negative carry associated with holding this cash at the central bank.

Deutsche Bank’s leverage ratio will improve against peers, and it will not become an outlier on capital adequacy Under the new strategic plan, DB management targets a minimum 4.5% leverage ratio by 2020, rising toward 5.0% as of the end of 2022, closing the gap with peers (Exhibit 12). In addition, we expect the bank’s CET1 capital ratio to generally remain above the newly communicated minimum of 12.5% over the next 12-18 months, though it may temporarily dip below this level as DB allocates the costs of its strategic revisions in coming quarters. To achieve this, DB will not pay in 2019 and 2020; and future dividends will be subject to management discretion based on achievement of announced targets.

8 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 12 DB's leverage is set to improve significantly; capitalization will remain adequate despite possible periodic dips

CET1 ratio Tier 1 Leverage ratio Median CET1 ratio (13%) Median leverage ratio (5.4%) 21.0%

18.0% 17.3%

14.3% 15.0% 13.7% 13.4% 13.0% 13.0% 13.0% 12.6% 12.5% 11.9% 12.0% 11.7% 11.7% 11.4%

9.0% 6.5% 6.4% 6.4% 6.4% 6.8% 5.4% 5.4% 5.2% 6.0% 3.9% 4.9% 4.2% 4.2% 4.3% 3.0%

0.0% baa2 a2 ba1 baa1 a2 a3 baa3 baa2 baa1 a3 baa1 baa2 a3 MS HSBC DB GS JPM UBS* BCS** CS* C BAC BNP SG RBC Notes: (1) As of Q1 2019; (2) Basel III fully phased in advanced approach for all US banks. Citi has only reported CET1 ratio under the standardized approach, which is the binding constraint. The CET1 ratio under the advanced approach shown in the chart is Moody’s estimate; (3) Tier 1 leverage ratio for US banks is the supplemental leverage ratio (SLR). *UBS and CS leverage ratio reflect Common Equity Tier plus Low Trigger Additional Tier 1 and High-Trigger Additional Tier 1 securities. **Barclays leverage is reflective of the spot UK leverage ratio. Sources: Company reports, Moody's Investors Service

External factors could derail success Deutsche Bank's past results have been hindered by litigation, as well as major restructuring and legacy portfolio costs. As a result of these extraordinary costs6, the firm generated only €1.0 billion in cumulative pretax income during the 2012-18 period.

In addition to raising capital twice during this period, Deutsche Bank has resolved several litigation proceedings that posed large tail risks for bondholders, thereby significantly enhancing its financial flexibility. Total litigation reserves stood at €1.2 billion at year-end 2018, and the amount of reasonably possible contingent liabilities stood at €2.7 billion as of the same date (Exhibit 13). However, the possibility of additional litigation and conduct-related charges – the occurrence and amount of which are very difficult to forecast accurately – remains a tail risk for future earnings that could potentially set back DB’s progress in executing on its plans.

Exhibit 13 DB's path to settling litigation risk has been volatile and costly at times

Prior year reasonably possible litigation contingency Litigation amounts used 6.0

5.0

4.0

3.0

2.0

1.0

0.0 2013 2014 2015 2016 2017 2018 Sources: Company reports, Moody's Investors Service

The success of the plan also depends on whether DB will be able to defend and grow its corporate banking franchise and the supporting capital markets businesses, as well as foster growth in its retail and asset management segments. Maintaining customer and counterparty confidence will be critical to maintaining DB’s fundamental creditworthiness as it executes the plan. An extended decline in customer and counterparty confidence can lead to unwanted franchise erosion and revenue attrition in the remaining corporate and investment banking businesses. In this regard, demonstrating continued capital and liquidity strength – and sound asset quality in the core bank – will be critical to sustaining Deutsche Bank’s ba1 BCA, as well as market confidence.

9 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Moody’s related publications Credit Opinions

» Deutsche Bank AG, February 2019

Issuer Comments

» Deutsche Bank AG: Q1 2019: Lower cost base partially insulates Deutsche Bank from market pressures

» Deutsche Bank AG and AG: Merger talks have no immediate rating implications

» CEO change highlights strategic challenges still confronting Deutsche Bank

Issuer In-Depth

» Scenario analysis: Deutsche Bank AG and Commerzbank AG

» Deutsche Bank AG: Cleaner balance sheet buys time to execute deep re-engineering

» Deutsche Bank AG: Capital Raise, Strategic Course Correction Are Credit Positive

Rating Actions

» Moody's affirms Deutsche Bank AG's ratings, maintains negative outlook

Banking System Outlook

» , October 2018

Rating Methodology

» Banks, August 2018

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

10 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Endnotes 1 Unless indicated otherwise, the ratings shown in this report are the bank's deposit and senior unsecured debt ratings and corresponding outlook(s), as well as the Baseline Credit Assessment (BCA). 2 The new CRU is expected to hold about €38 billion in credit and market risk-weighted assets (RWAs) as well as €36 billion in operational risk RWAs. 3 As determined by FASB 157, an asset for which an accurate fair market value cannot be calculated is usually categorised as a Level 3 asset. A pricing model or other observable inputs may be able to provide a fair value or market estimate, but these assets are generally considered illiquid. 4 As part of the restructuring, DB will break out Corporate Banking (CB) from the former CIB segment and report separately. The other business segments, Investment Banking (IB), Private and Business Clients (PBC) and Asset and Wealth Management (AWM), will be adjusted accordingly to match the new reporting format. 5 This includes senior preferred and senior non-preferred issuances, as well as AT1 and Tier 2 instruments. 6 In Q4 2016 DB resolved some major outstanding litigation, cutting the bank’s tail risk. It settled with the US DOJ for $7.2 billion regarding civil claims in connection with the bank’s issuance and underwriting of residential mortgage-backed securities (RMBS) and related securitization activities between 2005 and 2007. The bank paid a monetary penalty of $3.1 billion in January 2017 and will provide $4.1 billion in consumer relief to be delivered over a multiyear period. DB also announced settlements with both the New York Department of (DFS) and the UK Financial Conduct Authority (FCA) for a total of $630 million in relation to the Russian ‘mirror’ trading investigation. This settlement was fully covered by existing provisions; however, there remain outstanding enquiries into the mirror trades by criminal authorities, which we understand are not yet fully resolved.

11 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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12 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Contributors CLIENT SERVICES

Michael R Porta Americas 1-212-553-1653 VP-Senior Research Writer Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454

13 8 July 2019 Deutsche Bank AG: Sweeping revamp of business model will be credit positive when and if achieved