FINANCIAL INSTITUTIONS

ISSUER COMMENT1 February 2019

Contacts

Michael Rohr +49.69.70730.901VP-Sr Credit Officermichael.rohr@moodys.com

Peter E. Nerby, CFA +1.212.553.3782Senior Vice Presidentpeter.nerby@moodys.com

Yana Ruvinskaya +44.20.7772.1618Associate Analystyana.ruvinskaya@moodys.com

Laurie Mayers +44.20.7772.5582Associate Managing Directorlaurie.mayers@moodys.com

Ana Arsov +1.212.553.3763MD-Financial Institutionsana.arsov@moodys.com

Deutsche Bank AGQ4 2018: Restructuring progress meets challenging marketconditions

Deutsche Bank AG (DB, A3/A3, negative, ba11) reported a fourth-quarter net loss of€409 million, following a net loss of €2.4 billion in the prior-year quarter2. While partlyowing to additional restructuring and higher loan loss charges booked in the final quarter of theyear, DB suffered from revenue pressure in its Corporate and Investment Bank (CIB), as well asin Asset Management (AM). This could not be compensated for by a better-than-expected costperformance with total adjusted expenses of €22.8 billion for 2018, below the bank’s €23 billiontarget (Q4 2018: €5.4 billion). Overall, and considering the more adverse market conditionsduring the fourth quarter of 2018, the results are in-line with our expectations.

On a pretax operating basis3, DB reported a €387 million pretax loss for Q4 2018, comparedto a €1.1 billion loss one year ago. Based on a normalised tax rate of 35%, DB’s net returnon risk weighted assets (RWA) stood at -29 basis points (bps) for the quarter, comparedto -86 bps one year ago. On this basis, the bank's underlying post-tax return on averageshareholder’s equity stood at -1.6% compared to -4.5% in Q4 2017.

Challenging market conditions strain revenues. Revenue generation was weakercompared to last year’s fourth quarter, especially in the Corporate and Investment Bank,driven by significantly lower client activity negatively affecting the bank’s fixed incomebusinesses. Deutsche Bank’s ability to rebuild and stabilize revenues in coming quartersacross the various businesses will be paramount to the long term success of its restructuringplan and remains work in progress.

Progress on costs becomes visible. DB reported adjusted costs of €5.4 billion in thequarter, down 15% compared to Q4 2017 and down 1% sequentially. Thereby, DB beat itscost target of €23 billion for 2018 and also slightly lowered its 2019 (adjusted) cost targetfrom €22 billion to €21.8 billion. Considering the firms progress in reducing staff (year-endfull-time staff of 91,737 versus the planned <93,000), we believe DB is well on track toachieve this revised cost target.

Capital and liquidity remain sound. Although DB recorded a loss for the quarter, itscapitalization and balance sheet liquidity remained sound. On the back of higher RWA asa result of heightened market risk, DB’s Common Equity Tier 1 (CET1) ratio declined to13.6%, down from 14.0% as of the end of the third quarter. Despite the decline, DB remainedpositioned above the peer group average (see Exhibit 1). The firm’s leverage ratio of 4.1%improved slightly over the quarter. In addition, DB’s balance sheet remained very liquid: DBreported a liquidity reserve of €259 billion and a LCR of 140% as of year-end 2018.

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Exhibit 1

Common Equity Tier 1 (CET1) ratio and Tier 1 Leverage Ratio for Global Investment Banks, as of 31 December 2018

17.0%

14.3%13.6%

13.1% 13.2% 13.1% 12.9% 12.9% 12.3%

11.9% 11.7% 11.5% 11.2%

6.5%

5.4%

4.1%

5.2% 4.9%

6.2% 6.4%

5.1%

6.4%6.8%

4.0%

4.4%

4.1%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

MS HSBC DB UBS* BCS** GS JPM CS* C BAC BNP RBC SG

CET1 ratio Tier 1 Leverage ratio Median CET1 ratio (12.9%) Median leverage ratio (5.2%)

Notes: (1) As of Q4 2018 for Bank of America, Citigroup, Deutsche Bank, Goldman Sachs and JPMorgan and Morgan Stanley which have reported Q4 earnings, and for RBC whose thirdquarter ended in October 2018; Q3 2018 for the rest; (2) Basel III fully phased in advanced approach for all US banks. Citi has only reported CET1 ratio under the standardized approachwhich 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 leverageratio (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 UKleverage ratio.Sources: Company reports, Moody's Investors Service

DB’s litigation reserves were down in the quarter due to further settlement of some litigation matters. At year-end 2018, totallitigation reserves stood at €1.2 billion and contingent liabilities increased to €2.7 billion at year-end 2018, reflecting a series of smallermatters adding to contingent liabilities over the quarter.

Asset risk stayed strong, despite uptick in loan loss charges. Cost of risk slightly increased to 13 bps for the full year, up from avery low level of 9 bps in the third quarter. Most of the increase was owing to Stage 1+2 increases related to forward-looking macro-economic estimates affecting IFRS 9 provisioning requirements. Average and stressed value-at-risk (99%, 1 day) of €30 million and €95million, respectively, went up over the quarter reflecting adverse market conditions (Q3 2018: €25 million and €74 million).

Exhibit 2

Segments negatively affected by challenging market conditions and select business exitsQuarterly pretax profits by business line (excluding litigation, impairments, DVA and one-offs)

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Corporate & Investment Bank Private & Commercial Bank Deutsche Asset Management Consolidation & Adjustments Non Core Operations Unit

Sources: Company reports, Moody's Investors Service

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 onwww.moodys.com for the most updated credit rating action information and rating history.

2 1 February 2019 Deutsche Bank AG: Q4 2018: Restructuring progress meets challenging market conditions

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Corporate and Investment Banking (CIB) reported a pre-tax loss of €303 million compared with a loss of €704 million duringthe same period last year. Revenues declined 5% year-over-year, mainly driven by lower fixed income sales and trading (down 23%year-over-year) as well as debt origination revenues (down 47%). In particular, the decline in fixed income sales and trading revenueswas driven by Rates and Equites, whereas FX has a relatively stable quarter. Global transaction banking as well as equity origination andadvisory revenues held up well, increasing 5%, 17% and 17% year-over-year, respectively. The CIB’s performance is at the lower end ofDeutsche Bank’s US-based peers, reflecting lower volatility and client activity in European rates as well as executed business exits in theUS. A strong 19% decline in operating expenses was, therefore, not able to fully offset revenue weakness.

Private & Commercial Bank (PCB) reported a pre-tax income of €23 million compared to a loss of €651 million for the sameperiod last year4. Revenues were up 5% year-over-year, excluding specific items in both quarters (Q4 2018: €75 million) resulting fromthe ongoing Sal. Oppenheim workout. Net interest income increased 3% year-over-year, as underlying growth in the loan book (up€10 billion) was offset by the impact of the lower interest rate environment. Adjusted operating expenses declined 9% due to lowerrestructuring costs and earlier cost cutting measures.

Deutsche Asset Management (DAM) reported a pre-tax profit of €59 million compared to €113 million for the same periodlast year. Revenues were down 17% driven by lower management fees (down 6%) and performance fees (down 64%). Assets undermanagement declined 5% to €664 billion, driven by market movements as well as €7 billion of net outflows. Operating costs weredown 16% benefitting from business exits and earlier restructuring measures.

Rating ConsiderationsDeutsche Bank has a baseline credit assessment of ba1 and is rated A3 for deposits, A3 for senior unsecured debt, Baa3 for junior seniorunsecured debt and is assigned a Counterparty Risk Assessment of A3(cr)/Prime-2(cr) and Counterparty Risk Rating of A3/P-2. Theoutlook on its deposit and senior unsecured ratings is negative.

3 1 February 2019 Deutsche Bank AG: Q4 2018: Restructuring progress meets challenging market conditions

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Moody's Related ResearchCredit Opinions

» Deutsche Bank AG, August 2018

Issuer Comment

» CEO change highlights strategic challenges still confronting Deutsche Bank

» Deutsche Bank passes credit-positive milestone with IPO of DWS Asset Management

Issuer In-Depth

» Cleaner balance sheet buys time to execute deep reengineering

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

Rating Action

» Moody's downgrades Deutsche Bank legacy senior debt to Baa3 following change in bank insolvency law and affirms A3counterparty and deposit ratings

Banking System Outlook

» Germany, 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 thisreport and that more recent reports may be available. All research may not be available to all clients.

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Endnotes1 The ratings shown in this report are DB’s deposit rating, senior unsecured debt rating, outlook, and baseline credit assessment (BCA).

2 All figures in this report relate to Q4 2018 and comparisons are made to Q4 2017, unless otherwise indicated.

3 This excludes asset sale gains, impairments, litigation, and DVA.

4 The prior-year result was negatively affected by a €157 million loss related to the now executed disposal of DB's Polish retail banking activities.

5 1 February 2019 Deutsche Bank AG: Q4 2018: Restructuring progress meets challenging market conditions

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