FINANCIAL INSTITUTIONS

ISSUER COMMENT18 June 2020

Contacts

Michael Rohr +49.69.70730.901Senior Vice Presidentmichael.rohr@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

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Deutsche Bank AGRestructuring progress supports DB's asset performance

On 18 June 2020, Deutsche Bank (DB; A3/A3, negative, ba11) hosted a 'Risk Deep Dive'providing additional information on concentrations in its loan books and overall risk profile.The event confirmed our view that Deutsche Bank has put itself in a better position towithstand the current coronavirus-driven shocks with expected financial metrics remainingat levels in line with its current rating level. Its diversified and tightly managed loan book, itscleaner and more liquid balance sheet post restructuring and its adequate capital will all helpmitigate earnings and – more importantly – capital strain during this crisis.

DB's loan book is well diversified, and risk concentrations are manageable. The bank's€459 billion loan book is well split across geographies, asset classes and segments. About halfof DB's lending is directed towards German retail and corporate customers, and exposuresto Commercial Real Estate (CRE) and Leveraged Debt Capital Markets (LDCM) only accountfor a combined 8% of total gross loans. Although sizeable on an absolute basis, DB's mostprominent risk concentrations in these areas are sufficiently mitigated by tight credit criteria,low loan-to-values (LTVs), as well as sufficient underlying collateral and hedging mitigation.DB further displays a low exposure to unsecured consumer lending.

Restructuring progress mitigates coronavirus-related earnings strain. DB's progress inexecuting on its more radical shift in strategy has put the bank in a better position to absorbthe impacts of the coronavirus-driven macroeconomic shock. Nevertheless, continued fastand steady progress in achieving the new goals and repositioning DB’s business model willbe important to maintaining its current credit strength, which we believe will continue to besupported by its clean balance sheet and solid capital and liquidity metrics during execution.

Sound capital position and strong liquidity provide further buffers. DB reaffirmed itscapital guidance of a Common Equity Tier 1 (CET1) ratio of around 12.5% for 2020, althoughthe ratio could dip modestly below the guidance level over the coming quarters2. Thisprovides DB with a good base to withstand expected asset-quality deterioration and negativerating migration, as well as regulatory changes, all leading to higher risk-weighted assets. Theguidance further includes expected restructuring charges and coupon payments on DB's AT1instruments.

Liquidity remains a comparative and credit-positive strength of DB and has significantlyreduced the bank's refinancing risk. We consider the group's management of liquidity acrossits various branches and subsidiaries, as well as its high stock of high-quality liquid assets,a mitigating factor that could help buffer potential additional negative effects from thecoronavirus pandemic on its asset performance.

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DB's loan book is well diversified, and risk pockets are manageableAs evidenced by sharply rising loan-loss charges in Q1 2020, the decade-long benign credit cycle has turned as a result of the globalcoronavirus outbreak, leading to higher loan-loss charges eating into DB's underlying profit-generation capacity. During Q1 2020, DBbooked loan loss charges of €506 million, up from €140 million in Q1 2019. Cost of risk therefore increased meaningfully, although thereported 44 basis points (annualized; against risk-weighted assets) are still not in excess of previous experiences during crisis.

However, and despite certain higher-risk lending exposures, we see DB's loan book as fairly diversified and therefore able to withstandasset quality deterioration (see Exhibit 1). The largest exposures stem from the bank's German retail operations booked in the PrivateBank (PB; approximately 50% of DB's gross loan book) and are focused on secured mortgages. DB's exposure to unsecured consumerlending and credit cards is low. Twenty eight percent (28%) of the loan portfolio sits in the Corporate Bank (CB), including lower-risktransaction banking balances amounting to about half of the Corporate Bank's loan exposures. The Investment Bank (IB) takes up 18%of the bank's loan balances, mainly focused on asset-backed loans and CRE (Exhibit 1). In addition, DB holds collateral (€232 billion) aswell as various hedges in place totaling €335 billion that help significantly reduce the bank's overall exposure (Exhibit 2).

Exhibit 1

DB's loan book is diversified and largely securedManageable exposure to sectors most affected by the coronaviruspandemic

Exhibit 2

Risk mitigation helps contain additional loan loss charges

PB - Mortgages33%

PB - Wealth Management10%

PB - Consumer and Business Finance7%

CB - Global Transaction Banking14%

CB - Corporate and Commercial Lending12%

CB/IB -Commercial Real Estate…

IB - Asset-Backed Securites and LDCM*9%

IB - Other5%

CRU^ and Other4%

LDCM = Leveraged Debt Capital Markets (Leveraged Finance); CRU = Capital Release Unit.Exhibit displays gross loan exposures under IFRS9 as of 31 March 2020.Sources: Company reports, Moody's Investors Service

495

-335

160

0

100

200

300

400

500

600

Exposure at Default Risk mitgation* Adjusted exposure (LGDbasis)

€ b

illio

n

*Notes: Risk mitigation includes asset collateral, hedges and other risk mitigation. Thefigure excludes additional protection from export credit agencies (ECA), private riskinsurance and credit default swaps (CDS).Sources: Company reports, Moody's Investors Service

As of 31 March 2020, DB has built €4.3 billion in allowances for potential loan losses, which we consider adequate in relation to itsdiversified loan book; and reserve levels are broadly in-line with its peers. In addition to higher loan loss charges, DB also suffered mark-to-market losses on credit positions within its Investment Bank, including CRE and LDCM exposures. However, we understand this waslargely offset by related hedging and risk management gains in the quarter which helped offset more meaningful losses in Q1 2020.

DB's CRE book displays a low LTV and has manageable exposure to sectors most affected by the pandemicDB holds €33 billion of CRE exposures on its balance sheet, focused on the United States (Aaa stable) and Germany (Aaa stable). Todate, no unexpected losses occurred in the portfolio, although DB performed various loan modification requests since the coronavirusoutbreak, mitigating its risk through higher equity contributions from sponsors. Within its CRE book (see Exhibit 3 overleaf), hotelsamount to €5 billion of exposures, three quarters of which sit in the United States. The book displays an average LTV of 60%and has high equity cushions. The latter also applies to the bank's retail and office portfolios. However, a persistent and extendedmacroeconomic shock as a result of the coronavirus pandemic could negatively affect the performance of the underlying assets andcash flows, leading to asset quality deterioration. In this regard, DB provided no information on debt service coverage and interestservice coverage ratios for its CRE portfolios.

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 18 June 2020 Deutsche Bank AG: Restructuring progress supports DB's asset performance

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Exhibit 3

DB's CRE book displays good asset-class diversification

Office26%

Hotels14%

Retail6%

Residential11%

Condo3%

Other11%

Other non-IB (former Postbank)29%

Sources: Company reports, Moody's Investors Service

In addition to its hold book, DB has €3.8 billion of CRE underwriting commitments with an average LTV of 62%. The exposures areusually market-risk hedged. DB expect delays in the sell down for approximately 25% of its syndicated loan and CMBS underwritingpositions. This will lead to valuation swings in its profit and loss account, depending on when and how severely these exposures mayhave to be marked to market.

LDCM portfolio is exclusively first lien and focused on cash-flow based lendingDB's leveraged debt capital markets (LDCM) exposures amount to €11 billion. DB only funds first lien or super-senior tranches anddoes not engage in funded term or even junior facilities. From a sector perspective, DB remains focused on lower-risk sectors suchas healthcare, technology and telecom, but also has a certain strength in the gaming, lodging and leisure industry which we considersignificantly more vulnerable to asset quality deterioration as long as the coronavirus continues to spread. In addition to its hold book,DB has €4.0 billion of LDCM underwriting commitments and expects the largest positions to be de-risked during the second and thethrid quarter of this year.

Restructuring progress helps mitigate coronavirus-related earnings strainAs the coronavirus pandemic unfolds, DB and its peers will face a delicate act to balance earnings pressures, customer forbearanceand efforts to support the economy while maintaining strength in capital and liquidity; and continue the proposed restructuring at asufficient pace. We see DB entering this period from an improved position following the restructuring measures initiated in summer2019 and the resulting balance-sheet transformation that has taken place since. In addition, DB has invested and improved its riskframework and technology during and prior to its current restructuring, providing it with timely information and good controls toproactively manage the current challenging and highly dynamic environment.

Being domiciled in Germany – with 47% of its gross loan balances stemming from DB's home country – could also prove supportiveto the bank's risk profile, since Germany has launched the largest support program in Europe to safeguard its economy from thecoronavirus-related shocks. Also, corporate and household debt in Germany are at low levels relative to other European countries,and stood at 59% and 54% of GDP, respectively, as of the end of 2019. This provides DB's most important customers with additionalleeway to cope with the crisis without immediately becoming overly indebted, supporting DB's asset performance.

Sound capital position and strong liquidity provide further buffersDB reported a Common Equity Tier 1 (CET1) capital ratio of 12.8% for the quarter, down from 13.6% as of the end of 2019 (Exhibit4). During 2020, DB expects the CET1 ratio could dip modestly below the 12.5% guidance level as a result of the bank's as well as thevarious governments' efforts to support clients and the economy. The related extension of credit to its customers is therefore likelyto lead to growth in risk-weighted assets as well as its balance sheet. In light of the latter, DB expects it will be unlikely it can reach its4.5% leverage ratio target for 2020 (Q1 2020: 4.0%). Under the new strategic plan, DB's management still targets a leverage ratio of5.0% by 2022. If achieved, this would close the long-standing gap with its peers.

3 18 June 2020 Deutsche Bank AG: Restructuring progress supports DB's asset performance

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Exhibit 4

Common Equity Tier 1 (CET1) ratio and Tier 1 Leverage Ratio for Global Investment Banks, as of 31 March 2020DB still needs to catch up on leverage over time

15.3% 14.6%

13.1% 12.8% 12.8% 12.7% 12.3% 12.3% 12.1% 12.0% 12.0%

11.2% 11.1%

6.2%5.3% 4.5% 5.4%

4.0% 4.2%

6.0% 5.9%5.3%

4.2% 3.9%

6.0%6.4%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

baa2 a2 baa2 a3 ba1 baa2 a2 baa1 baa2 a3 baa1 baa1 a3

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

CET1 ratio Tier 1 Leverage ratio Median CET1 ratio (12.3%) Median leverage ratio (5.3%)

Notes: (1) Basel III fully phased in advanced approach for all US banks; (2) Tier 1 leverage ratio for US banks is the supplemental leverage ratio (SLR).*UBS and CS leverage ratios reflect Common Equity Tier plus Low Trigger Additional Tier 1 and High-Trigger Additional Tier 1 securities. For the computation of the leverage ratio, the Swissregulator allowed for a temporary exclusion of cash at central banks until 01 July 2020. The ratios shown here do not include this benefit.**Barclays (BCS) leverage is reflective of the spot UK leverage ratio.Sources: Company reports, Moody's Investors Service

Liquidity remains a comparative and credit-positive strength of DB and has significantly reduced the bank's refinancing risk. With areported liquidity reserve of €205 billion as of 31 March 2020, largely comprising central bank cash and other highly liquid securities,DB mitigates substantial parts of the risks associated with refinancing of more confidence-sensitive wholesale market funding (€68billion MREL-eligible debt outstanding as of the same date). DB's liquidity reserve is also well in excess over the requirements stipulatedby the Liquidity Coverage Ratio (LCR), which stood at 133% as of the end of March 2020 (net buffer: approximately €40 billion, seeExhibit 5).

Exhibit 5

DB's LCR is well in-line with its peer groupGIBs' LCR, as of 31 December 2019 and as of 31 March 2020

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

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

Q4-19 Q1-20

Sources: Company reports, Moody's Investors Service

Going forward, however, we expect anticipated balance-sheet expansion – resulting from the bank's as well as the government's effortsto mitigate the negative effects of coronavirus pandemic – to consume some of the excess liquidity. On the other hand, this will helpreduce the negative carry associated with holding cash at the central banks.

Endnotes1 The ratings shown in this report are DB’s deposit rating/senior unsecured debt rating, outlook, and Baseline Credit Assessment (BCA).

2 DB expects the CET1 ratio to dip towards 12.3% by year-end 2020.

4 18 June 2020 Deutsche Bank AG: Restructuring progress supports DB's asset performance

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5 18 June 2020 Deutsche Bank AG: Restructuring progress supports DB's asset performance