Deutsche Bank gets ECB, key investor support as S&P questions strategy

On Thursday, it emerged that the US Federal Reserve had determined Deutsche's vast US business was in "troubled condition" - raising further questions about risk levels at the bank.

"At group level, our financial strength is beyond doubt", new CEO Christian Sewing said in a letter to staff.

Germany's largest lender is already facing challenges with US bank regulators and in financial markets, with its stock price falling to historic lows on Thursday.

News of the Fed's judgment, handed down a year ago but only made public now, was followed by a move from the leading ratings agency Standard & Poor's to downgrade Deutsche's long-term credit rating.

"We appreciate S&P's statement that 'management is taking tough actions to cut the cost base and refocus the business in order to address the bank's now weak profitability", the German lender said. A spokesperson for the bank said in a statement to the Journal: "We have previously indicated that our regulators have identified various areas for improvement relating to our control environment and infrastructure".

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S&P had rated Deutsche Bank's long-term credit at A-, on negative credit watch.

Although Deutsche Bank's senior debt has held up well, its junior and hybrid debt instruments that would be vulnerable if the bank got into serious financial trouble have underperformed.

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It has since recovered to a cash price of 93.167 and a yield of 8.1 percent; still almost double this year's low in January.

Turning to the downgrade, Sewing noted S&P's decision to keep a stable rating on Deutsche's outlook, reflecting the ratings agency's view that the bank's management was working towards a "better-functioning business model".

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A man walks past Deutsche Bank offices in London Thomson Reuters A spokesperson for Deutsche Bank said: "We appreciate S&Ps statement that 'management is taking tough actions to cut the cost base and refocus the business in order to address the bank's now weak profitability.' We note that Deutsche Bank's non-preferred senior unsecured debt rating of BBB- is reaffirmed".

Deutsche Bank is accelerating a plan to refocus on its relationship with clients in Europe, though Sewing has said that the US will remain an important market for the lender.

"We have made progress in remediating them over the past year", he wrote.

It could be hard for a bank which has a business on the "troubled" list to pass the scenarios, said a person familiar with the tests who was not authorized to speak publicly. We're not yet where we want to be, but we're steadily getting there.

S&P said in its assessment that it believed management "is taking decisive actions" to control costs.

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Deutsche Bank AG DBKGn.DE will face another challenge this month when the Federal Reserve publishes for the first time the results of a "stress test" on its USA operations.

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