Fitch Ratings has said in a special report that the performance of Germany's major banks' is expected to remain under significant pressure in light of the prevailing financial crisis. However, Fitch believes the banks can absorb a reasonable level of adjustments, either through diversified revenues and/or capitalisation.

"The massive credit spread widening for a wide range of asset classes observed in the first months of 2008 will result in further mark-to-market valuation losses," says Thomas von Luepke, Head of German Banking at Fitch. "However, in light of the banks' different exposures, as well as varying treatment of those positions from an accounting perspective, the negative impact on the major German banks' performance will continue to vary widely."

Deutsche Bank AG (Deutsche) already announced expected markdowns amounting to EUR2.5bn from its leveraged loans, commercial real estate and RMBS exposure, which may, in Fitch's view, result in a negative Q108 result. In H207 all major German banks, aside from Dresdner Bank AG (Dresdner), absorbed valuation adjustments via diversified revenue streams. A strong H107 provided buffer to mitigate declining revenues in the second half of 2007 and helped to uphold operating profitability in FY07.

"Besides the credit spread widening, a meltdown in the number of capital market transactions, is likely - together with lower brokerage fees from the banks' retail business - to burden 2008 revenues," says Simone Brehmer, Associate Director in Fitch's Financial Institutions group.

While asset quality, measured by the share of non-performing to total loans, gradually improved in most of the major German banks in FY07, the agency will closely monitor the market environment and the banks' exposures to commercial real estate and leveraged lending.

The latest rating actions on Deutsche and Dresdner reflect the negative global rating trend, triggered by the prevailing market crisis. Fitch's revision of its Outlook for Deutsche's Long-term Issuer Default rating (IDR) to Stable on 31 March 2008 factored in expected MTM losses and concerns regarding revenue generation, primarily in its wholesale banking business. The downgrade of Dresdner's Individual rating to 'C' from 'B/C' on 18 March 2008 was driven by the agency's anticipation of a deterioration in the bank's profitability and high operational risk from the announced split of its business units. The latter, together with the announcement that Deutsche Postbank AG's majority owner is considering a sale of its shares, have revived discussions regarding possible consolidation among the major German banks.

The major German banks covered in the report are Deutsche, Dresdner, Commerzbank AG, Bayerische Hypo- und Vereinsbank AG and Deutsche Postbank AG.