Fitch says in a special report that Germany's major banks' are well positioned to withstand the current market turbulences, while growth in operating profit is likely to slow down.

"Capital markets revenues, which have been the key growth drivers for most of the major German banks recently, are less sustainable and will come under pressure given the current market turbulences," says Thomas von Luepke, Head of German Banking at Fitch Ratings. Fitch expects the drop in demand for structured financing to negatively impact the banks' fee pools. The agency sees the credit deterioration in the US sub-prime market, as well as the overall widening of credit spreads, resulting in MTM losses and/or impairments, which will burden year-end results. However, the sound capitalisation of most of the major German banks provides some cushion. While the banks face higher funding costs, there are some signs that the current market facilitates risk-adjusted pricing, which could, in the medium-term, positively impact the banks' revenues.

"The banks' results for 2007 and 2008 will show to what extent the banks can withstand deteriorating market conditions through their diversified business models, level of sustainable revenues and improved risk management systems," says Simone Brehmer, Associate Director in Fitch's Financial Institutions group. The recovery of the German economy, with declining corporate insolvencies and sound growth rates to date, should support further growth in recurring revenues and sound asset quality. However, in Fitch's view, it will remain difficult for the banks, with the exception of Deutsche Bank AG, to fully close the narrowing, but persistent profitability gap with European peers, as long as profitability outside Germany does not decrease.

Although Fitch published some positive rating actions of some of the major German banks in 2007, it does not foresee the major German banks' Individual ratings catching up with their European peers' over the short-term. The latest rating action was taken on Deutsche Bank AG. On 5 October 2007 Fitch affirmed the bank's Positive Outlook on its Long-term Issuer Default rating, which was assigned in July 2007, after the bank published its expectations for Q307 results. Fitch considers the bank to be well positioned to cope with the volatility in investment banking experienced in Q307, although a persistent dampening effect on overall revenues and profitability would prompt Fitch to review the Positive Outlook.

In Fitch's view, and given the high importance of the major German banks for the banking system, the probability of sovereign support for all major German banks remains extremely likely, should it ever be required.

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