"The downgrade of the ratings on Deutsche Bank reflects the bank's failure to improve its core profitability and capital levels, mainly as a result of unfavorable cost structures and an ambitious expansion programme," the agency said in a statement.

But it added that following a proposed merger with Bankers Trust Corporation of the United States, Deutsche Bank will be well-placed to take advantage of a pan-European market and should benefit from the US firm's expertise in certain areas of investment banking.

The agency raised its ratings on Bankers Trust. Standard and Poor's warned that structural problems in the German banking sector, such as intense price competition and inflexible labour laws, "prevent Deutsche Bank, like many other German banks, from significantly improving the profitability of its domestic operations."

The agency maintained itsshort-term ratings on Deutsche Bank.