* Moody"s downgrades Deutsche two notches to Aa3
* Deutsche says downgrade has no impact on funding costs
* Deutsche Bank shares close up 1.4 percent at 49.7 euros
* Downgrade comes after markets were closed
(Adds more details, background)
FRANKFURT, March 4 (Reuters) - Fears that Deutsche Bank(DBKGn.DE) will have to add more leverage and risk to reachambitious earnings targets led Moody"s Investors Service to cutits investment-grade rating by two notches to Aa3 on Thursday.
Moody"s placed Deutsche"s ratings on review in December,shortly after the bank unveiled ambitious targets of achieving10 billion euros ($13.68 billion) in profit before taxes by2011.
Moody"s cut Deutsche"s long-term and senior debt ratings toAa3, the fourth highest, from Aa1, the second highest.
Moody"s also cut the bank"s financial strength rating toC-plus from B. The rating outlook for all ratings is stable,Moody"s said.
A spokesman for Deutsche Bank said the downgrade had nomaterial impact on funding costs.
Analysts have questioned Deutsche"s ability to meet itstargets, amid intensifying competition among investment banksand given a move by global regulators to curb risk taking bybanks. [ID:nLDE5BE0J8]
Although Deutsche along with many of its capital marketspeers benefited from unusually wide trading margins thanks tostimulus measures, margins would shrink as competitionintensifies, analysts say.
Earlier this week Deutsche Bank"s (DBKGn.DE) financedirector told analysts that business in February normalised, ina sign that earnings momentum was coming down from record levelsin January. [ID:nLDE6230IQ]
In its report, released on Thursday, Moody"s said in anenvironment of shrinking margins it was concerned, "the bankcould choose to add more leverage and risk", to meet itsambitious earnings goals.
"Moreover Deutsche Bank remains exposed to additionalpotential losses on its legacy assets, most notably commercialreal estate, leveraged finance, and financial guarantorreceivables," Moody"s said.
Aside from highlighting Deutsche"s vulnerability to changesin the outlook for investment banking, Moody"s said Deutsche"sother businesses, including retail banking, asset and wealthmanagement, have shown a greater degree of earnings volatilitythan Moody"s had previously expected. ($1=.7310 Euro) (Editing by Jon Loades-Carter) (Reporting by Edward Taylor in Frankfurt and Walden Siew in NewYork, +49 69 7565 1187; edward.taylor@thomsonreuters.com)
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