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Fitch Affirms Bayerische Landesbank's IDR at 'A-'/Stable, VR at 'bbb'
May 4, 2017 / 2:51 PM / 5 months ago

Fitch Affirms Bayerische Landesbank's IDR at 'A-'/Stable, VR at 'bbb'

(The following statement was released by the rating agency) FRANKFURT/LONDON, May 04 (Fitch) Fitch Ratings has affirmed Bayerische Landesbank's (BayernLB) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook and its Viability Rating (VR) at 'bbb'. The Short-Term IDR has been affirmed at 'F1' and the Support Rating (SR) at '1'. A full list of rating actions is available at the end of this rating action commentary. The affirmation of the IDRs and SR reflects Fitch's view that institutional support from the bank's owners is very strong. The affirmation of the VR reflects the bank's improving asset quality and capitalisation, which we expect to strengthen its company profile. The VR also reflects continued challenges on earnings driven by low interest rates and strong competition in the German banking sector. The rating action was taken in conjunction with Fitch's periodic review of three Landesbanken based in southern Germany. KEY RATING DRIVERS IDRS, SR AND SENIOR DEBT BayernLB's IDRs, SR and senior debt ratings are driven by strong institutional support from its owners, the regional state of Bavaria (AAA/Stable), Bavaria's savings banks and ultimately Germany's savings banks group, Sparkassen Finanzgruppe (SFG, A+/Stable). Fitch's institutional support assumptions are underpinned by provisions contained in the statutes of SFG's and the Landesbanken's institutional protection fund. Our support considerations are also based on the view that the owners consider their investment in BayernLB to be long-term and strategic. This is underpinned by BayernLB's focus on its statutory roles, which include supporting the Bavarian economy as well as acting as the central institution for Bavaria's savings banks and as house bank for the state of Bavaria. Fitch uses the lower Long-Term IDR of BayernLB's owners, SFG's Long-Term IDR, as anchor for determining the bank's support-driven ratings. Fitch's believes support would need to be forthcoming from both SFG and the state of Bavaria to avoid triggering state-aid considerations and resolution under the German Recovery and Resolution Act if BayernLB fails. Our assessment of Bavaria's creditworthiness is underpinned by the stability of Germany's solidarity and financial equalisation system, which links Bavaria's creditworthiness to that of the German sovereign (AAA/Stable). SFG's support ability is strong, but not as strong as that of Bavaria. We notch down BayernLB's Long-Term IDR twice from SFG's 'A+' because we consider BayernLB's role for its owners to be strategic, but not key and integral, and because of potential legal and regulatory barriers related to state-aid considerations and provisions of German resolution legislation. The Stable Outlook reflects steady support assumptions and the Stable Outlook on SFG's Long-Term IDR. The bank's Short-Term IDR is at the higher of the two Short-Term IDRs that map to an 'A-' on Fitch's rating scale. This reflects BayernLB's strong links to SFG and privileged access to SFG's ample excess liquidity and funding resources. The ratings of BayernLB's senior unsecured obligations are equalised with the bank's IDRs. VR The affirmation of the VR reflects BayernLB's improved asset quality and capitalisation, which has been driven by further reduction of legacy assets. The bank's modest underlying profitability constrains the VR, even though the stable performance achieved in 2016 has put the bank in a favourable position to repay its outstanding state aid of EUR1 billion to Bavaria within the next two years. Asset quality strengthened in 2016, supported by Germany's benign economic environment and sound corporate sector. The significant winding down of its non-core unit (NCU) and de-recognition of part of its impaired exposure to the Austrian wind-down institution HETA Asset Resolution AG also contributed to a further decline of BayernLB's non-performing loan ratio to a low level. Similar to its Landesbank peers, BayernLB's business model will continue to entail significant sector and single-name loan concentration. Declining risk-weighted assets boosted BayernLB's fully loaded common equity Tier 1 (CET1) ratio to 13.2% at end-2016 from 12% at end-2015. This compares favourably with peers and, in light of BayernLB's improved risk profile, provides adequate buffer above the bank's 2017 transitional CET1 SREP requirement of 8%. However, its fully loaded leverage ratio remains tight because a high share of the bank's assets benefits from very low regulatory risk weights. BayernLB's 10% pre-tax profit increase in 2016 was largely attributable to the NCU, which reduced its annual loss by 97% yoy, driven by low loan impairments. The core segments' performance benefited from one-off gains but will continue to suffer from the low-interest-rate environment and cost pressure in 2017. BayernLB has ample liquidity and a diversified funding mix by funding sources and customers. It includes material wholesale funding and additionally benefits from access to the savings banks' large excess liquidity and retail deposits of DKB, its online banking arm, which has strengthened its funding profile. GRANDFATHERED STATE-GUARANTEED SECURITIES The ratings of the grandfathered state-guaranteed senior unsecured, Tier 2 subordinated and market-linked notes are equalised with the regional state of Bavaria's Long-Term IDR as we believe that Bavaria's ability and propensity to honour its guarantee is very strong. TIER 2 SUBORDINATED DEBT AND HYBRID SECURITIES BayernLB's Tier 2 subordinated notes are notched down once from the VR to reflect our assessment of the notes' relative loss severity. The rating of the performing hybrid securities issued by BayernLB Capital Trust I is notched down four times from the VR, two notches for loss severity relative to average recoveries and two notches for incremental non-performance risk. DERIVATIVE COUNTERPARTY RATING AND DEPOSIT RATINGS BayernLB's Derivative Counterparty Rating (DCR) and Deposit Ratings are equalised with its IDRs. We believe the bank's buffers of junior and vanilla senior debt do not afford any obvious incremental probability of default benefit over and above the multi-notch support benefit already factored into its IDRs. We do not apply any uplift for above-average recovery prospects in the event of default because of the limited visibility into recovery levels in such circumstances. In the highly unlikely event that BayernLB failed and was not supported by its savings banks and state owners, its balance sheets would most likely differ substantially from the current one. RATING SENSITIVITIES IDRS, SR AND SENIOR DEBT The IDRs, SR and senior unsecured debt ratings are sensitive to changes in our assumptions around the propensity or ability of BayernLB's owners to provide timely support. This could result from a change to SFG's IDRs or changes to the owners' strategic commitment to BayernLB or to the bank's importance for its home region or for the savings bank sector. A change to our assessment of the risks of triggering a resolution process ahead of support for a Landesbank more generally could also affect the bank's IDRs, SR and senior unsecured debt ratings. VR BayernLB's VR could be upgraded upon a further strengthening of its company profile if BayernLB could demonstrate sustainable profit growth while maintaining a conservative risk appetite. A potential repayment of the remaining EUR1 billion of capital received from Bavaria in 2017 would conclude its state-aid procedure and open opportunities to broaden its franchise and diversify its revenue streams backed by its improved capitalisation. BayernLB's performance is highly dependent on Germany's economic environment. A significant weakening of the latter would likely put downward pressure on the VR because the bank's asset quality, earnings and capitalisation would be likely to weaken at the same time. GRANDFATHERED STATE-GUARANTEED SECURITIES The ratings of the grandfathered state-guaranteed senior unsecured, Tier 2 subordinated and market-linked notes are sensitive to changes in Fitch's view of the creditworthiness of Bavaria, which is closely linked to that of Germany. TIER 2 SUBORDINATED DEBT AND HYBRID SECURITIES The ratings of the Tier 2 subordinated notes and hybrid notes issued by BayernLB Capital Trust I are broadly sensitive to the same considerations that may affect the bank's VR. On 12 April 2017, the bank announced its intention to redeem the hybrid notes on 31 May 2017. We expect to withdraw the rating of the notes upon redemption. DERIVATIVE COUNTERPARTY RATING AND DEPOSIT RATINGS The DCR and Deposit Ratings are primarily sensitive to changes in the bank's IDRs. The rating actions are as follows: Bayerische Landesbank Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Viability Rating: affirmed at 'bbb' Derivative Counterparty Rating: affirmed at 'A-'(dcr) Deposit Ratings: affirmed at 'A-'/'F1' Senior unsecured debt and debt issuance programme: affirmed at 'A-'/'F1' Commercial paper programme: affirmed at 'F1' Grandfathered state-guaranteed senior unsecured and Tier 2 subordinated debt: affirmed at 'AAA' Grandfathered state-guaranteed market-linked securities: affirmed at 'AAAemr' Senior unsecured market-linked securities: affirmed at 'A-emr' Tier 2 Subordinated debt: affirmed at 'BBB-' Hybrid capital instruments issued by BayernLB Capital Trust I: affirmed at 'BB-' Contact: Primary Analyst Roger Schneider, CIIA Director +49 69 768 076 242 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Sebastian Schrimpf, CFA Associate Director +49 69 768 076 136 Committee Chairperson Patrick Rioual Senior Director +49 69 768 076 123 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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