March 7, 2013 / 5:33 PM / 5 years ago

Fitch Affirms 5 German Commercial Real Estate Banks

(The following statement was released by the rating agency) FRANKFURT/LONDON, March 07 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of Aareal Bank AG (Aareal), Hypo Real Estate Holding AG (HRE Holding) and its subsidiary Deutsche Pfandbriefbank AG (PBB) at 'A-'. The agency has also affirmed COREALCREDIT BANK AG's (COREALCREDIT) and Duesseldorfer Hypothekenbank AG's (DHB) Long-term IDRs at 'BBB-'. Berlin-Hannoversche Hypothekenbank AG's (Berlin Hyp) Long-term IDR, driven by assumed institutional support, has been affirmed at 'A+'. The Outlooks on all Long-term IDRs are Stable. At the same time, the agency affirmed the banks' Viability Ratings (VR) and senior debt ratings. A full list of rating actions is at the end of this release. RATING ACTION RATIONALE The affirmation of the IDRs and Stable Outlooks are driven by Fitch's view of continued sovereign and, in the case of Berlin Hyp, institutional support. The affirmation of all banks' VRs, ranging from 'c' to 'bbb', reflects Fitch's expectation that the banks' standalone profiles will be stable relative to their individual VR levels. Among other factors, the VRs take into consideration the banks' substantial exposure to commercial real estate (CRE), which is cyclical, and significant exposure to the public sector in southern peripheral countries, which is subject to tail risk. These challenges are balanced to various degrees, reflected in Fitch's spectrum of VRs for these banks, among other factors by the banks' level of capitalisation, recurring earnings power, geographical diversification of the loan book and track record of risk management. KEY RATING DRIVERS - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT - Sovereign Support-Driven Ratings The Long-term and Short-term IDRs, Support Ratings, Support Rating Floors and senior debt ratings of Aareal, PBB, COREALCREDIT and DHB reflect Fitch's continued view that their status as active Pfandbrief issuers results in a high (indicated by the SRF of 'BBB-') or very high (indicated by a SRF of 'A-') probability of state support. For Aareal and PBB (and HRE Holding where ratings are aligned with PBB), the already provided sovereign support results also in the higher of two possible Short-term IDRs at the SRF of 'A-'. The Stable Outlooks continue to benefit from Fitch's unchanged view on support. HRE Holding is a strategic and financial holding company that does not have any banking operations. Through HRE Holding, SoFFin (Financial Market Stabilisation Fund) controls its two main subsidiaries PBB and Depfa Bank plc ('BBB-'/Negative). For COREALCREDIT and DHB, Fitch does not factor in any potential support from their owners, funds managed by US financial investor Lone Star (LS), into the ratings. - Institutional Support-Driven Ratings Berlin Hyp's Long-term and Short-term IDRs, Support Rating and senior debt ratings are based on its ownership structure and forthcoming assumed institutional support, if needed, by its 100% owner Landesbank Berlin AG (LBB; 'A+'/ Stable). Fitch believes also that Berlin Hyp's IDRs will remain at their current level if the bank becomes disentangled from LBB (see 'Fitch: Planned Split of Landesbank Berlin Would Make Bank More Efficient', dated 10 December 2012 at Fitch's institutional support assumption is underpinned by Berlin Hyp's forthcoming membership in the savings banks' mutual support scheme and to a lesser extent, a profit-and-loss transfer agreement (Ergebnisabfuehrungsvertrag) concluded with and a declaration of backing (Patronatserklaerung) provided by LBB. Berlin Hyp's Stable Outlook reflects Fitch's continued institutional support assumption. RATING SENSITIVITIES - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT - Sovereign Support-Driven Ratings Fitch's expectation of the likelihood of support is based on its assessment that Germany's public authorities and Pfandbrief issuers have a strong interest in safeguarding the standing of Pfandbriefe as an asset class. The rationale for different SRFs is indirect sovereign ownership, outstanding capital support of SoFFin and the size and systemic relevance of these banks. Fitch does not expect the current support mechanisms for Pfandbrief issuers to change in the short to medium term, particularly given the currently volatile and unpredictable operating environment in the eurozone. However, Fitch's view on support is sensitive to developments within the regulatory and legal framework, particularly emanating from the European Commission with regard to bail-ins, centralised regulatory oversight and adjustments to deposit insurance schemes, and the changing attitude of the German authorities towards using their tools. If Fitch changes its view on support in the future, the current VRs provide a broad indicator of where IDRs could end up for the rated Pfandbrief issuers (see 'Support is Key to German Pfandbrief Issuers' Ratings', dated 28 August 2012 at In addition, Fitch would review Aareal's and PBB's IDRs if they repay their perpetual silent participations by SoFFin or, for PBB, if the bank was sold to a lower rated entity. Fitch views both banks as systemically relevant due to their size and Pfandbriefe license and the amount of outstanding Pfandbriefe and has no indication that these banks' systemic relevance has weakened in the view of German authorities. The rating of DHB's EUR1.5bn guaranteed notes is in line with the German sovereign IDR and is based on Fitch's belief that SoFFin will honour the guarantee, which is unconditional, irrevocable and unsubordinated. A change in the sovereign Long-term IDR would automatically result in a similar change in the guaranteed notes' rating. - Institutional Support-Driven Ratings Berlin Hyp's IDRs, Support Rating and senior debt ratings are sensitive to changes in its ownership structure or contractual relationships (eg its membership in the mutual support scheme) with its owners or a deterioration of the Sparkassen-Finanzgruppe (Sparkassen)'s financial strength in combination with a potential downgrade of Germany's sovereign IDR or perceived lower systemic importance, which would trigger a downgrade of Sparkassen-Finanzgruppe (Sparkassen)'s SRF (currently 'A+'). KEY RATING DRIVERS - VIABILITY RATINGS Aareal Bank AG Aareal's 'bbb' VR is the highest among its German monoline peers and benefits from its resilient performance since 2008. Fitch believes that Aareal's management is risk averse and that its risk management is adequate and tested. Its highly geographically diversified loan book exposes the bank to more volatile markets compared with the German property market. However, Fitch believes that inherent risks are offset by higher margins and conservative underwriting standards. Due to lower competition, Aareal was able to increase gross margins and decreased its loan-to-values (LTVs) in new business, which has improved its risk-return profile. A favourable LTV distribution, providing substantial buffer against market deterioration, and its low, albeit higher than its domestically focused peers, LIC ratio and its low non-performing loan (NPL) ratio results in strong asset quality, which mitigates high concentration risks due to its non-granular CRE lending and large public sector exposure, including Spain and Italy. Its Basel III compliant capitalisation and its strong liquidity position coupled with funding access to retail housing deposits drive Aareal's investment grade VR. Its already pro-forma achievement of the liquidity coverage ratio and net stable funding ratio thresholds under Basel III are also major achievements in Fitch's view. BERLIN-HANNOVERSCHE HYPOTHEKENBANK AG Berlin Hyp's 'bbb-' VR benefits from its solid performance during the global financial crisis and proven risk management practices reflected by very low loan impairment charges (LICs) and strongly reduced NPLs in the last two years. However, Fitch notes that Berlin Hyp's risk return profile could be influenced by assets spun off to it in the course of the current reorganisation. Berlin Hyp benefited from the withdrawal of competitors, which allowed it to cherry-pick new loans in Germany and to a minor extent in other European markets (which account for about a low 20% of its loan book) at higher margins and lower LTVs. Cost efficiency is high due to discipline and integration into LBB. Berlin area assets account for about 30% of the total CRE loan book, making the bank vulnerable to potential local stress. Berlin Hyp's total exposure to southern European countries will disappear in the next few years and should no longer represent a material risk by end-2016. Its senior unsecured exposure to these countries could theoretically be offset by a one-year profit by end-2013. Although this could result in an upgrade of its VR, Fitch questions Berlin Hyp's ability to fulfil the net stable funding ratio under Basel III's current draft. Fitch understands that the latest draft will be adjusted and may result in some relief for banks. However, without significant deposit access, Berlin Hyp faces a strategic challenge, in Fitch's view. The agency believes that Berlin Hyp will comfortably meet the liquidity coverage ratio due to its stock of high-quality liquid assets. Berlin Hyp's Fitch core capital ratio was adequate at 9.5% at end-September 2012 and the agency expects this ratio to improve further. COREALCREDIT BANK AG COREALCREDIT's 'bb' VR reflects the bank's progress in improving its risk profile, its good capitalisation and prudent positioning as a CRE lender in a relatively stable domestic environment. At the same time, it reflects the bank's need to further improve its recurring profitability and its still high, albeit rapidly declining, NPL portfolio. COREALCREDIT's legacy NPL loan book continues to benefit from the industry experience of Hudson Advisors Germany GmbH, an affiliate of LS, which services the bank's NPLs. Coupled with the sale of several tranches in 2011 and H112, the NPL portfolio (including sub-performing loans) had shrunk by more than half at end-2012 since end-2008. The bank's plan to eliminate its remaining legacy NPL book position by end-2013 appears somewhat ambitious, although Fitch does not expect any material losses to arise from the book. The asset quality of the CRE assets originated in the past few years appears satisfactory. The GIIPS exposure in relation to its capital is the lowest among its peers (about 35% at end-2012). On a pro-forma basis, COREALCREDIT has overachieved the liquidity coverage ratio and net stable funding ratio at end-May 2012, obtaining the strongest ratios in comparison with the other four banks based on data received at that time. Fitch also believes that COREALCREDIT's recently launched internet retail funding platform could make the bank more independent from capital market or wholesale funding in the longer term. The agency views the bank's capitalisation as strong compared with its peers. The bank's continued reduction of NPLs and its low exposure to GIIPS coupled with its strong capital base could result in an upgrade of its VR during 2013. Deutsche Pfandbriefbank AG PBB's 'bb' VR is driven by the bank's sector and single asset concentration as well as capital market and wholesale funding reliance. The VR also takes into account challenges in re-establishing a viable business, which outweigh PBB's currently strong asset quality, following the transfer of non-performing and non-strategic assets to FMS WM in 2010. In Fitch's view, the currently low level of NPLs and LICs is unsustainable considering PBB's substantial exposure to cyclical European property markets. Fitch expects normalised LICs to significantly dent PBB's earnings as it is unable to quickly improve the return on assets. PBB's business plan foresees strong new business growth until end-2015, predominantly in its Real Estate Finance segment and partly in its Public Investment Finance segment. This will trigger an increasing annual senior unsecured funding need. Fitch believes that PBB's access to the senior unsecured funding market is a key challenge. Constrained funding access or increasing funding costs (as a result of debt investors anticipating the sale of PBB, which is planned by latest end-2015 but deemed unrealistic by Fitch) would constrain business growth. This would prevent PBB from improving its currently low recurring profitability. Profitability suffers from its still large volume of low-yielding legacy public sector assets and cost inefficiency in connection with the servicing of FMS WM assets (the asset servicing ends in September 2013). The bank's solid liquidity overhang allowed it to gradually re-enter the funding market and consequently the CRE lending market in 2011. PBB's pro-forma liquidity coverage ratio is Basel III compliant. The absence of a retail or similar deposit base until now would make it difficult for PBB to fulfil the net stable funding ratio under Basel III, although the rules are not yet final. However, Fitch notes that PBB launched its internet retail funding platform in March 2013. PBB's capitalisation is sensitive to contingency risks in connection with its exposure to Southern European countries. Its Fitch core capital ratio of 12.6% is adequate but its pro-forma fully loaded Basel III Core Tier 1 ratio was a moderate 7.6% (both at end-H112). A rising CRE loan book, as planned, would result in increasing risk-weighted assets (RWAs) and lower regulatory capital ratios. Fitch expects that the introduction of counterparty credit risk (CRR)/CRDIV will increase RWAs in 2013. Its leverage is still high. Duesseldorfer Hypothekenbank AG DHB's 'c' VR reflects the bank's continued challenge to successfully establish itself as a niche CRE lender since the near collapse in 2008. It also takes into account the bank's large exposure to vulnerable public sector assets and its very weak capitalisation, which is in turn constrained by the weak performance limiting the much needed internal capital generation. Given the uncertainty underlying the bank's liability-driven business model, where the asset side of the balance sheet is driven by the available funding mix (largely secured or covered by the deposit protection scheme), upside potential for DHB's VR is currently limited. An improved capital position would be needed for an upgrade, which in Fitch's view would only come from an external capital injection. DHB's capitalisation is very weak with a Fitch core capital ratio of 0.6% at end-H112. Even taking into account the mandatory convertible subordinated bonds (EUR100m outstanding; EUR50m was voluntarily converted in 2012), the agency still views the bank's capitalisation as weak. To raise the VR above low speculative grade would additionally require considerable risk reduction and a sustainable return to robust profitability. Fitch expects the return to profitability to be a lengthy process given insufficient new business volumes to offset the low-margin public-sector legacy portfolio. New CRE business volumes in 2011 and H112 were low and, in the agency's view, are unlikely to reach a critical mass in the medium term given the bank's small franchise and concentration on relatively small participant tickets. Despite the progress made since 2008, the downsizing of its sizeable, vulnerable public-sector portfolio adds to the challenge of a return to a robust earnings profile. At end-H112, DHB's GIIPS exposure was 88 times its Fitch core capital. RATING SENSITIVITIES - VIABILITY RATINGS CRE loan books are typically very concentrated, partly mitigated by granular tenant structures, existing cash flow streams or through cross collateralisation. The banks' earnings capacity and capital are unlikely be strong enough to offset large single credit events in a severe scenario. At the same time, they are reliant on capital market and wholesale funding, with some exceptions and mitigants, including retail or similar deposits and/or funding access to crisis-proven Pfandbriefe and partly protected German Schuldscheindarlehen. In Fitch's view, these factors constrain the VR potential for German CRE monoline banks and make it difficult for them to be rated above the 'bbb' range. Upside potential for all banks could arise from significantly increasing recurring profitability, improving asset quality and capital or by funding sources becoming more diversified, eg by collecting or increasing stable retail or other deposits. Downward pressure could result from a slump in asset quality driven by large single credit events or potential stress in the banks' property markets, indicated by increasing NPLs or LICs. Further downward pressure would arise from the sovereign debt crisis again reaching a more critical stage, potentially resulting in write-downs of public sector assets, affecting each bank's capitalisation. Fitch would upgrade COREALCREDIT's VR if the bank demonstrates a track record of sustainably improved core profitability and a significant work-out of the NPL portfolio to a more manageable level. PBB's 'bb' VR could be downgraded if Fitch believes the bank is unable to establish a track record and fails to implement its current business plan. A breach of DHB's minimum regulatory capital ratios, or emergency external support measures aimed at preventing such a breach, would trigger a downgrade to 'f', excluding a potential conversion of DHB's outstanding EUR100m convertible bond into regulatory capital. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Aareal's, COREALCREDIT's and PBB's subordinated debt is rated one notch below their respective VRs to reflect the subordinated ranking of its investors, in line with Fitch's criteria. Aareal's hybrid securities, issued by Capital Funding GmbH and Aareal Capital Funding LLC (Delaware), are rated 'BB-'. PBB's hybrid Tier 1 securities, issued through Hypo Real Estate International Trust I, are rated 'C' and reflect the uncertain timing of these securities being serviced again. The European Commission agreement does not permit distribution on profit-related capital instruments (excluding SoFFin-related ones) prior to PBB's re-privatisation and the redemption of its outstanding EUR999m SoFFin silent participation. RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt ratings and hybrid ratings are sensitive to the potential changes of the banks' respective VRs and changes in Fitch's criteria. RATING ACTIONS Aareal Bank AG: Long-term IDR: affirmed at 'A-', Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'bbb' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Debt Issuance Programme: affirmed at 'A-'/'F1' Senior unsecured notes: affirmed at 'A-' Subordinated debt: affirmed at 'BBB-' Capital Funding GmbH (DE0007070088): affirmed at 'BB-' Aareal Capital Funding LLC (Delaware) (XS0138973010): affirmed at 'BB-'. Berlin-Hannoversche Hypothekenbank AG: Long-term IDR: affirmed at 'A+', Outlook Stable Short-term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'bbb-' Support Rating: affirmed at '1' Senior unsecured notes: affirmed at 'A+' COREALCREDIT BANK AG: Long-term IDR: affirmed at 'BBB-', Outlook Stable Short-term IDR: affirmed at 'F3' Viability Rating: affirmed at 'bb' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Senior unsecured notes: affirmed at 'BBB-' Subordinated debt: affirmed at 'BB-' Deutsche Pfandbriefbank AG: Long-term IDR: affirmed at 'A-', Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'bb' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Commercial paper: affirmed at 'F1' Market linked securities: affirmed at 'A-emr' Debt Issuance Programme: affirmed at 'A-'/'F1' Senior unsecured notes: affirmed at 'A-' Short-term debt: affirmed at 'F1' Subordinated debt: affirmed at 'BB-' Hypo Real Estate International Trust I (XS0303478118): affirmed at 'C' Duesseldorfer Hypothekenbank AG: Long-term IDR: affirmed at 'BBB-', Outlook Stable Short-term IDR: affirmed at 'F3' Viability Rating: affirmed at 'c' Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB-' Long-term SoFFin-guaranteed notes: affirmed at 'AAA' Debt Issuance Programme: affirmed at 'BBB-'/'F3' Hypo Real Estate Holding AG: Long-term IDR: affirmed at 'A-', Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Fitch may have provided another permissible service to Berlin-Hannoversche Hypothekenbank AG or its related third parties. Details of this service can be found on Fitch's website in the EU regulatory affairs page. Contact: Primary Analyst Markus Schmitt Associate Director +49 69 7680 76 129 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst (Aareal Bank AG and subsidiaries, COREALCREDIT BANK AG, Hypo Real Estate Holding AG, Deutsche Pfandbriefbank AG and subsidiaries and Duesseldorfer Hypothekenbank AG) Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Secondary Analyst (Berlin-Hannoversche Hypothekenbank AG) Christian van Beek Senior Director +49 69 76 80 76 248 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria 'Evaluating Corporate Governance', dated 12 December 2012, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012 and 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Recovery Ratings for Financial Institutions', dated 15 August 2012, 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012, 'Country-Specific Treatment of Recovery Ratings', dated 16 June 2012 are available at Applicable Criteria and Related Research Evaluating Corporate Governance here Assessing and Rating Bank Subordinated and Hybrid Securities here Global Financial Institutions Rating Criteria here Recovery Ratings for Financial Institutions here Rating FI Subsidiaries and Holding Companies here Country-Specific Treatment of Recovery Ratings here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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