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Fitch Affirms Landesbank Baden-Wuerttemberg's IDR at 'A-'/Stable, VR at 'bbb+'
May 4, 2017 / 2:51 PM / 7 months ago

Fitch Affirms Landesbank Baden-Wuerttemberg'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 Landesbank Baden-Wuerttemberg's (LBBW) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook, its Viability Rating (VR) at 'bbb+', Short-Term IDR at 'F1' and Support Rating (SR) at '1'. The rating action was taken in conjunction with Fitch's periodic review of three Landesbanken based in southern Germany. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SR, SENIOR DEBT LBBW's IDRs, SR and senior debt rating are driven by strong institutional support from its owners, the State of Baden-Wuerttemberg (State of BW), the City of Stuttgart, the regional savings banks and ultimately the Sparkassen-Finanzgruppe (SFG, A+/Stable). Fitch's institutional support assumptions are underpinned by provisions contained in the statutes of SFG's and the Landebanken's institutional protection fund. Our support considerations are also based on the view that the owners consider their investment in LBBW long-term and strategic. This is underpinned by LBBW's focus on its statutory roles, which include supporting the regional economy, acting as the central bank for regional savings banks and as house bank for the State of BW and the City of Stuttgart, as well as its function as a savings bank in the territory of the state capital Stuttgart. Fitch uses the lower Long-Term IDR of LBBW's owners', SFG's Long-Term IDR, as an anchor for determining LBBW's support-driven ratings. In Fitch's view, support would need to be forthcoming from SFG as well as the State of BW and the City of Stuttgart to avoid triggering state aid considerations and resolution under the German Recovery and Resolution Act if LBBW fails. Our assessment of the State of BW's creditworthiness is underpinned by the stability of Germany's solidarity and financial equalisation system, which links the State of BW's creditworthiness to that of the German sovereign (AAA/Stable). SFG's support ability, as expressed by its 'A+' Long-Term IDR, is strong, but not as strong as that of the State of BW. We notch down LBBW's Long-Term IDR twice from SFG's 'A+' because we consider LBBW's role for its owners strategic, but not key and integral, and due to potential legal and regulatory barriers related to state aid considerations and to the provisions of German resolution legislation. The Stable Outlook reflects our stable support assumptions and the Stable Outlook on SFG's Long-Term IDR. LBBW's senior unsecured debt ratings are equalised with its IDRs. The bank's 'F1' Short-Term IDR is at the higher of the two Short-Term IDRs that map to an 'A-' Long-Term IDR on Fitch's rating scale. This reflects LBBW's strong links with SFG and privileged access to SFG's ample excess liquidity and funding resources. VR LBBW's VR reflects the bank's strong franchise in its home region and its solid position in domestic corporate lending, strong capitalisation, adequate liquidity and funding, sound asset quality, albeit constrained by fairly high sector and single-name concentrations, as well as its modest profitability. Having restored its profitability after the financial crisis, LBBW has reported stable, albeit modest, operating results ever since. The drop in the net profit for FY16 was caused by goodwill impairment, which is neutral to our assessment of the bank's intrinsic capital generation ability. LBBW's operating results benefit from its resilient fee income, low loan impairments and declining costs of the state guarantee, covering the bank's exposure to an SPV (Sealink). We expect the guarantee charge to largely fade away in the next two years, providing moderate relief to its results. LBBW's profitability is hampered by its under-performing Retail and Savings Banks segment. This segment is undergoing a transformation to a multi-channel bank, which causes material IT, project and restructuring costs, while low interest rates put pressure on interest income. LBBW's costs remain high, despite measures to cut them, and its efficiency indicators continue to lag its peers'. We expect the structural changes necessary for a notable reduction in the cost level to take several years, while earnings are likely to remain under pressure from a challenging competitive and interest-rate environment. LBBW's loan indicators, including its non-performing and forborne-loan ratios, are strong and non-loan exposure is generally of a satisfactory credit quality. Fairly high sector and single-name concentrations remain a constraining factor for our asset-quality assessment, although they are mitigated by the good quality of large borrowers. Sector concentrations reflect the bank's strong links to its home regions and their related industries, particularly automotive manufacturing and supply chain. Capitalisation remains one of LBBW's major strengths. At end-2016, the bank reported a fullyloaded CET1 of 15.2%, down from 15.6% at end-2015, driven by an increase in risk-weighted assets (RWAs). At this level, the ratio still compares favourably with most peers and provides ample headroom over the bank's SREP requirement. It can comfortably accommodate moderate lending growth or regulation-driven RWA inflation. LBBW's leverage ratio is adequate but less strong than its CET1 ratio because it does not benefit from the favourable risk weights, resulting in a relatively low RWA density. LBBW's funding and liquidity is adequate. Similarly to its Landesbanken peers, LBBW is predominantly wholesale-funded. However, its reliance on wholesale funding is mitigated by access to regional retail deposits due to LBBW's role as a savings bank in the Stuttgart area, as well as strong and reliable funding links to highly cash-rich savings banks. We believe that LBBW's function as central bank for the affiliated savings banks strengthens its liquidity profile. Non-deposit funding sources are diversified by the issuance of covered bonds, which have proved a stable and cheap source of funding even in times of stressed markets. STATE-GUARANTEED/GRANDFATHERED SENIOR, SUBORDINATED AND MARKET LINKED SECURITIES The 'AAA' ratings of LBBW's state-guaranteed/grandfathered senior, subordinated debt and market-linked securities reflect the credit strength of the regional state guarantors. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt instruments are notched down once from LBBW's VR to reflect loss severity relative to average recoveries. DERIVATIVE COUNTERPARTY RATING AND DEPOSIT RATINGS The bank's 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 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 on recovery levels in such circumstances. In the highly unlikely event that LBBW failed and was not supported by its savings banks and state owners, its balance sheets would most probably differ substantially from the current one. RATING SENSITIVITIES DRS, SR, SENIOR DEBT The SR, IDR and senior unsecured debt ratings are sensitive to changes in Fitch's assumptions on the propensity or ability of LBBW's owners to provide timely support. The latter may be indicated by a change to SFG's IDR. LBBW's IDRs are also sensitive to changes to the owners' strategic commitment to LBBW and the importance of the bank to its home region or for the savings banks sector. A change to our assessment of the risks of triggering a resolution process ahead of support for a Landesbank could also affect the SR, IDRs and senior unsecured debt ratings. VR Upside potential for LBBW's VR could arise from a sustainable and material improvement in the bank's profitability and efficiency. This would probably rely on a reduction in its cost base, which Fitch believes is unlikely to be achieved in the short term. Downward pressure on LBBW's VR would result from structural deterioration in the domestic economic environment and negative developments in the region's key industry sectors, particularly in automotive manufacturing, utilities and commercial real estate, which could lead to a weakening of LBBW's asset quality. The VR is also sensitive to significant changes to LBBW's strategic objectives. It could come under pressure if we observe a material deviation from risk-conscious underwriting standards in the future, which could erode LBBW's strong asset quality and capitalisation. GRANDFATHERED STATE-GUARANTEED SENIOR, SUBORDINATED AND MARKET LINKED SECURITIES LBBW's state-guaranteed/grandfathered senior and subordinated debt ratings and market- linked securities are sensitive to changes to Fitch's view of the creditworthiness of the State of BW, which is linked to that of Germany. DERIVATIVE COUNTERPARTY RATING AND DEPOSIT RATINGS DCR and Deposit Ratings are sensitive to changes in LBBW's IDRs. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES LBBW's subordinated debt ratings are sensitive to changes in the bank's VR, which acts as their anchor rating. The rating actions are as follows: Landesbank Baden Wuerttemberg 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' Long- and short-term senior debt, including programme ratings: affirmed at 'A-'/'F1' State-guaranteed/grandfathered senior and subordinated debt: affirmed at 'AAA'/'F1+' State-guaranteed/grandfathered market-linked securities: affirmed at 'AAAemr' Tier 2 Subordinated debt: affirmed at 'BBB' 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 76 80 76 136 Committee Chairperson Patrick Rioual Senior Director +49 69 76 80 76 123 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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