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Fitch Assigns Aareal's Additional Tier 1 Securities 'B+' Final Rating
November 20, 2014 / 3:48 PM / in 3 years

Fitch Assigns Aareal's Additional Tier 1 Securities 'B+' Final Rating

(The following statement was released by the rating agency) FRANKFURT/LONDON, November 20 (Fitch) Fitch Ratings has assigned Aareal Bank AG's (A-/Negative/F1/bbb) issue of EUR300m (DE000A1TNDK2) undated non-cumulative fixed-to-reset rate additional Tier 1 (AT1) securities a final rating of 'B+'. The bank's other ratings are unaffected. The notes are offered in one tranche at 7.625%. KEY RATING DRIVERS The notes are AT1 instruments with fully discretionary coupon payments and are subject to a write-down if Aareal's Basel III common equity Tier 1 (CET1) ratio breaches a 7% trigger. The trigger ratio is calculated on a 'phased-in' consolidated IFRS basis under EU capital requirement regulations. The notes are rated five notches below Aareal's 'bbb' Viability Rating (VR), in accordance with Fitch's criteria for "Assessing and Rating Bank Subordinated and Hybrid Securities". The notes are notched down twice for loss severity to reflect the write-down on breach of the trigger, and three times for non-performance risk relative to that captured in the VR. The notching for relative non-performance risk reflects the notes' fully discretionary coupons, which Fitch considers the most easily activated form of loss absorption. In addition, Aareal will not make an interest payment if the payment, together with payments made on other Tier 1 instruments, exceeds available distributable items (ADI) adjusted for interest expense on Tier 1 instruments, or if the authorities or legislation prohibit the bank from making payments. The ADI are calculated on an unconsolidated German GAAP basis for the group's parent, Aareal Bank AG. The ADI include net income after movements to and from capital reserves (balance sheet profit), free capital reserves and retained earnings. Under the German commercial code, certain amounts related to intangible assets, deferred tax assets and pension assets cannot be distributed, reducing the available distributable items. German accounting standards allow Aareal to influence the amount of ADI. Taking into account the bank's substantial discretionary reserves pursuant to section 340 of the German Commercial Code, the amount available for distribution to AT1 holders significantly exceeds the ADI of about EUR660m at end-2013 as indicated in the notes' documentation. Fitch believes that Aareal would use the flexibility offered by these discretionary reserves to manage its unconsolidated German GAAP balance sheet profit and ensure that sufficient amounts are available to make interest payments on the AT1 instruments. The 7% trigger is on a phased-in basis, but even on a fully applied basis Aareal has a sizeable buffer above this trigger. The bank's fully applied Basel III CET1 ratio excluding the EUR300m grandfathered silent participations repaid to SoFFin on 30 October 2014 stood at 12% at end-3Q14, providing a buffer of over EUR800m above the 7% trigger point. This buffer also slightly exceeds the 10.75% fully-applied CET1 ratio plus management buffer set as a medium-term target by Aareal's management in a base case scenario. However, we believe that loss absorption could occur before a breach of the 7% trigger in the form of non-payment of coupon, which under Fitch's criteria would be considered as non-performance. We expect Aareal to be subject to capital regulations' restrictions on distributions, including distributions on AT1 instruments, if and when it breaches its combined buffer requirements. Aareal's solid outcome in the European Central Bank's (ECB) Comprehensive Assessment and stress test published in October 2014 supports our view that the bank's capitalisation can adequately withstand cyclical shocks inherent to its monoline, wholesale business model. Its fully-applied CET1 ratio in the ECB's adverse stress scenario is, at 11.4%, the fifth-highest of the 16 rated German banks in the stress test. This supports our expectation that Aareal will maintain a sufficient buffer to avoid restrictions on interest payments on its AT1 instruments. Fitch has assigned 100% equity credit to the securities. This reflects their full coupon flexibility, their ability to be written down well before the bank would become non-viable, their permanent nature and subordination to all senior creditors. The equity credit also factors in Aareal's sole discretion to activate the notes' write-up mechanism, or the bank's option to call the notes from 2020, subject to the supervisory authority's consent. RATING SENSITIVITIES The rating of the notes is primarily sensitive to any changes to Aareal's VR, which they are notched down from. Aareal's 'bbb' VR notably reflects - and is therefore sensitive to - the bank's solid earnings and slight capitalisation benefits arising from its acquisition at end-1Q14 of COREALCREDIT (BBB/Stable/F2). The benefits from the acquisition already reflected in 1Q14 include a EUR150m one-off gain stemming from negative goodwill and Aareal's improved impaired loan ratio, following COREALCREDIT's divestment of a material share of its impaired legacy loan portfolio. The VR also takes into account residual execution risk from the acquisition. For more details on the main sensitivities see 'Fitch Affirms Aareal at 'A-'; Maintains COREALCREDIT on RWP', dated 28 February 2014 at The notes' rating is also sensitive to any changes in notching, if Fitch changes its assessment of the notes' non-performance risk relative to that captured in Aareal's VR. This may reflect a change in capital management or flexibility or an unexpected shift in regulatory buffers, for example. Contact: Primary Analyst Patrick Rioual Director +49 69 76 80 76 123 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Sebastian Schrimpf Analyst +49 69 76 80 76 136 Committee Chairperson Erwin Van Lumich Managing Director +34 93 323 8403 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, and "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Additional Disclosure Solicitation Status 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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