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Fitch Affirms German Cooperative Banks and DZ BANK at 'AA-'; Outlook Stable
January 5, 2017 / 11:37 PM / a year ago

Fitch Affirms German Cooperative Banks and DZ BANK at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch Affirms German Cooperative Banks and DZ BANK at 'AA-'; Outlook Stable here FRANKFURT/LONDON, January 05 (Fitch) Fitch Ratings has affirmed Genossenschaftliche FinanzGruppe's (GFG) Long-Term Issuer Default Rating (IDR) at 'AA-' with Stable Outlook and Viability Rating (VR) at 'aa-'. Fitch has also affirmed the Long-Term IDRs of GFG's central institution, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, and of the 982 other banks members of GFG's mutual support scheme at 'AA-'/Stable. A full list of rating actions is at the end of this rating action commentary. A full list of rated GFG members is available at or via the link above. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT RATINGS GFG's IDRs are driven by its VR, which is heavily influenced by the group's strong capitalisation. The ratings also reflect GFG's strong domestic franchise, particularly in retail banking, as well as its strong funding profile, sound asset quality and solid, stable earnings, but also relatively high exposure to structural interest rate risk. The ratings also factor in the group's increasing cohesion, notably demonstrated by the increasing alignment of DZ BANK and GFG's strategy following the completion of DZ BANK's merger with its sister bank, WGZ BANK AG Westdeutsche Genossenschafts-Zentralbank AG, in 3Q16. The merger is a major step in the group's lengthy consolidation process. However, we expect GFG to remain strongly committed to its decentralised structure, local management's high degree of autonomy and large branch networks as long as the benefits from the group's strong locally rooted franchise outweigh the onerous regulatory consequences of the decentralised structure. The latter is likely to continue to limit the pace of efficiency gains. Fitch expects that the increasing regulatory demands regarding more robust and more frequent group-wide reporting will help GFG to further strengthen its capacity to react swiftly to external shocks. GFG's profitability has remained resilient despite low interest rates putting pressure on margins. We expect net interest income (NII) to suffer in the medium term if interest rates remain low. However, in our opinion GFG's profit generation is sufficiently strong, flexible and diversified to absorb a significant reduction in NII without jeopardising the group's overall financial flexibility. GFG's sound earnings and strong capitalisation provide solid protection against a possible sudden rise in interest rates, which is a very unlikely scenario, in our view. We expect GFG's profitability to weaken moderately in 2016 and remain under pressure until interest rates increase. Nonetheless, in our view GFG's financial flexibility, pricing power and internal capital generation will remain sufficiently strong for its rating, especially as the latter benefits from very high retention of profits. GFG's VR and IDRs reflect the group's high cohesiveness, which is supported by its tested mutual support mechanism and a recognised deposit protection scheme with its own dedicated fund. In 2015, GFG set up a new deposit protection scheme to fulfil statutory requirements in addition to its already existing mutual support fund, which is a key component of a, less regulated, voluntary scheme to protect members' viability. Both protection funds are managed by the National Association of German Cooperative Banks (BVR), which is also responsible for GFG's risk monitoring. We view the likelihood of mutual support as extremely high given GFG's extensive track record, and its members' deep institutional integration. To date, the support mechanism has always been sufficient to support even GFG's largest members. The IDRs of DZ BANK and its subsidiaries are group ratings and as such, the key rating drivers are identical to GFG's. We believe that GFG's current strong growth in residential mortgage lending is unlikely to significantly increase its risk profile. DZ BANK's risk profile benefits from its large, diversified and fairly low-risk retail activities, which include Bausparkasse Schwaebisch Hall AG (building society), R+V Versicherung AG (insurance) and Union Asset Management Holding AG (asset management). Years of non-core asset restructuring, run-off and disposals have significantly reduced DZ BANK's exposure to more volatile asset classes and should reduce GFG's future earnings volatility. DZ BANK's material remaining exposure to higher-risk business lines include commercial real estate (CRE), which is concentrated at Deutsche Genossenschafts-Hypothekenbank AG (DG HYP) and WL BANK WESTFAELISCHE LANDSCHAFT Bodenkreditbank AG, and DVB BANK SE's (DVB) shipping portfolio. The CRE assets are performing satisfactorily, but the shipping portfolio has deteriorated rapidly. We believe that this could dent DZ BANK's otherwise solid performance, but we expect that it will be easily manageable at both DZ BANK's and GFG's level. DERIVATIVE COUNTERPARTY RATING (DCR) AND DEPOSIT RATINGS GFG's senior debt is issued predominantly out of DZ BANK. In our view, GFG's consolidated layer of junior and vanilla senior debt does not provide sufficient protection to preferred senior creditors such as depositors and derivative counterparties in the event of a resolution of GFG (which in our opinion, would only occur in the unlikely event that the group's mutual support scheme would fail to protect its members' viability), to merit uplift for incremental probability of default reasons or to give sufficient comfort that recoveries on deposits in a default scenario would be above average. This is primarily driven by the fact that DZ BANK traditionally places a large share of its senior debt issuance within GFG. It also reflects DZ BANK's limited debt issuance needs due to the modest size of its wholesale business relative to the predominantly retail deposit-funded GFG. Consequently, the Deposit Ratings of DZ BANK and 980 other rated members and DZ BANK's DCR are aligned with GFG's IDRs. We do not assign Deposit Ratings to GFG as it is not a legal entity. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) GFG's SR and SRF reflect Fitch's view that legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for EU banks. The Bank Recovery and Resolution Directive (BRRD) and its bail-in tool came into force in Germany on 1 January 2015 and the Single Resolution Mechanism (SRM) providing resolution tools and mechanisms started on 1 January 2016. As a result, Fitch believes that extraordinary sovereign support, while possible, can no longer be relied upon. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated Tier 2 debt and hybrid capital instruments issued by DZ BANK and its subsidiaries are notched off GFG's VR. The use of GFG's VR as the anchor rating is based on our view that GFG will at all times ensure that the issuers are able to meet their payments on these instruments. DZ BANK, DG HYP and DVB's Tier 2 subordinated debt instruments are notched once below GFG's VR to reflect higher loss severity. The hybrid capital instruments issued by DZ Bank Capital Funding Trust I are rated four notches below GFG's VR, two notches each for loss severity and for incremental non-performance risk as, in our view, this instrument's distribution trigger is less likely to be activated than those of the other rated hybrids. The other hybrids (see list below) are notched five times from GFG's VR, twice for loss severity and three times for incremental non-performance risk. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT RATINGS We view GFG's IDRs and VR downside and upside potential as limited in the foreseeable future. The prevailing low interest rates should have no rating implications in the near future as they only gradually erode the group's profitability. Moderately weaker profitability would not in itself trigger a downgrade of GFG's VR and IDRs. Should unexpectedly adverse economic or market developments severely weaken its profitability, GFG would have considerable scope to improve its cost efficiency, which suffers from its decentralised structure. An upgrade of GFG's ratings would primarily require a change in Fitch's assessment of the group's cohesiveness and would require major efficiency gains from a (likely protracted) streamlining of the group's structure. GFG's predominantly domestic loan book makes its performance particularly sensitive to a weakening of Germany's economy. Hence, downside rating pressure is currently limited but could arise in the medium term from a severe deterioration of the credit quality of German borrowers, especially the more vulnerable small business clients, potentially triggered by a sharp rise in interest rates. A sudden interest rate increase would also weigh on earnings as the local cooperative banks' mostly overnight deposits would reprice much more rapidly than their generally long-term, fixed-rate asset bases. The group ratings are also sensitive to material adverse regulatory changes or changes in the group's strategy negatively affecting its cohesiveness, neither of which we expect. DZ BANK, DG HYP and DVB's IDRs are subject to the same sensitivities as GFG's IDRs. DCR AND DEPOSIT RATINGS The Deposit Ratings of GFG's members and DZ BANK's DCR are primarily sensitive to changes in GFG's IDRs. Substantially larger consolidated buffers of subordinated and senior vanilla debt could lead to an upgrade of GFG member banks' Long-term Deposit Ratings and DZ BANK's DCR and Long-term Deposit Rating to one notch above the Long-Term IDR. SR AND SRF An upgrade of GFG's SR and upward revision of its SRF would be contingent on a positive change in Fitch's view of the sovereign's propensity to support its systemically important banks. While not impossible, this is highly unlikely. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt and hybrid securities' ratings are notched from, and primarily sensitive to, a change in GFG's VR. The ratings are also sensitive to a change in their notching, which could be triggered by a reassessment of loss severity or relative non-performance risk. The rating actions are as follows: GFG Long-Term IDR: affirmed at 'AA-', Stable Outlook Short-Term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'aa-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'NF' 980 bank members of GFG's mutual support scheme Long-Term IDR: affirmed at 'AA-', Stable Outlook Short-Term IDR: affirmed at 'F1+' Long-Term Deposit Ratings: affirmed at 'AA-' Short-Term Deposit Ratings: affirmed at 'F1+' DZ BANK Long-Term IDR: affirmed at 'AA-', Stable Outlook Short-Term IDR: affirmed at 'F1+' DCR: affirmed at 'AA-(dcr)' Long-Term Deposit Rating: affirmed at 'AA-' Short-Term Deposit Rating: affirmed at 'F1+' Debt issuance programme: affirmed at 'AA-'/'F1+' Senior unsecured notes: affirmed at 'AA-'/'F1+' Market linked securities: affirmed at 'AA-emr' Subordinated Tier 2 notes: affirmed at 'A+' DZ BANK's hybrid capital instruments (preferred stocks): EUR300m DZ Bank Capital Funding Trust I (DE0009078337): affirmed at 'BBB+' EUR500m DZ Bank Capital Funding Trust II (DE000A0DCXA0): affirmed at 'BBB' EUR350m DZ Bank Capital Funding Trust III (DE000A0DZTE1): affirmed at 'BBB' EUR4.3m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series I (DE000A0GN869): affirmed at 'BBB' EUR45m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series VI (DE000A0GLDZ3): affirmed at 'BBB' EUR84m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series VII (DE000A0GMRS6): affirmed at 'BBB' EUR87m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series VIII (DE000A0GWWW7): affirmed at 'BBB' EUR40m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series IX (DE000A0NTTT1): affirmed at 'BBB' DG HYP Long-Term IDR: affirmed at 'AA-', Stable Outlook Short-Term IDR: affirmed at 'F1+' Long-Term Deposit Rating: affirmed at 'AA-' Short-Term Deposit Rating: affirmed at 'F1+' Debt issuance programme: affirmed at 'AA-'/'F1+' Senior unsecured notes: affirmed at 'AA-' Subordinated Tier 2 notes: affirmed at 'A+' DVB BANK Long-Term IDR: affirmed at 'AA-', Stable Outlook Short-Term IDR: affirmed at 'F1+' Long-Term Deposit Rating: affirmed at 'AA-' Short-Term Deposit Rating: affirmed at 'F1+' Debt issuance programme: affirmed at 'AA-'/'F1+' Senior unsecured notes: affirmed at 'AA-' Subordinated Tier 2 notes: affirmed at 'A+' Contact: Primary Analyst Patrick Rioual Director +49 69 76 80 76 123 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 Frankfurt Secondary Analyst Christian Schindler Associate Director +44 20 3530 1323 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 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 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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