TEXT - Fitch comments on Landesbank Berlin AG

Mon Dec 10, 2012 11:24am EST

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(The following statement was released by the rating agency)

Dec 10 - Fitch Ratings says that Landesbank Berlin AG's (LBB) planned transformation into a savings bank should make the bank more efficient in the long term. The agency's comment follows media response to a letter from LBB's management board on the 4th of December 2012 to its employees saying that the representatives of the ultimate owners of LBB and DekaBank, the German savings banks, are planning to propose a spin-off of some of LBB's businesses to their decision making bodies. According to the plan LBB will be transformed into a savings bank operating in the region of Berlin and Brandenburg, likely named Berliner Sparkasse, by spinning off its subsidiary Berlin-Hannoversche Hypothekenbank AG (Berlin Hyp) as well as transferring customer driven capital market activities to DekaBank. Berlin Hyp would be positioned as an independent commercial real estate lender and an integral part of the group of German savings banks. Fitch believes that the decision making process and approval by the regulatory authorities could take several months. Fitch believes that LBB's future focus on its role as a savings bank is tailored to its strengths, specifically its entrenched franchise in Berlin as the leading retail bank with two million retail and business customers, its strong funding franchise through cooperation with the German savings banks as well as its developing role as a service and product provider to the savings banks. Fitch added that LBB's weaknesses, specifically limited growth opportunities in the region as well as limited strategic flexibility because of modest profitability and capitalisation, will be difficult to overcome in the short- to medium term and would be compounded by the loss of stable earnings from Berlin Hyp. However, depending on the details of the asset and business split, LBB's risk-adjusted capitalisation might improve if its concentration risks to commercial real estate and its portfolio of sovereign and international financial institutions are reduced. Fitch believes that the pressure for LBB to improve its earnings from its regional franchise and its role within the savings banks group as well as greater transparency around the risk-return profile of its regional operations should promote greater efficiency. In addition, if the reorganisation takes place, Fitch expects Berlin Hyp to operate successfully as an independent bank working in cooperation with the German savings banks, based on its solid performance during the financial crisis and proven risk management practices. Berlin Hyp has benefited from the withdrawal of competitors over the past two years. At the same time its profitability has benefited from its low loan impairment charges, lean cost structure (as a result of function sharing between LBB and Berlin Hyp), interest revenues from maturity transformation and low funding costs through its affiliation to the German Sparkassen and its Pfandbrief franchise. Similarly to LBB, Berlin Hyp's risk return profile would be influenced by which assets are spun off to it. However, at this stage it is premature to assess the impact as the details are not yet decided. Fitch believes that if the proposed new corporate structure goes ahead, the agency would continue to view there to be an extremely high probability of support from the German savings banks, if required, for both banks. (Caryn Trokie, New York Ratings Unit)

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