Fitch Affirms Sparkassen and S-Verbund HT at 'A+'; Outlook Stable

Tue Jan 28, 2014 1:52pm EST

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(The following statement was released by the rating agency) FRANKFURT/LONDON, January 28 (Fitch) Fitch Ratings has affirmed German saving banking group Sparkassen-Finanzgruppe's (Sparkassen) Long-term Issuer Default Ratings (IDR) at ‘A+’ and Viability Ratings (VR) at ‘a+’. The Outlook on the Long-term IDR is Stable. At the same time, Fitch has affirmed the Long-term IDRs of 360 savings banks (Sparkassen) with a Stable Outlook. The agency has also affirmed and withdrawn the ratings of four savings banks as a result of their merger into another rated Sparkasse. Fitch has also affirmed another German saving bank group S - Finanzgruppe Hessen Thueringen's (S-Verbund HT) Long-term IDR at 'A+' with a Stable Outlook. S-Verbund HT's Group Viability Rating (VR) has been affirmed at 'a+'. In addition, the agency has affirmed the IDRs of the 50 savings bank members of S-Verbund HT's mutual support scheme and its central institution Landesbank Hessen-Thueringen Girozentrale (Helaba). The IDR of the Irish subsidiary of the regional savings banks associations (Sparkassen- und Giroverband Hessen-Thueringen, SGVHT) - NASPA Dublin - was affirmed at 'A+' and subsequently withdrawn. For the withdrawn ratings Fitch will no longer provide ratings or analytical coverage. A full list of rated Sparkassen is available at www.fitchratings.com or via the following link: Rated Sparkassen at end-2013. A full list of rating actions is provided at the end of this rating action commentary. At end-November 2013 Sparkassen accounted for a quarter of domestic lending and slightly more than a quarter of the domestic deposit market. SPARKASSEN-FINANZGRUPPE (SPARKASSEN) KEY RATING DRIVERS - IDRS AND VR As a mutual banking group, Fitch has assigned group ratings to Sparkassen in accordance with Fitch’s "Banking Structures Backed by Mutual Support Mechanisms" criteria. In line with these criteria, Viability Ratings are only assigned to the groups but not the individual members of the group. The Sparkassen group ratings only apply to the savings banks and not to the Landesbanken and other entities of the public banking sector. While the German savings banks are generally a less cohesive group than some of its peers, notably due to the absence of consolidated accounts and the limited integration of some of its members, the support track record at both groups is extensive and strong. As a result, both groups meet all of Fitch’s requirements for assigning group ratings, notably at least annual accounts, a common strategy, a risk management system with a degree of cohesion, supervision by the local regulator as single “risk� unit and the existence of a mutual support mechanism. Sparkassen's VR and IDRs are underpinned by the group’s leading and resilient franchise in German retail and SME banking, its strong and stable profitability, and a fairly low risk profile which benefits from the current benign operating environment in Germany. They also reflect the group’s limited direct capital market exposure, strong funding and liquidity profile as well as sound capitalisation. The VR also reflects the savings banks' relative cost inefficiencies, pressure on net interest income - their main revenue source - from persistently low interest rates and a likely but limited erosion of their leading deposit franchise from increasing deposit-taking competition. Fitch also expects a moderate increase in loan impairment charges, which will put further pressure on Sparkassen’s profitability, although deterioration should remain manageable. Excluding any write-downs of stakes in Landesbanken, the savings banks profitability is stable and predictable, reflecting their retail-focussed and deposit-funded business model. Even taking into account the Sparkassen’s decentralised organisation and fairly low balance sheet leverage (tangible common equity ratio of around 6%), Sparkassen’s operating profitability compares well with domestic and international peers. Its operating return on average equity (ROAE) ranges between 12% and 15% which Fitch views as sound. Fitch expects Sparkassen in early March 2014 to report broadly unchanged profitability for 2013, with revaluation gains on Sparkassen’s large securities holdings compensating for pressure on net interest income. Fitch expects credit impairment charges to remain below the historical average given Sparkassen’s asset mix and the benign domestic operating environment. Fitch considers Sparkassen’s capitalisation to be sound even after taking into account considerable contingent risk relating to the Landesbanken sector. Its aggregate Tier 1 ratio has gradually improved 12.5% at end-2012 from 10.5% at end-2011, both as a result of adequate internal capital generation and a conversion of Tier 2-eligible reserves into Tier 1-eligible reserves. Fitch core capital - which deducts the contingent risk relating to the Landesbanken but includes all capital reserves - of 12.4% at end-2012 compares well with peers’. Balance sheet leverage at Sparkassen is low which Fitch considers a distinct advantage in the current difficult environment. Financial and risk data Fitch receives from Sparkassen is in many respects less granular and comprehensive than data received from most of its peers. While this is largely due to Sparkassen not being a consolidated group, Fitch would expect reporting (both at individual savings bank and Sparkassen level) to improve given the increasing regulatory reporting requirements at both national and European level. RATING SENSITIVITIES - IDRs and VR Sparkassen’s financial metrics compare favourably with those of its international peers in the ‘A+’ rating level and therefore downside risk to its VR and IDRs is currently limited. Downward rating triggers include a prolonged and severe recession leading to materially higher default rates among SME and retail clients and falling collateral values; persistently extremely low interest rates negatively affecting Sparkassen’s earnings base; or a material erosion of its strong deposit franchise negatively affecting its margin and/or liquidity profile. Downside rating pressure may also arise from higher-than-expected contingent liabilities relating to the Landesbanken sector. However, Fitch does not view this as likely given the ongoing restructuring at most Landesbanken, initiated after 2008, including significant deleveraging and disposal of high-risk assets. An upgrade of Sparkassen’s VR and IDRs may be triggered by improved corporate governance, including more centralised risk reporting and risk control as well as improved decision-making processes. Further deleveraging of the most vulnerable Landesbanken would also be positive for Sparkassen’s ratings. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR In Fitch’s opinion there is an extremely high probability that the German municipalities, regional states and ultimately the federal government would support the savings banks, if ever needed, given the Sparkassen’s systemic importance. This is reflected in the Support Rating Floor (SRF) of 'A+'. To date, the support mechanism and the savings banks' strategic cohesion have always managed to support - at times together with the relevant municipalities - even large savings banks, and Fitch expects this to remain the case. Therefore, we view the risk that the group may require state support in the foreseeable future as remote. RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR Sparkassen’s Support Rating or SRF could be revised if Fitch changes its view on Germany's ability, as measured by Germany’s sovereign rating, or propensity to support its systemically important banks. The availability of and propensity to support could ultimately weaken as a result of legal, regulatory, political and economic dynamics about potential future sovereign support for senior creditors of banks across jurisdictions, as indicated in several special reports ("The Evolving Dynamics of Support for Banks", "Bank Support: Likely Rating Paths", both dated 11 September 2013, "Sovereign Support for Banks - Update on Position Outlined In 3Q13" available at at www.fitchratings.com). Developments outlined in these reports might result in Fitch revising SRFs down. Until now, senior creditors in systemically-important banks have been supported in full, but resolution legislation is developing quickly and the implementation of creditor "bail-in" is starting to make it look more feasible for taxpayers and creditors to share the burden of supporting banks. A downgrade of the sovereign rating alone would not automatically trigger a downgrade of Sparkassen’s IDRs as long as the respective VR remains at ‘a+’. However, if a sovereign rating downgrade is driven by a macroeconomic rather than a fiscal deterioration, the strong correlation between the group’s risk profile and the German economy would result in pressure on Sparkassen’s VR. S-FINANZGRUPPE HESSEN-THUERINGEN (S-VERBUND HT) KEY RATING DRIVERS - IDRS, VR, SUPPORT RATING AND SUPPORT RATING FLOOR S-Verbund HT's IDR is equal to its VR but is also at the same level as its SRF. The affirmation of the group’s VR reflects its strong and diversified franchise in the states of Hesse and Thuringia, its clear strategy with resilient core profitability, stable retail funding base, sound capitalisation and robust track record through the financial crisis. In common with other banks with a SRF of 'A+', the group has a Short-term IDR of 'F1+', reflecting greater certainty of the support propensity in the short-term. The SRF and Support Rating reflect the extremely high probability of support that would be provided by the states of Hesse and Thuringia if needed, given S-Verbund HT's vital role in the two states, its strong regional market share and its relationship with both states. Fitch does not rate both states, but their creditworthiness is underpinned by the strength of the German solidarity system, which links the states' creditworthiness to that of the Federal Republic of Germany. S-Verbund HT's full-year 2013 consolidated financial statements will not be published until July 2014. However, at end-3Q13 Helaba reported a consolidated pre-tax profit of EUR460m, up from EUR407m the previous year. With total assets of EUR182bn at end-3Q13 Helaba is the largest member of S-Verbund HT. Fitch highlights Helaba's exposure to the commercial real estate markets in Germany, USA, the UK and France, as well as some exposures to ship financing and aviation. In Fitch’s view these potentially high-impact risks are balanced by the loss-absorbing resources of Helaba and the entire group. S-Verbund HT is a banking group comprising 50 savings banks in the federal states of Hesse and Thuringia represented by the SGVHT and Helaba which is 68.9%-owned by SVGHT. S-Verbund HT integrates retail banking in Hesse and Thuringia via its savings banks with commercial wholesale banking services provided by Helaba. Helaba Asset Services' IDRs and SR are driven by an extremely high likelihood that support, if needed, from its owner Helaba would be forthcoming. RATING SENSITIVITIES - IDRS AND VR A downgrade of S-Verbund HT's Long-term IDR would stem from a combined downgrade of its VR and SRF. S-Verbund HT's SRF is sensitive to any change in Fitch's view of the ability or propensity of the states of Hesse and Thuringia to provide support. Fitch has so far not viewed this as likely given Germany's 'AAA' credit rating has a Stable Outlook and the strategic and economic importance of the bank to the local region. Even if the SRF is revised downwards, Fitch may consider the group's liquidity profile to be strong enough to maintain a Short-term IDR of 'F1+' rather than the 'F1' typically associated with an 'A+' Long-term IDR. S-Verbund HT's VR would come under pressure if Fitch revises its view on the financial strength of the savings banks or if there is significant deterioration in the quality of its loan portfolio, particularly within national and international commercial real estate and corporate finance. NASPA Dublin's IDRs are based solely on the high likelihood of support that the small Dublin-based bank would receive, in case of need, from the SGVHT. NASPA Dublin has been in a wind-down process since end-2007 and returned its banking license in Ireland in August 2013. Fitch withdraws the ratings of NASPA Dublin as the agency expects the entity to be finally wound down by 1Q14. The IDRs and SR of Helaba Asset Services are sensitive to changes to Helaba's IDR and to changes in Fitch's view of support as a result of developments linked to broad sovereign and associated banking sector risks in Ireland. The ratings are also sensitive to any developments affecting the cohesion of entities within the S-Verbund HT. RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR S-Verbund HT’s Support Rating or SRF could be revised if Fitch changes its view on Germany's ability, as measured by Germany’s sovereign rating, or propensity to support its systemically important banks. The availability of and propensity to support could ultimately weaken as a result of legal, regulatory, political and economic dynamics about potential future sovereign support for senior creditors of banks across jurisdictions, as indicated in several special reports ("The Evolving Dynamics of Support for Banks", "Bank Support: Likely Rating Paths", both dated 11 September 2013, "Sovereign Support for Banks - Update on Position Outlined In 3Q13" available at at www.fitchratings.com). Developments outlined in these reports might result in Fitch revising SRFs down. Until now, senior creditors in systemically-important banks have been supported in full, but resolution legislation is developing quickly and the implementation of creditor "bail-in" is starting to make it look more feasible for taxpayers and creditors to share the burden of supporting banks. A downgrade of the sovereign rating alone would not automatically trigger a downgrade of S-Verbund’s IDRs as long as the VR remains at ‘a+’. However, if a sovereign rating downgrade is driven by a macroeconomic rather than a fiscal deterioration, the strong correlation between the group’s risk profile and the German economy would result in pressure on S-Verbund’s VR. The rating actions are as follows: Sparkassen-Finanzgruppe (Sparkassen) Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1+' VR: affirmed at 'a+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' 360 savings banks: IDRs affirmed at 'A+' and 'F1+'; Outlook Stable The group ratings apply to 360 savings banks out of a total of 418. For a full rating list following these rating actions, please click on the link at the top of this comment. Sparkasse Ruegen: IDRs affirmed at 'A+'/Stable and 'F1+' and withdrawn as a result of its merger into Sparkasse Sparkasse Vorpommern Spar- und Leihkasse zu Bredstedt AG: IDRs affirmed at 'A+'/Stable and 'F1+' and withdrawn as a result of its merger into Nord-Ostsee Sparkasse Kreis- und Stadtsparkasse Speyer: IDRs affirmed at 'A+'/Stable and 'F1+' and withdrawn as a result of its merger into Sparkasse Vorderpfalz Kreissparkasse Rhein-Pfalz: IDRs affirmed at 'A+'/Stable and 'F1+' and withdrawn as a result of its merger into Sparkasse Vorderpfalz S-Verbund HT Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1+' Viability Rating affirmed at 'a+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' Helaba Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1+' Support Rating affirmed at '1' Senior debt affirmed at 'A+'/'F1+' Subordinated debt affirmed at 'A' Market-linked securities at Long-term 'A+emr' Guaranteed obligations affirmed at 'AAA' Naspa Dublin Long-term IDR affirmed at 'A+'; Outlook Stable and withdrawn Short-term IDR affirmed at 'F1+' and withdrawn Support Rating affirmed at '1' and withdrawn Helaba Asset Services Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1+' Support Rating affirmed at '1' The ratings of the group's 50 savings banks (as listed below) have been affirmed at: Long-term IDR 'A+'; Outlook Stable Short-term IDR 'F1+' Obligations guaranteed by the states of Hesse and Thuringia affirmed at Long-term 'AAA' The group's 50 savings banks are: Sparkasse Altenburger Land Sparkasse Arnstadt-Ilmenau Sparkasse Bad Hersfeld-Rotenburg Sparkasse Battenberg (Eder) Sparkasse Bensheim Stadtsparkasse Borken Stadt- u. Kreis-Sparkasse Darmstadt Sparkasse Dieburg Sparkasse Dillenburg Kreissparkasse Eichsfeld Stadtsparkasse Felsberg Frankfurter Sparkasse Sparkasse Fulda Kreissparkasse Gelnhausen Sparkasse Gera-Greiz Sparkasse Giessen Kreissparkasse Gotha Stadtsparkasse Grebenstein Kreissparkasse Gross-Gerau Sparkasse Gruenberg Sparkasse Hanau Kreissparkasse Hildburghausen Sparkasse Jena-Saale-Holzland Kasseler Sparkasse Kyffhaeusersparkasse Artern-Sondershausen Sparkasse Langen-Seligenstadt Sparkasse Laubach-Hungen Kreissparkasse Limburg Sparkasse Marburg-Biedenkopf Sparkasse Mittelthueringen Nassauische Sparkasse Kreissparkasse Nordhausen Sparkasse Oberhessen Sparkasse Odenwaldkreis Staedtische Sparkasse Offenbach am Main Zweckverbandssparkasse Rhoen-Rennsteig Kreissparkasse Saale-Orla Kreissparkasse Saalfeld-Rudolstadt Kreissparkasse Schluechtern Kreissparkasse Schwalm-Eder Stadtsparkasse Schwalmstadt Sparkasse Sonneberg Sparkasse Starkenburg Taunus-Sparkasse Sparkasse Unstrut-Hainich Sparkasse Waldeck-Frankenberg Wartburg-Sparkasse Kreissparkasse Weilburg Sparkasse Werra-Meissner Sparkasse Wetzlar Contact: Primary Analysts Christian Kuendig (Sparkassen) Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Christian van Beek (S-Verbund HT) Director +49 69 768076 248 Fitch Deutschland GmbH Taunusanlage 17 D-60325 Frankfurt am Main Secondary Analysts Michael Dawson-Kropf (Sparkassen, SFG-HT) Senior Director +49 69 768076 113 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria 'Global Financial Institutions Rating Criteria', dated 15 August 2012, ‘Banking Structures Backed by Mutual Support Mechanisms’, dated 18 December 2013, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012 and 'Evaluating Corporate Governance', dated 12 December 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Fitch Affirms Sparkassen and S-Verbund HT at ‘A+’; Outlook Stable here Banking Structures Backed by Mutual Support Mechanisms here Assessing and Rating Bank Subordinated and Hybrid Securities here Global Financial Institutions Rating Criteria here Evaluating Corporate Governance 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. 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