Fitch Affirms Hypo Real Estate Holding & Deutsche Pfandbriefbank at 'A-'

Fri Feb 28, 2014 11:26am EST

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(The following statement was released by the rating agency) FRANKFURT/LONDON, February 28 (Fitch) Fitch Ratings has affirmed Hypo Real Estate Holding AG (HRE Holding) and its subsidiary Deutsche Pfandbriefbank AG's (PBB) Long-term Issuer Default Ratings (IDR) at 'A-'. The Outlooks are Stable. At the same time, the agency affirmed the banks' Viability Ratings (VR) and senior debt ratings. A full list of rating actions is at the end of this release. The rating actions are part of Fitch's peer review of five German commercial real estate lenders. The affirmation of PBB and HRE Holding's IDRs and Stable Outlooks are driven by Fitch's view of continued sovereign institutional support. The affirmation of PBB's VR reflects Fitch's expectation that the bank will mildly improve its business profile in 2014, building on the progress made in 2013, but the successful return to a sustainable standalone profile remains uncertain. KEY RATING DRIVERS AND SENSITIVITIES - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT PBB's Long-term IDR with a Stable Outlook, Short-term IDRs, Support Ratings, Support Rating Floors (SRF) and senior debt ratings reflect Fitch's continued view that its status as an active Pfandbrief issuer results in a very high (indicated by a SRF of 'A-') probability of state support. For PBB (and HRE Holding where its ratings are aligned with PBB), the already provided sovereign support results also in the higher of two possible Short-term IDRs at the SRF of 'A-'. PBB's IDRs, Support Rating, SRF and senior debt ratings are sensitive to any change in Fitch's assumptions about the on-going availability of extraordinary sovereign support for the bank. In Fitch's view, there is a clear intention ultimately to reduce implicit state support for financial institutions in the EU, as demonstrated by a series of legislative, regulatory and policy initiatives, most recently agreement between the European Council and Commission on the Bank Recovery and Resolution Directive. In September 2013, Fitch commented on its approach to incorporating support in its bank ratings in light of evolving support dynamics for banks worldwide (see 'Fitch Outlines Approach for Addressing Support in Bank Ratings', 'Bank Support: Likely Rating Paths', and 'The Evolving Dynamics of Support for Banks' available at www.fitchratings.com) and followed this with an update in December (see ''Sovereign Support for Banks Update on Position Outlined In 3Q13'). PBB's SRF would be revised down and its Support Rating, IDRs and senior debt ratings downgraded if Fitch concludes that potential sovereign support has weakened relative to its previous assessment. Given PBB's VR is 'bb', any support-driven downgrade of the bank's Long-term IDR and senior debt ratings could be a multi-notch downgrade. HRE Holding is a strategic and financial holding company that does not have any banking operations. Through HRE Holding, SoFFin (Financial Market Stabilisation Fund) controls its two main subsidiaries, PBB and Depfa Bank plc (BBB-/Negative). KEY RATING DRIVERS AND SENSITIVITIES - VRs PBB's 'bb' VR is mainly driven by the bank's challenges in re-establishing a viable business, which outweigh its currently strong asset quality, improving funding and adequate capitalisation. PBB's business plan foresees strong new business growth, predominantly in its Real Estate Finance segment and partly in its Public Investment Finance segment. This asset growth, which is ultimately needed to achieve a sufficient level of profitability, will depend on senior unsecured funding at competitive prices, which Fitch believes is still uncertain after a potential privatisation. Fitch believes that it will be especially difficult for PBB's public sector business to be profitable after a potential privatisation without taking undue risks, for example liquidity risks or concentrations risks. However, PBB has successfully issued unsecured benchmarks in 2013 with maturities beyond its sale date, which is planned by latest end-2015, although in Fitch's view, this is unrealistic. Following the transfer of non-performing and non-strategic assets to FMS Wertmanagement AoeR in 2010 PBB's asset quality is sound, but its sector and single asset concentration are characteristics it shares with its peers. In Fitch's view, the currently low levels of non-performing loans and loan impairment charges (LICs) are unsustainable considering PBB's substantial exposure to cyclical European property markets. Fitch expects normalised LICs to have the potential to significantly dent PBB's earnings as it is unable to quickly improve the return on assets. Fitch expects that PBB's capitalisation will improve in 2013 and its pro-forma fully phased in Basel III Common Equity Tier 1 (CET1) ratio was 9.8% (simulation based on end-1H13 data). PBB's pro-forma simulation of its Basel III leverage ratio, liquidity coverage ratio and net stable funding ratio were above the required minimum level at HY13. In Fitch's view, uncertainty about the viability of PBB's business model constrains the VR to the 'bb' category. PBB's 'bb' VR could be downgraded if Fitch believes the bank is unable to establish a track record and fails to implement its current business plan. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES PBB's hybrid Tier 1 securities, issued through Hypo Real Estate International Trust I, are rated 'C' and reflect the uncertain timing of these securities being serviced again. The European Commission agreement does not permit distribution on profit-related capital instruments (excluding SoFFin-related ones) prior to PBB's re-privatisation and the redemption of its outstanding EUR999m SoFFin silent participation. RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt ratings and hybrid ratings are sensitive to potential changes to the banks' respective VRs and changes in Fitch's criteria. The rating actions are as follows: Deutsche Pfandbriefbank AG: Long-term IDR: affirmed at 'A-', Outlook Stable Short-term IDR: affirmed at 'F1' Viability Rating: affirmed at 'bb' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Commercial paper: affirmed at 'F1' Debt Issuance Programme: affirmed at 'A-'/'F1' Senior unsecured notes: affirmed at 'A-' Short-term debt: affirmed at 'F1' Subordinated debt: affirmed at 'BB-' Hypo Real Estate International Trust I (XS0303478118): affirmed at 'C' Hypo Real Estate Holding AG: Long-term IDR: affirmed at 'A-', Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Contact: Primary Analyst Patrick Rioual Director Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: christian.giesen@fitchratings.com; 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 31 January 2014, and 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating FI Subsidiaries and Holding Companies 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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