Fitch Affirms BayernLB at 'A+'; Outlook Negative

Thu Jun 12, 2014 11:10am EDT

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(The following statement was released by the rating agency) FRANKFURT/LONDON/PARIS, June 12 (Fitch) Fitch Ratings has affirmed Bayerische Landesbank (BayernLB) Long-term Issuer Default Ratings (IDR) at 'A+' and Short-term IDR at 'F1+'. The Outlook for the Long-term IDR is Negative. Fitch has also affirmed Bayern LB's Viability Rating (VR) at 'bb+'. A full list of rating actions is available at the end of this commentary. RATING DRIVERS AND SENSITIVITIES - IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOOR The affirmations of Bayern LB's Support Rating, Support Rating Floor (SRF), IDRs and senior debt ratings follow a peer review of Southern German Landesbanken and reflect the bank's systemic importance as a result of its important role in the state and the economy in its home region, Bavaria, one of the most populous and wealthy states in Germany. The Negative Rating Outlook on the IDR, which is driven by its SRF, relates to recent developments within the regulatory and legal framework, particularly emanating from the European Commission with regard to bank support, bail-ins and centralised regulatory oversight. It reflects the Bank Recovery and Resolution Directive (BRRD) and Fitch's expectation of further progress on Banking Union in the next one to two years, thereby reducing implicit sovereign support for banks in the EU. Accordingly Fitch will base its support considerations on direct institutional support, instead of ultimate sovereign support. Therefore BayernLB's SRF is likely to be withdrawn by end-1H15. However, Fitch is likely to retain some support from its owners in BayernLB's IDR and to downgrade its Long-term IDR and senior debt ratings by up to two notches. BayernLB is owned by the Free State of Bavaria (75%) and the savings bank association of Bavaria (25%), comprising 71 local savings banks. KEY RATING DRIVERS - VR The affirmation of Bayern LB's VR reflects BayernLB's restructuring, through de-risking and asset sales, and improved capital ratios, which is balanced by a still considerable share of non-core activities. Non-core activities still comprised almost 25% of risk-weighted assets at end-2013 and continue to weigh on BayernLB's asset quality, which is a primary rating driver of the 'bb+' VR. For example, Fitch expects yesterday's announcement by the Austrian government on specific legislation on winding up Hypo Alpe Adria (HGAA) to result in substantial impairment charges for BayernLB's exposure. Legacy risk also remains in MKB Bank Zrt, BayernLB's Hungarian subsidiary, which should be disposed of by end-2015, according to the EU state aid ruling. BayernLB's asset quality in its core segments remains robust as the bank continues winding down troubled assets, including its ABS portfolio. Sector exposures in Fitch's view are partly concentrated, for example in commercial real estate or utilities but these are mitigated by exposure to higher rated assets. Improvement in capitalisation came mainly from the perpetual silent-partner contributions from the Bavarian savings banks in the amount of EUR797m, raising their ownership to 25%. This highlights BayernLB's role as an important finance partner in the region and its link to the local savings banks. Bayern LB reported a CET 1 ratio of 12.2% at end-1Q14 (Basel III fully loaded according to the bank's definition, but which includes a regulatory discount of EUR1bn for HGAA and EUR3bn of the Free Sate of Bavaria's silent participation recognised until end-2017). While BayernLB's capitalisation currently ranks favourably among peers, it is uncertain what level of CET1 ratio Bayern LB will be able to achieve in the medium- to long-term given the downside risks of its non-core activities and its obligation to repay EUR4bn of capital by end-2019. BayernLB's profitability suffered a setback in 2013, primarily due to higher loan impairment charges and further losses in its non-core unit. However, Fitch believes that structural improvements in its core business remain on track despite headwinds from a low yield environment. The agency also believes that BayernLB will be able to meet its capital market funding needs, based on consistent demand from local savings banks for both secured and unsecured issuance. RATING SENSITIVITIES - VR BayernLB's VR may be upgraded from a resolution of its legacy asset issues. Conversely, the rating may be downgraded from a deterioration of unresolved legacy issues affecting its profits and capital ratios. Any setback in its on-going restructuring could also put pressure on its VR, while successful restructuring and improving contribution from the core business could positively affect BayernLB's VR. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Following Fitch's rating action on 28 January 2014, the agency now uses the VR as the anchor rating for BayernLB's subordinated debt. Given the affirmation of the VR Fitch has also affirmed BayernLB's subordinated lower Tier II debt at 'BB'. The VR is used as the anchor rating because revised state aid rules will make it more difficult for federal states to support BayernLB without some form of burden sharing affecting subordinated shareholders. The ratings are notched down once from the VR to reflect loss severity in line with Fitch's criteria for subordinated debt instruments. Bayern LB's subordinated debt ratings are sensitive to changes in BayernLB's VR as the anchor rating and changes to its rating drivers. The affirmation of BayernLB Capital Trust I's hybrid capital instrument is based on Fitch's view that the hybrid instruments will continue to be non-performing, despite an interest payment of USD4.9m in 2013. This payment was triggered by a one-off dividend pusher caused by Saarland's acquisition of the remaining shares in Landesbank Saar held by BayernLB. Fitch does not expect BayernLB to report sufficient distributable profits based on unconsolidated German GAAP accounting to meet the terms of the instrument for 2014 and potentially beyond. However, Fitch recognises that BayernLB has bought back most of the issue as reflected by an outstanding amount of only USD79.5m. The 'CCC' rating for BayernLB Capital Trust I's hybrid capital instruments would be upgraded if these instruments return to performing status. A downgrade could occur if BayernLB continues to report significant losses in its unconsolidated financial accounts, which Fitch views as unlikely. KEY RATING DRIVERS AND SENSITIVITIES - GUARANTEED DEBT The 'AAA' rating on BayernLB's guaranteed debt reflects the grandfathered guarantee by the Free State of Bavaria and is sensitive to any change in Fitch's view of the creditworthiness of the state, underpinned by the stability of the German solidarity system linking its creditworthiness to that of the Federal Republic of Germany (AAA/Stable). The rating actions are as follows: Bayern LB Long-term IDR affirmed at 'A+'; Outlook Negative Short-term IDR affirmed at 'F1+' Viability Rating: affirmed at 'bb+ Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' Senior debt: affirmed at 'A+'/'F1+' State-guaranteed/grandfathered debt: affirmed at 'AAA' State-guaranteed/grandfathered market-linked securities: affirmed at 'AAAemr' Senior market-linked securities: affirmed at 'A+ emr' Subordinated lower Tier II debt: affirmed at 'BB' BayernLB Capital Trust I Hybrid capital instruments: affirmed at 'CCC' Contact: Primary Analyst Roger Schneider Director +49 69 768 076 242 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Michael Dawson-Kropf Senior Director +49 69 76 80 76 Committee Chairperson Alain Branchey Senior Director +331 144 29 91 41 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1003, Email: Elaine.Bailey@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 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 31 January 2014, dated 12 December 2012, are available at www.fitchratings.com. 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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