Fitch: DuessHyp Sale Unlikely To Address Credit Weaknesses

Wed Aug 27, 2014 10:03am EDT

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(The following statement was released by the rating agency) LONDON, August 27 (Fitch) A change in ownership at Duesseldorfer Hypothekenbank to another financial investor is unlikely to address the German bank's capital and funding weaknesses or have ratings implications, Fitch Ratings says. These weaknesses and the nature of the buyer mean the sale agreement is likely to face regulatory scrutiny during the approval process. We believe DuessHyp needs new external capital in the long term to secure its viability and support its protracted transition from public-sector to commercial real estate (CRE) lending. The planned conversion of EUR40m of mandatory convertible bonds into equity will only marginally strengthen the bank's vulnerable capitalisation. This is under constant pressure from recurring losses, which is hindering the growth of the new CRE business. Limited access to long-term unsecured funding other than that insured by the German deposit protection scheme complicates the establishment of a sustainable franchise. These funding and capital weaknesses underpin DuessHyp's 'ccc' Viability Rating (VR). The German mortgage bank model, which combines mostly commercial mortgage lending with public sector lending, funded mainly by Pfandbriefe has been under severe pressure since the financial crisis. Almost all of the banks are substantially deleveraging and some are exiting the market completely. Financial investors are less strategic and may be less willing or able to address the problems. DuessHyp's 'BBB-' Long-Term IDR does not factor in potential support from such investors as we believe that it cannot be relied upon. The Long-Term IDR is likely to remain driven by systemic support, as our assessment of institutional support will not change under the new owner. Our Negative Outlook signals the expectation that IDRs will be downgraded by 1H15 as we expect state support to decrease under the Bank Recovery and Resolution Directive and Single Resolution Mechanism. However, expected support from Germany's private-sector deposit insurance fund is likely to keep DuessHyp's Long-Term IDR above its VR. Strategic buyers, such as banks, are more likely to establish focused, efficient and viable banks through restructuring, consolidation, synergies and reliable access to capital and funding sources. In the long term this is positive for the targets' credit profiles and for financial stability. Such investors are preferred by regulators. Otherwise regulatory scrutiny is likely to be particularly intense, as in the case of Deutsche Bank's sale of BHF-Bank, which Bafin finally approved in February 2014 after talks that started in June 2011. The regulator is likely to scrutinise DuessHyp's ability to withstand a crisis, including the financial resources and commitment of the new owner - an international group of buyers led by Attestor Capital and investor Patrick Bettscheider - to support the bank. The deal is unlikely to signal a broader wave of consolidation in the German banking sector, despite recent small transactions involving strategic buyers - Aareal Bank's acquisition of Corealcredit announced in December 2013 and BNP Paribas's agreement to buy online broker DAB Bank. Regulatory constraints are likely to keep consolidation low, despite the benefits of owning a Pfandbrief licence. The German government's recent decision to abandon a sale of Dublin-based public-sector lender Depfa Plc, part of the Hypo Real Estate group, which was bailed out by Germany, is a good example of how tough it is to agree an acceptable deal. Contact: Patrick Rioual Director Financial Institutions +49 69 768076 123 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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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