Fitch Affirms Deutsche Postbank AG's Public Sector Pfandbriefe at 'AA'; Outlook Stable

Mon Sep 1, 2014 12:32pm EDT

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(The following statement was released by the rating agency) FRANKFURT/LONDON, September 01 (Fitch) Fitch Ratings has affirmed Deutsche Postbank AG 's (DPB, A+/Negative) outstanding public sector Pfandbriefe at 'AA' with Stable Outlook. KEY RATING DRIVERS The affirmation follows Fitch's implementation of its updated criteria and subsequent application of its Issuer Default Rating (IDR) uplift to the programme, as detailed in 'Fitch Revises Outlook on Berlin Hyp's PS Pfandbriefe; Affirms 23 German Covered Bond Programmes' dated 10 April 2014 at The rating is based on DPB's Long-term Issuer Default Rating (IDR) of 'A+' and an IDR uplift of 2 assigned to the programme. For the affirmation, the agency also considered the scenario of a one-notch downgrade of DPB's IDR to 'A', which is in line with the Viability Rating of 'a' of its parent bank, Deutsche Bank. The combination of an 'A' IDR and the IDR uplift of 2 results in a rating floor of 'AA-' on a probability of default basis, irrespective of the over-collateralisation (OC) available to the covered bonds. The expected rating stability even if DPB is downgraded to 'A' is reflected in the Stable Outlook on the covered bonds despite the Negative Outlook on DPB's IDR. Fitch deems this programme dormant and, in the absence of a public OC statement, relies on the legal minimum OC. Under the law for German Pfandbriefe the legal minimum is the higher of 0% on a nominal basis and 2% on a net present value basis. This level of OC allows for a one-notch recovery uplift to 'AA' due to recoveries in the range of 51% to 91% should the covered bonds default. Compared with last year's analysis, the recovery given default does not allow for a two-notch recovery uplift because the programme's cash flow valuation differences have increased due to a jumbo bond having matured in July 2014, resulting in recoveries given default below 91%. The programme has a breakeven OC of 0%, which is driven by the cash flow valuation component of 25.5% as the weighted average interest received on the cover assets is lower than the average interest payable on the covered bonds. The next largest component is the cover pool's asset disposal loss component of 2.1%, driven by the stressed valuation of the entire cover pool after an assumed covered bond default. The smallest component is the credit loss (1.8%), showing Fitch`s expectation of low credit risk. Fitch's 'AA' breakeven OC is lower than the sum of the components, because the agency looks for a minimum recovery given default of 51%, rather than 100%. The IDR uplift of 2 reflects Fitch's opinion that resolution methods other than liquidation would be likely for DPB. This is based on the importance of covered bonds for Germany's financial markets, DPB as a subsidiary of Deutsche Bank AG - a large financial institution highly interconnected with Germany's economy, plus an additional buffer of issued senior unsecured debt that could be bailed in, representing more than 5% of Deutsche Bank group's balance sheet. As of end-June 2014 Postbank's public sector Pfandbriefe amounted to EUR1.72bn and were secured by a cover pool amounting to EUR1.96bn, representing a nominal OC of 14.6%. The cover pool comprises bonds issued or guaranteed by highly rated sovereigns and supranational institutions, as well as residential mortgages amounting to EUR0.27bn benefiting from a loss guarantee from KfW (AAA/Stable). The guarantee ensures full recovery (including accrued interest and foreclosure costs) after foreclosure of properties for defaulted borrowers. Following the maturity of DPB`s last outstanding jumbo covered bond of EUR1.5bn on 10 July 2014, nominal OC for the programme has increased significantly. While Fitch believes this amount of OC is sustainable it expects the issuer to remove some cover assets over time. However, no detailed information has been provided on future cover pool composition yet. Fitch has therefore tested different scenarios of future cover pool composition and deems it unlikely that a removal of assets would significantly influence recoveries given default other than what has been captured in the one-notch recovery uplift. RATING SENSITIVITIES The 'AA' rating would be vulnerable to downgrade if any of the following occurs: (i) the IDR is downgraded by two or more notches to 'A-' or below; or (ii) the number of notches represented by the IDR uplift is reduced to 1 or lower or (iii) the German sovereign is downgraded to 'AA+' or below. The Fitch breakeven OC for the covered bond rating will be affected, amongst others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore the breakeven OC to maintain the covered bond rating cannot be assumed to remain stable over time. More details on the cover pool and Fitch's analysis will be available in a credit update report, which will shortly be available at In the report Breaking Down Breakeven Overcollateralisation, published 8 July 2014, Fitch details its approach to determining the breakeven OC components. Contact: Primary Analyst Mathias Pleissner Director +49 69 7680 76 799 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt Secondary Analyst Jan Seemann, CFA Director +49 69 768076 112 Committee Chairperson Rebecca Holter Senior Director +49 69 7680 76 261 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available on Applicable criteria, 'Covered bond Rating Criteria', dated 08 August 2014, 'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds', dated 23 January 2014, 'Covered Bonds Rating Criteria - Mortgage Liquidity and Refinancing Stress Addendum', dated 04 February 2014, 'Asset Analysis Criteria for Covered Bonds of European Public Entities', dated 30 January 2013, 'Covered Bonds Rating Criteria - Public Sector Liquidity and Refinancing Stress Addendum' dated 07 February 2014, are available at Applicable Criteria and Related Research: Covered Bonds Rating Criteria here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds here Covered Bonds Rating Criteria – Mortgage Liquidity and Refinancing Stress Addendum here Covered Bonds Rating Criteria – Public Sector Liquidity and Refinancing Stress Addendum here Asset Analysis Criteria for Covered Bonds of European Public Entities 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.