(The following statement was released by the rating agency)
FRANKFURT/LONDON/PARIS, June 12 (Fitch) Fitch Ratings has
Landesbank (BayernLB) Long-term Issuer Default Ratings (IDR) at
Short-term IDR at 'F1+'. The Outlook for the Long-term IDR is
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
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
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,
emanating from the European Commission with regard to bank
support, bail-ins and
centralised regulatory oversight. It reflects the Bank Recovery
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
support, instead of ultimate sovereign support. Therefore
BayernLB's SRF is
likely to be withdrawn by end-1H15. However, Fitch is likely to
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%),
local savings banks.
KEY RATING DRIVERS - VR
The affirmation of Bayern LB's VR reflects BayernLB's
de-risking and asset sales, and improved capital ratios, which
is balanced by a
still considerable share of non-core activities. Non-core
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
on specific legislation on winding up Hypo Alpe Adria (HGAA) to
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
continues winding down troubled assets, including its ABS
exposures in Fitch's view are partly concentrated, for example
real estate or utilities but these are mitigated by exposure to
Improvement in capitalisation came mainly from the perpetual
contributions from the Bavarian savings banks in the amount of
their ownership to 25%. This highlights BayernLB's role as an
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
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
recognised until end-2017). While BayernLB's capitalisation
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.
believes that structural improvements in its core business
remain on track
despite headwinds from a low yield environment. The agency also
BayernLB will be able to meet its capital market funding needs,
consistent demand from local savings banks for both secured and
RATING SENSITIVITIES - VR
BayernLB's VR may be upgraded from a resolution of its legacy
Conversely, the rating may be downgraded from a deterioration of
legacy issues affecting its profits and capital ratios. Any
setback in its
on-going restructuring could also put pressure on its VR, while
restructuring and improving contribution from the core business
affect BayernLB's VR.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND
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
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
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
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
shares in Landesbank Saar held by BayernLB. Fitch does not
expect BayernLB to
report sufficient distributable profits based on unconsolidated
accounting to meet the terms of the instrument for 2014 and
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
be upgraded if these instruments return to performing status. A
occur if BayernLB continues to report significant losses in its
financial accounts, which Fitch views as unlikely.
KEY RATING DRIVERS AND SENSITIVITIES - GUARANTEED DEBT
The 'AAA' rating on BayernLB's guaranteed debt reflects the
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
Republic of Germany (AAA/Stable).
The rating actions are as follows:
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'
+49 69 768 076 242
Fitch Deutschland GmbH
60325 Frankfurt am Main
+49 69 76 80 76
+331 144 29 91 41
Media Relations: Elaine Bailey, London, Tel: +44 203 530 1003,
Elaine.Bailey@fitchratings.com; Hannah Huntly, London, Tel: +44
20 3530 1153,
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
Securities', dated 31 January 2014, dated 12 December 2012, are
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Assessing and Rating Bank Subordinated and Hybrid Securities
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