Feb 20 (The following statement was released by the rating agency)
Fitch Ratings has affirmed DZ Bank AG Deutsche Zentralgenossenschaftsbank's (DZ Bank, A+/Stable/F1+) outstanding DZ Bank Briefe at 'AA'; Outlook Stable. The affirmation follows Fitch's periodic review.
KEY RATING DRIVERS
The rating is based on DZ Bank's Long-term Issuer Default Rating (IDR) of 'A+', the unchanged Discontinuity Cap (D-Cap) of 0 (full discontinuity) and the overcollateralisation (OC) that Fitch takes into account in its analysis, which is currently 30.9%. This compares with the breakeven OC for the programme of 25%, which is unchanged from the last review and sufficient to achieve outstanding recoveries if the DZ Bank Briefe default, justifying a two-notch uplift to 'AA' for the DZ Bank Briefe rating.
The Stable Outlook on DZ Bank's Long-Term IDR of DZ Bank drives the Stable Outlook on the DZ Bank Briefe's rating.
The D-Cap of 0 limits the programme's rating on a probability of default basis to 'A+' and reflects the agency's view that the possibility of payment interruptions on the DZ Bank Briefe in scenarios where the issuer has defaulted cannot be excluded with the certainty necessary for ratings above 'A+'. Fitch's discontinuity analysis is based on the considerable exposure of DZ Bank's cover pool to the German cooperative banking group Genossenschaftliche FinanzGruppe (GFG, A+/Stable/F1+) of which DZ Bank is a member. DZ Bank is owned by the cooperative banks members of GFG and serves as the larger central institution for the group.
Fitch recognises the strong cohesion and mutual support within GFG, which is the basis for the common 'A+' IDR for DZ Bank and all other GFG members, based on the agency's applicable criteria, 'Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms', dated 18 December 2013.
However, due to this cohesion and mutual support, the agency deems the whole sector as highly correlated, especially in periods of financial stress. In a scenario in which DZ Bank defaulted the strong mutual support mechanism and the write-downs of the cooperative banks' equity in DZ Bank, would lead to a deterioration of the overall credit quality within the sector. Together with the expected decreasing liquidity of cooperative assets, in Fitch's view this would reduce the alternative manager's ability to make timely payments following the issuer's default.
Nonetheless, in a 'AA' stress scenario Fitch expects significant recoveries on defaulted covered bonds due to restructuring events in the cooperative sector following DZ Bank's default and a breakup of GFG. According to Fitch's Covered Bond Criteria, the covered bonds can be rated up to two notches above the rating on a probability of default basis due to recoveries on defaulted covered bonds. Fitch deems a level of OC of 25% sufficient to support a two-notch recovery uplift to 'AA'. During the past 12 months, OC has always been above 30.9%, which is the level taken into account by the agency under its Covered Bonds Criteria. As of December 2013, the cover pool comprised EUR22.5bn assets, which largely consisted of loans and bonds to GFG members. EUR17.2bn of covered bonds were outstanding. Fitch considers interest rate and currency mismatches to be low as 96% of the cover pool and 99% of the covered bonds are euro-denominated and 88% of assets and 73% of covered bonds yield a fixed rate of interest. The programme exhibits only minor maturity mismatches with the weighted average life of the assets seven years compared with six years for the covered bonds.
In terms of sensitivity of the covered bonds' rating, the 'AA' rating would be vulnerable to a downgrade if the following occurred: (i) DZ Bank's IDR was downgraded by one or more notches to 'A' or below; or (ii) the OC Fitch takes into account decreased below 25%.
The Fitch breakeven OC for the covered bond rating will be affected by, among other factors, 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 portfolio and Fitch's analysis will be available in a credit update, which will be shortly available at www.fitchratings.com.