(The following statement was released by the rating agency)
FRANKFURT/LONDON, June 12 (Fitch) Fitch Ratings has affirmed
Wuerttemberg's (LBBW) Long-term Issuer Default Ratings (IDR) at
Short-term IDR at 'F1+'. The Outlook on the Long-term IDR is
Negative. Fitch has
upgraded LBBW's Viability Rating (VR) to 'bbb' from 'bbb-'. A
full list of
rating actions is at the end of this commentary.
KEY RATING DRIVERS AND SENSITIVITIES - IDRs, SENIOR DEBT,
SUPPORT RATING AND
SUPPORT RATING FLOOR
The affirmation of LBBW's Support Rating, Support Rating Floor
(SRF), IDRs and
senior debt ratings follows a peer review of the Southern German
and reflect the bank's systemic importance as a result of its
important role for
the states and the economies in its home regions, (Baden
Palatine and Saxony), which represent over 20% of German GDP.
The Negative Outlook on the IDR, which is driven by its SRF,
relates to recent
developments within the regulatory and legal framework,
from the European Commission with regard to bank support,
centralised regulatory oversight. It reflects the Bank Recovery
Directive (BRRD) and Fitch's expectation of further progress on
during the next one to two years, thereby reducing implicit
for banks in the EU.
Accordingly Fitch will base its support considerations on direct
support, instead of ultimate sovereign support. Therefore,
LBBW's SRF is likely
to be withdrawn by end-1H15. However, Fitch is likely to retain
from its owners in LBBW's rating and is likely to downgrade
IDRs and senior debt ratings by one or two notches. The State of
Wuerttemberg through its direct and indirect holdings, and the
city of Stuttgart
own a combined 59.5% share of the bank. The other key
shareholder is the savings
bank association of Baden Wuerttemberg.
KEY RATING DRIVERS - VR
The upgrade of LBBW's VR reflects the accomplishment of key
arriving at its targeted business profile, namely consistent
renewed customer focus. Non-core activities declined to about 11
% of risk
weighted-assets under Basel III (IFRS), which Fitch believes
forms a healthy
basis from which to further build its core franchise.
At the same time, LBBW has improved its capitalisation which
ranks high among
German peers. The owner's reinvestment of repaid silent
contributions and currency swaps totalling EUR 2.2bn highlights
LBBWs role as an
important finance partner in the region and its corporate, asset
retail franchise. LBBW repaid EUR1bn of hybrid capital in April
2014 which had
no effect on its fully loaded Basel III CET1 ratio of 12.9% as
of March 13,
2014. As a result Fitch believes that LBBW is well prepared for
LBBWs profitability has been improving, albeit from a low level,
robust operational performance in its core business.
moderate but its potential to improve is better than for other
based on its broader franchise. Fitch expects a stable financial
2014 supported by a benign economic environment. However, as in
2013, the low
yield environment, subdued credit demand and the guarantee
commission paid to
the state of Baden-Wuerttemberg will remain constraining
LBBW's asset quality improved further by lowering large single
selling exposure in weaker rating classes primarily in the
portfolio, and continued wind-down of southern European debt.
are positive for the VR, but concentration risk in the
automotive and commercial
real estate sectors bear some tail risks.
While the bank is somewhat reliant on wholesale funding, LBBW's
close links to
associated savings banks in its regions have proved a reliable
funding. With the balance sheet shrinking in size, refinancing
declined sharply in recent years. Fitch understands that the
balance sheet will
not shrink much further but that future wholesale unsecured
funding needs will
be sourced primarily from private placements and not from the
RATING SENSITIVITIES - VR
Focus on customer business has raised LBBW's vulnerability to
fluctuations, particularly an unexpected economic downturn
accompanied by stress
in automotives and/or commercial real estate. Potential undue
risk taking in
face of stronger competition in its main market could also
impair asset quality
in its core business and potentially put pressure on its VR.
Given the upgrade
of its VR, Fitch expects upside potential to be limited over the
short term and
would require a material improvement of LBBWs profitability in
terms of quality,
specifically generating commission income, and quantity, without
KEY RATING DRIVERS AND SENSITIVITIES- SUBORDINATED DEBT AND
Following Fitch's rating action on 28 January 2014 to downgrade
lower Tier 2 debt instruments the agency now uses the VR as the
for LBBW's subordinated debt because the revised state aid rules
will make it
more difficult for federal states to support LBBW without some
form of burden
sharing affecting subordinated shareholders. The upgrade of
LBBW's Tier 2
instruments to 'BBB-' from 'BB+' reflects the upgrade of its VR
to 'bbb'. The
one-notch differential relates to loss severity as per Fitch's
rating subordinated debt.
LBBW's subordinated debt ratings are sensitive to any change in
LBBWs VR as the
GUARANTEED DEBT RATINGS - KEY RATING DRIVERS AND SENSITIVITIES
LBBW's and LBBW Dublin Management GmbH's guaranteed long-term
debt has been
affirmed at 'AAA', based on the grandfathering of the guarantees
by the state of
Baden Wuerttemberg and the Free State of Saxony, respectively.
Management GmbH's debt was issued by the former Sachsen LB
Europe plc. The
long-term debt is sensitive to any change in Fitch's view of the
creditworthiness of the German federal states, 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:
Long-term IDR affirmed at 'A+'; Outlook Negative
Short-term IDR affirmed at 'F1+'
Viability Rating upgraded to 'bbb' from 'bbb-'
Support Rating Floor affirmed at 'A+'
Support Rating affirmed at '1'
Senior debt: affirmed at 'A+'/'F1+'
State-guaranteed/grandfathered debt: affirmed at 'AAA'/'F1+'
State-guaranteed/grandfathered market-linked securities:
affirmed at 'AAAemr'
Subordinated lower Tier 2 debt: upgraded to 'BBB-' from 'BB+'
LBBW Dublin Management GmbH:
Grandfathered Long-term debt affirmed at 'AAA'
+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, are available at
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Assessing and Rating Bank Subordinated and Hybrid Securities
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