(The following statement was released by the rating agency)
Jan 31 - Fitch Ratings has affirmed HSH Nordbank AG's (HSH) Long-term Issuer
Default Rating (IDR) at 'A-' and Short-term IDR at 'F1'. At the same time, Fitch
has downgraded HSH's Viability Rating (VR) to 'b' and maintained it on Rating
Watch Negative (RWN). The Outlook on the Long-term IDRs is Stable. A full list
of rating actions is at the end of this commentary.
RATING ACTION RATIONALE
The affirmation of HSH's IDRs reflects the fact that in Fitch's view the
extremely high likelihood of support from its German federal state owners
The downgrade of HSH's VR by one notch to 'b' reflects the challenges faced by
the bank from the continued deterioration in the economic environment,
particularly in the shipping industry. This has pushed back the potential timing
of HSH's ability to meet its targeted business plan and recover to a sustainable
viable business. Fitch believes that the shipping sector, which is currently in
the midst of a deep crisis, will further deteriorate in 2013 and that the crisis
will last longer than originally expected, until at least mid-2014. Moreover,
the agency believes that loan impairment charges (LICs) in the bank's other
segments are likely to increase in light of a weakening operating environment.
Fitch understands that new business has been slower than planned under the
bank's new business model. Its slower progress in running down its legacy
portfolio in the past two years suggests that HSH will take longer to reach its
target of a more focused and regional business model and that its operations
will continue to be burdened by restructuring efforts. HSH's performance in Q312
was modest in light of low net interest margins, vulnerability to capital market
volatility and a still high fixed cost base, including the fee for the
RATING DRIVERS AND SENSITIVITIES - IDRS AND SENIOR DEBT
The Free Hanseatic City of Hamburg and the State of Schleswig-Holstein directly
and indirectly hold 85.4% of HSH's shares. The high level of support is based on
Fitch's view of HSH's strategic importance for both federal states and the
regional economies as well as its high share of guaranteed funding and funding
through German savings banks which is reflected in the Support Rating of '1' and
Support Rating Floor (SRF) of 'A-'. Fitch notes that the State of Schleswig
Holstein will dispose its shareholding once the market environment allows this,
but the agency does not believe that this will happen before 2016.
The IDR is at the SRF, meaning that the HSH's support-driven rating and debt
ratings are sensitive to a change in Fitch's view of the propensity and ability
of their federal state owners to provide support. The rating of
state-guaranteed/grandfathered debt reflects the credit quality of the
guarantors as well as Fitch's assessment of the Gewaehrtraegerhaftung.
The State of Schleswig-Holstein is rated 'AAA' by Fitch, reflecting the
stability of the solidarity system that underpins the creditworthiness of all
German Laender, linking their creditworthiness to that of the Federal Republic
of Germany ('AAA'/Stable). The state of Hamburg is unrated, but Fitch's
assessment of its ability to support HSH is also based on the solidarity system.
As such the support-driven ratings of HSH as well as the rating of
state-guaranteed/grandfathered debt are sensitive to any rating downgrade of the
Federal Republic of Germany.
RATING DRIVERS AND SENSITIVITIES - VR
The RWN on the VR relates to Fitch's view that HSH will need to implement
further appropriate balance sheet measures in order to stabilise its
deteriorating capitalisation and establish a viable business. Specifically, the
RWN reflects the uncertainty of whether further state aid approval will be
granted and whether this could lead to a requirement for broader restructuring
measures by the bank. Fitch will resolve the RWN once it has clarity about both
the type and size of the capital measures the bank will employ as well as the
outcome of any potential decision needed from the EC to do this. Fitch expects
this to become clear by the middle of 2013.
HSH's capitalisation is still weakening, with a Fitch core capital ratio of 7.3%
at end-September 2012 down from 7.8% at end-June 2012 and 8.8% at end-2011.
HSH's regulatory Tier 1 capital ratio stood at a still adequate 12.7% including
the bank's hybrid capital instruments. (common equity ratio at 9.4% down from
10.3% at YE11). Measures to stabilise capitalisation are likely to come at a
high cost in terms of appropriate compensation to the state.
HSH's liquidity and funding profile is adequate. The bank's dependence on
wholesale funding is mitigated by its ongoing (but slow) deleveraging process
and access to the German savings banks' excess liquidity, which has proved to be
a stable source of funding through the financial crisis.
Upside potential to the VR in the medium term is linked to a sustainable
stabilisation of the bank's earnings base in conjunction with a material
improvement in asset quality.
HSH's subordinated debt instruments have been affirmed at 'BBB-' three notches
below the bank's IDR. One notch captures the subordination and two notches
reflect Fitch's opinion that there is still modest incremental non-performance
risk relative to the unsubordinated obligations of the issuer.
While Fitch believes the likelihood of support to still be high, there is a
small possibility that the bank's owners may somehow be prevented from
supporting subordinated debt, for example by the EC. The subordinated debt
ratings are sensitive to any change in HSH's IDR or in any developments, for
example with respect to a change of the regulatory language around subordinated
debt that would make it more difficult for the state owners to support such debt
The rating actions are as follows:
Long-term IDR: affirmed at 'A-', Stable Outlook
Short-term IDR: affirmed at 'F1'
Viability Rating: downgraded to 'b' from 'b+', maintained on RWN
Support Rating: affirmed at '1'
Support Rating Floor ' affirmed at 'A-'
Senior debt: affirmed at 'A-' / 'F1'
State-guaranteed/grandfathered debt: affirmed at 'AAA' / 'F1+'
State-guaranteed/grandfathered market-linked securities: affirmed at 'AAAemr'
Senior market-linked securities: affirmed at 'A- emr'
Subordinated lower Tier 2 debt: affirmed 'BBB-''
(Caryn Trokie, New York Ratings Unit)