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Fitch Affirms DZ Bank Briefe at 'AA'; Stable Outlook
August 14, 2014 / 2:56 PM / in 3 years

Fitch Affirms DZ Bank Briefe at 'AA'; Stable Outlook

(The following statement was released by the rating agency) FRANKFURT/LONDON, August 14 (Fitch) Fitch Ratings has affirmed DZ Bank AG Deutsche Zentralgenossenschaftsbank's (DZ Bank, A+/Stable/F1+) outstanding DZ Bank Briefe at 'AA'; Outlook Stable. 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 DZ Bank Briefe's rating is based on DZ Bank's Long-term Issuer Default Rating (IDR) of 'A+' and the IDR uplift of '2' assigned to the programme. This results in a floor for the covered bonds' rating on a probability of default basis (PD) at 'AA', irrespective of the actual overcollateralisation (OC) available to the covered bonds. No recovery uplift above 'AA' is assigned as Fitch believes there is a high uncertainty in assessing recoveries from the cover pool in a scenario where the cooperative banks, to which the pool is significantly exposed, enter into severe difficulties and the group were to be restructured. This risk is also reflected in the programme's unchanged Discontinuity-Cap (D-Cap) of 0 (full discontinuity). The Stable Outlook on the covered bonds' rating is based on the Stable Outlook on DZ Banks's IDR. The IDR uplift of '2' reflects Fitch's view that resolution methods other than liquidation would be likely for DZ Bank. This view is based on the importance of covered bonds for Germany's financial markets, DZ Bank being 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 the issuer's balance sheet. Fitch believes that in a resolution scenario DZ Bank would be able to meet ongoing covered bond payments without interruption up to a 'AA' scenario. However, in scenarios higher than 'AA', Fitch considers there is a high likelihood of payment interruptions, reflected in a D- Cap of '0', and cannot rule out the possibility of recoveries being below 51%. DZ Bank`s cover pool is substantially exposed to the German cooperative banking group Genossenschaftliche FinanzGruppe (GFG, A+/Stable/F1+) of which DZ Bank is also a member. Fitch recognises the strong cohesion and mutual support within GFG. However, due to this cohesion and mutual support, the agency deems the whole sector as highly correlated, especially in periods of financial stress. The write-downs of the cooperative banks' equity in DZ Bank and potentially bailed in or defaulted senior debt held within the GFG would likely lead to a deterioration of the overall credit quality in the sector, increasing uncertainty to a level where it is not possible to conduct a robust recovery analysis. As of March 2013, the cover pool comprised EUR22.5bn assets, which largely consisted of loans and bonds to GFG members. EUR16.9bn 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 74% 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. RATING SENSITIVITIES In terms of sensitivity, the covered bonds' 'AA' rating would be vulnerable to a downgrade if DZ Bank's IDR was downgraded by one notch to 'A' or below. 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 shortly be available at Contacts: Primary Analyst Oliver Issl Associate Director +49 69 768076 122 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 768076 261 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email: Additional information is available at Applicable criteria, 'Covered Bonds Rating Criteria', dated 08 August 2014, 'Asset Analysis Criteria for Covered Bonds of European Public Entities', dated 30 January 2013, and '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 Asset Analysis Criteria for Covered Bonds of European Public Entities here Covered Bonds Rating Criteria – Public Sector Liquidity and Refinancing Stress Addendum 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.

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