June 12, 2014 / 3:11 PM / in 4 years

Fitch Affirms LBBW at 'A+'/Negative; Upgrades VR to 'bbb'

(The following statement was released by the rating agency) FRANKFURT/LONDON, June 12 (Fitch) Fitch Ratings has affirmed Landesbank Baden Wuerttemberg's (LBBW) Long-term Issuer Default Ratings (IDR) at 'A+' and 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 Landesbanken 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 Wuerttemberg, Rhineland 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, particularly emanating from the European Commission with regard to bank support, bail-ins and centralised regulatory oversight. It reflects the Bank Recovery and Resolution Directive (BRRD) and Fitch's expectation of further progress on Banking Union during 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 institutional support, instead of ultimate sovereign support. Therefore, LBBW's SRF is likely to be withdrawn by end-1H15. However, Fitch is likely to retain some support from its owners in LBBW's rating and is likely to downgrade LBBW's Long-term IDRs and senior debt ratings by one or two notches. The State of Baden 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 milestones in arriving at its targeted business profile, namely consistent deleveraging and 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 partnership contributions and currency swaps totalling EUR 2.2bn highlights LBBWs role as an important finance partner in the region and its corporate, asset based and 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 the ECB's comprehensive assessment. LBBWs profitability has been improving, albeit from a low level, driven by robust operational performance in its core business. Profitability remains moderate but its potential to improve is better than for other Landesbanken based on its broader franchise. Fitch expects a stable financial performance in 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 factors. LBBW's asset quality improved further by lowering large single exposures, selling exposure in weaker rating classes primarily in the credit investment portfolio, and continued wind-down of southern European debt. These developments 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 source of funding. With the balance sheet shrinking in size, refinancing volumes have 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 capital markets. RATING SENSITIVITIES - VR Focus on customer business has raised LBBW's vulnerability to cyclical 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 increasing its risk profile. KEY RATING DRIVERS AND SENSITIVITIES- SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Following Fitch's rating action on 28 January 2014 to downgrade Landesbanken's lower Tier 2 debt instruments the agency now uses the VR as the anchor rating 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 criteria for rating subordinated debt. LBBW's subordinated debt ratings are sensitive to any change in LBBWs VR as the anchor rating. 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. LBBW Dublin 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: LBBW: 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' Contact: Primary Analyst Roger Schneider Director +49 69 768 076 242 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Michael Dawson-Kropf Senior Director +49 69 76 80 76 Committee Chairperson Alain Branchey Senior Director +331 144 29 91 41 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1003, Email: Elaine.Bailey@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. 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 Hybrid Securities', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria 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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