May 19, 2015 / 3:41 PM / 4 years ago

Fitch Downgrades Aareal Bank AG to 'BBB+' on Support Revision; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, May 19 (Fitch) Fitch Ratings has downgraded Aareal Bank AG's (Aareal) Long-term Issuer Default Rating (IDR) and senior debt ratings to 'BBB+' from 'A-' and its Short-term IDR and debt ratings to 'F2' from 'F1'. The Outlook on the Long-term IDR is Stable. Its Viability Rating (VR) has been affirmed at 'bbb+'. A full list of rating actions is available at the end of this rating action commentary. The rating actions are in conjunction with Fitch's review of sovereign support for banks globally, which the agency announced in March 2014. In line with its expectations announced in March last year and communicated regularly since then, Fitch believes legislative, regulatory and policy initiatives have substantially reduced the likelihood of sovereign support for US, Swiss and European Union commercial banks. As a result, Fitch believes that, in line with its Support Rating (SR) definition of '5', extraordinary external support, while possible, can no longer be relied upon for Aareal. We have, therefore, downgraded its SR to '5' from '1' and revised its Support Rating Floor (SRF) to 'No Floor' from 'A-'. As a result, Aareal's Long-term IDR is now driven by its standalone creditworthiness as expressed in its VR. KEY RATING DRIVERS AND SENSITIVITIES - IDRs, VR AND SENIOR DEBT RATING Aareal's IDRs and senior debt rating are driven by its VR and are therefore sensitive to the same drivers as the VR. Aareal's VR reflects the bank's resilient performance and continuously strengthening capitalisation, which already comfortably fulfils the fully-loaded requirements under Basel III. We view management's public commitment to maintaining comfortable capital buffers (at least 12.25% Tier 1 ratio and 20% total capital ratios on a fully-loaded basis) as credible despite the resumption of dividend payments following the repayment in 4Q14 of the state hybrid capital. Fitch considers Aareal the strongest among rated German specialised CRE lenders, and Aareal is the sole member of the peer group that did not rely on institutional or state support or did not need to restructure or amend its business model during the global financial crisis. An upgrade of Aareal's VR is unlikely as we believe that its monoline business model focusing on non-granular, wholesale and cyclical assets are not commensurate with the 'a' category. Downward pressure on the VR could arise if it emerges that Aareal has materially overestimated the net gain or misjudged the risk from its Westdeutsche Immobilienbank AG (WestImmo, A-/F1; on RWN) acquisition, which it intends to close later this year. In the medium term, Aareal's VR will remain primarily vulnerable to asset quality deterioration or a significant increase of funding costs. Fitch views the latter as highly unlikely in the short term in light of the quantitative easing measures recently initiated by the ECB and from which covered bond issuers should continue to benefit. Moreover, a reversal of the current benign CRE market trend seems unlikely in 2015, and Aareal is only moderately exposed to the pockets of risks that are gradually building up in the German residential real estate market. Aareal announced in April 2015 that it will transfer by end-1H15 Corealcredit Bank AG's (BBB+/Stable/F2) banking operations into the group's parent entity as a branch while the legal entity Corealcredit will remain a subsidiary without operating activities. We expect that the profit-and-loss transfer and control agreement between Aareal and Corealcredit will be unaffected. Fitch equalises Aareal's VR with the Long-term IDR despite significant layers of subordinated debt. We have not given any uplift to Aareal's Long-term IDR relative to its VR because the bank's Long-term IDR would not achieve the higher level if Aareal's junior debt buffer was in the form of Fitch Core Capital (FCC) rather than debt. This is primarily because we believe that the bank's company profile, as a largely wholesale-funded, monoline CRE lender, constrains its VR at 'bbb+'. KEY RATING DRIVERS AND SENSITIVITIES - SR AND SRF The SR and SRF reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that Aareal becomes non-viable. In Fitch's view, the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) are now sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. In the EU, BRRD has been effective in member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Germany has fully applied BRRD, including the bail-in tool, from 1 January 2015. Any upgrade to Aareal's SR and upward revision to its SRF would be contingent on a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND HYBRID SECURITIES Aareal's lower Tier 2 subordinated notes are notched down once from its VR to reflect their higher loss severity relative to senior debt. The legacy, non-Basel III compliant hybrid securities issued by Capital Funding GmbH and Aareal Capital Funding LLC (Delaware), are notched down four times from Aareal's VR (two notches for high loss severity risk and two notches for high non-performance risk relative to that captured in the VR) to reflect their distributable profit trigger or annual profit trigger combined with a regulatory capital ratio trigger. The Basel III-compliant additional Tier 1 (AT1) hybrid securities are rated five notches below its VR, ie twice for loss severity to reflect their write-down on breach of their 7% trigger, and three times for non-performance risk. The ratings of the lower Tier 2 subordinated notes and hybrid instruments are primarily sensitive to changes to Aareal's VR. The rating actions are as follows: Aareal Bank AG: Long-term IDR: downgraded to 'BBB+' from 'A-'; Outlook Stable Short-term IDR: downgraded to 'F2' from 'F1' Viability Rating: affirmed at 'bbb+' Support Rating: downgraded to '5' from '1' Support Rating Floor: revised to 'No Floor' from 'A-' Debt issuance programme: downgraded to 'BBB+'/'F2' from 'A-'/'F1' Senior unsecured notes: downgraded to 'BBB+' from 'A-' Subordinated debt: affirmed at 'BBB' Capital Funding GmbH (DE0007070088): affirmed at 'BB' Aareal Capital Funding LLC (Delaware) (XS0138973010): affirmed at 'BB' Additional Tier 1 securities (DE000A1TNDK2): affirmed at 'BB-' Contact: Primary Analyst Patrick Rioual Director +49 69 76 80 76 123 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Sebastian Schrimpf Analyst +49 69 76 80 76 136 Committee Chairperson Christian Scarafia Senior Director +44 203 530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, Global Bank Rating Criteria, 20 March 2015, are available on www.fitchratings.com. Applicable Criteria and Related Research: Global Bank Rating 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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