Bayerische Landesbank

Transcription

1 CREDIT OPINION Bayerische Landesbank Update following rating upgrade Update Summary Rating Rationale On 1 April, we upgraded Bayerische Landesbank's (BayernLB) deposit ratings to Aa from A1, as well as the bank's senior unsecured ratings to A1 from A; the outlook on BayernLB's ratings is stable. Further, we upgraded BayernLB's baseline credit assessment (BCA) to baa from ba1, its Adjusted BCA to baa1 from baa, and its long-term Counterparty Risk Assessment (CR Assessment) to Aa(cr) from A1(cr). Bayerische Landesbank Domicile Germany Long Term Debt A1 Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Aa Type LT Bank Deposits - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Analyst Contacts Swen Metzler, CFA VP-Senior Analyst swen.metzler@moodys.com Carola Schuler Managing Director Banking carola.schuler@moodys.com BayernLB's baa BCA reflects its (1) good asset quality and low tail risks from remaining noncore exposures; as well as () sound capital ratios. At the same time, BayernLB's standalone BCA is constrained by its (1) low risk-adjusted profitability; and () highly wholesaledependent funding profile. Exhibit 1 Rating Scorecard BayernLB - Key Financial Ratios BayernLB (BCA: baa) Median baa-rated banks 18% 5% 16% 45% 14% 4% 5% 1% % 1% 5% 8% % 6% 4% 15% 1%.% % 16.%.% 44.1%.% Capital: Tangible Common Equity/Risk-Weighted Assets Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets % 5% % Asset Risk: Problem Loans/ Gross Loans Solvency Factors (LHS) Source: Moody's Financial Metrics Liquidity Factors (RHS) Liquidity Factors Alexander Hendricks, CFA Associate Managing Director - Banking alexander.hendricks@moodys.com BayernLB's ratings reflect (1) the bank's baa BCA; () its baa1 Adjusted BCA, incorporating our assessment of a high probability of BayernLB receiving affiliate support from Sparkassen-Finanzgruppe (S-Finanzgruppe; Aa stable, a)1, which results in two notches of rating uplift; () the unchanged results of our Advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes in resolution, providing two notches of rating uplift to BayernLB's senior unsecured debt ratings and three notches of rating uplift to the bank's deposit ratings; and (4) our assumption of moderate government support, resulting in one additional notch of rating uplift for BayernLB's long-term ratings. Solvency Factors RATINGS

2 BayernLB's guaranteed senior and subordinated obligations that qualify for 'grandfathering' under the public law guarantee ('Gewaehrtraegerhaftung') of the Free State of Bavaria (Bavaria, Aaa stable) are rated Aaa. Credit Strengths Good asset quality and low tail risks from non-core exposure Sound capital ratios Credit Challenges Despite de-risking, concentration risks to commercial real estate lending remain Profitability is challenged by low interest rates High wholesale funding dependence and asset encumbrance Rating Outlook BayernLB's long-term ratings carry a stable outlook reflecting our expectation that the bank will be able to sustain its improved credit profile, which will be supported by the benign domestic operating environment over the next 1 to 18 months, despite continued pressures from the persistent low interest-rate environment on the bank's earnings. The outlook on BayernLB's Aaa ratings assigned to the grandfathered long-term debts and deposits is stable. Factors that Could Lead to an Upgrade An upgrade of BayernLB's long-term ratings could be triggered following (1) a two notch upgrade of the bank's standalone BCA which would be needed to trigger upwards pressure on the bank's baa1 adjusted BCA based on our high sector support assumptions; and/or () a reduction of the expected loss severity following a shift in the bank's funding mix, which could result in higher rating uplift for its senior unsecured debt ratings as a result of our LGF analysis; the bank's deposit ratings already benefit from the highest possible uplift under the Advanced LGF analysis and would therefore not benefit from such changes in the bank's funding mix. An upgrade of BayernLB's BCA could develop from: (1) further improvements in asset risk, including a reduction of sector concentrations; () further improvements of its fully-loaded capital ratios and balance sheet leverage; and/or () persistent strengthening of recurring earnings. Factors that Could Lead to a Downgrade A downgrade of BayernLB's long-term ratings could be triggered following: (1) a downgrade of the bank's standalone BCA or its adjusted BCA; and/or () an increase in the expected loss severity following a shift in the bank's funding mix, which could result in less rating uplift for senior debts and deposits as a result of our LGF analysis. A downgrade of BayernLB's BCA and adjusted BCA could develop from: (1) a deterioration of credit fundamentals, in particular from weakening asset quality or capital, leading to a lowering of the bank's baa BCA; and/or () a reduction of our affiliate support assumptions from the S-Finanzgruppe or a weakening of the cross-sector support mechanisms. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

3 Key Indicators Exhibit Bayerische Landesbank (Consolidated Financials) [1] Total Assets (EUR billion) Total Assets (USD billion) Tangible Common Equity (EUR billion) Tangible Common Equity (USD billion) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) Avg [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [] Basel II; IFRS [4] Compound Annual Growth Rate (%). Any interim period amounts presented are assumed to be fiscal year end amounts for calculation purposes [5] Simple average of periods presented [6] Simple average of Basel III periods presented Source: Moody's Financial Metrics Detailed Rating Considerations Good asset quality and low tail risks from non-core exposure but commercial real estate concentrations remain We believe that the overall benign domestic credit environment and the continued wind-down of the bank's non-core exposure supports BayernLB's asset risks. At end6, BayernLB's reported problem loans as a percentage of its gross credit exposure declined to 1.6% from.4% in 15. Further, including the write-off of the bank's remaining impaired claim against Heta Asset Resolution AG (Heta, Carinthian state-guaranteed senior unsecured debt rating Ca stable), BayernLB's risk-weighted assets (RWA) for non-core exposure declined to.6 billion at end6 (15: 4.8 billion), representing 4.% of total RWA. We consider the tail risks from these non-core exposure, which include a mix of different activities, i.e. corporate banking, project finance, real estate, and German public sector lending outside of Bavaria, limited. In addition, BayernLB benefits from provisioning coverage, measured as loan-lossreserves to problem loans, of around 57% at end6, a relatively high numbers compared to its peers. Our assigned Asset Risk score of baa1 captures these risks, yet also includes a negative adjustment for concentration risks that arise from BayernLB's exposure to 46.5 billion commercial real estate (15: 44.5 billion). However, our assessment takes into account that around 9% of these commercial real estate exposure relates to Germany, including billion lending to social housing funding by German municipalities. At end6, around 8% of BayernLB's 58 billion exposure at default related to Germany, while remaining lending activities existed to other European countries (1%) and North America (5%). At 8% and 1%, corporate clients and public sector lending accounted for around half of the bank's credit exposure, followed by financial institutions (1%) and commercial real estate (18%). BayernLB's retail exposure (1%) arises from the banking activities of Deutsche Kreditbank AG (DKB, A1 stable/a stable, baa), its 1% subsidiary based in Berlin. Sound capital ratios BayernLB's financial strength is supported its improved capital ratios. At end6, the bank's fully phased-in Common Equity Tier 1 (CET1) capital ratio, which excludes the remaining 1. billion of state aid it received from the Free State of Bavaria (Aaa stable, the majority owner of the Munich-based Landesbank)4, increased to 1.% from 1.% in 15. The improvement reflects the lowering of BayernLB's risk-weighted assets, which declined to 65. billion from 69.6 billion over the same time, and ample earnings retention for 16. Further, we consider BayernLB's capital buffer of around.% over its expected 19 CET1 requirement of 9.9%, as determined under the Supervisory Review and Evaluation Process (SREP), adequate compared to its risk profile.

4 During 17, we expect a moderate reduction in the bank's capital ratios as a result of organic growth. As a result of the successful reduction of non-core exposure, we believe that the incremental financial flexibility from freeing up further capital is limited. Our assigned baa1 Capital score reflects these observations and also takes into account a negative adjustment for BayernLB's moderate regulatory leverage (measured as CET1 capital compared to tangible assets) of 4.% at end6 (15: 4.%). In April 16, BayernLB repaid 1. billion of silent participations to the Free State of Bavaria. The repayment, which was approved by the European Central Bank, BayernLB's regulatory supervisor, reduced the bank's remaining gross participation capital that the Free State of Bavaria still has in BayernLB to 1. billion from. billion previously. Profitability is challenged by low interest rates BayernLB's low risk-adjusted profitability constrains its credit profile. Because of the bank's high dependence on interest income, we believe that BayernLB faces challenges to its profitability, reflecting the persistent low rate environment. At end6, around 7% of the bank's revenues were generated from net interest income (15: 77%). We estimate that the bank's four core segments can deliver annual after-tax profits between 4 million and 5 million, equivalent to a return on assets of around basis points. This is reflected in our assigned b1 Profitability score. The successful derisking of BayernLB's balance sheet will result in lower earnings volatility, a credit positive. Given DKB's favorable growth trend over the last couple of years, the earnings contributions from its Berlin-based subsidiary have increased to around 4%5 in 16 from around 4% in 15. Given both entities' high dependence on interest income, we believe that BayernLB's consolidated earnings will be increasingly challenged by the low rate environment, in addition to overall cost inflation pressure. However, we believe that this pressure will continue to be mitigated by the benign credit environment in Germany. Excluding minorities, BayernLB reported net income of 545 million in 16 compared with 495 million in 15, benefiting from a reduction of credit provisions that declined to 87 million from 64 million. High wholesale funding dependence and asset encumbrance BayernLB's wholesale-dependent funding profile, in combination with asset encumbrance reflecting covered bonds and pass-through promotional lending, further limits the bank's standalone credit strength. At end6, BayernLB's market funding predominantly consisted of 54. billion in liabilities to banks and 61. billion issued debt, representing around 54% of BayernLB assets (15: 54%). The bank's high market funding dependence is also expressed by its loan-to-deposit ratio of 155%, a small improvement compared with 158% in 15, reflecting deposits growth at its Berlin-based subsidiary DKB. These considerations are captured in our ba Funding score, which positively takes into account BayernLB's access to covered bonds, promotional lending, and sector funds provided by regional savings banks. This is because we believe these funding sources exhibit a higher degree of stability, even in times of stress, compared with traditional wholesale funding, and thus mitigate potential funding challenges. However, our assessment also takes into account our view that deposits generated through DKB are ring-fenced, and are thus not available to fund BayernLB's lending business. BayernLB's liquidity is satisfactory as short-term liquidity gaps from funding mismatches are covered by liquidity buffer. This view is underpinned by a liquidity coverage ratio (LCR) of 16% at end6. However, our assigned baa Liquidity score also reflects the degree of encumbered assets for covered bonds and the pass-through for development loans. BayernLB's funding requirements remain largely unchanged for 17 compared with 15 and 16, at around 7. billion. Because of BayernLB's close proximity to regional savings banks, we expect that the bank is able to place a significant portion of its funding within the sector, but will also benefit from its ability to place a portion via covered bonds. Notching Considerations Affiliate Support BayernLB benefits from S-Finanzgruppe's cross-sector support which reduces the probability of default, as such support would be available to stabilise a distressed member bank, and not just compensate for losses in resolution. Our assumption of high cross-sector support provides two notches of rating uplift, leading to an adjusted BCA of baa1. Loss Given Failure BayernLB is subject to the EU Bank Recovery and Resolution Directive (BRRD), which we consider an Operational Resolution Regime. We apply our advanced Loss Given Failure (LGF) analysis to BayernLB's liabilities, considering the risks faced by the different debt and 4

5 deposit classes across its liability structure at failure. We assume residual tangible common equity of % and losses post-failure of 8% of tangible banking assets, a 5% run-off in junior wholesale deposits and a 5% run-off in preferred deposits. These are in line with our standard assumptions. In line with the new German insolvency legislation that will effectively subordinate senior bonds and notes to deposits in resolution from January 17, we base our calculation on the assumption that deposits are preferred to most senior unsecured debt instruments. For BayernLB's Aa deposits and senior senior unsecured debt instruments, our LGF analysis indicates an extremely low loss-givenfailure, leading to a three-notch uplift from the bank's baa1 adjusted BCA from which these ratings are notched. For BayernLB's A1 senior unsecured debt, our LGF analysis indicates a very low loss-given-failure, leading to a two-notch uplift from its baa1 adjusted BCA from which these ratings are notched. Subordinated and Hybrid Instruments For other junior debt classes, our Advanced LGF analysis indicates a high loss-given-failure, given the limited volume of debt and limited protection from more subordinated instruments and residual equity. However, additional notching applies to BayernLB's junior subordinated debt instruments and preferred securities, reflecting the incremental risks of a missed coupon payment and the timeliness of those payments. BayernLB's junior subordinated debt ('Genussscheine') is rated Baa(hyb), two notches below the bank's baa1 adjusted BCA. The rating reflects the junior subordinated claim in liquidation and cumulative coupon deferral features tied to the breach of a balance sheet loss trigger. BayernLB's perpetual non-cumulative preferred securities (Tier 1 instruments) issued by BayernLB Capital Trust I are rated Ba(hyb). The ratings reflect their deeply subordinated claim in liquidation and non-cumulative coupon deferral features tied to the breach of a balance sheet loss trigger. However, the rating also reflects that these equity capital instruments cannot be voluntarily serviced from capital reserves or retained earnings as long as BayernLB is under EU state aid proceedings ( hybrid ban ). This hybrid ban makes the instruments more comparable to non-cumulative preferred securities with a net loss trigger. This leads to positioning these instruments at the bank's adjusted BCA minus four notches, compared with the typical positioning for non-cumulative preferred securities with a balance sheet loss trigger at adjusted BCA minus three notches. Government Support Given its size on a consolidated basis, we consider S-Finanzgruppe as domestically systemically relevant. We therefore attribute a moderate probability of German government support for all members of the sector, in line with support assumptions for other systemically relevant banking groups in Europe. For BayernLB, this results in one notch of additional government support uplift for its long-term senior unsecured debt and deposit ratings. 5

6 Rating Methodology and Scorecard Factors Exhibit Bayerische Landesbank Macro Factors Weighted Macro Profile Very Strong - Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Solvency Asset Risk Problem Loans / Gross Loans.% a1 baa1 Sector concentration Capital TCE / RWA 16.% aa baa1 Expected trend Profitability Net Income / Tangible Assets.% caa1 b1 Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 44.1% b1 ba Extent of market funding reliance Liquid Resources Liquid Banking Assets / Tangible Banking Assets.% a baa Asset encumbrance a ba1 Balance Sheet in-scope (EUR million) 94,44 65,447 48,41 17,16,69 1,86, ,19 4,69 Key driver # Nominal leverage baa Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Other liabilities Deposits Preferred deposits Junior Deposits Senior senior unsecured bank debt Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Preference shares (bank) Equity Total Tangible Banking Assets 6 1% ba1 baa Aaa baa-ba1 baa baa1 % in-scope 46.%.%.7% 8.% 1.8% 15.6% 1.%.%.%.% 1% at-failure (EUR million) 11,118 58,771 46,9 1,76,69 1,86, ,19 4,69 % at-failure 49.4% 8.7%.5% 6.% 1.8% 15.6% 1.%.%.%.% 1%

7 Debt class Counterparty Risk Assessment Deposits Senior senior unsecured bank debt Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Instrument class Counterparty Risk Assessment Deposits Senior senior unsecured bank debt Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt De jure waterfall De facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe jure De facto notching guidance notching Assessment volume + ordination volume + ordination versus Subordination Subordination BCA 8.1% 8.1% 8.1% 8.1% a1 (cr) 6.% 4.5% 8.1%.1% a1 8.1% 6.% 8.1%.1% a1 6.% 4.5%.1% 4.5% a 4.5%.% 4.5%.% baa.%.%.%.% baa (hyb) Loss Given Failure notching Additional Preliminary Rating Notching Assessment a1 (cr) a1 a1 a baa baa (hyb) Government Support notching Local Currency Rating Aa (cr) Aa Aa A1 Baa Baa (hyb) Foreign Currency Rating -Aa -A1 Baa -- Source: Moody's Financial Metrics About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 7

8 Ratings Exhibit 4 Category BAYERISCHE LANDESBANK Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured Subordinate Jr Subordinate -Dom Curr Commercial Paper Other Short Term -Dom Curr Moody's Rating Stable Aa/P baa baa1 Aa(cr)/P(cr) A1 A1 Baa Baa (hyb) P (P)P DEUTSCHE KREDITBANK AG Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured -Dom Curr Stable A1/P baa baa1 A1(cr)/P(cr) A Source: Moody's Investors Service 8

9 Endnotes 1 The ratings shown are S-Finanzgruppe's corporate family rating and outlook and its baseline credit assessment (BCA). The rating shown is Bavaria's long-term issuer rating and outlook. The ratings shown are DKB's deposit rating and outlook, its senior unsecured debt rating and outlook, and its Baseline Credit Assessment. 4 The rating shown is Bavaria's long-term issuer rating and outlook. 5 We exclude DKB's extra-ordinary pretax profit of 1 million from our calculation. 9

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