Credit Opinion: Bausparkasse Mainz AG

Transcription

1 Credit Opinion: Bausparkasse Mainz AG Global Credit Research - 23 Mar 2015 Mainz, Germany Ratings Category Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Moody's Rating Rating(s) Under Review *Baa1/*P-2 baa1 baa1 * Rating(s) within this class was/were placed on review on March 17, 2015 Contacts Analyst Phone Bernhard Held/Frankfurt am Main Swen Metzler/Frankfurt am Main Carola Schuler/Frankfurt am Main Christina Gerner/Frankfurt am Main Key Indicators Bausparkasse Mainz AG (Unconsolidated Financials)[1] [2]12-13 [2]12-12 [2]12-11 [2]12-10 [2]12-09 Avg. Total Assets (EUR million) 2, , , , ,477.7 [3]-0.4 Tangible Common Equity (EUR million) Total Assets (USD million) 3, , , , ,554.8 [3]-1.4 [3]1.1 Tangible Common Equity (USD million) [3]0.0 Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) [4]2.0 [5]9.6 Problem Loans / (Tangible Common Reserve) (%) Equity + Loan Loss [4]31.2 Net Interest Margin (%) PPI / Average RWA (%) [4]1.3 [5]0.9 [4]0.0 [4]73.9 Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) [4]23.0 Liquid Banking Assets / Tangible Banking Assets (%) [4]19.6 Gross Loans / Total Deposits (%) [4]116.5 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel II; LOCAL GAAP [3] Compound Annual Growth Rate based on LOCAL GAAP reporting periods [4] LOCAL GAAP reporting periods have been used for average calculation [5] Basel II & LOCAL GAAP reporting periods have been used for average calculation

2 Opinion SUMMARY RATING RATIONALE On 17 March, we placed under review for upgrade Bausparkasse Mainz AG's (BKM) Baa1/Prime-2 long- and short-term deposit ratings. The review for upgrade was prompted by changes arising from the implementation of our new methodology for rating banks globally, which is positive for BKM's deposit ratings. This positive effect stems from the introduction of our advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes across the liability structure if the bank enters resolution. We expect BKM's Baa1 deposit ratings to be affirmed although a two-notch upgrade cannot be ruled out, depending on the degree of loss-givenfailure. BKM's standalone baa1 BCA remains unchanged under the new rating methodology and reflects: (1) BKM's good capital ratios which are conservatively calculated under the standard approach; (2) its good funding and liquidity management framework; and (3) its highly collateralised and granular loan book, predominantly invested in German retail residential mortgages. However, we observe an increased likelihood for negative implications of the protracted low interest-rate environment on BKM's earnings and related pressures on its narrow business model. BKM's rating are further constrained by (1) the bank's business model being essentially restricted to a single core product; and (2) a potential rise in risk charges under an adverse economic scenario, which could exert pressure on BKM's capital adequacy. BKM's RATINGS ARE SUPPORTED BY ITS MACRO PROFILE OF STRONG+ German banks benefit from operating in an environment with very high economic, institutional and government financial strength and very low susceptibility to event risk. Low and declining private-sector debt and a stable house price cycle support credit conditions. Funding conditions benefit from a strong domestic deposit base and good wholesale market access. However, operating conditions for the German banking system are constrained by high fragmentation in an over-saturated market, low fee income generation and intensifying competition for domestic business. Close to four-fifths of BKM's assets are in Germany and the remainder is predominantly invested in the Euro area, resulting in a macro score of `Strong+' (S+), somewhat below the Very Strong- (VS-) assessment for Germany. Rating Drivers - Profitability expected to remain subdued - Capital ratios are good in light of the conservative basis used for their calculation - Sound asset quality given highly granular and collateralised loan book - Adequate liquidity in light of diversified and less confidence-sensitive funding profile Rating Outlook BKM's long-term and short-term deposit ratings are on review for upgrade. Our advanced LGF analysis on BKM's deposits was not conclusive and led us to place the long-term deposit rating on review for upgrade. The review will focus on the liability structure, in particular the amount of junior deposits and senior long-term debt outstanding and the amount of debt subordinated to it. What Could Change the Rating - Up The upward pressure on the long-term ratings, as indicated by the review, is driven by positive effects from our LGF analysis - which may provide up to two notches of rating uplift for the deposit rating. We see limited upside potential for BKM's standalone BCA. Any upward pressure on the BCA would be conditional on a material strengthening of the group's capital volume, a significant improvement of the bank's profitability and strategic measures to offset challenges for the business model that relate to a prolonged low interest rate

3 environment. What Could Change the Rating - Down As indicated by the review, we do not expect downward pressure on BKM's long-term deposit rating at this stage. BKM's BCA could be lowered as a result of a weakening of its financial profile, in particular if heavier loan losses, persistently low interest-rates and/or realised losses on its securities portfolio exert additional pressure on BKM's low profitability, resulting in undue strain on capital. The BCA would also come under downward pressure if BKM's ability to earn its cost of capital remains constrained. DETAILED RATING CONSIDERATIONS PROFITABILITY EXPECTED TO REMAIN SUBDUED The provisions of the special banking act for German building and loan associations (Bausparkassengesetz) narrowly delimit the allowed business activities of BKM; we therefore classify BKM as a monoline institution that is vulnerable to potential changes in market dynamics which - in an adverse scenario - could be sudden and unforeseen with no offsetting earnings stream. The classification as a monoline entity leads to a full notch qualitative deduction from BKM's BCA in our scorecard. The low interest rate environment has accentuated the mismatch between BKM's sizeable Bauspar-deposit base and its opportunities to lend to Bauspar-clients. In our view, this exposes the Bausparkassen sector and BKM to additional interest rate margin pressure and asset-liability management (ALM) risks that bear significant earnings risks in a prolonged low interest rate environment. As a result, we assign a Profitability score of only caa1 to BKM, one notch below the score suggested by our scorecard. We also lower BKM's Asset Risk score by one notch, to reflect the bank's sensitivity to interest rate risks. BKM's earnings generation is poor, reducing its ability to strengthen and expand its existing franchise, and to withstand the negative impact of competitive challenges and the risks intrinsic to its business model. BKM's funding mix is less burdened than the overall Bausparkassen-sector by legacy high-coupon Bauspar deposits. However, BKM's profitability has been under pressure from costly interest-rate hedges, which as of year-end 2013 had a negative market value of EUR41 million. In addition, BKM has had to adjust downward interest rate assumptions used for estimating its pension gap - reported to be EUR11.1 million as of year-end and client-behaviour driven provisioning for interest rate bonus payments and closure fee reimbursements. BKM reported a pre-tax profit of EUR2.6 million in 2013, up from EUR1.5 million in 2012, and, in a recent press interview, its CEO pre-announced zero net income for The bank has a relatively high cost base given its small size and lack of economies of scale as displayed by its cost-to-income ratio of 78.0% in 2013 (2012: 79.6%). In 2013, BKM's net interest income and fee and commission income remained close to the subdued levels of 2012 because interest-rate risk hedging costs continued to weigh on net interest income, and because of the lack of recovery in customer demand for drawing loans out of existing contracts at high loan interest rates. We note positively that BKM's new mortgage savings and loan tariff introduced in March 2013 (which offers customers more attractive loan rates) has been well received by clients, leading to increased new contract sales in CAPITAL RATIOS ARE GOOD IN LIGHT OF THE CONSERVATIVE BASIS USED FOR THEIR CALCULATION BKM's improved Common Equity Tier 1 (CET1) ratio of 12.6% as of September 2014 (10.2% under Basel II as of year-end 2013) benefits from the transition to Basel III. Under the standard approach employed by BKM to measure its risk-weighted assets (RWAs), the risk weight assigned to mortgage loans declined to 35% from 50% under Basel II. Given the high level of collateralisation in BKM's loan book, we estimate RWAs to be significantly lower if BKM decided to apply the internal rating-based advanced (IRBA) approach. We reflect the improvement in capital ratios during 2014 in a four notch lift to the historic Capital Score to a3. Because of weak internal capital generation as result of BKM's poor profitability, we expect the bank's capital volume to remain rather stable over the coming years, thereby limiting BKM's growth potential when assuming unchanged leverage. Nevertheless, BKM's capitalisation levels are mitigated by the institution's moderate risk profile because of its focus on highly granular residential real-estate lending. In contrast to the risk-based capital ratios, BKM's leverage ratio (defined as Tier 1 capital as a proportion of total assets) stood at a satisfactory 4.7% in 2013.

4 SOUND ASSET QUALITY GIVEN HIGHLY GRANULAR AND COLLATERALISED LOAN BOOK The credit risk of BKM's loan book is low, as reflected by the institution's focus on residential mortgage lending (accounting for 76% of total assets) and the inherent high portfolio granularity. In addition, risks to asset quality are mitigated by the fact that borrowers have to prove their payment discipline by (1) building a deposit base with BKM before being granted the loan; or (2) by building such deposits at a speed above average mortgage loan amortisation schedules during the bridge financing period. For loans subject to the Bausparkassengesetz, the maximum loan-to-value (LTV) ratio is 80%. Traditional mortgage loans sourced from Bauspar contracts only accounted for 10% of BKM's total customer loans as of year-end With bridge loans (mortgage loans granted outside of Bauspar arrangements) accounting for the bulk of client lending, 98% of the building society's loan book (which accounts for 61% of its total assets) benefits from collateralisation or guarantees, indicating the low-risk nature of BKM's granular underlying mortgage lending business. Loans subject to specific loan loss reserves accounted for 2.2% as of year-end 2013, up from 1.7% as of yearend 2012 as the bank registered an increase in impairments on loans made to individuals. The reported problem loan metric is low compared with banking peers in Germany; however, we note that the published problem loans under local GAAP (the German Commercial Code or HGB) may understate downside risk as they do include only amounts where loan loss provisions have been built (`past due and impaired'). Absent of loan growth, BKM invested excess liquidity in a securities portfolio representing a significant EUR530 million or 22% of total assets as of year-end The portfolio mostly comprises highly rated financial institutions, corporate exposures and euro-area sovereigns, within the conservative investment limits set by the Bausparkassengesetz and by BKM's investment policy. ADEQUATE LIQUIDITY IN LIGHT OF DIVERSIFIED AND LESS CONFIDENCE-SENSITIVE FUNDING PROFILE Over the past years, BKM was successful in building up a retail-based funding franchise by offering moneymarket and term-deposits to private customers at competitive rates via the Internet. Although we regard these deposits as inherently more confidence-sensitive and thus less "sticky" (stable) than traditional retail deposits, we highlight that the retail deposit base now represents EUR1.8 billion or 72% of total assets as of year-end 2013 and has significantly diversified BKM's previously wholesale-dominated funding profile. In turn, the bank's funding dependence on fixed-rate Bauspar-deposits is considerably lower-than-average for the sector. In the low interest rate environment, this gives BKM some flexibility to maintain its net interest margin at adequate levels compared to other Bausparkassen that rely more heavily on traditional Bauspar-deposit funding. In addition, BKM exhibits increased volume flexibility compared to its direct competitors as result of the shorterterm nature of money-market and term-deposits. Interbank financing accounts for EUR450 million or 18% of total assets. Although interbank funding is more creditsensitive, particularly as it is largely sourced via brokers, we view favourably that it is largely long term, relates to promissory notes (Schuldscheindarlehen) primarily sourced from the German savings and co-operative banks sector, and also encompasses minor funding sources related to promotional lending. In addition, BKM's securities portfolio contains sufficient central bank eligible assets to counter unexpected liquidity outflows. Thus, we regard BKM's overall liquidity profile as adequate. Notching Considerations LOSS GIVEN FAILURE BKM is subject to the BRRD, which we consider to be an Operational Resolution Regime. We assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured debt. These ratios are in line with our standard assumptions. Our LGF analysis, based on disclosures of the bank's 2013 annual report, indicates a moderate loss-given-failure for deposits, leading us to position its Preliminary Rating Assessment (PRA) in line with the adjusted BCA. However, we would anticipate additional disclosure by the bank around the composition, seniority and maturity profile of its interbank funding to lead to some re-classification of liabilities into the senior unsecured debt category within our LGF analysis. This reclassification may lead to a sizeable reduction of loss-given-failure for BKM's deposits, therefore when closing the review, we might alternatively raise BKM's PRA by up to two notches.

5 GOVERNMENT SUPPORT We expect that our low systemic support probability assumption for BKM will remain unchanged, reflecting BKM's small size relative to the German banking system and its limited degree of systemic interconnectedness. ABOUT MOODY'S BANK RATINGS 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, a 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. Rating Factors Bausparkasse Mainz AG Macro Factors Weighted Macro Profile Strong + Financial Profile Factor Historic Ratio Macro Adjusted Score Solvency Asset Risk Problem Loans / Gross Loans Credit Trend Assigned Score 2.2% a2 a3 Interest rate risk Key driver #1 Key driver #2 Capital TCE / RWA 9.8% ba1 a3 Risk-weighted capitalisation Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets Combined Liquidity Score 0.0% b3 caa1 Earnings quality baa3 baa2 18.5% a3 a3 22.4% baa1 baa1 a3 a3 Financial Profile baa1 Qualitative Adjustments Adjustment Business Diversification -1 Opacity and Complexity 0 Corporate Behavior 0

6 Total Qualitative Adjustments Sovereign or Affiliate constraint Scorecard Calculated BCA range -1 Aaa baa1 - baa3 Assigned BCA baa1 Affiliate Support notching 0 Adjusted BCA baa1 Instrument Class Loss Given Failure notching Additional notching Preliminary Rating Assessment Government Support notching Local Currency rating Deposits Baa1 RUR Possible Upgrade Foreign Currency rating Baa1 RUR Possible Upgrade 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 Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL

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