Muenchener Hypothekenbank eg

Transcription

1 CREDIT OPINION Muenchener Hypothekenbank eg Semiannual Update Update Summary Rating Rationale We assign Aa/P-1 deposit ratings and A1/P-1 senior unsecured debt ratings to Muenchener Hypothekenbank eg (Muenchener Hyp). We further assign a ba Baseline Credit Assessment (BCA), a baa1 adjusted BCA, and an Aa(cr)/P-1(cr) Counterparty Risk (CR) Assessment. Muenchener Hypothekenbank eg Domicile Germany Long Term Debt A1 Type Senior Unsecured Dom 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. Contacts Bernhard Held, CFA VP - Senior Analyst bernhard.held@moodys.com Carola Schuler Managing Director Banking carola.schuler@moodys.com Muenchener Hyp's ba BCA reflects (1) its moderate asset risk, as captured through its low.9% non-performing loan and high collateralisation ratio; () its satisfactory funding profile, which benefits from Muenchener Hyp's embeddedness within the German co-operative banking sector, despite its high market funding reliance. However, the group's dual-line business model and the resulting sector concentration as well as considerable balance-sheet leverage constrain the bank's BCA. Exhibit 1 Scorecard Ratios of Muenchener Hypothekenbank eg Muenchener Hypothekenbank eg (BCA: ba) Median ba-rated banks % 5% 45% 46.5% 5% 4% 4.% 5% % % 15% 5% % 1% 16.1% 5% % 1% 5%.1%.9% 15% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) Source: Moody's Investors Service Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets Liquidity Factors (RHS) Liquidity Factors Alexander Hendricks, CFA Associate Managing Director - Banking alexander.hendricks@moodys.com Muenchener Hyp's ratings incorporate (1) the bank's ba BCA; () our expectation of a very high probability of Muenchener Hyp receiving affiliate support from Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR, unrated), which results in four notches of rating uplift; () the results of our Advanced Loss Given Failure (LGF) analysis, which result in two notches of rating uplift for the bank's debt ratings and three notches of uplift for its deposit ratings; and (4) our "moderate" government support assumption, resulting in one notch of rating uplift for Muenchener Hyp's debt and deposits. Solvency Factors RATINGS

2 Credit Strengths Asset quality is dependent on the development of international commercial real estate (CRE) markets, but the bank's asset base remains supported by the high granularity of its larger residential mortgage portfolio in Germany Strong risk-weighted-asset-based regulatory capital metrics Muenchener Hyp's creditors benefit from the bank's membership in the institutional protection scheme of the German cooperative banking sector, makes sector support in case of need very highly likely. Credit Challenges High leverage levels constrain the impact of capitalisation improvements Weak risk-adjusted profitability and thus very limited ability to generate capital internally High degree of liquid asset encumbrance, despite further improvement in 16 Rating Outlook Muenchener Hyp's ratings carry a stable outlook. The stable outlook reflects our expectation that (1) the risk of bank failure after considering standalone credit profile and sector support will not materially change; and () Muenchener Hyp will maintain its current funding structure. Factors that Could Lead to an Upgrade An upgrade of Muenchener Hyp's BCA may translate into an upgrade of the bank's long-term debt and deposit ratings, if we conclude the "very high" likelihood of cooperative sector support warrants an unchanged four notches of support despite the improvement in the bank's standalone credit profile. Upward pressure on Muenchener Hyp's BCA could result from a combination of (1) a medium-term upward trend of quality and quantity of capital, in particular from a significant and sustainable increase in the bank's Tangible Common Equity (TCE) leverage ratio; () rising and sustained profitability, without compromising underwriting standards or risk appetite; and () a greater diversification of funding tools beyond the current market funding focus or (4) a sustained increase in available unencumbered liquid assets. Material additions to its volume of subordinated instruments would imply higher protection for senior creditors and a lower lossgiven-failure in resolution, which could lead to additional uplift for the senior unsecured debt ratings. The same does not apply to Muenchener Hyp's deposit ratings because, with three notches of rating uplift from the adjusted BCA, these already benefit from the highest possible LGF result. Factors that Could Lead to a Downgrade Muenchener Hyp's ratings may be downgraded if the bank's BCA comes under pressure, if we conclude the "very high" likelihood of cooperative sector support warrants an unchanged four notches of support despite the improvement in the bank's standalone credit profile. Downward pressure could develop on the bank's BCA if (1) the bank's cushion of liquid resources declines significantly below the currently reported level - unless offset by an improvement in encumbrance levels; () the bank over time returns to its historically weaker capital cushions to regulatory minimum levels; or () Muenchener Hyp's asset quality deteriorates, leading to risk provisioning in excess of pre-provision income; or (4) the bank's weighted Macro Profile of Very Strong- were to deteriorate. 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 We could downgrade Muenchener Hyp's A1 long-term debt ratings if the size of Muenchener Hyp's volume of unsecured debt instruments materially decreases relative to its total banking assets. Key Indicators Exhibit Muenchener Hypothekenbank eg (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 (%) CAGR/Avg [1] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [] Basel II; LOCAL GAAP [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics Detailed Rating Considerations Member capital increase has improved the bank's moderate absolute core capital basis Following the confirmation of European authorities that a % leverage ratio will also apply to mortgage lenders, Muenchener Hyp raised additional member capital in the second half of 16, which is regulatorily recognised as Common Equity Tier 1. In our view, Muenchener Hyp's increase in subscribed member capital in the third quarter indicates the bank's willingness to sustainably raise its leverage ratio above the % threshold, which affords stronger structural protection for the bank's creditors. While the bank grows its balance sheet, we will monitor the extent to which the bank continues committed to staying comfortably above the % regulatory minimum ratio that is expected to become binding in January 19. The additional member capital has provided a further boost to Muenchener Hyp's risk-weighted capital ratios, as evidenced by a.9% Common Equity Tier 1 (CET1) ratio as of 1 December 16, up from 17.% as of 1 December 15 and 1.5% as of year-end 14. The marked growth in risk-weighted capital ratios since 14 is (in addition to the sourcing of member capital) also attributable to the extended use of internal models to determine the risk weights of the bank's mortgage portfolio. This intense use of the internal-ratings-based approach (IRBA) which the bank applies for determining credit-risk-related risk-weight assets for more than 8% of its total exposure, may result in a significant decline of the bank's risk-weighted capital ratios if current reform proposals to Basel III calculation approaches, were introduced. An increase in risk-weighted assets would be driven in particular by minimum risk floors for the bank's conservatively underwritten residential mortgages. We believe, however, that under the current proposals the bank would remain well above minimum regulatory requirements, including the European Central Bank-mandated minimum Pillar supervisory review and evaluation process ratio of 7.5% the bank disclosed for year-end 16. In the case of need, we believe Muenchener Hyp to have good and repeatedly demonstrated access to additional member capital from entities affiliated with the German cooperative sector.

4 The bank's asset base remains supported by high portfolio granularity, despite some risk concentrations in international commercial real estate lending We believe that asset quality pressures on Muenchener Hyp's international CRE portfolio and its selected financial institution and sovereign exposures have diminished following pro-active portfolio management and improving market conditions. Nevertheless, the size of these exposures relative to the bank's loss-absorbing capital and the limited earnings generation power in comparison to potential CRE loan loss provision requirements in an economic downturn continue to constitute a challenge for the bank. Since Muenchener Hyp exhibits low revenue and income diversity outside of the residential and commercial mortgage-lending businesses, we deduct one notch from the bank's Financial Profile. The bank's conservative underwriting has translated into a continued improvement in problem loans to 196 million as of 1 December 16 (down from 684 million in 1), also benefitting from positive work-out results in the bank's US CRE portfolio. The bank has successfully reduced exposures related to international CRE, as well as to financial institutions and sovereigns in the euro area periphery. Muenchener Hyp reduced its US CRE exposures to 5 million as of year-end 16, down from 1.6 billion at year-end 1. Overall, non-domestic loans represented % of Muenchener Hyp's mortgage loan book as of 1 December 16. In 16, Muenchener Hyp has been holding its exposure to international CRE loans constant at about 1.7 billion, which is still more than one time the bank's increased Tangible Common Equity (of 1. billion). Muenchener Hyp's international CRE exposures are broadly diversified by country, with loans and commitments in the United Kingdom (UK, Aa1 negative), the Netherlands (Aaa stable) and France (Aa stable) representing the biggest single-country exposures with between million and 4 million allocated to each as of 1 December 16. In line with the overall mortgage portfolio growth pace, Muenchener Hyp has continued to expand its Swiss residential mortgage portfolio which the bank acquires through its partnership with PostFinance (unrated). Against a background of intensified competition and shrinking lending margins in the Swiss mortgage market, Muenchener Hyp reported continued abovemarket growth of its outstanding Swiss mortgage book. Weak risk-adjusted profitability leads to limited ability to generate capital internally The bank's very low profitability and resulting limited internal capital generation capacity - coupled with its limited loss-absorption capacity - remain key constraining factors for its credit profile. The Profitability score of b reflects moderately positive profitability, characterized by currently very low risk costs and by the bank's limited ability to generate pre-provision income and achieve earnings retention. In 16, Muenchener Hyp earned 1.9 million (local GAAP), up from. million in 15, benefitting from higher net interest income and from a windfall recovery under its now disposed of 5 million exposure to Heta Asset Resolution AG (Heta, Ca stable)1. The improved net interest income reflects the bank's strong new business volumes in previous quarters combined with lower interest expenses. In 16, the cost-to-income ratio of Muenchener Hyp remained slightly above 6%, after having significantly improved in 15 from previous years' levels in excess of 7%. The bank's profitability has historically been low, principally reflecting its focus on low-yielding residential mortgage and public-sector lending activities. In addition, the lack of an own distribution franchise forces the bank to pay upfront fees and commissions in order to compensate third parties for their distribution capabilities. We do not expect that this situation will change. 4

5 Very high degree of liquid asset encumbrance, despite further improvement in 16 The majority of Muenchener Hyp's funding is raised through covered bonds ( 5 billion as of December 16) resulting in high cover pool requirements. The bank's regulatory asset encumbrance level remained within a tight range of 78% to 79.% at its quarterly reporting dates in 16, slightly lower than in 15 (77.8% to 8.5%). Our Liquid Resources score of ba1 recognises this development as well as Muenchener Hyp's ability to maintain a Net Stable Funding Ratio of 15% and a Liquidity Coverage Ratio of 5.6% as of year-end 16. Notching Considerations Affiliate Support Based on Muenchener Hyp's key service function for the sector and its majority ownership by the sector's member banks, the bank is highly likely to receive support in case of need. This support materially reduces the probability of default as the co-operative group's cross-sector support mechanism aims to stabilise its members by avoiding any form of loss-participation by creditors, or bail-in. Crosssector support currently provides four notches of rating uplift to Muenchener Hyp's debt and deposit ratings. Loss Given Failure Analysis Muenchener Hyp is subject to the EU Bank Recovery and Resolution Directive, which we consider an Operational Resolution Regime. We therefore apply our advanced LGF analysis, considering the risks faced by the different debt and deposit classes across the liability structure should the bank enter resolution. With one exception, we apply our standard assumptions for the LGF analysis of losses postfailure of 8% of tangible banking assets, a 5% run-off in "junior" wholesale deposits, and a 5% run-off in preferred deposits. In line with the new German insolvency legislation that effectively has subordinated senior bonds and notes to deposits in resolution since January 17, we base our calculation on the assumption that deposits are preferred to most senior unsecured debt instruments. For deposits and senior-senior unsecured debt, our LGF analysis indicates an extremely low loss-given-failure, leading to a three-notch uplift from the bank's baa1 adjusted BCA. For senior unsecured debt, our LGF analysis indicates a very low loss-given-failure, leading to a two-notch uplift from the bank's baa1 adjusted BCA. Government Support Because of its size on a consolidated basis, we consider the group of German co-operative banks to be systemically relevant and attribute a "moderate" probability of German government support for all members of the sector. This is in line with support assumptions for other systemically relevant banking groups in Europe. This results in one notch of government support uplift in the senior debt and deposits ratings of those co-operative banks that are incorporated in Germany, including Muenchener Hyp. 5

6 Rating Methodology and Scorecard Factors Exhibit Muenchener Hypothekenbank eg Macro Factors Weighted Macro Profile Very Strong - Factor 1% Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver # Solvency Asset Risk Problem Loans / Gross Loans.9% aa baa1 Sector concentration Collateral and provisioning coverage Capital TCE / RWA 4.% aa1 ba1 Nominal leverage Risk-weighted capitalisation.1% b b Expected trend Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 46.5% b1 ba Market funding quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets 16.1% baa baa Asset encumbrance 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 a1 ba ba1 Additional liquidity resources ba1 ba Aaa ba1-ba ba -baa1 null 6

7 Debt class Counterparty Risk Assessment Deposits Senior senior unsecured bank debt Senior unsecured bank debt Instrument class Counterparty Risk Assessment Deposits Senior senior unsecured bank debt Senior unsecured 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 vs. subordination subordination Adjusted BCA.4%.4%.4%.4% a1 (cr) 1.1%.5%.4%.9% a1.4% 1.1%.4%.9% a1 1.1%.5%.9%.5% a Loss Given Failure notching Additional Preliminary Rating Notching Assessment a1 (cr) a1 a1 a Government Support notching Local Currency Rating Aa (cr) Aa Aa A1 Foreign Currency Rating -Aa --- 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, 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. Ratings Exhibit 4 Category MUENCHENER HYPOTHEKENBANK EG Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured -Dom Curr Commercial Paper -Dom Curr Other Short Term -Dom Curr Moody's Rating Stable Aa/P-1 ba baa1 Aa(cr)/P-1(cr) A1 P-1 (P)P-1 Source: Moody's Investors Service 7

8 Endnotes 1 The rating shown is Heta's Carinthian state-guaranteed senior unsecured debt rating and outlook 8

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10 Contacts Bernhard Held, CFA VP-Senior Analyst 1 CLIENT SERVICES Mark C Jenkinson Associate Analyst Americas Asia Pacific Japan EMEA