LfA Foerderbank Bayern

Transcription

1 CREDIT OPINION LfA Foerderbank Bayern Semiannual update Update Summary rating rationale RATINGS LfA Foerderbank Bayern Domicile Germany Long Term Debt Aaa Type Senior Unsecured Dom Curr Outlook Stable Long Term Deposit Aaa 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 Goetz Thurm, CFA VP-Senior Analyst goetz.thurm@moodys.com Alexander Hendricks, CFA Associate Managing Director - Banking alexander.hendricks@moodys.com Carola Schuler Managing Director Banking carola.schuler@moodys.com We assign Aaa/P-1 deposit ratings and a Aaa debt rating to LfA Foerderbank Bayern (LfA), a development bank of the German Federal State of Bavaria (Bavaria, Aaa stable1). The outlook on the long-term debt and deposit ratings is stable. The ratings are based on the guarantee framework provided by Bavaria, which explicitly and unconditionally guarantees LfA's liabilities. As such, the bank's ratings qualify for a credit substitution approach, which is based on a full risk transfer to the guarantor. We recognise LfA's (1) important role as Bavaria's public development bank focused on the economic development of the region; (2) stable, but modest, core operating performance; and (3) conservative risk profile, supported by adequate capitalisation and asset quality. However, given the credit substitution, the bank's fundamentals have no bearing on our ratings. Exhibit 1 Key financial ratios LfA 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 86% 84% 82% 80% 78% 76% 4.0% 17.6% Asset Risk: Problem Loans/ Gross Loans Capital: TCE/Risk-Weighted Assets 0.5% 77.6% 85.2% Profitability: Net Income/Tangible Assets Funding Structure: Market Funds/TBA Liquid Resources: Liquid Banking Assets/TBA 74% 72% Solvency Factors (LHS) Note: Key Financial Ratios are for information only Source: Moody's Financial Metrics Liquidity Factors (RHS)

2 Credit strengths Ownership support via extensive guarantee framework Adequate regulatory loss-absorbing capacity Low liquidity risk, based on good market access and fallback options Role as Bavaria's economic development bank, which defines its franchise Credit challenges Maintaining high capital ratios despite changes in the regulatory framework Earnings pressure from low-yield environment Rating outlook The outlook on LfA's long-term ratings remains stable, reflecting the stable outlook on the bank's owner and guarantor, Bavaria. Factors that could lead to an upgrade LfA's ratings are at the highest level and therefore cannot be upgraded. Factors that could lead to a downgrade Negative pressure could be exerted on the ratings if (1) the credit profile of the bank's guarantor, Bavaria, weakens; or (2) the strong support mechanisms weaken or become disallowed, which we currently consider to be highly unlikely. Key indicators Exhibit 2 LfA Foerderbank Bayern (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 [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [3] 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 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. 2

3 Detailed rating considerations Strong support and extensive guarantee framework The bank's Aaa/P-1 ratings are based on the following support mechanisms provided by its guarantor Bavaria: (1) Bavaria's explicit and unconditional guarantee for LfA's liabilities, which provides creditors with direct recourse to the obligor; and (2) a strong public sector support arrangement in the form of Anstaltslast (maintenance obligation) and Gewährträgerhaftung (guarantee obligation) provided by Bavaria for the bank's obligations. The Anstaltslast requires the bank's owner to ensure that the entity has sufficient funds to meet all of its obligations on a timely basis. The Gewährträgerhaftung confers to LfA the benefit of unconditional support of the state for all its liabilities, once their claims cannot be satisfied fully out of the bank's assets. However, the explicit and unconditional guarantee provides creditors with direct recourse to the obligor, facilitating timely payment of all obligations. Accordingly, Bavaria explicitly and unconditionally guarantees LfA's liabilities. Similar to other development banks, we consider LfA's franchise value to be incomparable with those of commercially oriented banks. LfA operates under a policy mandate as stipulated by the local law (LfA Act), primarily supporting small and medium-size enterprises (SMEs) and start-ups on behalf of the Free State of Bavaria, and providing measures to improve and strengthen Bavaria's commercial and transport infrastructure, and to enhance its environmental protection. The LfA statutes detail the scope of the bank's business activities, including the use of products to perform its role in development lending to commercial enterprises, as well as its risk diversification and liquidity management activities. Regulated by the German banking supervisory authorities (Bundesbank and BaFin), LfA holds a full banking licence. Recourse to ultimate borrower mitigates high concentration in the banking industry LfA adopts a low-risk approach in its lending operations and typically lends to ultimate borrowers' "house banks", which are primarily small regional institutions from the cooperative or savings banks sectors. These banks, in turn, pass the loans through with the positive effect of assured funding, while taking on the primary credit risk and pledging the claims to LfA. This concept mitigates LfA's significant credit exposure to banks ( 14.1 billion as of the end of 2016) and materially reduces economic capital requirements. In the event of bank failure, LfA would benefit from its priority of claims over receivables from the ultimate borrowers, thereby providing another important layer of recourse to the bank. LfA only occasionally assumes direct credit risks, particularly if guided by regional government objectives, either through guaranteeing risks of house banks, when these institutions are not prepared to assume higher-risk levels, or through participation in syndicated loans at the request of commercial banks. Syndicated loans have gained importance for LfA in recent years, compensating for a decline in promotional loans, which have seen prepayments and lower demand in the low interest rate environment. As part of its special role, LfA's geographical concentration in Bavaria regularly exceeds 90% of total exposures. The relatively broad diversity of direct loans granted to various industry sectors only partially offsets this concentration. LfA has not booked any risk charges after 2010 because of its sound asset quality and the improved economic environment in Bavaria and wider Germany. The bank's conservative provisioning policies allow for a comfortable buffer of existing specific loan-loss provisions, which still stood at 16.5 million as of the end of 2016 (2015: 3 million). Furthermore, LfA is exposed to the credit risks of banks, corporates and the public sector through its 4.8 billion high-quality fixedincome securities portfolio. LfA makes only very limited use of derivatives and is not exposed to lower-rated European sovereigns through its securities holdings. Capital cushion declined sharply, but still at an adequate level LfA is still adequately capitalised in light of its low business risk and financial risk profiles, despite a sharp decline in the bank's transitional Common Equity Tier 1 (CET1) ratio to 17.9% as of the end of 2016 from the 22.9% reported as of the end of The decline in capitalisation levels was driven by a 35% increase in risk-weighted assets (RWA) to 9 billion, as LfA started to utilize public credit ratings for its bank exposures under the standardized approach for credit risk. Beforehand, LfA used the sovereign rating of a bank's domicile as a proxy instead. As a result, LfA now applies risk weights of 50% instead of 20% to more than half of its direct bank lending exposures and risk weights of 20% instead of 10% to two-thirds of its banking exposures in its investment portfolio. In contrast to LfA's CET1 ratio, the bank's leverage ratio, in accordance with the German Banking Act (Kreditwesengesetz), improved somewhat 3

4 from 6.4% as of the end of 2015 to 6.8% as of the end of 2016, which we view as comfortable, given LfA's low-risk profile (the Basel leverage ratio stood at 6.5%). The bank's core capital of 1.6 billion as of the end of 2016 incorporates the bank's regular reserves and special reserves allowable under German local GAAP, the "fund for general banking risks" or 340g reserve. In 2016, LfA again contributed 70 million to this reserve, which represented 540 million of the bank's core capital as of the end of In addition to the bank's core capital, LfA reported a 458 million 340f reserve as of the end of 2016, which provides further substantial loss-absorbing capacity, but was reduced by 30.1 million in 2016 in order to smooth the bank's reported net income million or 25% of the bank's 2016 net income will be retained (in line with the LfA Act), while the remaining 75% or 33.5 million will be distributed to its owner, the Free State of Bavaria. Earnings pressure from the low-yield environment LfA's performance reflects continuity and a low-risk business model, but also the low interest rate environment in recent years. The bank's net revenue is predominantly based on interest income (88%), while fees and commissions from guarantees and other risk assumptions play a minor role. The bank reported a lower net interest income of million for 2016 (2015: million), while fee and commission income also decreased to 15.7 million (2015: 19.7 million), partly reflecting some one-off gains recorded in Negative operating leverage was also a result of an increase in other operating costs related to the bank levy and a recourse claim. Net loan-loss provisions and valuation adjustments on receivables and securities were positive for the sixth consecutive year, though, as LfA reversed earlier write-downs on problem loans and securities of 8.8 million, in addition to the aforementioned 30.1 million in 340f reserve reversals, which are also recorded within loan-loss provisions. Overall, this allowed the bank to report a stable net profit of 44.9 million (2015: 49.6 million). We consider a high level of operating efficiency (46% cost-to-income ratio in 2016) and low credit costs to be essential for the success of the bank's business model, since LfA's public mandate limits its revenue generation to low-margin economic development activities. Given that profit maximisation is not part of the bank's mandate, the level of profitability is commensurate with its low-risk profile and ensures a gradual capital generation in line with LfA's growth. However, we expect the bank's earnings retention capacity to decline somewhat further due to the low interest rate environment, which should be partly offset by cost containment measures, though. Sound and prudent liquidity management LfA is reliant on regular access to market funding, as it predominantly refinances its lending activities from the issuance of bearer bonds, registered bonds and promissory notes. However, the bank's high standing as a quasi-sub-sovereign prime issuer has so far ensured uninterrupted access to domestic and international capital markets at very attractive rates. We expect the favourable conditions to remain broadly unchanged. We consider the risk of market access interruption to be sufficiently mitigated by LfA's portfolio of 4.8 billion liquid fixed-income securities, as well as the bank's ability to access the European Central Bank for repo transactions. LfA's funding strategy also includes federal development resources from Germany's largest development bank, Kreditanstalt für Wiederaufbau (Aaa stable/aaa stable2), which accounts for 5.6 billion of LfA's liabilites. The bank's capital market funding requirements typically exceed 2.0 billion per year and increased to 2.3 billion in 2016 from 2.2 billion in Interbank and European Central Bank facilities cover temporary funding requirements. Funding and lending are closely matched, and the pro forma liquidity coverage ratio and net stable funding ratio both stood well above 100% as of the end of 2016, underpinning LfA's sound liquidity management. Methodology The principal methodology we used in rating LfA was the Government-Related Issuers methodology published in October

5 Ratings Exhibit 3 Category LFA FOERDERBANK BAYERN Outlook Bank Deposits Senior Unsecured -Dom Curr Moody's Rating Stable Aaa/P-1 Aaa Source: Moody's Investors Service 5

6 Endnotes 1 The rating shown is the Free State of Bavaria's long-term issuer rating and outlook 2 The ratings shown are Kreditanstalt für Wiederaufbau's deposit rating and outlook, and senior unsecured rating and outlook 6

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8 8 Contributors CLIENT SERVICES Christina Gerner Associate Analyst Americas Asia Pacific Japan EMEA