DBRS Comments on WestLB’s H1 2009 Results – Senior at A (high), Stable

DBRS has today commented that the ratings for WestLB AG (WestLB or the Bank), including the Bank’s Long-Term Debt & Deposit ratings of A (high) are unaffected by its H1 2009 results. The trend on all ratings remains Stable.

For the first half of 2009, WestLB reported pre-tax earnings of EUR 302 million. Importantly, excluding non-recurring items, the half year results illustrated an improvement in operating performance, as the prior-year result was boosted by a non-recurring pretax gain of EUR 962 million from an asset transfer (Phoenix transaction). Underlying pretax profit for H1 2009, which excludes combined special items of a negative EUR 12 million, was EUR 314 million, which compares favourably to negative EUR 305 million in the year-ago period, excluding the Phoenix gain. Special items in H1 2009 included losses from the sale of private banking unit Weberbank, mark-to-market losses on bonds and losses from measurement mismatches under IAS 39. These negative effects were almost fully offset by gains on WestLB’s own liabilities.

The results were enhanced by a 38% (year on year) increase in net interest income, as WestLB’s debt capital markets business benefited from both customer business growth and the favourable money market conditions, particularly in the first quarter. The deepening distribution partnership with savings banks in WestLB’s home region resulted in rising sales of structured interest rate products in H1 2009. WestLB’s consumer lending unit Readybank wrote 88% more new business, benefiting from distribution partnerships with savings banks and auto dealers. However, low interest rates caused losses in transaction banking and the deconsolidation loss from the Weberbank sale also weighed on earnings.

Further indicating progress with its restructuring, administrative expenses declined 24% year-over-year, reflecting ongoing personnel reduction and other cost-saving measures. DBRS recognises the Bank’s progress towards rebuilding its weakened earnings generation ability; however, its risk profile remains elevated. The weakening economic environment continues to pressure credit quality in WestLB’s loan portfolio. Accordingly, the impairment charge of credit losses increased to EUR 368 million. Looking forward, DBRS expects that credit cost will remain at elevated levels, given the stage in the economic cycle.

The Bank continues to execute against its restructuring plan that targets a reduction in total assets by approximately 50% by 31 March 2011, compared to year-end 2007. WestLB’s balance sheet declined by 12% or EUR 34 billion in H1 2009 to EUR 255 billion, mainly due to lower market values of derivative assets, less reverse repos, interbank loans, and somewhat lower customer loans, as WestLB slowed down selected new business volumes. Further, WestLB continues to reduce non-strategic activities in H1 2009, closing several international office locations and divesting its private banking unit Weberbank.

WestLB’s core capital (tier 1) ratio declined to 5.7% at 30 June 2009, down from 5.9% at 31 March 2009 and 6.4% at year-end 2008. The decrease was predominantly the result of capital effects. The capital deduction for allowances for specific risks formed during the year and the shortfall (excess of expected loss over allowances for specific risks) both played a role. Risk-weighted assets (RWAs) increased by EUR 1.7 billion to EUR 90.2 billion, owed to rating drifts in the securitisation business which more than offset the slight decrease in RWAs in the non-securitisation business attributable to currency effects, the reduction in assets and increase in the number of allowances.

To assist in countering the deteriorating capital position, the Bank received EUR 4 billion of additional risk guarantees from its owners in June 2009. DBRS views this as demonstration of the willingness of WestLB’s owners to provide support. Still, DBRS expects continuing deterioration in parts of the Bank’s loan and certain parts of its securities portfolio to further weaken the Bank’s capital position. WestLB’s announced restructuring plans will provide a level of capital relief by reducing risk-weighted assets.

WestLB’s liquidity continues to benefit from its access to relatively stable funding from clients, German institutions and savings banks and their customers. As of 30 June 2009, the Bank had raised EUR 13 billion in long-term funding through private placements, including EUR 10.3 billion in unsecured funding. This amount exceeded the Bank’s total funding target for 2009. While DBRS notes positively that WestLB has remained funded without government guarantees, the Bank’s focus on core investors somewhat limits the diversity of its funding base.

WestLB’s ratings and the Stable trend continue to be based on DBRS’s floor ratings of A (high) / R-1 (middle) for the members of the joint liability scheme of Sparkassen-Finanzgruppe, to which the Bank belongs. The ratings also reflect the support from WestLB’s owners, primarily the German state of North Rhine Westphalia and two regional savings banks associations. While not expected, indications that the willingness of WestLB’s owners to support the Bank is eroding could cause significant downward ratings pressure.

Note:
All figures are in Euros unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.