DBRS Comments on DZ BANK’s Preliminary 2009 Results; Senior at AA (low), Trend Negative

DBRS has today commented that the ratings for DZ BANK Deutsche Zentral-Genossenschaftsbank AG (DZ BANK of the Bank), including DZ BANK’s AA (low) Senior Unsecured Long-Term Debt rating, are unaffected by the preliminary 2009 results of DZ BANK Group (DZ Group or the Group). The trend on all long-term ratings remains Negative, while the short-term ratings trend remains Stable.

DZ Group, which includes DZ BANK as the main operating bank, generated net profit of EUR 346 million in 2009, representing a significant improvement from the year-ago period, in which the Bank reported a net loss of EUR 1,166 million. DBRS considers the 2009 performance as demonstrating DZ Group’s solid underlying earnings ability which is a significant factor considered in the ratings. Profit before loan impairment losses and taxes amounted to EUR 1.5 billion in 2009, after a negative EUR 1.0 billion result in the prior year, demonstrating the Group’s solid underlying earnings ability. Importantly, the Group was able to absorb rising loan impairment losses, impairments on its structured credit portfolio, and other negative effects, while still generating solidly positive results.

DZ Group benefited from very strong trading gains in 2009, which partly reflected market-driven reversals of prior impairments on trading assets. This effect is unlikely to recur; however, trading was also bolstered by strong customer-driven business, which is more stable in nature. Customer-related activities such as fixed income products for local cooperative banks and investment certificates for retail customers continued to show solid momentum in the first two months of 2010. DBRS sees this as an illustration of the strength of the overall franchise

Net interest income dropped 17% year-on-year in 2009; however, more than half of the decline was due to negative contributions from the DZ Group’s stake in Austria’s VBAG Group. The remaining exposure to VBAG Group is limited, which reduces the risk of further negative effects. DBRS expects underlying net interest income to remain under pressure in 2010, given the higher cost of funding and the effort to reduce non-core assets. Importantly, customer-driven lending remains strong, with continued growth in DZ Group’s joint lending with local cooperative banks to small- and medium-sized businesses.

While DZ Group’s portfolio of asset-backed securities (ABS) declined by almost 30% since year-end 2007, it remains a key risk exposure at EUR 18.5 billion at year-end 2009. The risks inherent in the ABS portfolio, which sustained further sizeable impairments in 2009, are reflected in the Negative long-term ratings trend. A portion of the ABS book is protected by a risk guarantee from the Protection Scheme, the support mechanism of Germany’s Cooperative Financial Services Network (CFSN) to which DZ Group belongs. DZ Group plans to reduce the risk guarantee from originally EUR 1.2 billion to EUR 760 million. Given the guarantee’s limited size, DBRS would not view the planned reduction as materially changing DZ Group’s risk exposure. DBRS also sees elevated credit risk in the commercial real estate (CRE), leasing and shipping exposures of DZ Group’s subsidiaries, which contributed to the 25% increase in loan loss impairments in 2009.

Positively, DZ Group’s bolstered its capitalisation, through raising equity and hybrid capital, receiving the risk guarantee, retaining earnings and reducing risk-weighted assets. As a result, the Tier 1 capital ratio rose to 9.9% at year-end 2009, up from 7.4% a year earlier. The ratings reflect the strong cohesion and support mechanisms within CFSN.

DBRS views DZ Group as well positioned to manage through the tail end of the credit cycle, given its solid underlying earnings ability, strengthened capital and its close integration into CFSN. Nonetheless, DBRS remains cautious, given the preponderance of external factors and the sustainability of the global economic recovery remains tenuous. Continuing elevated levels of unemployment and a less than robust recovery in Germany could weigh on credit metrics. DBRS remains concerned that the improvement in global capital markets, which bolstered results in 2009, may prove unsustainable, as new risks emerge. Moreover, DBRS sees heightened sovereign risks, as well as uncertainty surrounding the ultimate form and subsequent impact of new regulations as key risks.

Note:
All figures are in Euros unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition; Analytical Background and Methodology for European Co-Operative Banks 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.