DBRS Confirms Landesbank Berlin’s Ratings – Senior at A (high), Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings for Landesbank Berlin AG (LBB AG), including its Issuer & Senior Long-Term Debt rating of A (high) and its Short-Term Instruments rating of R-1 (middle). The trend on all ratings is Stable.

DBRS’s ratings for LBB AG are based on its ownership of the German savings banks and on DBRS’s floor rating for all members of the joint liability scheme of Sparkassen-Finanzgruppe. In DBRS’s view, LBB AG has strategic importance for the savings banks, which is underpinned by the Group’s growing joint business with its owners. The Issuer & Senior Long-Term Debt rating of A (high) and the Short-Term Instruments rating of R-1 (middle) consider DBRS’s view that, in a stress scenario, support would be made available to LBB AG from its owners, the German savings banks, and from the joint liability scheme of Sparkassen-Finanzgruppe, to which LBB AG belongs. It is important to note that LBB AG has not needed or taken any support throughout the 2007-1Q12 period.

DBRS maintains the intrinsic rating at BBB (high), which considers the stand-alone financial profile of its parent, Landesbank Berlin Holding AG (LBB or the Group), its strong regional banking franchise, reliable earnings generation ability, and stable liquidity profile. DBRS recognises the positive momentum in the business that continues to support the intrinsic rating. These strengths are partially offset by several factors, including the volatility and risk inherent in LBB’s capital markets and real estate finance businesses. In addition, DBRS views LBB’s capital resources as limited. LBB is currently taking steps to improve the capital ratio, mainly by a targeted EUR 750 million reduction of RWA by year end 2014. In DBRS’s view, further Basel III adjustments may require actions over and above current capital improvement measures planned by LBB.

LBB has a solid, diverse franchise comprising regional retail and corporate banking, real estate financing and capital markets activities. The Group’s market share in primary current accounts in Berlin has remained above 40% for many years and this strength underscores its leading position in its core region of Berlin Brandenburg. LBB is also a market leader for credit cards in Germany. Among corporates, LBB has a strong market reach with 37% penetration with SME customers in its home market. It also ranks among the top three leading providers of commercial real estate finance in Germany.

LBB’s earnings capacity has allowed the Group to absorb the negative impact of securities valuation from financial markets and the Eurozone crisis. The relative stability of earnings from its customer driven businesses have also helped the Group weather higher levels of loan loss allowances during past recessionary environments in Germany. Although bottom line results in 2011 have been severely impacted by write downs (most notably Greece), core earnings from customer driven activities in retail and corporate banking have remained substantial. LBB reported a net pre-tax profit of EUR 41 million for 2011 despite significant one-off charges. On an after tax basis, the Group reported a small loss for the period due to the reversal of tax loss carry-forwards. Pre-tax earnings for the first quarter of 2012 were reported at EUR 84 million. DBRS views the underlying earnings capacity from LBB’s retail and corporate businesses as reliable, yet the volatile results from capital market activities help to underscore the potential weakness in overall performance.

LBB’s strategy to reduce risks from capital markets activities in the future is viewed positively by DBRS. The Group is also successfully strengthening its retail and regional corporate banking franchises via improved integration and support of the savings banks. Key has been the establishment of the consumer finance platform S-Kreditpartner in June 2011, which has thus far proven successful via the participation of 260 German savings banks. Given the Group’s ability to weather the market disruption of 2011, DBRS continues to view LBB as well positioned to succeed in further growing its customer driven activities.

Although LBB is dependent upon wholesale funding, the Group has a stable liquidity and funding profile which is centered on the Group’s strong regional deposit franchise. In addition to retail deposits, the funding provided by its savings banks owners is complemented by a meaningful portion of more stable covered bond (Pfandbriefe) funding. Overall, LBB has access to a diverse menu of funding instruments, including medium-term notes, structured notes, commercial paper and promissory note loans. The Group has maintained access to wholesale funding throughout the 2007-2012 period without the need for government guarantees.

At the Group level, LBB reported a Tier 1 ratio of 10.31% as of 1Q12. Nonetheless, DBRS continues to view capital resources as limited, particularly in the current environment of rising market and regulatory capital requirements. LBB is taking steps to improve the overall quality of its capital via the planned full Basel III conversion of its silent participations, as well as the on-going amortisation of goodwill and a targeted EUR 750 million reduction in RWA. DBRS views improvement in the level and quality of capital as a key factor towards maintaining LBB’s intrinsic rating.

The trend on all ratings is Stable, reflecting the Stable trend on the floor rating for members of the joint liability scheme of Sparkassen-Finanzgruppe. Accordingly, a weakening of the intrinsic rating would not result in a concurrent downgrade of the final rating, assuming DBRS’s view on support remains unchanged. Conversely, significant improvement in the intrinsic rating could lead to a final rating above the floor level.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include publicly available company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Peter Burbank
Rating Committee chair: Alan G. Reid
Initial Rating Date: 22 January 2007
Most Recent Rating Update: 23 February 2011

For additional information on this rating, please refer to the linking document under Related Research.