DBRS Comments on Landesbank Berlin’s 3Q 2012 Results–Senior at A (high), Stable

DBRS Ratings Ltd. (DBRS) has today commented that the ratings for Landesbank Berlin AG (LBB AG), including LBB AG’s Issuer & Senior Long-Term Debt rating of A (high), are unchanged. This follows the publication of the 3Q12 results for LBB AG’s parent, Landesbank Berlin Holding AG (LBB or the Group). The trend on all ratings remains Stable. LBB’s ratings are underpinned by the Group’s intrinsic profile, the ownership of the German savings banks and by DBRS’s floor ratings of A (high) for the members of the joint liability scheme of Sparkassen-Finanzgruppe.

LBB reported 3Q12 pre-tax results of EUR 14 million, down marginally quarter-on-quarter (Q0Q) and significantly below the higher profitability reported during 1H12. The decline in results for 3Q12 reflected a combination of lower net interest income (NII), as well as higher net allowances for losses on loans and advances. Nonetheless, the performance marked the fourth consecutive quarterly pre-tax profit for LBB. This followed two quarters of pre-tax losses in 2011, which had been impacted by valuation losses on investment securities. At the Group level, NII for 3Q12 declined by 6.7% to EUR 207 million as the low interest rate environment continued to pressure margins. In parallel, net allocations to loan losses for the wider Group increased to EUR 39 million, well above the very low EUR 6 million reported in 2Q12, as additions during the quarter of EUR 64 million were higher than reversals of EUR 25 million. Nonetheless, DBRS views the stabilisation of the Berlin/Brandenburg economy as supportive for asset quality in the medium term.

On a segment basis, all areas reported positive pre-tax earnings for 3Q12. During the third quarter, Retail operations reported an operating result of EUR 4 million, following a break-even performance in the second quarter. The segment benefited from improved NII and higher fee and commission income, which was partially offset by higher allowances for loan losses, which increased by more than 40% QoQ to EUR 23 million. Capital Markets, which had also been breakeven prior quarter, reported EUR 43 million of pre-tax profits for 3Q12. The result benefited from a EUR 60 million improvement in NII, a zero allocation to loan loss allowances, as well as higher contributions from fair market valuation adjustments on investments. DBRS notes that prior quarter results had been impacted by the reduction in risk exposure, as well as restructuring charges linked to LBB’s closure of the London and Luxembourg operations. Moreover, DBRS comments that results for both Retail Banking and Corporate Banking reflect a change in the internal settlement method in 2012 which renders year-on-year comparison difficult.

DBRS continues to view the underlying strength of LBB’s customer franchise as healthy, evidenced by a further 8,000 new retail customer deposits which rose by EUR 239 million QoQ and a quarterly net increase of 8,000 new current accounts at Berliner Sparkasse. LBB reported further expansion in its consumer finance platform for the Savings Banks, S-Kreditpartner GmbH (SKP). The number of savings banks offering the full SKP product range increased by 6% during 3Q12 to 96 institutions and LBB reported that 150 savings banks are now using portions of its back office processing capabilities offered via BankenService. In DBRS’s view, each step towards strengthening the very important relationship with its Savings Banks partners adds to the strength of LBB’s franchise.

Pre-tax results at the Regional Corporate Banking level improved by 20% QoQ to EUR 24 million and represented a second consecutive quarterly improvement. Corporate lending volumes continue to expand in a competitive marketplace, increasing by EUR 200 million during 3Q12 and totalled EUR 800 million for the nine months to 30 September 2012. There was also positive, if marginal, expansion of the customer base by just less than 1% to 69,800 regional corporate clients. DBRS considers the strengthening of the Regional Corporate Banking segment throughout 2012 as further demonstrating the strength of the LBB’s customer driven segments.

Within the Real Estate Financing segment, pre-tax profit of EUR 21 million for 3Q12 was sharply down on the EUR 83 million reported in the prior quarter, driven by a combination of lower reversals in loan loss allocations, as well as losses from financial assets and valuation fair market valuation adjustments. Total contract volumes for 3Q12 increased by EUR 600 million (not including extensions), yet on a year to date basis were down 28% to EUR 2.5 billion versus the same period in 2011. LBB points out that the lower business volume in part reflects higher internal standards for quality and return adopted in order to reflect future capital requirements. DBRS views efforts to improve quality and to possibly reduce the magnitude of cyclical impacts from the real estate portfolio as supportive of the rating.

In terms of liquidity, LBB continues to enjoy significant deposits from its own customers, as well as deposits from its Savings Bank partners. Indeed, the proportion of lending funded by own deposit remained above 78% at 30 September 2012. Although liquidity remains satisfactory, DBRS continues to monitor the strengthening of LBB’s more limited capital resources. RVG Group, LBB’s ultimate parent, reported a Tier 1 capital of 14.1% and an overall capital ratio of 15.9% for end September, both above the respective 12.5% and 14.4% ratios reported at year end 2011. Looking ahead to forthcoming changes to regulatory capital requirements, LBB has made significant progress towards reducing risk weighted assets in non-customer driven activities. As of 3Q12, LBB had achieved roughly EUR 380 million of capital releases, and is confident to achieve EUR 500 million by year-end 2012.

Notes:

All figures are in 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. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This commentary was disclosed to the issuer and no amendments were made following the disclosure.

Lead Analyst: Peter Burbank
Approver: Alan G. Reid
Initial Rating Date: 22 January 2007
Most Recent Rating Update: 29 June 2012

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