DBRS Confirms Landesbank Berlin AG at A (high); Trend 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), its subordinated debt rating of A and its Short-Term Instruments rating of R-1 (middle). The trend on all ratings is Stable.

The ratings for Landesbank Berlin AG (LBB AG) are based on its full ownership by 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 business with respect to S-Kreditpartner and S-Servicepartner, as well as the planned reorganisation of LBB as a savings bank focused on the needs of the Berlin-Brandenburg area under the Berliner Sparkasse name. 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 2007-2013 period.

DBRS also maintained the intrinsic assessment (IA) of BBB (high) for LBB AG, 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 Group’s core customer driven business that continues to support the intrinsic rating. Likewise, the reorganization of LBB into a savings bank focused organization will also help to eliminate much of the volatility and risk inherent in LBB’s capital markets and real estate finance businesses which will be largely separated from Berliner Sparkasse once the reorganization is complete. Based on the final structure following LBB’s reorganisation, DBRS may reassess the IA to reflect the cessation or separation of the less stable capital markets and real estate activities, as well as any resulting financial impact from the reorganisation.

The earnings capacity of LBB’s customer driven businesses has allowed the Group to absorb the negative impact of securities valuation from financial markets and the Euro zone crisis. The relative stability of these earnings has also helped the Group weather higher levels of loan loss allowances during past recessionary environments in Germany. The retail segment largely comprises the core business of Berliner Sparkasse, which combined with regional corporate banking will comprise the focus for the franchise following the Group’s reorganisation. The more volatile results from capital market activities will largely be separated from the Group in future. These areas had contributed to volatile losses as well as profits in past years, yet in DBRS’s view have heightened risk for the Group relative to the more stable risk profile of the Group’s retail and commercial banking franchise. During 2H13, however, additional charges and adjustments related to the reorganisation could prove material and may contribute to a full year loss for the Group.

Although LBB has been dependent upon wholesale funding, the strength of the Group’s regional deposit franchise will become more visible following the reorganisation when DBRS expects that the Bank should be able to more fully fund itself via retail and Savings Bank deposits. Nonetheless, wholesale funding via more stable covered bond (Pfandbriefe) will continue following the reorganisation in order to support the real estate activities in and around the Berlin area which will remain with Berliner Sparkasse. Overall, LBB has enjoyed 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 2007-2013 period without the need for government guarantees.

At the Group level, LBB reported a Tier 1 ratio of 12.83% as of 1H13. Nonetheless, DBRS has viewed capital resources as limited, particularly in the current environment of rising market and regulatory capital requirements. LBB has taken steps to improve capital in recent periods, yet the pending reorganization could prove more meaningful and influence overall capital levels. DBRS views improvement in the level and quality of capital as a key factor towards maintaining LBB’s intrinsic assessment.

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 the willingness and availability of support remain unchanged.

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

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended July 7, 2014 to reflect actual methodologies used.]

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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: 29 June 2012

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For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf