DBRS Confirms A (high) Floor Ratings on Sparkassen-Finanzgruppe with Stable Trend

DBRS Ratings Limited (DBRS) today confirmed the A (high) floor rating for Sparkassen-Finanzgruppe (Sparkassen-Finanzgruppe or the Group). The Trend on all ratings is Stable. The floor ratings are based on the depth and resources of the Joint Liability Scheme, the additional support for the Group’s members from their public owners (Träger), as well as broader systemic support. The ratings also consider the underlying earnings potential and the solid franchise of the savings banks and the overall importance of the Group to the German banking sector. Offsetting these rating strengths are the riskier funding profile and weak overall earnings of several Landesbanks that are a meaningful part of the Group, and the high level of competition in the savings banks’ core business of German retail banking.

The floor ratings of A (high) for Issuer & Senior Long-Term Debt and R-1 (middle) for Short-Term Instruments apply to each member of Sparkassen-Finanzgruppe’s Joint Liability Scheme. The Joint Liability Scheme includes 417 German savings banks, the seven Landesbank groups, ten public-sector building societies (LBS), the Group’s central asset manager DekaBank and other specialised service providers. The floor ratings indicate that each member of the Joint Liability Scheme is rated at least at A (high)/R-1 (middle); However, this does not prevent members from potentially achieving higher individual ratings based on their individual credit assessment.

In DBRS’s view, the Joint Liability Scheme of Sparkassen-Finanzgruppe reduces the default risk for each individual member, because the Scheme makes financial resources available to each institution within the Group. As such, the strength and structure of the Scheme is a key factor considered in the floor ratings. The Joint Liability scheme is designed to ensure the solvency and viability of each member, thereby protecting creditors and counterparties. Since the Scheme’s inception in 1973, no member has defaulted, an indication which DBRS views as the scheme fulfilling its function. However, DBRS recognises that the Joint Liability Scheme has limitations, as it does not amount to a legal cross-guarantee. Moreover, while the combined resources of the Joint Liability Scheme have enabled it to cope with most stress scenarios, resources may be insufficient in a wider systemic crisis. These limitations are factored into the floor ratings.

The internal support mechanism of Sparkassen-Finanzgruppe is complemented by external support for the Group’s Landesbank members, thereby adding a level of stability to the floor ratings. During the recent financial crisis, several Landesbanks received support from their public owners in the form of capital injections or other forms of support, such as from the Sparkassen or via risk shielding from the German government. In DBRS’s view, these external measures reduce the need for additional support from within the Group; however, they do not fully eliminate it. Nonetheless, DBRS sees the availability of this external support as benefitting the Group, as it lessens the potential burden of the Landesbanks on the wider membership. However, any indication of reduced access to systemic support for the Landesbanks would likely lead to downward pressure on the floor ratings, as it could reduce the total financial resources available to the members of Sparkassen-Finanzgruppe.

The floor ratings also consider the overall strong market positions and the solid franchises of the institutions comprising the Sparkassen-Finanzgruppe. Despite some marginal share volatility in recent years, together, the Group’s members maintain leading positions across many areas of German banking as demonstrated by the strong combined market shares of roughly 43% nationally in lending to businesses and sole proprietors, as well as leading national share in retail customer deposits at year-end 2013. The Group continues to see solid lending and deposit activity, especially at the savings bank level. The sizeable combined market shares demonstrate the Group’s importance to the German banking sector. Likewise, the close relationship of its members is illustrated by the increasing levels of cohesion that exists among the savings banks, which helps to promote cross selling. DBRS sees the Group’s overall franchise strength as benefitting from the solid positioning of the savings banks, whereas the negative impact from weaker Landesbanks has diminished markedly following meaningful de-risking and restructuring.

The Sparkassen-Finanzgruppe’s underlying earnings generation ability reflects both the stability of the savings banks’ performance, as well as the improving risk profile of most of the Landesbanks, which DBRS expects may contribute to lower earnings volatility in the future. In 2012, the most recent year for which aggregate data is available, Sparkassen-Finanzgruppe recorded EUR 15.7 billion of operating earnings before other and non-operating income/expenses and before valuation results (which under German GAAP include losses on loans, securities). This was a decline compared to EUR 16.4 billion in 2011 and EUR 17.1 billion in 2010 reflecting the low interest environment, the large cost base and the lower contribution to results from the Landesbanks. However, lower provisions to the general banking risks’ fund (Section 340g and 340e of the German Commercial code (HGB)) and lower income taxes led to a slightly improved net result.

In DBRS’s view, the overall risk profile of Sparkassen-Finanzgruppe has improved with the deleveraging of the Landesbanks and is now less impacted by the higher volatility of their earnings, as well as the more wholesale orientation of the state level banks. Likewise, the credit quality of the savings banks has generally benefited from the stronger domestic economy, as well as improved credit standards and processes. In 2012, loan loss provision returned to an all-time low of EUR 0.6 billion.

The strength of the Sparkassen-Finanzgruppe’s overall liquidity and capitalisation are also considered in the ratings. The strong deposit base and sound liquidity of the savings banks is in part offset by the more wholesale-oriented funding profile of the Landesbanks. Nonetheless, the Landesbanks benefit from sizeable deposits from savings banks, as well as the strong track-record of governmental liquidity support offered during the recent crisis. In DBRS’s view, this reduces potential demands on the Joint Liability Scheme and adds to the satisfactory evaluation for liquidity across the Group. Likewise, capitalisation remains adequate in DBRS’ view. The savings banks reported a Tier 1 capital ratio 13.4 % and a total capital ratio of 16.4% at year-end 2013.

For DBRS, the Sparkassen-Finanzgruppe continues to face several challenges. These include defending the still dominant position of savings banks in German retail while also maintaining margins and solid profitability. Both are challenged by strong competition and remain under pressure due to the low interest rate environment. Maintaining the dominant position is particularly important, as the savings banks’ solid retail franchise underpins the overall Group’s franchise strength. Lastly, as with most financial institutions operating across the globe, the Group needs to manage business strategies to adapt to the ever-changing regulatory environment. While DBRS sees the Group as a whole as generally well-positioned to adapt to challenges, increasing competition and regulatory requirements could present problems at the level of individual institutions.

The trend on the floor ratings is Stable. This reflects DBRS’s expectation that the support mechanisms will remain intact, underscored by the stable performance of the savings banks and the general reduction in risk and volatility at the Landesbanks. Given the structure and strength of the Joint Liability Scheme is a key rating factor, regulatory or other changes that reduce the availability of support to the Group’s members from the Scheme or from external support would have a negative impact on ratings.

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: Support Assessment for Banks and Banking Organisations. These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company documents. 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: Roger Lister
Initial Rating Date: January 18, 2007
Most Recent Rating Update: April 22, 2013

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