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

DBRS Ratings Limited (DBRS) has today confirmed the ratings for Sparkassen-Finanzgruppe (DSGV, the Association 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 Landesbanken that are a meaningful part of the Group, as well as 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 416 German savings banks, the seven Landesbanken, nine 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.

The trend on the floor ratings is Stable. This reflects DBRS’s expectation that the strengths of the Sparkassen Finanzgruppe’s franchise and financial dynamic will be maintained. Upward rating momentum is unlikely in the medium-term, although DBRS views positively the continued de-risking at the Landesbanken and ongoing efforts to strengthen the resources available to the Joint Liability Scheme. Negative rating pressure could result from any indication of weakening of the Scheme, any deterioration in the core franchise of the savings banks and/or a reduced level of external support.

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 which currently adds one notch of uplift within the floor rating. External support was evidenced during the recent financial crisis particularly for some of the Landesbanken which received help 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 reduced the need for additional support from within the Group. However, they do not fully eliminate it. Indeed, the pressure placed on the Joint Liability Scheme could increase should external support become less likely.

At its core, the floor ratings reflect the overall franchise strength of the Sparkassen within the Sparkassen-Finanzgruppe. Despite some marginal share volatility in recent years, together, the Group’s members (which include the Landesbanken) 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. DBRS sees the Group’s overall franchise strength as benefitting from the solid positioning and cooperative strategy of the savings banks. Although the potential negative impact of the weaker Landesbanken has diminished following de-risking and re-structuring, their still larger and less risk averse profiles could contribute to pressure for the Group’s support mechanisms.

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 2013, the most recent year for which aggregate data is available, Sparkassen-Finanzgruppe recorded EUR 14.7 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 of 3.0% compared to EUR 15.7 billion in 2012 and EUR 16.4 billion in 2011 reflecting the low interest environment, the large cost base and the negative contribution to results from the Landesbanks.

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, despite the ongoing burden of legacy issues at some Landesbanks. 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 2013, loan loss provision returned to an all-time low of EUR 0.3 billion, or roughly half the level of 2012.

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 of 13.5 % and a total capital ratio of 16.6% at year-end 2014.

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. In addition, the Group needs to manage its 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, or indeed in terms of external support for larger and less risk averse members such as the Landesbanken.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).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 3, 2014, 2013

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