DBRS Confirms “A” 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 rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Group’s Issuer & Senior Long-Term Debt is “A” and its Short-Term Instruments rating is R-1(low). These ratings apply to each member of Sparkassen-Finanzgruppe’s Institution Protection Scheme, which as of February 2016 includes 409 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 Institution Protection Scheme is rated at least at Senior Long-Term Debt “A” and Short-Term R-1 (low); however, this does not prevent members from potentially achieving higher individual ratings based on their individual credit assessment. The Stable trend on the floor ratings 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 Institution Protection Scheme. Negative rating pressure could result from any indication of weakening of the Scheme and/or any deterioration in the core franchise of the savings banks.

The floor ratings are based on the depth and resources of the Institution Protection Scheme and the additional support for the Group’s members from their public owners (Träger). After removal of systemic support considerations from the rating in September 2015, the rating no longer incorporates broader systemic support. The removal of the one notch of systemic support followed the transposition of the European Bank Recovery and Resolution Directive (BRRD) into national, German legislation reflecting DBRS’s view that there is less certainty about the likelihood of timely systemic support. This is reflected in an SA3 support assessment for the members of the Institution Protection Scheme. In DBRS’s view, the Institution Protection 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. However, DBRS recognises that the Institution Protection Scheme has limitations, as it does not amount to a legal cross-guarantee.

The ratings 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.

At its core, the floor ratings reflect the overall franchise strength of the Sparkassen-Finanzgruppe. Sparkassen-Finanzgruppe’s aggregated balance sheet of EUR 2.2 trillion makes the Group of vital importance for the German economy. Approximately three quarters of all German businesses have a banking relationship with the Group. With 47.5 million current accounts, approximately 60% of Germany’s population is banking with the Group. DBRS sees the Group’s overall franchise strength as benefitting from the solid positioning and cooperative strategy of the savings banks.

The Sparkassen-Finanzgruppe does not produce audited consolidated financial statements under IFRS but provides aggregated numbers on the basis of local GAAP (HGB accounting rules). In 2014, the most recent year for which aggregate data is available, Sparkassen-Finanzgruppe recorded net income of EUR 288 million compared to EUR 1.6 billion in 2013. The weaker results in 2014 were driven by extraordinary items at certain Landesbanken, which impacted the aggregate results of the Group.

The savings banks (Sparkassen) within the Sparkassen-Finanzgruppe continued to perform well and recorded once again a stable operating performance in both 2014 and in 2015. Despite pressures from the low interest rate environment and rising staff costs, the Sparkassen continued to generate strong underlying earnings in 2015. The Sparkassen used the benign domestic economic environment to further build their reserves.

While aggregated year-end 2015 data for the Landesbanken is not yet available, given the individual results reported to date, DBRS expects a continued improvement in operating results for the majority of the Landesbanken. In 2015, the Landesbanken are expected to have returned to profitability as significant legacy problems, are by now either fully provisioned or resolved. While DBRS expects that earnings volatility should decline going forward, for most Landesbanken, significant legacy issues remain with HSH Nordbank (HSH). We note however, that HSH has reached an agreement on March 21st, 2016 with the EU Commission on the renewal of its EUR 10 billion risk shield.

In DBRS’s view, the overall risk profile of Sparkassen-Finanzgruppe has improved with the deleveraging of the Landesbanken and is now less impacted by the higher volatility of their earnings, despite the ongoing burden of legacy issues at some Landesbanken. Given the geographic concentration in Germany, Sparkassen-Finanzgruppe is naturally exposed to the German economic and credit cycle.

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 Landesbanken. Nonetheless, the Landesbanken benefit from sizeable deposits from savings banks. In DBRS’s view, this reduces potential demands on the Institution Protection 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 14.8 % and a total capital ratio of 16.7% at year-end 2015.

For DBRS, the Sparkassen-Finanzgruppe continues to face several challenges. These include defending the still dominant position of savings banks in German retail banking while also maintaining margins and solid profitability. Both are challenged by strong competition and remain under pressure due to the low interest rate environment. Managing interest rate risk prudently during the prolonged low-yield environment emerges as an additional challenge, predominately for smaller and mid-sized savings banks. In addition, the Group needs to adapt to the ever-changing regulatory environment. While DBRS sees the Group as a whole as generally well-positioned to adapt to future challenges, increasing competition and higher regulatory requirements could present problems at the level of individual institutions. Moreover, the lower likelihood of external support after the implementation of the BRRD could potentially pose challenges for Sparkassen-Finanzgruppe’s larger and less risk averse members such as the Landesbanken.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016).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 reports. 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: William Schwartz
Initial Rating Date: January 18, 2007
Most Recent Rating Update: September 29, 2015

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