DBRS Confirms DZ BANK AG Deutsche Zentral-Genossenschaftsbank at A (high), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the Senior Unsecured Long-Term Debt rating of DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ BANK Group or the Group) at A (high) and the Short-Term Debt rating at R-1 (middle). DZ BANK Group’s intrinsic assessment (IA) remains A (high).

DZ BANK Group’s ratings are driven by i) the Group’s stand-alone credit profile underpinned by its multi-divisional business model (with revenues streams mainly from corporate finance, asset management, insurance, commercial and residential real estate finance, consumer finance, transport finance); ii) the Group’s role as a central clearing bank and service provider to the majority of the Cooperative Banks in Germany, which provides the Group with ample access to retail liquidity as a result of the strong market position of the Cooperative retail banking network; and iii) the strength and cohesion of the Cooperative Financial Network (CFSN), tying together the more than 1,000 local Cooperative Banks and the Group in the CFSN Protection Scheme.

After removal of systemic support considerations from the rating in September 2015, the rating no longer incorporates broader systemic support. This is reflected in an SA3 support assessment for the Group.

The Cooperative retail banking network’s strong banking franchise is underpinned by its sizable domestic market share, capturing approximately 25% of German retail customers. Overall, the Cooperative retail banking network is the second largest provider of financial services in Germany with over 12,000 branches and significant on-line banking distribution channels.

On June 22, 2016, DZ BANK Group’s shareholders approved the merger agreement of the two central institutions of the German cooperative sector: DZ BANK Group and WGZ BANK. DBRS views the planned combination as a constructive step, which will complete the consolidation of the cooperative sector central bank functions. While in DBRS’s view the merger is positive over the medium term, it has no immediate impact on the ratings.

The Group reported a full year 2015 net profit of EUR 1.8 billion in 2015 compared with EUR 2.2 billion in the previous year. Results at the main operating bank of the Group, DZ BANK AG, remained relatively stable and benefited from lower impairment levels and a favourable domestic business environment. The Group reported net interest income (NII) of EUR 2.98 billion for the full year of 2015, down by 2% year-on-year. This mainly reflects pressure on margins from the low interest rate environment despite a rise in loan volumes by 3.7%. Overall, income before provisions and Taxes (IBPT) fell by EUR 452 million to EUR 2.6 billion reflecting a drop in profit contribution from insurance activities and a higher burden from regulatory- and IT infrastructure costs.

DBRS views the Group’s liquidity profile as strong. This is supported by the Group’s diversified funding profile, benefiting from corporate deposits, Pfandbrief issuance and indirect access to retail liquidity, as a significant level of local Cooperative bank deposits is centrally placed with the Group.

DBRS views positively the Group’s improved capital position. During 2015, the Group further strengthened its regulatory capital ratios and reported a year-end Common Equity Tier 1 (CET1) ratio of 13.0% (Basel III, fully-loaded), an improvement of 120 bps from 1H15. This compares well against the minimum CET1 capital ratio of 9.5% set by the ECB banking supervision (SREP ratio) for the Group for 2016. Likewise, the Group’s fully-loaded leverage ratio improved to 4% from 3.2% in year-end 2015, reflecting a core capital increase in the form of AT1 issuance and further exposure reductions.

RATING DRIVERS
Factors which could contribute to an improved IA would include continued and solid earnings generation demonstrating a sustained track record in internal capital formation at the Group, while further improving its risk profile.

Factors which could contribute to a lower IA would include i) sustained pressure on the Group’s profitability with emerging business model deficiencies, ii) weakened liquidity or capitalisation or iii) any indication of reduced cohesion and mutual support among the members of CFSN or any form of weakening of the CFSN Protection Scheme.

Notes:
All figures are in EUR 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), and 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, Bundesverband der Deutschen Volksbanken und Raiffeisenbanken and company reports. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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: George Yiannakis
Rating Committee Chair: Roger Lister
Initial Rating Date: May 22, 2007
Most Recent Rating Update: September 29, 2015

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