DBRS Confirms Landesbank Berlin AG at “A”; Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings for Landesbank Berlin AG (LBB or the Bank), including its Issuer & Senior Long-Term Debt rating of “A”, its Subordinated Debt rating of A (low) and its Short-Term Instruments rating of R-1 (low). The Intrinsic Assessment (IA) remains BBB (high) and the Support Assessment remains SA1.

DBRS’s ratings for LBB are based on its full ownership by the German savings banks and on DBRS’s floor rating for members of the Institution Protection Scheme (formerly known as the Joint Liability Scheme) of the Sparkassen-Finanzgruppe (SFG, rated “A”, Stable, for Issuer & Senior Long-Term Debt). In DBRS’s view, LBB has strategic importance for the savings banks, which is underpinned by the Bank’s strong retail and regional franchise in the Berlin-area, as well as the further progress made in transforming LBB into a savings bank under the Berliner Sparkasse name. DBRS expects that in a stress scenario, support would be made available to LBB from the German Savings Banks, as well as from the Institution Protection Scheme.

The trend on all ratings is Stable, reflecting the Stable trend on the floor rating for members of the Institution Protection Scheme of the Sparkassen-Finanzgruppe. Accordingly, a weakening of LBB’s BBB (high) intrinsic assessment (IA) would not result in automatic negative rating pressure on the Issuer & Senior Long-Term Debt, unless DBRS’s view on the willingness and availability of support were to materially weaken. Likewise, a stronger IA would not result in automatic upward rating pressure.

DBRS has maintained LBB’s IA at BBB (high). This considers the stand-alone financial profile of the Bank which is the core subsidiary of Landesbank Berlin Holding AG (Holding or the Group). The IA also reflects the Bank’s strong regional banking franchise and the progress made towards restructuring the Bank into the regionally focused Berliner Sparkasse, including the spin-off from LBB of the BerlinHyp operations into a separate subsidiary of the Group. DBRS expects that LBB’s savings bank business model should help to support greater stability in the Bank’s future earnings, as exposure to more volatile capital markets and real estate risk is being reduced. DBRS expects that positive pressure on the IA could result after a track-record of stable earnings is established following completion of the Bank’s transformation. However, negative pressure on the IA could materialise, should LBB’s financial strength deteriorate, if its risk profile were to increase or its franchise to weaken.

The transformation of LBB into the regionally focused Berliner Sparkasse highlights the importance and strength of the Bank’s core retail deposit base. Nonetheless, wholesale funding, including relatively stable covered bonds (Pfandbriefe), will continue to support LBB’s more focused real estate activities in and around Berlin, as well as portions of the Bank’s regional corporate activity. DBRS expects that LBB will continue to enjoy wholesale market access, in particular through covered bonds (Pfandbriefe).

LBB is owned 100% by the Sparkassen Finanzgruppe via an economic vehicle, Erwerbsgesellschaft der S-Finanzgruppe mbH & Co. KG (S-Erwerbsgesellschaft), which is also the entity through which LBB reports its capital ratios to the German regulator. As such potential capitalisation pressure at the S-Erwerbsgesellschaft or Holding level could indirectly exert pressure for LBB.

A part of the future earnings has been retained in the recent past for capital strengthening through the build-up of silent capital reserves (§340f reserves under local GAAP) and will subsequent be partially converted into open capital reserves (§340g reserves). Indeed, the fully loaded Core Equity Tier 1 ratio, as of August 2016, was reported at 16.9%, well in excess of the LBB’s SREP ratio

1H2016 RESULTS
In 1H16 LBB posted pro-forma net income of EUR 32 million under German GAAP accounting rules, which will be transfered at year-end to the Holding in accordance with the existing Profit & Loss Trasnfer agreement. This result reflected pressure on operating income driven by the ultra-low yield environment in Germany, as well as multiple and partially offsetting extraordinary items. Net interest income (NII) totalled EUR 407 million, up by 7.7% compared to 1H15, partly reflecting increasing loan volumes in real estate lending. The NII result was, however, mainly driven by an exceptional contribution from securities and participation income from associated entities (LBB’s consumer credit platform, SKP). Net fee and commission income stood at EUR 118 million (-2.5% compared with 1H15). Other extraordinary and non-recuring items included among other i) one-off pension accounting impacts based on legislative changes in Germany, ii) extraordinary gains from the sale of LBB’s stake in VISA Europe. The Bank booked minimal risk provisions for the lending business, reflecting the benign point in the credit cycle in Germany. LBB has allocated EUR 134 million to the build-up of silent §340f reserves under German GAAP. The Bank’s final result for 1H16 also included a EUR 14 million bank levy contribution.

SUPPORT
LBB’s “A” Issuer & Senior Long-Term Debt rating and its R-1 (low) Short-Term Instruments rating reflects DBRS’s expectation that the Bank would receive support in a stress scenario. LBB benefits from two sources of support, namely, its German savings bank owners, as well as its membership in the joint liability scheme (Haftungsverbund) of the Sparkassen-Finanzgruppe. DBRS would anticipate that the Sparkassen Finanzgruppe itself, in conjunction with the joint liability mechanisms of the sector, would be the first sources of assistance. For more details on the Joint Liability Scheme of Sparkassen-Finanzgruppe please see the DBRS Rating Report on the Sparkassen-Finanzgruppe.

OWNER SUPPORT
LBB is jointly owned by the German savings banks. Together, they acquired a majority stake in the Bank from the State of Berlin in August 2007 and have since increased their ownership to 100%. DBRS views LBB as economically important to the savings banks, as they have invested EUR 6.4 billion in the Bank and committed to ultimately reimburse the State of Berlin for any losses associated with debt covered by state guarantees (grandfathered debt). Moreover, LBB’s multiple links with savings banks and other members of the Sparkassen-Finanzgruppe make it strategically important for its owners. Given that LBB’s regional banking franchise operates under the Sparkasse brand, there is also a visible and credible reputational tie. Nonetheless, LBB does not benefit from explicit guarantees from the individual savings banks and this could add some complexity to the coordination and timeliness of support.

RATING DRIVERS
LBB’s Issuer & Senior Long-Term Debt rating benefits from the Sparkassen-Finanzgruppe’s (SFG) Institution Protection Scheme and are therefore at the “A”/R-1 (low) level. Therefore any change in the floor rating for the SFG would also impact the ratings of LBB.

Positive pressure on LBB’s IA would result from a track-record of improved and stable earnings and successful completion of the transformation into a savings bank.

The IA could come under negative pressure should the transformation of the Bank not be completed, if LBB’s risk appetite were to increase, or if the financial position and performance of Berliner Sparkasse (the core savings bank) weakens. Any significant deterioration of the capitalisation at the S-Erwerbsgesellschaft or Holding level indirectly translating into capitalisation pressure or risk transfer for LBB, would also negatively pressure LBB’s IA.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). 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 and company reports. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets Authority (“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, Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: January 22, 2007
Most Recent Rating Update: December 8, 2015

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