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

DBRS Ratings Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Long-Term Debt rating of DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ BANK Group, or DZ, or the Group) at A (high) and the Short-Term Debt rating at R-1 (middle). All ratings have a stable trend. DZ BANK Group’s intrinsic assessment (IA) remains A (high). The support assessment for the Group is SA3 and as such, the Senior Long-Term Debt and Deposits rating of DZ BANK Group is positioned in line with the Group’s IA.

DBRS has today assigned a Critical Obligations Ratings (COR) to DZ BANK AG Deutsche Zentral-Genossenschaftsbank, with a Long-Term COR of AA, two notches above the Group’s Intrinsic Assessment, and a Short Term COR of R-1 (high). The Critical Obligations Rating (COR) addresses the risk of default of particular obligations/ exposures at certain banks that are considered critical. For DBRS, these obligations have a higher probability of being excluded from bail-in and remaining in a continuing bank than other senior unsecured obligation. As such they are less likely to absorb losses in the event of resolution of a troubled bank, as can occur under the implementation of the Bank Recovery and Resolution Directive (BRRD). DBRS typically assigns Critical Obligations Ratings to Banks with a meaningful national market share, which are integral to the financing of the domestic economy and are systemically important. DZ BANK Group is, with EUR 509 billion of total assets, among the top two banking players in Germany, is a complex bank with products integral to the financing of the domestic economy, and whose failure could have a significant impact on a wide range of third parties.

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 970 local Cooperative Banks and the Group in the CFSN Protection Scheme.

In DBRS’s view, DZ continues to make consistent progress in improving its regulatory capital buffers, enhancing its risk profile and positioning itself successfully to increase organisational efficiencies after its recent merger with WGZ Bank. The Group has been steadily building its capital position and its fully-loaded Common Equity Tier 1 (CET1) ratio of 14.5% is, after the completion of the merger, in the upper end of the range for its peers. DZ’s management aims to maintain a conservative risk profile; the Group’s NPL ratio improved y-o-y by 20bps and is down to 1.5% in 2016. The merged group is expected to keep its decentralised set up and business model unchanged. Looking ahead, DBRS views DZ BANK Group comparatively well positioned to successfully face the rising costs from regulation and IT infrastructure over the medium term. The Group’s significant size, with the potential to deploy scale economies across its business, provide in DBRS’s view, a significant cost advantage in the medium term and the opportunity to reap scale efficiencies.

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 approximately 12,000 branches and significant on-line banking distribution channels.

In 2015, DZ BANK Group and WGZ BANK Group announced a memorandum of understanding to merge into one cooperative central institution. DZ announced on August 1st, 2016 the completion of the legal merger with WGZ Bank, acquiring WGZ’s assets as of June 30th, 2016. DBRS views the merger positively and as a constructive step which will complete the consolidation of the cooperative sector’s central bank functions. DBRS notes that after the completion of the legal merger in summer 2016, DZ has made good progress in order to complete important IT migration milestones by the end of 2017 with a view to full completion of the unification of IT platforms, process chains and its organizational set up by end of 2018. DZ also aims for further development of its current governance structure by the end of 2020 with the centralisation of strategic and steering functions. DBRS views the execution risk of the merger as limited due to the similarities of the two organisations and the good visibility of their risk profiles facilitated by their common membership in the CFSN Protection “Scheme” which is underpinned by sharing a common risk reporting to the cooperative central coordinating body (BVR).

The Group reported full year 2016 preliminary net profit of EUR 1.6 billion under IFRS accounting rules compared to EUR 1.79 billion in 2015. DBRS notes that the FY2016 Group’s results have been impacted by high loan impairment charges from DZ’s shipping segment.

Overall for the Group, income before provisions and Taxes (IBPT) stood at EUR 2.5 billion (excluding Net income from the merger with WGZ BANK, see below) in FY 2016 compared with EUR 2.6 billion last year, noting however that the FY2016 results of the merged Group are not completely comparable with previous year numbers. The lower operating income was mainly driven by i) lower net interest income which stood at EUR 2.66 billion compared to EUR 2.87 billion in FY 2015, which was particularly negatively impacted by Bausparkasse Schwäbisch Hall’s related provisions and ii) an increase in administrative expenses to EUR 3.6 billion from EUR 3.25 billion due to regulatory projects, merger related items as well as the payment of bank levy expenses. Additionally, lower gains from valuation of financial instruments which stood at EUR 51 million compared to EUR 300 million last year were offset by trading gains of EUR 780 million on the back of good performance in DZ BANK AG’s capital markets activities.

DZ BANK Group reported restructuring and merger related net income of EUR 256 million under the line Net income from the merger with WGZ BANK including proceeds of EUR 344 million from the consolidation of business relationships and a positive IFRS valuation effect of EUR 159 million.

In 2016, DZ Group’s loan impairments stood at EUR 569 million compared to EUR 153 million in 2015 and were impacted by high loan loss provisions for DVB Bank’s sizable shipping finance portfolios. Looking into 2017 DZ Group confirmed its net income guidance within the lower bound of EUR 1.5 billion to EUR 2 billion.
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 2016, DZ Group further strengthened its regulatory capital ratios. The Group reported a fully loaded Basel III Common Equity Tier 1 (CET1) ratio of 14.5%, an improvement of 150 bps from year-end 2015. This compares well against the minimum CET1 capital ratio of 9.5% set by the ECB banking supervision (SREP ratio, including Pillar 2 Requirement) for the DZ BANK Group for 2016. DZ Group’s current regulatory capitalisation however does not account for increased risk weights for DZ’s sizable insurance operations (R+V) as stipulated by Basel III. This is expected to weaken DZ’s regulatory capitalisation going forward. DZ Group’s leverage ratio improved marginally to 4.1% from 4.0%.

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.

DBRS Morningstar notes that this press release was amended on January 16, 2020, to correct the Short-Term Critical Obligations rating in the text and in the Rating Table below.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This 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, Vice President - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: May 22, 2007
Most Recent Rating Update: March 7, 2017

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