DBRS Confirms Sparkassen Group at ‘A’, Trend now Positive

DBRS Ratings Limited (DBRS) has confirmed the floor ratings for the Sparkassen-Finanzgruppe (the Association or the Group) including the Long-Term Issuer Rating at “A”, and Short-Term Issuer Rating at R-1 (low). The trend on all ratings was changed to Positive from Stable. The Support Assessment for the Group remains unchanged at SA3.

These ratings also apply, in line with DBRS’s floor ratings concept, to each member of Sparkassen-Finanzgruppe’s Institution Protection Scheme (IPS) which as of February 2018, includes 386 German savings banks (the Sparkassen), the seven Landesbanken, eight public-sector building societies (LBS), the Group’s central asset manager DekaBank and other specialised service providers. For a complete list of ratings, please see the table at the end of this press release.

The change in the trend to Positive reflects DBRS’s view that the profitability in the Sparkassen sector continues to show resilience despite the low interest rate environment, the further de-risking of the Landesbanken sector and the consistent progress the group has made in improving its capital position.

The ‘A’/R-1 (low) ratings reflect the underlying earnings and the very strong franchise of the Sparkassen which is a vital component of the group. The Group’s aggregated balance sheet of EUR 2.1 trillion, as of FY2016, underscores its importance to the German banking sector and the German economy, and DBRS notes that approximately 60% of Germany’s population has a banking relationship with the Group. Offsetting these rating strengths are the higher risk credit profiles of several Landesbanken that remain a meaningful part of the Group.

The savings banks continue to generate strong underlying earnings, which form the core of the Group’s earnings profile. In FY2017 the Sparkassen - based on preliminary and aggregated German GAAP figures - posted a net income of EUR 2.2 billion (EUR 2.0 billion in 2016). The result reflected substantially higher fee and commission income and continued low credit charges. In 2017 net interest income (NII) was EUR 21.5 billion, down by 2.9% year-on-year, impacted by the low yield environment and intensive competition in the German banking market. DBRS notes positively that net fee and commission income for the year grew by 8.4% to EUR 7.8 billion (in 2016: up by 2.8%), almost compensating for the NII decline, mainly reflecting adjustments to the pricing model on current account transactions. The result was further helped by continued low credit charges, driven by the benign German economic and credit cycle and reflected in a provision release of EUR 100 million (2016: EUR 300 million release). The Sparkassen continued to increase their reserves with a net addition of EUR 4.6 billion (vs EUR 4.7 billion in the previous year). Looking ahead, DBRS expects margin pressure to remain throughout 2018, but the Group continues, in DBRS's view, to adapt well to its demanding operating environment.

The overall risk profile of Sparkassen-Finanzgruppe has in DBRS’s view improved significantly in recent years with the continued deleveraging and de-risking of the Landesbanken. DBRS notes however that risk pockets, specifically from shipping finance exposures, remain. These are concentrated in the Landesbanken sector and continue to impact the Group’s aggregated financial results, albeit at lower levels than in the recent past.

DBRS considers the Group’s overall liquidity position as strong based on the strong deposit base and sound liquidity of the savings banks, which is in part offset by the more wholesale-oriented funding profile of the Landesbanken. SFG’s capitalisation is in DBRS’s view good. In addition, the Group has steadily strengthened its capital ratios in recent years, primarily as a result of earnings retention. The Group reported a Tier 1 ratio, as of FY2016, of 15.6% (15.1% in FY2015 and 14.6% in FY2014).

RATING DRIVERS
Further positive rating pressure could stem from:

1. A continued de-risking at the Landesbanken reflected in the reduction of shipping exposures at the northern Landesbanken and/or reduced risk concentrations.
2. Continued resilience in profitability for the Sparkassen sector, reflected in strong commission income generation and the maintenance of competitiveness in its retail and SME customer segments.
3. Consistency in maintaining the Group’s sound capital position.

Negative rating pressure could result from:

1. Any significant deterioration of the capitalisation of the Sparkassen sector and/or any indication of weakening of the IPS scheme.
2. Any deterioration in the core franchise of the savings banks reflected in substantially weakening market shares in customer loans and deposits.
3. Any significant deterioration of the group’s financial profile and/ or strategic challenges faced by larger members.

The Grid Summary Grades for Sparkassen-Finanzgruppe are as follows: Franchise Strength – Very Strong/ Strong; Earnings Power – Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Good.

Notes:
All figures are in Euros 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 and company disclosures. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating included participation by the rated entity or any related third party. DBRS had access to accounts, management and other 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 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 and US regulations only.

Lead Analyst: George Yiannakis, Vice President, Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Senior Vice President, Global Financial Institutions Group
Initial Rating Date: January 18, 2007
Most Recent Rating Update: April 04, 2017

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