DBRS Morningstar confirms Landesbank Berlin AG ratings at A/R-1 (low), Positive Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings for Landesbank Berlin AG (LBB or the Bank), including the Long-Term Issuer Rating at “A” and the Short-Term Issuer Rating at R-1 (low). The trend on all ratings remains Positive, in line with the ratings of the broader Sparkassen-Finanzgruppe (SFG). The Intrinsic Assessment (IA) was maintained at BBB (high) and the Support Assessment remains unchanged at SA1. For a complete list of ratings, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of LBB’s Long-Term ratings reflects its full ownership by the SFG and its membership in the Institution Protection Scheme of the SFG. Each member of the Institution Protection Scheme, including LBB, is generally rated at the floor level, which is currently “A” with a Positive trend (for more information see the DBRS Morningstar Rating Report of the SFG).

RATING DRIVERS
LBB’s Issuer Ratings benefit from the SFG’s Institution Protection Scheme. Any change in the “A”/ R-1 (low) floor rating level of the SFG would lead to a change in LBB’s ratings. Likewise, any change in the Positive trend of the SFG would lead to a trend change in LBB’s Issuer Ratings.

Positive pressure on the IA would require i) an improvement in profitability while maintaining a strong risk profile ii) an increase in capital cushions and iii) a more balanced revenue mix.

Negative pressure on the IA could arise from i) a deterioration in LBBs financial strength including its CRE exposure ii) a failure to execute and materialise cost efficiency projects or iii) a deterioration in capital levels.

RATING RATIONALE
The BBB (high) IA reflects the strength of the Bank’s regional savings bank franchise in Berlin, along with its nationwide credit card business. The IA also takes into account the Bank’s solid funding and liquidity profile underpinned by a strong customer deposit base, its adequate capital position and the benefits from being part of the larger SFG. However, the IA also takes into account the Bank’s large concentration in cyclical CRE lending, a relatively sizeable securities portfolio and the comparatively modest profitability.

Despite the low interest rate environment, LBB has continued to show resilient, albeit modest profitability. The Bank reported net income of EUR 53 million under German GAAP accounting rules for 1H19, flat Year on Year (YoY), benefiting from lower risk provisioning and higher income from financial instruments, as operating revenues declined. Income before provisions and taxes (IBPT) of EUR 91 million was down from EUR 118 million YoY, as both net interest income (NII) and commission and fee income declined. Higher pension-related costs still stand in the way of meaningful cost reductions and caused administrative costs to increase by 1.3% YoY. As a result, the Bank’s cost-to-income ratio (CIR) deteriorated from 81.3% a year earlier to 84.5% in 1H19, well above international peers.

Although LBB’s asset quality is good, DBRS Morningstar notes the large risk concentration in the Berlin CRE market, and, the Bank’s sizeable securities portfolio. CRE represented 22.5% of the total balance sheet at the end of June 2019. While the Berlin real estate market is buoyant, the recently introduced cap on apartment rents could have a negative impact on prices and borrower health. DBRS Morningstar believes that LBB’s underwriting policies have been prudent but will closely monitor the Berlin CRE market as well as the performance of the Bank’s CRE portfolio.

The Bank has a stable liquidity and funding profile, which is underpinned by LBB’s strong retail deposit franchise. It also has access to the German Pfandbrief market, which, in DBRS Morningstar’s view, is a more stable form of wholesale funding. For the first time, the Bank has also issued Tier II capital in 2019, demonstrating its ability to place the paper with major institutional investors.

In terms of reported capital levels, DBRS Morningstar notes that LBB has an ample cushion over regulatory capital requirements. The fully-loaded common equity tier 1 (CET1) ratio as of July 2019 was reported at 16.8%, well in excess of the LBB’s SREP requirement of 8.5% for 2019. The Tier 1 ratio of 16.8% was also well above regulatory requirements of 10.0%. The fully-loaded total capital ratio of 18.5% exceeded requirements of 12.0% by a wide margin. However, part of this cushion will be needed for future requirements like TRIM and the final stages of Basel III. Also, given the modest earnings, the capital generation capacity is limited, especially during less favorable periods of the credit cycle. Due to its ownership structure the company is constrained in raising capital.

The Grid Summary Grades for Landesbank Berlin AG are as follows: Franchise Strength – Good; Earnings Power – Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good; Capitalisation – Good/Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Sonja Förster – Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman – Managing Director, Head of European FIG – Global FIG
Initial Rating Date: January 22, 2007
Last Rating Date: November 28, 2018

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Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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