DBRS Morningstar confirms NORD/LB’s Issuer Ratings at A/R-1 (low), Trend returned to Positive

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Norddeutsche Landesbank Girozentrale (NORD/LB or the Bank), including the Long-Term Issuer Rating at “A”, the “R-1 (low)” Short-Term Issuer Rating, and the Subordinated Debt Rating at “BBB (high)”. The ratings are supported by the ‘floor’ rating that is generally assigned to all members of the Sparkassen-Finanzgruppe (SFG). The trend on all ratings has been returned to Positive, in line with the ratings of the broader SFG. The Intrinsic Assessment (IA) was maintained at BBB (low) and the Support Assessment remains unchanged at SA1. This concludes the review originally initiated on January 31, 2019.

KEY RATING CONSIDERATIONS

The confirmation of NORD/LB’s ratings follows the recent capital injections by the Bank’s public-sector owners and the Institution Protection Scheme (IPS) of the SFG. Each member of the IPS, including NORD/LB, is generally rated at the floor level, which is currently “A” with a Positive trend (for more information see the DBRS Morningstar Rating Report on SFG). In addition, the European Commission’s confirmation that the capital injections are not viewed as State Aid means that any potential burden-sharing with junior creditors will not take place. As a result, the Bank’s subordinated debt rating has been confirmed at BBB (high), positive trend, two notches below the rating of the SFG.

The confirmation of NORD/LB’s BBB (low) IA reflects the recent recapitalisation, which is expected to lift the Bank’s Common Equity Tier 1 (CET1) ratio from 6.6% at end-June 2019 to above 14% at end-2019 as well as the Bank’s reduced exposure to shipping through a mix of divestments, reserve build and guarantees.

RATING DRIVERS

NORD/LB’s Issuer Ratings benefit from the SFG’s IPS. Any change in the “A”/ R-1 (low) Rating level of the SFG would lead to a change in NORD/LB’s ratings.

Upward movement of the Intrinsic Assessment (IA) is unlikely in the short-to medium term given the significant execution risk involved in the current restructuring programme.

The IA would come under negative pressure should the Bank experience a noticeable deterioration in revenues or fail to execute its restructuring programme in a timely manner.

RATING RATIONALE

NORD/LB continues to have a diverse corporate and retail client base in Northern Germany, complemented by revenues from more global business lines. In early 2019, the bank embarked on a large-scale restructuring programme, including an exit from the shipping business which previously had been one of the Bank’s major business lines. DBRS Morningstar notes that this restructuring, which will significantly reduce the Bank’s total assets to about EUR 95 billion by end-2024, down from EUR 145 billion at end-June 2019, carries significant execution risk.

Whilst NORD/LB’s earnings generation has been supported by its relatively diverse revenue base, given the ongoing restructuring process, the Bank is not expected to reach meaningful profitability until 2022. This is somewhat mitigated by the fact that guarantee fees, which total EUR 350 million over a 6-year period, paid by the Bank to the State of Lower Saxony, will be reinvested in the Bank in order to support capital formation.

The need for the Bank’s restructuring and capital injections was primarily driven by the Bank’s significant, and troubled, exposure to the shipping sector. This has been contained through divestments, reserve built and guarantees that have been put in place, thereby improving the Bank’s credit risk. As a result of asset sales, the Bank’s non-performing loan (NPL) ratio improved to a reported 2.7% at end-June 2019, from 4.0% at end-2018, and is expected to improve further. Other risks faced by the bank appear to be well-managed, and DBRS Morningstar notes that the troubled shipping loans were predominantly underwritten prior to 2009.

The largely wholesale funding profile is supported by the established funding relationships within the SFG and the access to stable Pfandbrief funding. The reduction in the size of the balance sheet will also reduce funding needs. At end-June 2019, NORD/LB’s MREL ratio was 19.1%, well above the regulatory requirement of 9.13% for 2019, and the Bank’s Liquidity Coverage Ratio stood at 152%, both ratios are in line with peers.

The recent capital increase is expected to lift the CET1 ratio above 14% by end 2019. This positions NORD/LB at the upper end of its domestic peer group and provides the Bank with a large buffer relative to its 2019 SREP requirement of 10.57%. This leaves NORD/LB well prepared for future regulatory changes, however, in DBRS Morningstar’s view, the strong current capital ratios are required as the Bank will be challenged for the foreseeable future to internally generate additional capital and the Bank has limited flexibility to access capital markets.

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

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, the European Commission 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: June 11, 2018
Last Rating Date: January 31, 2019

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