DBRS Morningstar upgrades DZ Bank Group to AA (low) / R-1 (middle), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) upgraded the Long-Term Issuer Rating of DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank Group or the Group) to AA (low) from A (high). The Short-Term Issuer Rating was confirmed at R-1 (middle). The trend on all ratings is now stable. The ratings now explicitly incorporate the benefits of DZ Bank’s membership of the Genossenschaftliche Finanzgruppe Volksbanken und Raiffeisenbanken (Cooperative Financial Network or CFN) with one notch of uplift from the IA to the Issuer Rating. DZ BANK Group’s intrinsic assessment (IA) remains A (high). The support assessment for the Group is SA1, reflecting the expectation of support in case of need from within the CFN. The Short-Term Critical Obligations Rating (COR) has been upgraded to R-1 (high), from R-1 (middle), reflecting the normal mapping of DBRS Morningstar’s short-term ratings.

KEY RATING CONSIDERATIONS

DZ BANK Group’s A (high) IA reflects the Group’s solid profitability underpinned by diversified revenue streams and sound risk profile. It also reflects the Group’s diversified liquidity and funding profile as well as sound levels of capital retention. The IA is underpinned by the Group’s role as a central clearing bank and service provider to the local cooperative banks in Germany. The IA also takes into consideration the competitive German banking market and low interest rate environment which limits earnings upside, as well as some earnings sensitivity to capital market volatility.

Whilst DBRS Morningstar had already incorporated into DZ Bank Group’s IA aspects of its CFN membership that impact the Group’s underlying credit profile, the Group’s Issuer Ratings now also explicitly incorporate uplift from the IA to reflect the benefit to the Group from its membership in the BVR Protection Scheme and Deposit Insurance Scheme.

RATING DRIVERS

Any change in the overall credit profile of the CFN could lead to a change in DZ Bank Group’s Issuer ratings.
A strengthening of DZ Bank’s bottom line profitability along with reduced earnings volatility could lead to positive pressure on the IA.
Negative pressure on the IA could result from a material increase in DZ’s risk profile or significant earnings volatility.

RATING RATIONALE

Through a number of intra-network mergers, DZ BANK Group has become Germany’s second largest banking group by total assets. DBRS views the DZ BANK Group as 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 a significant cost advantage in the medium term and the opportunity to reap scale efficiencies. While DZ BANK Group benefits from a diversified earnings stream, more recently, Group results have been affected by the low interest rate environment and capital market volatility.

For H1 2019 the Group reported a pre-tax profit of EUR 1.5 billion compared to EUR 1.0 billion a year earlier. However, this was driven by a number of one-off items. Gains and losses on investments by the insurance segment improved, and long-term equity investment sales at Union Investment and Schwäbisch Hall generated additional proceeds, while DZ HYP saw improvements in fair value gains. This was partly offset by lower one-off items at DZ Bank as well as higher loan loss allowances for the Group (EUR 105 million versus a release of EUR 44 million a year earlier). DBRS Morningstar notes the weak trend in net interest income, which was down 9.9% YoY to EUR 1.3 billion, and fee and commission income was flat YoY at EUR 958 million. DBRS Morningstar still views DZ BANK Group’s solid profitability as a core strength but notes the weakening in recent years and will carefully monitor the trend going forward.

The non-performing loan ratio remained stable at 1.3% in H1 2019, in line with German peers and better than the European average. Moderate economic growth in Germany, low interest rates, low unemployment and a resilient Mittelstand sector also continue to support asset quality.

DBRS Morningstar views DZ BANK Group’s liquidity as strong. The Group’s loan to deposit ratio (LTD) stood at 131% at end-H1 2019. The Group also benefits from ample deposits placed by the cooperative banking network. The Group reported a liquidity coverage ratio (LCR) of 135% against a regulatory minimum of 100% and an internal minimum target of 110%.

DZ BANK Group’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio at the end of H1 2019 was up 60 basis points (bps) YoY to 14.3%, comfortably above the minimum capital requirement of 9.78% for 2019. The total capital ratio of 17.1%, up from 16.8% a year earlier, also compares well against SREP minimum requirement of 13.28% for 2019. DZ BANK Group’s fully loaded leverage ratio marginally increased by 10 bps YoY to 4.4%, compared to the Group’s 3.5% internal target.

The BVR (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken) organises the interests of the CFN and is in charge of the BVR Institutional Protection Scheme and Deposit Protection Scheme (BVR Institutssicherung GmbH (BVR-ISG)). At end-2019, 851 institutions were part of these protection schemes which are financed entirely without government support. These reduce the default risk for each individual member by making financial resources available to each institution within the Group. The strength and structure of the Scheme are a key element in the one-notch uplift of the Group’s Issuer Rating from the IA.

Alongside today’s rating action DBRS Morningstar has Discontinued-Withdrawn the Mandatory Pay Subordinated Debt rating for business reasons.

The Grid Summary Grades for DZ BANK AG Deutsche Zentral-Genossenschaftsbank’s IA are as follows: Franchise Strength – Strong; Earnings – Strong/Good; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This 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.

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 Morningstar had no access to relevant internal documents for the rated entity or a related third party.

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 - Global Financial Institutions Group
Initial Rating Date: May 22, 2007
Last Rating Date: May 31, 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrs.com.