DBRS Morningstar Upgrades Sparkassen-Finanzgruppe’s Long-Term Issuer Rating to A (high), Trend Stable

DBRS Ratings GmbH (DBRS Morningstar) upgraded the floor ratings for the Sparkassen-Finanzgruppe (the Group) including the Long-Term Issuer Rating to A (high) from ‘A’, and the Short-Term Issuer Rating to R-1 (middle) from R-1 (low). The trend on all ratings is now Stable. The Support Assessment for the Group remains unchanged at SA3.

These ratings also apply, in line with DBRS Morningstar’s floor ratings concept, to each member of the Sparkassen-Finanzgruppe’s Institutional Protection Scheme (IPS) rated by DBRS Morningstar. As of March 2020 the members of the IPS include 371 German savings banks (the Sparkassen), the five 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.

KEY RATING CONSIDERATIONS

The upgrade reflects the de-risking of the Landesbanken sector and the consistent progress the Group has made in improving its capital position in recent years. The ratings continue to incorporate the very strong franchise of the Sparkassen which is a vital component of the Group. With an aggregate balance sheet of EUR 2.3 trillion the Group commands significant market shares in all business segments, underscoring the Group’s importance to the German banking sector and the German economy overall. The ratings also reflect the relative stability of earnings of the Sparkassen. Offsetting these rating strengths are modest profitability and risks associated with the Landesbanken sector that remains a meaningful part of the Group as well as the high dependence on net interest income in a low rate environment.

RATING DRIVERS

Given the recent upgrade, and the challenges related to the COVID-19 pandemic, a rating upgrade is unlikely. A further rating upgrade would require the Group to significantly improve profitability while maintaining prudent risk management.

A significant deterioration of the Group’s financial profile and/or strategic challenges faced by larger members, would result in a rating downgrade. Any indication of a weakening of the IPS scheme would also lead to negative rating actions.

RATING RATIONALE

The Sparkassen-Finanzgruppe’s (SFG) aggregated balance sheet of EUR 2.3 trillion makes the Group of vital importance for the German economy. SFG’s regional savings banks, five wholesale and clearing institutions (Landesbanken) as well as a number of specialised institutions offer a full set of financial services to their customers with considerable market share in their respective markets. The market share for loans to domestic non-banks was 38% at end-FY2018 and 35% for client deposits.

The stable risk profile of the Sparkassen is reflective of their well-diversified and highly granular exposures. The overall Group risk profile has improved with the continued deleveraging and de-risking of the Landesbanken. For the Group, net valuation expenses, (a German GAAP accounting category which includes provisions for loan losses and fair value changes for securities), were EUR 0.3 billion in FY2019, down from EUR 3.6 billion in the previous year, in the absence of large impairments at the Landesbanken, but also due to a large valuation reversal for the Group’s liquidity portfolio as a result of stronger capital markets in FY2019. The Sparkassen (as part of their preliminary results) reported FY2020 loan loss provisions of EUR 1.3 billion, up from EUR 0.6 billion in FY2019. We also expect significant increases in loan loss provisions at the Landesbanken. Looking ahead DBRS Morningstar expects loan loss provisions to remain elevated. Over the longer term, DBRS Morningstar is of the opinion that the creation of a central institution with a focus on the needs of the Sparkassen could further lower the risk within the Group. More granular disclosure on an aggregate basis would also be viewed positively.

DBRS Morningstar considers the Group’s overall liquidity position as strong based on the extensive deposit base and sound liquidity of the savings banks, which is partly offset by the more wholesale-oriented funding profile of the Landesbanken. Aggregate deposits of the Sparkassen grew by 7.9% YoY in FY2020 to EUR 1.07 trillion, exceeding customer loans by EUR 169 billion. The Landesbanken have a more wholesale-oriented funding profile, albeit this is based partly on the more stable covered bond market. Nevertheless, in the current negative rate environment, deposit growth has weighed on the Sparkassen’s profitability, whereas the Landesbanken have benefited from TLTRO III. DBRS Morningstar therefore expects some measures by the savings banks to limit the rate of deposit inflows.

SFG’s capitalisation is, in DBRS Morningstar’s view, solid, reflecting the overall sound capital levels and consistent earnings retention of the savings banks. The Group’s aggregated Tier 1 ratio (including Landesbausparkassen) increased to 16.1% at end-FY2019 from 15.9% a year earlier. All Landesbanken now carry capital cushions well above their regulatory requirements. The healthy capital cushion is partly mitigated by the fact that Sparkassen and SFG as a Group cannot raise capital in the capital markets. DBRS Morningstar believes that the Group is well positioned from a capital perspective for the challenges related to the COVID-19 pandemic.

The Group posted FY2019 income before valuation (Betriebsergebnis vor Bewertung) of EUR 10.2 billion (down 9.9% YoY), as net interest income (NII) declined by 3.1% year-on-year (YoY) to EUR 27.8 billion and income from financial investments was down by 29% to EUR 474 million. This was not fully compensated for by the large increase in net commission income (up 8.9% to EUR 9.6 billion). Administrative expenses increased by 1.9% to EUR 28.0 billion, reflecting the impact of new labour agreements despite lower headcount, as well as a 3.5% increase in other administrative expenses, due to a large extent to digitalisation. In FY2019, the cost-income ratio (CIR) of the Group as a whole increased to 73.3% (2019: 70.8%), mainly due to the decline in net interest income (NII), and higher costs.

Reflecting the challenges in FY2020 the Sparkassen (according to preliminary unaudited FY2020 results) reported a 2.2% YoY decline of income before valuation to EUR 9.4 billion. Loan growth was strong at 5.2% YoY, but deposits increased even more by 7.9%. As a result, NII declined by 3.3% YoY, which was only marginally offset by a 2.4% increase in fees. Operating expenses declined by 1.4% due to more moderate pay raises, staff reductions and lower other administrative expenses. As expected, credit impairments increased significantly from EUR 600 million in 2019 to EUR 1.3 billion in 2020 reflecting the impact of the COVID-19 pandemic. Pre-tax profit as calculated by DBRS Morningstar fell by 19% YoY to 6.8 billion and net profit declined by 28% to EUR 4.3 billion. However, the savings banks also reduced the contribution to the Fund for General Banking risks by EUR 1.5 billion to EUR 2.7 billion. Going forward, DBRS Morningstar expects negative rates to continue to weigh on revenues and loans loss provisions are likely to remain elevated.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

DBRS Morningstar notes that this Press Release was amended on 7 April 2021 to incorporate the disclosure for historical default rates.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020). https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The sources of information used for this rating include Sparkassen-Finanzgruppe 2019 Annual Report, Bilanzpressekonferenz der Sparkassen 2020, Confidential Company Documents, Bundesfinanzministerium Corona Schutzschild, ECB: various press releases 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 12-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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375447.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Förster, Vice President - European Financial Institutions
Rating Committee Chair: Elisabeth Rudman, Managing Director, European Financial Institutions
Initial Rating Date: January 18, 2007
Last Rating Date: March 27, 2020

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