Morningstar DBRS Confirms Landesbank Baden-Württemberg's Long-Term Issuer Rating at A (high) With a Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Landesbank Baden-Württemberg (LBBW or the Bank), including its Long-Term Issuer Rating at A (high) and Short-Term Issuer Rating at R-1 (middle). Morningstar DBRS also confirmed the Bank's Senior Non-Preferred Debt credit rating at "A", the Subordinated Debt credit rating at A (low), and the Critical Obligations Ratings (COR) at AA/R-1 (high). The trends on all credit ratings are Stable. The credit ratings and the trends are all in line with those of the broader Sparkassen-Finanzgruppe (SFG) network. LBBW's Intrinsic Assessment (IA) is "A" and its Support Assessment is SA1. For a complete list of credit ratings, please see the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
LBBW's credit ratings reflect its membership of SFG and in SFG's Institutional Protection Scheme (IPS). Each member of the IPS, including LBBW, is generally rated at the floor level, which is currently A (high) with a Stable trend.

LBBW's Intrinsic Assessment (IA) reflects its strong franchise, particularly as a leading commercial lender in the wealthy region of Baden-Württemberg, in Germany. As a Landesbank, it serves as a central institution and clearing bank for savings banks in Baden-Württemberg, Rhineland-Palatinate, and Saxony. While the Bank's liquidity and funding profile leans toward wholesale funding because of its smaller retail deposit base, its resilience is supported by a well-established covered bond franchise and membership of SFG, which provides access to savings banks' liquidity. Capital ratios remain solid despite a slight reduction in 2024; however, cushions remain comfortably above minimum requirements. Morningstar DBRS expects this strength to remain in the medium term.

The lA also takes into account LBBW's higher profitability over recent years, although 2024 results no longer benefit from the peak margins seen in 2023 amid elevated interest rates, and the Bank's profitability metrics remain weaker than those of its European peers. Asset quality softened in 2024 because of Germany's economic slowdown, particularly in CRE and some corporate segments, but remains manageable thanks to prudent underwriting and risk provisioning. While Morningstar DBRS expects the CRE portfolio to benefit from lower interest rates and the gradual market recovery, uncertainties around price developments will likely persist. Additionally, Morningstar DBRS continues to monitor potential impacts from global geopolitical and trade head winds on the Bank's corporate portfolios. The Stable trend incorporates Morningstar DBRS' view that risks to the credit ratings are broadly balanced.

LBBW's IA of "A" is positioned at the lower end of the IA Range. This reflects the potential challenges in the operating environment and considers the Bank's concentration in highly cyclical sectors such as CRE and some corporate sectors that are more vulnerable to current headwinds in global geopolitics and trade.

CREDIT RATING DRIVERS
LBBW's Issuer Ratings benefit from the SFG's IPS, and therefore a change in SFG's credit ratings would lead to a change in LBBW's credit ratings.

Morningstar DBRS would upgrade the Bank's IA if it improves profitability on a sustainable basis while maintaining solid asset quality.

A significant deterioration in asset quality or a material decline in profitability would lead Morningstar DBRS to downgrade the IA.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong/Good
LBBW is a medium-sized commercial bank and the largest Landesbank in Germany with total assets of EUR 356 billion at YE2024. The Bank provides universal banking services primarily to corporate clients across a diverse range of industrial and corporate sectors. It is also the clearing bank for savings banks in its core regions in Germany. In addition, LBBW serves individuals and savings banks while providing specialised services in real estate and project finance alongside maintaining a significant presence in capital markets. The Bank's leading position in German CRE was further strengthened following the acquisition of Berlin Hyp in 2022. LBBW is expected to consolidate its real estate business portfolio under the Berlin Hyp brand. This should lead to higher operating efficiency through synergies in the medium term. Furthermore, LBBW is an institution incorporated under German public law with legal capacity and a member of SFG and therefore part of the group's joint liability scheme.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS sees LBBW's earnings trajectory over the past years as improving, although profitability levels remain behind those of its European peers. While the Bank has focused on growing in strategic business segments, as well as revenue diversification to offset compressed margins from the lower interest environment, Morningstar DBRS sees efficiency levels affected by factors such as the competitive German banking market, the public mission of the business model of the Landesbanken, and a relatively high proportion of wholesale funding.

In 2024, LBBW reported a profit before tax of EUR 1.2 billion, down 10% year over year (YOY) from EUR 1.4 billion in 2023, when the Bank benefitted from the higher interest rate environment. In 2025, the Bank expects earnings before taxes to be above EUR 1.0 billion, despite high investments in strategic projects, particularly regarding the integration of Berlin Hyp. The Bank's operating income remained broadly in line with the previous year's high level at EUR 4.0 billion. Total expenses increased slightly by 1% to EUR 2.4 billion, reflecting a rigorous cost management despite important investments in IT, of which 10% related to the enhancement of the Bank's cybersecurity infrastructure. The cost base also benefitted from the absence of the European bank levy.

In addition, LBBW booked EUR 360 million in risk provisions in 2024, up 42% YOY, reflecting developments in real estate markets as well as Germany's sluggish economy and heightened geopolitical risks. The Bank's cost-to-income ratio, as reported, deteriorated slightly to 60.4% in 2024 from 59.6%, while pre-tax return on equity was 7.8% in 2024, down from 9.1% in 2023. Morningstar DBRS expects both metrics to remain broadly in line for F2025.

Risk Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views LBBW's risk profile as well managed. However, Morningstar DBRS notes a significant concentration in the highly cyclical CRE sector, accounting for around 22% of the Bank's total customer exposures at YE2024 (gross exposure within the scope of the impairment requirements of IFRS 9), as well as to a number of corporate sectors that are vulnerable to the current economic downturn in Germany and heightened geopolitical tensions. There were some signs of asset quality deterioration in 2024 in line with the current economic environment, primarily stemming from the CRE, construction, and retail & consumer goods sectors. The Bank's nonperforming loan ratio as calculated by Morningstar was 1.7% at YE2024 compared with 1.3% at YE2023. As a result, total loan loss provisions (LLPs) increased by 42% YOY to EUR 360 million in 2024, particularly in the corporate customers segment, for which the Bank set aside EUR 200 million, around double the previous year's figure.

Despite the current CRE market situation, LLPs for the segment decreased 17% YOY, albeit from a high level of EUR 180 million in 2023. Risk provisioning in 2023 was affected by model adjustments; however, the amount set aside in 2024 was based on real cases from real estate financing, including in the U.S. While Morningstar DBRS views the Bank's lending policies as prudent, supported by conservative loan-to-value ratios, high-quality properties, and solid cash flow generation, Morningstar DBRS remains cautious about the sector given the weakening of the German economy and uncertainty around price developments despite lower interest rates from the European Central Bank.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
In Morningstar DBRS' view, LBBW's funding and liquidity profile is sound. The high reliance on wholesale funding reflects the Bank's commercial business model, which lacks large retail franchise with granular and stable deposits. However, Morningstar DBRS views this as mitigated by a well-matched asset/liability profile and good access to Pfandbriefe (German covered bonds), which Morningstar DBRS considers a stable source of funding. In 2025, Pfandbriefe placements will take place via LBBW and Berlin Hyp, but from 2026 onwards, only LBBW will remain active as an issuer. LBBW has a solid liquidity position with liquid assets (cash, deposits with central banks, and securities) accounting for 25% of total assets. Furthermore, LBBW manages its portfolio effectively against interest rate changes through interest rates swaps and valuation changes are recognised directly in equity or already in the income statement. The Bank also has access to the savings banks' liquidity pool and benefits from the confidence derived from its membership in the SFG. At YE2024, the Liquidity Coverage Ratio (LCR) was 149.0% and the Net Stable Funding Ratio (NSFR) was 113.9%, well above minimum requirements.

Capitalisation Combined Building Block (BB) Assessment: Good
Morningstar DBRS views LBBW's capital position as adequate, broadly in line with peers and with ample cushions over regulatory requirements, although Morningstar DBRS notes a slight reduction in 2024. The Bank reported a fully loaded CET1 ratio of 14.4% and a total capital ratio of 19.2% at YE2024, down from 14.6% and 20.1%, respectively, a year before. Despite retaining profits in 2024, the reduction was mainly driven by an 5.5% YOY increase in RWAs resulting from larger business volumes and the challenging economic environment in Germany, which could not be offset by two synthetic securitisation transactions during the period. LBBW maintained cushions well over minimum requirements. LBBW's SREP requirement for CET1 increased somewhat by 16 bps in the course of 2024 to 10.72% as of March 2025, mainly due to slight increases in countercyclical capital, AT1 shortfall, and Pillar II Requirement buffers. The healthy capital cushions should protect the Bank in case of increased pressure on asset quality. This is particularly important given the Bank's limited access to capital markets for the issuance of equity because of its ownership structure.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/452134.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The subfactor Corporate Governance is relevant to SFG's credit rating, and this is reflected in the franchise grid grades for the Bank. In Morningstar DBRS' view, the ownership mix and the parliamentary process involved in decision making at the Landesbanken has made it difficult at times for SFG to swiftly react to challenges. In addition, the level of transparency and financial disclosure of SFG is limited compared with that of international peers.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

Notes:
All figures are in euros unless otherwise noted.

The scorecard incorporates data until end-June 2024.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents. Other sources include LBBW's 2018-23 annual reports, 2024 results presentation, 2024 press release, and H1 2024 disclosure report. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at:
https://dbrs.morningstar.com/research/452133

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Nicola De Caro, Senior Vice President, Sector Lead
Rating Committee Chair: Elisabeth Rudman, Managing Director
Initial Rating Date: 21 April 2022
Last Rating Date: 17 April 2024

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