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Fitch Affirms Landesbank Saar at 'A-'/Stable, VR at 'bb+'
May 4, 2017 / 3:04 PM / 5 months ago

Fitch Affirms Landesbank Saar at 'A-'/Stable, VR at 'bb+'

(The following statement was released by the rating agency) FRANKFURT/LONDON, May 04 (Fitch) Fitch Ratings has affirmed Landesbank Saar's (SaarLB) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook, and its Viability Rating (VR) at 'bb+'. It also affirmed the Short-Term IDR at 'F1' and the Support Rating (SR) at '1'. A full list of rating actions is at the end of this Rating Action Commentary. The rating action was taken in conjunction with Fitch's periodic review of three Landesbanken based in southern Germany. KEY RATING DRIVERS IDRS, SR AND SENIOR DEBT SaarLB's IDRs, SR and senior debt rating are driven by strong institutional support from its owners, the regional state of Saarland (AAA/Stable), Saarland's savings banks and ultimately Germany's savings banks group, Sparkassen Finanzgruppe (SFG, A+/Stable). Fitch's institutional support assumptions are underpinned by provisions contained in the statutes of SFG and the Landesbanken's institutional protection fund. Our support considerations are also based on the view that the owners consider their investment in SaarLB long term and strategic. This is underpinned by SaarLB's focus on its statutory roles, which include supporting Saarland's economy and acting as the central institution for Saarland's savings banks and as house bank for the state of Saarland. Fitch uses the lower Long-Term IDR of SaarLB's owners, SFG's Long-Term IDR, as anchor for determining the bank's support-driven ratings. In Fitch's view, support would need to be forthcoming from both SFG and the state of Saarland to avoid triggering state aid considerations and resolution under the German Recovery and Resolution Act if SaarLB fails. Our assessment of Saarland's creditworthiness is underpinned by the stability of Germany's solidarity and financial equalisation system, which links Saarland's creditworthiness to that of the German sovereign (AAA/Stable). SFG's support ability is strong, but not as strong as that of Saarland. We notch down SaarLB's Long-Term IDR twice from SFG's 'A+' because we consider SaarLB's role for its owners strategic, but not key and integral, and due to potential legal and regulatory barriers related to state aid considerations and provisions of German resolution legislation. The Stable Outlook reflects stable support assumptions and the Stable Outlook on SFG's Long-Term IDR. The bank's Short-Term IDR is at the higher of the two Short-Term IDRs that map to 'A-' on Fitch's rating scale. This reflects SaarLB's strong links to SFG and privileged access to SFG's ample excess liquidity and funding resources. SaarLB's short-term senior unsecured debt rating is equalised with its Short-Term IDRs. VR SaarLB's VR primarily reflects the bank's modest capitalisation and company profile, which is constrained by its concentration on the small and moderately prosperous region of Saarland and its niche presence in commercial real estate (CRE) and renewables financing in France. These franchise limitations result in meaningful sectoral concentrations. The bank's regulatory capital ratios improved in 2016, driven by a reduction of risk-weighted assets (RWA) and retention of (partly non-recurring) earnings. The capital buffer above regulatory minimums is sufficient, but provides limited headroom to accommodate RWA growth or negative rating migrations. The small capital base is a constraining factor because it offers limited loss-absorption capacity in light of the bank's concentrated loan book. SaarLB's asset quality benefits from its exposures to highly rated sovereigns and financial institutions, which account for a material share of gross credit exposures. However, material loan concentrations constrain our asset quality assessment despite a stable and sound non-performing loan (NPL) ratio. CRE exposures represent about a fifth of SaarLB's non-bank credit exposure and a multiple of its capital. They increase the bank's vulnerability to cyclical asset performance fluctuations and account for more than half of total loan allowances. SaarLB also has a material exposure relative to its loss-absorbing capacity to key regional steel and automotive manufacturers, which are exposed to risks related to the economic and commodity cycle and to technological changes. SaarLB's renewables portfolio has been growing for years and by volume it represents a concentration risk comparable to CRE. However, its performance has been very robust so far. It bears tail risks stemming from regulatory or technological changes, but we do not expect existing projects to be affected by a revision of the current subsidy scheme. Furthermore, SaarLB has sound and long-standing expertise in the sector and closely follows industry developments in its markets in France and Germany. SaarLB has shown the ability to generate moderate but consistent profits, driven by firmer margins in its French business and the favourable risk-return profile of its renewable energy portfolio. The bank's cost efficiency, which has compared favourably with many of its Landebanken peers', has deteriorated, driven mainly by costs related to IT modernisation. We believe that in line with the sector SaarLB's profitability metrics are exposed to ongoing pressure from interest rates and fixed costs, including those related to regulation and digitalisation. We understand that the recently launched SaarLB-2020 project will review and address the bank's strategy, structure, segment revenues and efficiency. SaarLB's funding and liquidity profile is adequate. Like its Landesbanken peers it is predominantly wholesale funded. The bank's funding mix is sufficiently diversified and includes covered bonds issuance. SaarLB's reliance on wholesale funding is mitigated by strong and reliable funding links to savings banks, which together with other Sparkassen group members play a key role in absorbing SaarLB's debt placements. DERIVATIVE COUNTERPARTY RATING AND DEPOSIT RATINGS The bank's Derivative Counterparty Rating and Deposit Ratings are equalised with its IDRs. We believe the bank's buffers of junior and vanilla senior debt do not afford any obvious incremental probability of default benefit over and above the multi-notch support benefit already factored into its IDRs. We do not apply any uplift for above-average recovery prospects in the event of default because of the limited visibility on recovery levels in such circumstances. In the highly unlikely event that SaarLB failed and was not supported by its savings banks and state owners, its balance sheets would most likely differ substantially from the current one. RATING SENSITIVITIES DRS, SR, SENIOR DEBT The IDRs, SR and senior unsecured debt ratings are sensitive to changes in assumptions around the propensity or ability of SaarLB's owners to provide timely support. This could result from a change to SFG's IDRs or changes to the owners' strategic commitment to SaarLB or to the bank's importance for its home region or the savings bank sector. A change to our assessment of the risks of triggering a resolution process ahead of support for a Landesbank more generally could also affect the bank's IDRs, SR and senior unsecured debt ratings. VR SaarLB's VR is primarily sensitive to changes in the economic or regulatory environment that drive the performance and risk profile of its CRE, renewables and corporate portfolios. A material decline of capital ratios or profitability could also put pressure on the VR. Upward momentum for the VR would require a material improvement in capitalisation and a reduction of concentration risks. The bank's narrow franchise means upside to the VR is limited. DERIVATIVE COUNTERPARTY RATING AND DEPOSIT RATINGS Derivative Counterparty Rating and Deposit Ratings are sensitive to changes in SaarLB's IDRs. The rating actions are as follows: Landesbank Saar Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Viability Rating: affirmed at 'bb+' Derivative Counterparty Rating: affirmed at 'A-'(dcr) Deposit Ratings: affirmed at 'A-'/'F1' Short-term senior unsecured debt: affirmed at 'F1' Contact: Primary Analyst Roger Schneider, CIIA Director +49 69 768 076 242 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Sebastian Schrimpf, CFA Associate Director +49 69 76 80 76 136 Committee Chairperson Patrick Rioual Senior Director +49 69 76 80 76 123 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Rebecca O'Neill, London, Tel: +44 203 530 1697, Email: rebecca.oneill@fitchratings.com. 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