August 22, 2017 / 4:16 PM / a year ago

Fitch Affirms Deutsche Postbank at 'A-'/Negative; Withdraws VR

(The following statement was released by the rating agency) FRANKFURT/LONDON, August 22 (Fitch) Fitch Ratings has affirmed Deutsche Postbank AG's (PB) Long-Term Issuer Default Rating (IDR) at 'A-' with a Negative Outlook. Fitch has also upgraded PB's Viability Rating (VR) to 'a-' from 'bbb+' and subsequently withdrawn it. The upgrade of PB's VR reflects our expectation that Deutsche Bank AG's (DB, A-/Negative/F1/a-) decision to retain full ownership of PB and integrate it with its own German private and commercial clients and wealth management businesses will increase ordinary operational support from DB, notably in the form of capital. DB plans to remove any barriers to capital and funding fungibility by means of a legal entity merger, which we expect will materialise over the next two years. The withdrawal of the VR reflects our view that the autonomy of PB to determine its strategy and business model is decreasing, and assessing its franchise independently is increasingly difficult, given DB's plans to reorganise the subsidiary and integrate it with the group's other private and commercial clients businesses. The rating actions are part of Fitch's periodic review of PB. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATING (SR) AND SENIOR DEBT PROGRAMME RATINGS PB's SR of '1' and the equalisation of the bank's IDRs and senior debt ratings with those of DB reflect our view that PB is a core business under DB's revised strategy, which results in an extremely high probability of support from DB, if needed. Our assessment of support takes into consideration the control and profit and loss transfer agreement between PB and DB, via the intermediate DB Beteiligungs-Holding GmbH, which is a factor of high importance. Furthermore, we believe that default by PB would constitute a significant reputational risk to DB's standing and franchise. We believe PB will play an integral role in realising DB's revised business objectives, including a repositioning in German retail banking, operational synergies and cost optimisation. The decision to retain PB marks the second reversal of DB's strategic approach to PB after a sale was decided in 2015. In Fitch's view, deviations from this strategy and from DB's commitment to PB's integration are highly unlikely given the severe reputational damage that could result from another strategic shift. DEPOSIT RATINGS We do not notch up PB's Deposit Ratings from the bank's IDRs given the insufficient qualifying subordinated and non-preferred senior debt buffer. UNSECURED GUARANTEED DEBT RATINGS OF LEGACY DSL BANK ISSUES The rating of the guaranteed notes issued by the former DSL Bank (which was subsequently merged into PB) reflects their grandfathered deficiency guarantee from Germany (AAA/Stable). The notes are rated two notches below the guarantor's Long-Term IDR as Fitch sees only limited uncertainty around the timeliness of payments due to the high reputational risk Germany would face if debt holders incur losses. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The legacy hybrid capital securities, issued by Deutsche Postbank Funding Trust I-III and subject to phasing-out under the EU's Capital Requirements Regulation, are notched twice for non-performance risk and twice for loss severity from DB's VR. This reflects our expectation that DB's support for PB would extend to PB's hybrid instruments in light of PB's core status. VR PB's stable and transparent business model focuses on retail deposit-taking, residential mortgage lending and SME lending in Germany. It has an adequate franchise as the largest centrally managed retail bank in Germany. However, its market penetration and pricing power are moderate by international standards and trail those of the much larger savings and cooperative banking groups, which dominate the competitive German retail banking market. PB's weak earnings also reflect a high and inflexible cost base, recurring restructuring costs and margin dilution from long-dated, high-yielding legacy liabilities. Their run-off will drive further deleveraging and result in a significant reduction of securities and interbank exposures. However, it will take several years before this allows solid internal capital generation. PB's solid asset quality reflects a focus on the historically robust and resilient German retail banking market. Impaired loans are low and loan concentration is moderate. German and western European sovereign and bank (mostly covered) bonds dominate its significantly reduced legacy securities portfolio, the majority of which is investment-grade. Risk-adjusted capitalisation, as reflected by a fully-loaded common equity tier 1 (CET1) ratio of 12.8% at end-1H17, is adequate in light of PB's solid loan book and our expectation that ordinary support will be available from DB. PB's strong funding and liquidity are underpinned by stable and granular retail deposits. Non-deposit funding consists to a large extent of diversified and stable covered bonds, with limited sensitivity to market sentiment. RATING SENSITIVITIES IDRS, SR AND SENIOR DEBT PROGRAMME PB's institutional support-driven ratings are primarily sensitive to changes in DB's IDRs or in our assumptions around DB's propensity or ability to provide PB with timely support if needed. This could result from a reversal of DB's integration strategy for PB, which we do not expect. UNSECURED GUARANTEED DEBT RATINGS OF LEGACY DSL BANK ISSUES The rating of the guaranteed notes issued by the former DSL Bank is primarily sensitive to a downgrade of Germany's Long-Term IDR. DEPOSIT RATINGS PB's Deposit Ratings are sensitive to changes in the bank's IDRs. They are also potentially sensitive to the amount of qualifying debt buffer relative to the recapitalisation amount likely to be needed to restore PB's viability and prevent a default on the bank's deposits. In addition, we could upgrade PB's Long-Term Deposit Rating if we have more visibility into PB's inclusion in DB's resolution plans following the bank's reintegration into DB's operations. Uplift to PB's Long-Term Deposit Rating could be warranted if we believe that DB's large qualifying debt buffer would offer material incremental default protection to PB's depositors or that their recoveries in a default scenario would be above-average. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Deutsche Postbank Funding Trusts I-III's hybrid securities are primarily sensitive to DB's VR. VR Not applicable as the VR has been withdrawn. The rating actions are as follows: Long-Term IDR: affirmed at 'A-'; Outlook Negative Short-Term IDR: affirmed at 'F1' Viability Rating: upgraded to 'a-' from 'bbb+' and withdrawn Support Rating: affirmed at '1' Senior debt issuance programme ratings, including ECP: affirmed at 'A-'/'F1' Guaranteed senior unsecured bonds issued by the former DSL Bank: affirmed at 'AA' Long- and Short-Term Deposit Ratings: affirmed at 'A-'/'F1' Deutsche Postbank Funding Trust I-III's hybrid securities: affirmed at 'BB+' Contact: Primary Analyst Patrick Rioual Senior Director +49 69 76 80 76 123 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Ioana Sima Associate Director +44 20 3530 1736 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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