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Fitch Affirms Germany's Cooperative Banks and DZ BANK at 'A+'/Stable
April 1, 2014 / 3:52 PM / in 4 years

Fitch Affirms Germany's Cooperative Banks and DZ BANK at 'A+'/Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch Affirms Germany’s Cooperative Banks and DZ Bank at ‘A+’/Stable here LONDON, April 01 (Fitch) Fitch Ratings has affirmed Genossenschaftliche FinanzGruppe Volksbanken Raiffeisenbanken's (GFG) Long-term Issuer Default Rating (IDR) at 'A+' and Viability Rating (VR) at 'a+'. The Outlook is Stable. At the same time, Fitch has affirmed the Long-term IDR of GFG's major central institution, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, at 'A+' with a Stable Outlook. In addition, Fitch has affirmed the Long-term IDRs of 1,093 members of GFG's mutual support scheme at 'A+' with a Stable Outlook. The agency has also affirmed and withdrawn the IDRs of 23 local cooperative banks, members of the scheme, as a result of their mergers into other rated members. A full updated list of GFG's 1,093 rated members following these rating actions is available at or via the link above. GFG is Germany's cooperative financial services network and the country's second-largest domestic retail banking group. KEY RATING DRIVERS- VR AND IDRs The affirmation of GFG's VR reflects the group's strong retail and SME franchise, including its leading retail deposit franchise, the group's low-risk and granular credit risk exposure, sound asset quality, which benefits from Germany's benign operating environment, moderate direct capital market exposure and the local banks' adequate, resilient and diversified profitability, which dominates GFG's earnings base. The VR also factors in exposure to riskier and more volatile asset classes at GFG's two central institutions (albeit manageable considering the group's overall size) as well as to a lesser extent GFG's need to improve capitalisation at DZ BANK in light of Basel III phase-in and the European Central Bank's Asset Quality Review (AQR) expected in 4Q14. The IDRs (group ratings) apply collectively to GFG as a group and individually to the scheme's 1,093 members. The IDRs are based on the approach described in Fitch's "Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms". In line with these criteria, no VR is assigned to the individual members (including DZ BANK). GFG's VR and IDRs reflect the group's high cohesiveness, which is supported by its tested mutual support mechanism. The protection scheme providing GFG's members with mutual support is managed by Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR). Fitch considers the likelihood of mutual support, if needed, as extremely high given GFG's extensive track-record, and its members' deep institutional integration. To date, the support mechanism has always been sufficient to support even GFG's largest members. The IDRs assigned to DZ BANK are group ratings and as such, the key rating drivers are identical to GFG's. DZ BANK's standalone risk profile benefits from its fairly diversified business model, which includes stable retail businesses (building society, insurance and asset management activities). These largely mitigate DZ BANK's still sizeable exposure to riskier asset classes such as commercial real estate, shipping, GIIPS bonds and its shrinking ABS portfolio. The performance of DZ BANK's main commercial real estate and public sector lender, Deutsche Genossenschafts-Hypothekenbank AG (DG HYP), benefited in 2013 from tightening spreads on its large portfolio of peripheral eurozone countries which are unlikely to recur to the same extent in 2014. DZ BANK's leasing business (VR Leasing) returned to modest profitability in 2013 after a sizeable loss in 2012. DVB BANK SE, DZ BANK's medium-sized ship and transport financing business, reported solid profitability in 2013 despite challenging market conditions for ship finance. We view DZ BANK's funding and liquidity profile as strong as it benefits from local banks' placing excess liquidity (typically around EUR100bn) with it. Reliance on wholesale funding markets is moderate and largely met by covered bond issuance. RATING SENSITIVITIES - VR AND IDRs GFG's and its members' Long-term IDRs are driven by GFG's VR and are at the same level as GFG's Support Rating Floor (SRF). As a result, GFG's IDRs would not be affected by a downward revision of its SRF. Downside pressure on GFG's VR is currently limited but could arise from a severe domestic recession resulting in sharply higher corporate default rates or significant regulatory changes affecting the group's cohesiveness, neither of which are expected by Fitch. Further pressure on GFG's net interest income from continued low interest rates can, in our view, be absorbed by GFG's strong earnings base and is unlikely to affect the group's VR. Given GFG's large domestic deposit base, any negative regulatory developments regarding the effectiveness of GFG's mutual support scheme could affect the bank's VR. For instance, this could happen in the context of EU banking union developments. However, we believe that the German authorities are strongly committed to preserving the effectiveness of GFG's support scheme. Upgrade potential for GFG's VR (and Long-term IDR) could be driven by improved corporate governance practices, which Fitch does not expect in the short term, as well as reduced risk-taking at GFG's central institutions and significant cost efficiency gains. Given GFG's decentralised structure and - in Fitch's opinion - limited consolidated reporting and risk monitoring, we view GFG as relatively weakly positioned to react swiftly to external shocks. The group's considerable risk and earnings diversification mitigates this deficiency to a considerable degree - and underpins GFG's current VR. However, tighter consolidated risk monitoring would be an important condition for an upgrade of GFG's VR. The IDRs assigned to DZ BANK are group ratings and as such, rating sensitivities are identical to GFG's. DZ BANK's current capitalisation under Basel III (phased-in common equity Tier 1 (CET1) ratio of 8.6% on 1 January 2014; Fitch estimate for fully-loaded CET1 ratio: 6.3%) is weak. DZ BANK has announced a sizeable capital increase (around EUR1.5bn) for 2Q14, which should improve the phased-in and fully-loaded CET1 ratio to around 10% and close to 8%, respectively. The capital increase is in Fitch's view likely to be fully subscribed by the respective local banks and should it prove insufficient in light of the upcoming ECB AQR, we would expect GFG to provide additional capital support. WGZ Bank AG Westdeutsche Genossenschafts-Zentralbank and Muenchener Hypothekenbank eG, two members of GFG, have also announced capital increases for 2014. KEY RATING DRIVERS - SUPPORT RATING AND SRF GFG's SRF of 'A+' is based on our view that there is an extremely high probability that the German state (AAA/Stable) would support GFG or (groups of) individual members if ever needed, given GFG's systemic importance. DZ BANK's SRF reflects Fitch's view of the likely state support available to the bank if a severe crisis, compounded by DZ BANK's size, proved so substantial that it was beyond GFG's ability to support. Systemic support would, in our view, be motivated by GFG's reliance on DZ BANK, Germany's third-largest commercial bank, to serve the vast majority of the group's 30 million domestic clients. In Fitch's opinion, state support to GFG would be likely to be channelled through the mutual support scheme or DZ BANK. The latter's SRF is aligned with GFG's. However, we view the risk that GFG or DZ BANK may require state support in the foreseeable future as remote. RATING SENSITIVITIES - SUPPORT RATING AND SRF The availability of and propensity to support could ultimately weaken as a result of legal, regulatory, political and economic dynamics about potential future sovereign support for senior creditors of banks across jurisdictions. In late March 2014, Fitch stated that as a result of legislative progress in the European Union (notably the national implementation of the provisions of the Bank Recovery and Resolution Directive) it will likely revise downward the SRFs of a number of banks (see 'Sovereign Support for Banks: Rating Path Expectations', dated 27 March 2014). This reflects our view of a weakening support propensity in respect of further progress being made in addressing legislative and practical impediments to effective bank resolution. Upon conclusion of our sovereign support assessment, we expect to revise GFG's SRF to 'No Floor' from 'A+'. The current timeline for this is late 2014 or 1H15. In the meantime, GFG's SRF remains sensitive to changes in Germany's ability to support as reflected in its sovereign rating. A downward revision of GFG's SRF would not automatically lead to a downgrade of GFG's Short-term IDR, as we currently consider the group's liquidity profile to be strong enough to maintain a Short-term IDR of 'F1+' rather than the more common 'F1' with a 'A+' Long-term IDR. The rating sensitivities for DZ BANK's support-based ratings are identical to GFG's. In 2013, GFG generated IFRS pre-tax profit of around EUR9bn. While pre-tax profit benefited to some extent from valuation gains on securities at DZ BANK, the local banks' profitability remained remarkably stable despite a still challenging interest rate environment. We view GFG's internal capital generation capacity as strong and its capitalisation as solid, which provides GFG with a considerable loss-absorbing buffer should the German economy enter a less benign phase. While GFG's profitability is unlikely to improve given the interest rate environment and historically low loan impairment charges (EUR375m for the local banks in 2013), we expect GFG's performance to only weaken gradually in 2014. Lower interest income from structural interest rate risk positions will likely be compensated for by continued strong loan growth (loans grew by 4.3% at local banks in 2013) and considerable deposit pricing power. GFG's two central banks have made significant restructuring efforts in recent years, which should lead to lower P&L volatility and support the quality of GFG's overall profitability. Should earnings erosion be more pronounced than Fitch currently anticipates, GFG would have considerable scope to improve its cost efficiency, which suffers from its decentralised structure. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED AND HYBRID SECURITIES Subordinated debt and hybrid capital instruments issued by DZ BANK and DG HYP are all notched down from GFG's VR. The use of GFG's VR as the anchor rating is based on Fitch's view that GFG will at all times ensure that DZ BANK and DG HYP are able to meet their payments on these instruments. Consequently, these bonds' ratings are primarily sensitive to a change in GFG's VR. DZ BANK and DG HYP's lower Tier 2 subordinated debt instruments are notched down once from GFG's VR in line with Fitch criteria. Most hybrid capital instruments (see list below), are notched five times from GFG's VR (twice for loss severity, three times for incremental non-performance risk relative to the VR). DZ Bank Capital Funding Trust I is rated four notches below GFG's VR which reflects only two notches for incremental non-performance risk as this instrument's distribution trigger is in our view less likely to be activated than in the case of the other rated hybrids. The rating actions are as follows: GFG Long-Term IDR: affirmed at 'A+', Stable Outlook Short-Term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'a+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' DZ BANK Long-Term IDR: affirmed at 'A+', Stable Outlook Short-Term IDR: affirmed at 'F1+' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' Debt issuance programme: affirmed at 'A+'/'F1+' Senior unsecured notes: affirmed at 'A+'/'F1+' Market linked securities: affirmed at 'A+emr' Subordinated LT2 notes: affirmed at 'A' DG HYP Long-Term IDR: affirmed at 'A+', Stable Outlook Short-Term IDR: affirmed at 'F1+' Debt issuance programme: affirmed at 'A+'/'F1+' Senior unsecured notes: affirmed at 'A+' Subordinated LT2 notes: affirmed at 'A' DVB BANK Long-Term IDR: affirmed at 'A+', Stable Outlook Short-Term IDR: affirmed at 'F1+' Debt issuance programme: affirmed at 'A+'/'F1+' Senior unsecured notes: affirmed at 'A+' 1,093 members of GFG's mutual support scheme Long-Term IDR: affirmed at 'A+', Stable Outlook Short-Term IDR: affirmed at 'F1+' The IDRs of the following members have been affirmed at 'A+'/Stable/'F1+' and withdrawn as a result of their mergers into other rated members of the group: Raiffeisenbank eG Bad Doberan Volksbank eG Dassel Volksbank Hamm eG Volksbank Vallendar-Niederwerth eG Raiffeisenbank Illertal eG Volksbank Raiffeisenbank Mangfalltal-Rosenheim eG Raiffeisen-Volksbank Dillingen eG VR Bank Leipziger Land eG Volksbank Aerzen eG Spar- und Darlehnskasse Brachelen eG Volksbank Seppenrade eG Volksbank Nordmuensterland eG Volksbank Beckum eG Volksbank Westerloh-Westerwiehe eG Volksbank Dillingen eG Uhlbacher Bank eG Raiffeisenbank Oberes Buehlertal eG Volksbank Moessingen eG Bad Waldseer Bank eG Raiffeisenbank Neumarkt-St. Veit - Niederbergkirchen eG Raiffeisenbank Fuessen-Pfronten-Nesselwang eG Raiffeisenbank Haibach-Obernau eG Volksbank Jestetten eG DZ BANK's hybrid capital instruments (preferred stocks): EUR300m DZ Bank Capital Funding Trust I (DE0009078337): affirmed at 'BBB' EUR500m DZ Bank Capital Funding Trust II (DE000A0DCXA0): affirmed at 'BBB-' EUR350m DZ Bank Capital Funding Trust III (DE000A0DZTE1): affirmed at 'BBB-' EUR10m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series I (DE000A0GN869): affirmed at 'BBB-' EUR50m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series VI (DE000A0GLDZ3): affirmed at 'BBB-' EUR100m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series VII (DE000A0GMRS6): affirmed at 'BBB-' EUR100m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series VIII (DE000A0GWWW7): affirmed at 'BBB-' EUR50m DZ Bank Perpetual Funding Issuer (Jersey) Limited Series IX (DE000A0NTTT1): affirmed at 'BBB-' Contact: Primary Analyst Christian Kuendig Senior Director +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Michael Dawson-Kropf Senior Director +49 69 76 80 76 113 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Christian Giesen, Frankfurt am Main, Tel: +49 69 768076 232, Email:; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria' dated January 2014 and 'Banking Structures Backed by Mutual Support Mechanisms' dated December 2012 are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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