June 9, 2017 / 1:38 PM / a year ago

Fitch Affirms HSH Nordbank's IDR at 'BBB-'; Outlook Negative

(The following statement was released by the rating agency) FRANKFURT/LONDON, June 09 (Fitch) Fitch Ratings has affirmed HSH Nordbank's (HSH) Long-Term Issuer Default Rating (IDR) at 'BBB-', Short-Term IDR at 'F3' and Support Rating (SR) at '2'. The Outlook is Negative. Its Viability Rating (VR) was affirmed at 'b'. A full list of rating actions is at the end of this rating action commentary. The affirmation follows a periodic review of the bank. The European Commissions (EC) in May 2016 ordered the privatisation of the bank by February 2018 in an open, transparent, non-discriminatory tender process or, if the sale is unsuccessful and HSH's viability not confirmed, a wind-down of the bank. HSH initiated the sales process in January 2017 and received non-binding bids from a range of investors with the process ongoing. KEY RATING DRIVERS IDRS, SENIOR DEBT AND SUPPORT RATING The bank's IDRs, senior debt rating and SR are driven by support from HSH's owners comprising the federal states of Schleswig-Holstein (AAA) and Hamburg (AAA), the regional savings banks and ultimately the Sparkassen-Finanzgruppe (SFG, A+/Stable), including the Sparkassen (savings banks) and Landesbanken-shared institutional protection fund (Sicherungseinrichtung). HSH's Long-Term IDR is five notches below SFG's Long-Term IDR, which reflects Fitch's view that the bank is strategic to its owners, but also its weak company profile, which in Fitch's opinion makes support less likely given the private investor test under EU legislation. HSH is currently in the midst of a privatisation process and we expect a clearer picture to emerge on final bidders over the coming months. Fitch believes that the pool of potential buyers is limited given HSH's overall weak asset quality and profitability, but under the terms of the EU agreement HSH could also be sold in parts. The agreement requires a positive, state aid-free sale price and a sale will be subject to the EC's assessment of viability of the new entity and its final approval. If the privatisation is successful HSH's regional state owners will no longer be majority shareholders and would only be allowed to own a combined share of up to 25% for a period of up to four years, and following a privatisation Fitch would likely consider the public sector owners' stakes in HSH no longer a strategic investment. If a sale is unsuccessful, the bank will have to cease new business activities and manage the assets with a view of winding them down. In this scenario, we expect that the existing owners will have financial and reputational incentives to ensure that the wind-down is managed in a way that senior unsecured creditors do not incur losses. The Negative Outlook on HSH's reflects our expectation that a sale could result in a downgrade of the IDRs if the new owners have a lower ability or propensity to provide support than HSH's current federal state owners. VR HSH's VR reflects the bank's weak stand-alone credit profile, still burdened by legacy exposures, despite an overall risk reduction in recent years and particularly in 2016. HSH has re-allocated certain business segments to the non-core bank to strengthen the core bank's business and credit profile and profitability metrics. This included a partial carve-out of the shipping portfolio to the non-core bank, which in turn has to bear higher costs. We believe risk reduction efforts over the last two years and stronger impaired loan coverage had a positive impact on the risk profile of the overall bank, because of measures undertaken in preparation for the sales process, but the viability of its business model remains uncertain. Commitments to deleverage the bank's legacy portfolio have led to a moderate improvement in assets quality, and we foresee further declines in the non-performing loan (NPL) ratio in 2017 due to committed asset sales. But HSH's NPL ratio at end-2016 was still the weakest among peers. A decline in risk-weighted assets resulted in an improved fully loaded CET 1 ratio of 13.4% at end-2016, in line with higher-rated peers and its leverage ratio is well above peers'. However, HSH's capitalisation remains burdened by high net impaired loans. The projected sale of a second tranche of assets in the amount of about EUR1.6 billion as part of the EU commitment in 2H17 will underpin an adequate capitalisation into 2018 and provide a sufficient buffer to its current SREP regulatory requirements. Nevertheless HSH's capitalisation will remain vulnerable to further asset quality deterioration in the shipping portfolio and potential negative rating migration even though charter rates improved in 1Q17. HSH's profitability is weak due to a decline in interest-earning assets and high restructuring costs. However, due to a guarantee mechanism EUR156 million of loan loss provisions were released at end-2016, which allowed HSH to report a net profit of EUR121 million. We believe that HSH's profitability is unlikely to materially improve until the bank's future business model has been decided in the event of a privatisation of the bank. HSH has reached its funding targets for 2016, driven by strong covered bond issuance and also unsecured and asset-based funding. Its liquidity metrics remained solid and we expect uninterrupted funding through 2017 in the absence of unexpected shocks to investor confidence during the privatisation process. DCR AND DEPOSIT RATINGS We view HSH as a notable derivative counterparty in light of the hedging activities inherent in its business model. We have aligned HSH's DCR and Deposit Ratings with the bank's respective Long- and Short-term IDRs. In Fitch's opinion, debt buffers do not afford any obvious incremental probability of default benefit over and above the support benefit already factored into their IDRs. STATE-GUARANTEED/GRANDFATHERED SECURITIES The 'AAA' rating of HSH's state-guaranteed/grandfathered senior debt, subordinated debt and market-linked securities reflect the credit strength of the guarantor - the federal state of Schleswig Holstein and the City of Hamburg - and our view that they will honour their guarantees. RATING SENSITIVITIES IDRS, SENIOR DEBT AND SUPPORT RATING HSH's IDRs, senior debt rating and SR are primarily sensitive to the likelihood of a successful privatisation. HSH's IDRs and Support Rating would only be upgraded if a new owner with a high rating and strong ability and propensity to support HSH is found. We believe that this is not impossible but view it highly unlikely. Fitch would likely place HSH's IDRs, senior debt rating and SR on Rating Watch Negative or downgrade the ratings if Fitch concludes that support from a successful buyer is not sufficiently strong to warrant an IDR of at least 'BBB-'. If the privatisation is not successful, HSH's shareholder structure will be unchanged and the bank will be wound down. In this case HSH is likely to remain a member of the protection scheme of the Landesbanken (Sicherungseinrichtung), which means that it could continue to receive support from its owners in combination with SFG to protect senior unsecured bondholders. This could result in the affirmation of its IDR at 'BBB-' if we conclude that imposing losses on senior creditors during the run-down of assets is prevented by the Sicherungseinrichtung and HSH's owners. VR An upgrade of HSH's VR would be contingent on the confirmation of the long-term sustainability of the bank's business model that will allow the bank to generate adequate profitability. Fitch believes that this would ultimately rely on its successful privatisation. A disruption of the sales process or sudden unexpected stress that would significantly undermine investor confidence in the bank and reduce HSH's chances on a successful privatisation could trigger a downgrade of its VR. We believe that in such a scenario HSH is most vulnerable to a stress on liquidity and funding. If HSH is wound-down, we would likely withdraw its VR, in line with our approach for other wind-down institutions where we believe a stand-alone assessment of the bank is not meaningful. DCR AND DEPOSIT RATING DCR and Deposit Ratings are sensitive to changes in HSH's IDRs. STATE-GUARANTEED/GRANDFATHERED SECURITIES The ratings of HSH's state-guaranteed/grandfathered senior debt, subordinated debt and market-linked securities are sensitive to changes in Fitch's view of the creditworthiness of the guarantors. The rating actions are as follows: HSH Nordbank AG Bank Long-Term IDR: affirmed at 'BBB-', Outlook Negative Short-Term IDR: affirmed at 'F3' Support Rating: affirmed at '2' Derivative Counterparty Rating: affirmed at 'BBB-(dcr)' Viability Rating: affirmed at 'b' Long-term senior debt, including programme ratings: affirmed at 'BBB-' Short-term senior debt: affirmed at 'F3' Long-term deposits: affirmed at 'BBB-' Short-term deposits: 'F3' State-guaranteed/grandfathered senior and subordinated debt: affirmed at 'AAA' State-guaranteed/grandfathered market-linked securities: affirmed at 'AAAemr' Senior market-linked securities: affirmed at 'BBB-emr' Contact: Primary Analyst Roger Schneider Director +49 69 768 076 242 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Ioana Sima Associate Director +44 20 3530 1736 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Summary of Financial Statement Adjustments: Fitch re-classifies the hedge effect of the second loss guarantee as an offset to loan impairment charges and removes the balance sheet impact of the compensation from impaired loans reserves to better reflect the economic effect of the second loss guarantee. Additional information is available on www.fitchratings.com 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. 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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