DZ BANK and German Cooperative Banking Sector Upgraded to 'AA-/A-1+' on Bank Criteria Change; Outlook Stable
Total Page：16
File Type：pdf, Size：1020Kb
December 5, 2011 DZ BANK And German Cooperative Banking Sector Upgraded To 'AA-/A-1+' On Bank Criteria Change; Outlook Stable Primary Credit Analyst: Harm Semder, Frankfurt (49) 69-33-999-158; [email protected] Secondary Contact: Markus Schmaus, Frankfurt (49) 69-33-999-155; [email protected] Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List www.standardandpoors.com/ratingsdirect 1 919207 | 300016412 DZ BANK And German Cooperative Banking Sector Upgraded To 'AA-/A-1+' On Bank Criteria Change; Outlook Stable Overview • Following a review of Germany's cooperative banking sector under Standard & Poor's revised bank criteria (published on Nov. 9, 2011), we have raised our ratings on the sector's core members, including central bank DZ BANK, to 'AA-/A-1+' from 'A+/A-1'. • Our ratings on the sector's core members reflect our view of the sector's strong aggregate business position, strong capital and earnings, adequate risk position, above-average funding, and strong liquidity. • We regard the sector as a cohesive economic group and expect to see solidarity support among member banks in a crisis. We do not factor in additional uplift for potential extraordinary government support. • The stable outlook reflects our view that the ratings on Germany's cooperative banking sector are unlikely to change over the next one to two years, assuming continually robust credit metrics. We also believe that the solidarity support within the sector will remain unchanged. Rating Action As previously announced, on Dec. 5, 2011, Standard & Poor's Ratings Services raised its long- and short-term counterparty credit ratings on core members of Germany's cooperative banking sector, including its main central bank DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ BANK) to 'AA-/A-1+' from 'A+/A-1'. The outlook on all entities is stable. At the same time, we raised various issue ratings on the debt instruments of DZ BANK and its subsidiaries. Rationale Standard & Poor's bases its ratings on core group members of Germany's cooperative banking sector, which, on aggregate, show a "strong" business position, "strong" capital and earnings, an "adequate" risk position, "above-average" funding, and "strong" liquidity, as our criteria define these terms. We assess the group credit profile (GCP) at 'aa-'. Under our bank criteria, we use our Banking Industry Country Risk Assessment economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating (ICR). Our anchor for a commercial bank operating only in Germany is 'a-', based on an economic risk score of '1' and an industry risk score of '3'. Our economic risk assessment reflects Germany's highly diversified and competitive economy and a lack of major economic imbalances. An export-led nation, Germany remains vulnerable to swings in global economies, trade flows, and capital market trends, however. Economic risk for the cooperative banking sector is, in our view, in line Standard & Poors | RatingsDirect on the Global Credit Portal | December 5, 2011 2 919207 | 300016412 DZ BANK And German Cooperative Banking Sector Upgraded To 'AA-/A-1+' On Bank Criteria Change; Outlook Stable with that of the anchor because almost all lending is in Germany. Industry risk benefits from Germany's extensive funding market and banks' domestic funding surpluses from low domestic credit growth and high savings rates. However, the sector's competitive dynamics result in relatively low profitability, which is fueled by significant disparities in the commercial targets and business and risk profiles of market players. We expect the sector to maintain its "strong" business position as the second largest financial services group in Germany. This is because we view the sector as somewhat less vulnerable than the industry risk score of '3' indicates. The sector comprises more than 1,100 local cooperative banks that service more than 30 million domestic customers. These banks have impressive market shares in traditional retail banking, which provide, in our view, superior business stability. The banks also have strong market positions in nonbank financial services through specialized sector entities. DZ BANK, the sector's main central bank, consolidates the specialized product providers, allowing the sector to offer a complete range of financial services, such as insurance, building-savings contracts, mutual funds, and leasing. However, in our view, limited strategic leadership and execution is a relative weakness for the sector relative to some mutual banking groups. We believe this weakens the sector's financial performance and its ability to respond to challenges (such as intense margin pressure and banks' high cost bases) or to strengthen its below-average position in domestic corporate banking. Our assessment of the sector's capital and earnings as "strong" reflects our expectation that the aggregate risk-adjusted capital (RAC) ratio (before diversification adjustments) will continue to improve. We anticipate that the aggregate RAC ratio could increase to about 12.0% by 2013 from about 10.5% at year-end 2010. We base this on the cooperative banks' good quality earnings, moderate growth potential, and ownership structures that support high earnings retention into capital. Distributing capital resources across the sector to support growth remains a challenge, however. For example, although the cooperative banks enjoy particularly strong capitalization, the RAC ratio for DZ BANK will likely remain moderate at less than 6%. We assess the sector's risk position as "adequate". In our opinion, German cooperative banks benefit from a favorable economic environment, their highly granular portfolios of retail and small and midsize enterprise clients, and moderate growth potential. However, decentralization means that the group lacks a harmonized risk management system and increases the complexity of managing larger members' exposures. Nevertheless, on the positive side, we see that DZ BANK is making progress in reducing risk from its international operations and oversized structured credit investments. The cooperative banking sector will likely maintain its "above-average" funding position and "strong" liquidity. We base this assessment on the sizable surplus liquidity of the majority of local cooperative banks. These banks' funding stems chiefly from retail deposits and they typically display loan-to-deposit ratios of about 70%. The excess funding is mainly channeled to the sector's two central clearing institutions, DZ BANK and WGZ BANK AG Westdeutsche Genossenschafts-Zentralbank, increasing the clearing banks' liquidity. DZ BANK and WGZ BANK reinvest the funds in other businesses. Our ICR on the sector is equal to our assessment of the GCP. This reflects our view of the sector's aggregate creditworthiness and solidarity support, including its comprehensive protection scheme for member banks in an emerging stress scenario. The protection scheme is administered by the National Association of German Cooperative www.standardandpoors.com/ratingsdirect 3 919207 | 300016412 DZ BANK And German Cooperative Banking Sector Upgraded To 'AA-/A-1+' On Bank Criteria Change; Outlook Stable Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e.V.). We do not add an uplift to the GCP for potential extraordinary government support because we consider the local cooperative banks to have low systemic importance in Germany's banking industry. In addition, unlike some mutual banking groups, the German cooperative banking sector does not need to comply with regulatory requirements on a consolidated basis, which hampers supervision as well as the fungibility of capital and liquidity within the group. Our criteria state that subsidiaries or member banks we consider to have moderate or high systemic importance--like DZ BANK--would receive the higher indicative ICR resulting from our assessment of group support or government support. We raised the issue ratings on DZ BANK's nondeferrable senior subordinated debt to 'A+' from 'A-'. The reason for this is our view of sector support to maintain payments on these instruments. Nonetheless, we believe that Germany's legal and regulatory framework allows the authorities to instigate restructuring of a failing bank to the detriment of nondeferrable subordinated debtholders. We raised our issue ratings to 'A' (two notches below the ICR) from 'BBB+' on several hybrid capital instruments issued by DZ BANK Capital Funding Trust I (nominal €300 million) and DZ BANK Perpetual Funding Private Issuer (Jersey) Ltd. (two issues: nominal €290 million and nominal €210 million). The issue ratings reflect our view that the instruments absorb losses only after a broad earnings test (including management's discretion to reverse capital reserves), measured on unconsolidated balance sheet profits according to German generally accepted accounting principles. Moreover, we raised our issue ratings on DZ BANK's other outstanding hybrid capital instruments to 'A-' (three notches below the ICR) from 'BBB'. This reflects our view that the instruments absorb losses only after a narrow earnings test (excluding management's discretion to reverse capital reserves), measured on the consolidated net loss/gain before minority interest according to International Financial Reporting Standards. Outlook The stable outlook reflects our expectation that the ratings on Germany's cooperative