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Landesbank Berlin AG 18 December 2020 Update to Credit Analysis

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Landesbank Berlin AG 18 December 2020 Update to Credit Analysis FINANCIAL INSTITUTIONS CREDIT OPINION Landesbank Berlin AG 18 December 2020 Update to credit analysis Update Summary We assign Aa2(stable)/P-1 deposit and issuer ratings to Landesbank Berlin AG (LBB). We further assign A2 junior senior unsecured debt ratings, as well as Aa2/P-1 Counterparty Risk Ratings (CRRs), a baa2 Baseline Credit Assessment (BCA) and an a3 Adjusted BCA. The ratings reflect the bank's baa2 BCA, two notches of rating uplift from its membership RATINGS in the institutional protection scheme of Sparkassen-Finanzgruppe (S-Finanzgruppe, Aa2 Landesbank Berlin AG 1 Domicile Berlin, Germany negative, a2 ); the application of our Advanced Loss Given Failure (LGF) analysis to the Long Term CRR Aa2 liabilities of Erwerbsgesellschaft der S-Finanzgruppe mbH & Co. KG (SEG), LBB's ultimate Type LT Counterparty Risk parent, yielding three notches of rating uplift; and one notch of government support uplift, Rating - Fgn Curr Outlook Not Assigned given LBB's membership in Sparkassen-Finanzgruppe. Long-term debt Withdrawn LBB's baa2 BCA reflects the bank's strong deposit franchise and strengthened capital ratios, Type Senior Unsecured - Dom Curr constrained by increased asset risk stemming from substantial commercial real estate (CRE) Outlook Rating(s) Withdrawn lending exposures, mainly concentrated in the Berlin area. In addition, LBB's role within SEG Long Term Deposit Aa2 and, specifically, the weaker standalone credit profile of the bank's sister company Berlin Type LT Bank Deposits - Fgn 2 Curr Hyp AG (Berlin Hyp, Aa2/Aa2 stable, ba1 ) constrain LBB's BCA. While direct financial links Outlook Stable between the banks are limited, the close links within the group, via profit and loss transfer agreements (PLTAs), result in a significant risk correlation between the two banks. Our view Please see the ratings section at the end of this report for more information. The ratings and outlook shown of LBB's BCA could change if the coronavirus pandemic-induced credit shock leads to a reflect information as of the publication date. sustained erosion of its solvency. Exhibit 1 Rating Scorecard - Key financial ratios Contacts LBB (BCA: baa2) Median baa2-rated banks Alexander Hendricks, +49.69.70730.779 18% 40% CFA 16% 35% Associate Managing Director 14% 30% [email protected] FactorsLiquidity 12% 25% Andrea Wehmeier +49.69.70730.782 10% 20% VP-Senior Analyst 8% 15% [email protected] 6% SolvencyFactors 4% 10% 2% 1.4% 5% 16.5% 0.1% 11.6% 34.7% 0% 0% Asset Risk: Capital: Profitability: Funding Structure: Liquid Resources: Problem Loans/ Tangible Common Net Income/ Market Funds/ Liquid Banking Gross Loans Equity/Risk-Weighted Tangible Assets Tangible Banking Assets/Tangible Assets Assets Banking Assets Solvency Factors (LHS) Liquidity Factors (RHS) Source: Moody's Investors Service MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Credit strengths » Adequate risk-adjusted capitalisation levels, providing a sufficient buffer for regulatory minimum requirements » Improved asset quality » Solid liquidity, supported by strong access to customer deposits and significant liquid resources Credit challenges » Substantial CRE exposures, exposing the bank to tail risks from dislocations in CRE markets » Geographical concentration in the Berlin-Brandenburg region » Close contractual links within the SEG group, which constrain LBB's credit profile Outlook The stable outlook reflects our expectations that the combined credit profile of LBB and its sister company Berlin Hyp (measured by the consolidated accounts of both banks' ultimate parent SEG) will stay broadly unchanged and that SEG's liability structure will stay stable. Factors that could lead to an upgrade » An upgrade of LBB's ratings will be subject to an upgrade of its baa2 BCA and a3 Adjusted BCA. In addition, an upgrade of the bank's junior senior unsecured debt rating could be driven by improved results from our Advanced LGF analysis, if sufficient amounts of subordinated or junior senior unsecured debt were to be issued by LBB or Berlin Hyp, or both, which would provide an additional buffer or lower the loss severity for junior senior debt at the consolidated level of SEG. » An upgrade of LBB's Adjusted BCA would require an improvement in the combined intrinsic strength of LBB and Berlin Hyp, as reflected in the consolidated accounts of SEG, which would be subject to a significant increase in the diversification of the group's lending book. » Upward pressure on LBB's baa2 BCA could develop following a strengthening of the combined credit profile of LBB and Berlin Hyp, as reflected in the consolidated SEG accounts. Furthermore, a revision of the currently applicable PLTAs, as part of a reorganisation of SEG, and the associated reduction in risk correlations between LBB and Berlin Hyp could potentially lead to a reassessment of the currently applicable constraint for LBB's BCA. Factors that could lead to a downgrade » A downgrade of LBB's ratings will be subject to a lowering of its a3 Adjusted BCA. In addition, changes in SEG's liability structure, resulting in a higher loss given failure in resolution and, therefore, fewer notches of rating uplift from our Advanced LGF analysis, could negatively affect the ratings. » Downward pressure on LBB's a3 Adjusted BCA could develop as a result of a significant weakening of LBB's and Berlin Hyp's financial fundamentals to the extent that the combined credit strength of SEG is adversely affected, particularly if higher asset risks at both banks deplete the group's capital resources. » Downward pressure on LBB's BCA could develop from a significant weakening of both its solvency and liquidity. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 18 December 2020 Landesbank Berlin AG: Update to credit analysis MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Key indicators Exhibit 2 Landesbank Berlin AG (Consolidated Financials) [1] 06-202 12-192 12-182 12-172 12-162 CAGR/Avg.3 Total Assets (EUR Billion) 44.1 40.9 43.1 44.8 45.9 (1.1)4 Total Assets (USD Billion) 49.5 45.9 49.2 53.8 48.4 0.74 Tangible Common Equity (EUR Billion) 2.4 2.4 2.3 2.3 2.2 1.74 Tangible Common Equity (USD Billion) 2.7 2.7 2.6 2.7 2.4 3.54 Problem Loans / Gross Loans (%) -- 0.7 1.7 1.8 2.5 1.75 Tangible Common Equity / Risk Weighted Assets (%) 16.5 17.7 16.8 17.8 18.1 17.46 Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) -- 5.9 13.1 13.6 17.0 12.45 Net Interest Margin (%) 1.8 1.7 1.7 1.6 1.6 1.75 PPI / Average RWA (%) 0.7 0.8 1.0 1.3 1.2 1.06 Net Income / Tangible Assets (%) 0.1 0.4 0.1 0.2 0.3 0.25 Cost / Income Ratio (%) 90.4 89.9 87.9 85.3 87.8 88.35 Market Funds / Tangible Banking Assets (%) 16.3 11.6 15.1 18.1 20.8 16.45 Liquid Banking Assets / Tangible Banking Assets (%) 36.1 34.7 43.0 47.4 52.1 42.75 Gross Loans / Due to Customers (%) -- 85.1 78.3 74.6 66.8 76.25 [1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully loaded or transitional phase-in; LOCAL GAAP. [3] May include rounding differences because of the scale of reported amounts. [4] Compound annual growth rate (%) based on the periods for the latest accounting regime. [5] Simple average of periods for the latest accounting regime. [6] Simple average of Basel III periods. Sources: Moody's Investors Service and company filings Profile Landesbank Berlin AG (LBB) is a German public sector bank that provides retail banking, corporate banking and real estate financing services in the Berlin-Brandenburg region. In addition to its local mandate, LBB's remit on a national scale encompasses the provision of certain services for Sparkassen-Finanzgruppe (S-Group) in the areas of consumer finance, auto loans and credit cards. As of June 2020, the bank reported total assets of €44.1 billion and employed 3,158 staff. LBB and its sister company, CRE lender Berlin Hyp AG (Berlin Hyp), are set up under Erwerbsgesellschaft der S-Finanzgruppe mbH & Co. KG's (SEG) umbrella and are closely tied via a PLTA with Landesbank Berlin Holding AG (LBBH), a holding entity, which is fully owned by SEG. LBB delivers its retail banking, corporate banking and real estate financing services through Berliner Sparkasse, a branch of LBB, while other services, such as its auto loan and consumer finance businesses, are housed within the S-Kreditpartner GmbH (SKP) subsidiary, and the national credit card business and treasury management are operated by LBB. Weighted Macro Profile of Strong+ As a result of the bank's large exposure to its home market, the assigned Weighted Macro Profile of LBB is set at Strong+, in line with the Macro Profile of Germany (Aaa, stable) Recent developments Nascent economic rebound takes hold globally but recovery will remain fragile. We expect the G-20 advanced economies as a group to contract by 5.1% in 2020 and the euro area by 7.7%, followed by a gradual recovery in 2021. The recession in 2020 will weigh on banks' asset quality and profitability. In the current pandemic-induced recession and its aftermath, capital levels will be a key differentiator of credit profiles among banks. Generally, banks are facing a sharp deterioration in asset quality and reduction in profitability from already-low levels, while central banks are providing extraordinary levels of liquidity and governments have strong incentives to support banking systems to foster an eventual recovery.
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