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Landesbank Berlin AG 12 June 2020 Update to Credit Analysis

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Landesbank Berlin AG 12 June 2020 Update to Credit Analysis FINANCIAL INSTITUTIONS CREDIT OPINION Landesbank Berlin AG 12 June 2020 Update to credit analysis Update Summary We assign Aa2 (stable)/P-1 deposit and issuer ratings to Landesbank Berlin AG's (LBB). We further assign A2 junior senior unsecured debt ratings, as well as its 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-Group, Aa2 negative, Landesbank Berlin AG 1 Domicile Berlin, Germany a2 ); the application of our Advanced Loss Given Failure (LGF) analysis to the liabilities of Long Term CRR Aa2 Erwerbsgesellschaft der S-Finanzgruppe mbH & Co. KG (SEG), LBB's ultimate parent, yielding Type LT Counterparty Risk three notches of rating uplift, and one notch of government support, given LBB's membership Rating - Fgn Curr Outlook Not Assigned 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 Long Term Debt Withdrawn LBB's baa2 BCA reflects the bank's strong deposit franchise and strengthened capital ratios, Type Senior Unsecured - Dom Curr while it is restrained by heightened asset risk, because of substantial commercial real estate Outlook Rating(s) WithDrawn (CRE) lending exposures, largely concentrated in the Berlin area. In addition, LBB's role within Long Term Deposit Aa2 SEG 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 meaningful 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 on LBB's BCA could change if the coronavirus credit shock led to a sustained erosion of its reflect information as of the publication date. 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% Liquidity FactorsLiquidity [email protected] 12% 25% 10% Andrea Wehmeier +49.69.70730.782 20% 8% VP-Senior Analyst 15% [email protected] 6% Solvency FactorsSolvency 4% 10% 1.9% 2% 5% 16.6% 0.2% 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) Asset Risk and Capital reflect latest available data Source: Moody's Investors Service MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Credit strengths » Adequate risk-adjusted capitalisation levels, providing a sufficient buffer to 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 expectation that the combined credit profile of LBB and its sister company Berlin Hyp (measured through the consolidated accounts of both banks' ultimate parent SEG) will stay broadly unchanged and that the liability structure of SEG 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 an improved result 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 a joint improvement of the intrinsic strength of LBB and Berlin Hyp, as reflected in the consolidated accounts of SEG, which would be subject to a material increase it the group's diversification of its 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 in rating uplift derived from our Advanced LGF analysis, could negatively affect the ratings. » Downward pressure on LBB's a3 Adjusted BCA could develop from significant weakening of LBB's and Berlin Hyp's financial fundamentals to the extent that the combined credit strength of SEG was adversely affected, particularly if higher asset risks at both banks depleted the group's capital resources. » Downward pressure on LBB's BCA could develop from a significant joint weakening of LBB's solvency and liquidity profile. 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 12 June 2020 Landesbank Berlin AG: Update to credit analysis MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS Key indicators Exhibit 2 Landesbank Berlin AG (Consolidated Financials) [1] 12-192 12-182 12-172 12-162 12-152 CAGR/Avg.3 Total Assets (EUR Billion) 40.9 43.1 44.8 45.9 47.5 (3.6)4 Total Assets (USD Billion) 45.9 49.2 53.8 48.4 51.6 (2.9)4 Tangible Common Equity (EUR Billion) 2.4 2.3 2.3 2.2 2.1 2.64 Tangible Common Equity (USD Billion) 2.7 2.6 2.7 2.4 2.3 3.44 Problem Loans / Gross Loans (%) -- 1.6 1.7 2.3 2.8 2.15 Tangible Common Equity / Risk Weighted Assets (%) -- 16.8 17.8 18.1 17.4 17.56 Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) -- 12.3 12.9 15.8 17.6 14.65 Net Interest Margin (%) 1.7 1.7 1.6 1.6 1.4 1.65 PPI / Average RWA (%) -- 1.0 1.3 1.2 0.5 1.06 Net Income / Tangible Assets (%) 0.4 0.1 0.2 0.3 0.0 0.25 Cost / Income Ratio (%) 89.9 87.9 85.3 87.8 94.3 89.15 Market Funds / Tangible Banking Assets (%) 11.6 15.1 18.1 20.8 29.1 18.95 Liquid Banking Assets / Tangible Banking Assets (%) 34.7 43.0 47.4 52.1 56.9 46.85 Gross Loans / Due to Customers (%) 85.1 78.3 74.6 66.8 64.8 73.95 [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 S-Group in the areas of consumer finance, auto loans and credit cards. As of year-end 2019, the bank reported total assets of €40.9 billion and employed 3,170 staff. LBB and its sister company, CRE lender Berlin Hyp, are set up under the 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 is delivering 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 being housed within the S-Kreditpartner GmbH (SKP) subsidiary, and the national credit card business and treasury management are being operated by LBB itself. 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. Recent developments The coronavirus will cause unprecedented shock to the global economy. The full extent of the economic downswing will be unclear for some time; however, G-20 economies will contract in 2020. We presently expect the G-20 advanced economies as a group to contract by 5.8% in 2020 and the euro area by 6.5%, followed by a gradual recovery in 2021. In Europe, the coronavirus outbreak adds to late-cycle risks for European banks. The recession in 2020 will weigh on banks' asset quality and profitability.
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