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Rating Action:

Moody's affirms Aa2 corporate family rating of Sparkassen-Finanzgruppe, outlook changed to stable from negative

13 Oct 2021

Ratings of Sparkassenverband Baden-Wuerttemberg and Kreissparkasse Koeln also affirmed with stable outlooks

Frankfurt am Main, October 13, 2021 -- Moody's Investors Service (Moody's) has today affirmed the Aa2 corporate family rating (CFR) and the a2 Baseline Credit Assessment (BCA) and Adjusted BCA of Sparkassen-Finanzgruppe (S-Finanzgruppe). The rating agency also affirmed the Aa3 long-term issuer rating of Sparkassenverband Baden-Wuerttemberg (SVBW) and the Aa3 long-term deposit and issuer ratings of Kreissparkasse Koeln (KSK Koeln), as well as KSK Koeln's a3 BCA and a2 Adjusted BCA.

Concurrently, Moody's changed the outlook to stable from negative on the CFR as well as the long-term deposit and issuer ratings where applicable.

For a list of all affected ratings, please refer to the end of this press release.

RATINGS RATIONALE

-- RATIONALE FOR THE AFFIRMATION OF S-FINANZGRUPPE'S BCA

Today's rating action reflects Moody's assessment that the financial strength of S-Finanzgruppe, Germany's largest banking group, remains resilient despite material economic challenges caused by the pandemic and persisting structural profitability challenges which have become aggravated by the extension of an ultra-low interest rate environment and the group's lackluster success in lifting operating efficiency. Notwithstanding, S-Finanzgruppe remains among the strongest universal banking group's globally.

A key factor for the affirmation is the very low risk profiles of its member savings banks and captures the business profiles of the group of Landesbanks which has successfully and sustainably been de-risked over several years. As of June 2021, the financially stronger savings banks accounted for around 65% of the aggregate assets of savings banks and Landesbanks, whereas a decade ago the financially weaker Landesbanks contributed the majority of combined assets. This shift towards the more resilient, primarily retail client focused savings banks together with the long-term de-risking and restructuring of the Landesbanks, which started after the global financial crisis, results in a significant decline of the group's asset risks, which now better reflects the economic strengths and challenges of its home market.

While Moody's believes that the sector will make gradual progress in cost management and raising its revenues from fee and commission income, S-Finanzgruppe's sustainable profitability will continue to only provide a moderate buffer against unexpected losses and remains a weakness of its financial profile. The rating agency anticipates the group's profitability as a percentage of its growing tangible assets base to remain under pressure, in particular as cost of risk is expected to normalize from 2022 on and the adverse interest rate environment will continue to compress interest margins.

Overall, the affirmation of S-Finanzgruppe's a2 BCA reflects its strong and improved asset quality, its very strong and stable capitalization, as well as its defensive, deposit-focused funding profile and sufficient balance-sheet liquidity. The BCA also takes into account the group's overall robustness given its leading market shares in Germany and the agency's expectation of an economic recovery in Germany which should keep credit risk at benign levels and allows for a moderate level of profitability.

-- RATIONALE FOR THE AFFIRMATION OF S-FINANZGRUPPE'S CORPORATE FAMILY RATING

The affirmation of S-Finanzgruppe's Aa2 CFR reflects the affirmation of its a2 BCA and Adjusted BCA; the unchanged two notches of rating uplift from Moody's Advanced Loss Given Failure (LGF) analysis; and the unchanged one notch uplift from Moody's assumption of moderate government support.

S-Finanzgruppe's CFR represents the risk characteristics of a notional single class of debt assumed to fund its aggregate balance sheet. Moody's Advanced Loss Given Failure analysis suggests that this notional instrument would face very low losses in resolution.

-- RATIONALE FOR THE RATING AFFIRMATION OF SVBW

The affirmation of SVBW's Aa3 long-term issuer rating reflects SVBW's unchanged intrinsic financial strength; the very high support assumption from S-Finanzgruppe; the result of Moody's Advanced LGF analysis to SVBW's and its members' liabilities, which results in a low loss given failure; as well as Moody's assumption of a moderate likelihood of SVBW receiving government support given its membership in the systemically relevant S-Finanzgruppe.

SVBW's intrinsic financial strength is based on aggregated financials considering the legal and statutory interlinks among its 50 member banks, the regional savings banks of Baden-Wuerttemberg. The regional savings banks' financial strength is similar to the strength of the entire group of savings banks in Germany and characterized by high asset quality and low levels of non-performing loans, a very strong capitalisation, both on a risk-weighted basis and in relation to total assets, but also a more moderate profitability. SVBW's funding profile benefits from granular, largely retail deposits and an overall sufficient amount of liquid resources. In particular, the member banks' asset quality proved to be resilient during the pandemic, despite evidencing some geographic concentration to a region which represents the core of German manufacturing, including car manufacturers and suppliers, and a meaningful share of employment in these sectors within the state of Baden-Wuerttemberg.

-- RATIONALE FOR THE RATING AFFIRMATION OF KSK KOELN

The affirmation of KSK Koeln's Aa3 long-term deposit and issuer ratings reflects the affirmation of the bank's a3 BCA and a2 Adjusted BCA; the unchanged one notch of rating uplift from Moody's Advanced LGF analysis; and the unchanged one notch uplift from Moody's assumption of moderate government support.

The affirmation of KSK Koeln's a3 BCA reflects the bank's strong asset quality, which, however, has embedded regional concentration risk from operating in a narrowly defined region within Germany. KSK Koeln reports a very high capitalization and has an extremely defensive funding mix, which is almost exclusively based on high-quality, granular deposit funding, accompanied by pass-through loans from German development banks. The key vulnerability of KSK Koeln's creditworthiness is its weak profitability, largely caused by an excessive cost base in relation to its revenues.

The affirmation of KSK Koeln's a2 Adjusted BCA reflects one notch of rating uplift to KSK Koeln's a3 BCA from affiliate support. Being a savings bank, Moody's considers KSK Koeln to be a core member of S-Finanzgruppe. The group and its member banks operate a regulated and supervised institutional protection scheme and the rating agency assesses the likelihood that savings banks receive support as very high, resulting in an Adjusted BCA that benefits from the overall financial creditworthiness of the group.

OUTLOOK CHANGE TO STABLE FROM NEGATIVE

The change in outlook to stable from negative for the long-term CFR of S-Finanzgruppe, long-term issuer rating of SVBW, and long-term issuer and deposit ratings of KSK Koeln reflects Moody's expectation that the German savings banks sector and its member banks will maintain stable fundamental credit profiles with broadly unchanged key financial ratios over the 12 to 18 months outlook horizon. Despite continuous pressure on profitability, the sector and member banks' creditworthiness will continue to benefit from a low risk profile, strong capitalisation and solid retail deposit base over the outlook horizon. Further, the stable outlooks capture Moody's expectation of unchanged liability structures for SVBW and KSK Koeln, and therefore unchanged results from its Advanced LGF Analysis.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of S-Finanzgruppe's, SVBW's or KSK Koeln's ratings could be triggered by an improvement in the savings banks sector's financial strength. While upward pressure on S-Finanzgruppe's BCA is unlikely, given its high level, a BCA upgrade could result from a meaningful and sustainable progress in improving its overall profitability without increasing its risk appetite.

Upward pressure on SVBW's or KSK Koeln's rating could further result from the issuance of material volumes of senior unsecured or subordinated debt instruments, such that it results in increased rating uplift from Moody's Advanced LGF analysis.

Downward pressure on S-Finanzgruppe's, SVBW's or KSK Koeln's ratings could result from a downgrade of their BCAs, for example because of a significant weakening of asset quality or a deterioration of profitability beyond Moody's current expectation. The ratings of S-Finanzgruppe's member banks could also be downgraded if the creditworthiness of S-Finanzgruppe, the supporting entity, weakened, which could result in fewer notches of rating uplift from affiliate support.

In addition, SVBW's and KSK Koeln's ratings could be downgraded because of fewer notches of rating uplift from Moody's Advanced LGF analysis, for example because their funding profiles shift further towards deposits and away from senior unsecured and lower ranking instruments.

LIST OF AFFECTED RATINGS

Issuer: Sparkassen-Finanzgruppe

..Affirmations:

....Long-term Corporate Family Rating, affirmed Aa2, outlook changed to Stable from Negative

....Baseline Credit Assessment, affirmed a2

....Adjusted Baseline Credit Assessment, affirmed a2

..Outlook Action:

....Outlook changed to Stable From Negative

Issuer: Sparkassenverband Baden-Wuerttemberg

..Affirmation:

....Long-term Issuer Rating, affirmed Aa3, outlook changed to Stable from Negative

..Outlook Action:

....Outlook changed to Stable From Negative

Issuer: Kreissparkasse Koeln

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed Aa2

....Short-term Counterparty Risk Ratings, affirmed P-1

....Long-term Bank Deposits, affirmed Aa3, outlook changed to Stable from Negative

....Short-term Bank Deposits, affirmed P-1

....Long-term Counterparty Risk Assessment, affirmed Aa1(cr)

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Long-term Issuer Rating, affirmed Aa3, outlook changed to Stable from Negative

....Baseline Credit Assessment, affirmed a3

....Adjusted Baseline Credit Assessment, affirmed a2

..Outlook Action:

....Outlook changed to Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Swen Metzler, CFA
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alexander Hendricks, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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