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Rating Action:

Moody's affirms Bausparkasse Mainz's A2 deposit ratings; outlook negative

30 Nov 2016

Frankfurt am Main, November 30, 2016 -- Moody's Investors Service has today affirmed Bausparkasse Mainz AG's (BKM) long-term deposit ratings at A2 and maintained a negative outlook on the ratings. The rating agency has also affirmed BKM's Baseline Credit Assessment (BCA) and adjusted BCA at baa2, as well as its short-term deposit ratings at Prime-1 (P-1). The building and loan association's Counterparty Risk (CR) Assessment was also affirmed at A2(cr)/Prime-1(cr).

Today's rating action reflects: (1) Moody's assessment of the negative implications of the protracted low interest rate environment on BKM's earnings and related pressures on its narrow business model; and (2) BKM's otherwise sound financial fundamentals such as asset quality, capitalisation and liquidity, underscored by a higher macro profile of 'Very Strong--'.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

---RATIONALE FOR THE AFFIRMATION OF BKM'S BASELINE CREDIT ASSESSMENT

The affirmation of BKM's BCA at baa2 reflects the bank's proven ability to maintain good asset quality, as well as sound capitalisation and liquidity levels within a challenging business environment. Following a significant reduction of the negative market value position of its interest rate swap hedges during its loss-making year 2014, the bank has restored modest profitability levels, which the rating agency expects to be sustainable in a continued low interest rate environment.

Within the building and loan associations (Bausparkassen) sector, BKM is the entity with the lowest proportion of actual Bauspar deposits within its refinancing mix. In light of the fixed interest rate payment promises attached to such deposits, BKM's access to a more diversified set of refinancing options currently provides the bank with overall less expensive funding cost versus its peers. This flexibility is a key relative strength of the entity compared to the broader sector of German building associations. The rating agency believes that the lower weight of costly Bauspar deposits in its funding structure also limits BKM's exposure to the pending lawsuits launched by clients of the sector for a range of reasons, including deposit contract terminations and fees charged.

Following the amendment of the sector-specific legislation in late 2015, Moody's understands BKM intends to make use of the greater flexibility of the law afforded for both its assets and liabilities. The rating agency believes that this would, however, only result in moderately higher risk taking, accompanied by declining refinancing costs for its non-Bauspar liabilities. In addition, cost saving measures initiated in 2014 have helped reduce BKM's non-interest expenses.

Overall, the strong focus of the bank's core business and securities investment activities on the domestic German market and on other comparably strong economies, Moody's raised BKM's weighted macro profile to "Very Strong--", which further underpins the current positioning of the baa2 BCA.

---RATIONALE FOR THE AFFIRMATION OF BKM'S DEPOSIT RATINGS AND CR ASSESSMENT

BKM's A2 deposit ratings reflect: (1) The bank's baa2 BCA and adjusted BCA; (2) the result of Moody's Advanced Loss-Given-Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes in resolution and provides three notches of rating uplift to BKM's deposit ratings; and (3) a low probability of BKM receiving government support, resulting in no rating uplift.

BKM is subject to the EU Bank Recovery and Resolution Directive (BRRD), which the agency considers to be an Operational Resolution Regime. Moody's therefore applies its Advanced LGF analysis, considering the risks faced by the different debt and deposit classes across the liability structure at failure.

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they: (1) Consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default; and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. Our CR Assessment captures the probability of default on certain senior obligations, rather than expected loss. Therefore, we focus purely on subordination and take no account of the volume of the instrument class. BKM's A2(cr)/P-1(cr) benefits from three notches of uplift above the baa2 adjusted BCA, reflecting the high amount of subordination provided, in particular, by BKM's outstanding senior unsecured debt.

---RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's assessment that the prolonged low interest rate environment has given rise to unprecedented structural challenges for building and loan associations ("Bausparkassen") in Germany (Aaa stable) that weigh on the profit and franchise outlook for BKM. Its monoline business model provides BKM with fewer opportunities to offset these negative pressures compared to other, more diversified retail banks. Hence, the A2 ratings of BKM could be downgraded if the bank's current baa2 BCA was downgraded during the ratings outlook period.

WHAT COULD MOVE THE RATINGS UP/DOWN

The negative outlook on BKM's ratings indicates that there is currently no upward pressure on the ratings.

A lower BCA would exert downward pressure on BKM's long-term ratings. BKM's long-term ratings may also be downgraded upon a change in its liability structure, particularly if the amount of senior debt outstanding declines from current levels. This could result in higher than the currently expected extremely low loss-given-failure for BKM's depositors.

A downgrade of BKM's BCA to baa3 could result from: (1) increasing margin pressure from the low interest-rate environment; (2) more aggressive risk-taking following the greater flexibility afforded in this respect by last year's amendment of the sector's specific law that would negatively affect the bank's asset-quality; and/or (3) future growth of BKM's balance sheet outpacing its capacity to generate additional capital.

LIST OF AFFECTED RATINGS

The following ratings were affirmed:

....Adjusted Baseline Credit Assessment, affirmed at baa2

....Baseline Credit Assessment, affirmed at baa2

....LT Counterparty Risk Assessment, affirmed at A2(cr)

....ST Counterparty Risk Assessment, affirmed at P-1(cr)

....LT Bank Deposits (Local & Foreign Currency), affirmed at A2, Outlook Remains Negative

....ST Bank Deposits (Local & Foreign Currency), affirmed at P-1

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Bernhard Held
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

No Related Data.
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