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Rating Action:

Moody's affirms DZ BANK's ratings post-merger and withdraws ratings of WGZ BANK

05 Aug 2016

Frankfurt am Main, August 05, 2016 -- Moody's Investor Service (Moody's) affirmed DZ BANK AG Deutsche Zentral-Genossenschaftsbank's (DZ BANK) Aa1/Prime-1 deposit ratings, its Aa3/Prime-1 senior unsecured debt and issuer ratings and its A3 subordinated debt ratings. DZ BANK's baa2 baseline credit assessment (BCA), its a2 adjusted BCA and its Aa1(cr)/Prime-1(cr) Counterparty Risk (CR) Assessments were also affirmed. The outlook on the bank's Aa3 long-term debt rating was changed to positive from stable, and the stable outlook on the Aa1 long-term deposits was maintained.

In addition, Moody's affirmed and will withdraw WGZ BANK AG's (WGZ) Aa1/Prime-1 deposit ratings. Moody's also withdrew the bank's Aa1(cr)/Prime-1(cr) CR Assessments, its Aa2 issuer rating, as well as its baa2 BCA and a2 adjusted BCA.

Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

The rating actions follow DZ BANK's preannounced merger with WGZ, which took effect on 29 July 2016. With this transaction, DZ BANK effectively assumed the assets and liabilities of WGZ, and WGZ ceased to exist as a separate legal entity.

In addition, Moody's affirmed the ratings of WGZ Bank Ireland Plc (WGZ-I), for which the merger resulted in a change of parent bank from WGZ to DZ BANK. The affirmed ratings and rating input factors are the bank's A1 long-term deposit rating with its positive outlook, the Prime-1 short-term deposit rating, the A1(cr)/Prime-1(cr) CR Assessment, the baa2 BCA and the a2 adjusted BCA.

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

RATINGS RATIONALE

AFFIRMATION OF DZ BANK'S RATINGS

Moody's affirmation of DZ BANK's debt and deposit ratings takes into account the various financial benefits from the merger, but also the possible, mildly adverse effects for the enlarged bank. The merger with WGZ makes DZ BANK the single central institution for all of Germany's cooperative sector banks and the third-largest commercial banking group in Germany, with a balance sheet of approximately EUR500 billion total assets.

Specifically, the affirmation takes into account:

1) the stability of DZ BANK's baa2 BCA, in recognition of mildly positive effects from the merger with WGZ in the areas of asset risk and capitalisation, but also of possible offsetting factors, such as the addition of WGZ's less profitable operations;

2) Moody's unchanged assumption of a very high probability of support available from the co-operative sector, represented by its central organisation, Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR, unrated), which results in three notches of affiliate support uplift, leading to an adjusted BCA of a2;

3) Moody's Advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes in resolution, providing one notch of rating uplift for the bank's senior unsecured debt and issuer ratings and three notches for the deposit ratings, from DZ BANK's a2 adjusted BCA; and

4) a moderate probability of DZ BANK receiving government support, yielding one notch of government support uplift.

DZ BANK's targeted medium-term Common Equity Tier 1 (CET1) ratio of 13.5% and 4.0% leverage ratio, both based on full application of the Basel III rules, are supportive of a stable fundamental risk profile, expressed in the baa2 BCA. These numbers are either slightly above or in line with the latest ratios reported by DZ BANK, pointing to moderate capital retention targets for the next three years. The enlarged DZ BANK will also benefit from leveraging synergy potential from centralising and streamlining back office functions.

However, the rating affirmation takes into account that the combined bank's future profits will probably remain either at or below DZ BANK's recent performance, given major positive non-recurring effects during 2013-15 included in DZ BANK's results, the diluting effect from WGZ's weaker return metrics and persistent revenue pressures in a low interest rate environment. These factors will likely lead to mildly lower return metrics for DZ BANK, although Moody's expects the group to sustain an overall healthy level of profits and profit retention.

OUTLOOK CHANGE TO POSITIVE FOR SENIOR DEBT; STABLE OUTLOOK FOR DEPOSITS

The outlook change for DZ BANK's senior unsecured debt ratings to positive from stable reflects Moody's expectation that the merger with WGZ will result in higher rating uplift for this liability class from Moody's Advanced LGF analysis. The expectation is based on a Moody's assessment of DZ BANK's pro-forma post-merger liability structure whereby senior bond holders will likely benefit from the addition of WGZ's relatively large volume of senior unsecured debt relative to total assets. With a higher tranche volume of, and the resulting lower loss severity for senior debt in resolution, the Advanced LGF analysis could result in two notches of rating uplift (instead of one) for senior debt.

Moody's maintained the stable outlook on the Aa1 long-term deposit rating, because this liability class already benefits from the highest possible LGF result.

WITHDRAWAL OF WGZ BANK'S RATINGS

Moody's affirmed WGZ's long- and short-term deposit ratings at the Aa1/Prime-1 level and will withdraw these ratings because, from a risk and ratings perspective, depositors in the former WGZ remain unaffected by the merger. This takes into account that DZ BANK, as the successor institution, is assigned deposit ratings at the same Aa1/Prime-1 level. Moody's will withdraw all of WGZ's ratings, the CR Assessments and rating input factors, because WGZ ceased to exist with effect from 29 July 2016.

AFFIRMATION OF WGZ-I RATINGS

Following its former parent bank's merger with DZ BANK, Moody's affirmed WGZ-I's A1/Prime-1 deposit ratings and the Prime-1(cr) short-term counterparty risk assessment, taking into account:

1) Moody's affirmation of the bank's baa2 BCA, whereby the BCA was previously aligned with that of WGZ, but will henceforth be aligned with the BCA of DZ BANK, currently at baa2;

2) the affirmation of its a2 adjusted BCA, which incorporates three notches of affiliate support uplift from the BCA, based on Moody's assessment of a very high probability of support being available from the German co-operative sector central organisation, BVR;

3) the result of Moody's Advanced LGF analysis, which results in one notch of rating uplift for WGZ-I's deposit ratings (whereby Moody's constrains the result at a level two notches above the sovereign bond rating, and therefore currently at A1 positive in Ireland); and

4) the low likelihood of WGZ-I receiving government support, which results in no further notches of rating uplift.

WGZ-I's BCA is aligned with the baa2 BCA of its parent bank, because the Irish bank's financial profile and performance are a result of its narrow business model and integrated position within the DZ Group. In addition, given the high degree of WGZ-I's integration into the larger DZ Group, Moody's does not consider it appropriate to analyse WGZ-I as a standalone franchise. A public letter of comfort (Patronatserklaerung) underpins parental support for the Irish subsidiary, which Moody's understands must be honoured by DZ BANK, following the merger.

WHAT COULD CHANGE RATING -- UP

Upward pressure on DZ BANK's long-term ratings could be exerted by (1) a higher BCA; (2) the cooperative sector's financial strength improving, which could result in additional rating uplift for affiliate support; and/or (3) higher volumes of senior unsecured debt and/or instruments subordinated to senior unsecured debt relative to total banking assets, which could lead to additional rating uplift from Moody's LGF analysis for senior debt instruments. The potential for a higher LGF result does not apply to DZ BANK's deposit ratings because, with three notches of rating uplift from the adjusted BCA, the deposit ratings already benefit from the highest possible LGF result.

Upward pressure on DZ BANK's BCA would be subject to the efficient integration of the former WGZ operations, evidenced by achieving synergies, a reduction in risk concentrations relative to capital and further improvement in its absolute capital levels.

For WGZ-I, the same drivers could result in upward ratings pressure, if at the same time, the A3 rating for Irish sovereign debt is upgraded, because a higher sovereign rating would raise the level at which Moody's constrains bank ratings in Ireland. For bank debt and deposit ratings, Moody's constrains the rating level to two notches above the respective sovereign bond rating.

WHAT COULD CHANGE RATING -- DOWN

Negative pressure on the bank's debt and deposit ratings could arise (1) from a BCA downgrade; (2) in the unlikely event that the cooperative sector's financial strength comes under pressure, or that the commitment of the sector to support its members shows signs of deterioration; and/or (3) in the unlikely event that DZ BANK displays a liability structure with a materially lower volume of senior debt relative to its total banking assets. The latter could result in removing the one notch of rating uplift for unsecured debt resulting from Moody's advanced LGF analysis.

DZ BANK's baa2 BCA could face downward pressure if additional risks emerge from the bank's commercial banking activities in combination with the group being unable to further improve its leverage ratio.

For WGZ-I, the same drivers could result in downward ratings pressure, because WGZ-I's BCA and adjusted BCA remain aligned with those of its parent. In addition, a downgrade of the Irish sovereign rating could place downward pressure on the Irish bank's ratings, because a lower government rating would lower the above-mentioned constraint for Irish bank ratings from the current A1 level.

RATING LIST

Affirmations:

Issuer: DZ BANK AG

....LT Bank Deposits, Affirmed Aa1, Stable

.... ST Bank Deposits, Affirmed P-1

.... LT Issuer Rating, Affirmed Aa3, Outlook changed to Positive from Stable

.... ST Issuer Rating, Affirmed P-1

....Senior Unsecured, Affirmed Aa3, Outlook changed to Positive from Stable

....Senior Unsecured MTN, Affirmed (P)Aa3

....Subordinate, Affirmed A3

....Subordinate MTN, Affirmed (P)A3

....Other Short Term, Affirmed (P)P-1

....Commercial Paper, Affirmed P-1

.... Adjusted Baseline Credit Assessment, Affirmed a2

.... Baseline Credit Assessment, Affirmed baa2

.... Counterparty Risk Assessment, Affirmed Aa1(cr)

.... Counterparty Risk Assessment, Affirmed P-1(cr)

Issuer: WGZ Bank Ireland Plc

.... LT Bank Deposits, Affirmed A1, Positive

.... ST Bank Deposits, Affirmed P-1

.... Adjusted Baseline Credit Assessment, Affirmed a2

.... Baseline Credit Assessment, Affirmed baa2

.... Counterparty Risk Assessment, Affirmed A1(cr)

.... Counterparty Risk Assessment, Affirmed P-1(cr)

Issuer: WGZ BANK AG

.... LT Bank Deposits, Affirmed Aa1, Stable, will be withdrawn

.... ST Bank Deposits, Affirmed P-1, will be withdrawn

Withdrawals:

Issuer: WGZ BANK AG

.... Issuer Rating, Withdrawn, RWR, previously rated Aa2, Negative

.... Adjusted Baseline Credit Assessment, Withdrawn , previously rated a2

.... Baseline Credit Assessment, Withdrawn , previously rated baa2

.... Counterparty Risk Assessment, Withdrawn , previously rated Aa1(cr)

.... Counterparty Risk Assessment, Withdrawn , previously rated P-1(cr)

Outlook Actions:

Issuer: DZ BANK AG

....Outlook, Changed To Stable(m) From Stable

Issuer: WGZ BANK AG

....Outlook, Changed To Stable From Stable(m)

..Issuer: WGZ Bank Ireland Plc

....Outlook, Remains Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings 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.

Katharina Barten
Senior Vice President
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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