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Rating Action:

Moody's affirms Debeka Bausparkasse's deposit ratings at Baa2 with negative outlook

09 Oct 2018

Baseline credit assessment downgraded to baa3

Frankfurt am Main, October 09, 2018 -- Moody's Investors Service has today affirmed Debeka Bausparkasse AG's (Debeka) deposit ratings at Baa2/P-2 and the bank's Counterparty Risk Ratings (CRRs) at A3/P-2. At the same time, the rating agency downgraded Debeka's Baseline Credit Assessment (BCA) and adjusted BCA to baa3 from baa2 and its Counterparty Risk (CR) Assessment to A3(cr)/P-2(cr) from A2(cr)/P-1(cr). The outlook on the long-term deposit ratings remains negative.

Today's rating action reflects Moody's assessment of the negative implications of the protracted low interest rate environment on Debeka's earnings and related pressures on its capital resources, mitigated by funds available from its parent company, Debeka Krankenversicherungsverein a.G., and Debeka's otherwise sound financial fundamentals in the areas of asset quality and liquidity.

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

RATINGS RATIONALE

---RATIONALE FOR THE DOWNGRADE OF DEBEKA'S BASELINE CREDIT ASSESSMENT

The downgrade of Debeka's BCA to baa3 from baa2 balances the offsetting effects of the ongoing deterioration in the bank's intrinsic profitability and therefore pressure on its capital, and a capital measure from Debeka's parent company that Moody's expects will be concluded shortly. In Moody's view, the pressure on Debeka's net interest margin has increased the pressure on its future profits and capital, driven by high fixed interest rate payment promises given to some of its Bauspar depositors, whereby the least favourable tariff still applied to almost half of the bank's total deposits as of December 2017. As a result, Moody's expects that the bank will remain structurally loss-making for an extended period. The persistent low interest rate environment has triggered depressed profitability particularly for Germany's building and loan associations (Bausparkassen).

The BCA downgrade incorporates both, the improvement in Debeka's capital metrics during 2017 and a sizeable capital measure which has been decided upon, but has yet to be implemented. The increase of Debeka's Tangible Common Equity ratio to 17.5% from 13.3% in 2017 was partly driven by the release of the bank's remaining Technical Security Reserve together with other hidden reserves, whereas Debeka recorded a third year of intrinsic losses. The capital support from the parent company will sufficiently address the pressures emanating from prospective losses over an extended period, based on the assumption that Debeka will successfully implement business model adjustments that, over time, will translate into higher revenue and lower cost.

Moody's further said that the baa3 BCA remains underpinned by Debeka's very good asset quality and its satisfactory funding and liquidity profile.

---RATIONALE FOR THE AFFIRMATION OF DEBEKA'S DEPOSIT RATINGS AND CRRs

The affirmation of Debeka's deposit ratings and the Counterparty Risk Ratings (CRRs) is based on the offsetting effects of a lower BCA on the one hand, and a stronger result from Moody's Advanced Loss Given Failure (LGF) analysis on the other hand. The stronger LGF result takes account of a favourable change in Debeka's liability structure. The bank's issuance activity over the past 12 months, privately placing promissory notes, has resulted in a lower loss severity for both, deposits and the obligations captured by the CRRs.

Debeka's Baa2 deposit ratings therefore reflect: (1) The bank's baa3 BCA and adjusted BCA; (2) the result of Moody's LGF analysis, which provides one notch of rating uplift to Debeka's deposit ratings (instead of zero uplift previously); and (3) no government support. The A3/P-2 CRRs reflect a stronger result of Moody's Advanced LGF analysis with three notches, instead of two previously.

CRRs are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are not honoured.

---RATIONALE FOR THE DOWNGRADE OF DEBEKA'S CR ASSESSMENT

The downgrade of Debeka's CR Assessments mirrors the one-notch downgrade of its BCA. Debeka's A3(cr)/P-2(cr) CR Assessments continue to benefit from three notches of uplift above the baa3 adjusted BCA from Moody's Advanced LGF analysis, reflecting the adequate amount of subordination provided in particular by Debeka's outstanding junior senior unsecured debt and junior deposits.

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails. Moody's CR Assessment captures the probability of default on certain senior obligations, rather than expected loss. Therefore, the assessment focuses purely on subordination and takes no account of the volume of the instrument class.

---RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects Moody's assessment that, although Debeka will probably adequately manage its capital resources during the prolonged period of stress on profit, the bank has yet to prove that it can implement sufficient adjustments to its product pricing, operational set up and internal structures that will be necessary to turn around the negative profit situation and ensure the viability of its business model.

WHAT COULD MOVE THE RATINGS UP/DOWN

Higher ratings could be prompted by a BCA upgrade or upon a change in Debeka's liability structure, particularly if the amount of senior debt outstanding materially increases from current levels which, however, is not expected.

An upgrade of Debeka's BCA would be subject to: (1) a recovery of Debeka's revenue and profit, potentially earlier than currently expected; or (2) further capital measures, if these were to provide sufficient comfort even in a strongly adverse scenario.

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

A downgrade of Debeka's BCA could result from: (1) persistent or even increasing margin pressure from the low interest-rate environment; (2) indications of more aggressive risk-taking with a negative impact on the bank's asset-quality; and/or (3) failure to compensate for losses by drawing on the capital resources of the bank's parent company.

LIST OF AFFECTED RATINGS

Issuer: Debeka Bausparkasse AG

..Affirmations:

....Long-term Counterparty Risk Rating, affirmed A3

....Short-term Counterparty Risk Rating, affirmed P-2

....Long-term Bank Deposits, affirmed Baa2 Negative

....Short-term Bank Deposits, affirmed P-2

..Downgrades:

....Adjusted Baseline Credit Assessment, downgraded to baa3 from baa2

....Baseline Credit Assessment, downgraded to baa3 from baa2

....Long-term Counterparty Risk Assessment, downgraded to A3(cr) from A2(cr)

....Short-term Counterparty Risk Assessment, downgraded to P-2(cr) from P-1(cr)

..Outlook Action:

....Outlook remains Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. 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.

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
Client Service: 44 20 7772 5454

Carola Schuler
MD - Banking
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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