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Rating Action:

Moody's affirms Sparkasse KoelnBonn's A1/P-1 ratings; outlook remains stable

02 Dec 2013

Subordinated debt downgraded to Ba1 from Baa2; rating withdrawn for EUR20 million subordinated bond (ISIN: DE0005426316) issued in 2002

Frankfurt am Main, December 02, 2013 -- Moody's Investors Service has today affirmed various ratings of Sparkasse KoelnBonn (SKKB), including the A1 senior debt and deposit ratings, the D- standalone bank financial strength rating (BFSR) -- equivalent to a standalone credit assessment (BCA) of ba3 -- and the Prime-1 short-term debt rating. The outlook on the bank's BFSR and the long-term ratings remains stable.

The affirmation of SKKB's senior unsecured debt and deposit ratings reflects the affirmation of the bank's BFSR and Moody's view that the bank's senior debt and deposits continue to benefit from very high support probabilities. The rating affirmation of SKKB's D- standalone BFSR reflects the gradual improvement in the bank's risk profile, although Moody's acknowledges that the improvement is balanced by external challenges. In particular, fierce competition and margin pressure, and the necessity to improve capital levels further in the context of the higher regulatory requirements for capital under Basel III.

Additionally, Moody's downgraded the bank's senior subordinated (lower Tier 2) debt to Ba1 from Baa2, with a stable outlook, in order to position this rating one notch below the adjusted BCA of baa3. Simultaneously, the agency withdrew the A2 rating of a EUR20 million backed subordinated bond (ISIN: DE0005426316) issued in February 2002. The subordinated bond qualifies for `grandfathering' of the public law guarantee (Gewaehrtraegerhaftung) of SKKB's majority owner, the city of Cologne.

A list of all affected ratings is included further below.

RATINGS RATIONALE

--- DEBT AND DEPOSIT RATINGS CONTINUE TO INCORPORATE VERY HIGH SUPPORT PROBABILITIES

The affirmation of the A1/Prime-1 senior unsecured debt and deposit ratings reflects the affirmation of the BFSR and the unchanged ratings uplift of eight notches incorporated into the debt and deposit ratings from the standalone ba3 BCA. This continues to capture Moody's view that SKKB benefits from a very high probability of support from its owners, the mutually supportive public banking sector, as well as systemic support.

--- STANDALONE RATINGS AFFIRMED ON THE BACK OF GRADUAL IMPROVEMENT IN SKKB's RISK PROFILE

The rating affirmation of SKKB's D- standalone BFSR reflects the gradual improvement in the bank's risk profile. However, Moody's says that this is balanced against external challenges, in particular fierce competition and margin pressure, and the necessity to improve capital levels further in the context of the higher regulatory requirements for capital under Basel III. Moody's notes positively SKKB's (1) reductions of single-name concentrations in its loan book and of its legacy structured credit investments; (2) the important milestones reached in complying with the restructuring measures that were agreed with the European Commission in compensation for state aid; and (3) the improvement of its capitalisation. SKKB reported a Tier 1 ratio of 8.02% at the group level and of 8.52% at the bank level as of December 2012.

Moody's says that these positive factors are partly offset by market and regulatory pressures. Factors that continue to weigh on ba3 standalone BCA include (1) SKKB's susceptibility to potential shocks or macroeconomic stress given its current capital levels; (2) its need to improve the capital structure as the bank's EUR1.36 billion Tier 1 capital as of December 2012 contained EUR0.5 billion (or more than one third) of hybrid Tier 1 capital instruments, implying a pro-forma common equity Tier 1 (CET1) ratio of below 6%, based on Basel 2.5; (3) persistent earnings pressure, due to the low interest-rate environment and fierce competition in German SME and retail banking; and (4) the medium-term prospect of limited earnings retention.

SKKB's earnings power remains below the average of the German savings banks sector, due to its bias towards middle-market corporate lending, which yields lower lending margins. Future earnings retention will be subdued also because the bank will have to allocate substantial portions of expected profits towards the costs of capital instruments and annual reserves to cover its contingent liabilities relating to EAA Erste Abwicklungsanstalt (EAA; Aa1, negative) -- the wind-down entity of the former WestLB (now Portigon AG, unrated except for grandfathered liabilities).

--- DOWNGRADE OF SENIOR SUBORDINATED DEBT RATING REFLECTS EXCLUSION OF SYSTEMIC SUPPORT

The downgrade of the senior subordinated debt rating to Ba1 from Baa2 reflects Moody's decision to position this rating one notch below the adjusted BCA of baa3, in line with its current methodology. The rating continues to benefit from three notches of cross-sector support, but excludes assumptions of regional government or systemic support. The rating was previously positioned one notch above the adjusted BCA, based on the assumption that regional government support may benefit the risk profile of such subordinated instruments, which represented an exception to the current methodology.

--- GRANDFATHERED SUBORDINATED DEBT / RATING WITHDRAWAL

The withdrawal of the rating of a EUR20 million backed subordinated bond (ISIN: DE0005426316) issued on 8 February 2002 and maturing on 28 December 2015, at the A2 rating level is due to limited information. The subordinated bond qualifies for "grandfathering" of the public law guarantee (Gewaehrtraegerhaftung) of SKKB's majority owner, the city of Cologne. Moody's has withdrawn the rating because it believes it has insufficient or otherwise inadequate information to support the maintenance of the rating. In particular, this concerns information for an appropriate assessment of external support available for this instrument. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the D- BFSR takes account of SKKB's ability to generate sufficient pre-provision income to cover credit costs during expected downturns in the credit cycle. Rating stability is also based on the assumptions that (1) SKKB will be able to retain sufficient earnings to support future growth in its core lending activities; and (2) improve the quality and size of its capital to maintain a commensurate buffer above the rising minimum thresholds under Basel III.

The stable outlook on the A1 deposit rating reflects the stability of the ba3 standalone BCA and Moody's expectation that the very high probability of regional government, cross-sector and systemic support will continue. Moody's support assessment reflects a combination of SKKB's ownership background, its membership in the Sparkassen-Finanzgruppe (Aa2 stable, BFSR C+/BCA a2 stable) and its important role in the regional economy.

WHAT COULD MOVE THE RATINGS UP / DOWN

Upward pressure on the standalone BCA would be subject to SKKB (1) achieving further de-risking of its balance sheet; (2) improving its capital structure and building a significantly higher buffer above the new (and rising) minimum requirement for capital under Basel III; and (3) further improving its capital generation capacity without compromising the risk profile of its loans and investments in the context of normalising (i.e., rising) risk charges and persistent market challenges.

An upgrade of the A1 long-term ratings would be subject to Moody's raising the standalone BCA to investment grade and with unchanged assumptions for support.

Downward pressure on the standalone BCA could be triggered by (1) rising revenue pressures due to a challenging operating environment marked by persistently low interest-rates; (2) sustained weak recurring earnings power and low levels of operating efficiency; (3) material asset-quality deterioration beyond levels that are consistent with the bank's risk-absorption capacity, especially if this follows a marked slowdown in the regional commercial real-estate markets; and (4) failure to improve the quality of Tier 1 capital during 2014 in order to ensure commensurate CET1 ratios.

A downgrade of the A1 long-term ratings could principally be triggered either by a lowering of the standalone BCA, or by weakening prospects of any of the support sources for SKKB.

LIST OF AFFECTED RATINGS

Long term debt and deposits: affirmed at A1, stable

Short term debt: affirmed at Prime-1

Standalone BFSR / BCA: affirmed at D- /ba3

Subordinated debt: downgraded to Ba1, from Baa2 previously

Backed subordinated debt: withdrawn at A2

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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
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
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

Moody's affirms Sparkasse KoelnBonn's A1/P-1 ratings; outlook remains stable
No Related Data.
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