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Rating Action:

Moody's affirms Sparkasse KoelnBonn's Aa3 deposit and A2 debt ratings; outlook stable

18 Jul 2016

Standalone Baseline Credit Assessment upgraded to ba1 from ba2

Frankfurt am Main, July 18, 2016 -- Moody's Investors Service has today affirmed Sparkasse KoelnBonn's (SKKB) Aa3 long-term deposit ratings and the bank's A2 long-term debt ratings with a stable outlook. The Prime-1 short-term deposit ratings of SKKB, its Baa2 subordinate debt rating and its Aa3(cr)/Prime-1(cr) Counterparty Risk (CR) Assessment were also affirmed. At the same time, Moody's upgraded SKKB's Baseline Credit Assessment (BCA) to ba1 from ba2, and affirmed the bank's baa1 Adjusted BCA.

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

RATINGS RATIONALE

IMPROVEMENT OF SKKB'S STANDALONE BCA REFLECTS ACCESS TO ADDITIONAL CAPITAL

The upgrade of SKKB's standalone BCA by one notch to ba1 reflects the bank's improved capital, also considering increasing high-quality additional capital reserves allowed by German GAAP (§340f reserves) and a binding agreement reached earlier in 2016 that provides SKKB's management full discretion to convert silent participation instruments into new common equity. While Moody's considered the bank's firmly committed access to additional common equity in its assessment, the rating agency has not preempted such a conversion in its determination of the BCA.

SKKB has entered into an agreement with its owners, the cities of Cologne (unrated) and Bonn (unrated), that allows SKKB to convert EUR500 million of existing silent participations into common equity. Moody's currently includes these instruments as deeply subordinated components of its Advanced Loss Given Failure (LGF) Analysis, and not as part of Tangible Common Equity in its assessment of the bank's intrinsic financial strength. SKKB's ability to convert these silent participations at any time into common equity is supportive of SKKB's ba1 BCA.

AFFIRMATION OF THE ADJUSTED BCA REFLECTS REDUCED AFFILIATE SUPPORT UPLIFT

Concurrent with the upgrade of the BCA, the rating agency reduced the affiliate support uplift included in SKKB's Adjusted BCA to three from four notches previously. The reduced uplift is based on Moody's unchanged assumption of a very high support probability of Sparkassen-Finanzgruppe's (S-Finanzgruppe, Corporate Family Rating Aa2 stable, BCA a2) institutional protection scheme (IPS) in the case of need. As a result of SKKB's improved standalone credit strength and the narrowing gap to the credit strength of S-Finanzgruppe, the rating agency's unchanged affiliate support assumptions provides less uplift to SKKB's baa1 Adjusted BCA.

AFFIRMATION OF SKKB'S DEBT AND DEPOSIT RATINGS WITH A STABLE OUTLOOK

The affirmation of SKKB's long-term debt and deposit ratings reflects the agency's unchanged results from its Advanced LGF analysis, taking into account the bank's liability structure at end-2015. The analysis indicates an extremely low loss-given-failure for the bank's deposits, leading to a three notch uplift from its baa1 Adjusted BCA. For the bank's senior unsecured debt, the analysis indicates a low loss-given-failure for the bank's deposits, leading to a one notch uplift from its baa1 Adjusted BCA. This assessment is supported by the bank's adequate volume of senior unsecured debt including those registered bonds Moody's considers to rank pari passu with senior unsecured instruments, as well as the amount of subordinated liabilities.

The stable rating outlook incorporates Moody's view that SKKB will maintain the volume for the individual liability classes and that upon a conversion of the silent participations, rising future loss severities for the individual debt classes will be fully offset by a further BCA improvement on the back of stronger common equity levels.

WHAT COULD MOVE THE RATINGS UP / DOWN

An upgrade of SKKB's debt and deposit ratings would require an upgrade of its BCA accompanied by an unchanged loss-given-failure resulting from Moody's LGF analysis. SKKB's BCA could be further upgraded following a significant increase of its capitalization (by several percentage points) for example as a result of the conversion of the bank's EUR500 million of silent participations into common equity. However, because the conversion of silent participations into common equity would reduce the volume of deeply subordinated instruments and therefore increase the loss-given-failure of senior debt and deposits Moody's expects upward pressure on the BCA to be offset by an increase in the loss severity for these instruments.

SKKB's long-term ratings may be downgraded if Moody's LGF analysis results a higher loss-given-failure for SKKB's individual debt classes than Moody's currently anticipates. Such higher loss severities may result from a continued reduction in senior and subordinated debt volumes outstanding. A future downgrade of SKKB's BCA may not directly translate into a downgrade of SKKB's long-term ratings if Moody's assumption of a very high support probability by S-Finanzgruppe's IPS remains unchanged.

LIST OF AFFECTED RATINGS

The following ratings were affirmed:

....Adjusted Baseline Credit Assessment, affirmed at baa1

....Long Term Counterparty Risk Assessment, affirmed at Aa3(cr)

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

....Long Term Bank Deposit Ratings affirmed at Aa3, outlook remains Stable

....Short-Term Bank Deposit Ratings, affirmed at P-1

....Senior Unsecured Rating affirmed at A2, outlook remains Stable

....Senior Unsecured Medium-Term Note Program Rating, affirmed at (P)A2

....Subordinate Rating, affirmed at Baa2

....Subordinate Medium-Term Note Program Rating, affirmed at (P)Baa2

The following rating input was upgraded:

....Baseline Credit Assessment, upgraded to ba1 from ba2

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.

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

Moody's affirms Sparkasse KoelnBonn's Aa3 deposit and A2 debt ratings; outlook stable
No Related Data.
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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