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Rating Action:

Moody's affirms Sparkasse KoelnBonn's debt and deposit ratings; changes deposit rating outlook to negative from stable

02 Jul 2018

Counterparty Risk Rating upgraded to Aa2 from Aa3; subordinated program upgraded to (P)Baa1 from (P)Baa2

Frankfurt am Main, July 02, 2018 -- Moody's Investors Service today affirmed Sparkasse KoelnBonn's (SKKB) Aa3/P-1 deposit ratings and the bank's A2 long-term senior unsecured debt ratings. At the same time, the rating agency upgraded SKKB's long-term Counterparty Risk Rating to Aa2 from Aa3 and the bank's subordinated program rating to (P)Baa1 from (P)Baa2. Furthermore, Moody's affirmed SKKB's P-1 short-term Counterparty Risk ratings and the P-1(cr) short-term Counterparty Risk Assessment.

In addition, the rating agency upgraded the bank's Baseline Credit Assessment (BCA) to baa2 from ba1 and its Adjusted BCA to a3 from baa1, as well as the bank's long-term Counterparty Risk Assessment to Aa2(cr) from Aa3(cr).

The outlook on the long-term deposit ratings was changed to Negative from Stable, the outlook on the long-term senior unsecured debt ratings remains Negative.

The upgrade of several of SKKB's ratings and assessments reflects an improved standalone financial strength supported by significantly improved core capitalization following a conversion of silent participations into core capital. At the same time, the negative outlooks on the bank's long-term deposit and debt ratings reflect the rating agency's expectation of a continued shift in the bank's liability structure towards retail deposits, at the expense of instruments that could absorb asset losses before or alongside SKKB's rated debt and deposit instruments. Further, the negative outlook on the bank's long-term debt ratings continues to reflect that Moody's may lower for this debt class the moderate probability of government support upon the national transposition of an amendment to the EU's Bank Recovery and Resolution Directive (BRRD).

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

RATINGS RATIONALE

-- UPGRADE OF THE BCA AND THE ADJUSTED BCA

By upgrading SKKB's BCA to baa2 from ba1, Moody's has taken into account the significantly strengthened core capitalization of the bank as well as further improved asset risks due to lower levels of problem loans.

Following the conversion of €500 million of silent participation or Basel 3 non-compliant Additional Tier 1 capital instruments into Common Equity Tier 1 (CET1) capital, SKKB's core capitalization has been significantly strengthened. In addition, the bank's capital now provides a higher quality buffer against downside risks going forward. Over the past years, the bank has benefitted from both benign economic conditions in the domestic market and improved underwriting that have resulted in a significant reduction of the weight of problem loans in SKKB's portfolio. At the same time, asset risk concentrations within the local commercial real estate market continue to constrain the rating agency's assessment of the bank's asset quality.

SKKB's funding profile is supported by a continuous inflow of retail client deposits. As a member of the institutional protection scheme (IPS) of Sparkassen-Finanzgruppe (S-Finanzgruppe, corporate family rating Aa2 stable, BCA a2), SKKB benefits from its broad access not only to client funds but also to the wholesale funding markets. The bank has been reducing its actual reliance on wholesale funding and possesses ample liquidity buffers to meet resulting payment obligations.

Moody's upgraded SKKB's Adjusted BCA by one notch to a3 from baa1. Based on the results of Moody's Joint Default Analysis, this assessment now incorporates two (previously: three) notches of affiliate support uplift reflecting the higher starting level of SKKB's BCA, combined with an unchanged assumption of a very high likelihood of support being available in case of need through S-Finanzgruppe's IPS.

-- RATIONALE FOR THE RATING ACTIONS ON THE LONG-TERM RATINGS

Moody's rating actions on SKKB's long-term ratings are principally based on the upgraded Adjusted BCA and the results under Moody's Advanced Loss Given Failure (LGF) analysis.

The upgrade of the bank's subordinated program rating to (P)Baa1 from (P)Baa2 follows the upgrade of the Adjusted BCA to a3 and the unchanged one notch downward adjustment for this debt class under Moody's LGF analysis.

In affirming SKKB's senior unsecured debt and deposit ratings the rating agency has taken into account that the higher Adjusted BCA is offset by less favorable results under Moody's Advanced Loss Given Failure (LGF) analysis as well as an unchanged assumption and one notch for government support. While strengthening the standalone profile of the bank, the conversion of Additional Tier 1 capital instruments led to a reduction of the stack of liabilities Moody's would expect to be available as a loss-absorbing cushion in the unlikely event of failure of SKKB.

Accordingly, the loss-given-failure under the rating agency's LGF analysis is now moderate for senior unsecured debt instruments of SKKB, whereas previously, Moody's had expected a low loss-given-failure. Consequently, SKKB's senior unsecured liabilities no longer benefit from the previous one notch rating uplift under the Advanced LGF analysis. For SKKB's deposits, the loss-given-failure is now very low instead of extremely low, leading to two notches of rating uplift instead of three.

The rating agency upgraded by one notch the long-term Counterparty Risk Ratings (CRR) based on the upgrade of the Adjusted BCA and because the results under the Advanced LGF analysis indicate continued extremely low loss-given-failure from the high volume of instruments subordinated to CRR liabilities; SKKB's CRR continues to benefit from one notch of rating uplift based on government support, in line with our support assumptions on deposits and senior unsecured debt.

-- NEGATIVE OUTLOOK ON SKKB'S LONG-TERM DEBT AND DEPOSIT RATINGS

When taking into account expected debt issuance plans and the debt maturity profile over the next 12 to 18 months, Moody's identified the potential for a downgrade of SKKB's debt and deposit ratings on the basis of a further decline of the aggregate of subordinated and equal-ranking liabilities. The rating agency would however not rule out that SKKB could opt for additional issuance of bail-in-able debt instruments once its individual minimum requirements of own funds and eligible liabilities are communicated to the bank.

The negative outlook for SKKB's senior unsecured debt continues to also reflect the potential for a one-notch downgrade as a result of a lowering of current government support assumptions for this debt type. In line with a proposed legislative change that is expected to come into force in Germany on 21 July 2018, Moody's expects to reclassify current senior unsecured liabilities of German banks into a new category of junior senior debt that would carry a lower government support probability.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

As indicated by the negative outlook, an upgrade of SKKB's ratings is currently unlikely. A one notch upgrade of SKKB's BCA would lead to an upgrade of long-term ratings, unless accompanied by a further compression in affiliate support notching or by a further reduction in the bank's subordinated debt cushion. SKKB's long-term ratings may be upgraded if the volume of subordinated and equal-ranking liabilities increased substantially - and beyond Moody's current expectations - compared with the bank's tangible banking assets, which could result in additional rating uplift resulting from Moody's Advanced LGF analysis.

SKKB's BCA could be upgraded as a result of: (1) a sustainable further accumulation of core capital, (2) a reduction of asset risk concentrations and (3) a sustainable improvement in risk-adjusted profitability.

SKKB's ratings could be downgraded if the bank's financial strength significantly deteriorates following: (1) weaker than currently expected levels of capital and earnings; (2) a pronounced decline in the quality of SKKB's asset and loan portfolio.

A downgrade of SKKB's ratings could also be prompted if SKKB's volume of subordinated and equal-ranking debt instruments declined further relative to the bank's tangible banking assets, which could lead to fewer notches of rating uplift resulting from Moody's Advanced LGF analysis.

In addition, SKKB's senior unsecured ratings could be downgraded by one notch if Moody's lowers its current government support assumption.

LIST OF AFFECTED RATINGS

Upgrades:

....Subordinate MTN (Local Currency), Upgraded to (P)Baa1 from (P)Baa2

....LT Counterparty Risk Rating (Local & Foreign Currency), Upgraded to Aa2 from Aa3

....LT Counterparty Risk Assessment, Upgraded to Aa2(cr) from Aa3(cr)

....Adjusted Baseline Credit Assessment, Upgraded to a3 from baa1

....Baseline Credit Assessment, Upgraded to baa2 from ba1

Affirmations:

....LT Bank Deposits (Local & Foreign Currency), Affirmed at Aa3, Outlook Changed to Negative from Stable

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

....LT Senior Unsecured (Local Currency), Affirmed at A2, Outlook Remains Negative

....Senior Unsecured MTN (Local Currency), Affirmed at (P)A2

....ST Counterparty Risk Rating (Local & Foreign Currency), Affirmed at P-1

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

Outlook Action:

....Outlook, Changed to Negative from Stable(m)

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in June 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.

Bernhard Held
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
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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