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Rating Action:

Moody's assigns first-time A2 deposit ratings to Germany's Deutsche Kreditbank AG; outlook stable

20 Apr 2016

Provisional (P)A3 senior unsecured debt rating assigned

Frankfurt am Main, April 20, 2016 -- Moody's Investors Service has today assigned for the first time long-term A2 deposit ratings with a stable outlook and a provisional (P)A3 senior unsecured debt rating to Deutsche Kreditbank AG (DKB). In addition, Moody's has assigned a baa3 standalone baseline credit assessment (BCA) and a baa2 adjusted BCA to DKB. DKB's short-term deposit ratings are Prime-1. Moody's has also assigned a long- and short-term Counterparty Risk Assessment (CRA) of A2(cr)/Prime-1(cr) to DKB.

A full list of assigned ratings and rating inputs can be found at the end of this press release.

RATINGS RATIONALE

-- STANDALONE BASELINE CREDIT ASSESSMENT

DKB's standalone baa3 BCA is underpinned by its low asset risk profile despite some sector and regional concentrations and its very solid funding structure. However, the bank's BCA is constrained by its moderate capitalization, including a weak leverage ratio (measured as tangible common equity (TCE) compared to assets) and low profitability.

DKB's funding profile strongly supports its standalone credit profile. At end-2015, 66% (or €48.6 billion) of DKB's assets were funded by customer deposits, complemented by the bank's modest dependence on market funds consisting of funds from development banks (€13.1 billion or 18% of assets) and covered bonds (€9.8 billion or 13%). Since 2010, DKB's deposit base has grown on average by 9.9% per annum from €30.4 billion to €48.6 billion in 2015. Moody's expects that DKB's comfortable funding profile will remain robust throughout 2016 and beyond.

Despite sector and regional concentrations, DKB's low level of problem loans underpins the bank's sound asset risk profile. Exposures from DKB's lending activities are the bank's main risk driver. At end-2015, gross loans accounted for 84% of the bank's assets -- split into €35.9 billion for infrastructure (58% of total), €12.7 billion for commercial (21%), and €12.5 billion for retail lending activities (20%). Standing at 1.3% at end-2015 (2014: 1.8%), DKB exhibits a low level of problem loans, which reflects the bank's good asset quality from its infrastructure activities and mortgage loan book. However, while the latter is spread across all German regions, DKB's infrastructure and commercial exposures exhibit high concentrations to Eastern German municipalities, cities, and public sector entities. In addition, DKB's direct exposure of €4.4 billion vis-à-vis its parent bank Bayerische Landesbank (BayernLB, deposits A1 stable, BCA ba1) accounted for 162% of its TCE. As DKB has grown its loan book by a compound annual growth rate of more than 4% from 2010 to 2015 (compared with a moderate reduction of loan exposures of the German banking industry over the same period), the rating agency considers the bank's lending book to be relatively unseasoned, a credit negative observation.

DKB's moderate regulatory capital ratios are a key constraining factor for the bank's standalone credit profile. DKB reported a transitional Common Equity Tier (CET) 1 ratio of 8.2% for end-2015 compared with 8.7% in 2014 under the Capital Requirements Regulation and Directive (CRR/CRD IV). While Moody's considers that risks to capital will remain manageable, the agency believes that DKB's weak leverage ratio of 3.7% at end-2015 and its low capital buffer to regulatory minima limits the bank's ability to further grow its balance sheet. In addition, the existence of a profit and loss transfer agreement with BayernLB limits DKB's ability to retain profits and makes the bank dependent on its parent bank's willingness to provide capital support, in case of need. Moody's further believes that DKB's low risk-adjusted profitability will be particularly challenged by the low interest rate environment because nearly all of the bank's revenues are generated from net interest income.

-- AFFILIATE SUPPORT

Moody's considers the likelihood of support from BayernLB, the parent bank of DKB, to be very high owing to DKB's vital contribution to its parent bank's earnings and the addition of diversifying bank activities. Moody's further believes that DKB would benefit from some cross-sector support from Germany's Sparkassen-Finanzgruppe (S-Finanzgruppe; corporate family rating Aa2 stable, BCA a2) implicitly provided through BayernLB, in case of need, although DKB is not a direct member of the institutional protection scheme of the S-Finanzgruppe. As a result, these assumptions of very high parental support provide one notch of rating uplift, leading to DKB's adjusted BCA of baa2.

-- LONG-TERM DEPOSIT AND PROVISIONAL SENIOR UNSECURED DEBT RATINGS

DKB's provisional debt and deposit ratings reflect: (1) The bank's baa3 BCA; (2) its baa2 adjusted BCA incorporating one notch of affiliate uplift from BayernLB and S-Finanzgruppe; (3) the result of Moody's Advanced Loss-Given-Failure (LGF) analysis which takes into account the severity of loss faced by the different liability classes in resolution and provides three notches of rating uplift to DKB's deposit ratings and two notches of rating uplift to the provisional debt ratings; and (4) a low probability of DKB receiving government support, resulting in no rating uplift.

Moody's expects DKB to be included in the resolution perimeter of BayernLB. DKB's Munich-based parent bank is subject to the EU Bank Resolution and Recovery Directive, which the agency considers to be an Operational Resolution Regime. Moody's therefore applies BayernLB's LGF analysis, considering the risks faced by the different debt and deposit classes across the liability structure at failure.

The stable outlook on DKB's long-term deposit ratings reflects Moody's inclusion of all foreseeable risks in the ratings.

WHAT WOULD MOVE THE RATING UP / DOWN

Upward rating pressure on DKB's provisional senior unsecured debt and deposit ratings would be subject to a higher BCA. A higher BCA would require: (1) A significant improvement of DKB's capital ratios and balance sheet leverage; (2) a persistent strengthening of the bank's recurring earnings without compromising its risk profile; and (3) a lowering of DKB's sector and regional concentration risks. An upward movement in DKB's BCA would likely result in upgrades to all other rating classes. Upward rating pressure on DKB's ratings could also result from DKB becoming a direct member of S-Finanzgruppe's institutional protection scheme; Moody's considers S-Finanzgruppe to be systemically relevant and includes one notch of government support uplift in the senior unsecured debt and deposits ratings of S-Finanzgruppe member banks incorporated in Germany.

In addition, DKB's provisional senior unsecured debt rating could be upgraded if the volume of subordinated instruments significantly increases relative to the bank's tangible banking assets. This could result in one additional notch of uplift resulting from Moody's LGF analysis. The same does not apply to DKB's deposit ratings because, with three notches of rating uplift from the adjusted BCA, the deposit ratings already benefit from the highest possible LGF rating uplift.

A downgrade of DKB's provisional senior unsecured debt and deposit ratings could be triggered following: (1) A lowering of the bank's BCA; (2) a reduction in Moody's assumptions for affiliate support uplift; (3) a reduction in uplift as a result of Moody's LGF analysis; and/or (4) a change in our assumption that DKB is included in the resolution perimeter of its parent bank BayernLB.

Downward pressure on DKB's standalone BCA may arise from: (1) A weakening of the bank's Macro Profile; (2) a meaningful weakening of its strong funding profile; and/or (3) a weakening of the bank's capital adequacy and asset quality.

LIST OF AFFECTED RATINGS

The following ratings and ratings input were assigned to DKB for the first time:

- Long-term deposit ratings (local- and foreign currency) at A2, with stable outlook

- Short-term deposit ratings (local- and foreign currency) at Prime-1

- Long-term provisional senior unsecured debt (local currency) at (P)A3

- Long- and short-term Counterparty Risk Assessment at A2(cr) / Prime-1(cr)

- Standalone baseline credit assessment at baa3

- Adjusted baseline credit assessment at baa2

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. 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.

Swen Metzler
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 assigns first-time A2 deposit ratings to Germany's Deutsche Kreditbank AG; outlook stable
No Related Data.
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