Standalone credit assessment lowered to b3 from b1
Frankfurt am Main, December 14, 2012 -- Moody's Investors Service has today downgraded the long-term debt
and deposit ratings of Deutsche Pfandbriefbank AG (pbb) to Baa2 from A3,
its ratings for senior subordinated debt to Caa1 from B2, and the
bank's short-term ratings to Prime-2 from Prime-1.
The rating actions were prompted by the lowering of pbb's standalone
credit assessment to b3 from b1, within the E+ standalone bank
financial strength ratings (BFSR) category. At the same time,
Moody's confirmed the E+ BFSR. The outlook on all ratings
is negative.
The lowering of pbb's standalone credit assessment was driven by
(1) uncertainty as to whether the bank can re-establish itself
as a viable commercial franchise against the background of subdued business
activity in 2012 and the challenges it is currently facing to reduce its
cost base and improve recurring profitability; (2) confidence sensitivity
of the bank's funding base, in particular with respect to
senior unsecured funding, and its susceptibility to shocks given
the bank's reliance on whole-sale funding; and (3) the
bank's modest economic capitalisation and high sensitivity to losses
under stress in the context of its regional exposure concentrations,
in particular its sizeable exposures to weaker euro area countries.
The long-term debt ratings continue to benefit from seven notches
of systemic support uplift, indicating Moody's expectation
of the continued (implicit) commitment of the German government,
as the sole owner of pbb, to further support Germany's second-largest
covered bond issuer during times of persistent market disruption.
Today's rating actions conclude the review for downgrade,
initiated on 3 July 2012, of pbb's BFSR and long-term
and short-term deposit and senior unsecured debt ratings,
as well as the bank's subordinated debt ratings.
RATINGS RATIONALE
According to Moody's, today's rating actions reflect
multiple pressures on pbb's leveraged business model in the context
of the persistent adverse operating environment and the conditionality
that came with the state aid that pbb received in prior years --
especially the requirement to complete privatisation by 2015. In
Moody's view, the deadline for privatisation poses considerable
uncertainties for bondholders.
PRESSURE ON THE STANDALONE PROFILE CONTINUES AMIDST THE CHALLENGING OPERATING
ENVIRONMENT
The lowering of pbb's standalone credit assessment was driven by
the following three factors:
Firstly, Moody's believes there is uncertainty as to whether
pbb has the ability to re-establish a viable business franchise,
which is a prerequisite for a successful privatisation by 2015,
as required by the European Commission (EC). The level of business
activity remains behind the bank's schedule as a result of lower
funding volumes in 2011. pbb's profits have been under rising
pressure, mainly driven by lower interest income due to the decreasing
asset base.
Moody's says that it expects further challenges to profitability
starting from Q4 2013, when fee income of more than EUR100 million
per annum is expected to fall away because these revenues relate to service
contracts with FMS Wertmanagement (Aaa, negative), which are
due to expire in September 2013. Moody's does not expect
the bank's cost base to be fully flexible once this contract expires.
Secondly, Moody's considers pbb's funding base to be
susceptible to market shocks in a deteriorating market environment,
given its reliance on whole-sale funding. The rating agency
says that it recognises pbb's recent success in accessing the market
for senior unsecured debt by issuing EUR750 million three-year
securities in Q3 2012, which reflects a vital improvement of its
funding franchise. Moody's also notes pbb's ability
to obtain funding beyond 2015 by issuing promissory notes that are protected
by the deposit protection fund of Germany's private-sector
banks. However, Moody's considers access to additional
sources of senior unsecured funding to be vital, also given the
size of pbb's balance sheet. These funds are susceptible
to market shocks and the bank will need to prove its ability to obtain
them beyond the date for the planned privatisation in 2015.
Thirdly, based on Moody's findings from stress testing earnings
and capital, pbb remains vulnerable to capital pressures that could
arise from cyclical and/or unexpected credit losses, given the uncertain
environment and pressures from the euro area sovereign debt crisis.
This vulnerability results from pbb's leveraged business model that
focuses on commercial real estate and public investment finance,
with a significant exposure to euro area peripheral countries.
The total exposure to sovereigns, local authorities and other public-sector
entities in these countries was EUR7.8 billion as of 30 September
2012, which amounts to more than 2.5x Tier 1 capital.
The potential for unexpected losses from these exposures --
combined with the bank's limited capital generation -- may
stipulate a potential capital short-fall in a deteriorating economic
environment in the medium term.
The vulnerability to a more adverse economic environment is captured by
the negative outlook on the standalone BFSR.
ASSUMPTIONS OF VERY HIGH SUPPORT FROM THE GERMAN GOVERNMENT REMAIN UNCHANGED,
BUT 2015 PRIVATISATION DEADLINE REPRESENTS UNCERTAINTY
Moody's continues to factor a very high probability of support from
the German government (Aaa, negative) into pbb's Baa2/Prime-2
senior unsecured debt and deposit ratings, as reflected in the seven-notch
uplift. This takes into account (1) the bank's full ownership
by the German government; and (2) the bank's high systemic
relevance as the second-largest covered bond issuer in Germany.
Whilst the implementation of the bank resolution regime --
as part of the German Bank Restructuring Act in January 2011 --
allows for more flexibility to impose losses on all debt classes,
imposing losses on senior debt holders at pbb would likely trigger significant
disruptions in the capital markets. At the same time, Moody's
says that the approaching deadline for a privatisation to be completed
by 2015 involves some uncertainty for bondholders, given that non-compliance
with EC conditionality may have considerable consequences for pbb's
future in its current set-up. Such uncertainty combined
with the continued pressures on the standalone credit profile are reflected
in the negative outlook on the long-term rating.
SUBORDINATED DEBT
The downgrade of pbb's dated subordinated debt ratings to Caa1 from B2
reflects the lowering of the bank's standalone credit strength.
The subordinated debt rating is one notch below pbb's b3 standalone
credit assessment, and also carries a negative outlook.
WHAT COULD MOVE THE RATING -- UP/DOWN
Upwards pressure on the E+ BFSR is limited, as indicated by
its negative outlook. A higher standalone BFSR would be subject
to (1) a full recovery of pbb's business franchise as a specialised
lender for commercial real-estate and public investment finance,
with adequate cost structures and sustainable profits; (2) higher
(economic) capitalisation; and (3) maintained access to senior unsecured
funding with maturities beyond 2015.
Upwards pressure on the group's senior debt and deposit ratings
is unlikely, and would be subject to a significantly higher standalone
credit assessment or explicit support from the German government,
neither of which is currently expected.
Downwards pressure on the standalone E+ BFSR could be triggered if
(1) pbb fails to restore its business franchise, in particular if
the cost-to-income dynamics worsens; (2) pbb is unable
to re-establish an independent funding franchise for unsecured
debt with sufficiently long maturities, allowing for a duration
of the bank's financing structure commensurate with its long-term
asset profile; and (3) the bank faces renewed capital pressures and/or
fails to maintain adequate regulatory capital ratios during the phase-in
period for higher capital levels under Basel III. Further pressure
could result from renewed setbacks due to higher-than-anticipated
credit losses in pbb's core business areas, or unforeseen
contagion effects from the euro area sovereign crisis that may have adverse
implications for both of the bank's core lines of business.
Downwards pressure on the Baa2 ratings could result from any of the following
(1) a further downgrade of the BFSR; (2) any weakening of the prospects
of future support for pbb, or any sooner-than-warranted
exit strategy of the German government; and/or (3) a gradual decrease
of pbb's systemic importance.
PRINCIPAL METHODOLOGIES
The principal methodology used in these ratings was Moody's Consolidated
Global Bank Rating Methodology, published in June 2012. 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 relevant 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 relevant 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 relevant 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
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Mathias Kuelpmann
Senior Vice President
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
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Carola Schuler
MD - Banking
Financial Institutions Group
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Releasing Office:
Moody's Deutschland GmbH
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Moody's downgrades Deutsche Pfandbriefbank's ratings to Baa2 from A3; outlook negative
