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I AGREE
19 Apr 2011
E bank financial strength rating affirmed
Frankfurt am Main, April 19, 2011 -- Moody's Investors Service has today downgraded by two notches the long-term
debt and deposit ratings of IKB Deutsche Industriebank (IKB) to Ba2 from
Baa3 and changed the Prime-3 short-term rating to non-prime.
The rating actions follow Moody's review of its assumptions of future
government support for IKB, due to Moody's view that the possibility
of future government support for IKB is weakening. The rating action
also reflects the slow recovery of IKB's weak financial profile
and limited financial flexibility. The outlook on the Ba2 senior
unsecured debt and deposit ratings therefore remains negative.
Moody's has also affirmed with a stable outlook IKB's E bank financial
strength rating (BFSR), mapping to Caa1 on the long-term
rating scale.
All IKB's other ratings remain unaffected by today's rating
actions, including (i) the Caa2 rating for senior subordinated debt;
(ii) the C(hyb) rating for the upper Tier 2 junior subordinated instruments
("Genussscheine") issued by IKB and its vehicle ProPart Funding Ltd.;
(iii) the Ca(hyb) ratings for the Tier 1 instruments issued by IKB Funding
Trust I & II and Capital Raising GmbH; and (iv) the Aaa rated
bonds guaranteed by the Financial Market Stabilisation Agency (FMSA,
also referred to as "SoFFin").
Any subsequent short-term debt, long-term senior unsecured
debt, and senior subordinated debt issued by IKB will be rated non-prime,
Ba2 and Caa2 respectively.
RATINGS RATIONALE
Moody's decision to downgrade IKB's senior unsecured debt and deposit
ratings to Ba2 and to change the short-term rating to non-prime
was triggered by the agency's concerns that the probability of future
government support for IKB is weakening. This view reflects (i)
the German government's stated intention to have bond investors
(rather than taxpayers) take a share in losses, if banks encounter
financial distress; (ii) Moody's view that IKB's systemic
relevance is lessening; and (iii) the government's scheduled
exit from supporting IKB with liquidity, with more than half of
the FMSA-guaranteed bonds currently outstanding maturing in 2012.
One additional consideration that is of increasing importance in Moody's
assessment of future support, is whether the European Commission
would be likely to approve of the renewal of state aid. For IKB,
this appears questionable, given the weaknesses of its franchise
as a standalone entity and the fact that it has so far not been able to
prove that it can generate appropriate returns.
The downgrade also reflects the slow recovery of IKB's weak financial
profile and limited financial flexibility, given that it remains
structurally loss-making. For Moody's standalone rating,
this weakness continues to override the progress that IKB has made in
various other areas, chiefly in substantially de-risking
its balance sheet and securing sound regulatory capitalisation (the Tier
1 ratio for the group was a satisfactory 10.8% as of December
2010). In addition, IKB has sufficient liquidity for around
six quarters without raising any new funds or deposits. However,
it still has very limited access to external funding and this could raise
IKB's liquidity risk during 2012. As a result of its assessment,
Moody's therefore takes the view that the recent developments do
not yet allow for upward pressure on the E standalone financial strength
rating.
"The lower Ba2 rating level still includes relatively high assumptions
of future support, which is reflected in the five-notch rating
uplift from the Caa1 stand-alone level," says Katharina
Barten, a Vice President and Senior Credit Officer in Moody's banking
team in Frankfurt. "However, with the introduction
of the new resolution regime for German banks in January 2011, the
legal framework has changed, particularly affecting smaller banks.
The resulting risk for IKB, which currently continues to downsize
the balance sheet, is better reflected in the Ba2 sub-investment
grade rating level." Ms. Barten explains.
Following the scheduled repayment of FMSA-guaranteed debt in Q1
2012 -- for which IKB currently maintains sufficient liquidity
levels -- the government will thereafter cease to be IKB's
primary risk taker, leaving the Deposit Protection Fund of the Association
of German Banks the party most exposed to risk associated with any renewed
distress that IKB may encounter. This fund, however,
insures deposits only, and not senior bonds.
KEY RATING DRIVERS
Moody's stresses that, notwithstanding the negative outlook
on the Ba2 long-term debt ratings, these ratings could be
subject to upward pressure, in particular if the current owners
manage to successfully sell IKB. If the eventual buyer is a financially
robust player in the banking market with a clear intention to support
IKB, the ratings may be subject to a potentially multi-notch
upgrade.
That said, the negative outlook is an indicator that the Ba2 ratings
could be subject to a further downgrade in the next 12 to 18 months,
if (i) the bank continues to operate as a standalone bank without a beneficial
change of its ownership; and (ii) if IKB fails to quickly restore
profitability and obtain access to market (or other) funding.
MOODY'S METHODOLOGIES
The principal methodologies used in this rating were Bank Financial Strength
Ratings: Global Methodology published in February 2007, Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published in November
2009.
Headquartered in Duesseldorf, Germany, IKB reported total
assets of EUR34.2 billion at the end of December 2010 and a group
net loss of EUR132.2 million for the nine months to December 2010.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information and confidential and proprietary Moody's Investors
Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
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of each rating category and the definition of default and recovery.
Frankfurt am Main
Katharina Barten
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Frankfurt am Main
Carola Schuler
MD - Banking
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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 downgrades IKB to Ba2 on weakening government support; outlook negative (Germany)
No Related Data.
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