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Rating Action:

Moody's downgrades IKB to Ba2 on weakening government support; outlook negative (Germany)

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 a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning 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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