Downgrades driven by Moody's expectations of rising credit costs and weak capital retention
Frankfurt, July 23, 2009 -- Moody's Investors Service today downgraded the bank financial strength
rating (BFSR) of Landesbank Baden-Wuerttemberg (LBBW) to C-
from C. The C- rating translates to a baseline credit assessment
(BCA) of Baa2. Concurrently, the rating agency downgraded
LBBW's senior debt and deposit ratings to Aa2 from Aa1 and its rating
for senior subordinated debt to Aa3 from Aa2. All these ratings
now carry a negative outlook.
Furthermore, Moody's downgraded LBBW's upper Tier 2
instruments ("Genussscheine") to Ba2 from Aa2, based on the individual
expected-loss analysis on these instruments. The Ba2 ratings
are based on the assumption that the coupons may be deferred for two years
(with a medium probability) and not fully paid by the time the instruments
fall due, given their short time to maturity of 2.5 years.
These ratings carry a stable outlook.
Today's rating actions conclude Moody's review for possible
downgrade initiated on 23 June 2009. The ratings for grandfathered
debt and the Prime-1 short-term debt ratings are not affected.
DOWNGRADE OF THE BFSR DRIVEN BY RISING CREDIT COSTS AND WEAK CAPITAL RETENTION
GOING FORWARD
Moody's downgrade of the BFSR to C- from C was driven by
the following considerations: (i) the rating agency's expectation
that deteriorating asset quality in LBBW's corporate and commercial
real estate exposures will likely lead to rapidly rising credit losses;
(ii) the additional charges to the income statement and a minimum dividend
to be paid in compensation for various support measures (which include
a EUR12.7 billion guarantee and EUR5 billion of fresh capital)
recently provided by the bank's public sector owners; and (iii)
the resulting very limited scope for LBBW to generate and retain capital
over the next few years.
The rating agency says that it considers the first issue as representing
a critical pressure point for the bank's ratings over the next two
to three years, as high single borrower concentrations and large
exposures to cyclical industries may result in sizeable credit losses
that could largely, if not fully, absorb pre-provision
income over the next few quarters. Moody's further expresses
concern over the high dividend payouts on the new EUR5 billion of fresh
capital injected last month in addition to the considerable fees on the
guarantee, which the European Commission demands as compensation
for the state aid received.
"Moody's recognises the recently achieved, more comfortable
capital levels as well as the risk-weighted asset relief from the
guarantee, which currently support a BFSR within the C range.
However, the costs attached to the support measures, coupled
with rising credit losses, will pose a challenge to LBBW and limit
its financial flexibility", says Katharina Barten, a
Moody's Vice President-Senior Analyst and Lead Analyst for
LBBW Group.
Furthermore, Moody's notes that the downgrade also reflects a degree
of uncertainty linked to the approval of state aid, which has been
given for a period of six months. Before the end of this period,
LBBW will have to present a restructuring plan that may need to involve
a downsizing of its balance sheet, which will likely affect not
only non-core secondary market investments, but also some
of its participations. That said, the rating agency does
not expect that the group will be required to fundamentally change its
business model, as restructuring targets will likely aim at reducing
costs and freeing up capital, which the bank will in any case pursue
as a matter of prudence.
STRONG DEBT AND DEPOSIT RATINGS UNDERPINNED BY HIGH PROBABILITY OF STAKEHOLDER
SUPPORT
Moody's recognises the strong commitment that LBBW's owners have shown
by providing adequate additional resources for the bank to rebuild weakened
capital levels and to weather rising credit losses as the global recession
deepens. The rating agency believes that this high level of support
will likely continue as long as the current ownership structure is maintained,
which benefits from relatively uniform stakeholder interests among the
bank's owners.
NEGATIVE OUTLOOK DRIVEN BY CONTINUED VOLATILITY OF LBBW'S PERFORMANCE
AND THE LOW PREDICTABILITY OF THE FUTURE OF GERMANY'S LANDESBANKEN
The current C- BFSR has factored in substantial room for credit
losses and charges against capital, which makes renewed rating pressure
in the foreseeable future relatively unlikely. However, in
the context of continued uncertainty in the international financial markets,
the rating agency does not rule out renewed rating pressure over the next
two years, in particular since LBBW has sizeable trading operations
and large investments in credit-spread-sensitive products,
which in Moody's view warrants a negative outlook on the C-
BFSR.
Moody's additionally takes into account the medium-term probability
of LBBW participating in the widely expected consolidation process of
the German Landesbanken. This has to be seen in the context of
rising political pressure to pursue a consolidation of the Landesbanken
and the fact that the next steps in this process may involve LBBW as well
as those other banks that have received external support during the financial
crisis. These banks are WestLB (A2 negative/Prime-1/E+),
Bayerische Landesbank (A1 stable/Prime-1/D-) and HSH Nordbank
(A2 stable/Prime-1/E+); all of which are substantially
weaker than LBBW in terms of franchise value and financial profile.
In this context, Moody's is concerned that LBBW's asset and risk
profile may change over the medium term, although the bank itself
stressed that it will abstain from any transaction that would unduly put
it at risk. However, any M&A transaction involving other
Landesbanken will likely be rating-negative for LBBW. While
this is not expected to happen in the near term, the rating agency
believes that the likelihood of further transactions for LBBW within two
to three years is relatively high. Any such transaction may then
also trigger changes in the bank's ownership and potentially Moody's assumptions
regarding the probability of future support. These considerations
are additionally responsible for the negative outlook on the Aa2 senior
debt and deposit ratings.
RATING HISTORY AND MOODY'S METHODOLOGIES
The last rating action on LBBW was on 23 June 2009, when Moody's
placed its BFSR, long-term debt and deposit ratings and subordinated
debt ratings on review for possible downgrade.
The principal methodologies used in rating LBBW are "Bank Financial Strength
Ratings: Global Methodology", "Incorporation of Joint Default
Analysis into Moody's Bank Ratings: A Refined Methodology" as well
as "Guidelines for Rating Bank Junior Securities", which can be
found on www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies sub-directory.
Other methodologies and factors that may have been considered in the process
of rating the issuer can also be found in the Credit Policy & Methodologies
directory.
With respect to hybrid instruments and subordinated debt, Moody's
adds that it released a Request for Comment entitled, "Moody's Proposed
Changes to Bank Subordinated Capital Ratings", dated June 2009.
In this comment, the rating agency requested market feedback on
potential changes to its bank hybrid rating methodology. Should
Moody's implement this revised methodology as proposed, the ratings
of LBBW's instruments will most likely not be affected.
Domiciled in Stuttgart, Germany, LBBW reported total assets
of EUR448 billion at 31 December 2008 and a consolidated net loss for
the year of EUR2.1 billion.
Frankfurt
Katharina Barten
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Frankfurt
Carola Schuler
Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades LBBW's debt ratings to Aa2, BFSR to C-
