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Rating Action:

Moody's downgrades Postbank's ratings to A1/D+ from Aa3/C

 The document has been translated in other languages

19 Feb 2010

Frankfurt, February 19, 2010 -- Moody's Investors Service today downgraded the bank financial strength rating (BFSR) of Deutsche Postbank AG (Postbank) to D+ from C, the senior debt and deposit ratings to A1 from Aa3, and the subordinated debt ratings to A2 from A1.

In line with its revised Guidelines for Rating Bank Hybrids and Subordinated Debt published in November 2009, Moody's also downgraded the ratings of the existing trust preferred securities issued by Deutsche Postbank Funding Trust I-IV to Ba3 from A2, the rating of the Genussschein issued by ProSecure Funding Limited Partnership to Ba2 from A1 and the Genussschein due 2014 issued by Postbank to B1 from A1.

The outlook on the D+ BFSR, the A1 senior unsecured, the A2 subordinated as well as all hybrid ratings is negative. Additionally, Moody's affirmed Postbank's Prime-1 short-term rating.

The rating actions conclude the review for possible downgrade on Postbank's BFSR and senior and subordinated debt ratings initiated on 4 March 2009.

"The downgrade of Postbank's BFSR reflects a number of concerns. Firstly, Moody's believes the bank's risk profile has increased following a shift towards riskier lending and investment activities including structured products and commercial real estate in recent years. In addition, its earnings and capital generation capacity has diminished. Finally, following consecutive loss-making quarters, its weakened capitalisation leaves Postbank in a vulnerable position to absorb additional potential future credit losses in the current, continuously challenging credit environment," explains Claude Raab, lead analyst at Moody's for Postbank.

The downgraded senior debt rating of A1 reflects the lower BFSR but also incorporates an uplift reflecting Moody's view that Postbank enjoys a very high probability of systemic support in case of need.

POSTBANK'S CAPITAL LEVELS CONSIDERED WEAK GIVEN ITS EXISTING RISK PROFILE

Following the stress-testing of Postbank's earnings, assets and capital, Moody's has downgraded the bank's BFSR to D+, which maps to a baseline credit assessment (BCA) of Baa3.

"The outcome of Moody's scenario analysis on Postbank reveals that the bank is not adequately capitalized in the context of its risk profile, poor profitability and weak capital generation capacity. In addition, the bank's cost structure, which is currently not commensurate with the bank's earnings capacity -- represents a further challenge in the highly competitive German banking market," Mr Raab adds.

Moody's stresses that Postbank's remaining exposure to structured credit products and commercial real estate lending represent a considerable challenge for the bank. The rating agency believes that the international commercial real estate segment potentially represents a major source of future credit losses with limited visibility over the next 12-18 months.

According to Moody's expectations, higher risk provisions in Postbank's commercial real estate business and ongoing losses in its trading and investment activities may constrain a full recovery in profitability and capital generation, hence the two-notch downgrade of the BFSR to D+.

However, Moody's notes positively that management has taken measures to restore Postbank's profitability and capitalisation including a reduction in complexity, a planned increase in its Tier 1 ratio to approximately 10% by 2012 from 7.6% as per preliminary reported FY 2009 results and a significant reduction in the leverage ratio to below 30 from 40. Furthermore, the rating agency remains comfortable with Postbank's strong liquidity and diversified funding profile.

While Moody's acknowledges that such measures will play an important role in stabilising Postbank's rating profile in the medium term, the agency remains cautious about the bank's ability to achieve these targets within the timeframe given:

1) The potential challenges the bank faces in returning to pre-crisis levels of operating income -- equivalent to more than EUR4 billion -- without increasing its risk profile during a period of weakened economic growth.

2) Moody's view that restoring the bank's profitability and efficiency could become more difficult given its expectation that credit charges will remain at elevated levels for the foreseeable future and the bank's limited scope for restructuring its comparatively high cost base as evidenced by the sub-par cost-to-income ratio.

Therefore, Moody's views management's stated capital targets as important milestones that the bank must achieve in order to maintain the current BFSR of D+. Any negative deviation from these targets could warrant a further downgrade, which is expressed in the negative outlook.

NEGATIVE OUTLOOK ON D+ BFSR AND A1 LONG-TERM RATINGS

Moody's negative outlook on the D+ BFSR reflects its concern that additional losses in 2010 -- particularly from Postbank's structured credit portfolios and commercial real estate business -- could absorb the bank's pre-provision profits and weigh on its capital, thus further exerting pressure on the BFSR, especially in the absence of any meaningful capital generation that could improve the bank's resilience against further credit losses or other setbacks.

The negative outlook on the A1 senior debt and deposit ratings reflects the fact that any further downward movement in the BCA would likely weigh on these A1 ratings, which currently benefit from a five-notch uplift from the BCA of Baa3.

HYBRID RATINGS DOWNGRADED; OUTLOOK ON ALL INSTRUMENTS NEGATIVE

Moody's Investors Service has downgraded its ratings on all rated hybrid securities issued by Deutsche Postbank, in line with its revised Guidelines for Rating Bank Hybrids and Subordinated Debt published in November 2009. Prior to the global financial crisis, Moody's incorporated an assumption into its ratings that support provided by national governments and central banks to shore up a troubled bank would, to some extent, benefit the subordinated debt holders as well as the senior creditors. The systemic support for these instruments has not been forthcoming in many cases. The revised methodology largely removes previous assumptions of systemic support, resulting in today's downgrades. In addition, the revised methodology generally widens the notching on a hybrid's rating, based on the instrument's features.

The rating actions incorporate Moody's downgrade of the existing subordinated debt issued by Deutsche Postbank Funding Trust I-IV to Ba3 from A2, the Genussscheine issued by ProSecure Funding Limited Partnership to Ba2 from A1 and the Upper T2 instruments (Genussschein due 2014) issued by Postbank to B1 from A1. The outlook on all hybrid ratings is negative.

The starting point in Moody's revised approach to rating hybrid securities is the Adjusted Baseline Credit Assessment (Adjusted BCA). The Adjusted BCA reflects the bank's standalone credit strength, including parental and/or cooperative support, if applicable. The Adjusted BCA excludes systemic support expectations.

As per Moody's revised methodology for hybrid ratings, the assigned ratings for the trust preferred securities and the Genussschein issued by ProSecure Funding Limited Partnership reflect Postbank's modest intrinsic financial strength, represented by the Baa3 BCA, while the ratings on the Genussschein due 2014 are based on Moody's expected loss calculation.

For Postbank Funding Trust I-IV, the three-notch differential below the adjusted BCA reflects the deeply subordinated claim in liquidation and the non-cumulative coupon cancellation clause under which profit distribution will only accrue if there is sufficient balance-sheet profit; and participation in a balance-sheet loss together with any other loss-bearing capital of Postbank.

For the Upper T2 issued by ProSecure Funding Limited Partnership, the two-notch differential versus the BCA reflects the mandatory coupon deferral clause under which profit distribution will only accrue if, and to the extent that, there is a sufficient balance sheet profit. In addition, these Cumulative Profit Participating Securities participate in a balance sheet deficit pari passu with the bank's liable capital and other loss-sharing, deeply subordinated instruments.

The Genussschein due in 2014 has a profit and loss trigger and based on our expected loss approach and the anticipation of a coupon deferral for at least one year and a moderate probability of coupon deferral in the following year. In addition, the securities participate in a balance-sheet loss together with any other loss-bearing capital of Postbank. As a consequence, Moody's assigns a B1 rating for the instrument.

RATING HISTORY AND MOODY'S METHODOLOGIES

The last rating action on Postbank was on 19 November 2009 when Moody's extended the review for possible downgrade of its BFSR and long-term ratings.

The principal methodologies used in rating Deutsche Postbank AG are "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, which can be found on www.moodys.com in the Rating Methodologies subdirectory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- 17 November 2009 Frequently Asked Questions: Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt -- 17 November 2009

Deutsche Postbank AG reported total assets of EUR239.3 billion as of the end of September 2009.

Frankfurt
Carola Schuler
Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Claude Raab
Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Postbank's ratings to A1/D+ from Aa3/C
No Related Data.
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