Downgrade follows Special Comment "Assessing Post-Crisis Support for German Banks"
Frankfurt, May 04, 2010 -- Moody's Investors Service has today downgraded the senior unsecured debt
and deposit ratings of WestLB AG to A3 from A2 and its subordinated debt
ratings to Baa1 from A3 following Moody's revision of its assumptions
for future support for the bank. The rating action concludes the
review for possible downgrade that Moody's initiated for these ratings
on 8 December 2009. The E+ bank financial strength rating
(BFSR, which maps directly to a B2 baseline credit assessment,
BCA), was affirmed and the outlook on this rating changed to stable
from developing. The Prime-1 short-term rating was
also affirmed, while WestLB's hybrid ratings and the Aa1 rating
for obligations that qualify for the grandfathering of "Gewaehrtraegerhaftung"
(a guarantee obligation) remained unaffected by today's rating action.
In line with the rating action on WestLB AG, Moody's has also
changed the outlook on the E+ BFSR of WestLB Covered Bond Bank plc,
Dublin, to stable from developing and affirmed the subsidiary's
Prime-1 short-term ratings. The review status of
the bank's A2 senior unsecured debt and deposit ratings will be
concluded shortly.
DOWNGRADE OF WESTLB'S LONG-TERM RATINGS DUE TO WEAKENING
SUPPORT FROM PUBLIC SECTOR SHAREHOLDERS
"Today's rating action follows a review of the probability
of future support for WestLB from its current owners," says
Katharina Barten, a Vice President at Moody's in Frankfurt
and lead analyst for WestLB. "Past support measures have
reached such a scale that the two North-Rhine Westphalian savings
bank associations, which together still hold a majority share in
the bank, would likely compromise their own financial strength if
they decided to offer further support measures in the foreseeable future.
More importantly, the two associations have stated publicly that
they are no longer willing to provide further support to the bank,"
Ms. Barten adds. Moody's therefore lowered its assumptions
for the probability of future cooperative support -- which also captures
support from public sector owners if these are themselves members of the
group of public sector banks (the S-Financial Group), which
in turn maintain and benefit from cross-sector support mechanisms.
Another driver for this adjustment was the uncertainty of whether WestLB
will remain a member of this group over the long term, given the
European Commission's requirement that the current owners divest
the majority of their shareholding by December 2011 at the latest.
At the same time, Moody's factored into WestLB's fully
supported ratings a slightly higher probability of support from the German
government, which, through a EUR 3.0 billion hybrid
capital injection, for the first time offered direct support to
a German Landesbank. "Moody's fully recognises that WestLB
will remain in the hands of public sector owners for the time being and
that the government's Financial Market Stabilisation Fund (SoFFIN) has
been available to support the bank," Ms. Barten explains.
"This offsetting effect has resulted in the relatively mild downgrade
of just one notch to A3 for WestLB's senior unsecured debt ratings."
The rating uplift from the bank's B2 BCA was lowered from nine to
eight notches. This still implies Moody's expectation of
very high support going forward, even though WestLB has lost some
of its systemic relevance through the off-loading of approximately
EUR 40 billion of its assets, together with the bulk of its grandfathered
debt, into a wind-down entity.
Moody's decision should be viewed in the context of its recent analysis
of changing support in Germany, as outlined in the Special Comment
"Assessing Post-Crisis Support for German Banks".
In this report Moody's points out that weakening support from public
sector owners -- among other factors -- exerts pressure on several
supported Landesbank ratings, while uncertainties for junior classes
of debt are rising across the banking landscape. While the latter
has not yet been factored into any German bank ratings -- whose subordinated
debt ratings generally remain one notch below senior unsecured debt --
today's rating action reflects Moody's concern about the gradually
weakening support for banks that needed large-scale support during
the crisis and do not yet display sufficient financial recovery and stabilisation
that would allow for a material upgrade in their BFSRs.
NEGATIVE OUTLOOK ON THE A3 RATING REFLECTS RISK OF FURTHER WEAKENING SUPPORT
OVER LONG TERM
Moody's believes that, in a post-crisis situation with more
normal market conditions and a potentially better-capitalised banking
system, single banks in distress could be less likely to receive
support than in the past. This should ultimately generate downward
rating pressure, unless banks are able to offset this anticipated
reduction in systemic support by strengthening their levels of stand-alone
financial strength which would exert upward pressure on their BFSRs.
In the case of WestLB, this likely trend could be exacerbated by
the forthcoming change in its shareholder composition, in particular
if the bank were to be taken over by private investors, which would
in turn almost certainly jeopardise the bank's membership in the
S-Financial Group's. Nevertheless, Moody's
considers such an outcome to be unlikely and expects that a solution to
the Commission's requirement of a change in the bank's ownership
will be found within the S-Financial Group of public sector banks.
E+ BFSR CONSTRAINED BY WEAK FRANCHISE AND THE BANK'S UNCERTAIN
FUTURE
Moody's change of the outlook on the BFSR to stable from developing reflects
the improved financial profile of the core bank following the completion
of a "bad bank" structure on 30 April 2010. (This included a transfer
of sizeable portfolios of non-core and higher-risk assets
into the wind-down vehicle Erste Abwicklungsanstalt (rated Aa1/Prime-1),
along with capitalisation measures amounting to EUR 3.0 billion
from the SoFFin.) The offloading transaction has a number of positive
implications for WestLB's risk and business profile, including
(i) a reduction in risk-weighted assets and thus capital relief,
(ii) a reduction in certain risk concentrations and (iii) an improvement
in the group's funding profile.
Moody's affirmation of the E+ BFSR and the change of its outlook
to stable also reflects that, despite these positive developments,
the BFSR remains constrained by the bank's weak franchise,
which includes several core segments that do not (or only insufficiently)
contribute to group profits, thus resulting in the bank's
continued dependence on volatile, wholesale-focused sources
of income. Moreover, Moody's does not rule out that
the bank could be split up and unwound if efforts to divest the bank were
to prove unsuccessful.
SUMMARY OF RATINGS AND RATING ACTIONS: WestLB
- Rating for senior unsecured debt and deposits: downgraded
to A3
- Rating for senior subordinated debt: downgraded to Baa1
- Prime-1 short-term rating: affirmed
- E+ BFSR (B2 BCA): affirmed, outlook changed
to stable from developing
- Aa1 rating for grandfathered obligations, stable outlook:
unaffected
SUMMARY OF RATINGS AND RATING ACTIONS: WestLB Covered Bond Bank
plc
- A2 rating for senior unsecured debt and deposits, on review
for downgrade: no action yet
- Prime-1 short-term rating: affirmed
- E+ BFSR (B2 BCA): affirmed, outlook changed
to stable from developing
RATING HISTORY AND MOODY'S METHODOLOGIES
The previous rating action on WestLB was implemented on 11 March 2010
when Moody's corrected the rating of one grandfathered security.
In its previous rating action on 8 December 2009, Moody's had placed
the A2 senior unsecured debt and deposit ratings and the A3 subordinated
debt ratings on review for possible downgrade and changed the outlook
on its E+ BFSR to developing from negative.
The principal methodologies used in rating WestLB were "Moody's Bank Financial
Strength Ratings: Global Methodology", published in February
2007, "Incorporation of Joint-Default Analysis into Moody's
Bank Ratings", published in March 2007, and " Moody's Guidelines
for Rating Bank Hybrid Securities and Subordinated Debt", published
in November 2009, which are available on www.moodys.com
in the Rating Methodologies sub-directory 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.
Headquartered in Duesseldorf, Germany, WestLB reported total
assets of EUR242.3 billion as of the end of December 2009 and reported
a pre-tax loss of EUR503 million for the 12-month period.
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 WestLB's senior debt ratings to A3, negative outlook
