Frankfurt am Main, July 03, 2012 -- Moody's Investors Service has today placed on review for downgrade
Deutsche Pfandbriefbank's (pbb) standalone bank financial strength
rating (BFSR) of E+ (equivalent to a b1 standalone credit assessment)
and pbb's senior debt and deposit ratings of A3. The review
for downgrade reflects the pressure that the current operating environment
is exerting on pbb's franchise and standalone credit strength as
well as concerns regarding the very high support uplift from the German
government, pbb's sole owner.
As a result, pbb's B2 subordinated debt and Prime-1
short-term ratings have also been placed on review for downgrade.
Moody's notes that pbb's senior debt and deposit ratings are
likely to remain investment grade. The ratings of pbb's sister
company, Depfa plc (Baa3 stable; E+/b2 stable),
are not affected by this announcement.
The review reflects Moody's concerns regarding the bank's
wholesale funded business model together with increased asset-side
vulnerabilities, also as result of a deteriorating operating environment
in Europe. The review will focus on pbb's ability (i) to
raise funding in the debt capital markets at conditions that allow for
a suitable margin; (ii) to bear potential losses in the context of
its exposures to euro area peripheral countries; (iii) to write new
business to replace the existing -- partly low yielding
-- asset base; and (iv) to adjust its business profile
to the changing regulatory and market environment, as a precondition
for the bank to be privatised by 2015.
At the same time Moody's will reassess its current very high assumptions
for support from the German government in the light of the pending privatisation
and shifting policy towards support in Europe.
RATINGS RATIONALE
Moody's acknowledges the progress pbb has made in stabilising and
rebuilding its business following the asset transfer to FMS Wertmanagement
(Aaa stable) in October 2010. The bank has remained profitable
in the last seven quarters and has re-entered the capital markets
successfully, including issuing benchmark covered bonds.
Moreover, pbb's liquidity levels remain satisfactory and its
asset quality compares positively to its peer group as a result of the
previous asset transfer. Moody's decision to place the bank's
ratings on review for downgrade reflects its concerns regarding the bank's
business model in the current operating environment.
REVIEW OF STANDALONE CREDIT ASSESSMENT
Today's rating announcement reflects several factors that are exerting
downwards pressure on the long-term viability of pbb's franchise.
Moody's believes that pbb is constrained in its ability to obtain
senior unsecured funds maturing beyond 2015, which is the date by
which the German government -- the bank's current
sole owner -- must sell its majority stake according to
the state aid ruling of the European Commission (EC). pbb requires
such funding to refinance the unsecured portion of its core business in
the medium term.
Although pbb has a comfortable Tier 1 capital ratio of 15.9%,
Moody's cautions that pbb's leverage is high as its Tier 1
capital only accounts for EUR2.8 billion or 2.8%
of the operating balance sheet at the end of Q1 2012. In addition,
pbb retains sizeable exposures to sectors and regions, which expose
it to potentially material losses over the medium term, including
exposure to the euro periphery, including Spain (EUR 5.1
billion) and Italy (EUR4.2 billion). Moody's considers
commercial real estate to be an asset class that is particularly vulnerable
to impairments in the weakening European operating environment.
Finally, Moody's believes that the longer-term viability
of pbb's business model is under increasing pressure, given
pbb's current low core profitability, which partly reflects
its low yielding public-finance legacy portfolio. Challenges
for the bank to build up more profitable businesses (including commercial
real estate) have increased as market conditions and the operating environment
have deteriorated as a result of the euro area debt crisis.
REVIEW OF SUPPORT ASSUMPTIONS
Moody's will also reassess its assumptions of support forthcoming
from the German government in the event of need. The current assumptions
are very high, resulting in seven notches of rating uplift from
pbb's current b1 standalone credit assessment. This is more
than the level of support assumed for pbb's peers, reflecting
the strong support that has been evolving since pbb's parent Hypo
Real Estate (HRE (unrated) first experienced distress and needed financial
assistance in late September 2008, and the role the government has
played in restoring pbb's capital and liquidity position.
The German government's commitment to supporting the bank,
of which it is the sole shareholder, is credit positive for creditors.
However, there remain uncertainties regarding the level of support
creditors could expect over the rating horizon that arise from the government's
need and desire to privatise the bank, and the challenges it will
face in doing so given the weak market outlook and pbb's size and
profile. Moody's also notes that the implementation of the
bank resolution regime as part of the German Bank Restructuring Act in
January 2011 allows for more flexibility to impose losses on certain debt
classes and has made government support less predictable. The review
will assess whether those uncertainties are consistent with such high
uplift.
WHAT COULD MOVE THE RATINGS UP/DOWN
The review for downgrade indicates that there is currently no upwards
rating pressure for pbb's ratings. Downwards pressure on
the E+ BFSR could be triggered by (i) a failure to restore pbb's
business franchise; (ii) renewed setbacks due to higher-than-anticipated
credit losses in pbb's core business areas; (iii) difficulties in
tapping the unsecured debt markets; and/or (iv) unforeseen losses
on pbb's selective exposure to peripheral euro area economies.
Downward pressure on the A3 ratings could result from (i) a further downgrade
of the E+ BFSR; (ii) an unexpected reduction in support or a
sooner-than-warranted exit by the German government;
and/or (iii) a gradual reduction in pbb's systemic importance.
PRINCIPAL METHODOLOGIES
The principal methodology used in these ratings was Moody's Consolidated
Global Bank Rating Methodology published in June 2012. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, and public information.
Moody's considers the quality of information available on the rated
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Moody's reviews Deutsche Pfandbriefbank's ratings for downgrade
