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Rating Action:

Moody's upgrades Landesbank Baden-Wuerttemberg's long- and short-term ratings to A2/Prime-1; outlook stable

06 May 2014

LBBW's baseline credit assessment raised to baa3, outlook stable

Frankfurt am Main, May 06, 2014 -- Moody's Investors Service has today upgraded Landesbank Baden-Wuerttemberg's (LBBW) long-term debt and deposit ratings to A2 from A3. The long-term ratings carry a stable outlook. Concurrently the rating agency raised the bank's short-term ratings to Prime-1 from Prime-2.

At the same time, Moody's has affirmed LBBW's standalone bank financial strength rating (BFSR) at D+ with a stable outlook and raised the bank's baseline credit assessment (BCA) to baa3 from ba1 within the D+ BFSR category.

Furthermore, Moody's upgraded LBBW's subordinated debt ratings to Baa2 from Baa3 with a stable outlook.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

-- UPGRADE OF LONG-TERM RATINGS WITH A STABLE OUTLOOK

The upgrade of LBBW's long-term debt and deposit ratings was induced by the one-notch raising of the BCA to baa3 from ba1.

Moody's maintained its view that senior depositors and bondholders will very likely benefit from support that LBBW is likely to receive from multiple sources. These include not only systemic support, which is currently coming under pressure given the prospect of centralised supervision and rules for bank resolution in Europe, which favour bail-ins over publicly-funded bail-outs. More importantly, continued external support will likely remain available for LBBW, including support from (1) its public-sector owners, i.e., the Land (federal state) of Baden-Wuerttemberg (Aaa stable) and the City of Stuttgart (unrated); (2) the Savings Bank Association of Baden-Wuerttemberg (Sparkassenverband Baden-Wuerttemberg or SVBW; Aa3 stable); and (3) cross-sector support from Germany's public-sector banks (Haftungsverbund). Those levels of support are closely interlinked for public-sector banks, and Moody's unified approach of applying support uplift from multiple sources anticipates concerted support solutions in case of need.

This, together with the bank's important role in the regional economy along with the bank's size and its integration into the public-sector support mechanisms, continues to lead to an unchanged four-notch ratings uplift to A2 from the bank's BCA of baa3. Moody's view on systemic support for LBBW is in line with the view it takes for other large public-sector banks in Germany.

The stable outlook on LBBW's long-term ratings mirrors the stable outlook of the bank's BFSR.

-- AFFIRMATION OF THE BFSR WITH A STABLE OUTLOOK AND REMAPPING OF THE BCA

The rating agency says that the affirmation of LBBW's BFSR at D+ with a stable outlook and the subsequent raising of the BCA to baa3 from ba1 reflects (1) the successful and substantial de-risking of the bank since the onset of the financial crisis as evidenced by the reduction of its structured credit portfolio to EUR11 billion as of year-end 2013, accompanied by the exit from EU state aid proceedings in late 2013; (2) the bank's improving resilience against downside risks displayed by significantly strengthened capital adequacy ratios (fully-loaded common equity Tier 1 ratio reported at 12.6% as of year-end 2013); and (3) LBBW's recovery and stabilisation in profitability with a reported net profit of EUR337 million as of 31 December 2013 following the 2009-11 period in which the bank's earnings were highly volatile and negatively affected by write-offs, impairments and restructuring charges.

The standalone credit assessment remains constrained by (1) Moody's assessment of the bank's limited ability to significantly grow its net profits and thus its retained earnings in 2014 and potentially beyond as a result of continued high costs for a risk shield provided by the bank's public-sector owners in 2009; and (2) uncertainties arising from LBBW's high exposures to domestic and international corporate and commercial real-estate (CRE) portfolios that may exert pressure on the bank's profitability and, potentially, capital ratios in a highly adverse scenario.

-- UPGRADE OF THE BANK'S SUBORDINATED RATINGS

The upgrade of the bank's subordinated debt ratings to Baa2 with a stable outlook from Baa3 follows the raising of the bank's BCA, as these instruments are notched off the bank's adjusted BCA that includes our expectation about the availability of support from the sector of public banks in case of need. Concurrently, Moody's has upgraded these ratings, following the raising of LBBW's adjusted BCA to baa1 from baa2.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

Upwards pressure on LBBW's standalone BFSR and long-term ratings could result from (1) further reduced single-name credit concentrations and a faster-than-anticipated re-focusing of LBBW's asset profile expressed by a continuous reduction of higher-risk secondary market investments; (2) a marked and sustainable improvement in risk-adjusted profitability and efficiency, especially if this would be driven by enhanced cost management as well as higher quality and quantity of recurring earnings from core businesses while sustaining this structural improvement in retained earnings in order to foster better internal capital generation and thus loss-absorption capacity; and (3) continued improvement of asset quality within the bank's loan portfolios comprising exposures to commercial real-estate and cyclical industry sectors such as automotives and construction.

Downwards pressure could be exerted on the bank's BFSR if (1) the bank's financial strength or franchise strength were to deteriorate, especially if this would be followed by a sustained weakening of its recurring earnings power and levels of operating efficiency; (2) the bank's risk profile fails to improve or even weakens; and (3) if asset quality materially deteriorates beyond levels that are consistent with the bank's risk-absorption capacity.

LBBW's long-term ratings could be negatively affected by (1) a downgrade of its standalone BFSR; (2) as a result of a change in its ownership structure; (3) deterioration in the implied creditworthiness of its owners; and/or (4) weakening cross-sector support mechanisms. The long-term ratings could also be downgraded if we were to lower our assessment of the very high probability of systemic support currently factored into the bank's long-term ratings.

LIST OF AFFECTED RATINGS

Landesbank Baden-Wuerttemberg:

The following ratings were affirmed with a stable outlook:

- BFSR at D+

The following ratings were upgraded with a stable outlook:

- Long-term bank debt and deposit ratings (local and foreign currency) to A2 from A3

- Subordinated debt ratings to Baa2 from Baa3

The following ratings were upgraded:

- Long-term Senior Unsecured MTN to (P)A2 from (P)A3

- Long-term Subordinate MTN to (P)Baa2 from (P)Baa3

- Short-term bank deposit ratings (local and foreign currency) to Prime-1 from Prime-2

- Short-term Deposit Note/CD Program to Prime-1 from Prime-2

- Short-term Senior Unsecured MTN to (P)Prime-1 from (P)Prime-2

- Commercial Paper to Prime-1 from Prime-2

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Banks published in May 2013. 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 certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael Rohr
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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 upgrades Landesbank Baden-Wuerttemberg's long- and short-term ratings to A2/Prime-1; outlook stable
No Related Data.
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