DBRS Confirms Landesbank Berlin AG at “A”; Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings for Landesbank Berlin AG (LBB or the Bank), including the Long-Term Issuer Rating at “A”, Subordinated Debt rating at BBB (high) and Short-Term Issuer Rating at R-1 (low). The trend on all ratings remains Stable. The Intrinsic Assessment (IA) remains at BBB (high) and the Support Assessment remains unchanged at SA1. For a complete list of ratings, please see the table at the end of this press release.

The confirmation of the debt ratings reflects LBB’s full ownership by the German savings banks and its membership in the Institution Protection Scheme of the Sparkassen-Finanzgruppe. Each member of the Institution Protection Scheme, including LBB, is generally rated at the floor level of “A”, Stable trend (for more information on the DBRS rating floor see the DRBS Rating Report of the Sparkassen-Finanzgruppe).

DBRS has maintained LBB’s IA at BBB (high). The IA reflects the Bank’s solid regional banking franchise and the progress made in recent years towards restructuring the Bank towards the regionally focused Berliner Sparkasse. It also reflects the improving, but still volatile, earnings profile, as well as the risks related to the Bank’s cyclical commercial real estate (CRE) lending and sizable security portfolio. The IA further reflects the Bank’s solid funding franchise based upon its solid regional retail deposit and Pfandbrief franchise as well as its improved capitalisation following restructuring and de-risking.

Following the restructuring DBRS expects future earnings to be more stable, albeit at lower levels which reflect its lower risk profile. In 1H17 LBB posted pro-forma net income of EUR 34 million under German GAAP accounting rules, which will be transferred at year-end to its Holding (Landesbank Berlin Holding AG) in accordance with the existing Profit & Loss Transfer Agreement. The result reflected higher commission generation counterbalanced by pressure on net interest income driven by the low yield environment in Germany, as well as additional personnel costs related to changes in pension accounting.

Following the lengthy restructuring, LBB’s risk profile has reduced, however DBRS also notes that the Bank’s exposure to the growing Berlin real estate market remains substantial. LBB has generated new CRE lending of EUR 3 billion in 2016 and continued high new lending in 2017. DBRS will continue to closely monitor the performance of the Bank’s exposures, given the industry’s cyclicality and cautions that a downturn in Berlin’s real estate market would have a negative impact on LBB’s asset quality and profitability.

LBB’s stable liquidity and funding profile is supported by the Bank’s solid retail and regional deposit franchise, as well as the funding provided by its savings bank partners/owners. LBB operates the regionally focused Berliner Sparkasse (BSK) as a branch within the Bank, benefiting from the strength of BSK’s core retail deposit base. Nonetheless, LBB has a relatively high usage of wholesale funding (largely more stable Pfandbriefe) to fund LBB’s real estate activities in and around Berlin, as well as portions of the Bank’s regional corporate activity.

LBB is owned 100% by the Sparkassen Finanzgruppe via an economic vehicle, S-Erwerbsgesellschaft (Erwerbsgesellschaft der S-Finanzgruppe mbH & Co. KG), which is also the entity through which LBB reports its capital ratios to the German regulator. As such potential capitalisation pressure at the S-Erwerbsgesellschaft or Holding level could indirectly exert pressure on LBB.

Over the last several years, LBB has steadily strengthened its regulatory capital ratios. The fully loaded Core Equity Tier 1 ratio, as of 1H2017, was 17.7%, well in excess of LBB’s SREP ratio. However, DBRS expects capital ratios to reduce due to increasing pressure on regulatory RWAs with the recalibration of asset risk weights under the upcoming Basel IV regime and ECB’s TRIM (Targeted Review of Internal Models) initiative.

RATING DRIVERS

LBB’s Issuer Ratings benefit from the Sparkassen-Finanzgruppe’s (SFG) Institution Protection Scheme. Any change in the “A”/ R-1 (low) floor rating level of the SFG would lead to a change in LBB’s ratings.

Upward movement of the IA is unlikely in the short-medium term given the pressure on capitalisation and the need to establish a track-record of stable risk adjusted earnings. The IA could come under negative pressure should LBB’s financial strength deteriorate, in particular if there is an increase in the risk profile resulting from a significant further increase in LBB’s CRE portfolio relative to its loss absorbing capital. Any significant deterioration of the capitalisation at the Holding (S-Erwerbsgesellschaft) level translating into capitalisation pressure or risk transfer for LBB, would also negatively pressure LBB’s IA.

The Grid Summary Grades for Landesbank Berlin AG are as follows: Franchise Strength – Good; Earnings Power – Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good; Capitalisation – Good/Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: George Yiannakis, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: January 22, 2007
Most Recent Rating Update: July 14, 2017

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