Rating Action: Moody`s upgrades German banks` deposit

Rating Action: Moody's upgrades German banks' deposit ratings and
downgrades senior debt ratings
Global Credit Research - 26 Jan 2016
Action reflects the introduction of legislation that subordinates certain creditors to depositors in
resolution from 2017
Frankfurt am Main, January 26, 2016 -- Moody's Investors Service has today taken a number of ratings actions for
35 German banks, including several rated subsidiaries in Luxembourg and Ireland, as well as their supported
entities. In particular, the rating agency upgraded the deposit ratings of 22 banks by up to two notches and
downgraded the senior unsecured debt ratings of seven banks by a maximum of one notch. In addition, the bank
deposit ratings for nine banks, and senior debt ratings for 18 banks were affirmed and the senior debt ratings for
two banks were upgraded by one notch. The outlooks on the ratings have mostly been revised to stable.
Today's action reflects the changes in protection offered to depositors and senior creditors, as captured by
Moody's Advanced Loss Given Failure (LGF) analysis. The changes in protection result from the subordination of
certain senior unsecured debt obligations relative to other senior liabilities, including deposits, in Germany's
insolvency legislation which will take effect from January 2017. The changed rank ordering in bank resolutions
implies a higher severity of loss in resolution for senior unsecured debt instruments because these will no longer
benefit from their current pari passu status with junior deposits. Conversely, for junior deposits, the new law
implies a lower severity of loss as these will benefit from the subordination of long-term debt instruments.
In the context of prospective legal changes, Moody's also upgraded several German banks' short-term debt
ratings because these are now referenced to their respective long-term deposit ratings, reflecting that the new
German legislation will not subordinate money market obligations to junior deposits. Short-term debt and deposit
ratings are therefore Prime-1 if a bank's long-term deposit rating is A2 or higher.
Within the group of 35 banks, Moody's also took several actions on ratings and rating inputs that were unrelated to
the forthcoming change in insolvency legislation:
Moody's upgraded Commerzbank AG's Baseline Credit Assessment (BCA) to baa3 from ba1, reflecting the
sustained improvement in the bank's asset quality and capitalisation. In addition, the rating agency upgraded
Bayerische Landesbank's (BayernLB's) BCA to ba1 from ba2 and its adjusted BCA to baa2 from baa3, reflecting
improvements in its asset quality, capital and profitability. The assessment of the banks' improved financial
strength in combination with their respective revised LGF assessments have led Moody's to affirm
Commerzbank's Baa1 long-term senior debt and issuer ratings, and to upgrade BayernLB's senior debt ratings to
A2 from A3.
Moody's also downgraded to B2 from B1 the senior subordinated debt rating of HSH Nordbank AG, due to higher
loss-given-failure for these instruments following sizeable maturities of mostly grandfathered subordinated debt in
2015.
The outlooks on German banks' long-term deposit ratings as well as senior debt or issuer ratings have, in most
cases, been changed to stable. The stable rating outlooks indicate Moody's expectation of a broadly stable liability
structure, along with stability for other ratings inputs. For a small number of banks, negative outlooks are
maintained or have been assigned. In most cases, negative outlooks indicate respective pressure on BCAs, or
likely changes to a bank's liability structure in the next 12-18 months which may adversely affect the result of
Moody's Advanced LGF analysis. Previously, the outlooks on junior deposit ratings were mostly positive and the
outlooks for senior unsecured debt and issuer ratings mostly negative in order to indicate the diverging rating
pressures from the prospective change in insolvency legislation.
Following the maturity of the vast majority of debt instruments benefitting from phased-out legacy guarantees by
German regional governments (so-called grandfathered debt), Moody's has withdrawn backed deposit and issuer
ratings and selected backed debt ratings for the group of Germany's Landesbanken. This reflects that: 1) Either
legacy guarantees by the regional governments no longer apply; or 2) these ratings have become obsolete
because no respective liabilities are outstanding any longer. For more information, please refer to "Moody's
Investors Service's Policy for Withdrawal of Credit Ratings," available at moodys.com.
Most other ratings and ratings inputs for the banks affected by today's rating action have been unaffected.
Please click on http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_187274 for the List of Affected Credit
Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
Moody's has also published a Special Comment entitled "Banks - Germany, Italy: Change in Insolvency
Legislation Drives German And Italian Bank Rating Actions", providing more background on today's rating action.
Subscribers can access the report under the following link:
http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1013718
A separate rating announcement for Deutsche Bank AG has been published today and can be found under
https://www.moodys.com/research/Moodys-upgrades-Deutsche-Bank-AGs-deposit-rating-and-downgrades-debt-PR_342809
RATINGS RATIONALE
(1) DEPOSIT RATING UPGRADES AND SENIOR DEBT RATING DOWNGRADES REFLECT CHANGES TO
GERMANY'S NEW INSOLVENCY LEGISLATION FOR BANKS
In November 2015, the German government amended the insolvency legislation for banks to effectively
subordinate certain senior unsecured debt obligations to other senior liabilities including deposits. From January
2017 onwards, depositors will benefit from the subordination of senior unsecured debt instruments, reducing the
severity of loss for deposits. In contrast, the subordination of senior unsecured debt instruments will increase the
loss severity for senior debt instruments, offering lower protection for senior bondholders.
Today's rating action reflects the lower loss-given-failure in resolution for German banks' junior deposits in its bank
deposit ratings. At the same time, it factors in the higher loss-given-failure for German banks' unsecured bonds
and notes in its senior unsecured debt ratings.
For long-term junior deposits of most German banks, Moody's Advanced LGF analysis results in an "extremely
low" loss-given-failure, resulting in three notches of rating uplift for junior deposits (previously in most cases "very
low" and two notches of rating uplift) for the majority of banks. However, some deposit ratings include less
favourable results and lower uplift, because their liability structures include low or no subordination in the form of
subordinated debt and/or senior debt instruments.
For senior unsecured debt ratings of most German banks, Moody's Advanced LGF analysis results in a "low" or
"very low" loss-given-failure, resulting in one or two notches of rating uplift. However, some banks have less
(more) favourable LGF results, leading to lower (higher) rating uplift for senior debt, depending on their individual
liability structures.
Moody's Advanced LGF analysis reflects the benefit of instrument volume and subordination protecting creditors
from losses in the event of resolution. German, Irish and Luxembourg-based banks are subject to the EU Bank
Resolution and Recovery Directive (BRRD), which Moody's considers to be an Operational Resolution Regime.
Although neither Luxembourg nor Ireland have introduced similar changes to the priority of claims in their
respective insolvency legislation, Moody's believes that subsidiaries in these jurisdictions, to the extent they are
highly-integrated, will form part of a common resolution perimeter with their respective parent banks.
For more information on Moody's LGF analysis and a discussion of the differences in creditor hierarchies, see
Moody's "How Resolution Frameworks Drive Our Creditor Hierarchies" at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1003760 (in addition to the primary
methodology itself).
(2) COMMERZBANK's BCA UPGRADE OFFSETS LOWER RATING UPLIFT FOR SENIOR DEBT
The affirmation of Commerzbank's Baa1 issuer/senior unsecured debt ratings reflects: (1) The upgrade of the
bank's BCA and adjusted BCA to baa3 from ba1; and (2) the reduced rating uplift from Moody's Advanced LGF
analysis, reflecting the changed priority of claims under Germany's new insolvency legislation. The bank's
issuer/senior unsecured debt ratings now only benefit from one notch of LGF uplift from previously two, owing to
the group's limited volume of subordinated and senior unsecured debt. At the same time, the rating agency
upgraded Commerzbank's deposit ratings to A2 from Baa1, now incorporating three notches of rating uplift from
the bank's adjusted BCA, reflecting the bank's large deposit base. The outlook on all ratings is stable.
Commerzbank's short-term debt and deposit ratings have been upgraded to Prime-1 from Prime-2 and are now
mapped from the bank's A2 deposit rating, as money market obligations have not been subordinated to junior
deposits under the new German legislation. Moody's also upgraded all subordinated and hybrid debt ratings by
one notch, mirroring the higher BCA.
The upgrade of Commerzbank's BCA to baa3 from ba1 reflects the bank's improved financial profile, most notably
with regards to asset quality and capital as well as its continued sound funding profile. At a Common Equity Tier 1
(CET1) capitalization of 10.8% on a fully phased-in basis (12.5% on a phase-in basis) and a leverage ratio of 4.1%
as of September 2015, Moody's considers Commerzbank's capital ratios to be adequate in the context of its risk
profile. As of September 2015, the bank's non-performing loans accounted for 3.5% of its gross loans. The BCA
remains constrained by the bank's low profitability and some tail risk relating to exposure concentrations to the
shipping and commercial real estate sectors.
(3) BAYERNLB'S BCA UPGRADE SUPPORTS UPGRADE OF SENIOR DEBT
The one-notch upgrade of BayernLB's senior unsecured debt ratings to A2/Prime-1 reflects: (1) The upgrade of
the bank's BCA to ba1 from ba2 and adjusted BCA to baa2 from baa3; and (2) the unchanged very low loss-givenfailure in resolution, which continues to result in rating uplift by two notches for this class of debt under Germany's
new insolvency legislation. The LGF result remains underpinned by BayernLB's large volume of wholesale funds
that are eligible as senior liabilities under the new German legislation, despite large maturities of (mostly)
grandfathered debt in 2015. Moody's also upgraded BayernLB's deposit ratings to A1 from A3, that now benefit
from three notches of LGF uplift from the bank's adjusted BCA, because depositors benefit from the subordination
of senior unsecured debt. Moody's also upgraded the bank's subordinated debt ratings by one notch, mirroring the
higher adjusted BCA.
The upgrade of BayernLB's BCA to ba1 from ba2 reflects the bank's improving financial profile as reflected by
stronger solvency metrics, i.e., Moody's key ratios for asset risk, capitalisation and profitability. In particular,
Moody's expects BayernLB's CET1 and leverage ratios to remain satisfactory as and when the bank returns the
remaining EUR2.3 billion of gross participation capital provided by the Federal State of Bavaria. As of September
2015, BayernLB reported a fully phased-in 11.1% CET1 ratio, compared to 10.2% in 2014.
(4) MOSTLY STABLE OUTLOOKS ON DEPOSIT AND DEBT RATINGS INDICATE MOODY'S
EXPECTATIONS OF STABLE LIABILITY STRUCTURES
Outlooks, which provide an opinion on the likely rating direction over the medium term, have in most cases been
changed to stable for both long-term deposit and senior unsecured debt (or issuer) ratings. Previously, the
outlooks on junior deposit ratings were mostly positive and the outlooks for senior unsecured debt and issuer
ratings mostly negative to indicate a high probability of a rating change upon the government's final decision to
subordinate senior debt instruments to junior deposits.
The mostly stable rating outlooks generally indicate Moody's expectation of the German banks' broadly stable
liability structure, along with stability for other ratings inputs. A stable outlook may also indicate diverging
pressures from a bank's BCA and its likely future LGF result, which may offset each other.
For a small number of banks negative outlooks are maintained or have been assigned. Where outlooks are
negative, they either indicate: (1) Respective pressure on BCAs; (2) likely changes to the bank's respective
liability structure in the next 12-18 months which may adversely affect the result of Moody's Advanced LGF
analysis; or (3) expected bank-specific developments during 2016.
(5) WITHDRAWAL OF BACKED GRANDFATHERED DEBT RATINGS FOR CERTAIN LIABILITY CLASSES
Moody's withdrawal of backed, or grandfathered, issuer and deposit ratings and selected debt ratings for the group
of German Landesbanken reflects that: 1) Either the legacy statutory guarantees from regional governments no
longer apply; or 2) these ratings have become obsolete because no respective liabilities are outstanding any
longer.
Most prominently, this relates to backed long- and short-term deposit ratings, backed long-term issuer ratings and
short-term debt ratings and several backed debt and debt program ratings. Moody's has generally not withdrawn
any grandfathered long-term debt or program ratings where instruments remain outstanding. Grandfathered debt
benefits from Gewährträgerhaftung, i.e. a statutory deficiency guarantee, which allows creditors direct recourse to
the guarantors, mainly Germany's regional governments. Instruments that were issued by German Landesbanken
before July 18, 2001 remain grandfathered until they mature; all issues after July 18, 2001 have ceased to be
grandfathered.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Ratings pressure in either direction may occur due to: (1) Fundamental developments that result in upgrades or
downgrades of a bank's BCA; (2) any change in Moody's assessment of the strength and/or availability of parental
support or cross-sector support -- the latter is generally applicable to banks that are members of an institutional
protection scheme; (3) alterations in a bank's liability structure that changes the expected loss severity for
particular liability classes; and/or (4) any change in Moody's assumptions regarding the likelihood of government
support being available.
Changes in the severity of loss for certain liability classes and therefore pressure on results of Moody's Advanced
LGF analysis may develop if the individual banks' subordinated instruments increase (or decrease), and/or if
senior unsecured debt increases (or decreases) relative to their tangible banking assets. This could result in
additional (or fewer) notches of uplift resulting from Moody's LGF analysis.
For bank-specific rating drivers, please refer to the respective banks' latest credit opinions.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in January 2016. 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
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