Fitch Revises Bremer Landesbank's Outlook to Negative; Affirms IDR at 'A-'
The Outlook revision to Negative reflects Fitch's view that the the Long-Term IDR could be downgraded by a full rating category to 'BBB-' if the long-term sustainability of the bank's business model deteriorates further because we consider that a weakened business could increase doubts about whether the bank's public sector owners would be allowed to provide support to BremenLB under EU legislation.
A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS
SR, IDRS, AND SENIOR DEBT
BremerLB's IDRs and SRs reflect Fitch's view of a very strong likelihood of combined support from the bank's owners. Norddeutsche LandesbankGirozentrale (NORD/LB) owns 54.8% of BremerLB and is itself owned by the federal states of Lower Saxony and Saxony-Anhalt and by the regional savings banks. The City of Bremen owns 41.2% in BremerLB, and the remainder ultimately by the Sparkassen-Finanzgruppe (SFG,'A+/Stable') through the regional savings banks.
Fitch's institutional support considerations are based on the view that the owners consider their investment in BremerLB long-term and strategic. The owners' strong support propensity is underpinned by BremerLB's focus on its statutory roles, which include supporting the regional economy and acting as the central bank for regional savings banks.
In Fitch's view, any support would need to be forthcoming from the bank's other owners as well as the City of Bremen to avoid triggering state aid considerations and resolution under the German Sanierungs und Abwicklungsgesetz (SAG) if BremerLB fails. Fitch's view of the creditworthiness of the City of Bremen is driven by the stability of Germany's solidarity system, and is therefore equalised with Germany's 'AAA' Long-Term IDR. The support ability of SFG, as expressed by its 'A+' IDR, while very strong, is weaker than that of the federal states. Fitch uses the lower of the ultimate owners' Long-Term IDRs, which is SFG's 'A+' Long-Term IDR, as the anchor rating for determining BremerLB's support-driven ratings.
We notch down BremerLB's Long-Term IDRs twice from SFG's 'A+' IDR. The notching reflects BremerLB's role for its owners, which we consider strategic, but not key and integral, as well as uncertainties over potential legal and regulatory barriers related to state aid considerations and provisions of German resolution legislation.
BremerLB's Short-Term IDR reflects the lower of the two possible ratings for an 'A-' Long-Term IDR in light of the revision of BremerLB's Outlook to Negative from Stable.
VR
BremerLB's VR reflects our view that the bank's oversized and poorly performing exposure to shipping finance is threatening the sustainability of the bank's business model, limiting managerial flexibility and burdening its financial profile. BremerLB's asset quality continued to deteriorate in 2015 and the non-performing-loan (NPL) ratio increased further to 14.6%, (from 12.4%in 2014) as the shipping sector remained under pressure.
BremerLB has taken various measures to reduce NPLs, including outright sale of ships, whose positive impact will in part become visible during 2016. However, it is important that BremerLB continues to reduce risks.
BremerLB's earnings deteriorated in 2015 because of unprecedented levels of loan impairment charges despite stable results in its core business outside shipping. We expect further volatility as efforts to clean up the shipping portfolio could have a significant negative impact on its profitability.
BremerLB has strengthened its capitalisation as its Fitch Core Capital (FCC) to risk-weighted assets (RWA) ratio increased to13.7% end-2015, from 10.3% in 2014. The improvement was mainly driven by a sharp drop in RWAs. In Fitch's view, the primary risk to capitalisation is further deterioration in asset quality as unreserved impaired loans were equal to a high 120% of FCC at end-2015. Capitalisation is also sensitive to movements in the euro/U.S. dollar exchange rate as a fairly high share of the group's exposure, especially to shipping, is U.S. dollar-denominated.
The bank issued additional tier 1 instruments in 2015, which has resulted in a slightly higher loss absorption capacity.
BremerLB's funding and liquidity are supported by access to the savings banks, and the bank did not need to access capital markets for its funding in 2015. However, the bank's funding could become more sensitive to investor sentiment if its performance continues to deteriorate, which could result in higher funding costs.
RATING SENSITIVITIES
SR, IDRS, AND SENIOR DEBT
The IDRs, SR and senior debt ratings are sensitive to changes to Fitch's assumptions around the propensity or ability of BremerLB's owners to provide timely support. This may be indicated by a change to SFG's IDR.
The Negative Outlook on BremerLB's Long-Term IDR reflects Fitch's view that the long-term sustainability of the bank's business model is deteriorating, mainly because of a potential further weakening of its asset quality given the bank's exposure to the shipping sector. Fitch believes that there is a greater risk that EU legislation would restrict support for a Landesbank for which there is no clearly demonstrated sustainable business model and would widen the notching of BremerLB's Long-Term IDR by a rating category to 'BBB-' if this became the case. In Fitch's view, a downgrade of the bank's VR to 'bb-' or below would be an initial indicator to assess whether BremenLB's business model is sustainable.
VR
BremerLB's VR is primarily sensitive to further deterioration in asset quality, which given the bank's modest profitability could put capitalisation under pressure. This could arise if the shipping sector fails to recover given the bank's large exposure to the sector. A failure to address the asset quality weakness could ultimately cast doubts on the sustainability of BremerLB's business model.
An upgrade of BremenLB's VR would be contigent on a material improvement in asset quality and capitalisation, which we consider unlikely given the weak outlook on the shipping sector.
The rating actions are as follows:
Bremer Landesbank
Long-Term IDR: affirmed at 'A-'; Outlook Revised to Negative
Short-Term IDR: downgraded to 'F2' from 'F1'.
Support Rating: affirmed at '1'
Viability Rating: affirmed at 'bb'
Long- and Short-term senior debt, including programme ratings: affirmed at 'A-' and downgraded to 'F2' from 'F1'
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