OREANDA-NEWS. Fitch Ratings has affirmed Bayerische Landesbank (BayernLB) VR at 'bb+' following the announcement of the Austrian Financial Market Authority that it has taken measures to resolve HETA ASSET RESOLUTION AG (HETA). BayernLB has outstanding and due senior unsecured loans to HETA.

BayernLB's support-driven ratings, including its 'A+'/Negative Long-term Issuer Default Rating (IDR) and 'F1+' Short-term IDR are not affected by this rating action.

A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS - VR
BayernLB's VR reflects its ongoing restructuring, where good progress was made in 2014, and takes into account the remaining legacy issues weighing on its asset quality and earnings and profitability.

BayernLB's outstanding and matured senior unsecured loans to HETA (the wind down unit of former Hypo Alpe Adria International AG (HGAA)) amount to EUR2.35bn end-2014, which we expect to fall under resolution as announced by the Austrian Financial Market Authority on 1 March 2015.

Today's affirmation reflects our view that BayernLB is in a position to manage the effect on its capital in case of a bail-in of senior unsecured creditors in HETA's resolution.

BayernLB's 12.8% common equity tier 1 (CET1) (Basel III fully loaded according to the bank's definition, but which includes EUR3bn of the Free State of Bavaria's silent participation recognised until end-2017) at end-3Q14 in our opinion indicates an adequate buffer for possible losses arising from its exposure to HETA. In addition end-3Q14 regulatory capital ratios already included a EUR1.06m deduction from fully-applied Basel III CET1 capital related to BayernLB's exposure to HETA.

A stress test of HETA ordered by the Austrian regulator and government suggests that a possible haircut to HETA's assets of between 25% and 48%. We also recognise that the repayment of the matured loans is subject to various lawsuits BayernLB has filed.

BayernLB further reduced its risk-weighted assets during 2014, including through the sale of its Hungarian subsidiary MKB in 3Q14 and the sale of its entire ABS portfolio (EUR6.5bn) in 4Q14. This reduced assets in its restructuring unit to EUR15bn at end-October 2014 (EUR22bn at end-2013). The restructuring enabled BayernLB to terminate the guarantee agreement and repay EUR1.1bn state aid in October and EUR700m of silent participations to the Free State of Bavaria in December 2014.

RATING SENSITIVITIES - VR
BayernLB's VR could benefit from further successful resolution of its legacy asset issues. Conversely, the rating may be downgraded if unresolved legacy issues materially affect its profit and capital ratios or if asset quality deteriorates. Any setback in its on-going restructuring could also put pressure on its VR, while successful restructuring and improving contribution from the core business could positively affect BayernLB's VR.

KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of BayernLB's subordinated debt is notched off its VR because revised state aid rules have made it more difficult for federal states to support BayernLB without some form of burden-sharing affecting subordinated shareholders. BayernLB's subordinated lower Tier II instruments are notched down once from the VR to reflect loss severity in line with Fitch's criteria for subordinated debt. Bayern LB's subordinated debt ratings are sensitive to changes in BayernLB's VR or to changes in its notching.

The rating of BayernLB Capital Trust I's hybrid capital instrument is based on Fitch's view that the hybrid instruments will continue to be non-performing. Fitch does not expect BayernLB to report sufficient distributable profits based on unconsolidated German GAAP accounting to meet the terms of the instrument for 2015 and potentially beyond. However, Fitch recognises that BayernLB has bought back most of the issue as reflected by an outstanding amount of only USD79.5m.

The rating actions are as follows:
BayernLB
Viability Rating: affirmed at 'bb+
Subordinated lower Tier II debt: affirmed at 'BB'

BayernLB Capital Trust I
Hybrid capital instruments: affirmed at 'CCC'