Fitch Affirms Six German Development Banks at 'AAA'/Stable
The affected banks are KfW, Landwirtschaftliche Rentenbank (Rentenbank), NRW.BANK, Investitionsbank Berlin (IBB), Investitionsbank Schleswig-Holstein (IB.SH) and Landeskreditbank Baden-Wuerttemberg - Foerderbank (L-Bank).
A full list of rating actions is available at the end of this rating action commentary. The rating action follows a peer review of European development banks.
KEY RATING DRIVERS
The banks' IDRs, SRs, SRFs, and senior debt are equalised with those of their guarantors, reflecting formal support arrangements and the roles that the banks fulfil for the Federal Republic of Germany (FRG; AAA/Stable) and their respective owners/guaranteeing states.
Fitch rates subordinated debt instruments for NRW.Bank and Rentenbank at the same level as their senior debt as the agency believes that the support mechanisms for both banks provide similar protection to senior and subordinated debt instruments.
Fitch does not assign a Viability Rating to these banks as their business models are entirely dependent on the support of their state guarantors.
Rentenbank
Rentenbank focuses on the agriculture and agribusiness sectors. Its continuation as an economic entity is guaranteed by the FRG through a maintenance obligation (Anstaltslast) and since 1 January 2014, all its obligations also benefit from a guarantee from the FRG.
KfW
KfW is 80%-owned by FRG and is the largest development bank in Germany. Its obligations are backed by a direct and unlimited statutory guarantee from FRG as well as by a maintenance obligation. The bank undertakes a broad range of activities including export and project financing commercial activities These are contained in the bank's wholly-owned subsidiary KfW IPEX-Bank GmbH, which is legally independent and excluded from the state guarantees.
NRW.BANK
NRW.Bank provides funding for economic, social, municipal, infrastructure and housing promotion projects in the State of North Rhine-Westphalia (State of NRW; AAA/Stable). The State of NRW wholly owns the bank and provides it with a maintenance obligation, an explicit unconditional guarantee and a statutory guarantor's liability (Gewaehrtraegerhaftung).
IB.SH
IB.SH provides funding for social, infrastructure and environmental projects as well as for corporates, municipals, affordable housing and energy efficient real estate lending in the State of Schleswig-Holstein (SH; AAA/Stable). It also takes on special tasks on behalf of the State of SH, which provides it with a maintenance obligation, an explicit unconditional guarantee obligation and a Gewaehrtraegerhaftung.
L-Bank
L-Bank endorses homeownership, supports families, and promotes small- and medium-sized companies through the provision of low interest rate loans in its operating region, State of Baden-Wuerttemberg (State of BW). The State of BW wholly owns L-Bank and provides it with a maintenance obligation, an explicit unconditional guarantee, and a Gewaehrtraegerhaftung. Although the State of BW is not rated by Fitch, its creditworthiness is underpinned by the strength of the German solidarity system, which links BW's creditworthiness to that of the FRG.
IBB
IBB is covered by a maintenance obligation and an explicit unconditional guarantee obligation from the State of Berlin (Berlin; AAA/Stable). IBB focuses on a narrower range of development activities than peers as Berlin is a city state and therefore IBB is not active in financing municipalities' budgets or renewable energy projects, two areas of growth for other regional development banks in recent years. Fitch believes that the narrower range of promotional activities allows IBB to better focus its resources than other development banks.
RATING SENSITIVITIES
The banks' IDRs, senior debt ratings, and for NRW.BANK and Rentenbank, subordinated debt ratings are sensitive to a change in Fitch's assumptions around owners' support, specifically a downgrade of FRG, or a change in the terms of the state guarantees. The Stable Outlook on the banks' ratings reflects Fitch's view that neither of these scenarios is likely in the foreseeable future.
Fitch believes that the nature of the state support is unlikely to change significantly in the medium term due to the strategic importance of these banks to the German economy and their entrenchment in the domestic financial system. The support structure was approved by the European Union in 2002, although under competition law the banks may only engage in non-competitive activity. This also makes significant changes to the banks' business models unlikely in the medium term.
Fitch considers that the amendment to the "Law concerning KfW", effective from 13 July 2013, means KfW is subject to key banking supervision standards under the German Banking Act and is supervised by the German Federal Financial Supervisory Authority. However, Fitch does not expect that KfW's special role as a promotional bank will be materially impacted or that the support for KfW will change.
Fitch expects state support for development banks to be unaffected by the German implementation of the European Bank Recovery & Resolution Directive (BRRD) or the Single Resolution Mechanism (SRM). KfW is explicitly excluded in the BRRD from resolution and restructuring measures. For the regional development banks we do not expect an increase in risks for senior creditors since German development banks' policy status and guarantee structure have been reviewed by the European Commission, and that these banks only engage in non-competitive activity.
Over the next three months, Fitch plans to make a technical change to its assessment of the source of support for the German development banks owned and sponsored by the regional states, IB.SH, NRW.BANK, L-Bank and IBB. The source of support will be institutional and stem from the respective federal states, compared with state support from Germany as captured in the SRF. While either is possible under our criteria given the mechanism of support among German federal states and from Germany to its states, the switch would bring the application of criteria better in line with our practice in other countries.
This technical change means that we would be looking directly to the federal state for support rather than indirectly from Germany, and the banks would, therefore, no longer have a SRF. The change would have no effect on the banks' SRs or IDRs given that Fitch assesses all 16 regions (Bundeslaender) to have 'AAA' creditworthiness due to the solidarity and implicit guarantee mechanisms linking the federal government and the Bundeslaender ensure an equal and minimum risk of default for all.
The rating actions are as follows:
KfW
Long-term IDR affirmed at 'AAA', Stable Outlook
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Support Rating Floor at 'AAA'
Senior unsecured short-term rating including programme ratings affirmed at 'F1+'
Market-linked securities affirmed at 'AAAemr'
Commercial paper affirmed at 'F1+'
Rentenbank
Long-term IDR affirmed at 'AAA', Stable Outlook
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AAA'
Senior unsecured long-term rating including programme ratings affirmed at 'AAA' and 'F1+'
Market-linked securities affirmed at 'AAAemr'
Subordinated notes affirmed at 'AAA'
Commercial paper affirmed at 'F1+'
NRW.BANK
Long-term IDR affirmed at 'AAA', Stable Outlook
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AAA'
Senior unsecured long-term rating including programme ratings affirmed at 'AAA' and 'F1+'
Commercial paper affirmed at 'F1+'
Short-term certificates of deposit affirmed at 'F1+'
Subordinated notes affirmed at 'AAA'
Investitionsbank Berlin
Long-term IDR affirmed at 'AAA', Stable Outlook
Short-term IDR affirmed at 'F1+'
Senior unsecured long-term and short-term ratings affirmed at 'AAA' and 'F1+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AAA'
Investitionsbank Schleswig-Holstein
Long-term IDR affirmed at 'AAA', Stable Outlook
Short-term IDR affirmed at 'F1+'
Senior unsecured long-term ratings affirmed at 'AAA'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AAA'
L-Bank
Long-term IDR affirmed at 'AAA', Stable Outlook
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'AAA'
Senior unsecured long-term rating affirmed at 'AAA'
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