OREANDA-NEWS. Fitch Ratings has affirmed Duesseldorfer Hypothekenbank AG's (DHB) Long-term Issuer Default Rating (IDR) at 'BBB-'. All ratings have been removed from Rating Watch Negative (RWN) and the Outlook on the Long-term IDR is Stable. The rating action follows DHB's announcement that the Deposit Protection Fund (DPF) of the Association of German Banks (Bundesverband deutscher Banken e.V.; BdB) has indirectly acquired 100% of DHB's shares and guaranteed the bank's exposure to Heta Asset Resolution AG (Heta). Fitch has downgraded DHB's Viability Rating (VR) to 'f' from 'c' to reflect our opinion that these extraordinary support measures have become necessary to restore DHB's viability.

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

KEY RATING DRIVERS AND SENSITIVITIES - IDRs, SUPPORT RATING, SUPPORT RATING FLOOR (SRF) AND DEBT ISSUANCE PROGRAMME
The affirmation of DHB's support-driven Long-term IDR and its removal from RWN reflect Fitch's expectation that the bank will continue to receive support from its new owner if ever needed. BdB announced its takeover of DHB on 16 March 2015 and it was published on 24 March 2015 in Germany's commercial register. The BdB's DPF has since owned 94.6% of DHB's shares via the special-purpose acquisition vehicle which it controls, Resba Beteiligungsgesellschaft mbH. The remaining 5.4% of DHB's shares were indirectly taken over by the Auditing Association of German Banks (Pruefungsverband deutscher Banken e.V.) via Einlagensicherungs- und Treuhandgesellschaft mbH. Consequently, DHB's pending sale to financial investors agreed in August 2014 has been abandoned.

On 15 March 2015, BdB announced that it was also providing a guarantee to cover DHB's entire exposure to Heta, an Austrian wind-down institution subject to a moratorium imposed by the Austrian authorities on 1 March 2015. Given DHB's large exposure to Heta relative to its weak capitalisation, the bail-in of Heta's senior unsecured creditors that is likely to follow the moratorium would have exceeded DHB's modest loss absorption capacity and rapidly threatened its viability.

DHB's Long-term IDR remains at the low end of the investment grade category to reflect our opinion that the full ownership and the guarantee, which we estimate at several hundred million euros, increase BdB's already significant incentive to provide DHB with additional support if ever needed. The IDRs also reflect our assessment of the DPF's ability to provide support as we understand that its available paid-in resources are sufficient to cover DHB's exposure to Heta.

We consider that support is now most likely to come from DHB's new ultimate owner. Consequently, we have withdrawn the bank's SRF, which until now assumed systemic support as the most likely ultimate source of support. In Fitch's view, systemic support is becoming increasingly uncertain in light of the implementation into German national law of the European Union's Bank Resolution and Recovery Directive (BRRD) including its bail-in tool in early 2015.

The bank's support-driven IDRs and its Support Rating are primarily sensitive to changes in the DPF's ability and propensity to support DHB. Fitch believes that BdB could wind down DHB, which in our opinion would result in continued support for senior creditors.
A sale of DHB, which we currently do not consider likely in the short term, could indicate a lower propensity of the fund to provide support, which would result in a downgrade of the support-driven ratings. In this scenario, depending on Fitch's assessment of the remaining propensity to provide support to unsecured debtholders, DHB's Long-term IDR could be downgraded by several categories, potentially down to the level of its VR at the time of a sale if institutional support from the new owner or BdB appears uncertain.

DHB's SR and IDRs could benefit from institutional support if it becomes majority-owned by a strategic buyer with solid investment-grade ratings and a proven strong ability and credible strong willingness to support. However, this is not our base case.

We believe that operating the bank over a longer period of time as a going concern under BdB's ownership is a less likely option as this would be outside BdB's remit.

Regardless of BdB's strategic plans for DHB and the bank's future ownership, we expect the bank's institutional deposits to continue to benefit from the DPF's extensive coverage, which creates a high incentive for DPF to extend institutional support to DHB. An upgrade of DHB's support-driven ratings is unlikely in any of the above scenarios.

KEY RATING DRIVERS AND SENSITIVITIES - VIABILITY RATING (VR)
The downgrade of the VR to 'f' from 'c' reflects Fitch's opinion that BdB's acquisition of DHB and the provision of an asset guarantee shortly after the announcement of Heta's moratorium indicates that the likely haircut on DHB's large exposure to Heta would have resulted in the bank becoming non-viable on a standalone basis. The VR of 'f' is retrospective in nature.

An upgrade of the VR would be contingent on BdB's commitment to operate DHB as a going concern and inject the capital necessary to enable sufficient new business to develop DHB's weak commercial real estate franchise and compensate the erosion of its capital base resulting from its recurring losses. Alternatively, an upgrade could result from a sale to an investor with a credible plan to operate DHB as a going concern with a reliable access to sufficient financial resources. A decision by BdB to initiate an orderly wind-down of DHB would likely result in a withdrawal of its VR.

The rating actions are as follows:
Long-term IDR: affirmed at 'BBB-'; Stable Outlook
Short-term IDR: affirmed at 'F3'
Viability Rating: downgraded to 'f' from 'c'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB-' and withdrawn
Debt issuance programme: affirmed at 'BBB-'/'F3'