DBRS Confirms DZ BANK AG Deutsche Zentral-Genossenschaftsbank at A (high), Trend revised to Positive

DBRS Ratings Limited (DBRS) confirmed the Long-Term Issuer rating of DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ BANK Group, or DZ, or the Group) at A (high) and the Short-Term Issuer rating at R-1 (middle). DZ BANK Group’s intrinsic assessment (IA) remains A (high). The support assessment for the Group is SA3 and as such, the Senior Long-Term Debt and Deposits rating of DZ BANK Group is positioned in line with the Group’s IA. The trend on the Long-Term ratings was changed to Positive from Stable. The Trend on the Short-Term ratings remains stable.

KEY RATING CONSIDERATIONS

The change in the trend to Positive reflects DZ’s good track record in delivering solid profitability over the longer term, the Group’s strong risk profile, and the Group’s sound levels of capital retention. The change in trend also reflects DZ’s considerable progress in the integration of WGZ Bank Group and the benefits this merger is expected to bring to the Group.

DZ BANK Group’s ratings are driven by: i) the Group’s stand-alone credit profile underpinned by diversified revenue streams, ii) the Group’s role as a central clearing bank and service provider to the local Cooperative Banks in Germany, providing the Group with ample access to retail liquidity as a result of the strong market position of the Cooperative retail banking network, and iii) the strength and cohesion of the Cooperative Financial Network (CFSN), tying together the more than 915 local Cooperative Banks and the Group in the CFSN Protection Scheme.

RATING DRIVERS

Improving the risk profile through further reducing exposure to non-core cyclical assets (e.g. shipping and off-shore exposures) which would also have the benefit of strengthening bottom line profitability could lead to positive rating pressure.

Given the Positive trend, a downgrade is unlikely. However, negative rating pressure could result from: i) a significant increase in DZ’s risk profile and/or ii) any indication of reduced cohesion and mutual support among the members of CFSN or any form of weakening of the CFSN Protection Scheme.

RATING RATIONALE

In DBRS’s view, DZ has made significant progress in the integration of WGZ Bank. After the successful IT migration in October 2017, the Group completed its new organizational setup at end-2017. The merged group, which has become Germany’s second largest bank by total assets, has kept its decentralised structure and business model unchanged. DBRS views the DZ BANK Group as comparatively well positioned to successfully face the rising costs from regulation and IT infrastructure over the medium term. Total income and cost synergies from the merger –from strategic, business management, and regulatory perspectives – are estimated at EUR 100–150 million per year. The Group’s significant size, with the potential to deploy scale economies across its business, provide a significant cost advantage in the medium term and the opportunity to reap scale efficiencies.

DZ reported a FY2017 preliminary net profit of EUR 1,098 million under IFRS accounting rules down from EUR 1,606 million in FY2016. DBRS notes that the Group’s results have been impacted by one-off merger related operating expenses and high loan impairment charges for DZ’s specialized transportation finance subsidiary, DVB Bank.

In FY2017, DZ Group’s loan impairments increased to EUR 786 million (compared to EUR 569 million in FY2016 and to EUR 153 million in FY2015) and were driven by the sizeable shipping finance portfolios. DBRS expects the risk content of the DVB Banks’s exposures to remain manageable for the Group against the background of the Group’s good underlying recurrent earnings and its sound regulatory capitalisation levels.

The Group’s funding and liquidity remain strong. This is supported by the Group’s diversified funding profile, benefiting from corporate deposits, Pfandbrief issuance and indirect access to retail liquidity, as a significant level of local Cooperative bank deposits are centrally placed with the Group.

DBRS views positively the Group’s strong capital position. As of end-2017, DZ BANK Group reported a total capital ratio of 17.3% (FY2016: 18.6%) and a fully loaded Basel III Common Equity Tier 1 (CET1) ratio of 13.8% (FY2016: 14.5%). During 2017, DZ Group’s regulatory capital ratios decreased around 70 bps impacted mainly by changes in risk-weighting exposure on the insurance business R+V. DZ Group’s leverage ratio improved considerably to 4.6% from 4.1%, due to a strong increase on the Group’s core capital of around EUR 1.1 billion in 2017.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, Bundesverband der Deutschen Volksbanken und Raiffeisenbanken and company reports. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: George Yiannakis, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG

Initial Rating Date: May 22, 2007
Most Recent Rating Update: June 2, 2017

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