DBRS Confirms Landesbank Berlin AG at “A”; Positive Trend

DBRS Ratings Limited (DBRS) confirmed the ratings for Landesbank Berlin AG (LBB or the Bank), including the Long-Term Issuer Rating at “A” and the Short-Term Issuer Rating at R-1 (low). The trend on all ratings remains Positive, in line with the broader Sparkassen-Finanzgruppe (SFG). The Intrinsic Assessment (IA) was maintained at BBB (high) and the Support Assessment remains unchanged at SA1. For a complete list of ratings, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of LBB’s Long-Term ratings reflects its full ownership by the SFG and its membership in the Institution Protection Scheme of the SFG. Each member of the Institution Protection Scheme, including LBB, is generally rated at the floor level, which is currently “A” with a Positive trend (for more information on the DBRS rating floor, see the DRBS Rating Report of the SFG).

RATING DRIVERS
LBB’s Issuer Ratings benefit from the SFG’s Institution Protection Scheme. Any change in the “A”/ R-1 (low) floor rating level of the SFG would lead to a change in LBB’s ratings. Likewise, any change in the Positive trend of the SFG would lead to a trend change in LBB’s Issuer Ratings.

Positive pressure on the IA would require a longer-term track-record of good performance in the typically cyclical commercial real estate (CRE) segment, along with further improvement in profitability and efficiency.

Negative pressure on the IA could arise from a sharp deterioration in asset quality and failure to improve profitability metrics. It would also arise if capitalisation weakens at the Bank or Holding level.

RATING RATIONALE
The BBB (high) IA reflects the strength of the Bank’s regional savings bank franchise (through Berliner Sparkasse) in Berlin, along with its well-established nationwide credit card business. The IA also takes into account the Bank’s solid funding and liquidity profile underpinned by a growing customer deposit base, its adequate capital position and the benefits that it gets from being part of the larger SFG. However, the IA also takes into account the Bank’s large concentration in cyclical CRE lending.

Despite the low interest rate environment, LBB has continued to show resilient profitability, reporting in 1H18, pro-forma net income of EUR 53 million under German GAAP accounting rules. This was significantly up Year on Year (YoY) from EUR 34 million in 1H17, largely benefiting from lower §340g HGB reserves. Income before provisions and taxes (IBPT) of EUR 177 million was flat YoY, as growth in net interest income and commissions was mitigated by higher personnel costs (related to pension contributions), technology and regulatory costs. LBB’s Return on Adjusted Equity (ROAE) was 4.6%. The Bank’s cost efficiency remains weak, which is a key consideration for the IA. Even though the Bank’s cost-to-income ratio (CIR) has improved from 92% in 2015 to 81% in 1H18, it remains high when compared to similarly rated banks, and well above the Bank’s target of 70%.

Although LBB’s asset quality is good, DBRS notes the large risk concentration in the Berlin CRE market, and, to a lesser extent, the Bank’s sizeable securities portfolio. CRE represented about 20% of the total balance sheet at the end of June 2018, however DBRS notes that new CRE lending volumes are slowing down after two years of strong growth. Whilst asset quality remains robust with a reported 1% non-performing loans ratio at end-1H18, DBRS will continue to closely monitor the performance of the Bank’s CRE portfolio, as any sudden downturn in Berlin’s real estate market could potentially have a negative impact on LBB’s asset quality and profitability.

The Bank has a stable liquidity and funding profile, which is underpinned by LBB’s growing retail deposit franchise. LBB operates the regionally focused Berliner Sparkasse (BSK) as a branch within the Bank, benefiting from the strength of BSK’s core retail deposit base. At end-1H18, customer deposits fully funded the Bank’s lending activities.

The Bank has adequate capital levels. However, DBRS also notes that LBB is 100% owned by the Sparkassen Finanzgruppe via an economic vehicle, S-Erwerbsgesellschaft (Erwerbsgesellschaft der S-Finanzgruppe mbH & Co. KG), and this is the entity through which LBB reports its capital ratios to the German regulator. As such, potential capitalisation pressure at the S-Erwerbsgesellschaft or Holding level could indirectly exert pressure on LBB. At end-1H18, LBB’s phased-in Common Equity Tier 1 ratio was 13.2%, well above the minimum regulatory requirements under the SREP of 9.5% for 2018. The Total Capital Ratio stood at 13.2%.

The Grid Summary Grades for Landesbank Berlin AG are as follows: Franchise Strength – Good; Earnings Power – Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good; Capitalisation – Good/Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). 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 and Company disclosures. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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 historical default rates published by the European Securities and Markets Authority (“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: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: January 22, 2007
Most Recent Rating Update: April 17, 2018

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.