DBRS Places NORD/LB‘s Ratings Under Review – Negative Implications

DBRS Ratings GmbH (DBRS) has today placed the ratings of Norddeutsche Landesbank GZ (NORD/LB or the Bank) Under Review with Negative Implications, including the ‘A’ / R-1 (low) Issuer Ratings, and the BBB (high) Subordinated Debt Rating. During the review, DBRS will also re-evaluate the Bank’s SA1 Support Assessment and the BBB (low) Intrinsic Assessment (IA).

KEY RATING CONSIDERATIONS
In order to clean up its balance sheet and shore up capital, NORD/LB has, in recent months, been undertaking a process to reduce its non-performing shipping loans portfolio, as well as soliciting bids for a capital injection. The review of the Bank’s ratings follows the recent announcement that NORD/LB has received a joint bid by two private equity investors to acquire a minority stake in the Bank, while the Bank is also continuing talks with the DSGV (Deutscher Sparkassen- und Giroverband) about a possible public sector solution. DBRS understands that there are still a number of possible outcomes for the Bank given the potential for equity investments from both the private and public sector, and that therefore NORD/LB’s long-term membership in the Institutional Protection Scheme (IPS) of the Sparkassen-Finanzgruppe (SFG) and the IPS’ support for NORD/LB, has become less clear. Currently, NORD/LB’s ratings reflect the Bank’s membership of the IPS, therefore any change to its membership of the support framework would be likely to have negative rating implications. The rating action also takes into account, that in the event of a public sector solution, EU State Aid procedures could be triggered, leading to a requirement for burden-sharing with junior creditors and further restructuring. DBRS notes that both potential transactions are also still subject to considerable execution risk.

DBRS acknowledges that both potential outcomes could be positive for NORD/LB’s standalone credit profile. Not only would the NPL ratio drop to very low levels, but credit concentration risks would also decline meaningfully, while capital ratios are expected to strengthen. However, DBRS will reassess the benefits of such improvements together with the outlook for the Bank’s franchise and strategy following the completion of the process.

RATING DRIVERS
NORD/LB’s Issuer Ratings benefit from the Sparkassen-Finanzgruppe’s (SFG) Institutional Protection Scheme (IPS). Any change in this would be likely to have negative implications and this will be a key focus of the current review. If NORD/LB is confirmed as an ongoing member of the support framework then the Issuer Ratings could be confirmed at the same levels as the SFG’s ratings.

A reduction of the non-performing shipping loans portfolio together with higher capital levels is likely to have a positive impact on NORD/LB’s IA. However, DBRS will reassess the benefits of such improvements together with the outlook for the Bank’s franchise and strategy once there is clarity about the bank’s future ownership. Any significant delays or failure to execute on the plans could lead to a lower IA.

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 documents. 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

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Sonja Förster, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: June 11, 2018
Last Rating Date: July 27, 2018

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