DBRS Confirms Sparkassen-Finanzgruppe Long-Term Issuer Rating at ‘A’, Trend remains Positive

DBRS Ratings GmbH (DBRS) has confirmed the floor ratings for the Sparkassen-Finanzgruppe (the Association or the Group) 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. The Support Assessment for the Group remains unchanged at SA3.

These ratings also apply, in line with DBRS’s floor ratings concept, to each member of Sparkassen-Finanzgruppe’s Institutional Protection Scheme (IPS) rated by DBRS which, as of March 2019, includes 379 German savings banks (the Sparkassen), the five Landesbanken, eight public-sector building societies (LBS), the Group’s central asset manager, DekaBank, and other specialised service providers. For a complete list of ratings, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS
The Positive trend continues to reflect DBRS’s view that the profitability in the Sparkassen sector shows resilience despite the low interest rate environment, the strong asset quality of the Sparkassen, as well as the further de-risking of the Landesbanken sector and the consistent progress the group has made in improving its capital position.

The ‘A’/R-1 (low) ratings reflect the underlying earnings and the very strong franchise of the Sparkassen which is a vital component of the group. The Group’s aggregated balance sheet of EUR 2.1 trillion, as of end-FY2017, underscores its importance to the German banking sector and the German economy. DBRS notes that approximately 60% of Germany’s population has a banking relationship with the Group. Offsetting these rating strengths are the still elevated risk within the Landesbanken sector that remains a meaningful part of the Group as well as the high dependence on net interest income in a low rate environment.

RATING DRIVERS
Further positive rating pressure would require (i) a restructuring of NORD/LB that not only lowers risk emanating from the entity, but also demonstrates the functioning of the IPS without triggering EU State Aid procedures, (ii) resilience in overall profitability, (iii) the maintenance of competitiveness in its retail and SME customer segments, and (iv) consistency in maintaining the Group’s sound capital position.

Given the positive trend, negative rating pressure is unlikely. However, this could result from (i) any significant deterioration in capitalisation, (ii) any indication of weakening of the IPS scheme, (iii) deterioration in the core franchise of the savings banks reflected in substantially weakening market shares in customer loans and deposits.

RATING RATIONALE
The Group reported net income of EUR 2.3 billion in 2017, up 12.8% YoY, to which the savings banks contributed EUR 2.1 billion, while the Landesbanken reported a net profit of EUR 188 million. Administrative expenses increased slightly overall, reflecting lower administrative expenses at the Sparkassen level, offset by increases at the Landesbanken. In FY2017, the cost-income ratio of the Group increased to 68.8% (2016: 66.8%) based on DBRS estimates, mainly due to the decline in net interest income (NII) and higher costs at the Landesbanken.

The Sparkassen, for which preliminary and unaudited figures for FY2018 were released in March 2019, generated solid revenues in 2018, albeit lower than 2017. Pre-provision profits (based on the Bank’s internal accounting system) were EUR 10.0 billion, down from EUR 10.5 billion a year earlier, as a decline in net interest income (NII) could not be offset by increases in fee and commission income.

As the Sparkassen still benefitted from the benign domestic economic environment, the valuation result for loans under German GAAP was zero for FY2018. However, a decline in equity markets required a negative valuation adjustment for securities in the liquidity portfolio of EUR 1.4 billion. Despite the negative impact from the liquidity portfolio, the Sparkassen were able to report a net profit of EUR 2.2 billion, exceeding FY2017 results by EUR 100 million, due to lower additions to their 340g reserves (EUR 2.7 billion versus EUR 4.7 billion in the previous year.) For the group as a whole, DBRS expects weak, possibly negative FY2018 earnings as a result of the restructuring process at NORD/LB

Looking ahead, DBRS expects margin pressure to persist throughout 2019, but the Group continues to adapt well to its operating environment. The overall risk profile of the Group has, in DBRS’s view, improved significantly in recent years with the continued deleveraging and de-risking of the Landesbanken. However, the issues at Nord LB show that this process is still not complete. DBRS continues to view the risk profile of the savings banks as stable and reflective of the broader German economic environment.

DBRS considers the Group’s overall liquidity position as strong based on the strong deposit base and sound liquidity of the savings banks, which is in part offset by the more wholesale-oriented funding profile of the Landesbanken. Aggregate deposits of the Sparkassen totalled EUR 950 billion at FY2018, up 4.3% from the previous year, exceeding customer loans by EUR 127 billion. The Landesbanken continue to have a more wholesale-oriented funding profile, albeit this is based partly on the more stable covered bond market.

SFG’s capitalisation is in DBRS’s view solid, reflecting the overall sound capital and consistent underlying earnings of the savings banks, the improved capital position in the Landesbanken sector, as well as the more challenging situation at NORD/LB. The Group’s aggregated Tier 1 ratio (including Landesbausparkassen) improved to 16.3% at the end-FY2017 from 15.6% a year earlier.

The Grid Summary Grades for SFG are as follows: Franchise Strength -Very Strong/Strong; Earnings Power – Good; Risk Profile - Strong/Good; Liquidity & Funding - Strong; Capitalisation - Strong/Good

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.

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: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: January 18, 2007
Last Rating Date: July 27, 2018

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Amtsgericht Frankfurt am Main, HRB 110259

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