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

DBRS Ratings GmbH (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 a result the Group’s final ratings are positioned in line with the IA. The trend on the Long-Term ratings remains Positive and the trend on the Short-Term ratings remains Stable. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
DZ BANK Group’s ratings reflect the Group’s reasonable profitability underpinned by diversified revenue streams and their solid risk profile. It also reflects the well-managed liquidity profile, sound levels of capital retention and the successful integration of WGZ Bank Group. The ratings also reflect the competitive German banking market and low interest rate environment which limits earnings upside, as well as some earnings sensitivity to capital market volatility.

DZ BANK Group’s ratings are underpinned by: i) the Group’s stand-alone credit profile, 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 (CFN), tying together the 885 institutions in the CFN Protection Scheme.

RATING DRIVERS
Stronger bottom line profitability along with limited earnings volatility could lead to further positive rating pressure. An improvement in the risk profile through further reducing exposure to non-core cyclical assets (e.g. shipping and off-shore exposures) could also support higher ratings.

Given the Positive trend, a downgrade is unlikely. However, the trend could revert to Stable, if improvements in profitability and earnings stability fail to materialise. In addition, negative rating pressure could result from: i) a material increase in DZ’s risk profile, ii) significant earnings volatility, and/or ii) any indication of reduced cohesion and mutual support among the members of CFN or any form of weakening of the CFN Protection Scheme.

RATING RATIONALE
Through a number of intra-network mergers DZ BANK Group has become Germany’s second largest banking group by total assets. 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. 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. While DZ BANK Group benefits from a diversified earnings stream, more recently, Group results have been impacted by the low interest rate environment and capital market volatility.

In FY18, Group income before provisions and taxes (IBPT) of DZ BANK Group was EUR 1.54 billion down from EUR 2.83 billion a year earlier. The spread widening for fixed income products and the decline in equity values in 2018 negatively impacted gains and losses and have contributed to revenue declines at DZ Bank, DZ Hyp and R+V insurance. DBRS notes that losses at DZ’s specialised transportation finance subsidiary, DVB Bank have been contained at EUR 130 million compared to a loss of EUR 774 million a year earlier. DBRS has viewed DZ BANK Group’s solid profitability as a core strength and therefore profitability will be a key rating driver in the future.
The non-performing loan ratio improved further to 1.3% at FY18, down from 1.7% at FY17, mostly as a result of the reduction in non-performing shipping loans. Moderate economic growth in Germany, low interest rates, low unemployment and a resilient Mittelstand sector also continued to support asset quality.

DBRS views DZ BANK Group’s liquidity as strong both on a Group level and on a DZ BANK AG level. The Group’s customer loan to deposit ratio (LTD) stood at 132% at end-FY18, however, the Group benefits from ample deposits placed by the cooperative banking network. The Group reported a liquidity coverage ratio (LCR) of 141% against a regulatory minimum of 100% for FY18.

In FY18, DZ BANK Group’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio remained flat at 13.7%, comfortably above the minimum capital requirement of 9.75% for end-FY18. DBRS notes DZ BANK Group’s commitment to strengthen its capitalisation through internal capital formation given the Group’s limitations as a cooperative institution to raise equity from the capital markets. DZ Group’s fully loaded leverage ratio marginally declined by 10 basis points (bps) year-on-year (YoY) to 4.3%, due to an increase of exposures driven by business growth, but still comfortably above the internal 3.5% target.

The Grid Summary Grades for DZ BANK AG Deutsche Zentral-Genossenschaftsbank are as follows: Franchise Strength – Very Strong/Strong; Earnings – Strong; Risk Profile – Strong; Funding & Liquidity – Very Strong/Strong; Capitalisation – Strong.

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, 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Sonja Forster, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: May 22, 2007
Last Rating Date: July 27, 2018

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