Fitch Affirms S- Finanzgruppe Hessen-Thueringen at 'A '; Outlook Stable
A full list of rated Sparkassen is available at www.fitchratings.com or via the link above. A full list of rating actions is at the end of this rating action commentary.
The ratings assigned to S-Verbund HT's Sparkassen are "group ratings" in line with our criteria for mutual banking groups. In accordance with these criteria, we have assigned a VR to the group as a whole but not to individual members of the group. S-Verbund HT comprises 34 savings banks in Hessen and 16 in Thueringen and Helaba, which acts as its central institution providing wholesale business services.
KEY RATING DRIVERS - IDRs AND VR
S-Verbund HT meets all of our requirements for assigning group ratings, notably at least annual accounts, a common strategy, a risk management system with a degree of cohesion, supervision by the local regulator as a single "risk" unit and the existence of a mutual support mechanism. Since 2010, S-Verbund HT has reported audited IFRS accounts for the group.
As well as the Sparkassen's overall support scheme (Haftungsverbund), S-Verbund HT has its own regional reserve fund, which underlines the commitment to support its members. To date, the support mechanism and the group's strategic cohesion have always managed to support - at times together with the relevant municipal owners - even large savings banks, and Fitch expects this to remain the case.
Hessen-Thueringen's Sparkassen's and Helaba's IDRs are based on the group's VR. The group's VR is underpinned by its diversified and leading regional franchise, focussing on retail and SME lending in its home region, complemented by domestic and international wholesale banking at Helaba. S-Verbund HT's 'Verbund' concept, in which Helaba plays a pivotal role, is based on a common, conservative business and risk strategy. In our view, this is a key driver of the group's consistent and predictable performance. It also mitigates challenges in governance resulting from the specific organisational structure with decentralised local Sparkassen.
We view the group's asset quality as sound, underpinned by a NPL ratio of 2.5 % at end-2013. It benefits from the Sparkassen's considerable granularity but we consider there is some concentration risk at Helaba. We expect further loan growth in 2014 but believe that impairment charges have reached a cyclical bottom.
The group has a stable operating performance with acceptable margins, supported by a low level of risk provisions and healthy contribution from Helaba. We expect 2014 results in line with the previous year when a pre-tax profit of EUR1.3bn was reported. However, the persistence of the low yield environment in our view poses the biggest risk to profits, which will make the current level of interest income unsustainable.
S-Verbund HT's capitalisation and leverage ratios are strong. Its Fitch core capital (FCC) ratio has improved consistently due to profit retention and stood at 17% at end-2013, which compares favourably with peers. Heleba reported a CET 1 capital ratio in its own right of 13.1 % at end-3Q14.
Funding and liquidity are stable, driven by the Sparkassen's large retail deposits base and a diversified funding mix at Helaba. This also underpins the group's 'F1+' Short-term IDR, which corresponds to the higher of the two possible Short-term IDRs for a 'A+' Long-term IDR.
RATING SENSITIVITIES - IDRs AND VR
The group's VR and IDRs are closely aligned with those of the Sparkassen-Finanzgruppe (A+/F1+/a+) due to the inclusion of the savings banks in S-Verbund HT within the nationwide savings bank grouping. Hence potential rating movement may be supported or affected by the financial condition of Sparkassen-Finanzgruppe.
We believe that specific downside risks to the group's VR and IDRs could arise from one or a combination of the following developments:
- A prolonged and severe recession leading to materially higher default rates among SME and retail clients and falling collateral values.
- A material deterioration in the quality of Helaba's wholesale assets.
- Persistently extremely low interest rates negatively affecting Sparkassen's earnings base.
- A material erosion of its strong deposit franchise due to increasing competition negatively affecting its margin and/or liquidity profile.
Given the group's current high VR and IDRs, upside potential is limited, and constrained by the scale of Helaba's wholesale businesses together with the group's primarily regional focus.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
S-Verbund HT's Support Rating of '1' and Support Rating Floor (SRF) of 'A+' reflect our view that support from the German municipalities, regional states and ultimately the federal government for Sparkassen is extremely likely if ever required given their systemic and economic importance to the region and through that to the country as a whole.
RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
S-Verbund HT's Support Rating or SRF could be revised if we changed our view on Germany's ability, as measured by Germany's sovereign rating and financial flexibility, or propensity to support its systemically important banks. In this respect, political momentum is gaining pace to resolve even complex banking groups without significantly disrupting the financial markets and without requiring state support. In our view, legislative, regulatory and policy initiatives are reaching a point where a bank resolution can be achieved without significantly disrupting financial markets.
The BRRD-Umsetzungsgesetz came into force on 1 January 2015, and the Single Resolution Mechanism (SRM) for eurozone banks starts on 1 January 2016. The BRRD and SRM will dilute the influence German and German public sector bodies have in deciding how German banks that have reached the point of non-viability are resolved. The BRRD-Umsetzungsgesetz requires 'bail in' of creditors in banks under resolution from 1 January 2015 before an insolvent bank can be recapitalised with state funds. As resolution tools and mechanisms are being put in place, they are becoming an overriding factor in our sovereign support-driven ratings. The likelihood of senior creditors to a member of the S-Verbund HT receiving full support from directly the sovereign will diminish substantially.
However, the federal states of Hessen and Thueringen and the municipalities in those states are strategic investors in members of S-Verbund HT and as such Fitch would expect them to behave as any rational investor would in deciding whether, when and how to support the banks in the group. Therefore, Fitch believes that the likelihood of institutional support will remain strong. The BRRD-Umsetzungsgesetz sets out hurdles for a public sector owner's ability to support a non-viable bank and the Single Resolution Board is also likely to place these decisions under greater scrutiny than they have been in the past. The ability to overcome these new obstacles remains to be tested.
Working through these rapidly evolving support dynamics, we expect to base S-Verbund HT's support considerations on direct institutional support from Hessen and Thueringen and their municipalities for Landesbank and savings banks, respectively, and no longer to base the Support Rating on ultimate sovereign support. Therefore, by end-1H15 S-Verbund HT's SRF is likely to be withdrawn but Fitch expects to retain a strong likelihood of support from its owners in S-Verbund HT's SR, which could remain at '1' or be downgraded to '2'.
KEY RATING DRIVERS AND SENSITIVITIES - HELABA'S GUARANTEED SENIOR UNESCURED AND SUBORDINATED NOTES AND OTHER SUBORDINATED NOTES
The 'AAA' rating on Helaba's guaranteed senior unsecured and subordinated debt reflects the statutory grandfathered guarantee by the State of Hesse and the Free State of Thueringen and is sensitive to any change in Fitch's view of the creditworthiness of the state, underpinned by the stability of the German solidarity system linking its creditworthiness to that of the Federal Republic of Germany (AAA/Stable).
Subordinated debt instruments that do not benefit from the grandfathered guarantee are notched down once from S-Verbund's VR to reflect higher loss severity. The rating is sensitive to movements in S-Verbund's VR.
KEY RATING DRIVERS AND SENSITIVITIES - HELABA ASSET SERVICES' IDRs
The IDRs of Helaba Asset Services (previously Helaba Dublin), which is not a member of the S-Verbund HT, are equalised with its parent's IDRs based on the explicit support from Helaba and the large reputational risks for Helaba if Helaba Asset Services were to default on its obligations. Helaba Asset Services' status as a private unlimited company means that its owner is fully liable for any shortfall in its assets in case of liquidation. In addition, upon return of the banking licence, revoked by the Irish Central Bank on 13 December 2013, Helaba has issued a declaration of backing to the company in which it ensures, except in the case of political risk, that the company is able to meet at all times all of its existing and future contractual liabilities. Helaba Asset Services IDRs are sensitive to any change in Helaba's IDRs.
The rating actions are as follows:
S-Verbund HT
Long-term Issuer Default Rating (IDR) affirmed at 'A+'; Outlook Stable
Short-term IDR affirmed at 'F1+'
Viability Rating affirmed at 'a+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
Helaba
Long-term IDR affirmed at 'A+'; Outlook Stable
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
Senior debt affirmed at 'A+'/'F1+'
Subordinated debt affirmed at 'A'
Senior and subordinated guaranteed obligations affirmed at 'AAA'
Helaba Asset Services
Long-term IDR affirmed at 'A+'; Outlook Stable
Short-term IDR affirmed at 'F1+'
Support Rating affirmed at '1'
50 savings banks: IDRs affirmed at 'A+' and 'F1+'; Outlook Stable
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