Fitch Affirms Berlin Hyp at 'A+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Berlin Hyp AG's (Berlin Hyp) Long-term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook, Short-term IDR at 'F1+' and Support Rating at '1'. These ratings are driven by institutional support from the German savings banks (Sparkassen-Finanzgruppe (Sparkassen), A+/Stable/F1+/a+). Fitch affirmed Berlin Hyp's Viability Rating (VR) at 'bbb-'. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, SENIOR DEBT AND SUPPORT RATING
Berlin Hyp's IDRs and senior debt and support ratings are based on support from the German savings banks, which fully own the bank's parent, Landesbank Berlin Holding AG (LBBH). Berlin Hyp's IDRs and senior debt rating are equalised with those of its ultimate owners, reflecting Fitch's view that support from the savings banks for Berlin Hyp would be forthcoming, if needed. Berlin Hyp is a member of the mutual support scheme of the German Landesbanken and is not directly a member of the savings banks' mutual support scheme.
We believe that the savings banks have a very high propensity to provide support to Berlin Hyp, primarily because failure to provide support if needed would constitute a huge reputational risk to the savings banks. In our opinion, Berlin Hyp's small size relative to the savings banks means that any required support would be immaterial to the savings bank group.
Berlin Hyp's access to the savings banks' excess liquidity supports its 'F1+' Short-term IDR, which corresponds to the higher of the two possible Short-term IDRs for a 'A+' Long-term IDR.
Berlin Hyp's capitalisation and risk appetite have a high influence on its VR. The VR is also based on the bank's good domestic franchise and the growing proportion of business that is undertaken with the savings banks, which underpins its business model and franchise. The VR also reflects Berlin Hyp's concentration on the cyclical commercial real estate business and its relatively small size, which results in concentration risks.
Berlin Hyp's capitalisation has improved following capital increases in 4Q14 with a 12.4% 'fully loaded' Common Equity Tier 1 (CET1) ratio at end-1H15. We consider this ratio more in line with peers, but the ratio benefits from the low risk-weighting of the bank's activities, and its leverage ratio, although improving, is at the lower end of peers.
Partly as a response to tightening margins in its domestic market, Berlin Hyp plans to moderately increase its exposure to European markets outside Germany from the current 25% and plans to expand its foreign business in the UK, where it expects margins to improve. Although lending standards in the bank's foreign operations are generally tighter, we believe that this change in strategy reflects a moderately stronger risk appetite.
Berlin Hyp's operating performance should remain adequate in 2016, but we expect pressure on profitability ahead given the persistence of low margins resulting from strong competition, ongoing material early loan repayments that dent loan growth and limited potential to lower funding costs even further from the current low levels.
Berlin Hyp's asset quality indicators are sound but, in line with peers, the bank is exposed to concentrations risk inherent in its business model. Non-performing loans have declined further, and we expect them to have reached a cyclical low. Berlin Hyp concluded a sizeable assets exchange with Landesbank Berlin to align loan portfolios to both entities' respective business strategies. The net rise in Berlin Hyp's exposure of about EUR860m has not had any material impact on the quality of its loan book, in our view.
Berlin Hyp's liquidity is adequate. It's funding is wholesale reliant but balanced by good access to the Sparkassen sector's structural excess liquidity and a diversified investor base. Berlin Hyp is a regular issuer of German mortgage Pfandbriefe (49% of total capital market funding at end-1H15).
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Berlin Hyp's IDRs, Support Rating and senior debt ratings are primarily sensitive to changes in its ownership structure or contractual relationship with the Sparkassen, including its membership in the mutual support scheme. The ratings are also sensitive to a change in the Sparkassen ratings as Berlin Hyp's IDRs are equalised with those of its ultimate parents.
The VR could be upgraded if the bank manages to withstand earnings pressure without a further material increase in risk appetite. Maintaining adequate operating profitability after a normalisation of loan impairment charges and withstanding further margin pressure could indicate stronger earnings capacity. However, upside potential to Berlin Hyp's VR is limited as the bank is constrained by its monoline business model.
Berlin Hyp's VR would come under pressure if a stress in property markets results in a material deterioration of asset quality, or if large single credit losses result in a deterioration of its capitalisation, which we currently do not expect.
The rating actions are as follows:
Long-term IDR: affirmed at 'A+', Outlook Stable
Short-term IDR: affirmed at 'F1+'
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '1'
Senior unsecured notes: affirmed at 'A+'