Fitch Affirms Duesseldorfer Hypothekenbank at 'BBB-'/Stable; Withdraws Ratings
KEY RATING DRIVERS - IDRs
The affirmation of DHB's support-driven Long-term IDR and the Stable Outlook reflects Fitch's expectation that the bank will continue to receive extensive support from its owner, the Deposit Protection Fund (DPF) of the Association of German Banks (Bundesverband deutscher Banken e.V.; BdB), if needed, until the bank's restructuring is completed. Fitch believes that the restructuring has the characteristics of a wind-down.
Fitch believes that a default of DHB would result in high financial and reputational risk for the BdB, and that the BdB has sufficient funds to support smaller member banks such as DHB. DPF's ability to provide support to DHB is underpinned by its ability to increase annual contributions from its members, if needed.
The BdB took over DHB in 1Q15 and has since guaranteed the bank's exposure to Heta Asset Resolution AG (Heta), an Austrian wind-down institution subject to a moratorium imposed by the Austrian authorities. Without the DPF's guarantee, we believe that the bank would have rapidly become non-viable on a standalone basis. DHB's Long-term IDR at the low end of the investment grade category, which reflects our opinion that the full ownership and the guarantee increase the BdB's already significant incentive to provide DHB with additional support if needed.
The DPF has accelerated the wind-down of DHB's low-margin, long-term legacy exposure to the financial and public sectors and interest rate derivatives, while compensating significant losses with the sale of these assets.
DHB's large exposure to the eurozone periphery public-sector comprises declining, but still large unrealised losses and single-event risk. We understand from DHB's management that the BdB intends to spend significant resources to accompany DHB's restructuring in the coming years. Given the BdB's intention to further actively reduce the bank's legacy assets and limit commercial real estate loan origination, we expect that DHB will continue to generate losses on a short- to medium-term basis.
KEY RATING DRIVERS - VR
The VR reflects our view that DHB will remain reliant on ongoing support from the DPF in the medium term. This comprehensive support is necessary to ensure that DHB maintains acceptable asset quality (through the guarantee of the Heta exposure) and capitalisation (through the compensation of losses from asset sales) and funding (through the DPF's coverage of a large share of the bank's unsecured funding).
The VR also reflects the BdB's decision to concentrate on the bank's restructuring without originating any material new business. As a result, we expect the bank to remain loss-making and its already weak franchise as commercial real estate lender to weaken further. DHB has not reported any material profit since 2006 and has since accumulated net losses of EUR0.8bn, equivalent to twice its equity and hybrid capital available at end-2006.
KEY RATING DRIVERS - SUPPORT RATING (SR)
The SR reflects our opinion of a high likelihood of extraordinary institutional support from the BdB. We expect the bank's eligible institutional funding to continue to benefit from the DPF's extensive coverage, which in turn creates a strong incentive for the DPF to extend institutional support to DHB. Therefore, we believe that senior creditors will continue to be supported during the bank's restructuring under the BdB's ownership as we view a sale of the bank as unlikely until its restructuring is completed, which will take several years.
The rating actions are as follows:
Long-term IDR: affirmed at 'BBB-'/Stable and withdrawn
Short-term IDR: affirmed at 'F3' and withdrawn
Viability Rating: affirmed at 'f' and withdrawn
Support Rating: affirmed at '2' and withdrawn
Debt issuance programme: affirmed at 'BBB-'/'F3' and withdrawn