DBRS Assigns First-Time Issuer Rating of ‘A’ to Norddeutsche Landesbank, Positive Trend

DBRS Ratings Limited (DBRS) has assigned first-time ratings to Norddeutsche Landesbank Girozentrale (NORD/LB or the Bank), a public, regional wholesale bank (Landesbank) and a member of the Sparkassen-Finanzgruppe (“A”, Positive trend). The ratings assigned include the Long-Term Issuer Rating at “A”, the Short-Term Issuer Rating at R-1 (low), the Subordinated Debt Rating at BBB (high), and these are in line with DBRS’s floor ratings concept for the Sparkassen-Finanzgruppe (see further below).

DBRS has also assigned an Intrinsic Assessment (IA) of BBB (low) to NORD/LB, which is based on the Bank’s credit fundamentals on a standalone basis. The assigned Support Assessment is SA1, indicating an expectation of a high level of support from the Sparkassen-Finanzgruppe. The Bank also benefits from its majority public-sector ownership by the State of Lower Saxony (59.1%) and the State of Saxony-Anhalt (5.6%). In DBRS’s view this ownership provides an additional economic incentive to these local governments to support the Bank’s viability in the case of a distressed scenario. The trend on the ratings is Positive mirroring the positive trend of the Sparkassen-Finanzgruppe. For a complete list of ratings assigned, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS
The issuer and debt ratings reflect NORD/LB’s membership in the Institution Protection Scheme (IPS) of the Sparkassen-Finanzgruppe. Each member of the Institution Protection Scheme, including NORD/LB, is generally rated at the floor level of “A”. For more details on the DBRS rating floor, see the latest DBRS Rating Report on the Sparkassen-Finanzgruppe.

The Positive trend on all ratings reflects the trend for the Sparkassen-Finanzgruppe (see “DBRS Confirms “A” Floor Ratings on Sparkassen-Finanzgruppe, Trend Revised to Positive”, March 27th, 2018). It reflects DBRS’s view that the profitability in the Sparkassen sector continues to show resilience despite the low interest rate environment, the further de-risking of the Landesbanken sector and the consistent progress the group has made in improving its capital position.

NORD/LB’s IA reflects the Bank’s moderate franchise in a number of challenging business segments, its diversified earnings profile, its stable funding & liquidity profile and the progress the Bank has made in downsizing its shipping portfolio. However, it also reflects the risk from decreasing regulatory capital buffers and the remaining execution risk the Bank faces in further reducing its shipping exposures.

RATING DRIVERS
NORD/LB’s Issuer Ratings benefit from the Sparkassen-Finanzgruppe’s (SFG) Institution Protection Scheme. Any change in the “A”/ R-1 (low) floor rating level of the SFG would lead to a change in NORD/LB’s ratings. NORD/LB’s Issuer Ratings could also be downgraded if there was an increased likelihood of departure from the Sparkassen-Finanzgruppe.

Upward movement of the IA is unlikely in the short-to-medium term given the issues in the Bank’s shipping portfolio and the pressure on capitalisation.

The IA could come under negative pressure should the Bank i) see its regulatory capitalisation further weaken, exerting added pressure on its SREP buffers, ii) experience a significant further deterioration in financial performance and earnings quality, or iii) witness a material further deterioration in asset quality.

RATING RATIONALE
DBRS views NORD/LB’s earnings profile as moderate. The Bank’s earnings are supported by its diverse wholesale franchise. DBRS notes that the stable performance of the Bank’s corporate and energy segments, have in the past often counterbalanced the earnings volatility from the shipping business. DBRS notes further that the Bank’s earnings quality has recently deteriorated, stemming from continued balance sheet deleveraging and increased fee costs for risk transfer securitisations.

NORD/LB returned to profitability in 1Q18, posting consolidated net income of EUR 43 million, after two consecutive quarters of losses and a sizable loss in FY2016. The Bank’s 1Q18 result was mainly driven by the release of loan loss provisions and lower fee income due to increased guarantee fees. DBRS notes, that last year’s results benefited from substantial positive one-off effects from the sale of securities. DBRS also notes, that the Bank’s 1Q18 results are only of limited comparability to its 2017 numbers due to the introduction of IFRS 9.

DBRS expects NORD/LB’s financial performance to stabilise in the short to medium-term, but it is likely to remain burdened by loan impairment charges related to its shipping exposures.

NORD/LB’s overall risk profile has improved but the Bank continues to maintain sizeable exposures to cyclical sectors that include more lumpy exposures, although DBRS notes NORD/LB’s significant progress in reducing its exposure to shipping. At end-1Q18 the Bank reported shipping exposures of EUR 11.6 billion (measured as exposure at default, EaD) compared to EUR 12.1 billion at year-end 2017 and EUR 19 billion at year-end 2015. The Bank recently communicated a new restructuring target for its troubled shipping portfolio, aiming to further trim it down to EUR 10 billion and also aiming to reduce the volume of problem loans from shipping to EUR 5 billion by year-end 2019. DBRS will continue to follow closely the progress of the restructuring of NORD/LB’s shipping segment.

DBRS views NORD/LB’s liquidity and funding profile as good. The predominantly wholesale funding based liquidity profile is balanced by access to stable Pfandbrief funding and established wholesale funding relationships within the Sparkassen-Finanzgruppe. The Bank’s Liquidity Coverage Ratio (LCR) was 206% at 1Q18 (205% at year-end 2017).

There has been improvement in NORD/LB’s absolute and relative capitalisation metrics in recent periods, however, DBRS views NORD/LB’s capitalisation as relatively weak given the Bank’s asset quality issues and the low levels of earnings. The Bank’s fully loaded common equity tier 1 (CET1) capital ratio increased by 90bps to 12.8% in 1Q18 (11.9% at year-end 2017), The Bank’s fully loaded Total capital ratio improved to 18.8% at 1Q18 (vs 17.7% at year-end 2017). The Bank’s SREP minimum CET1 requirement of 9.54%, implies a SREP buffer of currently 326bps (as of 1Q18).

In DBRS’s view NORD/LB continues to face pressure on regulatory capitalisation from i) increasing regulatory requirements (SREP evaluation process) and upcoming regulatory changes e.g. the Targeted Review of Internal Models (TRIM), Basel IV, ii) potentially rising shipping RWAs (reflecting further potential for negative rating migration), and iii) additionally its sensitivity to unbenign USD/EUR currency movements.

The Grid Summary Grades for Norddeutsche Landesbank are as follows: Franchise Strength – Good/ Moderate; Earnings Power – Good/ Moderate; Risk Profile – Moderate/Weak; Funding & Liquidity – Good; Capitalisation – Weak.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company disclosures and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS rating on this issuer.

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 Limited are subject to EU and US regulations only.

Lead Analyst: George Yiannakis, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: June 11, 2018
Most Recent Rating Update: Not Applicable as no last rating date

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