DBRS Morningstar confirms Sparkassen-Finanzgruppe LT Issuer Rating at ‘A’, Trend remains Positive

DBRS Ratings GmbH (DBRS Morningstar) confirmed the floor ratings for the Sparkassen-Finanzgruppe (the Group) including the Long-Term Issuer Rating at ‘A’, the Senior Non-Preferred Rating at A (low), and the Short-Term Issuer Rating at R-1 (low). The trend on all ratings remains positive. The Support Assessment for the Group remains unchanged at SA3.

These ratings also apply, in line with DBRS Morningstar’s floor ratings concept, to each member of Sparkassen-Finanzgruppe’s Institutional Protection Scheme (IPS) which, as of March 2020, includes 373 German savings banks (the Sparkassen), the five Landesbanken, eight public-sector building societies (LBS), the Group’s central asset manager, DekaBank, and other specialised service providers. For a complete list of ratings, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS
The ratings continue to incorporate the very strong franchise of the Sparkassen which is a vital component of the Group. With a balance sheet of EUR 2.2 trillion the Group commands significant market shares, underscoring the Group’s importance to the German banking sector and the German economy overall. The ratings also reflect the relative earnings stability of the Sparkassen. Offsetting these rating strengths are certain risks associated with the Landesbanken sector that remains a meaningful part of the Group as well as the high dependence on net interest income in a low rate environment.

The Positive trend continues to recognise the de-risking of the Landesbanken sector and the consistent progress the Group has made in improving its capital position in recent years. DBRS Morningstar notes that it continues to monitor the developing situation and potential impact of the coronavirus (COVID-19) outbreak on revenues, profits and asset quality, while taking into account the significant relief measures being taken by the German government and the Group’s regulators.

RATING DRIVERS
A manageable impact of the coronavirus on SFG’s earnings and asset quality metrics and the German economy overall would likely lead to an upgrade of the ratings. In addition, the successful creation of a central institution, which could drive further efficiency gains and improve corporate governance could lead to a rating upgrade.

A significant deterioration of the Group’s financial profile, potentially as a result of the coronavirus outbreak, and/or strategic challenges faced by larger members, could result in the trend reverting to stable or a rating downgrade. Any indication of a weakening of the IPS scheme could also lead to negative rating pressure.

RATING RATIONALE
The Sparkassen-Finanzgruppe’s (SFG) aggregated balance sheet of close to EUR 2.2 trillion makes the Group of vital importance for the German economy. SFG’s regional savings banks, five wholesale and clearing institutions (Landesbanken) as well as a number of specialised institutions offer a full set of financial services to their customers with considerable market share in their respective markets. Market share for loans to domestic non-banks was 38% at end FY2018 and 35% for client deposits.

The Group’s performance in FY2018 reflected the ongoing revenue pressure faced by all members of the group as well as a EUR 2.4 billion loss at NORD/LB related to the Bank’s restructuring, which led to the Group reporting a loss of EUR 213 million for FY2018. Pre-provision profit (Betriebsergebnis vor Bewertung) in FY2018 was EUR 11.1 billion, down 11.2% YoY, as lower net interest income (down 3.1% to EUR 28.9 billion) and income from financial investments (down 37% to EUR 671 million) was only marginally compensated by improved net commission income (up 2.1% to EUR 8.9 billion). Administrative expenses increased by 0.5% to EUR 27.5 billion, reflecting the marginally lower costs at the Sparkassen level, offset by increases at the Landesbanken. In FY2018, the cost-income ratio (CIR) of the Group as a whole increased to 72.80% (2017: 71.0%), mainly due to the decline in net interest income, some capital market driven earnings volatility and higher costs at the Landesbanken.

In FY2019 the Sparkassen (according to preliminary unaudited FY2019 results) showed strong loan growth of 4.6% YoY. However, this was not enough to offset margin and cost pressure. Net interest income declined by 2.7% YoY, which was only marginally offset by a 5.5% increase in fees. Operating expenses increased by 1.5% as pay raises of 3%, an increase in regulatory costs and higher IT and marketing spending were only partly offset by continued headcount reductions of 4,800. As a result, IBPT of EUR 9.7 billion was down 3.7% YoY. The valuation adjustment for securities in FY2019 was a positive EUR 600 million after a negative EUR 1.4 billion in the previous year. This was offset by credit impairments of EUR 600 million, which, while still low in historical terms, represents a marked increase.

While the extent of the impact from coronavirus is difficult to assess at this point, DBRS Morningstar expects a negative impact on SFG’s earnings as a result of lower revenues and higher credit costs.

The stable risk profile of the Sparkassen is reflective of their well-diversified and highly granular exposures. The overall Group risk profile has improved with the continued deleveraging and de-risking of the Landesbanken. Net valuation expenses, (a German GAAP accounting category which includes mainly provisions for loan losses and securities), jumped to EUR 4.0 billion in FY2018 from EUR 2.06 billion in the previous year, due to the large impairment at NORD/LB, but also due to a large valuation adjustment for the Group’s liquidity portfolio as a result of weak capital markets in FY2018. Valuation adjustments for securities are expected to revert to more normalised levels in FY2019 in the absence of outsized impairments and more benign capital markets. However, looking ahead DBRS Morningstar expects the weakening of the global economy to result in higher credit losses and other valuation expenses.

DBRS Morningstar considers the Group’s overall liquidity position as strong based on the extensive deposit base and sound liquidity of the savings banks, which is in part offset by the more wholesale-oriented funding profile of the Landesbanken. Aggregate deposits of the Sparkassen totalled EUR 995 billion at FY2019, up 4.8% from the previous year, exceeding customer loans by EUR 134 billion. The Landesbanken continue to have a more wholesale-oriented funding profile, albeit this is based partly on the more stable covered bond market.

SFG’s capitalisation in DBRS Morningstar’s view is solid, reflecting the overall sound capital levels and consistent earnings retention of the savings banks. For the Landesbanken sector the Tier 1 capital ratio declined by 225 basis points YoY to 15.25% at end-FY2018 as a result of the impairment charges taken at NORD/LB. This caused a reduction of 40 basis points for the Group overall to 15.9%. However, following the capital injection into NORD/LB in December 2019, DBRS Morningstar expects the capital ratios to recover. The healthy capital cushion is partly mitigated by the fact that Sparkassen and SFG as a Group cannot raise capital in the capital market.

ESG CONSIDERATIONS
Corporate Governance is a material rating factor for the Group and is reflected in the Franchise and Risk building blocks. In DBRS Morningstar’s view the decentralised structure and lack of consolidation of the Group reduces transparency, potentially limits risk control mechanisms and lowers efficiency.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for SFG are as follows: Franchise Strength -Very Strong/Strong; Earnings Power – Good; Risk Profile - Strong; Liquidity & Funding - Strong; Capitalisation - Strong/Good

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) - https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

The sources of information used for this rating include the Sparkassen-Finanzgruppe 2018 Annual Report, Bilanzpressekonferenz der Sparkassen 2019, Confidential Company Documents, Bundesfinanzministerium Corona Schutzschild, ECB: various press releases and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/358822

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
 

Lead Analyst: Sonja Förster, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: January 18, 2007
Last Rating Date: March 25, 2019

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