DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long- and Short-Term Issuer Ratings of DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ BANK Group or the Group) at AA (low) / R-1 (middle). The trend on all ratings is Stable. The DZ BANK Group benefits from the membership of the Genossenschaftliche Finanzgruppe Volksbanken und Raiffeisenbanken (Cooperative Financial Network or CFN), and as a result the AA (low) Long-Term Issuer Rating incorporates one notch of uplift from the A (high) intrinsic assessment (IA). The support assessment for the DZ BANK Group is SA1, reflecting the expectation of support in case of need from within the CFN.
KEY RATING CONSIDERATIONS
DZ BANK Group’s A (high) IA reflects the Group’s well-established franchise in Germany, its solid profitability benefitting from diversified revenue streams, and its sound risk profile. It also reflects the Group’s solid liquidity and funding profile as well as sound levels of capital retention. The IA is supported by the Group’s role as a central clearing bank and service provider to the local cooperative banks in Germany. The IA also takes into consideration the competitive German banking market and low interest rate environment which limits earnings upside, as well as some earnings sensitivity to capital market volatility. Following weaker results in 2020 affected by high provisioning needs, capital markets related valuation adjustments and lower performance fees, earnings recovered in H1 2021 driven by a reversal of the same factors. However, going forward, these positive tailwinds are expected to dissipate, whereas the revenue pressure from low rates is expected to persist.
An upgrade of DZ BANK Group’s Issuer Ratings would require a significant improvement in the overall credit profile of the CFN. A strengthening of DZ BANK Group’s bottom line profitability along with reduced earnings volatility would lead to an upgrade of the IA.
A substantial deterioration in the overall credit profile of the CFN would lead to a downgrade of DZ BANK Group’s Issuer ratings.
A downgrade of the IA could result from a material increase in DZ BANK Group’s risk profile or significant earnings volatility.
Franchise Combined Building Block (BB) Assessment: Strong
DZ BANK Group is Germany’s second largest banking group by total assets. DZ BANK Group’s franchise strength benefits from its multi-divisional business model with main revenue streams from corporate finance, asset management, insurance, commercial and residential real estate finance, and consumer finance, supported by demand from the vast network of cooperative banks. The wide range of segments provides the Group with a significant degree of revenue diversification. The Group’s material size should support further efficiency gains, especially given the pressure from the low interest rate environment, higher regulatory costs and the ongoing need to invest in IT infrastructure.
Earnings Combined Building Block (BB) Assessment: Good / Moderate
DBRS Morningstar views DZ BANK Group’s earnings power as solid, with relatively resilient core revenues (net interest and fee income), partly offset by more volatile, capital market driven revenues. Core revenues were strong in H1 2021, despite a decrease in net interest income (NII) due to a significant increase in fee income, particularly driven by the asset management subsidiary. Additional support came from capital markets related valuation results in the insurance segment and at DZ HYP, partly offset by negative fair value effects at the central institution. As these strong revenue trends offset regulatory driven cost increases, Group income before provisions and taxes (IBPT) was EUR 1.7 billion in H1 2021, up quite significantly from EUR 1.1 billion in H1 2020. Profit before tax (PBT) was EUR 1.8 billion versus EUR 0.6 billion a year earlier, as the Bank released EUR 114 million of loan loss reserves compared to a provision of EUR 522 million in H1 2020. Over the near-to medium term, DBRS Morningstar sees the potential of earnings pressure given the low-rate environment, economic uncertainties, and the absence of valuation gains.
Risk Combined Building Block (BB) Assessment: Strong / Good
DBRS Morningstar views the overall risk profile of the Group as sound and well positioned to withstand the challenges related to the COVID-19 pandemic. The reported non-performing loan (NPL) ratio for the entire Group decreased slightly to 0.9% at end-H1 2021 from 1.0% at end-2020 and 1.2% at end H1 2020. In Germany the government, the consumer and the corporate sector have all entered the crisis in relatively strong financial health, and various support measures have been supportive of banks’ credit performance. However, economic uncertainty still continues and credit problems could materialise in the future. We continue to monitor the Group’s exposure to commercial real estate and the shrinking shipping segment.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
In DBRS Morningstar’s opinion DZ BANK Group’s liquidity & funding profile supports the Banks overall credit strength. The Group’s loan to deposit ratio (LTD) stood at a relatively high 139% at end-H1 2020, however, the Group also benefits from ample deposits placed by the cooperative banking network and has access to diversified non-deposit funding, including covered bonds. The Group reported a liquidity coverage ratio (LCR) of 157% against a regulatory minimum of 100% and an internal minimum target of 110%.
Capitalisation Combined Building Block (BB) Assessment: Good
In DBRS Morningstar’s view the Bank maintains robust capitals levels through sustained internal capital generation together with its extensive profit retention policy. DZ BANK Group’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio at end-H1 2021 was 15.4% up from the 15.3% year-end 2020 and 14.4% a year earlier, The ratio comfortably exceeded the minimum capital requirements of 9.0% for 2021. The H1 2021 total capital ratio of 18.7%, up from 17.3% at end-H1 2020, and also compared well against the SREP minimum requirement of 13.3% for 2021. DZ BANK Group’s fully loaded leverage ratio increased significantly to 7.2% at end-H1 2021 from 4.9% at end-2020 H1 2020, well above the 3.5% internal target. The Bank’s MREL ratio as of June 30, 2020 was 10.9%, significantly higher than the 8.0% Single Resolution Board (SRB) requirement.
The BVR (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken) organises the interests of the CFN and is in charge of the BVR Institutional Protection Scheme and Deposit Protection Scheme (BVR Institutssicherung GmbH (BVR-ISG). As of end-September 2021, 800 institutions are part of these protection schemes which are financed without government support. They reduce the default risk for each individual member by making financial resources available to each institution within the Group. The strength and structure of the Scheme are a key element in the one-notch uplift of the Group’s Issuer Rating from the IA.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/387750.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021)
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The sources of information used for this rating include DZ BANK and CFN 2020 Annual Reports, DZ BANK H1 2021 Interim Report, DZ BANK H1 2021 Presentation, DZ BANK 2020 Facts and Figures, Cooperative Banks 2020 Annual Report, Cooperative Banks Press Releases, Press Conference Presentations 2016-2020 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.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.
With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO
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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/387749.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Sonja Förster, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director – Global Financial Institutions Group
Initial Rating Date: May 22, 2007
Last Rating Date: November 9, 2020
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