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 takes into account the Group’s diversified franchise in Germany, centred around the Group’s role as a central clearing bank and service provider to the local cooperative banks in Germany. It also reflects the sound risk profile, the Group’s diversified liquidity and funding profile, including access to the liquidity of the CFN, as well as the sound capital cushions. The IA also takes into consideration the competitive German banking market and the impact of the recent low interest rate environment, which has led to more modest profitability when compared to international peers. While revenue streams are diversified, there is an element of earnings sensitivity related to capital markets volatility. Following strong 2021 results, the results for H1 2022 weakened due to a return to more normalised loan loss provisions and weaker capital markets, but the Group remained solidly profitable. DBRS Morningstar expects revenue tailwinds from rising interest rates, but economic uncertainties could pose a number of challenges such as higher credit costs and weaker loan demand.
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, while maintaining solid risk and capital metrics, 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 deterioration in DZ BANK Group’s risk profile or a sustained decline in profitability.
Franchise Combined Building Block (BB) Assessment: Strong
DZ BANK Group is Germany’s second largest banking group by total assets and it operates through a multi-divisional business model with the main revenue streams coming 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 business lines that the Group operates in provides a significant degree of revenue diversification. The Group’s material size should support further efficiency gains, especially given the pressure from higher regulatory costs and the ongoing need to invest in IT infrastructure.
Earnings Combined Building Block (BB) Assessment: Moderate
DBRS Morningstar views DZ BANK Group’s earnings power as solid, though on the lower side when compared to international peers. Non-interest income averaged 59% of revenues in 2020 and 2021, which is relatively high. This reduced the pressure on net interest income in recent years, but also means that the Group revenues are likely to benefit less from interest rate increases going forward. The Group’s various non-interest income lines are exposed to capital markets, and earnings can be somewhat volatile. As a result of the weak capital markets in H1 2022, net profits declined by 40% to EUR 781 million, compared to strong H1 2021 results, with a return on average equity of 6.0% (9.1% in H1 2021) the Group remained solidly profitable. DBRS Morningstar expects earnings to benefit from rising rates, but economic uncertainties, could drive up loan losses and loan demand is likely to weaken.
Risk Combined Building Block (BB) Assessment: Strong / Good
The Group’s risk profile is sound, supported by the focus on the needs of the cooperative banks. Nonetheless, DZ BANK Group’s exposure to corporate customers and its capital markets-related activities add incremental risk to the Group’s overall risk profile. The reported non-performing loan (NPL) ratio for the Group decreased slightly to 0.7% at end-H1 2022 from 0.8% at end-2021 and 0.9% at end-H1 2021. DBRS Morningstar will closely monitor whether the current economic challenges such as high energy prices and high overall inflation, as well as the supply chain disruptions and increasing interest rates are likely to result in a deterioration in asset quality.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
DBRS Morningstar views DZ BANK Group’s liquidity as solid. Reflecting its asset mix and its role as a central banking institution, the Group’s diversified funding profile comprises corporate deposits and retail deposits, bank deposits from affiliated cooperative banks and other banks, and wholesale funding, including Pfandbriefe. The Group’s customer loan to deposit ratio (LTD) stood at 123% at end-H1 2022, however this is mitigated by the stable access to liquidity from the cooperative banking network. The liquidity surplus of the local cooperative banks is a major contributor to meeting DZ BANK Group’s short-term funding needs. The liquidity coverage ratio (LCR) remained strong at 141.2% as of end-H12022..
Capitalisation Combined Building Block (BB) Assessment: Good
DZ BANK Group’s capitals levels are strong, supported by continuous profit retention. The Group’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio at end-H1 2022 declined to 13.3% from 15.3% year-end 2021, driven by temporary accounting effects at R+V, the Group’s insurance business. As a member of the DZ BANK Group, R+V was required to measure its assets at fair value in accordance with IFRS 9. However, this will apply to equity and liabilities in the same way only after the transition to IFRS 17 next year. This led to a temporary technical interest-rate risk caused by the strong increase in interest rates with a corresponding effect on CET1 capital during the reporting period, with an offsetting effect expected for 2023. Nevertheless, the ratio still comfortably exceeded the minimum capital requirements of 8.98% for 2022.
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 2022, 760 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/405022.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (17 May 2022).
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, DZ BANK and CFN 2021 Annual Reports, DZ BANK H1 2022 Interim Report, DZ BANK H1 2022 Presentation, DZ BANK 2021 Facts and Figures, Cooperative Banks 2021 Annual Report, Cooperative Banks Press Releases, Press Conference Presentations 2017-2021. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/405023.
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, 2021
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