Mixed Fortunes for Germany’s Landesbanken Sector

Germany’s Landesbanken sector is marked by significant dispersion which is reflected by their varied business performance, according to Fitch Ratings. This has also led to different rating actions on some of the Landesbanken’s viability ratings (VR) in 2014.

The Landesbanken have a regional stracture unique to Germany and the credit ratings agency (CRA) comments that the southern Landesbanken (Landesbank Hessen-Thueingen Girozentrale, Landesbank Baden-Wuerrtemberg, Landesbank Saar and Bayerische Landesbank – following the sale of its Hungarian subsidiary MKB Zrt), are well positioned to refocus on their regionally and customer driven business franchise following the substantial wind down of risky exposure on their balance sheets in recent years.

However, the northern Landesbanken (Norddeutsche Landesbank Girozentrale, Bremer Landesbank Kreditanstalt Oldenburg – Girozentrale and HSH Nordbank AG) remain under pressure from their shipping exposure. In particular, HSH is also required to wind down its still-large restructuring unit in line with European Union (EU) requirements.

A robust economic environment in Germany for 2014 helped Landesbanken to remain profitable but Fitch says that it sees further need to address structural challenges such as the high reliance on net interest income, low fee income levels and a high cost base.

The CRA expects the Landesbanken’s asset quality to remain robust for now but believes quality and earnings to be sensitive to changes in the economic cycle in Germany. Fitch also does not anticipate a sustainable recovery in the shipping industry before end-2015.

Landesbanken have improved capital and leverage ratios in recent years, but the banks’ ability to strengthen capital further is constrained by their limited internal capital generation capacity, adds Fitch.

“We do not see funding as a challenge for the Landesbanken in the current environment,” the CRA’s report concludes. “Funding access is good thanks a large and stable investor base in the form of the highly-liquid savings banks, and funding requirements have declined as the Landesbanken have shrunk their balance sheets since the financial crisis.

“We expect all Landesbanken to meet the liquidity coverage ratio (LCR) requirement in 2015.”

Fitch plans to review the Landesbanken’s issuer default ratings in the first half of 2015 and says it will base its support considerations on direct institutional support instead of sovereign support. This is likely to lead to a withdrawal of the banks’ support rating floors.

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