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FINANCIAL INSTITUTIONS
CREDIT OPINION26 March 2020
Update
RATINGS
Landesbank Baden-WuerttembergDomicile Germany
Long Term CRR Aa3
Type LT Counterparty RiskRating - Fgn Curr
Outlook Not Assigned
Long Term Debt Aa3
Type Senior Unsecured -Dom Curr
Outlook Stable
Long Term Deposit Aa3
Type LT Bank Deposits - FgnCurr
Outlook Stable
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Alexander Hendricks,CFA
+49.69.70730.779
Associate Managing [email protected]
Landesbank Baden-WuerttembergUpdate to credit analysis
SummaryWe assign Aa3(Stable)/P-1 deposit and senior unsecured ratings to LandesbankBadenWuerttemberg (LBBW). We further assign A2 junior senior unsecured ratings, Aa3/P-1 Counterparty Risk Ratings (CRRs), a baa2 Baseline Credit Assessment (BCA) and a baa1Adjusted BCA to the bank
LBBW senior ratings reflect its baa2 Baseline Credit Assessment (BCA), one notch rating upliftfrom its membership in the institutional protection scheme of Sparkassen-Finanzgruppe (S-Group, Aa2 negative, a2)1, the application of our Advanced Loss Given Failure (LGF) analysisto its liabilities and one notch government support, given its membership in Sparkassen-Finanzgruppe.
LBBW's baa2 BCA reflects the bank's strong asset quality metrics, its solid capitalisationas well as its highly liquid balance sheet. The BCA further takes account of LBBW's low --yet relatively stable -- profitability metrics and its meaningful dependence on confidence-sensitive wholesale funding, which exposes the bank to refinancing risks in a more adversemarket environment. In its assessment, we also reflect the inherent concentration risks ofLBBW's significant exposures to highly cyclical sectors like commercial real estate (CRE) andthe automotive industry. While LBBW displays a generally sound history of low credit lossesfrom these sectors, the current economic shock due to the global spread of coronavirusas well as the structural challenges facing the automotive industry, challenges LBBW inmaintaining its sound asset quality and below-average loan loss charges.
Exhibit 1
Rating Scorecard - Key financial ratios
0.9%
15.4%
0.2%
50.4%
45.5%
0%
10%
20%
30%
40%
50%
60%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Asset Risk:Problem Loans/
Gross Loans
Capital:Tangible Common
Equity/Risk-WeightedAssets
Profitability:Net Income/
Tangible Assets
Funding Structure:Market Funds/
Tangible BankingAssets
Liquid Resources:Liquid Banking
Assets/TangibleBanking Assets
Solvency Factors (LHS) Liquidity Factors (RHS)
LBBW (BCA: baa2) Median baa2-rated banks
So
lve
ncy F
acto
rs
Liq
uid
ity F
acto
rs
Source: Moody's Financial Metrics
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Credit strengths
» Strong capitalisation, which provides a substantial buffer for investors
» Low problem loan ratio, which reflects a benign economic environment and the bank's limited risk appetite
» Generally sound liquid resources and liquidity management
Credit challenges
» Risk concentrations in cyclical sectors, such as CRE and the automotive industry
» Low and strained profitability and efficiency metrics
» Dependence on a significant confidence-sensitive capital market funding, which is only partly mitigated by the bank's access tosector funds
OutlookThe outlook is stable, reflecting our expectation of a stable financial profile and unchanged sector relationships, as well as the bank'sunchanged significant bail-in-able instruments ranking lower in resolution.
Factors that could lead to an upgrade
» An upgrade of LBBW's senior unsecured debt and deposit ratings would be subject to an upgrade of its BCA, because these ratingsalready benefit from the highest possible rating uplift from our Advanced LGF analysis.
» Upward pressure on LBBW's BCA could be triggered by a sustainable shift of the bank’s activities to very strong banking systems,in combination with a meaningful and sustained reduction in the bank’s reliance on capital market-sensitive funding or a materialincrease in liquid resources, or if the bank diversifies its lending book such that it significantly reduces existing high sectorconcentration risks.
Factors that could lead to a downgrade
» A downgrade of LBBW's ratings could result from a multi-notch downgrade of its BCA; developments within the S-Finanzgruppethat would trigger a reduction in our sector support assumptions; if the volume of subordinated or other debt instruments that aredesigned to be loss absorbing in resolution decreases substantially and beyond our expectations, compared with the bank’s tangiblebanking assets.
» Downward pressure on LBBW's BCA could result from a significant deterioration in its overall credit profile, especially if caused bysignificantly higher-than-expected loan-loss charges or an unexpected and sustained weakening in the bank’s capital adequacymetrics.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Key indicators
Exhibit 2
Landesbank Baden-Wuerttemberg (Consolidated Financials) [1]
06-192 12-182 12-172 12-162 12-152 CAGR/Avg.3
Total Assets (EUR Billion) 243.8 225.1 219.2 228.3 218.0 3.24
Total Assets (USD Billion) 277.6 257.4 263.2 240.7 236.8 4.64
Tangible Common Equity (EUR Billion) 12.7 12.9 12.8 12.5 12.7 0.04
Tangible Common Equity (USD Billion) 14.4 14.8 15.3 13.2 13.8 1.44
Problem Loans / Gross Loans (%) 0.7 0.8 0.9 1.2 1.8 1.15
Tangible Common Equity / Risk Weighted Assets (%) 15.4 16.1 16.9 16.2 17.0 16.36
Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 6.3 6.2 7.4 10.3 14.4 8.95
Net Interest Margin (%) 0.7 0.7 0.7 0.7 0.7 0.75
PPI / Average RWA (%) 1.0 0.9 1.0 0.9 0.8 0.96
Net Income / Tangible Assets (%) 0.2 0.2 0.2 0.2 0.2 0.25
Cost / Income Ratio (%) 70.8 72.9 73.3 74.4 77.3 73.75
Market Funds / Tangible Banking Assets (%) 51.5 50.4 50.5 56.5 58.6 53.55
Liquid Banking Assets / Tangible Banking Assets (%) 43.3 45.5 45.3 42.0 40.5 43.35
Gross Loans / Due to Customers (%) 146.3 138.8 143.7 168.0 188.8 157.15
[1]All figures and ratios are adjusted using Moody's standard adjustments. [2]Basel III - fully-loaded or transitional phase-in; IFRS. [3]May include rounding differences due to scaleof reported amounts. [4]Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5]Simple average of periods presented for the latestaccounting regime. [6]Simple average of Basel III periods presented.Source: Moody's Investors Service; Company Filings
ProfileLBBW is a German universal bank. The bank provides retail and commercial banking, leasing, factoring, asset management, real estate,and equity and project finance services, either directly or through its subsidiaries. The LBBW Group comprises LBBW and the regionalclient bank Baden-Württembergische Bank. As of half-year 2019, the bank reported consolidated assets of €265.1 billion and employed9.908 employees.
LBBW also offers key German and international account management, capital market and real estate finance services, and acts as thecentral bank for savings banks in Baden-Württemberg, Rhineland-Palatinate and Saxony2.
Weighted Macro Profile of Strong (+)LBBW is predominantly active in Germany (Aaa stable3), which has an assigned Strong + Macro Profile. LBBW's Strong+ Macro Profilealso captures gradually increasing exposures to international corporate and CRE-lending activities, as part of its revived growth strategy.
Recent developmentsThe coronavirus will cause unprecedented shock to the global economy. The full extent of the economic downswing will be unclear forsome time, however G-20 economies will contract in 2020. In Europe, the coronavirus outbreak adds to late-cycle risks for Europeanbanks. The recession in 2020 will weigh on the banks' asset quality and profitability. We expect fiscal policy measures, as alreadyannounced by a variety of euro-area governments to mitigate the economic contraction caused by the outbreak.
In March 2020, the European Central Bank (ECB) announced a series of measures to help the European Union economies weather thewidening effects of the coronavirus pandemic, temporarily increasing banks’ liquidity provision as well as lowering regulatory capitaland liquidity requirements. As part of these temporary measures, the ECB increased its targeted long-term refinancing operations(TLTRO III) under more favourable terms as well as its financial asset purchase program, while refraining from lowering interest ratesfurther. The temporary suspension of buffer requirements for regulatory capital and the liquidity coverage ratio (LCR) provides bankswith greater flexibility and additional leeway to absorb weakening borrower creditworthiness and satisfy additional corporate liquidityneeds. Overall, the package is intended to support the banks ability to provide loans to corporates and small and mid-sized businessessuffering from the effects of the coronavirus outbreak. We believe that the ECB’s measures will provide a limited relief for banks and
3 26 March 2020 Landesbank Baden-Wuerttemberg: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
their borrowers and it will require meaningful fiscal policy measure by the European Union and its member states to soften higherdefault rates in banks’ lending books.
Germany announced a large stimulus package that complements the European Central Bank's (ECB) supportive policy actions. TheGerman government launched emergency corporate lending guarantee programs and expanded short-time work subsidies andinvestments. The measures add to Germany's already expansionary fiscal policy stance and to automatic stabilizers that supporthousehold incomes when unemployment increases. These policy measures will soften the negative economic effects of the coronavirusoutbreak, but might not fully mitigate the credit-negative operational effect from the coronavirus.
LBBW reported an increased pre-tax profit of €612 million for 20194, up 11% - though relative performance remained unchanged ata modest level, providing a limited buffer in the current increasingly adverse economic situation. Key drivers were an improved netinterest income - largely based on the CRE segment- (+8%; €1.7 billion) and a stronger fee and commission income (+9%; €0.6bn),while operating costs were up 2.5% (to €1.9bn), reflecting the bank's growth strategy.
As a consequence, regulatory capital ratios dropped slightly to a CET ratio of 14.6%, Tier 1 to 15.6 %, while total capital stood at 22.9%and leverage at 4.6% as of year-end 2019. Buffers vs unchanged regulatory minima remained strong.
Detailed credit considerationsVery solid asset risk profile, despite concentrations in higher-risk sectorsWe assign a baa1 Asset Risk score to LBBW, five notches below the initial score5. of aa2. The score reflects the strong asset quality ofLBBW's loan book, and the bank's exposure to more cyclical industries such as the automotive and CRE industries. It also incorporatesthe bank's dependence on its capital market business.
LBBW’s strong asset quality was represented by a problem loan ratio of 0.7% as of half-year 2019, which has been trending downfor years. Strong economic growth in Germany, the successful finalisation of LBBW’s de-risking after the financial crisis and a morecautious risk approach contributed to lowering of problem loans to €858 million as of half-year 2019 from €4.7 billion in 2012.
We expect, however, that the coronavirus outbreak will have a direct impact on banks' asset quality and we could reassess our currentassessment of this factor depending on the breath and severity of the shock and the potential deterioration in credit quality. The bank'srisk concentrations to cyclical industries within its corporate loan and CRE book remain high and leave the bank susceptible to weakerGDP growth and potential structural shifts in the economy, especially with regards to automotive. An economic downswing and astructural shift for the automotive sector are underway, we do expect real GDP for Germany to contract by 3.0% in 2020, followedby a recovery of 2.5% in 2021 and identified particular challenges around the coronavirus pandemia and more demanding carbonregulation for automakers.
The bank's net exposure to the higher risk CRE sector and automotive industry accounted for €7.8 billion and €12.6 billion, respectively,as of half-year 2019, compared with an overall net exposure of €206.5 billion as of half-year 2019.
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 3
LBBW's problem loans have gradually declinedCoverage ratios have meanwhile strengthened
0%
25%
50%
75%
100%
125%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2015 2016 2017 2018 2019 H1
Problem Loans / Gross Loans Coverage ratio (right axis)
Problem loan ratio in accordance with Moody's definition. Coverage ratio = Loan-loss reserves/problem loans.Sources: Company reports, Moody's Investors Service
Apart from its role as the central bank for the regional savings banks (for example, money market and hedging activities), we takeaccount of the bank's relatively high proportion of market risk in its overall risk exposures, despite its declining share of revenuegenerated from trading activities.
LBBW's strong capital ratios start to declineOur assigned a1 Capital score for LBBW is one notch below the aa3 initial score and reflects our expectation regarding the potentialnegative impact of the upcoming regulatory changes; and the expected increase in the bank's risk-weighted assets, driven by businessgrowth in the medium term.
Going forward, lending growth related to LBBW's medium term strategy, as well as the implementation of upcoming regulatorychanges may lead to a downwards trend from its presently strong capital ratios, given the bank's yet limited capital generationcapacity. The bank's tangible common equity did fall to around 15.4% in half-year 2019, from 16.1% in half-year 2018. The decline wasdriven by the effect of the implementation of IFRS 9, as well as lending growth.
As of half-year, LBBW's reported fully loaded Common Equity Tier 1 (CET1) capital ratio stood at 14.6%, down from 15.1% as ofyear-end 2018. Moreover, the bank's total capital remained stable at 21.9%. However, the bank's regulatory capital ratios are stillsignificantly above the required total regulatory ratio of 13.25% (Tier 1: 11.25% and CET1: 9.75% for 2019), which the regulatordetermined following the supervisory review and evaluation process. The bank's regulatory leverage ratio stood at 4.3% as of half-year2019, slightly down from 4.7% as of year-end 2018.
Exhibit 4
LBBW's capitalisation remains consistently strongExhibit 5
LBBW's regulatory total capital requirements have increased
16.86%16.08%
15.41%15.80%15.10%
14.60%
5.82% 5.74%5.20%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2017 2018 2019 H1
TCE ratio CET1 ratio (transitional) TCE leverage ratio
TCE = Tangible common equity (Moody's calculation); CET1 = Common Equity Tier 1.Sources: Company reports, Moody's Investors Service
11.59%12.30%
13.25%
0%
2%
4%
6%
8%
10%
12%
14%
2017 2018 2019 H1
Pillar 1 - CET1 Pillar 1 - Tier 1 Pillar 1 - Tier 2
Pillar 2 Capital conservation buffer Countercyclical buffer
O-SII buffer
Source: Company reports
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Profitability and efficiency metrics are under strainWe assign the bank a b1 Profitability score, in line with the initial score, based on our expectation that for the next two to three years,the group's earnings will remain low compared with its overall risk profile and, therefore, modest by global standards. Central bankmeasures in reaction to a further spread of the coronavirus could, however, exacerbate further the profitability pressure that manyEuropean banks are under, particularly when combined with higher loan loss provisions.
Our assessment reflects our expectation of continued pressure on LBBW’s already low risk-adjusted profitability, thereby limitingits capital generation capacity. While LBBW displays a generally sound history of low credit losses, a weakening macroeconomicdevelopment, as well as the structural challenges facing the automotive industry, challenges LBBW's ability to maintain below-averageloan-loss charges. This, together with continued strain on earnings resulting from the low interest-rate environment as well as risinginvestments into digital banking services and infrastructure, is likely to strain the bank's profitability despite efforts to control costs.
For the half-year 2019, LBBW reported a pretax profit of €319 million, up from €282 million the year before. A stronger net interestincome of €811 million (up from €796 million), higher FCC of €279 million (H1 2018: €262 million) were the key drivers to balance thehigher risk provisions of €63 million (H1 2018: €33 million) for now. Admin expenses were slightly lower at €864 million (from €878million), though the key driver for the slightly stronger profit was a one-off of €43 million related to securities sales.
In 2018, LBBW reported a pretax profit of €558 million, up from €515 million in 2017, mainly driven by lower operating expenses. Inparticular, LBBW's administrative expenses in 2018 were lower than the figures for 2017 (in 2018: €1,773 million and in 2017: €1,824million), in contrast to the previous upward trend in costs. In addition, LBBW's net interest income slightly declined to €1.5 billion in2018, from €1.6 billion in 2017. The sale of LBBW's guaranteed structured credit portfolio (Sealink) in 2017 has slightly enhanced thebank's earnings capacity because of the easing burden of related state-aid costs (2017: €61 million).
Exhibit 6
Earnings are under pressureLower earnings from main income streams alongside slightly lower administrative costs
2,2441,773 1,878 1,654 1,669 1,587 1,527 1,622
514
545 518515 527 534 512 558
296 879 264 480 579 620 581 288
-2,098 -2,271 -2,139 -2,048 -2,065 -2,008 -1,911 -1,728
-130-90
-104
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
2012 2013 2014 2015 2016 2017 2018 2019 H1
€ m
illio
n
Net interest Income Net fees and commissions income Trading & other income Admin. Expenses
Risk provisions Extraordinary income and expense Pre-tax profit
*2019 H1 figures extrapolated to full yearSources: Company reports, Moody's Financial Metrics
Funding profile supported by the bank's access to the savings banks sectorWe assign a ba3 Market Funding score to LBBW, which is three notches above the b3 initial score. The assigned score takes intoconsideration LBBW's good access to stable funding resources provided by regional savings banks (and their retail clients), as well asits own retail client base, its strong covered bond franchise and access to development bank loans. The Market Funding score furthertakes into account the bank's overall high dependence on wholesale funding for a part of its lending business, which exposes the bankto refinancing risks in a more adverse market environment.
Given some decline in LBBW’s market funding reliance, we expect the bank's funding needs to stabilise at around €10 billion-€11 billionper annum. Nevertheless, LBBW is not entirely immune to market shocks, given its large derivatives book, the related risk of volatilecollateralisation requirements and its sizeable deposits from institutional clients.
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
LBBW funded itself with €77.8 billion in deposits and €40.1 billion in due from banks as of half-year 2019. Confidence-sensitive fundingsources such as bonds and promissory notes stood at €24.8 billion, while more stable covered bonds provided a €17.1 billion share inthe funding mix.
Exhibit 7
LBBW's funding structure is significantly dependent on interbank lines and debt issuance
0%
10%
20%
30%
40%
50%
60%
70%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016 2017 2018 2019 H1
Equity Other liabilities Trading liabilities Issued securities Interbank Deposits Market Funds Ratio* (right axis)
*Market funding ratio = Market funds/tangible banking assets.Sources: Company reports, Moody's Investors Service
A highly liquid balance sheet is a strong mitigant for market funding risksWe assign an a1 Liquid Resources score to LBBW, one notch below the initial score of aa3. Our consideration of pledged liquid assetsfor cover bond pools, repos and development bank activities results in a one-notch downward adjustment to the bank's strong LiquidResources score, also taking into account additional liquid resources available.
Together with the bank's diversified funding mix, the bank's liquidity reserves constitute a very balanced profile, offering the banksignificant flexibility in a more adverse market environment. The bank's ample liquidity and good access to sector funds are its keycredit strengths that mitigate potential funding challenges, but also support the bank's growth strategy, as it provides sufficientflexibility to replace the current costly cash into higher yielding lending assets.
LBBW’s liquid resources comprised €16.8 billion in cash as of half-year 2019, €26.1 billion in due from banks and €23.3 billion in liquidsecurities. The bank's €26.9 billion in pass through-loans, its €2.8 billion in pledged liquid assets in its cover pool and its other cash orother liquid encumbered assets of around €9 billion (all as of year-end 2018) are considered in our analysis.
Exhibit 8
LBBW has ample access to liquidity from sector funds, liquid securities and cash resources
38%
39%
40%
41%
42%
43%
44%
45%
46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016 2017 2018 2019 H1
Other assets Loans Securities/Investments Interbank Cash Liquid Banking Asset Ratio (right axis)
* Liquid banking assets ratio = Liquid assets/tangible banking assets.Sources: Company reports, Moody's Investors Service
Moreover, additional liquidity could be generated through the issuance of covered bonds. As of 30 September 2019, and based onan outstanding issuance of €10.8 billion, the over-collateralisation of LBBW's mortgage cover pool stood at 42.3% on an unstressed
7 26 March 2020 Landesbank Baden-Wuerttemberg: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
present value basis and at 61.4% for its public-sector cover pool, with €8.3 billion in outstanding liabilities. LBBW has, therefore,substantial leeway for using its existing cover pool to generate fresh liquidity through the issuance of covered bonds.
Environmental, social and governance considerationsThe global banking sector has been classified as “Low” risk in our environmental risk heat map6 and as “Moderate” risk in our social riskheat map.7
In line with our general view for the banking sector, LBBW has an overall low exposure to Environmental risks, except for the bank'sconcentration to the automotive industry as a sector with an 'Elevated risk - Emerging'. Such an evaluation goes in line with a clearexposure to environmental risk that could be material for credit evaluations over the medium term (the next 3-5 years). The relatedrisks for the bank's loan portfolio have been incorporated in the assigned Asset Risk score, as one of the key drivers for our significantdownwards adjustment from the initial score.
Governance8 is highly relevant for LBBW, as it is to all banks, but more specifically because of the complexity of its multi-countryoperations. However, we do not have any particular governance concern for LBBW, and we do not apply any corporate behaviouradjustment to the bank. Nonetheless, corporate governance remains a key credit consideration, given new emerging risks, andcontinues to be a subject of our ongoing monitoring.
Support and structural considerationsAffiliate supportLBBW benefits from cross-sector support from S-Group. Cross-sector support reduces the probability of default because the supportwould be available to stabilise a distressed member bank and not just to compensate for losses in resolution. The ownership structuresof the individual banks or banking groups determine the assigned level of support (either high or very high). Full S-Group ownership,combined with the membership in the cross-liability scheme, constitutes a very high level of support. The high support assumptionassigned to LBBW and also to most Landesbanks reflects their cross-liability scheme membership and only partial ownership byS-Group members. Cross-sector support, therefore, provides one notch of rating uplift to LBBW's debt, deposit and subordinatedinstrument ratings.
Loss Given Failure (LGF) analysisLBBW is subject to the EU Bank Recovery and Resolution Directive, which we consider an operational resolution regime. We, therefore,apply our Advanced LGF analysis, where we consider the risks faced by the different debt and deposit classes across the liabilitystructure should the bank enter resolution.
Our Advanced LGF analysis follows the insolvency legislation in Germany. In line with our standard assumptions, we assume a residualTCE of 3%, as well as asset losses of 8% of tangible banking assets in a failure scenario. We also assume a 25% runoff of juniorwholesale deposits and a 5% runoff in preferred deposits. Moreover, we assign a 25% probability to junior deposits being preferred tosenior unsecured debt. We apply a standard assumption for European banks that 26% of deposits are junior.
For LBBW, our LGF analysis indicates an extremely low loss given failure for deposits and for senior unsecured debt. Therefore, depositsand senior instruments benefit from three notches of rating uplift, while junior senior debt benefits from two notches of ratinguplift above the bank's baa1 Adjusted BCA. For LBBW, the two-notch uplift currently assigned is sensitive to the downside, given thesubordination and volume available for this liability class.
Furthermore, our LGF analysis continues to indicate a high loss given failure for subordinated debt classes, leading us to position theseinstruments one notch below the bank's baa1 Adjusted BCA.
Additional Tier 1 (AT1) instrumentsWe assign a Ba1(hyb) rating to LBBW's low-trigger AT1 securities (non-cumulative preferred shares), three notches below the bank'sbaa1 Adjusted BCA.
The rating reflects our assessment of the notes' undated deeply subordinated claim in liquidation, as well as their non-cumulativecoupon deferral features. The notes are senior only to LBBW's capital instruments that qualify as CET1. In addition, the notes' principal
8 26 March 2020 Landesbank Baden-Wuerttemberg: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
is subject to a write-down on a contractual basis if (1) LBBW's consolidated or standalone CET1 ratio falls below 5.125%, (2) the issuerreceives public support, and/or (3) a competent resolution authority determines that the conditions for a write-down of the instrumentare fulfilled and orders such a write-down as a measure to prevent in the solvency.
Government support considerationsFollowing the introduction of the Bank Recovery and Resolution Directive, we have lowered our expectations about the degree ofsupport the government might provide to a bank in Germany in the event of need. Because of its size on a consolidated basis, weconsider S-Group to be systemically relevant. We, therefore, attribute a moderate probability of German government support for allmembers of the sector, in line with support assumptions for other systemically relevant banking groups in Europe. We, therefore, stillinclude one notch of government support uplift in our CRRs, senior unsecured debt and deposit ratings for S-Group member banks thatare incorporated in Germany, including LBBW. For junior debt, we continue to believe that the likelihood of government support is lowand these ratings do not include any related uplift. Subordinated debt instruments do not benefit from any government support.
Counterparty Risk Ratings (CRRs)CRRs are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRRliabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRRs are distinct from ratingsassigned to senior unsecured debt instruments and from issuer ratings because they reflect that, in a resolution, CRR liabilities mightbenefit from preferential treatment compared with senior unsecured debt. Examples of CRR liabilities include the uncollateralisedportion of payables arising from derivatives transactions and the uncollateralised portion of liabilities under sale and repurchaseagreements.
LBBW's CRRs are positioned at Aa3/P-1The CRRs, before government support, are positioned three notches above the bank's baa1 Adjusted BCA, reflecting the extremely lowloss given failure from the high volume of instruments that are subordinated to CRR liabilities.
LBBW's CRRs benefit from one notch of rating uplift based on government support, in line with our assumptions on deposits and seniorunsecured debt.
Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financialloss, and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CRAssessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing),derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.
LBBW's CR Assessment is positioned at Aa3(cr)/Prime-1(cr)The CR Assessment, before government support, is positioned three notches above the Adjusted BCA of baa1, based on the bufferagainst default provided to the senior obligations represented by the CR Assessment by more subordinated instruments, includingjunior deposits and senior unsecured debt.
LBBW's CR Assessment benefits from one notch of rating uplift based on government support, in line with our support assumptions ondeposits and senior unsecured debt.
Methodology and scorecardThe principal methodology we used in rating LBBW was the Banks methodology published in November 2019.
About Moody's Bank ScorecardOur Bank Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When readin conjunction with our research, a fulsome presentation of our judgement is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.
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Rating methodology and scorecard factors
Exhibit 9
Landesbank Baden-Wuerttemberg
Macro FactorsWeighted Macro Profile Strong + 100%
Factor HistoricRatio
InitialScore
ExpectedTrend
Assigned Score Key driver #1 Key driver #2
SolvencyAsset RiskProblem Loans / Gross Loans 0.9% aa2 ←→ baa1 Sector concentration Market risk
CapitalTangible Common Equity / Risk Weighted Assets(Basel III - fully loaded)
15.4% aa3 ←→ a1 Risk-weightedcapitalisation
Expected trend
ProfitabilityNet Income / Tangible Assets 0.2% b1 ←→ b1 Return on assets Expected trend
Combined Solvency Score a2 baa1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 50.4% b3 ←→ ba3 Extent of market
funding relianceMarket funding quality
Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 45.5% aa3 ←→ a1 Stock of liquid assets Quality of liquid assets
Combined Liquidity Score ba1 baa3Financial Profile baa2Qualitative Adjustments Adjustment
Business Diversification 0Opacity and Complexity 0Corporate Behavior 0
Total Qualitative Adjustments 0Sovereign or Affiliate constraint AaaBCA Scorecard-indicated Outcome - Range baa1 - baa3Assigned BCA baa2Affiliate Support notching 1Adjusted BCA baa1
Balance Sheet is not applicable.
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
De Jure waterfall De Facto waterfall NotchingDebt ClassInstrumentvolume +
subordination
Sub-ordination
Instrumentvolume +
subordination
Sub-ordination
De Jure De FactoLGF
NotchingGuidance
vs.Adjusted
BCA
AssignedLGF
notching
AdditionalNotching
PreliminaryRating
Assessment
Counterparty Risk Rating - - - - - - - 3 0 a1Counterparty Risk Assessment - - - - - - - 3 0 a1 (cr)Deposits - - - - - - - 3 0 a1Senior unsecured bank debt - - - - - - - 3 0 a1Junior senior unsecured bank debt - - - - - - - 2 0 a2Dated subordinated bank debt - - - - - - - -1 0 baa2Non-cumulative bank preference shares - - - - - - - -1 -2 ba1
Instrument Class Loss GivenFailure notching
Additionalnotching
Preliminary RatingAssessment
GovernmentSupport notching
Local CurrencyRating
ForeignCurrency
RatingCounterparty Risk Rating 3 0 a1 1 Aa3 Aa3Counterparty Risk Assessment 3 0 a1 (cr) 1 Aa3(cr)Deposits 3 0 a1 1 Aa3 Aa3Senior unsecured bank debt 3 0 a1 1 Aa3Junior senior unsecured bank debt 2 0 a2 0 A2 A2Dated subordinated bank debt -1 0 baa2 0 Baa2 Baa2Non-cumulative bank preference shares -1 -2 ba1 0 Ba1 (hyb) (P)Ba1[1]Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody’s Investors Service
Ratings
Exhibit 10
Category Moody's RatingLANDESBANK BADEN-WUERTTEMBERG
Outlook StableCounterparty Risk Rating Aa3/P-1Bank Deposits Aa3/P-1Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment Aa3(cr)/P-1(cr)Issuer Rating Aa3Senior Unsecured -Dom Curr Aa3Junior Senior Unsecured A2Junior Senior Unsecured MTN -Dom Curr (P)A2Subordinate Baa2Pref. Stock Non-cumulative -Dom Curr Ba1 (hyb)Commercial Paper -Dom Curr P-1Other Short Term -Dom Curr (P)P-1
Source: Moody's Investors Service
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Endnotes1 The ratings shown are S-Group's corporate family rating and outlook, as well as its BCA.
2 For further details, please refer to LBBW's Company Profile and the German Banking System Profile.
3 The rating shown is the German government's issuer rating and outlook.
4 all 2019 numbers are preliminary
5 The initial score is referred to as the Macro-Adjusted score in our Bank Scorecard
6 Environmental risks can be defined as environmental hazards encompassing the impact of air pollution, soil/water pollution, water shortages, and naturaland man-made hazards (physical risks). Additionally, regulatory or policy risks, like the impact of carbon regulations or other regulatory restrictions,including the related transition risks like policy, legal, technology and market shifts, which could impair the evaluation of assets, are important factors.Certain banks could face a higher risk from concentrated lending to individual sectors or operations exposed to the aforementioned risks.
7 Social risk considerations represent a broad spectrum, including customer relations, human capital, demographic and societal trends, health and safety,and responsible production. The most relevant social risks for banks arise from the way they interact with their customers. Social risks are particularly highin the area of data security and customer privacy, which are partly mitigated by sizeable technology investments and banks’ long track record of handlingsensitive client data. Fines and reputational damage because of product mis-selling or other types of misconduct are a further social risk. Societal trendsare also relevant in a number of areas, such as shifting customer preferences towards digital banking services increasing information technology costs,ageing population concerns in several countries affecting demand for financial services or socially driven policy agendas that may translate into regulationsthat affect banks' revenue bases.
8 Corporate governance is a well-established key driver for banks and related risks are typically included in our evaluation of banks' financial profile. Furtherfactors like specific corporate behaviour, key-person risk, insider and related-party risk, strategy and management risk factors and dividend policy maybe captured in individual adjustments to the BCA, if deemed applicable. Corporate governance weaknesses can lead to a deterioration in a company’scredit quality, while governance strengths can benefit its credit profile. When credit quality deteriorates because of poor governance, such as breakdownin controls resulting in financial misconduct, it can take a long time to recover. Governance risks are also largely internal rather than externally driven.
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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
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13 26 March 2020 Landesbank Baden-Wuerttemberg: Update to credit analysis
