Primary Credit Analyst:
Dirk Heise, Frankfurt (49) 69-33-999-163; dirk.heise@standardandpoors.com
Secondary Contact:
Anna Lozmann, Frankfurt (49) 69-33-999-166; anna.lozmann@standardandpoors.com
Table Of Contents
Major Rating Factors
Outlook
Rationale
SACP
bbb-Anchor
bbb-Business
Position Adequate 0 Capital and
Earnings Strong +1 Risk Position Moderate -1
Funding Average
0
Liquidity Adequate
+
Support+3
GRE Support +3
Group
Support 0
Sovereign
Support 0
+
AdditionalFactors0
Issuer Credit RatingA-/Stable/A-2
Major Rating Factors
Strengths:• High likelihood of extraordinary government support from Germany, underpinned by the ownership transfer of Depfa to the government-owned FMS Wertmanagement Anstalt des oeffentlichen Rechts.
• Strong capitalization.
Weaknesses:
• Lack of a viable business model and legal restrictions on generating new banking business.
• Marginal earnings prospects and concentration risks in the public sector.
Outlook
Standard & Poor's Ratings Services' outlook on Ireland-based Depfa Bank PLC (Depfa) is stable. This reflects our view that, after the ownership transfer, Depfa is subject to an orderly wind-down within the government-guaranteed workout unit FMS Wertmanagement Anstalt des oeffentlichen Rechts (FMSW) and will continue to benefit from the strong commitment of the German government until the wind-down is completed. However, we note that Germany has no obligation to support Depfa directly, in contrast to its obligation to support FMSW.
We might lower the ratings on Depfa if the bank's stand-alone credit profile (SACP) deteriorates, or if the likelihood of government support were to diminish.
Rating upside is remote, given the current high level of ongoing and extraordinary government support factored into the ratings. A positive rating action would require either an improvement of the bank's SACP or a strengthening of Germany's commitment to the bank.
Rationale
Our ratings on Depfa reflect its anchor of 'bbb-', which represents our view of economic conditions in the countries in which the bank operates and banking industry risk in the Republic of Ireland.
We assess Depfa's SACP at 'bbb-', incorporating our view of the support Depfa has received from the German government through capital injections and asset transfers. We also take into account ongoing government support, because we cannot segregate benefits deriving from government ownership through FMSW, and commitment from our stand-alone analysis of the bank.
We consider Depfa's business position to be "adequate." This is based on our view that management is capable of reducing assets and liabilities under its wind-down status with ongoing implicit support from FMSW. We assess the bank's capital and earnings as "strong," reflecting the benefits of the former transfer of risky noncore assets into a dedicated workout unit, which took place in 2010. We assess Depfa's risk position as "moderate," mainly owing to the bank's high concentration risks. We view its funding as "average" and its liquidity as "adequate," balancing the weakness of the bank's wholesale business model against our expectation of ongoing implicit government support. Although Depfa is based in Ireland, we consider the German government to be a more likely source of support in the event of stress due to its indirect 100% ownership via FMSW. The long-term counterparty credit rating is three notches higher than the SACP, reflecting our view that we now regard Depfa as a government-related entity (GRE) and believe there is a "high" likelihood of timely and sufficient extraordinary support from the German government to Depfa if needed.
Anchor: 'bbb-'
Under our bank criteria, we use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The indicative BICRA for Ireland is group '7', according to our criteria. Our anchor for a commercial bank operating solely in Ireland is 'bb', based on an economic risk score of '6' and an industry risk score of '7'.
To assess the economic risk for Depfa, we use the weighted-average of its exposures in countries of operation.
Because Depfa's lending business is outside Ireland and its borrowers are located in countries with healthier economic conditions than Ireland, our weighted economic risk score on the bank is better than that on Irish lending institutions with higher proportions of domestic loans.
Based on the weighted economic risk score of '3' and the industry score of '7', we determine the anchor for Depfa at 'bbb-'.
Table 1
Depfa Bank PLC Key Figures
--Year-ended Dec. 31--(Mil. €) 2014* 2013 2012 2011 2010 Adjusted assets 46,535.0 49,117.0 73,286.0 129,905.0 143,976.0 Customer loans (gross) 10,358.0 15,290.0 18,627.0 56,971.0 83,775.0
Table 1
Depfa Bank PLC Key Figures (cont.)
Adjusted common equity 919.0 1,016.0 1,013.0 1,629.0 2,473.0 Operating revenues (60.0) (24.0) 144.0 109.0 (431.0) Noninterest expenses 48.0 96.0 174.0 158.0 247.0 Core earnings (96.0) (62.0) 6.1 (17.3) (681.0) *Data as of June 30.
Business position: Orderly wind-down under FMSW
We assess Depfa's business position as adequate, owing to the high risk already indicated by the Irish industry risk score of '7'. Our assessment is based on Germany's commitment to facilitate an orderly rundown of the bank's operations under the roof of and with ongoing implicit support from FMSW. The transfer of the ownership of Depfa to FMSW from HRE was completed by Dec. 19, 2014, following the decision of the German authorities to transfer the ownership of Depfa to FMSW and to wind down the group's assets on May 13, 2014. Depfa group banks retain their legal entity status following the transfer.
As a consequence of the wind-down, the Depfa group is not taking on any new lending business. We expect FMSW to manage the bank's cover pools throughout the wind-down. Therefore, under our expected-case scenario, we anticipate that there will be no material changes to the issuer's cover pool strategy, including overcollateralization levels.
The German government has provided various forms of extraordinary capital and funding support to prevent a default of Hypo Real Estate group since 2008. In addition, in 2010 both Depfa and its then sister company Deutsche
Pfandbriefbank AG (PBB) transferred a substantial amount of noncore assets into the government-guaranteed workout unit FMSW, which has materially improved both banks' credit, market, and funding risks. The European Commission approved of state aid for PBB and Depfa in 2011. Both banks were required to implement restructuring plans, and the government agreed to reprivatize PBB by year-end 2015 and Depfa by year-end 2014.
Following the former asset transfers to FMSW, Depfa's €46 billion remaining balance sheet is dominated by the covered bond pools and covered bonds issued by its subsidiaries, Ireland-based Depfa ACS Bank and
Luxembourg-based Hypo Pfandbrief Bank International S.A. We continue to regard both subsidiaries as core subsidiaries of Depfa.
Table 2
Depfa Bank PLC Business Position
--Year-ended Dec.
31--(%) 2014* 2013 2012 2011 2010
Total revenues from business line (mil. €) (58.0) 74.0 205.0 251.0 (431.0) Return on equity (20.0) 3.7 4.6 5.9 (47.9)
Table 2
Depfa Bank PLC Business Position (cont.)
*Data as of June 30.
Capital and earnings: Strong, but with uncertainties about the bank's capital policy in its rundown
We view Depfa's capital and earnings as strong. Our assessment reflects our forecast that Depfa's risk-adjusted capital (RAC) ratio is likely to remain at 10%-15% within the next 24 months. Our assessment reflects high uncertainties about the bank's capital policy during the potentially lengthy rundown. We cannot rule out the risk that Germany may ask Depfa to stream up capital at any point during the rundown. We are also uncertain about potential loan impairment charges, in light of high credit risk concentrations.
We consider the bank's quality of capital and earnings as well as its earnings capacity as weaknesses. Because Depfa is no longer authorized to conduct new banking business and profits from the existing portfolio are marginal, the bank's revenues may be just sufficient to achieve break-even results over the next few years, but are unlikely to provide a buffer for larger loan impairment charges, which could stem from deteriorating credit quality.
Table 3
Depfa Bank PLC Capital And Earnings
--Year-ended Dec.
31--(%) 2014* 2013 2012 2011 2010
Tier 1 capital ratio 25.1 48.3 37.6 47.8 50.8 S&P RAC ratio before diversification N.M. 22.1 20.9 26.0 38.2 S&P RAC ratio after diversification N.M. 11.8 11.7 18.4 31.9 Adjusted common equity/total adjusted capital 75.2 75.2 75.2 75.2 75.2 Net interest income/operating revenues 25.0 141.7 17.4 49.5 (58.5) Fee income/operating revenues 3.3 62.5 (13.2) (17.4) 71.9 Market-sensitive income/operating revenues 75.0 241.7 24.3 (27.5) 101.4 Noninterest expenses/operating revenues (80.0) (400.0) 120.8 145.0 (57.3) Preprovision operating income/average assets (0.5) (0.2) 0 0 (0.4) Core earnings/average managed assets (0.4) (0.1) 0 0 (0.4) *Data as of June 30. RAC--Risk-adjusted capital. N.M.--Not meaningful.
Table 4
Depfa Bank PLC Risk-Adjusted Capital Framework Data
(Mil. €) Exposure* Basel II RWA
Average Basel II RW (%)
Standard & Poor's RWA
Average Standard & Poor's RW (%) Credit risk
Government and central banks
28,774 1,379 5 3,751 13
Institutions 2,262 938 41 475 21
Corporate 394 213 54 332 84
Retail 0 0 0 0 0
Of which mortgage 0 0 0 0 0
Securitization 3,406 688 20 1,063 31
Table 4
Depfa Bank PLC Risk-Adjusted Capital Framework Data (cont.)
Total credit risk 34,891 3,274 9 5,681 16
Market risk
Equity in the banking book§ 0 0 0 0 0
Trading book market risk -- 86 -- 129
--Total market risk -- 86 -- 129
--Insurance risk
Total insurance risk -- -- -- 0
--Operational risk
Total operational risk -- 190 -- 302
--Basel II RWA
Standard & Poor's RWA
% of Standard & Poor's RWA Diversification adjustments
RWA before diversification -- 3,551 6,113 100
Total adjustments to RWA -- -- 5,295 87
RWA after diversification -- 3,551 11,408 187
Tier 1 capital Tier 1 ratio (%)
Total adjusted capital
Standard & Poor's RAC ratio (%) Capital ratio
Capital ratio before adjustments
-- 0 0 1,351 22.1
Capital ratio after adjustments†
-- 0 0 1,351 11.8
*Exposure at default. Securitization exposure includes the securitization tranches deducted from capital in the regulatory framework. §Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. †Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31, 2013, Standard & Poor's.
Risk position: High concentration risks remain
We assess Depfa's risk position as moderate, mainly reflecting high concentration risks. We consider that Depfa has high sector and single-name concentrations on public-sector entities and uses regulatory arbitrage, as indicated by its high ratio of total managed assets to adjusted common equity. In particular, concentrations in the bank's high exposure to western European countries affected by the sovereign debt crisis might lead to overproportional losses.
These risks are mitigated by significantly improved portfolio quality following the former transfer of complex and risky noncore assets to FMSW. The current portfolio composition should display much smaller losses under stress
compared with the unfavorable loan-loss track record before the asset transfer. Former losses resulted mainly from business that was not eligible for covered bond pools. The remaining assets relate mainly to covered bond pools and show a better risk profile, which reflects asset quality rules in the covered bonds legislation. In addition, based on FMSW's experience and guidance in managing wind-down entities, a shrinking of Depfa's balance sheet is likely to reduce future risk.
Table 5
Depfa Bank PLC Risk Position
--Year-ended Dec.
31--(%) 2014* 2013 2012 2011 2010
Growth in customer loans (64.5) (17.9) (67.3) (32.0) (31.1) Total diversification adjustment / S&P RWA before diversification N.M. 86.6 77.8 41.4 19.9 Total managed assets/adjusted common equity (x) 50.6 48.4 72.4 79.8 58.2 New loan loss provisions/average customer loans (0.1) (0.0) (0.1) 0 0 Net charge-offs/average customer loans N.M. N.M. N.M. N.M. N.M. Gross nonperforming assets/customer loans + other real estate owned N/A 0.6 0.5 0.2 0.1 Loan loss reserves/gross nonperforming assets N/A 114.9 113.3 75.3 88.5 *Data as of June 30. RWA--Risk-weighted assets. N/A--Not applicable. N.M.--Not meaningful.
Funding and liquidity: Reliant on implicit government support
We assess Depfa's funding as average and its liquidity position as adequate. Depfa is a wholesale-funded bank, and, in our view, is structurally reliant on ongoing implicit government support. However, we believe the bank's current ownership structure mitigates Depfa's initially below-average wholesale funding model and sensitivity to an erosion of confidence in times of stress.
In addition, the former asset transfers have substantially reduced the bank's unsecured funding needs and improved its liquidity positions, because they largely eliminated funding gaps. We anticipate that funding needs for Depfa's
remaining portfolio will be very limited over its lifetime and will decline further during the wind-down.
Standard & Poor's calculated liquidity ratio was 268% (calculated with a one-year horizon as opposed to the regulatory one-month horizon) and our stable funding ratio was 192%. The ratios underline the healthy balance sheet structure.
Table 6
Depfa Bank PLC Funding And Liquidity
--Year-ended Dec.
31--(%) 2014* 2013 2012 2011 2010
Core deposits/funding base 7.1 10.8 17.4 21.2 23.2 Customer loans (net)/customer deposits 422.0 370.3 203.9 266.4 323.6 Long-term funding ratio 78.4 85.0 85.3 59.0 62.5 Stable funding ratio 179.7 191.6 207.4 99.0 83.2 Short-term wholesale funding/funding base 22.5 15.6 15.1 41.9 38.7 Broad liquid assets/short-term wholesale funding (x) 3.0 3.7 4.1 1.0 0.7 Net broad liquid assets/short-term customer deposits 1,702.6 2,134.6 524.0 0.7 (98.2) Short-term wholesale funding/total wholesale funding 23.8 17.2 18.1 52.8 49.7 Narrow liquid assets/3-month wholesale funding (x) 6.4 4.2 8.6 1.1 0.7 *Data as of June 30.
External support: Three-notch uplift to the SACP due to the bank's GRE status
Although Depfa is based in Ireland, we consider the German government to be a more likely source of support in the event of stress due to its indirect 100% ownership via FMSW. The long-term counterparty credit rating is three
notches higher than the SACP, reflecting our view that, following the ownership transfer to FMSW, the bank benefits from an increased likelihood of government support.
We now regard Depfa as a GRE and believe there is a high likelihood of timely and sufficient extraordinary support from the German government if needed, as per our GRE criteria. This is based on our assessment of Depfa's:
• "Important" role for the German government in ensuring a controlled run-off of assets to safeguard confidence in the German banking sector, and to minimize costs for the government, as the owner of the bank, and ultimately for taxpayers.
• "Very strong" link with the German government. Until the wind-down is complete, we believe there is a low
probability of the bank changing ownership or of the German government withdrawing its support from Depfa . This reflects government's commitment, indirect, but full control, and track record of support.
We continue to regard Depfa ACS Bank, Hypo Pfandbrief Bank International S.A., and Hypo Public Finance Bank as core subsidiaries of Depfa. Furthermore, we now regard the subsidiaries as GREs, in line with the parent's GRE status. As a result, we also assume there is a high likelihood that these subsidiaries would receive extraordinary support from the German government if necessary.
Nondeferrable senior subordinated debt: State support unlikely
Our 'BB' issue ratings on Depfa's nondeferrable senior subordinated debt are two notches below Depfa's SACP. The reason for this is that we believe the legal and regulatory frameworks of Germany and Ireland allow authorities to instigate restructuring of a failing bank to the detriment of nondeferrable subordinated debtholders. We do not expect Depfa's hybrid debt to benefit from government support, despite Depfa's GRE status and the benefits of increased government support for investors of Depfa's senior unsecured issues.
Junior subordinated debt instruments: Negligible probability of coupon payments
We rate Depfa's junior subordinated debt instruments as 'D' (default). The 'D' rating reflects the fact that Depfa's hybrid instruments have missed successive coupons in the past years, and that we see such suspensions as a breach of the promise we impute to rate the instrument.
Our 'D' rating on the noncumulative instruments issued by the Depfa group also reflects our current expectation that all these instruments will also miss their next coupon payment. However, in our view, the probability of the bank resuming coupon payments on these instruments is negligible.
Additional rating factors: None
No additional factors affect this rating.
Related Criteria And Research
Related Criteria• Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015
• Group Rating Methodology, Nov. 19, 2013
• Principles For Rating Debt Issues Based On Imputed Promises, Oct. 24, 2013
• Use Of 'C' And 'D' Issue Credit Ratings For Hybrid Capital And Payment-In-Kind Instruments, Oct. 24, 2013
• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
• Bank Capital Methodology And Assumptions, Dec. 6, 2010
Related Research
• Depfa Bank Upgraded To 'A-' On Upcoming Ownership Transfer To FMSW; Outlook Stable, Dec. 1, 2014
Anchor Matrix
Industry Risk
Economic Risk
1 2 3 4 5 6 7 8 9 10
1 a a a- bbb+ bbb+ bbb - - -
-2 a a- a- bbb+ bbb bbb bbb- - -
-3 a- a- bbb+ bbb+ bbb bbb- bbb- bb+ -
-4 bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb
-5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+
6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+
7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b+
8 - - bb+ bb bb bb bb- bb- b+ b
9 - - - bb bb- bb- b+ b+ b+ b
10 - - - - b+ b+ b+ b b
b-Ratings Detail (As Of February 13, 2015)
Depfa Bank PLC
Counterparty Credit Rating A-/Stable/A-2
Certificate Of Deposit
Foreign Currency A-/A-2
Local Currency A-/A-2/A-2 Commercial Paper
Foreign Currency A-2
Preferred Stock D
Senior Unsecured
A-Senior Unsecured A-2
Short-Term Debt A-2
Subordinated BB
Counterparty Credit Ratings History
01-Dec-2014 A-/Stable/A-2
19-May-2014 BBB/Positive/A-2
14-Feb-2014 BBB/Watch Neg/A-2
08-Oct-2010 BBB/Stable/A-2
Sovereign Rating
Ireland (Republic of) A/Stable/A-1
Related Entities Depfa ACS Bank
Ratings Detail (As Of February 13, 2015) (cont.)
Senior Secured
A-Senior Secured A-/Stable
Senior Unsecured
A-Short-Term Debt A-2
Short-Term Secured Debt A-2
Subordinated BB
Finanzmarktstabilisierungsfonds (SoFFin)
Senior Unsecured AAA
FMS Wertmanagement Anstalt des oeffentlichen Rechts
Issuer Credit Rating AAA/Stable/A-1+
Commercial Paper A-1+
Senior Unsecured AAA
Germany (Federal Republic of)
Issuer Credit Rating AAA/Stable/A-1+
Transfer & Convertibility Assessment AAA
Commercial Paper
Local Currency A-1+ Senior Unsecured
Greater China Regional Scale cnAAA
Senior Unsecured A-1+
Senior Unsecured AA
Senior Unsecured AAA
Short-Term Debt A-1+
Short-Term Debt AAA/Watch Neg
Subordinated AAA
Hypo Pfandbrief Bank International S.A.
Issuer Credit Rating A-/Stable/A-2
Senior Secured A+/Negative
Hypo Public Finance Bank
Issuer Credit Rating A-/Stable/A-2
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.
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