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Deutsche Apotheker- und Aerztebank eG -- Moody's downgrades Deutsche Apotheker- und Aerztebank eG's senior unsecured program rating to (P)Aa2 from (P)Aa1

·17 mins read

Rating Action: Moody's downgrades Deutsche Apotheker- und Aerztebank eG's senior unsecured program rating to (P)Aa2 from (P)Aa1

Global Credit Research - 26 Aug 2020

Deposit ratings affirmed at Aa1; outlook remains stable

Frankfurt am Main, August 26, 2020 -- Moody's Investors Service (Moody's) has today downgraded the long-term senior unsecured program rating of Deutsche Apotheker- und Aerztebank eG (apoBank) to (P)Aa2 from (P)Aa1. At the same time, the rating agency affirmed the bank's long-term deposit ratings at Aa1, its junior senior unsecured debt ratings at A2, and its subordinated debt ratings at A3. Concurrently, Moody's affirmed apoBank's baa1 Baseline Credit Assessment (BCA) and a2 Adjusted BCA. The outlook on apoBank's long-term deposit ratings remains stable.

For a list of all affected ratings, please refer to the end of this press release.

RATINGS RATIONALE

-- AFFIRMATION OF THE BASELINE CREDIT ASSESSMENT

The affirmation of apoBank's baa1 BCA reflects the resilience of the bank's intrinsic financial strength, even in an adverse operating environment further weakened by the coronavirus outbreak. Despite the pandemic's severe and extensive credit implications across many sectors, including the healthcare sector to which apoBank has a highly concentrated exposure, and which mostly weigh on the bank's solvency, Moody's views apoBank as sufficiently prepared to withstand these pressures on a standalone basis. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

apoBank's business model is that of a highly focused bank specializing in the German healthcare sector with a broad product offering, including financing, account handling and wealth management. Despite this product mix and the healthcare service sector's non-cyclical nature, apoBank's business model results in material concentration risks for the bank and leaves it highly exposed to the wellbeing of healthcare services in Germany. Moody's therefore considers apoBank to operate a monoline business model, with exposure to potential tail risks, for example due to regulatory or structural shifts. These risks are mitigated through the bank's very good asset quality and its strong -- albeit declining -- capital ratios, whereas apoBank's profitability remains low and faces increasing pressure from rising risk costs and lower interest margins. At the same time, the bank benefits from a stable and growing deposit base and limited confidence-sensitive capital market funding.

-- AFFIRMATION OF THE ADJUSTED BCA REFLECTS UNCHANGED VERY HIGH SUPPORT FROM THE CO-OPERATIVE BANKING SECTOR

apoBank's a2 Adjusted BCA incorporates two notches of rating uplift from affiliate support to its baa1 BCA. apoBank is the largest single co-operative bank within the group that forms the German co-operative banking sector, Genossenschaftliche FinanzGruppe (VR-FinanzGruppe). VR-FinanzGruppe and its member banks operate a regulated and supervised institutional protection scheme and Moody's assesses the likelihood that member banks support each other as very high, resulting in an Adjusted BCA that benefits from the overall financial creditworthiness of the group.

-- DOWNGRADE OF THE SENIOR UNSECURED PROGRAM RATING REFLECTS INCREASE IN LOSS SEVERITY EXPECTATION

Today's one-notch downgrade of apoBank's senior unsecured program rating to (P)Aa2 from (P)Aa1 was prompted by ongoing strong balance sheet growth, in combination with a reduction in the outstanding volumes of loss-absorbing instruments. These developments result in a higher loss severity for instruments covered by the senior unsecured program rating under Moody's Advanced Loss Given Failure (LGF) analysis. Moody's Advanced LGF analysis now indicates a very low loss-given-failure, or two notches of rating uplift from the Adjusted BCA for the senior unsecured program rating, while the previous LGF analysis resulted in an extremely low loss-given-failure and three notches of rating uplift.

Moody's assumes an unchanged moderate probability of government support for member institutions of VR-FinanzGruppe, which results in one notch of rating uplift for the senior unsecured program rating, because the rating agency considers Germany's cooperative banking sector to be of domestic systemic importance.

-- AFFIRMATION OF DEPOSIT RATINGS REFLECTS UNCHANGED LOSS-ABSORPTION CAPACITY AND GOVERNMENT SUPPORT ASSUMPTIONS

The affirmation of the deposit ratings at Aa1 reflects the unchanged Adjusted BCA as well as the unchanged notching result under Moody's Advanced LGF analysis. Despite apoBank's balance sheet growth being generally negative for the outcome of the Advanced LGF analysis, the volume of junior deposits in combination with other loss-absorbing instruments is still sufficient to result in an unchanged very low loss-given-failure and three notches of rating uplift.

Similar to its assumption for the senior unsecured program rating, Moody's incorporates one notch of rating uplift into apoBank's deposit ratings, because of its assessment that VR-FinanzGruppe (and apoBank as a member of it) is of domestic systemic importance.

-- AFFIRMATION OF JUNIOR SENIOR AND SUBORDINATED DEBT RATINGS

The affirmation of apoBank's A2 junior senior and A3 subordinated debt ratings reflects the affirmation of the bank's BCA and Adjusted BCA, as well as the unchanged notching results under Moody's Advanced LGF analysis.

-- STABLE OUTLOOK ON THE LONG-TERM DEPOSIT RATINGS CONTINUES TO REFLECT STABLE CREDIT AND LIABILITY PROFILE

The stable outlook on the long-term deposit ratings reflects Moody's expectation that apoBank will maintain its current solvency and liquidity strengths, and that the outstanding volumes of deposits in combination with more junior debt instruments remain sufficient to result in unchanged rating uplift from Moody's Advanced LGF analysis, even if apoBank records further balance sheet growth.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of apoBank's deposit ratings could be prompted by a higher Adjusted BCA, hence, a combination of a higher BCA for apoBank and unchanged affiliate support uplift from VR-FinanzGruppe. The senior unsecured program rating and the junior senior unsecured debt and subordinated debt ratings could also be upgraded in case of significantly increased issuance volumes of bail-in instruments, such that it results in more rating uplift from Moody's Advanced LGF analysis.

apoBank's baa1 BCA could be upgraded if the bank reduces its concentration risks, improves its capital ratios and achieves a sustainably stronger profitability, by offsetting pressure on its net interest income in the current low interest rate environment through growth in fee income.

A downgrade of apoBank's ratings could be triggered by a downgrade of its Adjusted BCA, either as a result of a combined weakening of the bank's and the sector's creditworthiness, or because of a more pronounced deterioration of apoBank's standalone credit strength; a reduction in rating uplift from Moody's Advanced LGF analysis, due to lower volume of issued bail-in instruments; or a reduction in Moody's government support assumption.

Downward pressure on the BCA could occur if apoBank's solvency were to weaken beyond Moody's current expectations, in particular if the bank were to sustain its past years' trend of capital ratio deterioration, or if the bank's profitability materially weakens.

LIST OF AFFECTED RATINGS

Issuer: Deutsche Apotheker- und Aerztebank eG

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed Aa1

....Short-term Counterparty Risk Ratings, affirmed P-1

....Long-term Bank Deposits, affirmed Aa1, outlook remains Stable

....Short-term Bank Deposits, affirmed P-1

....Long-term Counterparty Risk Assessment, affirmed Aa1(cr)

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Baseline Credit Assessment, affirmed baa1

....Adjusted Baseline Credit Assessment, affirmed a2

....Junior Senior Unsecured Regular Bond/Debenture, affirmed A2

....Subordinate Regular Bond/Debenture, affirmed A3

....Subordinate Medium-Term Note Program, affirmed (P)A3

....Commercial Paper, affirmed P-1

....Other Short Term, affirmed (P)P-1

..Downgrades:

....Senior Unsecured Medium-Term Note Program, downgraded to (P)Aa2 from (P)Aa1

..Outlook Action: ....Outlook remains Stable PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/research/Banks-Methodology--PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andrea Wehmeier Vice President - Senior Analyst Financial Institutions Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Alexander Hendricks, CFA Associate Managing Director Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454

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