Moody's Trims Ratings on Six German Banks, One Subsidiary; Assigns Stable Outlook

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Moody's Investors Service has today taken various rating actions on seven German banks and their subsidiaries, as well as one German subsidiary of a foreign group. As a result, the long-term debt and deposit ratings for six groups and one German subsidiary of a foreign group have declined by one notch, while the ratings for one group were confirmed. Moody's also downgraded the long-term debt and deposit ratings for several subsidiaries of these groups, by up to three notches. At the same time, the short-term ratings for three groups as well as one German subsidiary of a foreign group have been downgraded by one notch, triggered by the long-term rating downgrades.

Further to these actions, Moody's has assigned stable outlooks to the ratings of most German banks. The ratings of two groups and of one German subsidiary of a foreign bank carry negative outlooks, reflecting bank-specific vulnerabilities to a possible further deterioration of the environment.

The ongoing rating review for Deutsche Bank AG and its subsidiaries will be concluded together with the reviews for other global firms with large capital markets operations.

Today's rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks' limited loss-absorption capacity. The key drivers of today's rating actions on German banks are:

• Increased risks to asset quality for the banks affected by today's actions due to their exposures to asset classes prone to further deterioration if downside risks from the euro area debt crisis and the weakened global economic outlook materialise.
  
  
• Limited loss-absorption capacity, given the comparatively small equity cushions relative to total assets (not risk-weighted) and low pre-provision earnings. As a result, many German banks have limited capacity to absorb losses out of earnings, raising the potential that capital could diminish in a stress scenario.

Moody's notes that several factors have caused the ratings of many German banks to decline by less than for other European banks and also less than the initial maximum guidance communicated on 15 February 2012. One mitigating factor is the comparatively benign operating environment in the German home market, supported by below-average unemployment, low household and corporate debt levels and the general resilience of the German economy. Another critical mitigating factor is the modest funding risk of many German banks, underpinned by broadly matched maturity profiles, recurring access to intra-sector funds (for the Landesbanks and the central institutions of the German cooperative banking sector), and improved liquidity buffers. Moreover, Moody's recognises the steps German banks have taken to address past asset quality challenges; however, as stated above, significant downside risks remain.

Todays' rating actions have no impact on debt issued by Landesbanks that is guaranteed by state governments (grandfathered debt). The ratings for this debt continue to reflect the applicable sub-sovereign long-term and short-term ratings.

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