Fitch affirms Landesbank Baden-wuerttemberg

LONDON

Global rating agency Fitch has affirmed Germany-based Landesbank Baden-Wuerttemberg's (LBBW) Long-term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. Fitch has simultaneously affirmed LBBW's Viability Rating (VR) at 'bbb', its Support Rating at '1', Support Rating Floor (SRF) at 'A+' and its guaranteed obligations at 'AAA'.

The Support Rating reflects Fitch's view of an extremely high likelihood of support for LBBW from its owners, in particular the State of Baden-Wuerttemberg (BW), which directly and indirectly holds a 40.534% stake, based on the strong relationship between it and the bank. LBBW's Long-term IDR is at its SRF and therefore sensitive to any change in Fitch's view regarding the ability or propensity of LBBW's owners to support the bank.

LBBW's VR is supported by improving capitalisation, including plans to convert certain silent partici- pations into Basel III-compliant Tier 1 instruments as well as a continuing reduction in risk-weighted assets and the ring-fencing of troubled assets. LBBW's well-entrenched regional franchise in the SME segment of its home and neighbouring regions forms the base for the bank's sharp- ened strategy, which focuses on client-driven business and winding down non-core business activities built up in the years leading up to the crisis. Combined with the requirements from the restructuring plan agreed with the European Commission (EC) following state aid, Fitch expects its sharpened strategy to significantly lower LBBW's risk profile and make the bank a more stable credit. Any slippage in achieving this would be negative for the VR. In Fitch's opinion, the bank's exposure to peripheral European sovereign debt, which equalled 86% of Fitch core capital at end-H112, is one of the major sources of credit risk. Concentrated exposures to more volatile industries and some companies within those industries are high and expose the bank to event risk. To improve its capital buffers, LBBW has made good progress in the negotiations with its owners to convert their silent partners' contributions into Basel III Tier1 capital.

While the bank is somewhat reliant on wholesale funding, the investor base and funding sources are well-diversified. With the balance sheet shrinking in size, refinancing volumes have declined sharply in recent years. Additionally, LBBW's close links to associated savings banks in BW have proved a reliable source of funding. LBBW's profit for H112 was down 50% yoy. The deterioration in operating financial performance was driven by charges relating to the run-down of the non-core credit investment portfolio and valuation adjustments on its core bond portfolio and own debt.