Fitch Takes Rating Action on HSH Nordbank on Privatisation Announcement.
A full list of rating actions is at the end of this rating action commentary.
The rating action follows the announcement by HSH Nordbank's owners, the state of Schleswig Holstein and the City of Hamburg that they together with the Savings Bank Association of Schleswig-Holstein have signed an agreement with a consortium consisting of Cerberus Capital Management, L.P; J.C. Flower & Co., Golden Tree Asset Management LP, BAWAG Group and Centaurus Capital LP. to sell their entire stake in HSH to the consortium.
The transaction is subject to regulatory and parliamentary approval and to receiving a positive viability assessment from the European Commission (EC). We expect that HSH's IDR following the sale will be driven by the bank's VR and no longer by institutional support. The upgrade of the VR reflects progress made by HSH in improving its risk profile during 2017 and that the planned sale will allow the bank to continue operating as a commercial bank.
The RWP on the VR is based on our expectation that on closing of the sale the VR could be upgraded further if the bank's future strategy under new ownership becomes clearer. The agreement reached with the new owners includes plans to transfer a significant amount of bad assets from HSH's balance sheet which could also affect the VR positively.
We expect to resolve the rating watches on the IDRs and VR on closing of the transaction, which the bank expects in 2Q18 at the earliest. If the sale is delayed, we could maintain the rating watches beyond the typical six-month horizon.
KEY RATING DRIVERS
IDRS, SENIOR DEBT AND SUPPORT RATING
The bank's IDRs, senior debt rating and Support Rating (SR) are driven by support from HSH's current owners comprising the federal states of Schleswig-Holstein (AAA/Stable) and Hamburg (AAA/Stable), the regional savings banks and ultimately the Sparkassen-Finanzgruppe (SFG, A+/Stable), including the savings banks and Landesbanken-shared institutional protection fund.
HSH's Long-Term IDR is five notches below SFG's Long-Term IDR, because Fitch believes that the bank's weaknesses and the conditions set by the EC regarding the final approval of the bank's guarantee in May 2016 result in a lower likelihood of support than at other Landesbanken, which are rated two notches below SFG's Long-Term IDR.
The RWN on HSH's IDRs and on the SR reflects our expectation that following the sale to the consortium the IDRs will likely be downgraded to the level of HSH's VR at the time of the closing of the transaction.
In Fitch's view, institutional support from the new owners after a sale, while possible, cannot be relied upon, primarily because of the lack of a controlling shareholder and the difficulty to assess adequately the individual investors' capacity to provide extraordinary support.
DERIVATIVE COUNTERPARTY RATING (DCR) AND DEPOSIT RATING
HSH's DCR and Deposit Ratings are aligned with the bank's Long- and Short-Term IDRs. In Fitch's opinion, junior debt buffers do not afford any obvious incremental probability of default benefit over and above the support benefit already factored into their support-driven IDRs. The RWN reflects Fitch's view that a downgrade of these ratings is likely if the IDR is downgraded.
HSH's VR reflects the reduction of legacy bad assets and the bank's ability to maintain sound capitalisation and liquidity in 2017. The planned sale means that a wind-down of HSH, which would have been triggered if the bank could not be sold, can be avoided. The RWP reflects our expectation that the VR would be upgraded to reflect a clearer business model and strategy and improved asset quality if the transfer of the bad loans from the bank proceeds before the sale closes.
HSH's gross non-performing exposures were reduced slightly to 11.7% of gross exposures at end-3Q17 but remain a negative driver of the bank's VR. The legacy assets in the non-core unit (EUR14 billion exposure at default at end-3Q17), consisting mainly of non-strategic and poorly performing shipping, real estate and other loans, remain a significant 2.8x of the bank's Fitch Core Capital (FCC). However, the planned disposal of legacy assets, if successfully implemented, will significantly improve HSH's asset quality.
HSH's profitability will likely remain weak in the short term as a result of lower interest- earning assets, additional restructuring costs and further credit impairments. The removal of bad assets is likely to lower credit impairment charges, notwithstanding a large one-off charge booked at end-2017, which will render the bank loss-making. A further improvement in HSH's profitability is contingent on the implementation of strategic and business model decisions after the bank's privatisation.
A decline in risk-weighted assets resulted in an improved phased-in CET 1 ratio of 16.3% at end-3Q17 (pro-forma excluding any regulatory guarantee impact). Including the impact of the transaction the pro-forma CET1 ratio is set to decline to approximately 15%, which is still in line with higher-rated peers' and above the bank's current regulatory requirements. In the short-term capitalisation remains vulnerable to negative credit migration or collateral revaluation mainly in the remaining shipping portfolio, but we expect this to lessen when the bad assets' transfer is completed. Sustainability of its capitalisation is contingent on the new owners' plans on growth and risk appetite.
HSH's funding will change materially after privatisation as the bank leaves the institutional support scheme of Landesbanken and savings banks. We believe that this transition could make it more difficult for the bank to attract funding because HSH relies significantly on wholesale funding, which makes it vulnerable to investor sentiment. These risks could be mitigated by an extended transitional period during which HSH will remain a member of the public sector banks' institutional protection scheme beyond the statutory transition period of two years before it becomes a member of the voluntary deposit protection scheme of Germany's private sector banks.
In addition, the bank plans to raise increasing retail funding outside the savings banks sector, but the share of such funding is still small and the stability of its retail deposit base untested. HSH has reached its funding targets for 2017, driven by strong covered bond issuance and by unsecured and asset-based funding. Its liquidity metrics are well above regulatory requirements.
The rating of HSH's state-guaranteed/grandfathered senior debt, subordinated debt and market-linked securities reflect the credit strength of the guarantor - the federal state of Schleswig Holstein and the City of Hamburg - and our view that they will honour their guarantees after the sale of HSH.
IDRS, SENIOR DEBT AND SUPPORT RATING
HSH's IDRs, senior debt rating and SR are primarily sensitive to the completion of the bank's sale. On completion, we expect to downgrade the IDR to the level of HSH's VR. The RWN on the support-driven ratings reflects our expectation that the bank's VR will likely be below the current IDR at that time.
If the transaction is not completed, the bank will have to cease new business activities and manage the assets with a view of winding down. In this scenario, we expect that the existing owners will have financial and reputational incentives to ensure that the wind-down is managed in a way that senior unsecured creditors do not incur losses. In this case HSH is likely to remain a member of the protection scheme of the Landesbanken, which means that it could continue to receive support from its owners in combination with SFG. This could result in the affirmation of its IDR at 'BBB-' if we conclude that imposing losses on senior creditors during the run-down of assets is prevented by the institutional protection fund and HSH's owners.
DCR AND DEPOSIT RATING
DCR and Deposit Ratings are sensitive to changes in HSH's IDRs. These ratings will likely be downgraded if HSH's IDR is downgraded but could be affirmed if the downgrade of the Long-Term IDR is limited to one notch and if the amount of qualifying junior debt and what we consider to be non-preferred senior debt is sufficient to notch these ratings above the Long-Term IDR.
We expect to upgrade HSH's VR after the successful privatisation of the bank, which is subject to receiving the necessary regulatory approvals, if the bank has demonstrated further progress in strengthening its balance sheet at that time. Maintaining strong capitalisation, healthy liquidity and adequate funding costs would underpin a VR upgrade. We currently expect HSH's VR to remain constrained at or below 'bb+' until profitability has improved sustainably, following the privatisation and subject to the development of its business model.
A disruption of the sale process or a sudden unexpected stress that would significantly undermine investor confidence in the bank and reduce the likelihood of a successful privatisation could trigger a downgrade of its VR.
If the sale does not proceed and HSH is wound down, we would likely withdraw its VR, in line with our approach for other wind-down institutions.
The ratings of HSH's state-guaranteed/grandfathered senior debt, subordinated debt and market-linked securities are sensitive to changes in Fitch's view of the creditworthiness of the guarantors.
The rating actions are as follows:
Long-Term IDR: 'BBB-', placed on RWN
Short-Term IDR: 'F3', placed on RWN
Support Rating: '2', placed on RWN
Derivative Counterparty Rating: 'BBB-(dcr)', placed on RWN
Viability Rating: upgraded to 'bb-' from 'b', placed on RWP
Long-term senior debt, including programme ratings: 'BBB-', placed on RWN
Short-term senior debt: 'F3', placed on RWN
Long-term deposits: 'BBB-', placed on RWN
Short-term deposits: 'F3', placed on RWN
State-guaranteed/grandfathered senior and subordinated debt: affirmed at 'AAA'
State-guaranteed/grandfathered market-linked securities: affirmed at 'AAAemr'
Senior market-linked securities: 'BBB-emr', placed on RWN
Fitch is withdrawing the 'F3' rating of HSH's USD15 billion issuance programme, which has become inactive and is no longer considered by Fitch to be relevant to the agency's coverage.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||May 18, 2018|
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