TEXT-S&P affirms unsolicited 'BBB+/A-2' ratings on NORD/LB

(The following statement was released by the rating agency)

Oct 04 - Overview

-- After a review, we are affirming our unsolicited 'BBB+/A-2' ratings on Norddeutsche Landesbank Girozentrale (NORD/LB) and its subsidiary Norddeutsche Landesbank Luxembourg S.A. (NORD/LB Lux).

-- At the same time, we are affirming our 'BBB+/A-2' solicited ratings on NORD/LB Lux's subsidiary, NORD/LB COVERED FINANCE BANK S.A.

-- The stable outlooks on all three entities reflect our view that NORD/LB's financial profile, its ties to its state owners, and Germany's supportiveness are unlikely to change over the next one to two years.

Rating Action

On Oct. 4, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' long-term and 'A-2' short-term unsolicited counterparty credit ratings on Germany-based Norddeutsche Landesbank Girozentrale (NORD/LB). The outlook remains stable.

We have also affirmed our 'BBB+/A-2' unsolicited ratings on NORD/LB's core operating subsidiary Norddeutsche Landesbank Luxembourg S.A. (NORD/LB Lux) and our solicited 'BBB+/A-2' ratings on NORD/LB Lux's subsidiary, NORD/LB COVERED FINANCE BANK S.A. (NORD/LB CFB).


The unsolicited ratings on NORD/LB continue to reflect the anchor of 'a-', which represents our view of the economic environment of the countries in which the bank operates and banking industry risk in Germany. The stand-alone credit profile (SACP) for NORD/LB is 'bbb-'.

We consider NORD/LB's business position to be "moderate", as defined in our criteria. The bank's capitalization has improved following recent capital initiatives. However, we see a considerable need for NORD/LB to adjust its business model to enable it to cope with the new regulatory rules on a sustained basis, without the owners' support.

NORD/LB's capital base increased by EUR1.2 billion as of Aug. 31, 2012, largely due to the conversion of silent participations. To reflect this improvement, we have revised our assessment of the bank's capital and earnings position to "adequate" from "moderate". The capital increase drives an improvement of our risk-adjusted capital (RAC) ratio above 7% for the next 18-24 months. We assess the bank's internal capital-generation capacity as deficient, and we think that the bank will remain reliant on its state shareholders to support its capital ratios in times of stress.

We have lowered our assessment of NORD/LB's risk position to "weak" from "moderate". We consider that risks stemming from the bank's concentrations in cyclical corporate, commercial real estate and ship financing, and its substantial securities portfolio, have increased in the challenging operating environment. We see increased tail risks for the loan book and higher market risk for securities in the banking book, neither of which are fully reflected in our capital framework. As an almost exclusively wholesale bank with a strong focus on cyclical industries, NORD/LB is particularly vulnerable to stress in credit and funding markets. Our opinion of NORD/LB's risk position is also to be seen in the context of our very favorable economic risk assessment for Germany and our comparison of NORD/LB with typically more diversified banks in Germany and in countries with similar economic risk.

We consider NORD/LB's funding to be "average" and its liquidity "adequate", which we base on implicit state support for the bank, which materially reduces its sensitivity to market confidence. NORD/LB is almost exclusively a wholesale-funded bank, which, in our view, makes it structurally reliant on ongoing implicit government support. The bank's ownership structure and our expectation that it would receive support mitigate our view of its innately below-average wholesale-funding model and sensitivity to an erosion of confidence in times of stress.

The German states of Lower Saxony (not rated) and Saxony-Anhalt (AA+/Stable/A-1+) together own 65% of NORD/LB. The state owners have confirmed their commitment through temporary guarantees provided for NORD/LB's debt issues during the most recent crisis, conversion of hybrid instruments into core capital as defined by Basel III, and an injection of new capital.

Due to our view of a "moderately high" likelihood of extraordinary support for NORD/LB from Germany in the event of financial distress, we factor in two notches of uplift to the bank's SACP. We consider NORD/LB to have "high" strategic importance to Germany.

The unsolicited ratings on NORD/LB Lux and the solicited ratings on NORD/LB CFB reflect our view of these entities' "core" status within, and high level of integration with, NORD/LB. The ratings on NORD/LB and NORD/LB Lux serve as a component of our solicited counterparty credit ratings and issue ratings on NORD/LB CFB.


The stable outlook on NORD/LB reflects our view that the bank's financial profile, its ties to its state owners, and Germany's supportiveness are unlikely to change over the next one to two years.

We could take negative rating actions if the bank's financial profile were to weaken substantially due to credit losses or securities valuations.

We consider a positive rating action unlikely within the next 24 months. This reflects our view that NORD/LB would need to demonstrate a material improvement in asset quality and reduce concentrations to be able to withstand stress periods on its own and reduce its dependence on shareholder support.

The stable outlooks on NORD/LB Lux and NORD/LB Lux's subsidiary NORD/LB CFB mirror the outlook on NORD/LB, due to their "core" strategic status within the group. Ratings Score Snapshot To From Issuer Credit Rating BBB+/Stable/A-2 BBB+/Stable/A-2 SACP bbb- bbb- Anchor a- a- Business Position Moderate (-1) Moderate (-1) Capital and Earnings Adequate (0) Moderate (-1) Risk Position Weak (-2) Moderate (-1) Funding and Liquidity Average Average and Adequate (0) and Adequate (0) Support +2 +2 GRE Support 0 0 Group Support 0 0 Sovereign Support +2 +2 Additional Factors 0 0 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

-- Group Rating Methodology And Assumptions, Nov. 9, 2011 -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 -- Bank Capital Methodology And Assumptions, Dec. 6, 2010 Ratings List Ratings Affirmed Norddeutsche Landesbank Girozentrale (Unsolicited Ratings) Norddeutsche Landesbank Luxembourg S.A. (Unsolicited Ratings) NORD/LB COVERED FINANCE BANK S.A. Counterparty Credit Rating BBB+/Stable/A-2 ((Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))