Rating action

Scope Ratings GmbH (Scope) has today affirmed LfA Förderbank Bayern’s long-term issuer and senior unsecured debt ratings at AAA in both local and foreign currency with Stable Outlooks. Scope has also affirmed its short-term issuer rating of S-1+ in both local and foreign currency with a Stable Outlook.

The AAA rating of LfA Förderbank Bayern (LfA) is equalised with the AAA/Stable rating of the German federal state of the Free State of Bavaria, given the federal state’s explicit, unconditional, unlimited, statutory, direct and irrevocable guarantee for LfA’s obligations.

Scope further acknowledges: i) a mature and very supportive legal set-up, which makes changes to LfA’s business model or guarantee structure unlikely; ii) the bank’s high strategic importance to the federal state, where it serves as a crucial government-related entity (GRE) with a counter-cyclical function, reinforced by the bank’s resource stability; iii) high levels of capitalisation and asset quality; and iv) a robust liquidity and funding profile that ensures strong access to capital markets. Challenges relate to LfA’s modest but stable profitability and limited loan portfolio diversification, which are both driven by the bank’s public mandate.

Download the updated Rating Report here.

Key rating drivers

Equalisation factor: LfA's AAA rating reflects the robust guarantee framework provided by Bavaria (AAA/Stable), which serves as the primary factor equalising LfA's ratings with the ratings of the federal state. This guarantee is explicit, unconditional, unlimited, statutory, direct, and irrevocable, with alterations, revocation, or restrictions requiring a parliamentary act of Bavaria, an event considered highly unlikely by Scope.

Bavaria also undertakes LfA's institutional liability (Anstaltslast) and guarantee obligation (Gewährträgerhaftung). This three-fold guarantee mechanism significantly enhances the likelihood of government support for LfA if ever needed. In line with other German state development banks, LfA is exempt from insolvency procedures due to its public law charter.

High strategic importance: The bank's activities carry a high level of strategic importance for its public sponsor. LfA plays a pivotal role in advancing critical regional economic objectives, primarily by providing financing to medium-sized corporations, freelancers, start-up enterprises, and municipalities in Bavaria, further enhancing Bavaria's appeal as a business location. LfA's strategic significance and its capacity to adapt were demonstrated during the recent Covid-19 and energy crises, as it adjusted its product range to provide support, underpinned by a dedicated guarantee from the federal state.

In 2023, the bank's overall banking activities amounted to EUR 2.48bn, including EUR 2.30bn in loans and EUR 188m in risk-participation products. This marked a decline from levels seen in 2020-22 ranging from EUR 2.9bn to EUR 4.3bn. Elevated levels of activity in 2020-21 were driven by the Covid-19 pandemic, with related lending and risk mitigation products benefiting from a counter-guarantee provided by Bavaria. The drop in business volume in 2023 reflects the full phase out of pandemic-related initiatives, high prevailing interest rates, which reduced the relative attractiveness of the bank’s subsidised loans, as well as adverse macroeconomic conditions. These resulted in clients postponing investment decisions until economic activity picks up again. In 2024, Scope expects business volume to remain subdued at around EUR 2bn. In the first nine months of the year, loans approved amounted to EUR 1.2bn. This is down from EUR 1.6bn for the same period in 2023.

To improve the attractiveness of its products, the bank continuously innovates and adjusts existing programmes. In 2024, LfA simplified and expanded its largest loan programme, the ‘Gründungs- und Wachstumsfinanzierung’ targeted at SMEs, to include financing for operating costs. Additionally, its loan programme for innovation and digitalisation, the ‘Innovationskredit 4.0’, was made available to small mid-cap corporates with annual turnover of up to EUR 500m. Further, LfA offers products to support companies’ energy transition, like ‘Energiekredit Regenerativ’ and ‘Energiekredit’, which remain highly relevant following the energy inflation shock of 2022.

Robust capitalisation and asset quality, excellent funding and liquidity profiles.

LfA's capitalisation is comfortable and exceeds regulatory requirements. Its CET1 capital ratio stood at 19.6% as of YE 2023, in line with its level in 2022. Scope expects capital buffers to gradually expand as the bank continues to retain profits.

The bank's asset quality also demonstrated resilience despite various shocks. This resilience is attributed to the protective cushion provided by double-recourse loan protection within its on-lending portfolio. Typically, LfA has a direct claim against the intermediary bank to whom it provided the initial loan (the ‘house-bank principle’) as well as the ultimate borrower.

LfA's activities mainly focus on the financial sector, accounting for 85% of its total exposure. The bank also engages in self-supported activities, including direct lending to Bavarian municipalities totalling around EUR 1.6bn at YE 2023. Additionally, LfA offers guarantee and risk mitigation products for businesses, especially startups without sufficient collateral. As of YE 2023, the volume of guarantee and risk participation products reached EUR 1.65bn, well above its 2019 level due to the Covid-19 response mandated by Bavaria. Counter-guarantees provided by Bavaria mitigate risk exposure, enhancing overall risk management.

LfA's portfolio exhibits a low share of non-performing exposures of EUR 145.1m at YE 2023, or approximately 0.72% of the bank's interbank assets and customer loans. The bank's non-performing loans ratio, as defined by BaFin, was recorded at 0.66% at YE 2023. Risks stemming from non-performing exposures are further mitigated by specific provisions and EUR 78.7m of counter-guarantees provided by Bavaria, leading to a total coverage ratio of 72.4%.

Finally, LfA benefits from strong access to financial markets and favourable regulatory treatment of its debt obligations, supported by the explicit liability backing from the Free State of Bavaria. The bank primarily funds its operations through medium to long-term debt securities with maturities of three to ten years.

LfA's well-established access to capital markets, along with its ability to tap central bank facilities contribute to maintaining ample liquidity. At YE 2023, LfA's liquidity coverage ratio stood at 915%, significantly up from an average 334% in prior years, due to a significant decline in net outflows. This underpins a robust liquidity position, ensuring that the bank is well-prepared to meet its funding requirements and withstand potential liquidity stress scenarios.

Credit challenges: limited loan portfolio diversification and moderate, if stable, profitability.

Given its specific public mandate, LfA's exposure is concentrated in the financial sector. However, the underlying loan portfolio, representing the end-customers of funds on-lent to LfA's partner banks, displays diversification both across sectors and geographic regions within Bavaria.

This concentration, whether sectoral or geographical, is influenced by the nature of the bank's mandate. Potential long-term risks include transition risks, particularly in the automotive sector, as Bavaria's economy has a strong tie to the export-oriented industry. Nevertheless, Bavaria's economy demonstrated relative resilience since 2020.

Finally, LfA's profitability is modest, a direct result of its public mandate. Over the past five years, the return on equity averaged around 1.3%, closely in line with the national peer average of regional promotional banks. In prior years, net profits were either retained or allocated to the Free State of Bavaria. The state subsequently channelled these
proceeds back to the bank.

Scope anticipates continued cost pressures, particularly on staff and administrative expenses as well as targeted investments into IT infrastructure. However, ongoing digitisation efforts, including automatic approvals within specific programmes, are expected to lead to some longer-term cost savings.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. Downgrade of the Free State of Bavaria;
    
2. Changes in LfA’s legal framework or guarantee structure, notably weakening government support for the bank.

Qualitative Scorecard QS1 and Equalisation Factor

Scope employs a top-down approach (QS1) to evaluate LfA's creditworthiness, commencing with the public sponsor's rating (Free State of Bavaria: AAA/Stable).

This approach acknowledges a 'strong' level of integration between LfA and the Free State of Bavaria, which is underscored by the following factors: i) LfA's sole public ownership by the state; ii) its public legal status as an 'Anstalt des öffentlichen Rechts' (public law institution); iii) its exclusive mandate to carry out activities on behalf of the government, primarily aimed at implementing economic and social policies; and iv) its high financial interdependence with the state due to LfA's significant direct funding of Bavaria's municipalities.

Scope then applies a rating equalisation factor given the explicit, unconditional, unlimited, statutory, direct and irrevocable guarantee of Bavaria for LfA’s obligations.

The approach also includes a supplementary analysis of the entity’s business and financial risk profiles, which has no impact on the final credit ratings.

The assessments under QS1 and the rating equalisation factor result in an indicative rating of AAA.

For further details, please see Appendix I of the rating report.

The results were discussed and confirmed by a rating committee.

Environmental, Social and Governance (ESG) factors

Scope incorporates ESG factors into its credit rating methodology when assessing LfA's creditworthiness.

The evaluation considers governance and social aspects, reflecting the extent of LfA's alignment with its public sponsor. This assessment underlines the supportive legal framework mandating compliance with the bank's statutes and its role as a competition-neutral public-law institution, serving regional economic objectives. Moreover, Scope analyses LfA's stand-alone fundamentals, emphasising its robust governance and conservative risk management practices.

While Scope has not directly attributed these factors to the current rating action, Scope has considered the bank's long-term environmental considerations within the context of assessing credit risks. This perspective includes a comprehensive review of the bank's sustainability initiatives, such as its sustainability reports and its ambitious target to achieve climate neutrality by 2028. Additionally, LfA offers dedicated loan programmes aimed at promoting sustainable investments. Finally, for its securities portfolio, LfA adheres to minimum ESG ratings and maintains a minimal share of housing stock in a covered bond's cover pool, designating them as sustainable investments.
 
Rating Committee
The main points discussed during the rating committee were: i) the level of integration with the public sponsor; ii) the liability support mechanism; and iii) a supplementary analysis of LfA’s fundamentals.

Methodology
The methodology used for these Credit Ratings and Outlooks, (Government Related Entities Rating Methodology, 4 September 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
 
Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Associate Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 10 December 2021. The Credit Ratings/Outlooks were last updated on 10 November 2023.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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