Rating action

Scope Ratings GmbH has today affirmed the AAA long-term issuer and senior unsecured ratings of Landeskreditbank Baden-Württemberg – Förderbank – (L-Bank) in both local and foreign currency. The agency has also affirmed the S-1+ short-term issuer rating in both local and foreign currency. All Outlooks are Stable.

The AAA rating of L-Bank is equalised with the AAA/Stable rating of the German Federal State of Baden-Württemberg (Baden-Württemberg), given the state’s explicit, unconditional, unlimited, statutory, direct, and irrevocable guarantee for L-Bank’s existing and future obligations with respect to money borrowed, bonds issued, and derivative transactions entered into by the bank.

This is further underpinned by i) a mature and very supportive legal set-up, which makes changes to L-Bank’s business model or guarantee structure unlikely; ii) the bank’s high strategic importance to the Federal State as a key government-related entity implementing economic and social policies with a countercyclical role, supported by the stability of its resources; iii) high capitalisation and asset quality, and iv) a strong liquidity and funding profile with strong capital market access.

Download the updated Rating Report here.

Key rating drivers

Equalisation factor: L-Bank’s AAA rating reflects the extensive guarantee framework for its liabilities provided by the German Federal State of Baden-Württemberg, which is the key factor for equalising L-Bank’s ratings with the ratings of the federal state. The explicit, unconditional, unlimited, statutory, direct and irrevocable guarantee can only be amended, revoked or restricted through a parliamentary act of Baden-Württemberg. Scope deems any such development unlikely.

Baden-Württemberg also undertakes L-Bank’s institutional liability (Anstaltslast) and guarantee obligation (Gewährträgerhaftung). This three-fold guarantee mechanism significantly enhances the likelihood of government support for L-Bank if ever needed. In line with other German state development banks, L-Bank is exempt from insolvency procedures due to its public law charter. As such, L-Bank became exempt from ECB supervision as a CRR credit institution in 2019 and does not need to establish a bail-in able liability structure.

High strategic importance: The rating is further underpinned by L-Bank’s high strategic importance to the Federal State of Baden-Württemberg. As the federal state’s development agency, with total assets of EUR 95bn, L-Bank plays an essential role in meeting key economic and political objectives on a regional level.

The bank’s activities have a ‘high’ strategic importance for its public sponsor. It fulfils a central role in supporting regional economic and social objectives by financing economic development, housing developments and infrastructure projects, and providing financial aid. L-Bank’s strategic relevance and adaptability have been highlighted in recent years. During the Covid-19 pandemic, the bank paid out emergency funds on behalf of the central and state governments. In response to the energy and cost-of-living shock in 2022, the bank established programmes to support municipalities and businesses, and to further support investments in renewables to increase energy resilience. With targeted adjustments to existing products, the bank is actively supporting the regional green and digital transition.

L-Bank’s activities are split into four promotional pillars: i) development loans to support the regional economy and promote affordable housing, home ownership, and municipal infrastructure; ii) equity participations; iii) the development of Baden-Württemberg as an investment location through the bank’s technology parks; and iv) the provision of financial assistance on behalf of Baden-Württemberg. Across these pillars, L-Bank is placing an increasing focus on fostering the green and digital transition of the regional economy and society, in line with the federal state’s agenda. Potential risks to L-Bank’s position as the federal state’s sole development bank and its provision of competition-neutral business activities, which are underpinned by a mature and supportive legal framework, are deemed remote.

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

L-Bank’s Common Equity Tier 1 ratio of 21.2% is sound. Scope expects the Federal State of Baden-Württemberg to continue allowing the bank to retain earnings to support further growth and to provide a sufficient buffer for regulatory changes. At least half of annual profits must be retained according to the L-Bank Act. Scope views L-Bank’s regulatory capital management as prudent and the bank has consistently reported significant buffers for all risk types.

L-Bank’s asset quality is high, underpinned by the bank’s double-recourse loan protection for its policy mandated lending business. Typically, L-Bank 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. Only around 1% of the bank’s exposures had a non-investment grade internal rating. L-Bank’s share of non-performing exposures over total exposures was 0.1% in 2023, in line with its long-term average.

The guarantee structure allows the bank to tap capital markets at favourable rates and provides resilient access to capital markets when needed. The bank demonstrates a favourable liquidity and funding profile, with an excellent track record of capital market access. This is further supported by preferential treatment of the bank’s bonds under Solvency II, along with their recognition as Level 1 high-quality liquid assets for liquidity coverage ratio requirements and zero risk-weighting under Basel rules.

Credit challenges: limited loan portfolio diversification and modest though stable profitability, both driven by L-Bank’s public policy mandate.

L-Bank’s loan portfolio is characterised by regional and sectoral concentration. More than half of its primarily domestic exposures are in the Federal State of Baden-Württemberg. The regional concentration makes the bank’s asset quality susceptible to developments in the federal state. At the same time, prudent underwriting standards lead to very robust asset quality, which Scope expects to remain robust despite the protracted economic stagnation in Germany and Baden-Württemberg. This is also driven by the Federal State’s relative economic resilience and high wealth levels.

Finally, L-Bank’s profitability is modest, but stable, reflecting its non-profit maximising character and public policy mandate according to the L-Bank Act. Operating performance is largely dependent on net interest income, which continues to benefit from relatively high interest rates prevailing in the euro area. In general, L-Bank’s moderate profitability offers only limited buffers in case asset quality were to deteriorate significantly, which Scope deems unlikely.

L-Bank’s cost-to-income ratio stood at 61.3% in 2023, above its long-term average. Scope expects cost pressures to persist given ongoing investments in IT infrastructure, digitalisation and to meet regulatory requirements. To reduce its cost base, the bank’s management had committed to an efficiency programme that aims to cut around EUR 21m in annual expenditure by 2025.

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 Baden-Württemberg;
    
2. Changes to L-Bank’s legal framework or guarantee structure, notably weakening government support.

Qualitative Scorecard QS1 and Equalisation Factor

Scope applies a top-down approach (QS1) in assessing the creditworthiness of L-Bank, which takes the public sponsor’s rating (Federal State of Baden-Württemberg: AAA/Stable) as the starting point. Scope sees ‘strong’ integration between L-Bank and the Federal State of Baden-Württemberg, reflecting the bank’s: i) sole public ownership by the Federal State; ii) public legal status as an ‘Anstalt des öffentlichen Rechts’ (public law institution); iii) fulfilment of operating activities exclusively on behalf of the government, with the purpose of implementing economic and social policies; and iv) its high financial interdependence with the Federal State due to significant direct funding provided by L-Bank to municipalities.

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

Scope then applies a rating equalisation factor given the explicit, unconditional, unlimited, statutory, direct and irrevocable guarantee of the Federal State of Baden-Württemberg for L-Bank’s obligations with respect to money borrowed, bonds issued, and derivative transactions entered into by the bank.

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

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

The results were discussed and confirmed by a rating committee.

Environmental, Social and Governance (ESG) factors

ESG factors material to L-Bank’s credit quality are captured by Scope’s rating approach through several analytical areas.

Governance and social considerations are material to L-Bank’s credit rating and were included in Scope’s assessment of: i) L-Bank’s level of integration with the public sponsor, highlighting the supportive legal framework that requires the bank to comply with its statutes and fulfil its role as a competition-neutral public-law institution, including the provision of key services to support regional economic and social objectives, including the financing of social housing; and ii) L-Bank’s standalone fundamentals in the supplementary analysis, highlighting its conservative risk profile and management.

Environmental considerations include the bank’s role in fostering and enabling the public sponsor’s climate protection agenda. The Federal State of Baden-Württemberg’s Climate Protection and Climate Change Adaptation Act (Climate Act) foresees a reduction in greenhouse gas emissions of 65% versus 1990 levels, and net neutrality by 2040, five years earlier than the German central government. In 2023, L-Bank updated its sustainability strategy incorporating the Climate Act which expanded the bank’s promotional mandate to include climate change adaptation programmes and measures. The multi-year project to establish a bank-wide ESG database initiated in 2022 has progressed as planned in 2023 on the conceptualisation of ESG data requirements.

As regards its development activity, L-Bank reports on its impact in relation to the UN’s Sustainable Development Goals. The bank’s activities positively impact 13 out of the 17 goals, with a particular focus on “decent work and economic growth”, “industry, innovation and infrastructure” and “sustainable cities and communities”. Further, as part of the federal state’s Climate Act, any new, renewed or altered development programme must undergo a compatibility check with the Climate Act. Further initiatives to report on impact are progressing.

The bank is expanding its development loan products to support its public sponsor’s sustainability agenda, for example via adding an ‘Energiefinanzierung’ loan product targeted at funding sustainable investments. Further, the bank is broadening its ‘sustainability bonus’, i.e. interest-rate deductions to businesses with CO2 reporting and/or emissions reduction plans. In 2024, tourism financing can benefit from the bonus, and a third stage was introduced, with businesses reporting on their emission reductions benefitting from further interest rate deductions.

Finally, the bank produces non-financial reports, including on its efforts to be climate-neutral by 2030 for its own operations, and by 2040 for its overall banking activities, taking into account the impact of its lending, investing and refinancing operations. The bank plans to voluntarily report on certain CSRD disclosures from 2025, covering the year 2024.
 
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 L-Bank’s fundamentals.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Government Related Entities Rating Methodology, 10 December 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or 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 22 January 2020. The Credit Ratings/Outlooks were last updated on 1 December 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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