Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations that may act as a lender of last resort.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit rating’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Free State of Bavaria (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term local- and foreign-currency issuer rating: S-1+/Stable) on 27 January 2025.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

The AAA rating is underpinned by the highly integrated institutional framework under which all German federal states, or Länder, operate, characterised by a very strong revenue equalisation system together with the federal solidarity principle and the primary shock-absorbing role the federal government has demonstrated in the context of the Covid-19 and energy crises which enable the Land to better counteract economic and financial shocks.

Bavaria’s AAA rating further reflects the following individual credit strengths: i) low debt burden and excellent capital market access; ii) ample liquidity and strong budgetary performance, and iii) a wealthy economy constituting almost 19% of German GDP in 2023 and contributing the highest absolute amounts to the German equalisation system.

Bavaria benefits from a very low debt burden. In 2023, debt to operating revenue amounted to 25%, the lowest among all German Länder. Scope expects the debt ratio to remain strong as pandemic related debt is repaid. As for all German Länder, Bavaria’s capital market access is excellent as underlined during the Covid-19 pandemic when Bavaria re-entered the bond market in 2020 for the first time since 2014, issuing EUR 7.2bn mostly at near-zero coupons. In 2022 and 2023, Bavaria did not tap public debt markets to raise new debt, indicating limited financing needs and reflecting volatile public capital markets as the ECB tightened monetary policy.

The state’s position is strengthened by its cash reserves, which are among the highest across the German Länder, stemming from its sound budgetary and financial management. Additionally, access to external liquidity, if required, is available at short notice via credit facilities from major financial institutions. German Länder lend excess liquidity to each other via cash transactions, generating another source of liquidity. Combined with Bavaria’s own sizeable reserves, this makes the risk of a liquidity shortfall negligible.

Credit challenges relate to i) limited revenue flexibility, ii) high pension liabilities that weigh on long-term expenditure flexibility, and iii) sizeable, although largely low-risk, contingent liabilities.

As for all Bundesländer, revenue flexibility is limited as Bavaria mainly receives shared taxes (largely personal income tax, VAT taxes and corporate taxes) and a substantial share of taxes is subject to federal revenue equalisation. Latest tax estimates from October 2024 indicate that revenues will be EUR 900m lower than previously expected for 2025 and EUR 1.5bn lower for 2026. Despite the weak economic outlook at the federal level and lower-than-expected tax revenues, the 2024/2025 budget does not require additional debt financing thanks to Bavaria’s significant reserves.

Expenditure flexibility remains limited with personnel costs representing around 45% of operating revenue in 2023. Sizeable pension liabilities are placing structural pressure on expenditure flexibility. To ease rising pressure from an ageing population (the old-age dependency ratio of 32.7% is lower than the German average of 35.1% in 2023, but increased from 32.3%), Bavaria has created a pension fund which was endowed with EUR 4.01bn by the end of 2023. Until 2030, annual contributions of at least EUR 110m are planned.

Bavaria’s shareholding in BayernLB increased from 75% to 80.17% in 2024 due to a restructuring of the ownership as required by the ECB. An agreement between Bavaria, the Association of Bavarian Savings Banks and BayernLB resulted in a conversion of Bavaria’s ‘silent partner contribution’ in the Bank to the increased shareholding. The restructuring does not impact the share of dividends Bavaria receives. BayernLB’s capital ratio remains strong, and the contingent liability risk remains low.

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

The ratings could be downgraded if: i) the German sovereign rating was downgraded; ii) changes to the institutional framework were to result in a notably weaker individual credit profile; and/or iii) the individual credit profile deteriorated significantly and structurally.

For the latest Rating report, click here.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sub-Sovereigns Rating Methodology, 11 October 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Eiko Sievert, Senior Director

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