Ratings of 12 German public sector banks are on review for downgrade by Moody’s after the rating agency on Friday said that it was initiating or continuing reviews based on weakening systemic support for the country’s Landesbanks and expects to cut long term ratings by one or two notches.

Bayerische Landesbank was already on review for downgrade and the senior debt ratings of 10 more public sector banks were put on review, while WestLB’s senior rating is on review direction uncertain.

Moody’s said that its actions reflect:

• Its concerns that the relatively high systemic support assumptions factored into the long term ratings of Germany’s public sector banks may be challenged in the context of weakening political will to support bank bail-outs; and
• To a less extent, Moody’s observation that some of Germany’s savings banks have been reluctant to support their larger Landesbanks, which in turn exerts pressure on current co-operative support assumptions.

“The relatively high systemic support assumptions factored into the long term debt ratings of Germany’s public sector banks are increasingly challenged by the weakening political will to support bank bail-outs,” said Katharina Barten, vice president and senior credit officer at Moody’s.

The rating agency said that the Landesbanks’ long term debt ratings currently enjoy an average of six notches of ratings uplift from their standalone financial strength ratings thanks to systemic, co-operative and regional government support.

“The rating agency expects that in most cases the long term debt ratings could be lowered by one or two notches; three-notch downgrades are less likely,” said Moody’s.

The rating agency said that it is concerned that the continued difficulties of several Landesbanks in obtaining approval from the European Commission (EC) for state aid raises questions about the likelihood of the viability of future support. It said that this was of particular concern for four banks that have already needed support during the crisis — BayernLB (A1), HSH Nordbank (A3), Landesbank Baden-Württemberg (Aa2), and WestLB (A3) — and that it would likely revise its assumptions for these banks in a way that would result in downgrades of more than one notch, although it said that “downgrades by more than two notches (if any) will be the exception”.

Moody’s said that smaller banks – Bremer Landesbank Kreditanstalt Oldenburg (Aa2), Deutsche Hypothekenbank (A1), Landesbank Saar (A1), and Norddeutsche Landesbank Luxembourg (Aa3) – are less systemically important and were therefore under greater ratings pressure, but that larger banks that have not required state support – DekaBank Deutsche Girozentrale (Aa2), Landesbank Berlin (A1), Landesbank Hessen-Thüringen (Aa2), and Norddeutsche Landesbank (Aa2) – are facing less rating pressure.