Münchener Hypothekenbank was downgraded from A1 to A2 by Moody’s on Friday, with the rating agency citing persistently weak profitability and internal capital generation, and asset quality pressures.

The outlook was changed from negative to stable.

Mortgage covered bonds issued by Münchener Hypothekenbank are rated Aaa by Moody’s. A combination of the issuer’s new A2 rating and a Timely Payment Indicator of “probable-high” for the programme means that under Moody’s methodology the covered bonds have a TPI leeway of one notch.

Münchener Hypothekenbank’s public sector Pfandbriefe are also rated Aaa by Moody’s but have a TPI of “high” and hence a TPI leeway of two notches.

The one notch downgrade of the issuer rating followed the downgrade of the bank financial strength rating (BFSR).

Moody’s downgraded the BFSR because of the bank’s “persistently weak profitability and internal capital generation, which leaves room for expected loss, and the bank’s only adequate capitalisation in the context of its risk profile and its low quality of capital, which represents a challenge with regards to the upcoming Basel III requirements”.

The rating agency also said: “Furthermore, the bank remains exposed to ongoing asset-quality pressures at the current level from non-core portfolios such as international commercial real estate, as well as selected exposures within the bank’s financial institutions and sovereign portfolio.”

Moody’s said the issuer rating incorporated Moody’s view that Münchener Hypothekenbank would continue to benefit from existing support available to members of the group of co-operative banks in Germany as well as a high probability of systemic support, indirectly from the German co-operative sector. The issuer now benefits from a five notch uplift, from four previously.

A further downgrade of the BFSR could push down the issuer rating. Moody’s said that it would consider a further downgrade of the issuer’s BFSR if Münchener Hypothekenbank experienced a further deterioration in non-performing loans or suffered credit deterioration in its securities portfolio.