At least nine German covered bond issuers were downgraded by Moody’s today (Wednesday) as part of rating actions on seven German banking groups plus UniCredit Bank. Eurohypo was hardest hit among the issuers affected, suffering a two notch cut.

Asset quality risks and limited loss absorption capacity were the main drivers, according to Moody’s, although it said that several mitigating factors led to downgrades of a smaller magnitude than the maximum guidance it had communicated in February.

The covered bond issuers cut by Moody’s were: Bremer Landesbank Kreditananstalt Oldenburg, DekaBank Deutsche Girozentrale; Deutsche Hypothekenbank; DZ Bank; Eurohypo; Helaba; LBBW; NordLB, and UniCredit Bank. It confirmed at A1 the rating of WGZ Bank.

Having been cut by one notch, DekaBank and DZ Bank are now rated A1; LBBW, Bremer Landesbank, NordLB, and UniCredit A3, Helaba A2, and Deutsche Hypothekenbank Baa2.

Eurohypo was downgraded by two notches, from A3 to Baa2, with Moody’s also lowering the rating of its parent, Commerzbank, by one notch from A2 to A3.

The outlooks on Commerzbank’s ratings and those of its subsidiaries are negative, as is that of UniCredit Bank. The outlooks on all other German banks that Moody’s cut are stable. The rating agency will conclude a review of Deutsche Bank and its subsidiaries together with other global firms with large capital market operations.

The short term ratings of Commerzbank, Eurohypo, LBBW, NordLB, and UniCredit Bank were cut from P-1 to P-2.

“Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss absorption capacity,” said Moody’s.

However, it said that several mitigating factors caused the ratings of many German banks to decline by less than for other European banks and also less than the initial maximum guidance communicated in February, when Moody’s put 114 European banks on review for downgrade.

These are a comparatively benign operating environment in the German home market and modest funding risk of many German banks, with the latter “underpinned by broadly matched maturity profiles, recurring access to intra-sector funds (for the Landesbanks and the central institutions of the German cooperative banking sector), and improved liquidity buffers”.

According to Moody’s the (asset-weighted) average deposit rating of German banks of A2 falls in the mid-range for western European banking systems, and the average standalone credit assessment of baa3 in the mid-to-lower range compared with European peers.

“Moody’s has not changed its assumptions about the likelihood of support from external sources, such as parent owners, broader sector groups, and governments,” it said. “Reflecting these support assumptions, many German banks’ debt and deposit ratings continue to be positioned several notches above their standalone credit assessments.”