A debt moratorium imposed on Heta Asset Resolution will put most pressure on German covered bond issuers, Fitch said today (Thursday), although it said this should be manageable, after having on Tuesday warned that Düsseldorfer Hypothekenbank urgently requires external support.

According to the rating agency, German banks have larger exposures than Austrian banks to Heta, with German covered bond issuers facing the greatest pressure from this.

“These banks are largely exposed through their legacy public-sector portfolios because state-guaranteed bonds are eligible collateral for public sector covered bond pools,” said Fitch.

However, it noted that most of the affected banks have typically low standalone Viability Ratings, reflecting vulnerable asset quality and concentration risk, or are members of larger and stronger banking groups, and that therefore losses are unlikely to have much effect on German bank ratings. Assuming a haircut of 50% – which it said is suggested for senior bondholders in a review by the Austrian regulator – and that German banks hold around 40% of Heta’s liabilities affected by the moratorium, Fitch does not expect Heta-related losses to exceed 15bp of the German banking sector’s Common Equity Tier 1 ratio – although it could cost up to 10% of the sector’s 2015 net profit.

Fitch noted that Deutsche Pfandbriefbank will provision Eu120m, or 30%, of its Eu395m Heta exposure in its 2014 accounts, cutting its pre-tax profit by almost 70%, while Dexia Kommunalbank Deutschland will take an unspecified charge in 1Q15 on its Eu395m of Heta bonds, likely exceeding recurrently weak profits, said the rating agency.

“Large exposures to Heta, other Landeshypothekenbanken and the Austrian regional states are likely to be held on the balance sheets of other Pfandbriefbanken,” it added.

Bayerische Landesbank (BayernLB) is the most affected issuer among Landesbanks, with Eu2.35bn of unsecured (unguaranteed) loans at end-2014, according to Fitch, which nevertheless said that a published CET1 ratio of 12.8% at end-3Q14 provides an adequate buffer.

Heta exposure has been cited by market participants as a likely reason for Fitch on Tuesday putting the BBB- Issuer Default Rating (IDR) of Düsseldorfer Hypothekenbank (DHB) on Rating Watch Negative (RWN) and cutting its Viability Rating from ccc to c. Heta was not named in Fitch’s press release on the German bank but a covered bond analyst, for example, noted that it reported Eu756m of exposure to “Austria – other debtors” out of total public sector collateral of Eu3.361bn cover pool as at the end of 2014.

“In light of DHB’s highly concentrated single exposures in its legacy public-sector portfolio, Fitch believes that these events make the bank more vulnerable to adverse credit events than previously expected and could overstretch its tight financial flexibility,” said the rating agency. “In addition, we have placed DHB’s IDRs and other support-driven ratings on RWN to reflect the likelihood of downgrade unless there are clear signs of external support for the bank in the near future, given that the need for such support has, in Fitch’s view, become urgent.

“DHB’s IDRs reflect the agency’s opinion that support will be available ultimately from the German government, most likely via the voluntary deposit protection fund (DPF) of the country’s private sector banks.”

It warned it could downgrade the bank’s IDR to C if no support is forthcoming. A sale of DHB by US private equity fund Lone Star to a group of financial investors was agreed in August 2014 and is still awaiting regulatory approval, Fitch noted, adding that such a change in ownership would not address its concerns and that it expects the sale, “at best”, to be delayed.