Moody’s cut Kreissparkasse Köln from Aa2 to Aa3 yesterday (Monday), citing factors including the prospects of deteriorating asset quality and low growth.

It also downgraded the issuer’s standalone bank financial strength rating (BFSR) from C to C-, equivalent to a standalone credit assessment of baa1. The downgrade of the senior debt rating reflects the lower BFSR and an unchanged four notch uplift from the standalone credit assessment.

Moody’s said that the downgrade of the BFSR reflects a combination of external and bank-specific factors, including earnings pressure amid a low interest rate environment and fierce competition in German SME and retail banking, and the prospect of rising risk charges on the bank’s corporate loan book as the credit cycle in Germany has turned.

Kreissparkasse Köln has a Tier 1 ratio of 9.9% as of June 2012, which, in combination with available reserves, is a satisfactory capitalisation level but still only a modest buffer to absorb potential losses under Moody’s adverse scenario, said the rating agency, adding that the issuer’s earnings power is more in line with the C- BFSR category and below the average of the German savings banks sector.

Mortgage Pfandbriefe issued by Kreissparkasse Köln are rated Aaa by Moody’s, with a Timely Payment Indicator (TPI) of “high”. This points to a TPI leeway of eight notches.