German banking group Dexia appears sound bond investment

News - Funds

Tuesday, 05 January 2010 12:45

Investors should however watch for changes in credit rating by S&P

Dexia Kommunalbank Deutschland AG belongs to the Dexia Group, and specialises in public sector financing. Its major funding tools are called Pfandbriefe, which have an AAA rating by S&P. At the end of the first half of 2009, DKD had total assets of EUR 46.1bn and reported a net income of EUR 0.4mn.

In the first half of 2009, Dexia’s Pfandbrief funding activities totalled EUR 2.6bn.

As of the end of September 2009, Dexia Kommunalbank Deutschland AG had EUR 35.3bn of public sector covered bonds outstanding. Given a cover pool of EUR 36.9bn, the nominal overcollateralisation was EUR 1.6bn or 4.6%.

The structure of Pfandbrief maturities and maturing collateral has proved financially sound over the last two years. However, there are funding needs in the shorter maturity brackets.

The public sector cover pool is dominated by Germany. The exposure to the German sovereign (EUR 51mn), to German regional authorities (EUR 12.3bn), German local authorities (EUR 8.2bn), and other German public bodies (EUR 7bn) adds up to EUR 27.5bn or 74.5% of the total cover pool. This is followed by EUR 2.3bn exposure to Italy (6.3% of the pool), Austria EUR 2.1bn (5.6%), and a number of smaller countries.

In the first half of 2009, DKD's net interest income increased by EUR 3.3mn yoy to EUR 36.1mn. Given the lower administrative expenses (-14.2% yoy) due to reorganisation and reduced personnel expenses, the operating profit before risk provisioning increased to EUR 25.5mn vs. EUR 21.7mn in the previous year. Net risk provisioning was EUR 25.0mn (vs. EUR 20.5mn in 1H08), reflecting valuation changes in the securities business, and leading to an overall lower pre-tax profit of EUR 0.5mn (vs. EUR 1.0mn).

Dexia Kommunalbank Deutschland AG's public sector Pfandbriefe are rated AAA with a watch negative status by S&P. S&P has not assigned counterparty credit ratings to DKD. On December 16 2009, S&P announced a large number of covered bond rating actions in connection with its revised covered bond rating criteria. In this context, S&P also put Dexia Kommunalbank Deutschlands AG's public sector covered bonds on watch negative, together with 97 other covered bond programmes. S&P plans to resolve the credit watch placements within four months.