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Fitch Affirms Commerzbank at 'BBB+'; Outlook Stable
February 21, 2017 / 3:41 PM / in 9 months

Fitch Affirms Commerzbank at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) FRANKFURT/LONDON, February 21 (Fitch) Fitch Ratings has affirmed Commerzbank AG's (CBK) Long-Term Issuer Default Rating (IDR) at 'BBB+', Viability Rating (VR) at 'bbb+' and Short-Term IDR at 'F2'. The Outlook is Stable. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The IDRs of CBK are driven by its VR, which reflects CBK's modest profitability, solid asset quality in the core bank, progress in winding down higher-risk non-core legacy assets, adequate capitalisation and solid funding and liquidity. Fitch expects earnings to remain under pressure from a challenging environment and headwinds in cost management. The bank's revenues have been negatively affected by low interest rates, subdued client activity and high loan impairment charges (LIC) on shipping loans in 2016. The bank's reported 2016 pre-tax profit, which included material one-off gains and costs, fell more than 60% yoy to EUR643m. The operating profitability of the core customer segments Private and Small Business Customers (PSBC) and Corporate Clients (CC) has weakened, but remains adequate. We expect CBK to be able to generate sufficient recurring income in these segments despite ongoing pressure from low interest rates and competition. We believe that losses attributable to higher-risk legacy assets have peaked, but will remain a material drag on the bank's results. CBK expects the legacy assets accounted for in the Asset and Capital Recovery segment to generate a cumulative operating loss of about EUR1.1bn by 2020. CBK's new strategic plan aims to streamline the bank's business model and increase digitalisation and the customer base. The plan includes a gross reduction of about 9,600 staff by 2020. We believe that the strategy addresses the bank's challenges, including those related to its modest profitability. However, we view the execution risk as high. The profitability targets are ambitious and contingent on CBK's ability to achieve its growth objectives without compromising margins, which will be challenging in the competitive domestic environment. Restructuring costs will lead to low and volatile net results until end-2018. Asset quality in CBK's core segments is solid. The volume of non-performing loans (NPL) was EUR6.9bn at end-2016, of which about a quarter related to non-core legacy shipping and commercial real estate assets. After a steady decline over the past six years, the group's default portfolio temporarily increased at end-9M16, largely as a result of new individual shipping defaults, which have now been restructured. We estimate the NPL ratio at about 3.4% at end-2016 with reasonable provision coverage. While further defaults in the shipping portfolio remain likely, we expect the core bank's NPLs to moderately decrease in the coming quarters. The downside in the bank's shipping portfolio is still material; however, in view of the significantly reduced outstanding exposure, we regard it as manageable. CBK's capitalisation and leverage are adequate. CBK reported a fully loaded end-2016 CET1 ratio of 12.3%, 30bp higher than at end-2015. At this level, the CET1 ratio is 155bp above the bank's fully phased-in SREP requirement of 10.75% (assuming an unchanged Pillar 2 requirement). Increase in risk-weighted assets (RWAs) and volatile other comprehensive income (OCI), mainly driven by valuation changes in the securities portfolio and pension liabilities, resulted in a volatile CET1 ratio during 2016. We believe that the bank's CET1 ratio could remain volatile, while internal capital generation in 2017 and 2018 is likely to remain low due to the transformation and restructuring costs under the bank's strategic plan. However, we understand from management that the bank is targeting a CET1 ratio of at least 12% during this transition period and above 13% thereafter. CBK's liquidity is sound and funding is balanced and stable. The bank benefits from its established domestic franchise that allows stable access to a broad, diversified and granular deposit base. CBK also has good access to wholesale funding. Reliance on unsecured wholesale funding is moderate as about half of CBK's capital market funding is in the form of covered bonds, which have proved to be a stable and inexpensive source of funding even in times of stressed markets. CBK's 'plain vanilla' senior debt is rated in line with the bank's IDRs. Structured notes with embedded market risk (ISIN XS0590249222 and DE000CZ426G2) are rated one notch above the bank's Long-Term IDR because they benefit from protection provided by the combined buffers of qualifying junior and vanilla senior debt (see DCR and Deposit Ratings below). The short-term rating of Commerzbank U.S. Finance Inc's commercial paper programme is equalised with CBK's Short-Term IDR. This reflects our view of the high likelihood that CBK would support its US commercial paper programme, in case of need. SUPPORT RATING AND SUPPORT RATING FLOOR CBK's Support Rating (SR) and Support Rating Floor (SRF) reflect our view that following the implementation of the resolution legislation and tools senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that CBK becomes non-viable. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings on subordinated debt and other hybrid capital issued by CBK are notched down from CBK's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risks. HT1 Funding GmbH's Tier 1 securities, which have a distributable profit trigger, are rated four notches below CBK's VR, comprising two notches each for loss severity and for non-performance risk. Dresdner Funding Trust I's securities, which have a regulatory capital ratio trigger, are rated three notches below CBK's VR, comprising two notches for loss severity and one notch for non-performance risk. Dresdner Funding Trust I has always paid its coupons whereas CBK's legacy Tier 1 instruments with a distributable profit trigger have not, which is reflected in the one-notch difference. DERIVATIVE COUNTERPARTY RATING AND DEPOSIT RATINGS CBK's Derivative Counterparty Rating (DCR) reflects Fitch's view that the bank has sufficient combined buffers of qualifying junior and vanilla senior debt that could be used to recapitalise it, restore its viability and prevent default on other "preferred" senior liabilities upon resolution. The protection afforded to "preferred" senior debt, deposits and derivative counterparties by those buffers means DCRs and Long-Term Deposit Ratings are each given a one-notch uplift above the Long-Term IDR to reflect these liabilities' lower vulnerability to default than vanilla senior debt. CBK's Short-Term Deposit Rating is aligned with the bank's Short-Term IDR, which is the lower of the two options available at an 'A-' level. This is because of high uncertainty regarding the bank's likely balance sheet composition upon default and how a resolution scenario would affect short-term depositors in Germany, given the lack of precedent for favouring short term creditors. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Upside to CBK's ratings is limited as an upgrade would require a structural improvement in the bank's earnings, which we believe is unlikely as profitability will be burdened by restructuring costs over the next two years, while revenue remains under pressure from low interest rates and competition. A significant improvement in profitability could result in an upgrade, if the bank maintains sound asset quality in its core portfolio and achieves further material progress in winding down the shipping portfolio. CBK's ratings are also sensitive to the progress in the implementation of the bank's strategic plan. The ratings would come under pressure if execution risks materialise, which could lead to insufficient revenue generation, significantly higher restructuring costs or a loss in franchise. The short-term rating of Commerzbank U.S. Finance Inc's commercial paper programme is sensitive to changes to CBK's Short-Term IDR. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and upward revision to the SRF would require a positive change in the sovereign's propensity to support its banks. While not impossible, this is highly unlikely in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES CBK's debt ratings are sensitive to changes in CBK's VR, from which they are notched, or to a change in Fitch's assessment of the notes' loss severity or their relative non-performance risk. DCR AND DEPOSIT RATINGS The DCR, Deposit Ratings and rating of the structured notes with embedded market risk are primarily sensitive to changes in CBK's IDRs. They are also sensitive to the amount of subordinated and senior vanilla debt buffers relative to the recapitalisation amount likely to be needed to restore the bank's viability and prevent default on more senior derivative obligations, deposits and structured notes with embedded market risk. High short-term volatility or long-term inflation of RWAs as a direct result of the implementation of more stringent regulatory requirements could materially increase the debt buffer needed to recapitalise the bank upon failure and further justify the rating uplift. The DCR, Deposit Ratings and rating of the structured notes with embedded market risk are also sensitive to increases in the bank's individual pillar 2 regulatory requirements as we assume that these determine the level to which the bank would have to be recapitalised upon resolution. Furthermore, the DCR, Deposit Ratings and rating of the structured notes with embedded market risk are sensitive to Fitch's assumptions regarding the individual point of non-viability at which the regulator is likely to require a recapitalisation by way of bail-in of junior and standard senior instruments. Subsequent changes to the resolution regime, which may alter the hierarchy of the various instruments in resolution, could also trigger a change in the DCR and Deposit Ratings. The rating actions are as follows: Commerzbank AG Long-Term IDR affirmed at 'BBB+'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating: affirmed at 'bbb+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Commercial paper and certificates of deposits: affirmed at 'F2' Senior unsecured debt: affirmed at 'BBB+' Market linked securities: affirmed at 'A-emr' Derivative Counterparty Rating: affirmed at 'A-(dcr)' Long-Term Deposit rating: affirmed at 'A-' Short-Term Deposit rating: affirmed at 'F2' Commerzbank U.S. Finance, Inc.'s Short-Term rating: affirmed at 'F2' Subordinated debt: affirmed at 'BBB' Subordinated debt (Dresdner Funding Trust IV (XS0126779791, 26157HAA6)): affirmed at 'BBB' Dresdner Funding Trust I's dated silent participation certificates (XS0097772965, 26156FAA1): affirmed at 'BB+' HT1 Funding GmbH Tier 1 Securities (DE000A0KAAA7): affirmed at 'BB' Contact: Primary Analyst Roger Schneider Director +49 69 768 076 242 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Secondary Analyst Lola Yusupova Associate Director +49 69 768 076 114 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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