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Rating Action:

Moody's affirms Commerzbank's Aa3/Prime-1 Ratings

02 Sep 2008
Moody's affirms Commerzbank's Aa3/Prime-1 Ratings

BFSR downgraded to C following the announced acquisition of Dresdner Bank AG

London, 02 September 2008 -- Moody's Investors Service today has downgraded Commerzbank's Bank Financial Strength Rating (BFSR) to C from C+. In view of an ongoing very high support expectation, the lower BFSR (equivalent to a Baseline Credit Assessment of A3, down from A2) does not impact the bank's Aa3 long- and P-1 short-term debt and deposit ratings or any of its subordinated ratings, which have therefore been affirmed. The outlook on all ratings is stable.

This rating action follows yesterday's announcement that Commerzbank AG has committed to buying Dresdner Bank AG (rated Aa3/P-1/C) from Allianz insurance group for a consideration of about Euro 9.8 billion. This consists of a purchase price of Euro8.8 billion and an additional Euro 975 million to be paid as a contingent deferred consideration. This deferred component is paid into a trust containing specific ABS assets from Dresdner Bank and is to absorb potential additional valuation adjustments; if not used to compensate for mark-downs, this will ultimately be paid to Allianz.

DETAILS OF THE TRANSACTION

According to the terms of the transaction, the purchase price includes a risk shield of almost Euro 1 billion which will protect Commerzbank against a fall in value of certain of Dresdner Bank's assets. The net purchase price of around Euro 8.8 billion comprises a cash component of Euro 1.6 billion, the sale of Commerzbank's asset management operations for about Euro 0.7 billion and new Commerzbank shares for the equivalent of Euro 6.6 billion. The transaction is still subject to regulatory approval and expected to close, in two steps, in the course of 2009. In a first step, Commerzbank plans to acquire 60% of Dresdner Bank AG in January 2009. Subject to the consent of an extra-ordinary shareholder meeting to a planned capital increase, the bank plans to take over the remaining 40% in the second half of 2009 and to achieve the full legal absorption of Dresdner Bank AG. It is Moody's understanding that for Commerzbank the acquisition will not translate into significant goodwill. The bank expects to maintain its regulatory Tier 1 ratio within a range of 7 to 8 percent.

Underpinning Moody's rating decision is the expectation that outstanding approvals from the regulatory and competition authorities as well as from Commerzbank's shareholders for the planned capital increase should not derail this transaction, given

(i) the broad support among Germany's financial and political community for this transaction;

(ii) the combined entity's market share still only amounting to low double-digits in most products and the absence of meaningful pricing power in its key retail and SME markets;

(iii) the structure of the transaction allowing Commerzbank to proceed even without shareholders' consent to the planned capital increase.

RATING RATIONALE

Moody's commented that in the medium- to long-term the benefits of this transaction should exceed the shorter-term risks.

In this context, the rating agency noted positively

(i) the compelling strategic rationale for the acquisition of Dresdner Bank as it should significantly enhance Commerzbank's franchise and market position in core customer segments, notably among retail customers and mid-sized and large corporate customers in Germany, despite some marginal losses of clients due to overlaps etc.;

(ii) the meaningful cost savings resulting from better economies of scale and scope, albeit at a relatively late stage of the planned integration;

(iii) Commerzbank's good integration track record and the experience of its management stemming from the recently concluded smooth integration of Eurohypo.

(iv) the expected successful downscaling of Dresdner Bank's investment banking operations, taking into consideration how Commerzbank has successfully reduced its investment-banking activities, and the cost base and risks associated with them, and focuses on a client-centric business model.

(v) Finally, the expected ongoing presence of Allianz as an exclusive distribution partner for insurance products, from 2011 onwards, and as a core shareholder should provide for stability and allow Commerzbank's management the time to implement its integration strategy.

Notwithstanding these positive factors which in the longer run should underpin Commerzbank's strategic flexibility and commercial and financial strength and could in the medium term result in the strengthening of its BFSR to C+ again, Moody's cautioned with regard to the bank's BFSR that in the short term

(i) the financial and execution risks inherent in the transaction should be substantial and could pose a significant challenge to the banks;

(ii) that Dresdner Bank has displayed a materially weaker and more volatile financial performance;

(iii) the bank's sizeable exposure to a weakening economy: With pro-forma total assets of about Euro 1.1 trillion, Commerzbank would likely be the largest lender to the German economy and have an increased exposure to the weakening domestic and international macroeconomic environment;

(iv) the remaining exposure to the persistent crisis in international capital markets which are expected to affect operating revenues and asset quality. In this context, Moody's noted positively the risk shield of approx. EUR 1 billion which Moody's expects should cover any risks from the portfolio of specific structured credit products unless markets deteriorated significantly further.

(v) In addition, the rating agency added that asset concentrations in the two banks' loan and securities portfolios and a certain degree of customer attrition could weigh on performance metrics before meaningful cost synergies could be achieved.

Please refer to the Credit Opinion which will be updated shortly for more details.

RATING IMPACT ON MAJOR SUBSIDIARIES

Eurohypo's C BFSR, which carries a negative outlook, is unaffected by the rating action on Commerzbank. Additionally, Eurohypo's A1 senior unsecured debt and deposits ratings remain on review for upgrade for the reasons mentioned in our press release published on 19 August 2008. The outstanding senior and junior unsecured debt of Essenhyp (A1, on review for upgrade), which was merged onto Eurohypo on 19 August 2008, is also unaffected and continues to carry the same ratings as Eurohypo.

Similarly, Moody's is not taking any rating action on Deutsche Schiffsbank as a result of the transaction. Following the take-over of Dresdner Bank, Commerzbank will likely hold a combined stake of 80% in Schiffsbank, thus gaining control over the bank. In due course, Moody's will assess whether, for the benefit of Schiffsbank, this could result in different assumptions about the support which Schiffsbank might receive, if ever needed, and the impact this could have on Schiffsbank's A2 senior unsecured debt and deposit ratings. However, at this stage it is not yet clear what strategy Commerzbank will follow with regard to Schiffsbank, and no support uplift is included in the rating.

This rating action does not impact the ratings of Commerzbank Europe (Ireland) which is rated A2/C+/P-1 with a stable outlook) and of Commerzbank International S.A. (rated A2/C+/P-1). However, Moody's notes that any weakening of these bank's standalone BFSR to C would likely put downward pressure on their long- and short term ratings.

For Forum Bank, Commerzbank's subsidiary in the Ukraine, the E+ BFSR, Ba1 local currency deposit rating, B2 foreign currency deposit rating, Ba3 senior unsecured debt ratings - all of which continue to carry a positive outlook, and the Aa1.ua National Scale ratings (which carries no specific outlook) all remain unchanged.

Please refer to separate communication on the ratings of Commerzbank's subsidiaries in Poland, BRE Bank SA (rated A2/D/P-1) and BRE Bank Hipoteczny (A3/D-/P-2).

Commerzbank and Dresdner Bank are both domiciled in Frankfurt, Germany. At the end of June 2008, Commerzbank had total consolidated assets of Euro 615.2 billion and equity of Euro 15.4 million and recorded a net income of Euro 1.2 billion. Dresdner Bank had total consolidated assets of Euro 478.9 billion and equity of Euro 10.3 million and recorded a net loss of Euro 1.0 billion.

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Guido Versondert
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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