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Rating Action:

Moody's downgrades Commerzbank to A2 stable, Eurohypo to A3 stable

24 Feb 2011

Deutsche Schiffsbank downgraded to A3 negative

Frankfurt am Main, February 24, 2011 -- Moody's Investors Service has today downgraded the senior debt and deposit ratings of several Commerzbank group entities, specifically: (i) the senior debt and deposit ratings of Commerzbank AG and Commerzbank Europe (Ireland) to A2 from Aa3; (ii) Eurohypo AG's senior debt and deposit ratings to A3 from A1; and (iii) Deutsche Schiffsbank's senior debt and deposit ratings to A3 from A2. The outlook on these ratings for Commerzbank AG, Commerzbank Europe (Ireland) and Eurohypo AG is now stable, and negative for Deutsche Schiffsbank. Moody's also downgraded the ratings for Commerzbank AG's senior subordinated debt and Tier III instruments to Baa3 from Baa2 and confirmed the Ba1 ratings for such instruments issued by Eurohypo AG. The rating outlook remains negative on all Eurohypo's senior subordinated debt (including Tier III instruments).

Concurrently, Moody's has downgraded the short-term rating of Deutsche Schiffsbank to Prime-2 from Prime-1. The Prime-1 short-term ratings for Commerzbank AG, Commerzbank Europe (Ireland) and Eurohypo AG remained unaffected by today's rating actions.

The deteriorating financial strength and franchise of Eurohypo AG -- reflected in the downgrade of its standalone bank financial strength rating (BFSR) from D to D- (mapping to Ba3) with a negative outlook on 17 February 2011 -- was one of the key drivers for today's rating downgrades of the four Commerzbank Group entities. The C- BFSRs of Commerzbank AG and Commerzbank Europe (Ireland), which Moody's affirmed on 17 February 2011 with a negative outlook, now map to Baa2 on Moody's long-term rating scale (previously Baa1). The D BFSR of Deutsche Schiffsbank (mapping to Ba2) with a negative outlook is unaffected by today's rating actions.

Contributing to today's rating actions was Moody's reassessment of its assumption on future extraordinary systemic support for Commerzbank and its subsidiaries.

For a detailed list of ratings affected, refer to the end of the press release.

RATINGS RATIONALE

Moody's says that the downgrade of Commerzbank's senior debt ratings to A2 reflects a combination of adverse pressures, in particular (i) the substantial financial burden represented by its largest subsidiary, Eurohypo; (ii) the low quality of group earnings with a large portion of the 2010 profit contributed by non-core investments that are subject to unwinding; and (iii) a weakening environment for future government support that prompted Moody's decision to reverse some of the extraordinary systemic support factored into the long-term ratings. The first two drivers have resulted in the lowering of Commerzbank's standalone financial strength to a Baa2 equivalent. For the latter factor, it has resulted in a reduction to three from previously four notches of rating uplift from the Baa2 standalone level. The support assumptions factored into the A2 ratings are now more in line with Moody's support assumptions pre-crisis. The outlook on the long-term ratings is now stable.

The downgrade of Eurohypo's senior debt ratings by two notches to A3 reflects (i) the lower standalone BFSR of D- (see press release dated 17 February 2011); (ii) the lower standalone assessment of Commerzbank AG; and (iii) Moody's view that the probability of systemic support for the bank will weaken over time. The A3 long-term ratings now include three notches each for systemic and parental support over the Ba3 standalone level. Moody's assumptions for high parental support take into account the substantial levels of intra-group funding and the existing profit-and-loss transfer agreement that will remain in place for at least another year. Based on Eurohypo's continued close integration in the group, the outlook on the A3 long-term ratings is stable.

The downgrade of Deutsche Schiffsbank's long-term ratings to A3 was triggered by the lower financial strength assessment of the parent bank. The A3 long-term ratings now include three notches uplift for parental support and two notches for systemic support over the Ba2 level. The outlook on the A3 rating is negative, in line with the negative outlook on the D BFSR.

Commerzbank Europe (Ireland)'s senior debt ratings were downgraded to A2 as the subsidiary's ratings (and rating outlooks) are aligned with those of the parent bank.

COMMERZBANK'S C- BFSR NOW POSITIONED AT THE LOWER Baa2 LEVEL

"Although we note the substantial improvement in earnings generation, the 2010 group results still confirm our concerns over Commerzbank's relatively low earnings quality, considering the weak performance of several core segments, the large profit contribution from non-core investments and the substantial losses from its asset-based finance business," says Katharina Barten, a Moody's Vice President and Senior Credit Officer. "Given the persistently adverse market conditions for commercial real estate and other international exposures, which may yet cause set-backs in the group's progressing recovery, we believe that Commerzbank's standalone financial strength is better reflected at the Baa2 level," Ms. Barten explains.

The Baa2 standalone rating level also takes into account the planned repayment of Commerzbank's substantial hybrid capital mostly provided by the federal government (through the Financial Market Stabilisation Funds) that the rating agency expects will likely constrain the Tier 1 ratio at a level below or close to 10%.

KEY RATING DRIVERS

COMMERZBANK AG

Further pressure on the C-/Baa2 rating could be exerted by the following factors: (i) continued credit losses and franchise erosion of Eurohypo; (ii) adverse developments in the shipping sector; and (iii) a slower-than-expected recovery of Commerzbank's core franchise, especially in retail banking. Although Moody's has factored into the ratings the considerable downside risk in the group's asset-based finance segment, a combination of these adverse developments cannot be ruled out, warranting the negative outlook on the C- BFSR.

Moody's notes that the A2 ratings already take into consideration the German government's expectation that, over time, the (hybrid) capital provided will be fully repaid. However, Moody's does not believe that in the short term the German government will prematurely withdraw support, nor reduce its 25% plus one share in the bank. These government measures will continue to provide comfort for bondholders for some years, allowing the group to gradually recover its earlier intrinsic strength. While the stable outlook on the A2 senior debt ratings indicates that Moody's does not expect any further rating change for the next 12 to 18 months, an earlier-than-expected exit by the government from its stake could trigger a reassessment of Moody's current support assumptions. Any such reassessment would take into account that a new legal framework for the resolution of banks in Germany allows for wider options of dealing with distressed (but systemically relevant) banks.

EUROHYPO AG

The rating agency expects that parental support will probably be available for longer than previously anticipated, even though Eurohypo will have to be divested by the end of 2014, according to the compensation measures agreed with the European Commission. As M&A markets in the financial sector may remain challenging for several years yet, and with no intrinsic recovery of Eurohypo visible to date, any alternative scenarios to a sale (if required) would probably entail continued parental support.

However, a cancellation of the P&L transfer agreement in the course of 2011 (valid from 2012) -- particularly if it were combined with a withdrawal of Commerzbank's letter of comfort for the subsidiary -- could result in a downgrade of the senior unsecured ratings of Eurohypo AG.

DEUTSCHE SCHIFFSBANK

The agency will revisit the ratings of Deutsche Schiffsbank, if the planned transfer of ship-finance portfolios from Commerzbank alters Deutsche Schiffsbank's current financial profile. Moody's will also continue to monitor the parental commitment to Deutsche Schiffsbank, which will remain an important credit factor for the bank's debt ratings.

COMMERZBANK EUROPE (IRELAND)

The standalone as well as senior debt and deposit ratings of Commerzbank Europe (Ireland) will continue to mirror those of Commerzbank. This is based on the Irish subsidiary's close integration into and support from the group. Please refer to Moody's press release dated 17 February 2011.

DETAILED LIST OF RATING ACTIONS

(1) Commerzbank AG

- BFSR: C- (Baa2), outlook negative; it previously mapped into Baa1

- senior debt and deposit ratings: downgraded to A2 (outlook stable) from Aa3 (on review for possible downgrade)

- subordinated debt ratings: downgraded to Baa3 (outlook negative) from Baa2 (on review for possible downgrade)

- program rating for senior subordinated Tier III instruments: downgraded to Baa3 (outlook negative) from Baa2 (on review for possible downgrade)

- short-term rating: Prime-1, not affected

The negative outlook on the subordinated debt ratings and the Tier III program ratings reflect the BFSR outlook as the adjusted standalone rating (adjusted BCA) is used as an anchor for notching down the subordinated debts (Please also refer to Moody's press release dated 17 February 2011, on Moody's downgrade of subordinated debt across the German banking system.)

Aaa rated bonds of Commerzbank AG that benefit from a guaranty of the Financial Market Stabilisation Agency (also known as "SoFFin") are unaffected by today's rating action.

(2) Eurohypo AG

- BFSR: D- (Ba3), outlook negative, not affected by today's rating action

- senior debt and deposit ratings: downgraded to A3 (outlook stable) from A1 (on review for possible downgrade)

- subordinated debt ratings: confirmed at Ba1 (negative outlook)

- program rating for senior subordinated Tier III instruments: confirmed at Ba1 (negative outlook)

- short-term rating: Prime-1, not affected

Eurohypo's D- BFSR with a negative outlook maps to Ba3 on Moody's long-term rating scale.

(3) Commerzbank Europe (Ireland)

- BFSR: C- (Baa2), outlook negative; it previously mapped into Baa1

- senior debt and deposit ratings: downgraded to A2 (outlook stable) from Aa3 (on review for possible downgrade)

- short-term rating: Prime-1, not affected

The rating actions on Commerzbank Europe (Ireland) mirror those on Commerzbank's ratings, as Moody's generally aligns all ratings of the Irish subsidiary with those of Commerzbank, owing to the subsidiary's close integration in the group.

(4) Deutsche Schiffsbank AG

- BFSR: D (Ba2), outlook negative, not affected by today's rating action

- senior debt and deposit ratings: downgraded to A3 (outlook negative) from A2 (on review for possible downgrade)

- short-term rating: downgraded to Prime-2 (no outlook) from Prime-1 (on review for possible downgrade)

The BFSR of Deutsche Schiffsbank, currently at D and mapping into a Ba2 on Moody's long-term rating scale, remains unaffected by today's rating action.

Equally, the ratings of the group's various hybrid instruments, which are rated based on Moody's expected-loss approach, are also unaffected by today's rating action.

Moody's will comment separately on any potential impact on the various covered bonds issued by Commerzbank Group entities.

PRINCIPAL METHODOLOGIES

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

LAST RATINGS ACTIONS

Moody's most recent rating action on Commerzbank AG and Eurohypo was on 17 February 2011, when the rating agency downgraded German banks' subordinated debt.

Moody's most recent rating action on Deutsche Schiffsbank was on 17 February 2011, when the rating agency placed Commerzbank Group ratings on review for possible downgrade.

Moody's most recent rating action on Commerzbank Europe (Ireland) was on 17 February 2011, when the rating agency placed Commerzbank Group ratings on review for possible downgrade.

Headquartered in Frankfurt, Germany, Commerzbank reported total assets of EUR754 billion as at year end 2010 and a pre-tax profit for 2010 of EUR1.4 billion.

Headquartered in Eschborn, Germany, Eurohypo is a fully owned subsidiary of Commerzbank. Based on half-year results as of June 2010, Eurohypo reported total assets of EUR257 billion and a pre-tax loss for the 6 months of EUR215 million.

Headquartered in Hamburg and Bremen, Deutsche Schiffsbank is a majority owned subsidiary of Commerzbank. Based on half-year results as of June 2010, Deutsche Schiffsbank reported total assets of €17.5 billion and a pre-tax loss for the 6 months of EUR20 million.

Headquartered in Dublin, Ireland, Commerzbank Europe (Ireland) is a majority owned subsidiary of Commerzbank. At the end of December 2009, the bank had total assets, according to Irish GAAP, of EUR2.3 billion and reported a pre-tax profit of EUR9 million for 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Katharina Barten
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Carola Schuler
MD - Banking
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
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Moody's downgrades Commerzbank to A2 stable, Eurohypo to A3 stable
No Related Data.
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