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19 Aug 2008
BFSR downgraded to C, with a negative outlook
Frankfurt, August 19, 2008 -- Moody's Investors Service has today placed on review for possible
upgrade the A1 long-term debt and deposit ratings as well as the
A2 subordinated debt ratings and the A3 rating for the silent participations
of Eurohypo AG. At the same time, the rating agency has downgraded
the Bank Financial Strength Rating ("BFSR") to C from C+
and changed the outlook on the BFSR to negative. The bank's
Prime-1 short-term rating was affirmed. Moody's also
affirms the Aaa ratings assigned to Eurohypo's Public Sector Pfandbriefe
and Mortgage Pfandbriefe.
Moody's commented that the review for possible upgrade was triggered
by the increasing integration of Eurohypo into its parent bank,
Commerzbank AG (rated Aa3/Prime-1/C+), as further evidenced
today by the merger of Essenhyp into Eurohypo (see separate Press Release
on rating actions for Essenhyp released today). Over the past year
-- since Commerzbank decided to obtain full ownership of Eurohypo
-- the bank has been increasingly integrated into Commerzbank group
as a centre of competence for Public Finance and Commercial Real Estate
(CRE) lending as well as centralising the group's 'Pfandbrief'
issuance, with unsecured funding and residential real estate activities
centralised at the parent bank level.
"In addition to the operational integration, the ratings review
will focus on explicit support agreements such as the comfort letter as
well as the enforceability and potential timeliness of payment under the
profit and loss transfer agreement between Commerzbank AG and Eurohypo
AG. Any potential upgrade of Eurohypo's debt and deposit
ratings would be limited to one notch, to reach an alignment with
those of its parent, Commerzbank AG," says Katharina
Barten, Frankfurt-based Moody's Vice President - Senior
Analyst, and lead analyst for Eurohypo AG.
Moody's added that the downgrade of Eurohypo's BFSR primarily
reflects: (i) the weak outlook on core risk-weighted profitability
until 2010, (ii) deteriorating asset quality in CRE business,
and (iii) the negative implications from the merger with Essenhyp (A1/P-1/C-).
Moody's said that the negative outlook on Eurohypo's risk-weighted
profitability over the next few years is a function of Moody's expectation
of lower fee and commission income, in turn driven by the sharply
declining volumes of new business underwritten (and syndicated or securitised),
and the other adverse factors mentioned above, deteriorating asset
quality and the integration of Essenhyp.
The deterioration of asset quality primarily concerns a rise in risk charges
compared to previous years, reported in the first half of 2008;
the adverse developments in that period required additional provisioning
on a single large CRE exposure in Continental Europe, and also contained
a 30% rise year-on-year even if the provisioning
related to the aforementioned single exposure were excluded. Furthermore,
Moody's believes that the concentration risk relating to Eurohypo's
exposures in Spain and the UK may prove challenging in the short-to-medium
term, given the sharp deterioration of the operating environment
for real estate business in these markets.
The rating agency points out that the adverse impact from the merger with
Essenhyp, albeit not the main reason for the BFSR downgrade,
adds pressure on the weak outlook on future profitability. Essenhyp
posted a loss of EUR241 million in 2007, and its operations are
expected to contribute negatively to group earnings during 2008 and 2009,
which is due to a combination of restructuring charges, costs for
closing EssenHyp's CDS book and charges relating to the closing
of the bank's previous yield curve exposure, as the bank had
previously engaged in funding long-term assets with short-term
liabilities. Moreover, the long-term benefits from
the transaction are considered to be modest.
On the positive side, Moody's recognises that Eurohypo's
sound economic and regulatory capitalisation serves as an important mitigant
to the critical factors mentioned above, and that Eurohypo has,
in response to the ongoing deterioration in several core markets,
further tightened its underwriting standards. Furthermore,
Moody's believes that Eurohypo's strong franchise in the primary
real estate markets should provide some revenue continuity throughout
the real estate business cycle. However, the negative outlook
on the bank's BFSR highlights the uncertainty about the degree of
deterioration as well as the degree of correlation in some key real estate
markets to which Eurohypo is exposed.
The previous rating action on Eurohypo was in May 2007, when the
BFSR was affirmed, the senior unsecured debt and deposit ratings
were upgraded to A1 from A2 and the ratings for subordinated debt (including
for 'Genussscheine') were upgraded to A2 from A3.
Headquartered in Eschborn, Germany, Eurohypo is a fully owned
subsidiary of Commerzbank. At the end of June 2008, the group
had consolidated assets, according to IFRS, of EUR200 billion
and reported a net loss of EUR83 million; the Tier-1 ratio
was 9.1% -- now based on Basel II.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's reviews Eurohypo's unsecured ratings for upgrade
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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