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Rating Action:

Moody's reviews for downgrade long and short-term ratings of Commerzbank AG & subsidiaries

18 Jan 2012

Bank financial strength rating downgraded for Commerzbank entities and Eurohypo

Frankfurt am Main, January 18, 2012 -- Moody's Investors Service has today downgraded the standalone bank financial strength ratings (BFSRs) of Commerzbank AG and Commerzbank Europe (Ireland) (CBE(I)) to D+ from C-, that of Eurohypo AG to E+ from D-, and kept the revised ratings on review for further downgrade. At the same time, Moody's has placed on review for downgrade the A2/Prime-1 senior debt and deposit ratings of Commerzbank AG, Commerzbank International S.A. (CISAL) and CBE(I), as well as the A3/Prime-1 ratings of Eurohypo AG. The D BFSR and Prime-2 short-term debt ratings of Deutsche Schiffsbank were unaffected by today's rating actions, but its A3 senior debt and deposit ratings were placed on review, direction uncertain, ahead of their alignment with the debt ratings of Commerzbank AG. The review for downgrade of the ratings of various hybrid instruments of Commerzbank Group, initiated on 7 November 2011, has been extended.

Moody's says that the weakening resilience and eroding franchise of Eurohypo AG were the key drivers for today's BFSR downgrades and various rating reviews for downgrade initiated for the five Commerzbank Group entities.

More specifically, Eurohypo AG's BFSR was downgraded to E+ from D-, now mapping to B3 (previously Ba3) on the long-term scale. This reflects the bank's continued franchise erosion, high vulnerability to market shocks and uncertain future. This, in turn, adversely affects the credit profile and stability -- and therefore the ratings -- of the whole Commerzbank Group. As a result, Commerzbank AG's BFSR and that of its Irish subsidiary, CBE(I), were downgraded to D+ from C-, mapping to Baa3 (previously Baa2). The standalone BFSRs of these three banks remain on review for further downgrade.

Concurrently, the C+ BFSR (mapping to A2 on the long-term scale) of CISAL was placed on review for downgrade, as this is the same rating level as Commerzbank's A2 senior debt rating, now on review for downgrade.

Additionally, Commerzbank's rating for senior subordinated debt was downgraded to Ba1 from Baa3, and the same instruments as well as the hybrid Tier III program of Eurohypo to Ba3/Ba3(hyb) from Ba1/Ba1(hyb). These ratings remain on review for downgrade. The Ba3 rating for Eurohypo's subordinated debt represents a wider notching of -2 notches (instead of -1) from the adjusted standalone credit assessment, which incorporates parental (but not government) support. Furthermore, the downgrade to Ba1 from Baa3, on review for further downgrade, of Commerzbank's subordinated debt also applies to the debt instrument issued by Dresdner Funding Trust IV, as this displays the same risk profile as Commerzbank's senior subordinated debt.

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

RATINGS RATIONALE

-- BFSR DOWNGRADE OF COMMERZBANK

The downgrade of Commerzbank's standalone BFSR to D+ from C- reflects the rising risk and earnings constraints stemming from Eurohypo's exposures and persistent loss generation. In the context of deteriorating sovereign credit profiles and the ongoing euro area debt crisis, these constraints represent a major burden for the group that (i) continues to overhaul and consolidate various parts of its businesses; and (ii) displays weak earnings power.

Through the existing profit & loss transfer agreement -- and as the principal provider of senior unsecured debt -- Commerzbank AG bears a very high degree of responsibility for Eurohypo's obligations, which closely links the earnings prospects of both banks.

-- BFSR DOWNGRADE OF EUROHYPO

The downgrade of Eurohypo's standalone BFSR to E+ from D- reflects the considerable fragility of its franchise, considering (i) the rising probability of further large credit losses (in the context of Eurohypo's remaining exposure to Greece); (ii) the bank's reliance on Commerzbank for its funding needs; and (iii) the prospect of regulatory changes that might materially affect the functioning of Eurohypo's business model.

The deteriorating euro area sovereign debt markets imply that Eurohypo will likely require support for an extended period. Given its inadequate economic capital and lack of market access for unsecured long-term funds, Moody's believes that Eurohypo -- as a standalone bank -- could not weather a further weakening of the yet-unresolved euro area debt crisis. While the rating agency notes Eurohypo's progress in deleveraging and the improved 11.4% Tier 1 ratio reported as of 30 June 2011, it cautions that the bank's high leverage implies a limited capacity to absorb unexpected losses.

Another important consideration for the BFSR downgrade to E+ was the additional franchise erosion due to the recently announced freeze in new underwriting in Eurohypo's commercial real-estate (CRE) segment, which has effectively halted any new business activity at Eurohypo. Moody's notes that further seasoning of the CRE loan portfolio might negatively affect net interest margins and non-performing loan ratios.

-- COMMERZBANK EUROPE (IRELAND)

The downgrade of the BFSR of CBE(I) to D+ (as well as the review of this rating and the A2/Prime-1 debt ratings) mirrors the rating action on Commerzbank's ratings. This follows Moody's approach of maintaining the same ratings for the parent bank and subsidiary, which takes into account the high level of integration in (and dependence on) the parent bank.

-- COMMERZBANK INTERNATIONAL S.A. (CISAL)

The review for downgrade of CISAL's C+ BFSR and the A2/Prime-1 debt and deposit ratings reflects that these ratings are capped at the debt and deposit ratings of Commerzbank. CISAL displays a considerably stronger credit profile on a standalone basis, and its A2 debt and deposit ratings currently do not benefit from any support assumptions (or rating uplift). In the absence of any ring-fencing of the Luxembourg entity (and given upstream lending to the parent bank) the agency does not assign a BFSR -- nor debt and deposit ratings -- higher than the senior debt ratings of Commerzbank. Any downgrade of Commerzbank's debt ratings would negatively affect CISAL's BFSR and debt ratings.

-- DEUTSCHE SCHIFFSBANK

Given the recent announcement that Commerzbank plans to merge the German ship-finance specialist with the parent bank in the course of H1 2012, the review with direction uncertain of the long-term senior debt and deposit ratings of Deutsche Schiffsbank was initiated because these ratings will be aligned with those of Commerzbank upon closing of the transaction.

FOCUS OF THE REVIEW

The review of Eurohypo's ratings will focus on:

- The loss potential and loss-absorption capacity of the bank in an adverse scenario of the euro area debt crisis;

- Whether the recently announced freeze of new underwriting in commercial real estate will likely be reversed post June 2012 or marks a shift towards an unwinding scenario for Commerzbank's largest and most risky subsidiary; and

- Considerations of short and long-term support probabilities.

The review of the ratings for Commerzbank and other group entities will focus on:

- The strategic response of Commerzbank's senior management in the context of the regulatory capital shortfall calculated by the European Banking Authority (EBA) in December 2011, as well as the measures that will be taken to improve the group's regulatory capital levels;

- The magnitude of the ramifications for Commerzbank's franchise and future earnings prospects in the context of this strategic response and likely measures; and

- Considerations of short and long-term support probabilities.

Moody's will likely continue to assess the systemic support probability for Commerzbank as high. This takes into account the 25% + 1 share ownership of Commerzbank group by the German government, and also that the German government has announced that it will reinstall the support facilities of the Financial Market Stabilisation Agency (FMSA, previously referred to as SoFFin) that were first established after the collapse of Lehman Brothers in 2008 and then closed at the end of 2010. Moody's assumptions of systemic support may (partly) compensate for the pressure on debt ratings that arises from the weaker standalone BFSRs of Commerzbank and its subsidiaries.

WHAT COULD CHANGE THE RATINGS UP/DOWN

A severe worsening of the euro area debt crisis could adversely affect both Eurohypo's ratings and those of Commerzbank and its other subsidiaries.

Positive ratings pressure on the ratings of Commerzbank and its other European subsidiaries would be subject to a material reduction of its non-core assets and/or a containment of the risks posed by these assets.

DETAILED LIST OF RATING ACTIONS

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_138874

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with amendment resulting from that disclosure.

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Katharina Barten
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's reviews for downgrade long and short-term ratings of Commerzbank AG & subsidiaries
No Related Data.
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