Fitch Affirms HVB & Commerzbank at 'A+'; Upgrades Commerzbank's Hybrids

Wed Apr 24, 2013 10:36am EDT

(The following statement was released by the rating agency) FRANKFURT/LONDON, April 24 (Fitch) Fitch Ratings has affirmed UniCredit Bank AG (HVB) and Commerzbank AG's (CBK) Long-term Issuer Default Ratings (IDRs) at 'A+'. The Outlooks are Stable. The agency has also affirmed the banks' Viability Ratings (VR), Support Ratings (SR), Support Rating Floors (SRF) and senior debt ratings and upgraded some of CBK's hybrid instruments. A full list of rating actions is at the end of this release. KEY RATING DRIVERS - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT CBK and HVB's Long-term and Short-term IDRs, Support Ratings, Support Rating Floors and senior debt ratings reflect Fitch's continued view that their status as large universal banks in Germany results in extremely high (indicated by a SRF of 'A+') probability of state support. Fitch understands that after the capital increase announced by CBK on 15 March 2013, the German government will keep its ownership through the Financial Market Stabilisation Fund (SoFFin) below 20%. HVB is fully owned by UniCredit S.p.A. ('BBB+'/'F2') which is rated three notches below HVB following Fitch's downgrade of Italy on 8 March 2013. However, given its ownership structure, Fitch believes HVB would first look to its 100% owner, UniCredit S.p.A. for support, if needed. Nonetheless, Fitch expects that the German government would ultimately support HVB if the UniCredit S.p.A's resources were insufficient. The foreign ownership of HVB does not constrain Fitch's view of local sovereign support as it has a domestic franchise, is managed relatively independently and funds itself independently from its parent. The Stable Outlooks continue to benefit from Fitch's unchanged view on support. Fitch expects that the German government will continue to support large German banks, including CBK and HVB, as long as the financial system in Europe remains fragile and the tools for dealing with a large international bank failing are not fully developed. RATING SENSITIVITIES - IDRs, SUPPORT RATINGS, SUPPORT RATING FLOORS AND SENIOR DEBT Fitch's view on support is sensitive to developments within the regulatory and legal framework, particularly emanating from the European Commission with regard to bail-ins and centralised regulatory oversight and to the changing attitude of the German authorities towards using bank resolution tools. Fitch understands that there is broad political will in Germany, supported by all major parties, to move towards reducing the implicit state support of systemically important banks in the country at some point. The European Commission's 6 June 2012 paper proposing to avoid future bank bail outs represented another important step in a series of policy and regulatory initiatives to curb systemic risks posed by the banking industry. This followed Germany's implementation of a Restructuring Act in 2011. These developments highlight the potential risks for CBK's and HVB's Support Ratings, SRFs, IDRs and senior debt ratings. If Fitch changes its view on support in the future, the current VRs provide a broad indicator of where the IDRs could end up for CBK and HVB. KEY RATING DRIVERS AND SENSITIVITIES - VIABILITY RATINGS CBK The affirmation of Commerzbank's VR reflects its sound liquidity position and more solid capitalisation, as well as progress made with its extensive restructuring plans, including a reduction in non-core assets and declining administrative expenses. Although Commerzbank is now better positioned to protect its core franchise in a competitive domestic market, its restructuring still has some way to go and parts of its non-core assets (NCA) still potentially pose material downside risks. Commerzbank's performance has been helped by the favourable German economy and notably the very low number of corporate insolvencies in Germany. However, Commerzbank is still exposed to concentration risks and troubled European markets, which absorbed a substantial share of its profits in recent years, while earnings from its private customer business are weak. Fitch expects that Commerzbank would be able to absorb a potential deterioration of the asset quality in its core businesses, but the downside risks on certain non-core commercial real estate, shipping and southern European public sector assets is still potentially material. Fitch notes that a reduction of non-core assets, specifically of its exposure in ship finance and certain exposures or risks in southern Europe could result in upside potential for Commerzbank's VR. Similarly, improved profitability in CBK's private customer business could also lead to an upgrade of CBK's VR, assuming no further deterioration at its non-core assets. At the same time, a further weakening of CBK's core businesses in the short to medium term, most likely in the form of falling revenues coupled with higher loan impairment charges which are currently relatively low, could put pressure on CBK's VR. HVB HVB's VR reflects the bank's standalone credit strength, which benefits from its well-established domestic corporate and investment banking (CIB) franchise and especially from its strong capitalisation (Fitch core capital ratio at end-2012: 19.4%; falling to a still healthy 17.2% after the deduction of the consolidated profit expected to be transferred to its parent), which compensates for the intrinsic earnings volatility of these activities. HVB's solid capitalisation is the key rating strength and Fitch expects the bank's capital position to remain strong under forthcoming regulatory changes and the forecast business development. Fitch views HVB's announcement on 18 March 2013 that it will pay out a special dividend through the release of reserves as neutral for its VR at such high capitalisation levels. However, HVB's VR is potentially sensitive to further weakening in core capital ratios for similar or other reasons, to sustained material cross border transfers of liquidity or to a weakening of its core and sound corporate banking franchise. In addition, being part of the UniCredit group might pose potential contagion risk for HVB's funding franchise from negative developments in the European sovereign crisis, which cannot be fully excluded. Reflecting the German focus of its exposures, HVB's asset quality continued to benefit from the resilient German economy. Fitch expects this stable trend to continue in the coming quarters, but given the fragile economic situation, this trend could quickly reverse. In this context, some risk pockets remain, including risks from high concentrations in the bank's leveraged buyout exposure, project finance business and ship lending. Non-strategic assets are being worked out and the bank continues to reduce its exposure to riskier asset classes. Under Fitch's rating criteria, the VR of a subsidiary will not normally be more than three notches above a parent bank's IDR. As a result, further downgrades of the parent, potentially driven by further downgrades of Italy, could result in a downgrade of HVB's VR. KEY RATING DRIVERS AND RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES CBK Fitch has upgraded certain legacy Tier 1 and upper Tier 2 securities after CBK reported positive results under German GAAP for 2012. We expect write-ups of previous principal write downs and cumulative coupon payments in 2013 for UT2 Funding plc and write up and coupon payments on HT1 Funding Capital. We also expect Commerzbank Capital Funding Trust I and II to resume coupon payments. UT2 Funding plc securities are upper Tier 2 instruments and notching for loss severity (one notch) is lower than for the bank's Tier 1 securities (two notches). However, they have higher non-performance risk (three notches) compared with Tier 1 debt (two notches) because coupon payments are dependent on profits in the profit and loss account. The Tier 1 securities, including HT1 Funding Capital, that have a distributable profit trigger or a regulatory capital ratio trigger are rated four notches below CBK's VRs, two notches each for high loss severity and high non-performance risks. Lower Tier 2 securities issued by CBK are rated one notch below CBK's VR in order to reflect higher loss severity compared to senior unsecured debt instruments (one notch), in line with Fitch's "Assessing and Rating Bank Subordinated and Hybrid Securities" criteria. The subordinated debt issued by Dresdner Funding Trust IV has been upgraded to 'BB+' to reflect minimal incremental non-performance risk characteristics relative to CBK's VR (zero notches) plus one notch for loss severity for this CRD IV compliant subordinated debt. Subordinated debt and other hybrid capital issued by CBK and associated SPVs are primarily sensitive to any change in CBK's VR. HVB The ratings of HVB's hybrid capital instruments (issued through Funding Trusts I and II) reflect the financial standing of HVB, as reflected in its VR. They are notched down four notches from HVB's VR, reflecting two notches for loss severity and two notches for incremental non-performance risk relative to the bank's VR. While Fitch acknowledges that the German regulator could demand a deferral of coupon payment on these profit-linked instruments in line with the terms and conditions of the instruments, the agency does not anticipate such intervention in light of the bank's solid standalone financial profile. SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES Commerzbank U.S. Finance Inc and UniCredit US Finance LLC are wholly owned subsidiaries of CBK and HVB, respectively. The Short-term ratings of their commercial paper programmes are equalised with CBK's and HVB's Short-term IDRs and reflects the likelihood of systemic support. The Short-term ratings of the commercial paper programmes are sensitive to the same factors that might drive a change in CBK or HVB's IDRs. Hypothekenbank Frankfurt AG's ratings are unaffected by the rating actions. The ratings actions are as follows: Commerzbank AG Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1+' Viability Rating: affirmed at 'bbb-', Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A+' Commercial paper and Certificates of Deposits: affirmed at 'F1+' Senior unsecured debt: affirmed at 'A+' Market-linked securities: affirmed at 'A+emr' Subordinated debt (Lower Tier 2): affirmed at 'BB+' Subordinated debt (Dresdner Funding Trust IV (XS0126779791): upgraded to 'BB+' from 'BB-' Commerzbank U.S. Finance, Inc.'s Short-term rating: affirmed at 'F1+' Actions on hybrid capital instruments issued by Commerzbank: Dresdner Funding Trust I's dated silent participation certificates (XS0097772965): affirmed at 'B+'. Commerzbank Capital Funding Trust I (DE000A0GPYR7) and II (XS0248611047): upgraded to 'B+' from 'CCC' UT2 Funding plc upper Tier 2 securities (DE000A0GVS76): upgraded to 'B+' from 'CCC' HT1 Funding GmbH Tier 1 Securities (DE000A0KAAA7): upgraded to 'B+' from 'CCC' UniCredit Bank AG Long-term IDR affirmed at 'A+'; Outlook Stable Short-term IDR affirmed at 'F1+' Viability Rating affirmed at 'a-' Support Rating Floor affirmed at 'A+' Support Rating affirmed at '1' Market Linked Securities affirmed at 'A+emr' Senior unsecured Certificates of Deposit affirmed at 'F1+' Senior unsecured Debt Issuance Programme affirmed at 'A+' Senior unsecured Debt Issuance Programme affirmed at 'F1+' Senior unsecured BMTN Programme affirmed at 'A+' Senior unsecured EMTN Programme affirmed at 'A+' Senior unsecured EMTN Programme affirmed at 'A+' Senior unsecured EMTN Programme affirmed at 'F1+' Senior unsecured notes affirmed at 'A+' Senior unsecured GTD notes affirmed at 'A+' Subordinated notes affirmed at 'BBB+' UniCredit US Finance LLC Commercial Paper Programme affirmed at 'F1+' HVB Funding Trusts I and II Hybrid Notes affirmed at 'BB+' Contact: Primary Analyst Michael Dawson-Kropf Senior Director +49 69 7680 76 113 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Markus Schmitt Associate Director +49 69 76 80 76 129 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria 'Evaluating Corporate Governance', dated 12 December 2012, 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Recovery Ratings for Financial Institutions', dated 15 August 2012, 'Rating FI Subsidiaries and Holding Companies', dated 10 August 2012, 'Country-Specific Treatment of Recovery Ratings', dated 16 June 2012 are available at Applicable Criteria and Related Research Evaluating Corporate Governance here Assessing and Rating Bank Subordinated and Hybrid Securities here Global Financial Institutions Rating Criteria here Recovery Ratings for Financial Institutions here Rating FI Subsidiaries and Holding Companies here Country-Specific Treatment of Recovery Ratings here 2013 Outlook: German Banks here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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