Fitch Affirms Commerzbank & Hypothekenbank Frankfurt's IDRs

Mon Feb 10, 2014 11:48am EST

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(The following statement was released by the rating agency) FRANKFURT/LONDON, February 10 (Fitch) Fitch Ratings has affirmed Commerzbank AG's (CBK) Long-term Issuer Default Rating (IDR) at 'A+' and Hypothekenbank Frankfurt AG's (HF) at 'A-'. The Outlooks are Stable. At the same time, Fitch has upgraded CBK's Viability Rating (VR) and hybrid and subordinated debt ratings. 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's Long- and Short-term IDR, Support Rating (SR), and senior debt ratings reflect Fitch's view that its status as a large universal bank in Germany results in an extremely high probability of state support, as indicated by a Support Rating Floor (SRF) of 'A+'. After the capital increase in 2013, the German government keeps its ownership in CBK through the Financial Market Stabilisation Fund (SoFFin) at around 17%. HF's support-driven ratings are at their SRF and reflect Fitch's view of the high likelihood of support from the Federal Republic of Germany (AAA/Stable), particularly in view of HFs large size and outstanding issuance in the Pfandbrief market. Fitch expects that state support, if needed, would be forthcoming via CBK. Fitch's view of the likelihood of state support reflects HF's interconnectivity with its ultimate parent's creditworthiness and its large volume of issued German Pfandbriefe. HF has a letter of backing (Patronatserklaerung) from CBK and a domination and profit and loss transfer agreement is in place with its direct owner, Commerzbank Inlandsbanken Holding GmbH (not rated), a wholly-owned subsidiary of CBK. The Stable Outlooks reflects Fitch's expectation that the German government will continue to support large German banks, including CBK, as long as the tools for dealing with resolution of large international banks 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 bank support, bail-ins, centralised regulatory oversight and adjustments to deposit insurance schemes, and the developing attitude of the German authorities towards using these 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. In addition, the European Union discussion on the Bank Recovery and Resolution Directive and the Single Resolution Mechanism aspect of Banking Union are drawing to a close, with European Parliament votes scheduled for 1Q14 and representing important steps to curb systemic risks posed by the banking industry (see 'Fitch Outlines Approach for Addressing Support in Bank Ratings', 'Bank Support: Likely Rating Paths', 'The Evolving Dynamics of Support for Banks' and 'Sovereign Support for Banks Update on Position Outlined In 3Q13' at www.fitchratings.com). This follows Germany's implementation of a Restructuring Act in 2011. Although Fitch does not expect to immediately remove support incorporated into some EU bank ratings, these developments highlight potential risks for CBK's IDR and senior debt ratings. CBK's SRF would be revised down and its SR, IDRs and senior debt ratings downgraded if Fitch concludes that potential sovereign support has weakened relative to its previous assessment. Given CBK's VR is 'bbb', any support-driven downgrade of the bank's Long-term IDR and senior debt ratings would be limited to four notches. KEY RATING DRIVERS AND SENSITIVITIES - VRs The upgrade of CBK's VR by one notch reflects the bank's progress with its extensive restructuring plans as well as Fitch's expectation that the profitability of CBK's core businesses should mildly improve. Fitch views CBK's profitability and asset quality and its risk appetite as important rating drivers. Fitch believes that the operating profit of the Private Customers segment should improve in 2014 from low levels, reflecting CBK's growth in mortgage lending and a benign environment for investment products. In addition, the upgrade is based on the assumption that CBK can stabilise the operating profit in its Mittelstandsbank segment, which caters for its medium-sized corporate customers. In Fitch's view, CBK is now better positioned to protect its franchise in a competitive domestic market. However, its non-core assets (NCA) still pose downside risks. CBK's performance has been helped by the favourable German economy and notably the low number of corporate insolvencies in Germany. However, CBK is still exposed to concentration risks and troubled European markets, which have absorbed a substantial share of its profits in recent years. The VR is most sensitive to downside risks from non-core commercial real estate, especially in Spain, and its shipping portfolio, for which 2014 will be another difficult year. Fitch expects that CBK would be able to absorb a potential deterioration of the asset quality in its core businesses. Fitch notes that further successful deleveraging of its NCA, specifically of its exposure in southern Europe and shipping loans, or a broader and structural recovery of the Southern European countries would further underpin CBK's higher VR. If the improvement of CBK's core businesses is delayed or fails, most likely in the form of falling revenues coupled with higher loan impairment charges, which are currently relatively low in the core businesses, Fitch could reverse its view on CBK's VR. In this context, Fitch expects that the ECB's comprehensive assessment of large European banks' assets in 2014, including an extensive risk assessment, asset quality review and stress test, will not result in a material capital shortfall at CBK. Although only limited details of the actual test have been reported, Fitch has conducted some stress testing of CBK's phase in Basel III CT1 ratio, including assumptions about continued deleveraging of NCA, and concludes that it would take severe stressing, for example of CBK's shipping portfolio, to push the CT1 ratio below 8%. Fitch believes that such a scenario cannot be fully excluded but is not likely. Fitch expects CBK's capitalisation and funding franchise to remain stable. These are moderately important rating drivers at this stage as CBK has made considerable progress in both areas over the past few years compared with its lagging performance in restoring profitability. KEY RATING DRIVERS AND RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Fitch has upgraded CBK's and HF's Tier 1 and Tier 2 securities as a result of the upgrade of CBK's VR which is the anchor rating for these instruments. Subordinated debt and other hybrid capital issued by CBK are all notched down from CBK's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Because HF is in run down and has no VR, Fitch views CBK's 'bbb' VR as the initial source of anchor for HF's junior debt ratings, given Patronatserklaerung and the existence of a profit and loss transfer agreement. The Tier 1 instruments issued by Commerzbank Capital Funding Trust II have been upgraded to 'BBB-', one notch below CBK's new VR, because on 16 January 2014, CBK reported that it was complying with a court ruling which forced it to elevate the trust preferred securities to the same Lower Tier II capital class as the silent partnership certificates of Dresdner Funding Trust IV (Dresdner IV), to give them the same senior liquidation preference as the Dresdner IV securities and remove the profit-dependent trigger while maintaining the securities' accrual of capital payments. Similar to Dresdner IV the new Commerzbank Capital Funding Trust II instruments reflect minimal incremental non-performance risk characteristics relative to CBK's VR (zero notches) plus one notch for loss severity. The Tier 1 securities, including HT1 Funding Capital, which have a distributable profit trigger, are rated four notches below CBK's VRs, two notches each for high loss severity and high non-performance risks. Dresdner Funding Trust I, Tier 1 securities which have a regulatory capital ratio trigger, have been upgraded to 'BB', three notches below CBK's new VR, two notches for loss severity and now only one notch for performance risk. In Fitch's view, the fact that Dresdner Funding Trust I has always paid its coupon whereas Tier 1 instruments with a distributable profit trigger have not are reflected in a notch difference. 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. 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). Subordinated debt and other hybrid capital issued by CBK and associated SPVs are primarily sensitive to any change in CBK's VR. In addition, CBK's Capital Funding Trust I securities would be upgraded if CBK decides to restructure the instruments and change the documentation to mirror the documentation of CBK's Capital Funding Trust II securities. Fitch views CBK's 'bbb' VR as the initial source of support for HF's subordinated debt. The degree of notching relative to CBK's VR reflects Fitch's opinion that there is greater non-performance risk on HF's sub debt than there is on CBK's own subordinated debt (rated 'BBB-'). This is because HF is in wind down and its large size relative to CBK means a situation could arise where additional support for HF ultimately needs to be channelled from federal sources. Under such circumstances, support for subordinated debt cannot be assumed, given the precedent in the EU for subordinated debt burden sharing. The rating of the subordinated debt is therefore sensitive to an increase in the likelihood of such an event occurring. Fitch also notes that in 2012 CBK decided not to divest its subsidiary Eurohypo, now HF, but to run the company down. As a bank in wind-down, HF is not a viable entity. EUROHYPO Capital Funding Trust I and EUROHYPO Capital Funding Trust II were upgraded in December 2013 to reflect that the trustee has made forgone capital payments to the holders of the trust preferred securities for the years 2009-2012 in line with HF's agreement and that the trigger for coupon payments of the trust preferred securities has stopped being dependent on sufficient distributable profit in HF's unconsolidated German GAAP accounts but essentially "must"-payments as long as the profit and loss transfer agreement exists. In January, HF announced EUROHYPO Capital Funding Trust LLC's intention to redeem the Company Class B Preferred Securities in whole on 24 February 2014. EUROHYPO Capital Funding Trust I and II's ratings are sensitive to the termination of the profit and loss transfer agreement and to changes of Commerzbank's VR. SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES Commerzbank U.S. Finance Inc is a wholly owned subsidiary of CBK. The Short-term rating of its Commercial Paper Programme is equalised with CBK's IDR and reflects the likelihood of systemic support. The Short-term rating of the commercial paper programme is sensitive to the same factors that might drive a change in CBK's IDR. HF's subsidiary Hypothekenbank Frankfurt International S.A.'s (HFI) ratings are in line with its 100% parent HF as the subsidiary benefits indirectly from the support provided to the parent, as well as having a Patronatserklaerung from HF. As a result the ratings sensitivities for HFI are the same as those for HF. The ratings actions are as follows: Commerzbank AG Long-term IDR: affirmed at 'A+'; Outlook Stable Short-term IDR: affirmed at 'F1+' Viability Rating: upgraded to 'bbb' from 'bbb-'upport 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): upgraded to 'BBB-' from 'BB+' Subordinated debt (Dresdner Funding Trust IV (XS0126779791): upgraded to 'BBB-' from 'BB+' Commerzbank U.S. Finance, Inc.'s Short-term rating: affirmed at 'F1+' Hybrid capital instruments issued by Commerzbank: Dresdner Funding Trust I's dated silent participation certificates (XS0097772965): upgraded to 'BB' from 'B+'. Commerzbank Capital Funding Trust II (XS0248611047): upgraded to 'BBB-' from 'B+' Commerzbank Capital Funding Trust I (DE000A0GPYR7): upgraded to 'BB-' from 'B+' UT2 Funding plc upper Tier 2 securities (DE000A0GVS76): upgraded to 'BB-' from 'B+' HT1 Funding GmbH Tier 1 Securities (DE000A0KAAA7): upgraded to 'BB-' from 'B+' HF: Long-term IDR: affirmed at 'A-', Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Support Rating Floor: affirmed at 'A-' Senior unsecured debt: affirmed at 'A-' Subordinated debt: upgraded to 'BB-' from 'B+' HFI: Long-term IDR: affirmed at 'A-', Outlook Stable Short-term IDR: affirmed at 'F1' Support Rating: affirmed at '1' EUROHYPO Capital Funding Trust I/II preferred stock (XS0169058012, DE000A0DZJZ7): upgraded to 'BB-' from 'B+' Contact: Primary Analyst Michael Dawson-Kropf +49 69 7680 76 113 Fitch Deutschland GmbH Taunusanlage 17 60325 Frankfurt am Main Secondary Analyst Christian van Beek Director +49 69 76 80 76 248 Committee Chairperson Erwin van Lumich Managing Director +34 93 323 8403 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, and 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Evaluating Corporate Governance here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Recovery Ratings for Financial Institutions here Rating FI Subsidiaries and Holding Companies here Country-Specific Treatment of Recovery Ratings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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