Scope Ratings has today upgraded Commerzbank’s long-term and short-term ratings to ‘A-’ from ‘BBB+’ and to ‘S-1’ from ‘S-2’, respectively. Both have a stable outlook. This rating action follows the completion of the review for possible rating upgrade initiated on 24 March 2015.

According to Scope, the rating upgrade recognises the successful restructuring and redevelopment of Commerzbank’s German retail business which has led the bank to post improving levels of profitability since 2012. The German retail business of Commerzbank (defined as the combination of the Private Customers and Mittelstandbank divisions) has remained a stable source of cash generation over the years, with the steady improvement of the Private Customers division helping offset the impact of low interest rates on the performance of the Mittelstandbank. Scope notes that the weight of both divisions in the pre-tax profits of the core bank increased from 66% in 2012 to 89% in 2014, a sign of Commerzbank’s successful shift towards a lower risk and more stable business model.

In addition, Scope highlights the successful de-risking of Commerzbank - a process still under way - , noting that the non core assets portfolio of the bank decreased significantly from more than EUR 330bn at the time of the Commerzbank-Dresdner Bank merger in 2008 to EUR 82bn in Q1 2015. Scope also notes that within these assets, the Public Finance portfolio of EUR 51.9bn has an overall limited risk profile. Commerzbank’s recent announcement of two commercial real estate portfolio sales totalling EUR 2.9bn with no material impact on profits is a sign that the bank remains committed to further reduce its non core assets portfolios in a value-preserving way.

Scope also noted that the upgrade of Commerzbank’s short-term rating was driven by the very significant improvement in the bank’s liquidity and funding metrics since 2008. While the bank was then a net short-term borrower in the capital markets, Commerzbank has since then built a sizeable liquidity reserve showing, on Scope’s estimates, an excess of EUR 89bn over the amount of liquid assets that are necessary to cover the short-term needs of the bank. This improvement is in addition to the recent EUR 1.4bn capital raising of the bank that generated a boost in Commerzbank’s CET1 ratio of 70bps (to 10.2%) compared to its reported Q1 2015 CET1 ratio.

At the same time, the rating agency pointed out that an important challenge for a bank with excess deposit funding such as Commerzbank remains the current very low level of interest rates in the euro area, which is putting an important pressure on the bank’s deposit margin. Scope also notes that the loss component of the non core assets portfolio remains material (at EUR 1bn guided loss for 2015 and 2016 combined) even if Q1 2015 results showed significant lower level of losses for this division.

Scope concluded by saying that the A-/S-1 ratings reflect the agency’s belief that the bank will continue to pursue its de-risking and progress beyond 2016. The expected continuous improvement is a key factor in the upgrade, underpinned by the forward-looking focus of Scope’s ratings. In this context, Scope recognises that several factors that led to the upgrade are now firmly engrained in the new ratings, justifying the stable outlook for both long-term and short-term ratings.

The following ratings were upgraded, all with a stable outlook:
Issuer credit-strength rating (ICSR) to A- from BBB+;
Long-term senior debt ratings to A- from BBB+
Short-term debt ratings to S-1 from S-2