Scope Ratings has upgraded by one notch the Issuer Credit-Strength Ratings (ICSRs) of the two German banks it publicly rates – Commerzbank AG and Deutsche Bank AG. These rating actions follow last month’s release of Scope’s updated bank rating methodology, which includes adjustments addressing the forthcoming ranking of senior unsecured debt eligible for or allocated to TLAC and/or MREL, as opposed to the ranking of the respective banking groups’ senior unsecured liabilities which will not be eligible for TLAC and/or MREL.

Scope’s updated methodology notes that “as a general rule, all senior unsecured debt which may be specifically allocated or eligible for MREL and/or TLAC would be rated at least one notch below the ICSR – whether they are issued by a top holding company or an operating bank of the group. This represents an adjustment to our approach for rating bank senior unsecured debt in countries with resolution regimes and is a forward-looking reflection of evolving legal and regulatory changes. It is meant to offer investors increased clarity and transparency in assessing bank credit risk at a time when the complexity of new regulatory rules presents a material challenge for various market participants and often for the banks themselves.”

In its methodology update, Scope added that “with respect to adjustments to existing bank ratings related to the new TLAC/MREL rules, these would be done via a one-off uplift of one notch of the ICSR and rated senior unsecured liabilities which are not eligible for MREL/TLAC.” This approach reflects Scope’s opinion that, while the credit fundamentals of the group did not change, going forward the ICSR and the above-mentioned senior liabilities should benefit from the protection of a materially more ample capital structure in a default-like scenario.

Following the release of the bank rating methodology update, Scope published a two-page Q&A report titled “Adjusting bank ratings to reflect MREL/TLAC unsecured debt ranking”, in which it clarified the contents and timing of current and future rating actions related to the updated methodology.

For Germany, the report highlights that the law on the subordination of banks’ senior unsecured debt to other unsecured liabilities (primarily deposits) in liquidation – and by extension in resolution – was approved late last year and will become effective early next year. According to Scope, this development underpins today’s rating action.

The following ICSRs have been upgraded by one notch:

• Commerzbank AG: A (Stable Outlook) from A- (Stable Outlook)
• Deutsche Bank AG: A (Negative Outlook) from A- (Negative Outlook)

Commerzbank’s and Deutsche Bank’s senior unsecured debt ratings and their outlooks remain unchanged, at A- (Stable Outlook) and A- (Negative Outlook), respectively. As well, all other ratings of the banks remain unchanged.

Regulatory disclosures

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund and Dr. Sven Janssen.
The rating analysis has been prepared by Michaela Seimen Howat, Executive Director
Responsible for approving the ratings: Sam Theodore, Managing Director.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Rating history
The full rating history can be accessed via the individual rating cards on www.scoperatings.com

Information on interests and conflicts of interest
The Commerzbank AG rating was prepared independently by Scope Ratings without a mandate (unsolicited rating) but with participation of the issuer.
The Deutsche Bank AG rating was prepared independently by Scope Ratings without a mandate (unsolicited rating) and without participation of the issuer.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Website of the rated entity/issuer, Annual reports/quarterly reports of the rated entity/issuer, Current performance record, Detailed information provided on request, Data provided by external data providers, Interview with the rated entity, External market reports, Press reports / other public information,
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodologies applicable for this rating “Bank Rating Methodology” (May 2016) & “Bank Capital Instruments Rating Methodology” (May 2016) are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s credit rating, definitions of rating symbols and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability
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Rating issued by
Scope Ratings AG, Lennéstraße 5, 10785 Berlin