The rating affirmation reflects Scope’s view that Commerzbank can retain a leading position in private and commercial banking in its home market of Germany. Commerzbank is one of the few remaining national universal banks in Germany, though its market share and pricing power is limited by the fragmented structure of a banking system dominated by public and cooperative banks. Scope sees potential for in-market mergers in Germany but is concerned that consolidation will progress only very slowly.

The transformation programme initiated in 2016 has de-risked the balance sheet but has proved to be costlier and lengthier than expected, thus, failed to deliver a lasting improvement in profitability. In response, management recently launched “Commerzbank 5.0”, targeting further cost cuts across the group and a significant number of branch closures in Germany. Meanwhile, elevated spending on new technologies is set to continue in view of fast changing customer preferences and innovative market entrants. Scope believes this initiative provides the necessary reinforcement for the German franchise. However, in line with management guidance Scope does not expect any meaningful profitability improvement for some time.

Asset quality has improved materially over the past couple of years as the bank worked out its legacy exposures. However, Scope expects the credit cycle to turn in view of poor economic data from Germany and globally. Provisions at Commerzbank were already up in the first half of 2019 and we believe that visibility for 2020 is limited. Furthermore, Scope is concerned that new stringent accounting and regulatory rules risk exacerbating the impact of the NPL cycle on bank capital compared to previous episodes of economic weakness. Scope anticipates that the bank enters this period with only limited prospects for pre-provision income generation due to falling policy rates and flat yield curves in its key markets. Low cash flow from its core intermediation businesses will therefore limit Commerzbank’s ability to absorb rising credit cost and higher risk-weighted assets due to credit migration and rising regulatory requirements.

Management plans to free up capital by selling its profitable Polish subsidiary mBank. Scope believes that this can offset pressure on capital but will also reduce earnings power and diversification going forward. Most likely, Commerzbank will have to retain a legacy book of foreign currency loans that exposes it to lengthy and potentially costly litigation in Poland, which Scope believes will partly offset the benefits of the sale.

The following ratings have been affirmed, with Negative Outlook:

• Issuer Rating: A
• Senior unsecured Debt rating: A-
• Preferred senior unsecured debt rating: A
• Tier 2: BBB

The following rating has been affirmed, with Stable Outlook:

• Short term rating: S-1

Stress testing & cash flow analysis
No stress testing was performed. No cash flow analysis was performed

Methodology
The methodology used for this rating(s) and/or rating outlook(s) Bank rating methodology is available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity, public domain and third parties.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Dierk Brandenburg, Managing Director
Person responsible for approval of the rating: Pauline Lambert, Executive Director
The issuer ratings/outlook was first released by Scope on 2 April 2014. The ratings/outlooks was last updated on 9 June 2016.
The senior unsecured debt ratings/outlook was first released by Scope on 2 April 2014. The ratings/outlooks was last updated on 6 July 2015.
The preferred senior unsecured debt ratings/outlook was first released by Scope on 26 July 2018.
The short-term rating/outlook was first released by Scope on 22 May 2014. The ratings/outlooks was last updated on 6 July 2015.
The tier 2 debt ratings/outlooks were first released by Scope on 19 December 2016.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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