Rating action

Scope Ratings GmbH (Scope) has affirmed and published Commerzbank AG’s (Commerzbank) issuer rating of A and preferred senior unsecured debt rating of A, with a Stable Outlook. The ratings were previously only available to investors on a subscription basis.

The full list of rating actions and rated entities is provided at the end of this rating action release.

In September 2024, UniCredit SpA (A/Stable) acquired a stake of around 9% of Commerzbank’s share capital and another 11.5% through financial instruments which may only be settled if necessary regulatory approvals are obtained. These developments have no immediate rating implications for Commerzbank.

Key rating drivers

Business model assessment: Resilient (Low). Commerzbank’s issuer rating is anchored by the Resilient (Low) business model assessment. The bank operates through two business segments, with a focus on providing a comprehensive range of financial products to the German ‘Mittelstand’, or small-and medium-sized enterprises (SMEs), as well as large companies and institutional customers. In the retail segment (Private and Small-Business Customers), the Bank operates via its Commerzbank and comdirect brands. Finally, the bank operates via mBank, its Polish subsidiary. With total assets of EUR 565bn as of Q3 2024, the bank is Germany’s second-largest bank. However, its market share is still relatively moderate, reflecting Germany’s fragmented banking sector.

The bank’s focus remains on leveraging its stand-alone strengths and implementing the updated 2027 strategy remains the bank’s focus. The group is on track to achieve updated targets for 2024, thanks to a strong increase in interest revenue and fees and commissions, and the successful implementation of cost savings initiatives. The bank’s current strategic focus on improving underlying earnings will be preserved over time, especially via increasing net commission income. Headline targets include increased profitability, with return on tangible equity targeted at 12.3% for 2027 from 8.1% expected for 2024, and a reduction in the cost-to-income ratio to 54% from 60% expected for 2024. The bank targets a payout ratio of over 90% for 2025-27 with a target CET1 ratio of 13.5% by 2027, from 14.8% in Q3 2024.

Operating environment assessment: Supportive (High). The assessment reflects Scope’s blended view of the different markets where Commerzbank operates.

Germany (Supportive High) accounts for the majority of the bank’s exposure and revenues. As Europe’s largest economy, with high wealth levels, economic resilience is very high, although the country’s export-oriented manufacturing sector is facing multiple headwinds, leading to stagnant growth. The fiscal position remains a strength, with manageable fiscal deficits and a low debt-to-GDP ratio pointing to sizeable fiscal space. The German banking sector is fragmented, with large market shares of cooperative and saving banking groups, and aggregate profitability is low. The national legislative framework is predictable and stable.

Germany is part of the European Banking Union, which has brought about a significant strengthening and harmonisation in bank regulation and supervision under the ECB’s Single Supervisory Mechanism, which Scope considers to be supportive of financial stability. The European Central Bank also shares with national central banks the role of lender of last resort, which limits illiquidity risks to the banks.

Poland (Moderately Supportive High) is the bank’s second largest market, with a share of revenues of around 12% in FY 2023. The country’s economic outlook remains favourable, with growth of 2.5% this year and 3.2% next year, supporting a benign operating environment. Fiscal challenges persist with deficits exceeding 5% of GDP and rising debt ratio trajectory. Commerzbank’s Polish subsidiary mBank has strengthened its provisions for legal risks for CHF-denominated mortgages, to 140.2% provisioning for active CHF-denominated loans. Bank regulation in Poland is aligned to the EU regulatory framework. However, Poland is not formally part of the European Banking Union.

Scope arrives at an initial mapping of a- based on a combined assessment of the issuer’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing. The assessment reflects Scope’s view that the issuer is committed to adapting its business model for long-term sustainability. Although progress is evident, it does not warrant further credit differentiation.

Commerzbank continues to focus on dedicated digital banking capabilities. Comdirect provides a leading role in the online banking and brokerage market, and it provides digital solutions to corporate customers via the digital ‘Mittelstandsbank Direkt’.

Commerzbank’s public commitment to environmental factors is solid and stipulated by its comprehensive set of policies. The bank has established sector-specific exclusion lists and criteria, including for deforestation and fossil-fuel based projects. Commerzbank aims to increase sustainable products to EUR 300bn (advisory and lending) by 2025, from EUR 238bn in 2023. Lending products include the green infrastructure finance portfolio with investments in renewables.

The assessment for governance is sound. Near-term governance considerations include the bank’s defence strategy against Unicredit’s stake-building and potential takeover attempt, with a focus on increasing capital returns to shareholders.

The long-term sustainability assessment leads to an adjusted rating anchor of a-.

Earnings capacity and risk exposures assessment: Neutral. The assessment reflects Scope’s view that the group’s earnings capacity may fluctuate over economic cycles but is sufficient to cover expected losses. Asset quality is broadly in line with peers and risks are unlikely to generate losses that could undermine the issuer’s viability.

In line with the bank’s updated 2027 strategy, Scope assesses Commerzbank’s ability to generate earnings through the cycle as strengthened and sustainable, with metrics on profitability and underlying earnings now closer aligned to European peers. Given strong performance in 9M2024, guidance on full-year NII was moderately increased to EUR 8.2bn and is expected to range between EUR 7.6bn and EUR 8.4bn per year until 2027. In addition, the strategy is focussed on increasing net commission income via a strengthened securities business, including via the acquired Aquila Capital. Overall, net commission income is projected to grow more than 5% in 2024.

Asset quality is very robust, with a gross non-performing exposure ratio of 0.9% as of Q3 2024. Scope does not foresee a material deterioration in Commerzbank’s asset quality. Cost of risk was 25 bps in Q3 2024. Scope deems the group’s loan loss reserves to be appropriate including overlays to cover secondary effects from geopolitical crises and uncertainties from inflation. Exposure is somewhat concentrated on the German ‘Mittelstand’, with more than half of the bank’s exposure in Germany, with potential negative implications should the macroeconomic situation in the country worsen beyond Scope’s baseline assumptions.

Financial viability management assessment: Comfortable (+1 notch). The assessment reflects Scope’s view that the issuer’s maintains comfortable buffer to relevant regulatory requirements and Scope expects it to continue to do so. The issuer’s financial viability is largely resilient to tail-risk events.

Commerzbank’s capitalisation is sound, with a CET1 ratio of 14.8% reported as of Q3 2024. With the announced dividend policy of distributing more than 90% of net profit for 2025-27, Commerzbank plans to maintain a common equity tier 1 ratio of at least 13.5%, which supports the rating. The distance to the requirement is in line with most of its European peers. Commerzbank's solid funding and liquidity profile reflects a strong deposit base and good access to capital markets. The group’s liquidity has consistently been strong in recent years, considerably exceeding regulatory requirements. The liquidity coverage ratio was at 140.3% in Q3 2024, and the net stable funding ratio stood at 128.8%. Scope expects the funding and liquidity profiles to remain robust.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks to the current rating are balanced.

The upside scenarios for the ratings and Outlooks are (individually or collectively):

1. A sustained improvement in the bank’s profitability, with continued controlled risk appetite and sound asset quality, leading to a higher earnings capacity and risk exposure assessment.
    
2. An increase in the group’s geographic and business diversification profile, strengthening the bank’s business model assessment.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. A material deterioration in the group’s profitability and asset quality, leading to a downwards reassessment of the group’s earnings capacity and risk exposure.
    
2. A material reduction of capital buffers, due to unexpected events or a more aggressive capital policy, putting downwards pressure on the assessment of financial viability management.

Debt ratings

Preferred senior unsecured debt: A/Stable. The rating is aligned with the issuer rating and applies to senior unsecured debt ranking above other classes of senior unsecured debt.

Non-preferred senior unsecured debt: A-/Stable. The rating is one notch lower than the issuer rating, reflecting statutory subordination. The rating also applies to legacy senior debt issued by German banks prior to the introduction of the senior non-preferred debt class in 2018.

Short-term debt: S-1/Stable. Commerzbank’s S-1 short-term credit rating is derived from the long-term issuer credit rating. The rating is consistent with Scope’s long-term/short-term rating correspondence table. The choice of the highest possible short-term rating (S-1 given the A issuer rating) reflects the strength of the liquidity profile of the group and access to central bank funding (lender of last resort, ECB).

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

Commerzbank AG

Issuer rating: A/Stable, affirmed

Preferred senior unsecured debt rating: A/Stable, affirmed

Non-preferred senior unsecured debt rating: A-/Stable, affirmed

Short-term debt rating: S-1/Stable, affirmed

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

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Financial Institutions Rating Methodology, 6 February 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation   NO
With access to internal documents                                NO
With access to management                                         NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Associate Director
Person responsible for approval of the Credit Ratings: Marco Troiano, Managing Director
The Issuer Credit Rating/Outlook was first released by Scope Ratings on 2 April 2014. The Credit Rating/Outlook was last updated on 12 September 2024.
The Short-term Credit Rating/Outlook was first released by Scope Ratings on 22 May 2014. The Credit Rating/Outlook was last updated on 12 September 2024.
The Non-Preferred Senior Unsecured Debt Credit Rating/Outlook was first released by Scope Ratings on 2 April 2014. The Credit Rating/Outlook was last updated on 12 September 2024.
The Preferred Senior Unsecured Debt Credit Rating/Outlook was first released by Scope Ratings on 26 July 2018. The Credit Rating/Outlook was last updated on 12 September 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab GmbH and Scope ESG Analysis 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.