Various Rating Actions Taken On Four
Systemically Important German Banks On
Improved Loss-Absorbing Capacity
Primary Credit Analysts:
Harm Semder, Frankfurt (49) 69-33-999-158; [email protected]
Richard Barnes, London (44) 20-7176-7227; [email protected]
Secondary Contacts:
Benjamin Heinrich, Frankfurt +49 (0) 69 33999 167; [email protected]
Giles Edwards, London (44) 20-7176-7014; [email protected]
OVERVIEW
• Due to a retroactive change in German law introduced in January 2017, we
believe that four systemically important German banks--Commerzbank AG,
Deutsche Bank AG, Deutsche Pfandbriefbank AG (PBB), and UniCredit Bank
AG--now have significantly improved additional loss-absorbing capacity
(ALAC) buffers protecting senior creditors.
• We've reviewed the documentation for each of these banks' long-term
senior unsecured debt instruments that we rate, after placing our issue
and issuer credit ratings on the banks on CreditWatch on Dec. 15, 2016.
• We have also considered other important rating drivers, such as ongoing
restructuring, any implications from possible increased economic risk in
Germany, and group-related aspects.
• As a result, we have raised by up to two notches or affirmed our
long-term counterparty credit ratings on Commerzbank, Deutsche Bank, PBB,
and UniCredit Bank, mainly reflecting stronger ALAC buffers, and removed
the ratings from CreditWatch with positive implications.
• Additionally, we raised by up to two notches or affirmed our issue
ratings on the banks' debt that we continue to assess as senior
unsecured, and lowered our issue ratings on the banks' debt that we have
reclassified as senior subordinated.
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FRANKFURT (S&P Global Ratings) March 28, 2017--S&P Global Ratings today took
various rating actions on four systemically important German banks--Commerzbank
AG, Deutsche Bank AG, Deutsche Pfandbriefbank AG (PBB), and UniCredit Bank AG-as well as several of their subsidiaries. We have also removed all
counterparty credit and issue ratings on these banks from CreditWatch, where
we placed them on Dec. 15, 2016 (see "Four German Banks On Watch Positive,
Various Banks' Snr Unsecured Debt On Watch Developing Or Neg, Pending Notes
Review" on RatingsDirect).
We have raised by up to two notches or affirmed our long-term counterparty
credit rating on Commerzbank, Deutsche Bank, PBB, and UniCredit Bank. At the
same time, we raised or affirmed our ratings on 91 issues that we will
continue to treat as senior unsecured debt, and lowered by up to two notches
our ratings on 333 instruments that we reclassified as senior subordinated
debt, that were issued by these banks.
Specially, we have:
• Raised our long-term rating on Commerzbank to 'A-' from 'BBB+' and
affirmed our 'A-2' short-term rating. The outlook is negative. As a
result, we have raised to 'A-' from 'BBB+' our issue ratings on 46 of
Commerzbank's senior unsecured issues, and lowered our ratings to 'BBB'
from 'BBB+' on 102 other issues we reclassified as senior subordinated.
• Raised our long-term rating on Deutsche Bank to 'A-' from 'BBB+' and
affirmed our 'A-2' short-term rating. The outlook is negative.
Accordingly, we have raised to 'A-' from 'BBB+' our issue ratings on 27
of Deutsche Bank's senior unsecured isses, and lowered our ratings to
'BBB-' from 'BBB+' on 128 other issues we reclassified as senior
subordinated.
• Raised our long-term rating on PBB to 'A-' from 'BBB' and affirmed our
'A-2' short-term rating. The outlook is negative. Likewise, we have
raised to 'A-' from 'BBB' our issue ratings on seven of PBB's senior
unsecured issues, and lowered our ratings to 'BBB-' from 'BBB' on 41
other issues we reclassified as senior subordinated.
• Affirmed our 'BBB/A-2' long- and short-term ratings on UniCredit Bank.
The outlook is developing. At the same time, we affirmed our 'BBB' issue
ratings on 11 of UniCredit Bank's senior unsecured issues, and lowered
our ratings to 'BBB-' on 62 other issues we reclassified as senior
subordinated.
RATIONALE
Today's rating actions represent the finalization of our industry wide review
of German bank senior unsecured debt in light of a German law that, as of Jan.
1, 2017, retroactively turned certain long-term standard senior unsecured
bonds into subordinated instruments in a resolution and liquidation.
Accordingly, we reclassified affected instruments as senior subordinated debt,
after we resolved our related CreditWatch placements on nine German banks last
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month (see: "Various German Banks' Snr Unsecured Debt Lowered/Affirmed After
Notes Review; Off Watch; Four Banks Remain On Watch," published Feb. 9, 2017,
on RatingsDirect).
We have now also reviewed the terms and conditions for each of the four
systemically important banks' rated senior unsecured issues and reclassified
them as senior subordinated debt where appropriate. For the senior
subordinated instruments, the starting point for the issue ratings is the
lower of the bank's stand-alone credit profile (SACP) and long-term
counterparty credit rating. We then deduct one notch for subordination, given
that the starting point for rating all four banks is 'bbb-' or higher. This
rating construct matches our approach with what we see as equivalent
instruments in other countries, such as senior debt issued by Swiss, U.K., and
U.S. nonoperating holding companies and senior nonpreferred bonds issued by
French banks.
Our understanding of the instruments' legal status reflects the interpretation
guide prepared jointly by the German regulator (BaFin), the German central
bank, and the German resolution authority, on the classification of certain
liabilities of institutions that must meet capital requirements regulation
(under insolvency law pursuant to Section 46f 5 to 7 of the German Banking
Act, published Nov. 7, 2016, on www.bafin.de). The key characteristics of
senior subordinated instruments are that they are mainly standard, long-term
instruments that have either a fixed coupon or carry a floating interest rate
based on the most common reference rates. By contrast, instruments that
continue to rank pari passu with other senior unsecured liabilities (such as
corporate and institutional deposits) have structured coupon types (including,
among other features, cap and collar structures) or an original term that does
not exceed 365 days. We continue to rate these senior unsecured issues in line
with the counterparty credit rating on each bank. We understand that German
authorities are currently considering a legislative change that would enable
banks to issue new standard, long-term bonds that rank as senior unsecured
debt. We consider that this would be beneficial for banks' funding costs and
flexibility.
We also considered the potential rating implications on Commerzbank, Deutsche
Bank, PBB, and UniCredit Bank from the significant increase of each bank's
buffer of subordinated instruments that could protect senior creditors in the
event of a resolution. This is because we consider the retroactive legal
alteration on German senior subordinated instruments economically equivalent
to senior subordinated debt that we rate in other European countries. It also
reflects our assessment that a default on these instruments would not lead to
a general default of the issuing banks, according to German legislation and
our view that these four large German banks are likely to be subject to a
well-defined resolution process in Germany.
For each bank, we considered not only the estimated additional loss-absorbing
capacity (ALAC) ratio at end-2016, but also the likely sustainability of these
buffers in the context of our broader projections of earnings and
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capitalization. We also took into account the potential consequences that the
banks' liability profiles and issuance strategies might have for their funding
models and earnings. Additionally, we undertook a relative assessment of each
bank's overall credit strength versus that of similarly rated domestic and
international banks. On this basis, Commerzbank, Deutsche Bank, and PBB all
merit an 'A-' long-term rating, in our view, even though they each currently
suffer from subpar profitability. The negative outlooks on these three banks
reflect the downside risks we see from the possibly increasing economic risk
in Germany and/or the banks' need to execute fully on their respective
restructuring plans. The rating actions on certain of the four banks' rated
foreign subsidiaries reflect the action taken on the parent and our view on
whether these subsidiaries would, if needed, likely be recapitalized through
the resolution of the parent.
We note that, in Article 72(b) of the November 2016 draft regulation amending
the European Capital Requirements Regulation, the European Commission proposed
new criteria for instruments comprising the minimum requirement on own funds
and eligible liabilities (MREL). We understand that a large proportion of
German banks' existing senior subordinated debt likely does not meet the draft
criteria relating to set-off and acceleration rights and contractual
acknowledgement of bail-in risk. We have included this debt in our ALAC
analysis on the assumption that it will be eligible as MREL under a
grandfathering arrangement or through revisions to Article 72(b). We would
revisit our ALAC analysis if our assumption proves incorrect.
There are no other aspects of our ALAC analysis that are specific or unique to
Germany. Consistent with our approach in neighboring countries, we have only
included instruments issued under EU law or featuring contractual recognition
of bail-in powers. For callable issues without coupon step-ups or other
incentives to redeem early, we use the maturity date (not the call date) as
the effective maturity because we believe there will be regulatory oversight
of calls.
The paragraphs below provide an overview of our rationale for the related
rating actions we have taken on each bank.
COMMERZBANK AG
We have raised our long-term rating on Commerzbank by one notch to 'A-',
mainly due to its materially enlarged ALAC buffer after the debt
reclassification. We believe Commerzbank will maintain ALAC buffers in the
6%-7% range, comfortably above the 5% threshold for a one-notch uplift.
Considering the materially increased senior debtholders protection in the
event of a resolution, we believe its rating level is in line with
international peers'. Our action also acknowledges the progress that
management has made in restructuring Commerzbank. While this task is not yet
complete and we still have some doubts about its ability to generate
sufficient shareholder returns absent a cyclical recovery, we now see a
significantly reduced risk of setbacks and negative surprises. Moreover, we
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continue to assess Commerzbank's unsupported group credit profile (GCP) as
'bbb+', reflecting our unchanged views of its moderate business position,
strong capital and earnings, moderate risk position, and adequate funding and
liquidity.
We lowered our ratings on the issues we reclassified as senior subordinated
debt to 'BBB', reflecting their status as bail-in instruments. We use their
unchanged GCP as the starting point to derive the ratings and subtract one
notch for their embedded subordination.
We raised our long-term rating on Commerzbank's Polish subsidiary mBank by one
notch to 'BBB+', reflecting our higher rating on Commerzbank and our
expectation that mBank remains its strategically important subsidiary.
Accordingly, we affirmed our 'A-2' short-term rating on mBank (for more
details, see "German Commerzbank Long-Term Rating Raised To 'A-' On Higher
ALAC Buffer; Outlook Neg; Sr Subordinated Debt Cut To 'BBB'," published March
28, 2017).
DEUTSCHE BANK AG
We have raised our long-term rating on Deutsche Bank by one notch to 'A-',
given our expectation that it will maintain an ALAC buffer above our 8.5%
threshold for two notches of uplift. We have removed the one-notch positive
adjustment we previously included in the rating because we consider that the
'A-' rating correctly positions Deutsche Bank relative to domestic and
international peers. We have reviewed Deutsche Bank's SACP in light of the
equity increase and strategic revisions announced on March 5, 2017, and
continue to assess it at 'bbb'. We believe these measures underpin Deutsche
Bank's balance sheet and address our previous concerns over its financial
strength and ability to meet future regulatory capital requirements.
The negative outlook reflects the multiyear execution process required to
restructure its operations and our view that it could encounter setbacks along
the way (for more details, see "Deutsche Bank Upgraded To 'A-' On Increased
ALAC Buffer; Outlook Negative; Senior Subordinated Debt Lowered To 'BBB-',"
published on March 28, 2017).
DEUTSCHE PFANDBRIEFBANK (PBB)
We have raised our long-term rating on PBB by two notches to 'A-' for ALAC
uplift, reflecting our expectation of a significant increase of ALAC buffers
materially above our 8% threshold for a two-notch uplift, which is from
inclusion of eligible senior subordinated debt that we assess as sustainable
over the medium to long term. Considering the materially increased senior
debtholders protection in the event of a resolution, we believe the rating
level on PBB is in line with international peers'. Our action also
acknowledges the progress that management has made in restructuring PBB. While
the bank remains narrowly focused on the commercial real estate sector, we now
see its asset quality as solid and note the geographic diversity of its loan
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book. While the bank targets only moderate shareholder returns (about a 6%
return on equity), its profitability appears likely to remain subpar through
end-2018, despite its satisfactory efficiency, due to currently low interest
rates and the low-activity environment. We also see some vulnerability if the
economic environment in Germany deteriorates. Since we continue to assess
PBB's GCP at 'bbb'--based on our views of its weak business position, strong
capital and earnings, moderate risk position, and adequate funding and
liquidity--we lowered to 'BBB-' our rating on its reclassified senior
subordinated debt, considering a one-notch deduction for subordination (for
more details, see "German Deutsche Pfandbriefbank Upgraded To 'A-' On Higher
ALAC Buffer; Outlook Neg; Sr Sub Debt Cut To 'BBB-'," published March 28,
2017).
UNICREDIT BANK AG
We have affirmed our long-term rating on UniCredit Bank at 'BBB' on our
expectation that the ALAC buffer has increased significantly to a level above
our 5% threshold for a one-notch uplift, but that it remains uncertain if this
ratio is sustainable over the next two years. We assigned a developing outlook
to UniCredit Bank. The developing outlook indicates that we could affirm,
raise, or lower our ratings on UniCredit Bank over the next 12-24 months,
during which time we expect that the resolution strategy for Italy-based
UniCredit Group, including the level and positioning of bail-in buffers, will
become clear.
As a result, we lowered UniCredit Bank's reclassified senior subordinated debt
to 'BBB-', reflecting the unchanged rating on the bank as the starting point
for notching to derive the rating on senior subordinated debt and minus one
notch for its embedded subordination. We continue to assess UniCredit Bank's
unsupported SACP as 'bbb+' and to factor in a one-notch downward adjustment
into our rating to incorporate risks from interconnectedness with its
lower-rated Italian parent (for more details, see "German UniCredit Bank
Affirmed At 'BBB/A-2'; Outlook Developing; Senior Subordinated Debt Downgraded
To 'BBB-'," published March 28, 2017).
RELATED CRITERIA
• General Criteria: Guarantee Criteria, Oct. 21, 2016
• General Criteria: S&P Global Ratings' National And Regional Scale Mapping
Tables, June 01, 2016
• Criteria - Financial Institutions - Banks: Bank Rating Methodology And
Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015
• Criteria - Financial Institutions - Banks: Bank Hybrid Capital And
Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29,
2015
• General Criteria: Principles For Rating Debt Issues Based On Imputed
Promises, Dec. 19, 2014
• General Criteria: National And Regional Scale Credit Ratings, Sept. 22,
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2014
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• Criteria - Financial Institutions - Banks: Assessing Bank Branch
Creditworthiness, Oct. 14, 2013
• Criteria - Financial Institutions - Banks: Quantitative Metrics For
Rating Banks Globally: Methodology And Assumptions, July 17, 2013
• Criteria - Financial Institutions - Banks: Revised Market Risk Charges
For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012
• Criteria - Financial Institutions - Banks: Banks: Rating Methodology And
Assumptions, Nov. 09, 2011
• Criteria - Financial Institutions - Banks: Banking Industry Country Risk
Assessment Methodology And Assumptions, Nov. 09, 2011
• Criteria - Financial Institutions - Banks: Bank Capital Methodology And
Assumptions, Dec. 06, 2010
• Criteria - Financial Institutions - Banks: Methodology For Mapping ShortAnd Long-Term Issuer Credit Ratings For Banks, May 04, 2010
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• General Criteria: Rating Implications Of Exchange Offers And Similar
Restructurings, Update, May 12, 2009
• Criteria - Financial Institutions - Banks: Commercial Paper I: Banks,
March 23, 2004
RELATED RESEARCH
• Deutsche Bank Upgraded To 'A-' On ALAC Buffer; Outlook Negative; Snr Sub
Debt Lowered To 'BBB-', March 28, 2017
• German Deutsche Pfandbriefbank Upgraded To 'A-' On Higher ALAC Buffer;
Outlook Neg; Sr Sub Debt Cut To 'BBB-', March 28, 2017
• German UniCredit Bank Affirmed At 'BBB/A-2'; Outlook Developing; Senior
Subordinated Debt Downgraded To 'BBB-', March 28, 2017
• German Commerzbank Long-Term Rating Raised To 'A-' On Higher ALAC Buffer;
Outlook Neg; Sr Subordinated Debt Cut To 'BBB', March 28, 2017
RATINGS LIST
* * * * * * * * * * * * * * *
Commerzbank AG * * * * * * * * * * * * * * *
Upgraded; CreditWatch/Outlook Action; Ratings Affirmed
To
Commerzbank AG
Counterparty Credit Rating
A-/Negative/A-2
mBank
Counterparty Credit Rating
From
BBB+/Watch Pos/A-2
BBB+/Negative/A-2
BBB/Watch Pos/A-2
To
From
A-
BBB+/Watch Dev
Upgraded; CreditWatch Action
Commerzbank AG
Senior Unsecured
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Senior Unsecured
mFinance France S.A
Senior Unsecured[1]
A-p
BBB+p/Watch Pos
BBB+
BBB/Watch Pos
Downgraded; CreditWatch/Outlook Action
To
Commerzbank AG
Subordinated[2]
BBB
Subordinated[2]
cnA
From
BBB+/Watch Dev
cnA+/Watch Dev
Ratings Affirmed; CreditWatch Action
To
From
Commerzbank AG
Commercial Paper
A-2
A-2/Watch Pos
Commerzbank U.S. Finance Inc.
Commercial Paper[3]
A-2
A-2/Watch Pos
Ratings Affirmed
Commerzbank AG
Subordinated
BBB-
Dresdner Funding Trust I
Junior Subordinated
BB
Dresdner Funding Trust IV
Subordinated
BBB-
HT1 Funding GmbH
Junior Subordinated
BB-
[1]Guaranteed by mBank.
[2]Previously rated as senior unsecured.
[3]Guaranteed by Commerzbank AG.
* * * * * * * * * * * * * * * Deutsche Bank AG * * * * * * * * * * * * * *
Upgraded; CreditWatch/Outlook Action; Ratings Affirmed
To
Deutsche Bank AG
Counterparty Credit Rating
A-/Negative/A-2
Greater China Regional Scale
cnAA-/-Senior Unsecured
ASenior Unsecured
A-p
Certificate Of Deposit
A-
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From
BBB+/Watch Pos/A-2
cnA+/Watch Pos/-BBB+/Watch Dev
BBB+p/Watch Pos
BBB+/Watch Dev
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Deutsche Bank
Deutsche Bank
Deutsche Bank
Deutsche Bank
Deutsche Bank
Deutsche Bank
Deutsche Bank
Deutsche Bank
Deutsche Bank
Deutsche Bank
Counterparty
Trust Corp.
Trust Co. Delaware
Trust Co. Americas
National Trust Co.
Luxembourg S.A.
AG (Milan Branch)
AG (Madrid Branch)
AG (London Branch)
AG (Cayman Islands Branch)
AG (Canada Branch)
Credit Rating
A-/Negative/A-2
Deutsche Bank Securities Inc.
Counterparty Credit Rating
Local Currency
A-/Negative/A-2
BBB+/Watch Pos/A-2
BBB+/Watch Pos/A-2
Downgraded; CreditWatch/Outlook Action
Deutsche Bank AG
Subordinated[1]
Subordinated[1]
To
From
BBBcnA-
BBB+/Watch Dev
cnA+/Watch Dev
Ratings Affirmed
Deutsche Bank AG
Turkey National Scale
Subordinated
Subordinated
Subordinated
Junior Subordinated
Certificate Of Deposit
Commercial Paper
trAAA/--/trA-1
BB+
BB+p
cnBBB+
B+
A-2
A-2
Deutsche Bank AG (Cayman Islands Branch)
Commercial Paper
A-2
Deutsche Bank Capital Finance Trust I
Preferred Stock
BBDeutsche Bank Capital Funding Trust VII
Preferred Stock
B+
Deutsche Bank Contingent Capital Trust II
Preferred Stock[2]
B+
Deutsche Bank Contingent Capital Trust III
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Preferred Stock[2]
B+
Deutsche Bank Contingent Capital Trust IV
Preferred Stock[2]
B+
Deutsche Bank Contingent Capital Trust V
Preferred Stock[2]
B+
Deutsche Bank Financial LLC
Commercial Paper[2]
A-2
[1]Previously rated as senior unsecured.
[2]Guaranteed by Deutsche Bank AG.
* * * * * * * * * * * *
Deutsche Pfandbriefbank AG * * * * * * * * * * * *
Upgraded; CreditWatch Action; Rating Affirmed
To
Deutsche Pfandbriefbank AG
Counterparty Credit Rating
A-/Negative/A-2
From
BBB/Watch Pos/A-2
Upgraded; CreditWatch Action
Deutsche Pfandbriefbank AG
Senior Unsecured
To
From
A-
BBB/Watch Dev
To
From
BBB-
BBB/Watch Dev
Downgraded; CreditWatch Action
Deutsche Pfandbriefbank AG
Subordinated[1]
Ratings Affirmed
Deutsche Pfandbriefbank AG
Subordinated
Commercial Paper
BB+
A-2
Hypo Real Estate International Trust I
Preferred Stock[2]
BB[1]Previously rated as senior unsecured.
[2]Guaranteed by Deutsche Pfandbriefbank AG.
* * * * * * * * * * * * * * *
UniCredit SpA * * * * * * * * * * * * * * *
Outlook Action; Ratings Affirmed; CreditWatch Action
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To
From
UniCredit Bank AG
UniCredit Luxembourg S.A.
Counterparty Credit Rating
BBB/Developing/A-2
BBB/Watch Pos/A-2
UniCredit Bank AG
Senior Unsecured
Subordinated
Short-Term Debt
BBB
BB+
A-2
BBB/Watch Dev
BB+
A-2
To
From
BBB-
BBB/Watch Dev
Downgraded; CreditWatch Action
UniCredit Bank AG
Subordinated [1]
Ratings Affirmed
HVB Capital LLC I
Junior Subordinated
BB-
HVB Capital LLC II
Junior Subordinated
BB-
HVB Capital LLC III
Junior Subordinated
BB-
HVB Funding Trust I
Junior Subordinated
BB-
HVB Funding Trust II
Junior Subordinated
BB-
HVB Funding Trust III
Junior Subordinated
BB-
[1]Previously rated as senior unsecured.
Additional Contact:
Financial Institutions Ratings Europe; [email protected]
Certain terms used in this report, particularly certain adjectives used to
express our view on rating relevant factors, have specific meanings ascribed
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further
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information. Complete ratings information is available to subscribers of
RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All
ratings affected by this rating action can be found on the S&P Global Ratings'
public website at www.standardandpoors.com. Use the Ratings search box located
in the left column. Alternatively, call one of the following S&P Global
Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office
(44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225;
Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
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