Moody’s Investors Service cut financial-strength ratings for Commerzbank AG (CBK), Germany’s second- largest lender, citing the “weakening resilience and eroding franchise” of its public-finance unit. The shares fell. The standalone bank financial strength ratings of Commerzbank AG (CBK) and Commerzbank Europe (Ireland) were cut to D+ from C- and that of Eurohypo (EHY)to E+ from D-, it said in a statement. The ratings represent Moody’s opinion of a bank’s intrinsic safety and soundness and don’t address the probability of timely repayment of debt.
Eurohypo saddled Commerzbank with losses last year, after the bank wrote down the value of the unit’s Greek government bonds as Europe’s sovereign-debt crisis worsened.
The German lender has said a pledge to sell the division will be hard to deliver this year, as Eurohypo would have difficulty finding funding without the support of its parent company.
“The deteriorating euro-area sovereign debt markets imply that Eurohypo will likely require support for an extended period,” Moody’s said in the statement, “Eurohypo, as a standalone bank, could not weather a further weakening of the yet-unresolved euro-area debt crisis.”
Commerzbank fell as much as 5.1 per cent in Frankfurt trading and was 4.5 per cent lower at Euro1.37. That values the company at about Euro7 billion ($8.9 billion).
Commerzbank posted a 687 million-euro third-quarter net loss on November 4 after writing down the value of its Greek government bonds by Euro798 million.
A 760 million-euro writedown on the notes almost wiped out the bank’s second- quarter profit. Commerzbank’s net sovereign risk related to Greece was 1.4 billion euros at the end of September.
The German bank may have to extend measures to raise capital because of potential losses on Greek debt, Die Welt reported on Wednesday, citing unidentified people familiar with the matter. Commerzbank may have to raise about 6 billion euros, more than the 5.3 billion-euro capital shortfall identified by Europe’s top banking regulator, the German newspaper reported.
Commerzbank is scheduled to inform German financial market regulator Bafin on Jan. 20 how it plans to meet the European Banking Authority’s capital requirements, which are intended to help restore confidence in the sector amid the debt crisis. Eurohypo accounted for 4.8 billion euros of the shortfall, the bank said in a presentation posted on its website this month.
Raising Capital
The lender said as recently as Jan. 9 that it will raise capital by the end of the second quarter by selling assets, lowering costs and retaining earnings. Commerzbank wouldn’t see Eurohypo nationalized as part of the plan, a German government official said yesterday on condition of anonymity.
Commerzbank’s efforts to raise capital include a temporary suspension of new lending at Eurohypo, which also provides commercial-property loans. Moody’s cited the underwriting freeze as a consideration for its downgrade, and said “further seasoning of the commercial real-estate loan portfolio might negatively affect net interest margins and non-performing loan ratios.”
The European Commission ordered Commerzbank to sell Eurohypo by the end of 2014 as a condition for its rescue by the German state following the collapse of Lehman Brothers Holdings Inc. Chief Financial Officer Eric Strutz said in August that a sale would be difficult because of the unit’s funding issues.
To contact the reporters on this story: Tanya Angerer in Singapore at tangerer@bloomberg.net;
Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net
To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net;
Frank Connelly at fconnelly@bloomberg.net
