UniCredit’s Potential Acquisition of Commerzbank

Milan (Reuters) – UniCredit’s acquisition of Commerzbank (ETR:CBKG) could prompt Moody’s (NYSE:MCO) to consider raising its rating on the Italian bank’s riskier debt, the credit rating agency noted on Wednesday.

Moody’s affirmed UniCredit’s long-term senior unsecured debt rating at ‘Baa1’ – two notches above Italy’s ‘Baa3’ rating and already the highest it can be under Moody’s methodology.

However, the agency mentioned it would assess whether the bank’s standalone assessment of ‘baa3’, currently in line with Italy’s rating, would warrant an upgrade to ‘baa2’ if the acquisition proceeds.

Analysts pointed out that Commerzbank’s superior credit rating and UniCredit’s potential reduction of exposure to Italian debt are significant reasons for the acquisition pursuit.

An upgrade to UniCredit’s standalone assessment would improve the ratings assigned by Moody’s to riskier debt instruments, possibly lowering funding costs. These include senior non-preferred debt, known as ‘junior senior’ debt, other subordinated debts, and the riskiest type, Additional Tier 1 bonds (AT1), which blend characteristics of both debt and equity.

In a recent fixed-income presentation, UniCredit disclosed that its senior unsecured debt comprises 37% of the total, with subordinated debt at 10%, and AT1 bonds at 4%.

UniCredit has established a nearly 21% stake in Commerzbank, awaiting supervisory approval, and is interested in exploring a full acquisition.

This development has upset Germany’s establishment, with Commerzbank asserting its strategy is one of independence. If successful, this acquisition would mark Europe’s first significant cross-border banking deal since the global financial crisis.

Moody’s stated that any upgrade would hinge on the new group’s international diversification, exposure to Italian sovereign risk, and its capitalization, asset risk, funding, and liquidity post-acquisition.

Italy’s fragile credit status has historically complicated international expansion for its lenders.

On Wednesday, Moody’s reconfirmed Commerzbank’s ‘A2’ long-term senior unsecured debt rating, which stands two notches higher than UniCredit’s ‘Baa1’.

Prior to pursuing Commerzbank, UniCredit underwent extensive restructuring, amassing billions in excess capital above its minimum target.

If a deal is finalized, UniCredit would gain a stronger presence in triple-A rated Germany, diversified funding channels, and reduced direct exposure to Italy’s debt relative to its capital, thereby weakening the intrinsic ties between UniCredit’s and Italy’s ratings.

Moody’s anticipates that although the acquisition might dilute UniCredit’s currently strong capitalization, it would still remain robust and compatible with the management’s target range for a minimum CET1 of 12.5%-13%.

While short-term profitability could decrease due to restructuring costs, the acquisition could enhance returns over the medium term through cost synergies in Germany and a more robust combined franchise.