Commerzbank AG announced Tier 2 SGD 10.25NC5.25 notes with IPG of 6.125%

Commerzbank Aktiengesellschaft (“Commerzbank”) announced Tier 2 SGD subordinated notes at an initial price guidance (“IPG”) of 6.125%. The intended issuance date is expected to be 3 February 2023, which the notes may be called after 5.25 years on 3 May 2028 and mature on 3 May 2033 (assuming no changes to the issuance date). If not called, the notes would reset at the prevailing 5 year SORA-OIS plus the initial margin (to be determined on issuance). 

Currently, the issuer ratings are at A2 (Stable) by Moody’s and BBB+ (Stable) by S&P, while the expected issue rating on the notes is Baa3 by Moody’s given the Tier 2 unsecured, subordinated nature. The issue has an issuer call option, which may be redeemed early at the option of the issuer, for regulatory reasons or for reasons of taxation, all at par. A loss absorption feature is embedded in the issue as well, which allows the issue to be written down or be converted into equity depending on the insolvency, dissolution or liquidation of the issuer.

Commerzbank is a commercial bank primarily operating in Germany, with an international presence in almost 40 countries. It remains one of the largest banks in Germany, where Commerzbank transacts approximately 30% of Germany’s foreign trade. The operations of the bank are mainly differentiated into the following segments: Private and Small-Business Customers (“PSBC”) and Corporate Clients (“CC”).

For the nine months ended 30 September 2022 (“9M22”), Commerzbank reported operating profit of EUR 1,571m, a significant increase from EUR 1,042m in 9M21. The consolidated profit stood at EUR 963m in 9M22, as compared to only EUR 9m in 9M21. The effect of the rising interest rates definitely had a positive impact on Commerzbank. Despite the mandated credit holiday in Poland that resulted in a charge of EUR 270m in its subsidiary’s statement, we see an overall rise in the profitability for 9M22 as compared to 9M21.

For Commerzbank’s CET1 ratio, the current 13.79% as of 9M22 has a CET1 buffer of 435 basis points, to the required level of 9.44%, which is a slight increase from the CET1 ratio of 13.72% as of the second quarter of 2022. The “Strategy 2024” intends to keep the CET1 ratio above 13.0% across 2022, followed by the target to hit 14.8% by 2024. While Commerzbank remains on track, there is still a significant difference for it to make. Regardless of the target, we believe Commerzbank has had managed its credit profile with prudence, and expect it to remain decent until we see the plans past “Strategy 2024”.

Table 1
Comparable SGD notes against CMZB issuance

At an IPG of 6.125%, other notes of similar structure are BNP 5.250% 12Jul2032 Corp (SGD), ABNANV 5.500% 05Oct2032 Corp (SGD), HSBC 5.250% 27Jun2032 Corp (SGD) – all of which are trading above par, unsurprisingly given the investment-grade rating on the issues. As such, with the IPG of 6.125% and a relatively similar investment-grade expected to be assigned to the issue, the new issue by CMZB is highly attractive with a similar maturity term. However, investors ought to note that the final price guidance is likely to be lower than the IPG. Similarly, we wish to highlight once again that there is a loss absorption feature embedded in the issue given the Tier 2 nature of the issuance, which may not cater to all investors.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in CMZB 4.200% 18Sep2028 Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities.