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May 12, 2009

Commerzbank AG And Dresdner Bank AG Outlooks To Negative On Worsening Credit Conditions; 'A/A-1' Ratings Affirmed

Rationale

On May 12, 2009, Standard & Poor's Ratings Services revised its outlooks on
Germany-based Commerzbank AG and its wholly-owned subsidiary Dresdner Bank AG
to negative from stable. At the same time, Standard & Poor's affirmed its 'A'
long-term and 'A-1' short-term counterparty credit ratings on both banks. In a
related rating action, Standard & Poor's lowered its ratings on Commerzbank's
subsidiary Eurohypo AG (see "Eurohypo AG Ratings Cut To 'A-/A-2' On Worsening
Credit Environment And Loss Expectation; Outlook Negative," published today on
RatingsDirect).

These rating actions conclude our review of Commerzbank's stand-alone
credit profile and take into account our assessment of the potential impact of
a sharply deteriorated economic outlook on the bank's loan portfolio as a
large lender to commercial enterprises, and in commercial real estate and
shipping, and the likely effect on its outsized structured credit portfolio
over the next 12-30 months. The outlook revision reflects the challenges, in
our view, that Commerzbank faces in terms of funding capacity and capital
requirements for its large wholesale commercial businesses, owing to a
fundamentally changing banking environment; and Commerzbank's short- to
medium-term earnings prospects, in light of ongoing market dislocations, which
particularly affect Dresdner Bank's sales and trading business and Eurohypo
AG. In addition, we considered agreed and expected government support
measures.

The decline in Commerzbank's stand-alone credit profile reflects our
assessment of an increased probability that--like other large wholesale
lenders in Germany--Commerzbank's credit losses might increase beyond
historical patterns, potentially a cumulative 4%-5% on customer loans
(excluding public-sector loans) until year-end 2011. Our assessment takes into
account the poor performance of Dresdner Bank's investment banking business
and outsized high-risk legacy holdings in traded credit exposures and risks to
its financial profile from restructuring requirements.
We consider Commerzbank to be a highly systemically important bank to
Germany and a government-related entity. The government is likely to own 25%
plus one share in Commerzbank after a planned capital increase, which benefits
the ratings through a four-notch uplift above the bank's stand-alone credit
profile.

Our assessment of Commerzbank's stand-alone credit profile benefits from
its position as the second largest private bank in Germany, with a nationwide
network in retail and corporate banking, sound diversification across business
lines, and substantial extraordinary government support that has strengthened
the group's capitalization and liquidity. This is partly offset by Commerzbank's business profile as a largely wholesale-oriented bank and the
potential pressures on earnings and capital from the recession, market
dislocations, and the restructuring of the bank.

In our view, Commerzbank will remain under considerable financial stress,
and we believe that its weakened financial profile and high confidence
sensitivity as a wholesale bank make it highly reliant on implicit state
support for the foreseeable future. We believe that Commerzbank should be able
to absorb future losses, given the size of its capital base after an
additional planned €10 billion (from a total of €18.2 billion) capital
injection from the German government. However, this means the bank's equity
would include a high proportion of hybrid capital instruments, mainly provided
by the government. We therefore believe that future losses might substantially
erode shareholders' equity and, consequently, the bank's adjusted-total-equity
ratio. Nevertheless, we note that the hybrids provided by the German
government and some other hybrid capital instruments issued by Commerzbank and
Dresdner Bank would be able to absorb some of the losses on a going-concern
basis through a reduction in their face value.



Outlook

The negative outlook reflects our view of the short- to medium-term challenges
Commerzbank is likely to face in coping with the financial market crisis; the
impact of the recession on its loan book, which could still result in more
severe losses than currently factored into our ratings; and the restructuring
process needed to reduce its nonstrategic and wholesale-oriented activities,
capital leverage, funding needs, and cost base.

We could lower the ratings if we believe that the provided state support
could be insufficient.

Rating implications could be positive if Commerzbank's restructuring
process were to progress and if the downside risk to asset quality and
earnings were to diminish while the bank continues to benefit from government
support.


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