UniCredit’s rating might top Italy’s if it buys Commerzbank, Moody’s says

MILAN: Moody’s would consider hiking UniCredit’s credit rating one notch above Italy’s sovereign rating if it bought Commerzbank, depending on a number of factors including an ability to contain execution and operational risks, the ratings agency said.

Italy’s UniCredit has built a near 21% stake in Commerzbank, pending supervisory approval, and says it is keen to explore a full takeover. The move has irked Germany’s establishment and Commerzbank has said its strategy is based on independence.

An acquisition would be Europe’s first major cross-border banking deal since the global financial crisis. Moody’s said it would assess whether UniCredit’s standalone rating of ‘Baa3’, currently aligned with Italy’s rating, would merit an upgrade to ‘Baa2’ in the event of a deal. UniCredit’s unsecured debt rating would improve as a consequence, it said.

Any upgrade “would depend upon the combined group’s degree of international diversification, exposure to Italian sovereign risk, and its post-acquisition capitalization, asset risk, funding and liquidity,” Moody’s said.

Italy’s weak credit standing has traditionally posed a challenge to Italian lenders’ international expansion plans. Before courting Commerzbank, UniCredit underwent a long restructuring and amassed billions of capital in excess of its minimum target.

In the event of a deal, a stronger footprint in triple-A rated Germany, more diversified funding channels, and a lower direct exposures to Italy’s debt relative to capital would “loosen the intrinsic links and correlation” between UniCredit’s and Italy’s ratings.

“We would expect UniCredit’s currently very strong capitalization to be diluted in the event of an acquisition of Commerzbank, but to remain sound and at least consistent with management’s stated target range for a minimum CET1 of 12.5%-13%,” Moody’s said, referring to a key gauge of capital.

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“While any acquisition would likely reduce profitability in the short-term given restructuring and other costs, it would in the medium-term enable higher returns through cost synergies in Germany and deliver a stronger combined franchise,” it added. Meanwhile, Moody’s confirmed UniCredit’s ratings with a stable outlook.