FINANCIAL INSTITUTIONS

ISSUER IN-DEPTH19 October 2016

RATINGS

Commerzbank AG*Outlook Stable

Bank Deposits A2/P-1

Senior Unsecured Baa1/P-1

Baseline CreditAssessment

baa3

*For a full list of Commerzbank AG's ratings pleasesee Issuer homepage on Moodys.com. Source:Moody's Investors Service

KEY METRICS

H1'16 2015 2014 2013

PL Ratio1 3.0% 3.3% 5.1% 6.3%

TCE/RWA2 13.1% 13.4% 10.7% 12.4%

NI/TA3 0.2% 0.3% 0.2% 0.0%

MF/TBA4 28.3% 28.3% 32.6% 28.3%

LBA/TBA5 35.9% 40.2% 36.9% 34.0%

(1) Problem loans/Gross loans; (2) TCE = TangibleCommon Equity; RWA = Risk-Weighted Assets; (3) NI= Net Income, TA = Tangible Assets; (4) MF = MarketFunds, TBA = Tangible Banking Assets; (5) LBA =Liquid Banking AssetsSource: Moody's Banking Financial Metrics

Contacts

Michael Rohr 49-69-70730-901VP-Senior CreditOfficermichael.rohr@moodys.com

Alexander Hendricks,CFA

49-69-70730-779

Associate ManagingDirector - Bankingalexander.hendricks@moodys.com

Carola Schuler 49-69-70730-766Managing Director -Bankingcarola.schuler@moodys.com

Commerzbank AGDigital Revamp Will Cap Profits and Capital Build-Up

Commerzbank is refocusing its business with the aim of increasing profitability, efficiencyand reducing complexity. The reorganisation involves enlarging its most important segment,the Mittelstandsbank (MSB) that serves Germany's mid-sized businesses. The bank will scaleback its investment banking activities and digitalise 80% of its processes. The revamp willburden profitability over the next three years and restrict capital build-up. It also carrieshigh execution risks. Over the longer term, however, it should help the bank to improve itsleverage, free up capital for investment and reduce earnings volatility.

The strategic revamp will weigh on profitability during the 2016-18 period andlimit Commerzbank’s capacity to increase its capital through retained earnings.Restructuring costs and a continued high investment spend for information technology (IT)will cap profits and capital expansion. The bank expects to incur a €700 million impairmentcharge in the third quarter of 2016 and to book overall €1.1 billion of restructuring costs in2017 and 2018. As the reengineering proceeds, Commerzbank will find it hard to increaseits fully loaded common equity Tier 1 (CET1) capital ratio to meaningfully above 12% before2019, leaving only modest headroom above its 11.75% 2019 SREP1 ratio requirement.

Refocusing and restructuring the key Mittelstand business carries execution risks.The group's strategic refocusing largely affects Commerzbank’s most important division,the MSB, which will be enlarged by onboarding the bank's larger corporate and relatedcapital markets business, while smaller Mittelstand clients will be moved into the retail bank.The split exposes Commerzbank to considerable execution risk and could erode its strongposition in that business segment, if not executed carefully.

While the cost targets look feasible, achieving the targeted revenue growth willbe harder. By digitalizing 80% of its processes and downsizing higher-risk and high-cost investment banking activities, Commerzbank targets a cost base of €6.5 billion by2020, down from an annualised €7.2 billion in the first half of 2016. The cost-cutting looksfeasible but comes at a time when low interest rates are pressuring the bank’s revenues.Commerzbank is further aiming for a net return on tangible equity (RoTE) of more than 6%by the end of 2020 on revenues between €9.8 and €10.3 billion. In our view, this looks overlyambitious.

We view the revamp positively over the longer term. We believe that successfullyfocusing on two re-sized, client-focused business pillars will help support Commerzbank's riskprofile over the longer term. It will reduce its balance sheet to below €500 billion by 2020,further improve the leverage ratio and free up capital for investment. In addition, cuttinginvestment banking activities will reduce earnings volatility and lower risk-weighted assets,the latter allowing for business growth in Commerzbank's two refocused core segments.

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

The strategic revamp will weigh on profits and capital until 2019Commerzbank's planned reorganisation will incur €1.1 billion of restructuring charges over 2017 and 2018. The front-loaded costs willburden the bank's profitability because cost savings will only gradually become visible from some time in 2018. In addition, plannedrevenue increases will start slowly in 2017 and are expected to achieve their full run-rate only by 2020. Together with continuouslyhigh, and potentially steepening, loan-loss charges from the bank's highly cyclical commercial real estate portfolio or from the stressedshipping portfolio, we expect profitability to be low over the next three years. This weak profitability will expose the bank to potentialshocks such as a further fall in interest rates that would burden the bank's revenue base and exert additional pressure on the bank's netincome.

Exhibit 1

Overview Of Commerzbank's Targets Under Its 'Commerzbank 4.0' Program2016E-2020E

*Note: Revenue and cost targets as well as Cost-To-Income Ratio (CIR) 2016E based on analysts' consensus as of 15 August 2016. 2017E-2019E absolute revenues and costs estimatedbased on Commerzbank's target level of completion versus 2020E targets. Net return on tangible equity (Net RoTE) based on company presentation, 4 October 2016, pages 28 and 37Sources: Company reports and presentations, Moody's Investors Service

As a result, Commerzbank's ability to build its capital over the next three years will be constrained. The bank is targeting onlya moderate increase in its absolute level of CET1 capital. Coupled with our expectation of stable risk-weighted assets (RWA) –incorporating the anticipated reduction in RWA from the planned downsizing efforts being largely offset by business growth and futureregulatory measures2 – the bank will maintain a fully-loaded CET1 ratio of around 12% during the 2016-18 period. This will leave onlyvery modest headroom above the bank's 2019 capital requirements of 11.75% under the European Banking Authority's SupervisoryReview and Evaluation Process (SREP). Once the first phase of the restructuring is completed by the end of 2018, we would expectCommerzbank to gradually improve its capitalisation metrics and meet its target of a fully-loaded CET1 ratio of above 13% by 2020.

Refocusing and restructuring the key Mittelstand division carries execution risksCommerzbank's business model will rest on two customer segments in the years ahead, namely Private and Small Business Customersand Corporate Clients. This refocusing will require scaling back the trading desk and other capital-consuming, lower-return activities ininvestment banking. Capital freed up through this endeavour will be reallocated and used to finance the restructuring as well as loangrowth initiatives.

The business overhaul will largely affect Commerzbank’s most important division, the MSB, which will onboard the bank's largestcorporate clients from Commerzbank’s former Corporates & Markets division. Smaller MSB clients will be added to the Private andSmall Business Customers banking operations (i.e., Commerzbank’s former Private Customers division), and include the Central andEastern European operations.

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3 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Exhibit 2

Streamlining the Bank Will Be a Complex UndertakingTargeted new divisional set-up

Note: Size of stacked bars not indicative of underlying assets / revenuesSource: Company presentation, 4 October 2016, Moody's Investors Service

Tackling the restructuring of the bank by re-engineering the set-up of the MSB will be risky. MSB contributed 62% of the core bank’soperating profits between 2012 and 2015. It therefore plays a major role in the bank’s internal capital generation. The reaction ofclients to the move is a key risk to the bank's revenues, and consequently its profits.

We consider the risk is greatest among the regionally-oriented small to mid-sized corporate customers. While the regrouping does notnecessarily entail changes in the service level or product offering, it will be key for Commerzbank to foster continued strong and localcustomer services to satisfy its clients' needs.

Larger mid-sized entities will be grouped together with the bank's large corporate clients, formerly serviced through the Corporates &Markets division. We caution that those corporate clients could face some cultural disruption due to changes in key personnel at theMSB. If not executed carefully, the changes could weaken the bank’s MSB franchise and erode Commerzbank’s strong position in thatbusiness segment.

We take a positive view of the planned reduction of the investment banking business. Investment banking activities, such as interestrate derivatives and other exotic, structured businesses, are riskier and so drive up RWA and capital needs. An exit from these morevolatile businesses will also improve the quality of the bank's balance sheet, reduce the bank's leverage and lead to a more stableearnings trajectory over time. In addition, it will help avoid future RWA growth resulting from upcoming regulatory measures, such asthe fundamental review of the trading book (FRTB3).

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4 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Downsizing the investment bank requires significant efforts in streamlining and ring-fencing operations

As a large part of its program in refocusing and simplifying the bank, Commerzbank will execute several initiatives, largely targeting its formerCorporates & Markets business and reshaping it to fit with the MSB businesses. While client-centric activities such as corporate advisory andfinancing, core hedging products and core investment products will remain central to the bank's offering, higher-risk technology- and capital-intensive business will be separated or ceased.

This will affect the bank's exotic derivatives businesses in interest-rate trading which will be ceased entirely. Further, flow credit and bondtrading and market services businesses will be scaled back significantly. The structured equity business in Equity Markets & Commodities(EMC), largely geared into market-making and securitised product manufacturing, will be separated in a new entity.

Because this large overhaul affects many internal and often intertwined processes, this will not be an easy exercise for the bank. Further,Commerzbank will have to ascertain that continued business lines are not negatively affected by the realignment and right-sizing and will fitwith the bank's new strategy, also from a cultural perspective. This will consume significant management time and therefore prove challengingfor the bank's refocusing and growth initiatives towards two simpler and more client-focused core segments.

Digitalisation moves to the forefront of the bank's restructuring effortsThe strategy of becoming a digital enterprise by 2020 is a huge project carrying sizeable execution risk. Commerzbank faces a particularchallenge since it has been in restructuring and de-risking mode for almost a decade following the takeover of Dresdner Bank AG(assumed by Commerzbank AG; remaining outstanding debt rated Baa1 stable, Ba14) during the financial crisis. Despite having beensuccessful in migrating Dresdner Bank AG's IT systems on to Commerzbank's platform and developing several online applications for itsclients, performing the next step in reshaping the bank's IT systems will not be an easy task and involve numerous complexities.

As part of its new strategy, Commerzbank is targeting 80% digitalisation of all relevant processes by 2020 and will invest €700 millionannually into smart data and seamless IT architectures, largely by reallocating existing funds. To optimise this process of close to fullautomation, Commerzbank will center its efforts around a 'Digital Campus', a group of dedicated in-house businesses and IT experts.

At the same time, Commerzbank will not cut back on its regional presence. It will maintain its branch network of approximately 1,000branches but will differentiate them, turning them either into 'flagship' branches focused on advisory services, or 'city' branches with ahigher degree of automation.

With this dual strategy, Commerzbank will position itself squarely between predominantly online banks with simple product processesfor the vast majority of their business operations (e.g. ING DiBa; A2 stable, a25) and retail banks with a strong nationwide presenceand, as a result, high costs for maintaining an extensive branch network, e.g. the German savings banks (Sparkassen-Finanzgruppe; Aa2stable, a26).

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5 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Exhibit 3

Commerzbank's Efficiency Will Be Improved Following DigitalisationCost-to-income ratio, 2012-H1 2016

Note: *ING DiBa AG and Sparkassen-Finanzgruppe H1 2016 cost-to-income ratio based on Moody's estimatesSources: Moody's Banking Financial Metrics, Moody's Investors Service

The low interest-rate environment is exerting pressure on the revenue bases of Germany's (traditional) banks and is likely to trigger areduction in branch numbers in order to safeguard profitability. This will benefit Commerzbank because it will be faster in adapting tothe new environment than larger retail banking groups and will be able to maintain a strong regional foothold.

The dual strategy of digitalising the bank and maintaining local services also resembles the bank's customer base, with a highproportion of retail customers but also with a highly affluent and professional customer base in the German Mittelstand.Commerzbank's targeted cost-to-income ratio of below 66% by 2020 (down from 73% in 2015) therefore fits the bank's strategy, andwe believe the bank will be able to reach its announced cost-cutting targets.

Digitalisation will be an essential component and driver of Commerzbank's success in future years despite the effort and short-termdisruption it will involve. The bank not only needs to keep in pace with domestic competitors in a highly competitive German bankinglandscape, but will need to be able to cope with substantial increases in Internet-based transactions.

Recent market analyses show that over the next three to five years, more than two thirds of banking customers in Europe are likely tobe frequent users of online banking services7. Other industries, such as airlines and retailers have already needed to overhaul their clientofferings and have transformed themselves to better fit the digital world.

Therefore, digitalisation is the cornerstone of Commerzbank's strategy. Failure to successfully implement the full digital overhaulwill stall the restructuring and impede achievement of the bank's targeted cost reductions and efficiencies. If successfully executed,however, it would put Commerzbank at the forefront of most of its domestic peers. With better (and faster) controls, simpler and moreflexible workstreams, lower costs and a rising market share of online customers, the bank would also materially improve its financialstability.

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6 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Cost targets look feasible, but achieving targeted revenue growth will be harderCommerzbank targets an absolute cost base of €6.5 billion by 2020, down from an annualised €7.2 billion in the first half of 2016,chiefly by cutting 9,600 full-time positions, or 21% of the bank's year-end 2015 full-time personnel base. The bank aims to invest in2,300 new full-time positions by 2020, implying a net reduction of 7,300 full-time positions. This major restructuring program comeson the heels of multiple cost-cutting exercises over several years and some substantial restructuring as well as de-risking efforts.

Exhibit 4

Commerzbank's Cost Targets In DetailProgression of total operating expenses, 2016E-2020E

*Note: Based on analysts' consensus as of 15 August 2016Source: Company presentation, 4 October 2016, Moody's Investors Service

Executing the new, much larger programme will be more difficult and impose a greater strain on the bank than earlier cost-cuttingprograms since easy cost-cutting options have long been exhausted.

Commerzbank will book €1.1 billion of restructuring costs in 2017 and 2018 to achieve a gross annual cost reduction of €1.1 billion from2020 onwards. The bank expects the cost synergies to start in 2018 (25%), accelerate in 2019 (50%) and reach their full potential in2020. We view the cost-cutting targets as feasible but caution that they come at a time of significant pressure on the bank’s revenuesand earnings, largely because of persistently low interest rates.

Exhibit 5

Cost Targets Look FeasibleOperating expenses and Commerzbank targets, 2012-2020E

Sources: Company reports and presentations, Moody's Investors Service

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7 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Revenue targets are ambitiousAccompanying Commerzbank's drive for higher efficiency, the bank is targeting revenues for 2020 of between €9.8 and €10.3 billion,up from an annualised €9.1 billion in H1 2016. Underlying this target is an expectation of flat interest rates (3M Euribor -0.27%). Thebank sees considerable upside to revenue targets (€1.0 billion forecasted) should rates rise to 0.85% (3M Euribor) by 2020.

In our view, the bank's revenue targets look overly ambitious from today's perspective. Firstly, we anticipate revenue losses of €500million forecasted by the bank8 will burden its revenue base early during the restructuring phase, i.e. already in 2017 and to a lesserextent in 2018. Secondly, we believe the bank will find it difficult to realise 25% of its targeted cumulative revenue increase of €1.4to €1.9 billion by 2020 (i.e. approximately €350 million) already next year. While we expect additional revenues from new businessalready underwritten this year or early in 2017 to support the bank's revenue base, we expect revenue synergies from the initiativesunder Commerzbank's new strategy to be back-end loaded and only follow a successful and meaningful expansion of the bank'scustomer base and streamlining of its product portfolio.

Finally, we see risks that interest rates may fall further (3M Euribor at -0.31% currently), exerting greater pressure on the bank'srevenues than anticipated in its strategic plan.

Exhibit 6

Revenue Targets are AmbitiousTotal revenues and Commerzbank targets, 2012-2020E

Note: 2020E revenue target displayed above indicates the low end of Commerzbank's target range of €9.8 - €10.3 billionSources: Company reports and presentations, Moody's Investors Service

In particular, Commerzbank aims to increase revenues by more than €1.1 billion in its Private and Small Business Customer segment,largely by gaining a net two million new customers in the German market by 2020. This compares with approximately twelve millioncustomers as of year-end 2015 and one million net new customers acquired since 2012, with new customer growth largely stemmingfrom Commerzbank's online bank comdirect (unrated) and its Polish subsidiary mBank S.A. (Baa2 stable, ba29). We therefore believethat the targeted customer growth is unlikely to be achieved entirely by organic growth and Commerzbank may have to seek bolt-on acquisitions to support its targets. Depending on the prices paid, this could negatively affect the bank's capital adequacy metrics.In addition to the expansion of its customer base, Commerzbank aims to increase its market share for Small Business Customers to8% from 5% by 2020 by launching innovative (digital) products and seek growth in its already strong payment and credit transactionbusiness.

In corporate banking, the bank wants to increase revenues by more than €300 million by 2020, through a combination of pricingadjustments and by building on its leading position in trade finance with a focus on the most important trade corridors for German andEuropean corporate clients.

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8 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Exhibit 7

Commerzbank's Revenue Targets In DetailTotal revenue progression, 2016E-2020E

*Note: Based on analysts' consensus as of 15 August 2016Source: Company presentation, 4 October 2016, Moody's Investors Service

Based on the above cost and revenue targets, Commerzbank expects a net return on tangible equity (RoTE) of more than 6% bythe end of 2020. In our view, this would only be realistic if (1) Commerzbank meets or exceeds its revenue targets, which we findchallenging in the current market environment; and/or (2) interest rates remain stable (or rise slightly) during the 2016-2020 period;and/or (3) highly cyclical international asset classes such as shipping and commercial real estate remain stable. In addition, expectednew business will have to be of high quality and not lead to higher absolute loan-loss charges during the forecast period.

Longer-term, a successful execution of the revamp would be credit positiveWe consider Commerzbank's reorganisation a sensible move that acknowledges industry challenges. Becoming an IT-centeredorganisation with efficient, seamless processes and a focused core customer organisation will give the bank a greater competitive edgein an increasingly digital world. Execution on technical, cultural as well as financial aspects of the intertwined targets is a key risk goingforward, however.

Successfully focusing on two re-sized and client-focused pillars of its business model will benefit the bank’s risk profile over the longerterm. If executed carefully, Commerzbank will enjoy a simpler balance sheet, lower capital requirements as a result of its downsizedbalance sheet, and greater earnings predictability.

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9 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Peer Group:

» Landesbank Hessen-Thueringen GZ

» Landesbank Baden-Wuerttemberg

» ING DiBa AG

» Deutsche Kreditbank AG

» BAWAG P.S.K.

Moody's Related ResearchCredit Opinions:

» Commerzbank AG: First-half 2016 update, August 2016

» Commerzbank Finance & Covered Bond S.A.: Semiannual update, August 2016

» mBank S.A.: Semiannual update, September 2016

Special Comments:

» Banking System Outlook: Germany, October 2016 (1033730)

» Commerzbank's Restructuring Caps Profits Near Breakeven for About Three Years, a Credit Negative, October 2016 (192464)

» Export Finance Assets Provide Robust Collateral For Covered Bond Issuers, September 2016 (1027212)

» EU Banks are Broadly Resilient to EBA's Severe Scenario in 2016 Stress Tests, August 2016 (1034448)

» Banks - Central and Eastern Europe: Lower Interest Rates and Subdued Credit Growth Constrain Profitability, May 2016

» Hypothekenbank's Pfandbrief Holders Benefit from Cover Pool Merger, May 2016 (SF401511)

» Large European Banks' Oil & Gas Exposures Are Moderate But Will Add To Broader Earnings Challenges, April 2016 (1021994)

» New Covered Bond Law Will Enhance Funding Profiles of Polish Banks, December 2015 (1006464)

Performance Reports:

» Commerzbank AG: Mortgage-Covered Bonds, October 2016 (SF440919)

» Commerzbank AG: SME Structured Covered Bond Programme, September 2016 (SF440750)

» Commerzbank AG: Public-Sector Covered Bonds, August 2016 (SF439488)

Rating Methodologies:

» Banks, January 2016 (186998)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

10 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

Endnotes1 2019 capital requirements under the European Banking Authority's Supervisory Review and Evaluation Process (SREP), including a 1.5% buffer as a local

systemically important bank (D-SIB; so-called O-SII buffer).

2 These measures include, but are not limited to, the fundamental review of the trading book (FRTB), Prudent Valuation / IFRS9 as well as the proposedchanges to the Basel III framework with regard to the measurement of risk-weighted assets ('Basel IV').

3 Through the downsizing of selected parts of its investment banking activities, Commerzbank expects to avoid €8 billion of RWA growth that wouldotherwise have resulted from regulatory changes.

4 The ratings shown in this report are the bank's senior unsecured debt and its outlook as well as its subordinated debt ratings.

5 The ratings shown in this report are the bank's deposit rating and outlook as well as its baseline credit assessment (BCA).

6 The rating shown in this report is the group's corporate family rating and outlook as well as its baseline credit assessment (BCA).

7 Source: McKinsey “The rise of the digital bank”, July 2014

8 The revenue losses result from the bank's proposed downsizing measures, including the closure and/or right-sizing of select capital market businesses aswell as the further run-down of public finance, commercial real estate and shipping assets bundled in the bank's Asset and Capital Recovery (ACR) unit.

9 The ratings shown in this report are the bank's deposit rating and outlook as well as its baseline credit assessment (BCA).

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11 19 October 2016 Commerzbank AG: Digital Revamp Will Cap Profits and Capital Build-Up

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

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Mira CareyAssociate Analyst

Carolyn F HensonAVP-Research Writer

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