Germany’s second largest lender, Commerzbank AG (OTCMKTS:CRZBY), loaned over $400 million to Detroit, according to a German daily, Frankfurter Allgemeine Zeitung.


The exposure came through Commerzbank AG (OTCMKTS:CRZBY)’s subsidiary, Eurohypo, which the bank bought in 2005. Eurohypo lent over $400 million to the recently declared-insolvent city.

Detroit a small issue for CommerzBank

Jaime Becerril of J.P. Morgan Cazenove feels the Detroit exposure could be a small issue for the Germany bank. As of the first quarter of 2013, the bank had €74.2 billion exposure in its ‘public finance’ portfolio, split across fixed income securities (€23.3 billion), sovereign debt (€36.2 billion) and other securities (€14.7 billion).

Jaime feels chances of CommerzBank getting anything back from Detroit look remote now. However, the analyst feels the bank’s valuation already reflects much pain after a very weak 2013.

CommerzBank’s stock has already dropped 36 percent year-to-date, with its stock trading at some of the lowest multiples in Europe at 0.3 x P/TBV.

Jamie assigns a Neutral rating on Commerzbank AG (OTCMKTS:CRZBY) and revised the price target to €8.87 from €8.74 earlier, as the analyst feels there is some value left when the bank sells its shipping and CRE assets.

Exogenous factors may drive profitability

Matteo Ramenghi and the team at UBS Investment Research feel CommerzBank’s profitability will be largely driven by exogenous factors such as interest rates, sovereign exposures, real estate valuations and asset quality trends.

The UBS research team terms CommerzBank’s two major acquisitions since 2005 viz.: Dresdner Bank and Eurohypo, as unfortunate.

The analysts have assigned a Neutral rating for Commerzbank AG (OTCMKTS:CRZBY) with a 12-month price target pegged at €6.90. Matteo Ramenghi and team have arrived at the price target using a Gordon growth model (with CoE 10 percent and g 1 percent), cross-checked with market multiples.

Earlier, the UBS Investment Research team trimmed second-quarter operating EPS estimates of Assured Guaranty Ltd. (NYSE:AGO) by over 60 percent for its exposure to Detroit. The analysts anticipate about $130 million of losses on Assured Guaranty Ltd’s Detroit exposures. The bond insurer covers debt obligations, including variable-interest entities, which enables firms to keep certain assets off their balance sheets.

According to Dieter Hein, an analyst at Fairesearch GmbH in Kronberg, for more than five years Commerzbank AG (OTCMKTS:CRZBY) has been a restructuring case and almost every quarter there has been a writedown that strains the bank’s earnings.