DealBook: Commerzbank to Raise Capital and Pay Back Bailout

Michael Probst/Associated PressThe Frankfurt headquarters of Commerzbank, Germany’s second-largest lender.

11:41 a.m. | Updated

FRANKFURT – Commerzbank said on Wednesday that it would repay a taxpayer bailout and ask shareholders for more capital, moves that would reduce the German government’s influence over the bank but also dilute current shareholders.

Commerzbank, Germany’s second-largest bank after Deutsche Bank, said it would raise 2.5 billion euros ($3.3 billion) by selling new shares to existing shareholders. The issuance of new shares will reduce the German government’s stake in the bank to less than 20 percent, from 25 percent. As a result, the government would no longer have the right to veto management decisions.

The bank said it would use the money to bolster its capital reserves. Martin Blessing, the chief executive of Commerzbank, said the transaction signaled “the beginning of the end of the Federal Republic’s engagement in Commerzbank.” He said Commerzbank would save on interest by repaying its government loans earlier, and would be able to resume paying shareholder dividends sooner than expected.

Shareholders were disappointed, however, because the new shares would dilute the value of existing equity. Commerzbank shares fell more than 9 percent in Frankfurt trading on a day when German stock prices were otherwise flat.

Commerzbank said it Wednesday that it would pay back the remaining 1.6 billion euros of the 16.4 billion euros it received from the government in 2008 and 2009. That sum does not include an additional 3.7 billion euros in aid that the German government provided to the bank by buying its shares, some of which it will retain. the German federal agency for financial market stabilization, which administers bank bailout funds, said Tuesday that it would gradually sell off the rest of the government’s stake as market conditions allow.

The transaction is the latest effort by Commerzbank, and European banks in general, to move back to a semblance of normality after the turmoil of the last five years. While Germany has a reputation as an industrial powerhouse aloof from the financial crisis, almost all of its large banks are struggling and many would be bankrupt without public support. Moody’s has a negative rating on the German banking sector.

German and European banks still have a long way to go before the financial system can be considered healthy. Many banks remain dependent on the European Central Bank for cash, and credit remains scarce in much of the euro zone. Many banks are barely profitable or not at all. Commerzbank reported a loss of 716 million euros in the fourth quarter of 2012, compared with a profit of 316 million euros in the period a year earlier.

Commerzbank is taking advantage of relatively favorable market conditions for German banks because the country is regarded as a haven from financial turmoil, said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. But whether the transaction leads to a healthier banking system depends on whether current managers do a better job than their predecessors managing risk, he said.

“They might erase losses from previous bad risk management but that doesn’t mean their risk management going forward will be any better,” Mr. Véron said.

Commerzbank will also repay 750 million euros to the German insurer Allianz. The loan, a so-called silent participation, grew out of Commerzbank’s acquisition of Dresdner Bank from Allianz in 2008.

The bank said it would determine the number of new shares to be issued and the price in mid-May. Before that, Commerzbank will also consolidate existing shares, with one new share equaling 10 old shares. Deutsche Bank, Citigroup and HSBC will serve as underwriters.

Shareholders must approve the capital increase at the annual meeting, which is scheduled for April 19, about a month earlier than planned.

Commerzbank will use the cash raised to meet new regulations, known as Basel III, that require banks to increase the amount of capital they hold in reserve. Although the rules do not take full effect until 2019, banks are already under market pressure to comply.

Article source: http://dealbook.nytimes.com/2013/03/13/commerzbank-to-raise-more-capital-and-repay-taxpayer-money/?partner=rss&emc=rss