March 1, 2024

DealBook: Regulatory Pressure Drives Commerzbank to Seek Out New Capital

LONDON — European banks have gone on a capital-raising binge.

Commerzbank of Germany, the latest entrant, began a heavily discounted effort on Tuesday to raise 2.5 billion euros ($3.2 billion) in new capital.

The push by Commerzbank follows similar moves by other European lenders, which have come under growing regulatory pressure to increase capital reserves to protect against future financial shocks.

Despite a series of stress tests on the Continent’s largest financial institutions, investors have remained wary of the firms’ continued exposure to risky loans and sputtering economies like those of Spain and Greece.

Regulators have also pushed banks to shed unprofitable assets and protect against rising delinquent loans, and a proposed banking union for the euro zone is expected to lead to even greater scrutiny of balance sheets. Authorities say they want to ensure that banks meet stringent capital requirements outlined in new rules known as Basel III.

Under the rules, which are to come into force by 2019, firms must achieve a 7 percent core Tier 1 ratio, a measure of an institution’s financial health. Banks considered to be systemically important must hold an additional 1 to 2.5 percent in reserve.

As a result, banks have been pressing ahead to meet the capital demands. Last month, Deutsche Bank raised almost 3 billion euros through a rights issue specifically intended to improve its capital buffers.

The British bank Barclays has issued a number of contingent capital instruments, known as CoCos, which are intended to ensure that the firm’s core Tier 1 ratio stays above a certain level. A number of other banks, including Credit Suisse and BBVA of Spain, also have raised capital by this method.

The Swiss bank UBS, which announced a major reorganization last year, has a 10.1 percent core Tier 1 ratio. That is currently the highest figure among Europe’s largest banks, according to the data provider SNL Financial. Other big banks, including Deutsche Bank and HSBC, have ratios greater than 9.5 percent.

For Commerzbank, whose current core Tier 1 capital ratio of 7.5 percent is expected rise to 8.4 percent after its capital-raising effort is completed, the new funds will help to repay an 18 billion euro government bailout the firm received in 2009.

“The transaction marks the beginning of the federal government’s exit from Commerzbank,” the bank said in a statement. “The capital structure of the bank is improving considerably.”

The offering, the bank’s fifth since 2010, allows investors to buy 20 shares at 4.50 euros apiece for every 21 shares they already hold. The price represents a discount of about 55 percent on Commerzbank’s closing share price on Monday. The bank’s shares fell 3.8 percent in afternoon trading in Frankfurt on Tuesday.

As part of the deal, Commerzbank is reportedly in talks to sell 5.7 billion euros of British property loans to the American bank Wells Fargo and the investment firm Lone Star.

More capital-raising moves are expected. British banks, for example, must raise a combined £25 billion ($38 billion) by the end of the year, according to local regulators. That includes potentially raising up to £1.8 billion, according to banking analysts at Barclays, for the small British lender Co-Operative Banking Group, which was downgraded to junk status last week by Moody’s Investors Service over concerns about an increase in delinquent loans.

Commerzbank, Deutsche Bank, Citigroup and HSBC are handling Commerzbank’s capital-raising effort, which the bank said would close on May 28.

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DealBook: Deutsche Bank Posts $795 Million Profit in Third Quarter

The headquarters of Deutsche Bank in Frankfurt, Germany, under construction in 2009.Ralph Orlowski/Getty ImagesThe headquarters of Deutsche Bank in Frankfurt, Germany, under construction in 2009.

Deutsche Bank, Germany’s largest lender, said on Tuesday that profit in the third quarter was essentially flat, as a surge in investment banking revenue offset costs related to the bank’s legal problems and a cost-cutting program.

Net profit in the three months ended Sept. 30 fell to 755 million euros ($795 million) from 777 million euros in the period a year earlier, the bank said. Revenue rose 18 percent, to 8.7 billion euros. The bank reported a sharp recovery in its investment banking unit, which had been battered by the euro zone crisis and regulatory pressure to reduce risk.

Revenue in the investment banking unit rose 67 percent, to 2.5 billion euros, as customers increased trading activity, the bank said.

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Anshu Jain and Jürgen Fitschen, who share chief executive duties at the bank, said in a news release that the environment for banks was still unsettled.

“In the near term, the macro environment remains uncertain, and we will maintain a cautious and risk-focused approach,” they said.

Like most of its peers, Deutsche Bank has been trying to cope with market turmoil caused by the euro zone debt crisis at the same time regulators are putting pressure on European lenders with large investment banking operations.

Proposed European Union rules would compel banks to isolate their retail and lending businesses from risks created by investment banking. Deutsche Bank, which has often earned much of its profit from investment banking, could be among the those most affected if the rules go into force, some analysts say.

The bank, however, also appeared to benefit from reduced tensions in the euro zone in recent months. Fear of a breakup of the euro zone has eased after the European Central Bank said it would buy bonds of countries like Spain, if necessary, to keep their borrowing costs under control.

Deutsche Bank is facing legal proceedings related to allegations of unethical or illegal behavior in recent years. It is among the banks accused of manipulating the London interbank offered rate, or Libor, which is used to set interest rates on trillions of dollars of financial contracts worldwide.

Expenses related to litigation cut profit by 289 million euros in the quarter, Deutsche Bank said. Costs related to a restructuring program, which is intended to make the bank more efficient and less complex, subtracted another 276 million euros.

In September, Mr. Jain and Mr. Fitschen outlined an overhaul of the bank that would include lower profit targets, bigger capital buffers and smaller bonuses for top executives.

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