Commerzbank Seeks $3.3 Billion in Capital Increase

Commerzbank AG (CBK), Germany’s second- biggest bank, said it will sell 2.5 billion euros ($3.3 billion) of shares to repay the government and insurer Allianz SE. (ALV) The company slumped the most since November 2011.

Shareholders will be asked to approve a reverse share split on April 19 that will reduce the number of shares to 583 million from 5.83 billion, the Frankfurt-based bank said in an e-mailed statement today.

Commerzbank, which is 25 percent government-owned after receiving an 18.2 billion-euro bailout in 2009, is selling the shares as it seeks to strengthen capital, restructure its consumer banking unit and close loss-making shipping and real estate arms. It used the 5.3 billion euros it raised in a previous stock offering in June 2011 to repay government aid.

“The plan will dilute earnings per share by about 15 percent, so that’s quite something to swallow for investors,” Ronny Rehn, an analyst with Keefe, Bruyette & Woods Inc. in London who recommends investors sell the stock, said by telephone. “We’d have expected this to come later in the year when the bank would have a better story to tell after progressing on their overhaul.”

Commerzbank slid as much as 14 percent in Frankfurt. It declined 11 percent to 1.25 euros at 3:57 p.m., valuing the company at 7.3 billion euros.

Earnings Retention

Deutsche Bank AG, Citigroup Inc. and HSBC Holdings Plc (HSBA) agreed to underwrite the capital increase. They will buy the shares at a minimum of 1.1 euros apiece should Commerzbank fail to sell the whole amount planned, the company said.

“Perhaps they see something on their books that they believe could get worse in a year,” Dirk Becker, an analyst at Kepler Capital Markets in Frankfurt who has a buy recommendation on the stock, said by telephone. “They cannot be very optimistic about their own earnings retention capacity. The plan was to increase capital ratios via retained earnings over time.”

Chief Executive Officer Martin Blessing, 49, said he will use the capital to pay back a remaining 1.6 billion euros of so- called silent participations, a form of non-voting capital, that the bank owes the government and 750 million euros it owes Allianz. The government’s equity stake will fall to less than 20 percent under the plan, he said.

“The state is beginning its exit while preserving value with this repayment,” the Finance Ministry said in a statement from Berlin. “The company is improving its capital structure significantly. That’s an important step to win new investors.”

Credit Rating

Commerzbank will also use the cash to increase its core Tier 1 ratio to 8.6 percent under full Basel III capital rules from 7.6 percent, Blessing said.

“Their portfolio’s credit quality is weak, with ship finance and commercial real estate generating losses,” said Christian Hamann, an analyst with Hamburger Sparkasse who recommends investors sell the stock. “Their capital was low compared to peers and while the losses wouldn’t take them below the regulatory threshold, they still need to finance themselves on capital markets and don’t want to risk losing their credit rating.”

Standard & Poor’s cut its outlook on Commerzbank to negative last month, saying it will review the company’s rating of A once it receives more details about its business and risk plans. Commerzbank’s restructuring process is “more complex and more time-consuming” than previously assumed, it said.

To contact the reporter on this story: Annette Weisbach in Frankfurt at aweisbach1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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