Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Germany's Commerzbank has a muddled message for the market. Its loss-absorbing capital base is being eroded by a multitude of factors beyond its control, yet it's still setting aside a large pot of cash to pay out to loyal investors.

That could be interpreted as a show of strength by a bank that only recently resumed dividends after a painful crisis turnaround. Commerzbank's surprise pre-announcement said second-quarter net profit was in line with expectations, at 209 million euros ($230 million). But the real shocker was the drop in its core capital ratio to 11.5 percent from 12 percent at the end of March, caused by "non-operating" valuation and methodology effects. Investors understandably took fright and pushed the shares down as much as 7 percent.

The capital question does seem to clash with the bank's business-as-usual stance on dividends. Germany's second-biggest bank set aside 5 cents per share in the second quarter, or about 63 million euros in total, just as it did in the first. That looks at odds with the new balance-sheet pressures hitting the industry.

Business as Usual
Commerzbank has accrued a dividend of 10 euro cents per share in H1 2016, in line with 2015 payout level
Source: Company reports

Its capital base has been weakened by increased operational risk (a measure of potential losses from either inadequate internal processes or external events). Higher pension liabilities, caused by falling returns, are another problem. Neither is a simple or one-off factor that the bank can control. Add in the squeeze from higher credit spreads on the bank's Italian sovereign debt holdings and it's clear that future capital strength is far from stable. 

This doesn't bode well for other European lenders, most notably Deutsche Bank, which reports on Wednesday.

Capital Pressure
Falling CET1 solvency ratio at Commerzbank doesn't bode well for Deutsche Bank
Source: Company reports

Of course, Deutsche Bank has already dumped its dividend as it hunts for financial health. Investors may well start asking questions about Commerzbank's policy (which includes a 40 percent payout target) too, according to Bloomberg Intelligence colleagues Jonathan Tyce and Tomasz Noetzel. Other lenders aren't immune either. Most banks with plans to return capital are targeting ratios of 35 to 50 percent, according to BI, at a time when dividends are under increased regulatory risk. European stress test results due on Friday may lead to restrictions for institutions that screen poorly.

Commerzbank has tried to reassure the market about its ability to generate profit and pay dividends. The capital question may turn out to be the more important indicator.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Lionel Laurent in London at

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