Commerzbank Sale Hides as Much as It Reveals

Commerzbank's sale of a pool of real estate loans doesn't resolve doubts investors have about the German bank's balance sheet.

Commerzbank AG , Germany's second-largest bank, today said it is selling 5 billion euros ($6.5 billion) of loans to Wells Fargo & Co. and the private-equity firm Lone Star Funds at a 3.5 percent discount to book value. Michael Seufert, an analyst with Norddeutsche Landesbank Girozentrale in Hanover, Germany, told Bloomberg News that the price helps ease one of the "key concerns about Commerzbank, namely that they won't be able to sell their non-core portfolio without racking up large losses."

Not so fast. Commerzbank's balance sheet still has little credibility with investors. If concerns were eased, it was at the margins, although the stock did get a nice pop.

Commerzbank shares rose 4.7 percent today to 6.25 euros. That values the company at 7.1 billion euros, a small fraction of the 23.2 billion euros of common shareholder equity it showed on its March 31 balance sheet. In other words, the market continues to believe that most of the bank's book value is illusory. The stock is down 33 percent since the end of last year.

Sure, it's nice to see that a couple of outsiders were willing to pay something close to book value for a block of the bank's loans. But this is small potatoes. The latest sale covers less than 1 percent of the assets on Commerzbank's balance sheet. (The German government still owns a 17 percent stake in Commerzbank after bailing out the bank in 2009.)

Because the transparency of Commerzbank's financial statements is so poor, investors can't see if Commerzbank might have sold its best loans and kept the worst ones stashed on its books at inflated historical values. During the 1980s U.S. savings and loan crisis, this practice was known as "gains trading," although the term doesn't fit this situation, given that Commerzbank is recording a loss. To be fair, the lack of transparency at Commerzbank isn't unique. It's a problem at most large banks, especially in Europe.

It's going to take a lot more transactions like this one to convince investors that Commerzbank's books can be trusted.

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