Bloomberg News

Debt Crisis Puts Commerzbank Back to Drawing Board on Aid

November 30, 2011

(Updates with Eurohypo in sixth paragraph.)

Nov. 29 (Bloomberg) -- Commerzbank AG Chief Executive Officer Martin Blessing spent the last three years trying to free Germany’s second-largest lender from the shackles of government aid needed to survive the 2008 credit crunch. Europe’s debt crisis may put him right back where he started.

Blessing, 48, this year pulled off a capital increase of 11 billion euros ($14.6 billion), among the biggest ever in Germany. The stock sale, a conversion of shares held by the government and excess capital enabled the Frankfurt-based lender to repay 14.3 billion euros of government aid in June. Blessing has pledged not to accept state funds again, even as Commerzbank faces pressure to boost capital to meet new requirements.

European leaders are demanding banks bolster their capacity to withstand losses after financial firms agreed to accept losses on Greek sovereign debt. Commerzbank, told by the European Banking Authority last month that it may need 2.94 billion euros in fresh capital, may have to raise as much as 5 billion euros in a worst-case scenario, people familiar with the situation said last week.

“If the bank’s capital requirements rise significantly, it would be very hard for Commerzbank to reach them with the traditional measures they have to hand,” said Michael Seufert, an analyst with Norddeutsche Landesbank Girozentrale in Hanover. “Taking state aid again would be the very last option they’d try as it would be seen as a signal of weakness.”

Board to Meet

The bank’s supervisory board will meet on Dec. 2 to decide on a new chief financial officer to replace Eric Strutz, who announced in August plans to leave, as well as to discuss measures to boost capital levels to meet EBA requirements, according to two people familiar with the discussions. The candidate is from outside the bank, they said, without identifying the individual.

Commerzbank is exploring options including buying back hybrid bonds and placing sovereign holdings in an external entity, or bad bank, one of the people said. The lender is also looking at ways of getting rid of Eurohypo, its commercial- property and public finance unit, including a takeover by the German government, the person said.

The goal remains to avoid taking state aid. The bank already announced plans to scale back risk-weighted assets and new loans, and to sell non-strategic businesses. Even so, it may have to seek assistance from Germany’s Soffin bank-rescue fund, which the government plans to reactivate, if the EBA significantly raises its capital requirements, one person said last week.

‘On Our Own’

Commerzbank’s consideration of putting sovereign debt into a bad bank was reported by the Financial Times on Nov. 25, while the Financial Times Deutschland said yesterday the bank is weighing buying back as much as 1 billion euros of hybrid bonds in exchange for new shares.

Spokesman Reiner Rossmann declined to comment on Commerzbank’s potential capital requirements or whether the bank will have to take additional measures should they rise.

“We’ve said that we will to do it on our own,” Blessing said last week at an event in Berlin.

The stock has fallen 31 percent in the past month, making it the fifth-worst performer in the 50-member Stoxx 600 Banks Index. The shares rose 1.5 percent to 1.33 euros in Frankfurt trading today, valuing the firm at 6.8 billion euros.

Leaning Out Window

Commerzbank aims to meet the EBA capital requirement by the middle of 2012 by cutting as much as 30 billion euros in risk- weighted assets, it said last month. It will temporarily suspend new business at its Eurohypo unit, as well as new lending unrelated to Germany or Poland, and will reduce or sell “non- strategic” assets and review the sale of financial investments, excluding its stakes in Comdirect Bank AG and BRE Bank SA.

Finance head Strutz earlier this month signaled he’d be open to selling the lender’s Ukrainian unit Bank Forum JSC, which is based in Kiev, on a conference call.

Blessing is “leaning pretty far out of the window with his comments since October on saying Commerzbank won’t seek state aid,” said Olaf Kayser, an analyst at Landesbank Baden- Wuerttemberg. “They could explain that the rules have changed in the middle of the game, but they’ll try everything before having to accept state aid again.”

Blessing, born in the northern German port town of Bremen, started out in banking in 1983 with an apprenticeship at Dresdner Bank, according to Munzinger Archiv GmbH, a German biographical archive. He later worked for McKinsey & Co., where he became a partner at the age of 31, and led the takeover of Dresdner just months after taking the top job at Commerzbank in 2008.

Banking Family

His family has been interwoven with the German banking industry for at least three generations. His grandfather Karl, fired from the Reichsbank directorate seven months before World War II broke out, led the Bundesbank as its longest-serving president from 1958 to 1969. His father Werner worked as a management board member under Alfred Herrhausen at Deutsche Bank. His wife, Dorothee, has worked at Goldman Sachs Group Inc. and Deutsche Bank, according to Munzinger.

Commerzbank got more than 18 billion euros from the state after agreeing to buy Dresdner two weeks before the collapse of Lehman Brothers Holdings Inc. in September 2008. Germany has a stake of 25 percent plus one share.

Commerzbank owns 81 percent of Comdirect, which has a market value of about 1 billion euros, according to data compiled by Bloomberg. The company owns 70 percent of Warsaw- based BRE Bank, which is valued at 10.8 billion zloty ($3.2 billion), the data show.

‘Extreme Situation’

Selling those units “would be very painful given that it is part of their core business,” said Seufert, who recommends investors hold Commerzbank shares. “There’d be enough interested parties to get a good price. One strategic option for Comdirect would be to sell 30 percent of the company so as to keep a majority holding.”

BRE Bank, Poland’s third-biggest lender by assets, had 850.1 million zloty of profit in the first nine months of this year and may exceed 1 billion zloty of net income in 2011, CEO Cezary Stypulkowski said Nov. 4. Commerzbank also operates in the Czech Republic, Slovakia, Hungary, Russia and Ukraine.

Commerzbank raised 11 billion euros with capital measures earlier this year, including 8.25 billion euros from new and existing investors, excluding the Soffin fund, and 2.75 billion euros from the conversion of Soffin’s silent participations into shares, according to a presentation in June.

Importance of Capital

“With hindsight, the capital increase was right,” said Kayser at LBBW. “I asked myself at the time why they did it at such a low price but now we see how important capital has become.”

European stocks tumbled in the second half of the year on concern the sovereign-debt crisis will reduce global growth and plunge some economies into recession. Commerzbank has fallen 55 percent in the period, the biggest decliner on Germany’s benchmark DAX 30 index.

“It isn’t up for debate that Blessing would ask for state aid -- he’s ruled it out,” said Seufert at Nord LB. “If someone at Commerzbank did ask, it would have to be his successor. That’s a very extreme situation and that kind of a tough solution wouldn’t be taken lightly.”

--Editor: Frank Connelly, Keith Campbell

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

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


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