(Updates to add CEO’s comments in ninth paragraph.)
Feb. 23 (Bloomberg) -- Commerzbank AG, Germany’s second- largest lender, will boost its financial strength by asking investors to swap hybrid capital instruments trading below face value for new shares.
The measures could boost core Tier 1 capital by more than 1 billion euros ($1.33 billion), the lender said. Concern about the supply of new equity drove the shares lower, even as Commerzbank posted earnings that beat analysts’ estimates today.
European leaders ordered banks to raise capital by June 30 in a bid to restore confidence in the industry amid Europe’s sovereign debt crisis. Commerzbank is now almost two-thirds of the way to meeting its target with a mix of retained earnings, asset sales and capital management. While the swap isn’t part of that package, it will speed the process and help prepare Commerzbank for Basel III rules on capital, the lender said.
“The capital measures give the lender an additional buffer in case of any surprises in the market, which remains challenging,” said Michael Seufert, an analyst at Norddeutsche Landesbank in Hanover, who has a “hold” rating on the stock. “The operating figures were positive.”
The shares slumped as much as 9.6 percent, and were down 6 percent to 1.95 euros at 4:15 p.m. in Frankfurt trading.
Fourth-quarter net income rose to 316 million euros from 257 million euros in the year-earlier period, Commerzbank said. Full-year profit shrank 55 percent to 638 million euros, beating the 577 million-euro average estimate of seven analysts surveyed by Bloomberg. The bank said 2011 operating profit at the core bank more than doubled to 4.5 billion euros.
Commerzbank wrote down the value of its Greek sovereign bond holdings to 26 percent of their value, including 670 million euros of losses for the fourth quarter. The bank’s public- finance unit reduced its risks related to Greece, Ireland, Italy, Portugal and Spain to 12.3 billion euros from 16.8 billion euros last year.
Greece won a bailout on Feb. 21 that includes a plan for private creditors forgiving 53.5 percent of their principal and swapping their remaining holdings for new Greek government bonds and notes from the European Financial Stability Facility. The agreement followed three months of talks that sought to keep the transaction voluntary and avoid triggering credit-default swaps.
“I expect this transaction to be implemented and that Commerzbank will take part,” Chief Executive Officer Martin Blessing said at a press conference today. “I fundamentally have conceptual problems with a ‘voluntary’ haircut. The voluntary nature of this is about as voluntary as a confession during the Spanish Inquisition.”
Greece will still find it difficult to shoulder the reduced debt in the long run if it doesn’t implement “far-reaching reforms,” Joerg Kraemer, Commerzbank’s chief economist, said this week.
Lenders across Europe posted Greek writedowns in their earnings reports today. Royal Bank of Scotland Group Plc said today that it took a sovereign-debt impairment of 1.1 billion pounds ($1.73 billion) as it wrote off Greek securities.
Commerzbank, which posted the biggest decline last year in Germany’s benchmark DAX Index, has recouped some of its losses this year. Its shares have risen almost 50 percent in 2012, beating the 18 percent advance of the 43-member Bloomberg Europe Banks and Financial Services Index over the same period.
Blessing has spent three years trying to free the lender from government aid needed to survive fallout from the 2008 collapse of Lehman Brothers Holdings Inc.
The German lender still has to divest its Eurohypo public finance and commercial real estate funding unit by the end of 2014, a condition of the bailout. Eric Strutz, the company’s chief financial officer, said in August that a sale would be difficult because of funding issues at the unit.
Eurohypo tapped the European Central Bank’s three-year loans to reduce the unit’s funding dependence on Commerzbank, Strutz told analysts on a conference call today.
The European Commission, the European Union’s regulatory arm, hasn’t informed Commerzbank of “any steps forward with Eurohypo yet, and therefore we just wanted to increase our strategic flexibility,” Strutz said on the conference call. Commerzbank won’t use ECB funds to buy sovereign debt, he said.
The ECB awarded 489 billion euros in 1,134-day loans on Dec. 21 to keep credit flowing to the economy as Europe’s debt crisis made institutions wary of each other and drove up borrowing costs.
“The only thing you could envision, and we’re looking into that from a risk-management perspective, is whether it does make sense to have the contingent currency risks mitigated,” Strutz said. “That is not a funding issue.”
The capital increase, by means of a contribution in kind, will equal a maximum of 10 percent minus one share of Commerzbank’s current subscribed capital, the Frankfurt-based bank said in a statement today.
The capital increase comes five weeks after Blessing unveiled a plan to raise capital without asking German taxpayers for second bailout. Commerzbank has made more progress than anticipated Jan. 19, leaving a 1.8 billion-euro gap at the end of the year to close out of the original 5.3 billion-euro shortfall, the company said today.
The lender said it plans to cut 15 billion euros of risk- weighted assets in the first half after 19 billion euros last year. Commerzbank has sought to strengthen its finances by selling assets, retaining earnings and modifying its capital management. The company also bought back hybrid instruments trading below face value last year to boost core Tier 1 capital.
Income from the purchases buoyed fourth quarter profit by 735 million euros, the company said. Investors approached Commerzbank to discuss swapping hybrid instruments for shares after that transaction, Blessing said today.
Hybrid capital combines aspects of debt and equity and allows borrowers to cancel interest and principal payments without triggering a default.
The exchange offer period starts Feb. 23 and is expected to end on March 2, according to the statement. The principal amount of the capital instruments included in the offer totals about 3.16 billion euros, Commerzbank said.
Germany’s Soffin bank rescue fund will maintain its 25 percent stake in Commerzbank by converting a portion of its silent participation into shares. Silent participation is a form of non-voting capital used in Germany that is not accepted by the European Banking Authority as core Tier 1 capital.
Commerzbank intends to take advantage of a “favorable market opportunity to further improve its capital structure,” the bank said in the statement.
In December, the EBA told European banks to raise 114.7 billion euros in fresh capital by the end of June as part of measures introduced to respond to the euro area’s fiscal woes. The regulator called for lenders to have core Tier 1 capital, a measure of financial strength, of at least 9 percent of their risk-weighted assets after accounting for writedowns on some European sovereign bonds.
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