Commerzbank may have to ask for new bailout

Germany's banks ordered to increase capital ratios after stress tests reveal new vulnerabilities

Sean Farrell
Sunday 11 December 2011 01:00 GMT
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Commerzbank, Germany's second-biggest lender, is on course for a second government bailout after stress tests found it needed another €5.3bn (£4.5bn) of capital to withstand the market turmoil.

The increased estimates show how exposed banks in Germany and other continental economies are to the continuing turmoil in government debt markets. The European Banking Authority (EBA) has ordered banks to raise an extra €114.7bn – up from €106bn just two months ago.

Banks have until 20 January to publish plans for raising the fresh capital and until mid-2012 to raise the money.

Anke Reingen, a banking analyst at RBC Capital Markets, said Commerzbank may be forced to get hold of the cash much earlier to maintain investor confidence and that a government injection was likely.

She added: "The biggest negative swing in the capital shortfall versus previously reported is for the German banks, and Commerzbank in particular. Commerzbank has a challenging task to fill its €5.3bn shortfall without dilution to shareholders or the use of additional public funds."

Six German banks were last week told to raise an extra €€13.1bn to boost their buffers against losses. The figure is more than double the EBA's €5.2bn estimate in October.

At €3.2bn, Deutsche Bank, Germany's biggest bank, has the next biggest capital shortfall after Commerzbank. However, Deutsche Bank said it would generate enough capital from continuing operations to hit the target by the end of this year.

Commmerzbank said late last week that it did not plan to seek state aid and that it was making "good progress" in its efforts to cut its risk-weighted assets by €30bn. Issuing "equity capital instruments is also an option", it added.

But analysts and investors are sceptical that the bank will be able to avoid a second equity injection by the German state.

A banking analyst, who declined to be named, said: "Commerzbank had announced €30bn of deleveraging deliverable in two years and now they have to achieve this in two months. Commerzbank paper isn't that attractive and banks that launched rights issues before the EBA exercise will struggle to raise money on the market. This option [raising equity] is not viable without state support."

Commerzbank had raised €5.3bn in June, earmarked to repay some of the government's emergency cash injection during the financial crisis. But markets became far more volatile over the summer and there is little appetite for buying new bank shares.

The prices of bonds issued by troubled European states such as Italy and Portugal have fallen in recent months, creating losses on the books of banks that held them as a supposedly risk-free investments.

The Royal Bank of Scotland's boss, Stephen Hester, recently told MPs that investors now saw banks as a "dumb place" to put their capital because the outlook was so uncertain.

The German government injected €18.2bn into Commerzbank at the height of the crisis. The bank racked up big losses after making an ill-timed acquisition of Dresdner Bank from Allianz early in the credit crunch.

The EBA, which carried out the stress tests, on Friday warned banks not to cut lending or adjust the risk they attach to assets in order to inflate their ratios of capital to risk-weighted assets. The regulator's stance – aimed at maintaining credit to the wider economy – puts it in conflict with the banks, which are intent on cutting back lending to meet requirements.

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