I want to break free. Freddie Mercury and Commerzbank chief executive Martin Blessing have something in common. Germany’s second-largest lender was hobbled by its mid-crisis purchase of Dresdner Bank and had to be bailed out by Soffin, the state’s bank rescue fund. Mr Blessing vowed to repay most of the €16.2bn injection this year. That is understandable: it carries a punitive, moral hazard-killing 9 per cent coupon.
So Wednesday’s announcement that the bank would redeem substantially all (€14.3bn) of the bail-out by June prompted a 3 per cent pop in Commerzbank shares, even though it involved asking investors for more capital.
Soffin in effect owns 25 per cent of the lender, and its participation is central to a convoluted recapitalisation plan to raise almost double Commerzbank’s market value. The bulk – €11bn – of the new money will come from an issue of €8.25bn of a combination of so-called conditional mandatory exchangeable notes to new and existing investors, and a conventional rights issue. The rescue fund will supply the rest. Separately, Commerzbank will repay the government €3.3bn from surplus capital it built up when not paying dividends.
With a core tier one capital ratio of 8.8 per cent pro forma, Commerzbank will be Basel III-compliant and should pass the looming European stress test. It will not need to pay much of the Soffin coupon it would have faced; instead it can concentrate on making profits. Pre-tax profit forecasts of about €4bn for 2012 look plausible. Assuming tax of 20 per cent, €200m (say) of residual Soffin coupon payments, and dividend cover of three times, Commerzbank could generate 75 basis points of capital annually on risk-weighted assets of €260bn-€270bn. Investors have correctly identified the recovery potential. For banking more broadly, there is life after capital-raising.
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