Commerzbank is interested in a state capital injection that could see Germany take a stake in the country’s second-biggest bank, according to sources familiar with the situation.
The development comes as Commerzbank continues to grapple with the fallout from the global crisis that spurred the German government to launch an emergency fund that offers guarantees and capital to the country’s banks. Exposure in troubled Iceland as well as to collapsed Wall Street investment bank Lehman Brothers are compounding Commerzbank’s difficulties, said one of the sources. “The third quarter was hit by exposure to Iceland and Lehman Brothers,” said the source. “That’s another reason that the bank must keep a close eye on its capital base.”
The bank’s main problem, however, is its modest capital cushion. Commerzbank’s Tier 1 capital ratio -- a key measure of financial health -- is roughly 7.4%, putting it behind international rivals. British banks now have roughly 9% while Frankfurt neighbor Deutsche Bank has more than 10.
Commerzbank CEO Martin Blessing, who will brief his supervisory board on Tuesday about the situation, will have to weigh the potential tarnishing of the bank’s image by tapping the government for cash against the need for capital. The nearly €500 billion ($653 billion) rescue package offers banks guarantees that make it easier for them to borrow as well as help in recapitalizing their balance sheets.
The fund can, however, demand weak banks beef up their capital in return for getting the debt guarantees. “Commerzbank is interested in all the instruments that the fund is offering -- also on recapitalization,” said a second source. A spokesman for Commerzbank said only that the bank continued to examine participation in the fund.
Commerzbank shares fell 7.2% to €8.345 by 0829 GMT, the leading decliner among German blue chips. “The news that the company is interested in the rescue package is indeed negative for the share price,” one Frankfurt-based trader said. “In addition, the news that the third quarter was impacted by exposure in Iceland and to Lehman Brothers also weighs.”
A source familiar with the German government rescue said: “One tactic would be for Commerzbank to wait for the other banks to sign up to the guarantee scheme and then slip in inconspicuously behind them with a call on the government for capital.” Banks that turn to Berlin for cash are most likely to issue preference or ordinary shares which would then go to the state, an expert on the scheme said.
A separate source close to the government said Commerzbank would not be alone. “I think they (German banks) will all come or at least most of them,” he said. “That is, if the crisis is not over tomorrow and spreads do not continue to go up. Look at (the high capitalization) of the Swiss banks or those in the US.”
Hypo Real Estate became the first bank to use the lifeline from Berlin by securing €15 billion in loan guarantees it had requested from the rescue package. The short-term guarantee covers a bank bond and lets the commercial real estate lender draw on a liquidity support facility from Germany’s Bundesbank central bank.
The guarantee will help Hypo Real Estate bridge a funding gap until a separate €50 billion rescue package -- arranged earlier this month by the government, regulators and a consortium of German banks and insurers -- takes effect. German public-sector landesbanks BayernLB, WestLB and HSH Nordbank have also asked for help from the fund. (Reuters)