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Commerzbank finally looks to be getting something right. Its announcement of a €2.5-billion ($3.3-billion) capital increase is well-timed. Though it won't take place for a couple of months, equity markets are buoyant and Germany's autumn elections are still distant enough to preclude political meddling. Meanwhile, the capital hike is large enough to lift the bank's capital ratio in line with peers, but not so big that investors balk at the size.
As part of the deal, Commerz will repay €1.6-billion in hybrid capital instruments bought by SoFFin, the German government bank bailout fund. At the same time, Berlin's stake in the bank will drop from 25 per cent now to below 20 per cent. Yet crucially, given the political sensitivity involved, the transaction will be cash neutral for SoFFin. Insurer Allianz, which also helped out with a €750-million rescue slug, will be repaid in full too. Together, the moves could save Commerz a hefty €200-million in interest on bonds that carry coupons of about 9 per cent.
For its part, Commerz's core Tier 1 ratio on a Basel III basis will rise 100 basis points to 8.6 per cent. That puts it in sight of the regulator's 9-per-cent target. It's probably not enough to protect the bank from another thoroughgoing crisis, but is at least on a par with Deutsche Bank's current goal of 8.5 per cent.
Commerz still faces obstacles. Shares are way off the €3.30 to €3.40 level at which the German government bought in. Meanwhile, German banks are scrapping hard for domestic business. Deutsche is one of several looking to boost services to Mittelstand companies, which may impinge on the business that accounted for more than half of Commerz's operating profits last year.
But Commerz needed a deal this size to scotch fears about a drip-drip dilution of non-governmental investors and its indecisiveness. The structure also looks smart. The consolidation of shares addresses a German law that prevents companies from issuing equity when their stock is priced below €1. The shares may take a short-term hit but markets are looking kind. For now, investors can take heart that the bank has seized the moment.