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Commerzbank share issue just a drop in the bucket

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Commerzbank chairman Martin Blessing has good reason to feel peeved. Since rival Deutsche Bank announced an equity issue to help its capital position last month, its shares have risen 9 per cent. But Commerzbank's shares have fallen 23 per cent since it announced its own €2.5-billion ($3.3-billion) equity issue in March.

The fundraising, details of which were announced on Tuesday, is a step on Commerzbank's long road to rehabilitation. The proceeds will be used to pay back hybrid debt instruments which are held by the state and Allianz, the insurer. That will save €200-million of interest payments per year, which is helpful for a group that made pre-tax profits of €900-million last year. Investors who have an eye on the distant possibility of dividends will be encouraged. In the short term, the equity issue improves the Basel III tier one capital ratio from 7.5 per cent to 8.4 per cent. And the exercise will cut the state's stake in the bank from a quarter to a fifth.

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So far so good, but the fundraising does little to alter the bigger picture. Sure, it is nice to have €2.5-billion more equity but this is a bank with total assets of €650-billion. The extra money is small change. Not only that, but within the balance sheet are €143-billion of non-core assets, mainly commercial property, shipping and public finance loans. These assets are losing the bank money (€87-million in the first quarter), and although Commerzbank is reducing the size of the portfolio, it is just €7-million smaller than it was at the end of 2012.

The risk for shareholders is that more capital is required to shore up the non-core portfolio. That, plus a poor first quarter performance in the core business where profits fell 35 per cent, helps to explain why the shares trade on just 0.3 times tangible book value, against 0.8 for Deutsche Bank. Yes, the fundraising will make Commerzbank a slightly less bad investment. But that is not the same as making it a good one.

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