Commerzbank AG (PINK:CRZBY) (ETR:CBK) (FRA:CBK), the second largest bank in Germany, announced on Wednesday that it plans to raise €2.5 billion ($3.26 billion) by selling new shares to existing shareholders. That will dilute the current shareholders’ equity and reduce the German government’s shareholding from 25 percent to 20 percent, ending the government’s right to veto board management decisions. Under German corporate rules, 25 percent stake is considered a blocking majority.
The bank said it will use the funds to strengthen its balance sheet, and pay off the remaining €1.6 billion of the €16.4 billion bailout money it received from the government during 2008 economic crisis. Chief executive officer Martin Blessing said that the bank can save on interests by repaying the loans earlier, and will resume paying shareholder dividends much sooner. However, the move disappointed shareholders as it will dilute the value of existing equity.
Apart from the bailout fund, the German government had provided an additional €3.7 billion by purchasing its shares. SoFFin, the German agency that manages bank bailout funds, said that it will slowly sell the remaining stake of the government. Commerzbank AG (PINK:CRZBY) (ETR:CBK) (FRA:CBK), and many other European banks, are trying to move back to normality after five years of turmoil.
Germany is the largest economy of Europe, but most of its banks are struggling. In fact, many large banks would go bankrupt without government support. Banks in the European region have a long way to go before they can be considered healthy. Many of them still depend on European Central Bank for cash. Commerzbank AG (PINK:CRZBY) (ETR:CBK) (FRA:CBK) reported a loss of €716 million in Q4 of 2012, compared to a profit of €316 million in the same quarter of 2011. The bank recently announced job cuts in an attempt to improve earnings.
Commerzbank AG (PINK:CRZBY) (ETR:CBK) (FRA:CBK) will also use some of the proceeds to repay €750 million to Allianz AG. The German insurer had issued a loan of €750 million when Commerzbank purchased Dresdner Bank from Allianz SE (PINK:AZSEY) (FRA:ALV) (ETR:ALV) in 2008.
The bank will determine the number and price of new shares by mid-May. Before that, it plans to consolidate the existing shares by issuing one new share for every 10 old shares, with the price multiplied by 10. That will reduce Commerzbank AG (PINK:CRZBY) (ETR:CBK) (FRA:CBK)’s outstanding shares from 5.83 billion to 583 million. Shareholders will vote on the capital increase on April 19, during the company’s annual meeting. Citigroup Inc. (NYSE:C), Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) and HSBC Holdings plc (ADR) (NYSE:HBC) (LON:HSBA) will serve as underwriters.
After raising the cash, Commerzbank AG (PINK:CRZBY) (ETR:CBK) (FRA:CBK)’s core tier one capital ratio – under Basel III rules – will increase from 7.6 percent to 8.6 percent. The figure is expected to rise to 9 percent by the end of 2014.