Commerzbank may need five billion euros more capital

Commerz-bank may need considerably more capital than previously expected to meet a targeted 9 percent core capital buffer by mid-2012 as demanded by the EU's banking watchdog, several persons close to the bank told Reuters. Commerzbank's share price fell by as much as 10 percent and were down 8.3 percent at 1.242 euros by 1348 GMT, making the stock the biggest decliner on Germany's blue chip index.
Germany's second-biggest lender could need around 5 billion euros ($6.7 billion), as opposed to a previously expected 2.9 billion euros, should the European Banking Authority (EBA) proceed with plans to tighten further the capital requirements it is making of banks.
This is based on internal Commerzbank calculations, the sources said. The EBA's previous 2.9 billion figure was based on data for the second quarter, and the watchdog has since been mulling raising its standards even further, given the latest ructions from the euro zone debt crisis. Commerzbank's position has not been made easier by the 700 million euro net loss it incurred in the third quarter.
The potential higher capital requirement for Commerzbank raises questions about additional capital needs for the German banking sector as a whole, even if Commerzbank were still to account for the lion's share. Last month, the EBA had calculated that Germany's banks would need about 5.2 billion euros in extra capital. Regulatory sources on Tuesday cautioned that the final capital calculations were still being challenged by national supervisors, including Germany, who say the EBA's latest demands are going too far. Commerzbank, in which the German government owns a 25 percent stake, declined to comment.
A significant rise in the capital requirements would put more pressure on Chief Executive Martin Blessing, who has vowed to close the capital gap without again turning to the government for help, as he did during the financial crisis. "I'm not going there again," Blessing told journalists last month. Analysts said the bank is also unlikely to seek a rights issue because the current market price of the shares is too close to the nominal value of 1 euro and yet investors typically demand a discount of 30 percent.
"Commerzbank already would only have been able to make the 2.9 billion if it was really stretched. There's no way it can make the 5 billion," Kepler Equities analyst Dirk Becker said. Meeting a higher capital target would require Commerzbank to intensify its effort to slash risk-weighted assets, allowing it to free up capital, the sources said.
The bank has already said it would limit new lending in its main business with small and medium sized enterprises to its core markets of Germany and Poland for the time being. It also said it would end new business financing at real estate unit Eurohypo.
The sources said that in addition to these measures, Commerzbank would also drastically cut back its lending to German states and municipalities to help reach the 5 billion-euro target. Regulatory observers said the EBA may have gone too far with the latest tightening of capital requirements, which may stoke resistance from national banking supervisors like those in Germany as well as from banks themselves.
"It's a problem for all banks, not just Commerzbank," said one person familiar with banking supervisory thinking, who asked not to be named. "Lots of banks are worried that they cannot meet their obligations to the real economy because they are permanently dealing with changing stress tests and higher capital requirements," the person added.