LONDON - European banks have gone on a capital-raising frenzy.
In the latest move to increase reserves, Commerzbank of Germany began a heavily-discounted effort on Tuesday to raise 2.5 billion euros ($3.2 billion) in new capital.
The push to help its reserves follows similar moves by rival European lenders, which have come under growing regulatory pressure to increase their capital to protect against future financial shocks.
Despite a series of stress tests on the Continent’s largest financial institutions, investors have remained wary of firms’ continued exposure to risky loans and sputtering economies like Spain and Greece.
Regulators also have pushed banks to shed unprofitable assets and protect against rising delinquent loans. A proposed banking union across the euro zone also is expected to lead to greater scrutiny on banks’ balance sheets. Authorities want to ensure that banks meet stringent capital requirements outlined in new accountancy rules known as Basel III.
Under the rules, which come into force by 2019, firms must have core Tier 1 ratios, a measure of their financial health, of 7 percent. Banks deemed systemically important financial institutions must hold another 1 percent to 2.5 percent in reserve.
As a result, banks have been pulling out all the stops to meet the capital demands. Last month, Deutsche Bank raised almost 3 billion euros through a rights issue specifically targeted at improving its capital buffers. The British bank Barclays has issued a number of contingent capital instruments - known as CoCos - that will wipe out investors if the firm’s core Tier 1 ratio, a measure of a bank’s financial health, falls below a certain level. A number of other banks, including Credit Suisse and BBVA of Spain, also have raised capital through CoCos.
The Swiss bank UBS, which announced a major restructuring last year, has a 10.1 percent core Tier 1 ratio. That is currently the highest figure for Europe’s largest banks, according to the data provider SNL Financial. Other big banks, including Deutsche Bank and HSBC, also have ratios above 9.5 percent.
For Commerzbank, whose current core Tier 1 capital ratio of 7.5 percent is expected rise to 8.4 percent after the latest move, the new capital raised will help to repay an 18 billion government bailout that the firm received in 2009.
“The transaction marks the beginning of the federal government’s exit from Commerzbank,†the German lender said in a statement. “The capital structure of the bank is improving considerably.â€
The offering - the fifth since 2010 - allows investors to buy 20 shares for every 21 that they already hold for 4.50 euros a share. The price represents around a 55 percent discount on Commerzbank’s closing share price on Monday. The bank’s shares fell 3.8 percent in afternoon trading in Frankfurt.
As part of the deal, the German lender is reportedly in talks to offload 5.7 billion euros of British property loans to the American bank Wells Fargo and the investment firm Lone Star.
More capital raisings are expected to follow. British banks, for example, must raise a combined £25 billion ($38 billion) by the end of the year, according to local regulators. That includes potentially raising up to £1.8 billion, according to banking analysts at Barclays, for the small British lender Co-Operative Banking Group, which was downgraded to junk status last week by the credit rating agency Moody’s Investors Service on fears of rising delinquent loans.
Commerzbank, Deutsche Bank, Citigroup and HSBC are the book-runners for Commerzbank’s capital raising. The bank said the latest effort will close on May 28.
