Payback time
February 23, 2011
Commerzbank, Germany's second largest bank, is poised to start making payments on 16.2 billion euros ($22 billion) in government bailout funds. The capital was provided as a ‘silent participation' without voting rights, and has been helping to keep the lender afloat since 2008, when it reported a loss of 1.1 billion euros due to the financial crisis.
The money was provided by Germany's Financial Markets Stabilization Fund, SoFFin, which owns 25 percent plus one additional share of Commerzbank, giving it a blocking minority. It could potentially block actions like capital increases or mergers.
A speaker for SoFFin declined to comment when contacted by Deutsche Welle.
Commerzbank had a very profitable year in 2010, netting an operating profit of 1.4 billion euros. But its private banking business branch with 11 million customers barely scraped by with a gain of 48 million euros.
The bank acquired Dresdner Bank in 2008, and has gained some momentum because integration of the two institutions has proceeded more quickly than expected, Commerzbank CEO Martin Blessing said in a press release. Still, the bank blamed the costs of integration for its lagging profits from private banking.
"Much of this depends on the development of the debt crises in several European nations, and the consequences of the global crises in financial markets and economies," Blessing said.
Skipping interest payments
While Commerzbank is planning to repay SoFFin via dividends, it won't be paying interest on the borrowed money for now. A 1.9 billion euro write-down on the value of its floundering property finance unit, Eurohypo, ultimately brings the bank's financials down into the red. That means it can dodge paying SoFFin interest payments worth 1.5 billion euros for 2010, although Eurohypo is to be sold by the end of 2014.
Blessing said Commerzbank would do everything in its power "to make sure the German government ends its involvement positively."
Martin Ruckes, Professor of Finance and Banking at the University of Karlsruhe, said German law allows Commerzbank to write-down Eurohypo and, under the circumstances, may even required it.
"Naturally the first question which has to be asked is whether the write-down was required, or if it was a choice on the part of Commerzbank," he told Deutsche Welle.
Ruckes added he's optimistic about Commerzbank's chances of a continued upward trajectory. The bank has taken steps to reduce the size of Eurohypo, which was involved in government financing throughout Europe, a now deeply troubled sector.
"They've tried to end many of their engagements, even if that has led to losses," he said. "It could now be expected that the risks might not be as dramatic as they were in the past. It looks as though steps were taken to reduce risks."
Author: Gerhard Schneibel
Editor: Sam Edmonds