Another hybrid for equity swap February 22, 2012 at 9:40 am

Standard procedure, this, for European banks these days. Bloomberg reports:

Commerzbank AG (CBK) will ask investors to swap hybrid capital instruments trading below face value for new shares, adding to steps by Germany’s second-largest lender to boost its financial strength.

The measures, announced as Commerzbank unveiled earnings that beat analyst estimates, could boost the German company’s core Tier 1 capital by more than 1 billion euros ($1.33 billion), it said… The principal amount of the capital instruments included in the offer totals about 3.16 billion euros, Commerzbank said.

In other words, you buy the hybrids (which are trading well below par) back at market or close to it, and issue new equity. This is Basel 3 capital enhancing as the hybrids are not good capital in the new regime, and you (probably) get a pop from the sub par buyback.

Update. As FT alphaville says, one of the things that is interesting about CBK’s progress is its progress on RWA mitigation. They quote Nomura research from Chintan Joshi and Omar Keenan and as follows [MSB = Mittelstandbank, a corporate banking unit, ABF = Asset-based finance]:

In MSB there was a lot of progress made on RWAs. The effects of adding collateral into systems was EUR 5bn alone and CBK staff are getting better at this. There is a team of 200 people working on this, and previously CBK in moving from Basel 1 to Basel 2 was also a laggard in taking advantage of capital efficiencies. Second, there were better ratings in MSB. Third, the bank adjusts the model parameters once a year. Germany experienced a low recovery rate historically because the average equity in German companies used to be 17%. However, this is now 28% on average and implies higher recovery rates. This reduces LGD and risk RWAs…

200 people just to optimize their regulatory capital calculation in one part of the bank? Wow.

The other part of the story of course is synthetic securitization to optimize capital, and unsurprisingly CBK are doing that too

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