UPDATE 3-Commerzbank capital moves well ahead of EU targets

Wed May 9, 2012 9:17am EDT

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By Arno Schuetze and Edward Taylor

FRANKFURT, May 9 (Reuters) - Germany's Commerzbank said on Wednesday it had comfortably exceeded new EU capital rules to help banks weather future crises after shrinking its lending business sharply, a move which analysts say will hit its future profitability.

Commerzbank, which has twice been bailed out by German taxpayers, posted a 63 percent fall in quarterly profit due to weaker investment banking, a major write down in the value of Greek bonds and the absence of a one-off effect which inflated earnings in the same period last year.

The bank said the state of the German economy, which in contrast to most of the euro zone is robust, meant that provisions against loan defaults fell 30 percent, helping to offset the weaker earnings caused by the reduction in lending.

First-quarter net income fell to 369 million euros ($480 million), compared with a forecast for 416 million in a Reuters poll.

"We have again made good progress with our strategic goal of consistently deleveraging the balance sheet and further strengthening the capital base," chief executive Martin Blessing said.

Germany's second biggest lender said it was 1.1 billion euros above a capital target of 5.3 billion set by the European Banking Authority, the European Union's banking watchdog.

The bank, which received 18 billion euros in bailouts during the financial crisis, strengthened its balance sheet by shedding risky assets and converting debt instruments into equity.

Investors welcomed news that Commerzbank would not seek capital from the markets or even the German state again. Its shares were up almost 1 percent at 1250 GMT, outperforming the banking sector index which was 3.38 pct lower.

"It is clearly good news that the capital issue is off the table," said analyst Dirk Becker from brokerage Kepler.

Net interest income was down 17 percent at the group level, which Metzler Securities analyst Guido Hoymann said reflected the lowering of risky assets, which in the first quarter alone were cut by 10 percent to 223 billion euros.

FUTURE EARNINGS

However, shrinking of Commerzbank's business has raised questions about the bank's future earnings potential, particularly since the lender has yet to wind down ailing property lender Eurohypo fully.

"The bad news is that this effect is here to stay as the bank has announced even more deleveraging," said Hoymann.

New chief financial officer Stephan Engels said the bank intended to post a solid operating profit in 2012 in its core business, which comprises corporate lending, private customer, investment banking and eastern European units.

It does not include the bank's asset-based finance unit that lost 4 billion euros in 2011, mainly as a result of stricken property lender Eurohypo.

The Mittelstandsbank unit which specialises in corporate lending to small and mid-sized German firms, once again drove earnings with operating profit rising 12.5 percent to 487 million euros.

But Engels cautioned that the euro zone crisis would take time to resolve due to problems in the most troubled "GIIPS" countries - Greece, Ireland, Italy, Portugal and Spain.

"It is reasonable to expect that it will take rather longer," CFO Engels said. "The GIIPS states have undertaken big efforts to improve the situation, but there will also be setbacks. With determined and coordinated action of the European institutions a solution is possible."

Commerzbank said it intended to repay the remainder of the 18 billion euro bailout by 2014 "in pieces or in total", depending on the capital position.

In London, more than 100 bankers scored a legal victory against Commerzbank for slashing their bonuses after huge losses at its former investment banking arms.

The bank said it would seek leave to appeal after a High Court ruled it had breached its legal duties by failing to honour around 52 million euros of promised payouts.

Commerzbank saw first quarter operating profit at its investment bank fall 22 percent from the year-earlier period, or 88 percent when including a 160 million euro accounting charge for revaluing its own debt.

($1 = 0.7695 euro) (Editing by David Stamp)

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