* Commerzbank to repay 1.6 bln eur German govt bailout
* Core Tier One capital ratio to improve to 8.6 pct
* CEO says dividend repayment more likely from FY 2014
* Shares down 9 percent (Adds CEO quotes, analysts)
By Arno Schuetze and Edward Taylor
FRANKFURT, March 13 The German government will cut its stake in bailed-out lender Commerzbank AG to less than 20 percent from 25 percent as part of a raft of measures to strengthen its capital and comply with new bank rules.
The country's second-biggest lender said on Wednesday it would raise 2.5 billion euros ($3.3 billion) to repay the German government part of the bail-out money it received during the financial crisis, sending its shares to the lowest level in seven months.
The measures will increase Commerzbank's capital ratio to 8.6 percent and put it within reach of bank regulators' 2019 target of 9 percent. Earlier this year, Commerzbank had said it would take two to three years to get to that level from the current 7.6 percent.
"There was no specific demand by the regulator to do this transaction," Commerzbank Chief Executive Martin Blessing said, adding that at the same time many analysts have started to ask that banks to comply with Basel III rules well ahead of the deadline.
European banks are struggling to meet new bank rules that force lenders to hold more capital to absorb potential future losses. The global roll-out of Basel III rules began in January and gives banks six years to firm up their capital cushions.
In the wake of the Lehman Brothers failure during a 2008 financial markets crisis, the German government took a 25 percent stake in Commerzbank and injected 16.4 billion euros worth of non-voting debt-equity hybrid instruments, known as silent participations, to avoid ending up with a stake of around 80 percent.
The move saved the lender from potential failure after a merger with Dresdner Bank in 2008 that turned sour.
Commerzbank repaid all but 1.6 billion euros of the silent participations with a raft of capital measures worth 14.3 billion euros in 2011.
As part of the plan announced on Wednesday, Commerzbank will repay Germany's bank bailout fund Soffin a remaining 1.6 billion euro tranche of silent participation.
Separately, the bank will repay a silent participation worth 750 million euros held by Allianz SE, which the insurer took in the wake of Commerzbank's takeover of Dresdner Bank from Allianz.
"The redemption of the silent participation and the reduction of the share stake mark the start of the (government) exit at Commerzbank," said Soffin head Christopher Pleister.
Until now, the government had not wanted to decrease its stake to safeguard its silent participation in Commerzbank.
The state's decision to give up its blocking minority will make it easier for rivals to buy Commerzbank, but Blessing said it was unclear if consolidation within the banking sector was to be expected.
"At the moment, regulators are saying that they would rather have more smaller banks," Blessing said.
The government's remaining investment added up to 3.7 billion euros, Blessing said.
The state has said it wants to avoid booking a loss on its Commerzbank investment, and to achieve that it would have to wait for Commerzbank's share price to increase to at least 3.40 euros before sellng.
SLAP IN THE FACE
While Blessing stressed that repayment of the silent participation increased the likelihood of dividend payments from 2014 as the bank now no longer needs to service the roughly 200 million euros in annual coupon payments on the silent participations, shareholders took a different view.
"This (the cap hike) is a slap in the face of shareholders," said Dirk Becker, analyst at brokerage Kepler.
Shareholders will be asked to approve the capital increase at the bank's annual general meeting, which is being brought forward by roughly a month to April 19.
To make sure that the price for new Commerzbank shares can be set above the nominal value of the bank's shares, the lender will reduce the total number of shares in a ratio of 10-to-one, bringing them to 583 million from 5.83 billion.
($1 = 0.7680 euros) (additional reporting by Andreas Kröner; Editing by David Holmes)