aid it would issue new shares at a more than 50% discount, as the battered German lender struggles to wean itself off state aid.

Germany's second-largest bank by assets said it would nearly double its outstanding stock, issuing 556 million new shares at €4.50 a share ($5.84), about half Monday's closing price of €9.94. Investors won a steep discount because the stock has sunk in recent months, according to people familiar with the deal.

Though Commerzbank previously announced the capital raising, the discount came as a shock to some investors, the latest in a series of setbacks. The bank's shares finished down 6.3% at €9.31 in Frankfurt trading Tuesday.

"For current shareholders, this is another disaster," said Jürgen Kurz, spokesman for retail shareholders association Deutsche Schutzvereinigung fuer Wertpapierbesitz. "The question is whether that's the last of such measures. I hope so, but it looks as if the bank is muddling through rather than having a sustained business model."

The steep discount Commerzbank is offering investors highlights the growing divide between Europe's largest banks, which have had little difficulty raising capital, and second-tier lenders like Commerzbank.

European banks are increasingly being judged by investors as either being in growth mode or as riskier restructuring cases, bankers and analysts say. Top-tier banks can typically offer smaller discounts of around 15% to 25%, while more troubled banks are forced to offer discounts of anywhere from 35% to 50%.

Last month, Deutsche Bank AG, DBK.XE -2.59% Germany's largest bank, placed 90 million new shares, raising €2.96 billion and boosting a key measure of its health under new regulations. The shares rose 6% in trading the next day.

Commerzbank is perceived as a riskier investment because of the proportionally larger amount of troubled assets and noncore businesses it is trying to unload, its lower capital ratio and its murky earnings outlook, analysts and bankers say.

Since announcing it would restructure its core retail and other operations in November, Commerzbank's share price has plummeted. First-quarter earnings last week showed the bank's most reliable revenue producers—its small and midsize corporate business and private-client division—are significantly less profitable than in the same quarter a year ago.

Now, shareholders are being diluted as the bank attempts to raise €2.5 billion in capital to finish paying back all but a fraction of the bank's remaining state aid injection. The bank said it decided to make the move now to take advantage of favorable market conditions, to eliminate fees associated with the state-aid stake and to strengthen its capital base.

Commerzbank was forced to seek a government bailout in the wake of  the Lehman Brothers collapse, primarily because of heavy losses in its subprime and real-estate portfolios and an untimely acquisition of Dresdner Bank, which was one of the country's largest banks. The German government injected €18.2 billion to keep Commerzbank afloat, taking a 25%-plus-one-share stake, in addition to €16.4 billion in nonvoting rights known as silent participation.

Since then, the bank has struggled to find a functioning business model in the new environment as it has come under pressure to pay back the government aid. The bank faced another hurdle last year after regulators identified a €5.3 billion capital shortfall.

Commerzbank has raised capital five times in four years, including in spring 2011, when it tapped shareholders for a total of €11 billion. Last month, the bank moved to consolidate shares outstanding in a 10-for-1 exchange. The bank's market capitalization was about €5.5 billion before the capital increase, and is expected to climb to about €8 billion. The subscription period runs from May 15 through May 28.  

Nomura analysts said in a research note Tuesday that "we believe the valuation still does not look attractive next to peers, given the levels of earnings uncertainty."

The capital increase will allow the bank to strengthen a key capital ratio to risk-adjusted assets, an important measure of health under new regulations being phased in. Commerzbank has one of the lowest capital ratios of its peer group.

The move will allow the bank to fully repay the remaining €1.6 billion in silent participations still held by the German government's bailout fund, in addition to €750 million in silent participations held by insure Allianz SE ALV.XE -0.58% . After the completion of the capital increase, the government's stake in the bank is expected to fall below 20%. 

The decline in share value has drawn investor criticism of Chief Executive Martin Blessing. Some shareholders at the bank's annual general meeting last month called for him to step down, and they added an item to the agenda calling for a vote of no confidence. The measure garnered 5% support from voting shareholders.

Mr. Blessing in November laid out a new strategy for the bank, calling for broad restructuring, a shift in private banking strategy to win new customers, a boost to online banking and a turn away from businesses such as ship financing.

Commerzbank has been losing some corporate clients as it cuts back on its business models and faces more competition in its home market, say people familiar with the bank's business. At the same time, the low-interest-rate environment is hitting the bank's core private-customer business.  

In the first quarter, the bank said its private-customer profit had fallen to €70 million, compared with nearly double that a year ago. The bank's business with small and medium-size German corporate firms, known as the Mittelstand, saw a 33% drop in profit to €325 million compared with the same quarter the previous year.


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