Commerzbank has a fundamental problem: The most important business segments of Germany’s second-largest bank face profits that are falling faster than its costs. It’s a troubling trend for a bank that remains partially government-owned, having long struggled to pull itself out of the 2008 financial crisis.
To reverse the trend, the bank has said it will cut another 7,300 full-time positions by 2020 – more than 10 percent of its staff. Details about which areas will be affected by those cuts have so far been kept under wraps. But an internal document, which Handelsblatt obtained, shows which areas will be hardest hit by the layoffs.
The largest cuts will be in its corporate banking division, where 4,210 positions could be cut over the next three years, the document shows. This means that every third position within the division would be eliminated. On the private banking side, only around 800 positions, or 7.5 percent of the division’s staff, are on the chopping block.
Overall, the bank will invest more than €1 billion to restructure its operations this year, though Commerzbank Chief Executive Martin Zielke is keeping expectations in check when it comes to predicting a quick turnaround. “It will take additional time until our growth will significantly outpace the burden from negative interest rates,” Mr. Zielke said Tuesday as the bank posted a surprising first-quarter profit of €217 million, up from €169 million during the same period last year.
The reason for this tough-love approach is simple: Bankers believe the Mittelstand division has been operating less efficiently than its private and business banking segments.
The corporate banking unit is viewed as Commerzbank’s problem child. In the first quarter of 2017, the division’s earnings declined by 10 percent. Earnings fell on the private banking side by 30 percent, but the decline can be attributed to large one-off payments the bank received last year and regulatory fees for its Polish subsidiary.
Still, the cuts don’t mean Commerzbank is turning its back on its corporate or investment banking customers. Rather, the cuts are partially due to a broader overhaul that involves merging two divisions into one: The new corporate banking division is a combination of its capital markets operations and its lending to small and medium-sized businesses, known as the Mittelstand. That makes for plenty of redundancies.
The bank is also withdrawing from several business areas, though this doesn’t account for all the layoffs. The job cuts within the corporate banking division will disproportionally affect its regional offices. The Mittelstand lending operations in central/east, south and western Germany, could see every other position cut, in the northern regional office it will affect 40 percent of the staff.
Commerzbank insiders point out that the layoffs will not impact its customer-service sector. The word within the bank is that “we won’t touch our sales and distribution.” The cuts will instead target administrative duties, which the bank had partially outsourced to its regional offices.
The reason for this tough-love approach is simple: Bankers believe the Mittelstand division has been operating less efficiently than its private and business banking segments, where only every 10th position is under threat. The corporate banking division is internally known as an area that needs substantial work, but the document also offers some indications for how the bank hopes to restore a level of growth to corporate banking.
One particular segment, “Advisory & Primary Markets,” which advises Commerzbank customers on capital market products, is actually expected to grow in terms of staff size by 2020. This is part of where Commerzbank, long Germany’s primary lender to small and medium-sized businesses, thinks it has an edge over rivals. The bank in its quarterly release Tuesday said that increased demand for capital-market products has helped to prop up the Mittelstand division, which otherwise remained flat during the first quarter.
It doesn’t mean the capital-market sector of the bank will be completely unaffected by the cuts. Loan and currency trading will lose one out of every three positions. Analytics will be reduced by a quarter. The stock business, which increased its profits during the first quarter, is set to be spun off and sold. The move would eliminate 418 positions.
In addition to portions of investment banking, there’s another business field the bank intends to strengthen. The document includes a new section called “Big Data/Advanced Analytics,” which will feature a 100-person staff. Commerzbank has long said that it wants to strengthen its business with a more professional data analytics department. The internal document does not mention some of Commerzbank’s other divisions, which include its Eastern European unit, the asset manager Commerz Real, the online bank Comdirect, and the internal bad bank ACR.
The complete restructuring process is expected to cost about €1.1 billion this year. Exactly when the overhaul will impact the bank’s balance sheet depends on the outcome of the talks with its employees. The faster the bank reaches an agreement with its employees, the earlier the restructuring costs will be reflected. Stephan Engels, CFO of Commerzbank, said talks began in March have already resulted in “initial agreements regarding partial retirement” and at least part of the costs could be charged in the second quarter.
Booking the costs could mean the bank Common Equity Tier 1 ratio – a measure of its reserves – would temporarily decrease by 0.3 percentage points, a small price after the bank’s equity ratio increased slightly to 12.5 percent during the first quarter.
“This gives us the necessary wiggle room for investments and restructuring,” Mr. Engels said.
Yasmin Osman is a senior banking correspondent for Handelsblatt. Michael Brächer is a financial correspondent covering Commerzbank and Deutsche Börse among other firms. Both are based in Frankfurt. To contact the authors: [email protected] and [email protected]