Commerzbank Struggles Uncertain Future, Haunted by the Past

A major restructuring program and new bad loan provisions at Germany's second-biggest bank will weigh on earnings this year. Commerzbank's CEO has declined to issue a profit target and there will be no dividend until 2018.
Quelle: Bloomberg
Tough times ahead for Commerzbank and CEO Martin Zielke.

First the good news: Commerzbank made a profit in 2016. Chief Executive Martin Zielke this week described the bank's net profit of €279 million ($297 million) as a "solid result," even if it was much lower than the €1.1 billion recorded a year earlier. The 2016 surplus was largely thanks to the bank's retail business, which gained around 320,000 new customers.

Now for the bad news: Germany's second-largest bank, of which the German government still owns 15.6 percent after a 2008 bailout, is still in trouble. The bank's business has suffered in particular as a result of low interest rates and new charges for potentially bad shipping loans. Another hit of up to €600 million is expected this year.

Mr. Zielke, CEO since last May, has announced a restructuring that will cost 9,600 jobs and €1.1 billion. He's also reduced bonuses and scrapped dividends with the aim of creating a more profitable, more digital "Commerzbank 4.0." Everything is to become "simpler, faster and better." However, this could take years.

Shareholders were disappointed by the results presented Thursday, particularly in view of the bank's subdued outlook for the current financial year. Commerzbank shares were among the few losers on Germany's blue-chip DAX index on the day, dropping 1.8 percent. On Friday, the stock was down another 2.1 percent at €7.44 at midday, trading at a one-month low. The DAX was up 0.2 percent.

2017 and 2018 will be all about restructuring. Martin Zielke, CEO, Commerzbank

A year ago, it seemed as if Mr. Zielke’s predecessor Martin Blessing had turned the bank’s fortunes after a seven-year long struggle to overcome bad real-estate and shipping loans and an ill-timed takeover of rival Dresdner Bank in 2008. The German government bailed out the Frankfurt-based bank twice during 2008 and 2009, spending €18.2 billion. Mr. Blessing did manage to improve Commerzbank's operations, even enabling it to pay a dividend for its 2015 fiscal year – the first since 2007 – but Mr. Zielke has again suspended payments due to the new round of restructuring.

The detailed figures for 2016 are sobering. Operating profit plummeted to €1.4 billion, compared with €1.9 billion in the previous year. Moreover, Mr. Zielke and his team benefited from positive non-recurring effects. A settlement reached in the dispute over old debts owed by the crisis-stricken former Austrian bank Hypo Alpe Adria substantially boosted Commerzbank's profits, which were further bolstered by the sale of shares in Visa Europe. But such assets can only be converted into cash once.

Mr. Zielke, a Commerzbank manager since 2008, has declined to name a specific earnings target for the current year. "2017 and 2018 will be all about restructuring," he said, adding that he couldn't say whether the bank would break even this year.

Last year's results were propped up by Mr. Zielke's old specialty, the retail business, which he headed before becoming CEO. The operating profit in this division climbed 3 percent to €1.1 billion, partly owing to aggressive promotional campaigns such as a "welcome bonus" that helped add 300,000 new customers. The bank wants to attract around 2 million new retail customers and make a consistent annual profit of at least €1.1 billion by 2020.

Mr. Zielke has not ruled out acquisitions. He wants the classic deposits and lending business to help grow the bank. Although these activities have also been hampered by record low interest rates, Mr. Zielke hopes to offset this effect with growth in volumes. "The main lever for counteracting this is growth," he said, and added that this would be possible only by taking away market share from competitors.

In contrast, the corporate banking business is struggling. Operating profit in this division declined by almost a quarter to €1.3 billion. Business with small and medium-sized enterprises (SMEs) remained stable. As part of the new strategy, the bank's division for SMEs has been merged with the investment banking business. The bank hopes to gain 3,500 new customers in this division.

Results were further burdened by the difficult situation on the shipping market. The bank set aside €599 million for bad shipping loans in 2016 and it expects to reserve another €450 to €600 million this year. "That may have been the biggest negative surprise," said Neil Smith, an analyst at Bankhaus Lampe.

10 p25 Poor Numbers from Commerzbank-01

Nevertheless, Commerzbank is making progress with the reduction of its problematic portfolio of old debts, a legacy of the 2008 crisis, which contracted by another €2.3 billion to €16.2 billion. Mr. Zielke also reported an improvement in the bank's core capital ratio, an important measure of financial strength, which rose from 11.8 percent to 12.3 percent in three months. That means Commerzbank has almost reached the level that German market leader Deutsche Bank hopes to be at by 2018. The rival bank is aiming for a core capital ratio of 12.5 percent by then.

Commerzbank employees are unlikely to find much comfort in these improvements, however, as staff bonuses are to be cut significantly. Chief Financial Officer Stephan Engels said that variable pay for the last year fell by €100 million. "That certainly isn't nice news. But it's logical." He emphasized that variable pay is linked to the group's performance.

The bank plans to cut a total of 9,600 full-time positions by 2020. Negotiations with staff representatives will begin in March. Although the bank hopes to avoid compulsory redundancies, Mr. Zielke said they cannot be ruled out completely. "We want to work openly and constructively with the works committee to ensure that the necessary cuts are organized in a way that is as socially acceptable as possible," he said.

The group restructuring plan is set to place a heavy burden on results. Mr. Engels said that the costs of around €1.1 billion would probably "be split equally between 2017 and 2018." There will be no dividend for the period up to and including 2018. Mr. Engels expects the new strategy to begin paying off by 2020 at the latest.

Progress could only be faster if interest rates rise, he said, calculating that an upward shift in the interest-rate curve by 100 basis points would increase the bank's net interest income in the first year by around €500 million. However, he also admitted: "A look at current interest rates clearly shows that this scenario has not occurred and is not likely at present."

Given the sluggish prospects for the sector, some bankers are hoping that Deutsche Bank and Commerzbank could merge. The two banks explored options for a merger last summer. However, the resumption of talks is apparently not on Mr. Zielke's agenda for the time being. He said that Commerzbank was fully occupied with getting its own affairs in order.

Bank regulators are not keen on such a deal either. The reason, according to sources: Two sick entities cannot make a healthy one.

 

Michael Brächer is a financial editor in the investment team in Frankfurt, Germany's financial capital. Michael Maisch is the deputy chief of Handelsblatt's finance desk and based in Frankfurt. To contact the authors: [email protected] and [email protected]