Commerzbank Woes Slowly Cutting to the Quick

With internal targets unlikely to be met, Commerzbank is continuing to look for ways to cut costs, putting the employees of Germany’s second-largest bank on edge.
Shareholders show their displeasure.

Martin Blessing was in a festive mood at the annual kick-off event for management in mid-January. The Commerzbank chief celebrated past successes and, as always, provided his most important executives with directions for the upcoming year. But this time many of the 400 bankers in attendance failed to catch his euphoria, after learning their management level was to be merged with the one below it.

“That was an unexpected shock,” said one banker. It is not surprising that some managers left the event in Frankfurt early. Yet they’re not the only employees concerned about the future these days. The anxiety can be felt throughout Germany’s second-largest bank, especially in the headquarters in Frankfurt, because top management is combing through the entire company to find ways to save.

The bank wants to lower costs, because things are not going as well as the management had intended. Commerzbank, which had to be bailed out by taxpayers in the aftermath of the 2008 financial crisis and is still nearly 20-percent owned by the German government, still has a mountain to climb to restore some of its lost glory.

At the end of 2013, the bank set a target to increase its 2014 income before risk provisions to €9.9 billion, or $11.2 billion, and net profit to €1.3 billion, insiders told Handelsblatt. The goal was part of its medium-term planning for 2014 to 2017. The bank declined to comment on the targets.

These goals are no longer attainable, even if the bank were to exceed the analysts’ forecasts when it reports annual results on Thursday. On average analysts predict Commerzbank made a net profit of €578 million last year, after only €78 million in 2013. Commerzbank CEO Mr. Blessing has already indicated that the profits will be higher than last year.

The bank will give more specifics on Thursday when it presents its numbers for 2014. Dividends should probably not be expected this year. There is hope at the bank that that will change next year, assuming that penalties imposed by the United States or the crisis in Ukraine don’t upset those plans.

The most recent employee survey from last September gives insight into how deep the concern runs at Commerzbank over job security.

What’s more, the revenues are lower than had been hoped for. The record low interest rates in Europe have hit Commerzbank’s traditional business model hard. Analysts estimate gross revenues last year reached €9.1 billion. Weak income continues to be a pressing problem at the bank.

Therefore, the targets that the bank had set for 2015 and 2016 have been the subject of debate in the supervisory board. Some supervisors consider the bank management’s expectations to be unrealistically high. But the management board is clinging to them, even if one top manager or another admits that the goals are naturally “ambitious.”

In an interview with financial newspaper “Börsen-Zeitung,” Mr. Blessing recently confirmed his goal of achieving an after-tax profit margin of more than 10 percent in the core business in 2016.

That makes another sentence of his quite remarkable. “Today the financial world and the public are looking more at the equity ratio than at the profits,” he said only shortly after reiterating his margin goals. That almost seems as if he wants to leave a back door open.

Commerzbank has the reputation among analysts of tending to overestimate revenue, but it has been more reliable with cutting costs. Since it bought and merged operations with the eastern German bank Dresdner Bank in 2009, the institution has cut administrative expenses from €8.5 billion at that time, to just under €7 billion now.

 

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This time, too, the bank is looking to dress up the poor results by trimming costs. Boston Consulting Group was recently hired by the bank to look for savings potential in the costs of materials and internal processes. That is expected to generate savings in the low hundreds of millions. The personnel costs are expected to drop further, not spectacularly like in 2013, when the bank announced it was cutting 5,200 of the then 54,000 positions, but rather with an endless number of smaller cost-cutting measures.

Frank Annuscheit, the management board member responsible for banking operations and human resources, made that clear in an interview last summer, when the first plans on relocating jobs in accounting were made public. “We will have to come to regard cost discipline as a permanent management task,” he said.

Now it is apparent how serious he was about that. Recently the bank announced that it would be cutting or relocating 440 jobs from its London location. The bank has also just pushed through a savings program in accounting. By the end of 2018, 376 positions will be eliminated – almost half the jobs. The work is expected to be done in the future by the cheaper subsidiary ComTS, where new jobs have emerged at lower costs.

That was likely just the beginning. Mr. Annuscheit and department director Martin Fischedick have said several times that the entire back office of the bank is under scrutiny. Everything will be screened to see if the work can be done somewhere else cheaper, for example at ComTS.

Observers estimate that the jobs at ComTS cost between 40 and 50 percent less thank at Commerzbank. That makes job relocating a red flag for trade unions and employee works councils. “The wages at ComTS are just above the level of minimum wage,” said Mark Roach, from the union Verdi.

 

006--WTB excludes 2013 reference

Management wants to start talks with the works councils over savings in the personnel division. Insiders say they would be about standardized procedures such as payroll accounting, certificates or pension plans.

The manner in which the bank wants to consolidate management levels in operations is also making employees angry. The merging of the main and regional branches to branch offices will lead to a loss of about 260 management positions, or two-thirds of the posts.

The restructuring is hardly disputed on a substantive level, but the implementation is. Officially, the bank emphasizes that while some people are “personally affected,” the business is not suffering as a result. Not everyone agrees with that.

“Many main branch managers are angry, because as branch managers they would be responsible for smaller business areas, and the regional branch heads are rattled because there will not be enough positions for everyone,” said an insider.

And that is why nervousness and worry are spreading throughout the bank. The most recent employee survey from last September gives insight into how deep concerns run at Commerzbank over job security. Only 43 percent of its employees would recommend the bank as a good place to work. Mr. Annuscheit recently told an employee magazine that in times of downsizing, hiring freezes, restructuring and cost-cutting that level is probably “not surprising.”

 

Yasmin Osman covers banks in Frankfurt for Handelsblatt. To contact the author: [email protected]