When veteran Commerzbank head Martin Blessing bade farewell to his shareholders last year, Germany’s second largest bank had just enjoyed profits in the billions of euros and paid out dividends for the first time since the financial crisis. It seemed gift-wrapped and ready to go for his successor. “The path back to a sustainably successful bank is readily apparent,” Mr. Blessing, who had steered the bank since 2008, said at the time.
On the face of it, then, his successor Martin Zielke took over a bank that was finally putting the 2008 financial crisis – a devastating blow that nearly toppled it and required a government bailout – behind it. Only it wasn’t sustainable: After the rebound in 2015, earnings are once again falling, dividends are no longer on the table and high restructuring costs loom on the horizon. Mr. Zielke is still looking for a way to generate consistent growth.
It seems Commerzbank has little choice but to blaze a new (well-worn) path through restructuring. The trouble is that Mr. Zielcke’s shareholders, who still include the German government in Berlin, don’t have much stomach for yet another round of “rebuilding.” Shortly after assuming power last May, the new man in charge ordered just that. And at his first shareholders’ meeting this week, Mr. Zielke had to endure some harsh criticism as a result.
The bank still has yet to find a formula for increasing its earnings, or even truly stabilizing itself.
Mr. Zielcke has done his best to keep a positive face. In lieu of dividends, his shareholders were presented Wednesday with a forward-looking program, “Commerzbank 4.0,” which promises to outfit the bank with modern IT, lush profits and lean costs. Departments will be reconfigured, the bank will become smaller and thousands of jobs will be cut. The new plan makes one thing clear: Eight years after being on the receiving end of a government bailout to the tune of €18.2 billion, Commerzbank is again – or better yet – still a work in progress.
True, Commerzbank was at least able to avoid another loss last year, unlike its chief rival Deutsche Bank. Its 2016 profits stood at €279 million, but the bank still has yet to find a formula for increasing its earnings, or even truly stabilizing itself. Meager profits aside, last year was particularly difficult: The bank’s revenue contracted by roughly 4 percent to €9.4 billion and its operating profit, which excludes write-downs and restructuring costs, fell to €1.399 billion. Mr. Zielcke also got an earful Wednesday over the bank's dividend-stripping scandal, a form of tax avoidance practiced over the past decade that the Commerzbank chief admitted will likely force the bank to repay €131 million in back taxes to the German government.
Particularly daunting for the bank’s bottom line is that the European Central Bank has promised to keep interest rates at record-low levels for at least the next year. That policy especially hurts banks like Commerzbank, which rely on traditional lending to businesses and households, rather than Wall Street-style investment banking.
Stocks also have yet to recover significantly: At around €9 per share, they’re nearly double a record low of €5.20 hit last summer but a fraction of the €120 mark Commerzbank enjoyed before the 2008 crisis. Shares are still only about 0.4 percent of the bank’s book value.
Mr. Zielke believes he has found the cure for what ails Commerzbank: Through digitalization, he wants to reduce costs and allow the bank to concentrate its efforts on fewer areas of business. His promise: “We’re making the bank easier, faster and better.” The bank is being reduced to two divisions: private banking and commercial banking. Services to customers of what was the small and medium-sized business (Mittelstand) division will be divided between the two branches. The investment-banking division (small compared to major players in the US or Deutsche Bank) will be added to the commercial-banking branch.
The bank also hopes to save more money by cutting staff. Roughly 7,000 of the bank’s 50,000 full-time jobs are on the chopping block in the coming years. Savings like these, however, will cost the bank dearly in the medium term. In 2016, restructuring costs amounted to €129 million – but that was merely an appetizer. The main course is yet to come – and will likely appear wholly unappetizing to investors. In all, the restructuring will cost €1.1 billion. The lion’s share of the costs will appear on the books in 2017 and 2018, but the restructuring will continue until 2020.
In theory at least, there is light at the end of the tunnel. The belt-tightening through “Commerzbank 4.0” should allow the bank to raise annual revenues to about €10 billion by 2020, up from around €9.4 billion in 2016. With more favorable interest rates, this figure could rise to €11.3 billion, though that’s a scenario even the bank doesn’t currently consider realistic.
To reach these targets, the bank needs to grow its business in both the private and commercial banking sectors. Private banking head Michael Mandel wants to bring in 2 million new customers by 2020, up from around 12 million in Germany and another 5 million in central and eastern Europe today. While the competition is thinning out its network of bank branches, Commerzbank is looking to retain its network of roughly 1,000 branches.
Mr. Mandel is also seeking to win over new customers by offering aggressive rates and investing heavily in marketing strategies. This has so far proved to be a solid strategy. The private banking branch, once the bank’s problem child, proved itself to be a stable profit driver in 2016. Mr. Mandel increased the branch’s equity return to 26.2 percent. In 2016 alone, Commerzbank was able to attract 320,000 new customers in Germany.
In the commercial banking part of the business, former investment banker Michael Reuther has been tasked with forging a unified institution out of the small and medium-sized business (Mittelstand) division and the investment bank – all without scaring away customers. Instead of jet setting to London or New York, his business now sends him to Munich or Leipzig, where small and medium-sized business owners proudly present their factories. Initially, this foray into the restructuring of Commerzbank’s commercial banking endeavors has come with high costs.
There are other legacy challenges from the 2008 crisis still weighing on the bank. For the past five years, for example, Commerzbank has been trying to wind down its ship portfolio, a series of loans that turned bad amid a global collapse in trade in 2008. The bad shipping loans on its books have shrunk from an original sum of €24 billion to a current total of €4.8 billion, roughly a tenth of the balance-sheet total. But the remainder has proved difficult to shake. In the business year 2016, bad ship credit was responsible for more than half of Commerzbank’s total loan loss provisions, which amounted to nearly €1 billion. It stands to reason that bad investments like these cannot simply be restructured away.
It’s hard to blame the new chief executive, Mr. Zielke, for much of this. His own restructuring round is still in its infancy. Remaining shareholders will need to stay patient – and that’s also the case for taxpayers who still retain the 15 percent of shares in Commerzbank that the government bought for €5.1 billion back in 2008-2009. Today, these shares are worth a mere €1.76 billion.
All this to say that the future for Commerzbank and its shareholders does not appear particularly bright. If interest rates remain low, the bank may struggle even to recoup its capital costs, Mr. Zielke conceded during a presentation of his strategy this year.
The path to sustainable success, it seems, is only smooth and illuminated when the going is good.
Yasmin Osman is a senior banking correspondent for Handelsblatt and is based in Frankfurt. Michael Brächer covers Commerzbank, the German stock exchange and other institutions for Handelsblatt in Frankfurt. To contact the authors: [email protected] and [email protected]