Revenues Queried Goldman Sachs interested in buying Commerzbank's ETF unit

Barclays and France's Société Générale are also interested in buying the equities division, which Commerzbank announced last year it might spin off.
Is the sun setting on Commerzbank's business model?

Goldman Sachs, Britain’s Barclays Bank and French bank Société Générale have all expressed an interest in buying the Equities, Markets and Commodities division of Commerzbank, Germany’s struggling second largest bank, according to people familiar with the matter.

Commerzbank had said in March 2017 that it was spinning off the unit and was considering bringing it to market through an initial public offering. The EMC unit includes Commerzbank’s exchange-traded-funds (ETF) portfolio as well as equity derivatives and other market making activities.

CEO Martin Zielke announced in September 2016 that the bank, which had to be bailed out by the German government during the financial crisis, was changing its strategy to focus on private wealth management and catering to its corporate customers in Germany’s influential Mittlestand, the business segment that includes mainly family-owned medium-sized companies. He announced around 10,000 layoffs to reduce the bank’s overhead.

People familiar with the matter said that a number of banks had expressed interest in buying Commerzbank’s ETF portfolio, but that Mr. Zielke had made clear that he wanted to sell the division as a single unit. It has 450 employees in Frankfurt and 150 staff in London.

Banks in London may be interested in a beachhead in Frankfurt before Brexit.

One manager said Goldman Sachs, the American investment bank that Commerzbank hired to advise it on a possible merger with another bank, was in the lead to buy the EMC division, along with Société Générale. Rothschilds, the global advisory firm, is advising Commerzbank on the sale of the EMC division as well as providing advice on a possible sale to another bank. None of the banks involved had any comment.

The German government, which retains a 15 percent shareholding in Commerzbank after its bailout, must approve any merger.

One theory for the interest in EMC is that banks like Goldman, whose European operations are currently headquartered in London, may be seeking a continental base to use for European sales after Britain leaves the European Union, now scheduled for March of next year. After Brexit, as Britain’s departure is known, banks in London will no longer be able to operate freely with customers in the EU and are currently seeking to move some operations to Frankfurt, Paris, Dublin or Amsterdam.

Commerzbank’s EMC plays a dual role in the ETF market, both as an issuer of its own funds but also as a market maker for other ETFs. Market makers buy and sell short ETFs and their underlying assets when the ETF price, which is posted like a stock price, gets out of kilter with the value of the underlying assets. This process keeps the ETF price in close proximity to the value of the assets.

Goldman Sachs decided to end its role as lead market maker for ETFs last year, so it may now have decided to return to this role in Europe, where the American asset manager Blackrock has taken a huge lead in ETF issuance and other US firms are scrambling to compete.

Paradoxically, the EMC unit was the only part of Commerzbank’s corporate client division that increased its revenues last year. In the first nine months, revenues rose by 13 percent to €295 million ($366 million).

Some observers contended that Commerzbank might have dressed up the unit’s results by undercharging for common expenses such as real estate, IT and infrastructure costs, but bank officials insisted the results were fair and transparent.

Two top executives of the EMC division were reportedly forced out by Mr. Zielke last year as part of an inquiry into so-called “cum-ex” deals in which banks acquired shares just before the dividend due date and delivered the shares after the dividend date, allowing them to claim unjustified capital gains tax refunds from the German treasury.

Yasmin Osman covers banks for Handelsblatt in Frankfurt, Volker Votsmeier is an investigative reporter for Handelsblatt and Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: [email protected], [email protected] and [email protected].