Tentative hopes that Commerzbank’s years of crisis might finally be over have evaporated. Its share price fell sharply this week on news of a surprisingly strong decline in its capital base in recent months.
Investors are increasingly nervous and some want supervisory board chairman Klaus-Peter Müller to leave before his contract expires in 2018.
Mr. Müller has been at the helm of Commerzbank for a decade and a half — seven years as chief executive and eight as head of the supervisory board, the non-executive body that hires and fires the top executives and sets broad company policy.
The government still owns 15 percent of the bank following an €18 billion-bailout during the financial crisis.
“It would be good if Klaus-Peter Müller were to go as soon as possible,” said one investor. Another said Commerzbank’s new chief executive, Martin Zielke – currently working on a new strategy – was a “good man” but that he could use a “new supervisory board chairman as a good sparring partner.”
Investors are impatient for change because Commerzbank’s business model isn’t working. Negative interest rates are gnawing at its earnings. Earnings are even down for its cash-cow Mittelstandsbank unit, which caters to Germany's important small and medium-sized business sector.
Commerzbank needs a fresh start in its thinking to stop it becoming a takeover target Investor
Preliminary results for the second quarter show that the bank won’t be able to match last year’s profit. Analysts expect that Mr. Zielke will have to abandon his profit forecast when he presents the second-quarter results next week.
Even worse, the capital ratio shrank to 11.5 percent from 12 percent in the second quarter, the bank announced late Monday. Analysts had expected the ratio to remain unchanged or increase. Investors are alarmed and the share price was down 5 percent in late trading on Tuesday. To laymen, a half-point decline might look like a rounding error. To financial experts, it’s a sign of a major setback.
The capital ratio has been hit by a mix of stricter regulatory requirements, low interest rates and a fall in Italian government bond prices. The bank is still well above minimum capital requirements but those requirements will get stricter in coming years. At 11.5 percent, Commerzbank is below the 11.75 minimum authorities will likely demand of Germany’s second-largest bank in 2019.
The German government played down the capital decline. “It’s always good to keep a cool head,” said one official. But lawmaker Manfred Zöllmer, a banking expert with the center-left Social Democratic Party and a member of parliament’s finance committee, was more outspoken.
“Given the mega-issues of regulation, low interest rates and digitization, every bank faces brutal challenges,” he said. Every bank needed to adapt its business model. “That is why Commerzbank should think about a personnel change because the current supervisory board chairman tends to stand more for the old banking business.”
Some investors are voicing similar concerns. “Commerzbank needs a fresh start in its thinking to stop it becoming a takeover target,” said one investor, adding that he was referring to Mr. Müller, not Mr. Zielke. “One hopes that Mr. Müller’s successor won’t be another long-serving Commerzbanker.”
When Mr. Zielke, 53, took over as chief executive on May 1, the bank had only just issued its latest profit warning. His predecessor, Martin Blessing, had told the annual shareholder meeting that given the slow start to 2016 with stock market turbulence and continuing pressure from low interest rates, matching the 2015 net profit of €1.06 billion in 2015 was looking “considerably more ambitious.” Two months earlier, the bank had predicted a “slight increase” in net profit in 2016.
Mr. Zielke has the confidence of investors. But he’s under pressure to deliver a grand plan at the supervisory board’s strategy meeting in September: a plan to make Commerzbank a lot more profitable. Its net profit at €342 million, or $376 million, in the second quarter was significantly down from the year-earlier period. It won’t become clear which parts of the business were to blame until the full results are released on August 2. But it’s likely that Mittelstandsbank may be one culprit because in recent years its costs have risen but not its income.
So what should Mr. Zielke do about it? “Cut costs, cut costs, cut costs,” insisted one fund manager. Another said the bank could save 10 percent in the next two to three years if it tried.
“The bank doesn’t have a capital problem, it’s got a profitability problem,” said one investor. One high-ranking executive said: “I hope he’ll launch a savings program worthy of the name.” But saving on its own wasn’t enough, he added. “The bank must also generate income by introducing more charges for its customers.”
Sources at the bank said Commerzbank will likely withdraw from some capital-intensive businesses. “The bank will have to shrink even further,” said one source.
Worryingly, the bank also appears to be struggling in its core business. Its online unit Comdirect only managed to increase its second-quarter profit thanks to an extraordinary gain.
We don’t know what Mr. Zielke is thinking. But it’s unlikely he’ll confine himself to savings. He recently told the bank’s in-house magazine that the key to “lasting success” lay in “profitable growth.”
“At the moment the whole sector is fixated on costs,” Mr. Zielke said. “I’m convinced that that alone is too short-sighted.”
He made a success of that approach as head of the bank’s private clients division. A mixture of savings and growth led to a strong rise in the division’s return on equity. He now has to prove that he can make that work for the whole bank.
Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. Yasmin Osman is a financial editor with Handelsblatt's banking team in Frankfurt. To contact the authors: [email protected] and [email protected].