If Martin Zielke’s aim was to shock investors, he’s already succeeded. The new boss of struggling Commerzbank unveiled the details of a radical new restructuring plan Thursday morning, confirming Handelsblatt reports from earlier this week that have already made Germany’s second-largest bank a major talking point for days.
It doesn’t get much more ambitions than this: 9,600 jobs will go, out of a total 54,000. That’s nearly one-fifth of the workforce. Dividend payments to shareholders, which were only reinstituted last year for the first time since the financial crisis, will be suspended once again as the restructuring is expected to cost more than €1 billion ($1.12 billion).
“If that’s how it’s really going to be, then it would be a bold move,” said one fund manager ahead of the formal announcement.
Commerzbank’s shares dropped slightly in Thursday morning trading, down 0.38 percent at €5.97 by 11:30 local time in Frankfurt. The bank’s shares have fallen about 3.5 percent in the last 7 days as details of the restructuring have come to light, and are down by more than a third since the start of this year. Its main competitor Deutsche Bank is doing even worse.
Mr. Zielcke, who has only been in office since May, had originally planned to unveil the details on Friday, but media leaks have forced the bank to rush out a statement on Thursday. Earlier this week, Handelsblatt reported that as part of Mr. Zielke’s plans, Commerzbank shareholders are supposed to forego dividends and employees will be incomparably harder hit.
“The cancellation of dividends would be bearable if investors were able to hope for rising profitability.”
It isn’t clear whether the reduction in jobs will take place without dismissals, though given the magnitude this seems unlikely. In its statement, the bank said only that it would soon begin talks with unions and employee representatives. The bank did say that 2,300 new jobs would be added – leading to a net reduction of jobs in the company of 7,300 full-time employees.
The bank’s non-executive supervisory board, which must sign off on all strategic decisions and has the power to hire and fire management in German companies, is expected to approve the plans Friday morning. That includes the German government, which still owns 15 percent of the bank after bailing it out in the aftermath of the 2008 financial crisis.
The Commerzbank boss probably isn’t afraid of any opposition from Berlin, even if the German government reportedly wasn’t briefed on the plans in detail. The word in the capital is that full plans were presented only to the bank’s supervisory board.
With such a radical restructuring, it is hard to imagine that the chairman wouldn’t first informally sound out the government as it is, after all, still a major shareholder. Moreover, indications over recent months suggest that the government supports Mr. Zielke’s efforts.
“We see the need for restructuring,” said one federal government source.
Considering that, it’s likely that the two government representatives on the supervisory board – Markus Kerber, managing director of the Federation of German Industries (BDI), and Commerzbank fund manager Anja Mikus – are in on the plans.
Other shareholders of Germany’s second-largest bank do not seem very anxious. Sources in Frankfurt said earlier this week that they first want to wait and see exactly what Mr. Zielke is planning.
There is no arguing about the need for a new formula at Commerzbank. While the bank generated a profit of around €1 billion ($1.12 billion) last year under Mr. Zielke’s predecessor, Martin Blessing, that goal is no longer attainable for 2016.
“Blessing couldn’t have timed his departure better,” said Frankfurt-based analyst Philipp Hässler from Equinet. “Now his replacement is forced to resort to pretty drastic measures.”
Gerhard Schick, the Green party’s financial policy speaker, sees this as throwing a bad light on Mr. Blessing: “The songs of praise last year were premature, that’s now become very obvious.”
Even eight years after being bailed out by the state, Commerzbank is still in the throes of a restructuring process that’s unpleasant for both its employees and the taxpayers.
“In my opinion, it was a mistake to establish a new leadership so late that really tackles the challenges of the future,” Mr. Schick said.
“Blessing couldn’t have timed his departure better. Now his replacement is forced to resort to pretty drastic measures.”
The government shouldn’t have kept itself so far out of the bank’s business strategy, he added. For that reason, the bank today is a business that loses billions for the taxpayers.
That isn’t likely to change in the foreseeable future. Primarily, it is low interest rates that are afflicting the bank. Earnings are suffering, and at the same time, the bank isn’t getting a handle on the costs. To cite an example, the cost-income ratio in the first half of 2016 was at 79 percent, comparatively high in the industry.
“That is simply not acceptable,” one fund manager said. “Something has to happen so that the ratio is at least brought down to 70 percent.”
In its statement, Commerzbank said it now aims to bring the cost-income ratio down to 66 percent by 2020. Should the interest-rate situation have “normalized” by then, the bank said it could even cut the ratio to 60 percent on annual revenues of some €11 billion.
First of all, however, shareholders must brace themselves for cutbacks, since the planned restructuring will cost additional money. Mr. Zielke is reckoning with restructuring costs of as much as €1.1 billion. In Thursday’s statement, the bank said it would write off an initial €700 million in the third quarter of this year.
Despite the writedown, Commerzbank said it still expected a “slightly positive” result for the whole of 2016. Still, the restructuring costs mean that dividend payments have been suspended “for the time being.”
“The cancellation of dividends would be bearable if investors were able to hope for rising profitability,” analyst Mr. Hässler said. After all, the major German banks “aren’t particularly among the biggest payers of dividends anyway.”
With his new strategy, Mr. Zielke wants to turnaround three key fields at once: digitalization, growth and earnings. At the same time, the bank’s divisions are to rest on two pillars: a division for corporate banking and one for retail banking. Major corporate customers will be pooled with investment banking. Smaller business customers will be assigned to the retail banking business. Overall, that means one entire division – the one currently dealing with corporate lending – will be cut out.
By doing this, Mr. Zielke will reflect the zeitgeist. “Maybe we don’t need fewer banks, just smaller ones,” said Andreas Dombret, a board member of Germany’s central bank, the Bundesbank, on Tuesday.
Although Mr. Dombret didn’t mention individual institutions, he did note that measured against the volume of the banking sector, Europe is still “overbanked” – so maybe large institutions will have to slim down to a healthier size.
Michael Brächer is a financial editor in the investment team in Frankfurt. Frank Drost is a Handelsblatt editor in Berlin, covering financial supervision and banks. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Christopher Cermak is an editor with Handelsblatt Global Edition. To contact the authors: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, and email@example.com