Troubled Bank

Cerberus May Be Just What Commerzbank Needs

  • Why it matters

    Why it matters

    Investors hope Cerberus could help boost Commerzbank’s share price, even allowing the German government to finally sell its 15-percent share in the troubled bank – possibly with a profit.

  • Facts

    Facts

    • The US hedge fund Cerberus Capital Management has purchased a 5-percent stake in Germany’s Commerzbank, which has been struggling to make money for years.
    • Cerberus invests in distressed companies with the aim of cleaning them up and selling them at a profit. There’s speculation that its presence could help do the same for Commerzbank.
    • Any increase in Commerzbank’s share price is welcome news for the German government, which holds a 15 percent stake in the bank.
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    Audio

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Commerzbank’s Galileo HQ Building in Frankfrurt
Cerberus will have to get Commerzbank to focus on profitability. Source: Picture Alliance.

For Commerzbank, the paragon of successfully-rebounded banks might reside in Vienna. Its name is Bawag, an Austrian lender that has put losses, crises and risky speculative deals well behind it. Years ago, Bawag began to pivot away from investment banking to focus more on its retail business. This may have been a relatively boring choice from a banker’s perspective, but thanks to its rigorous frugality, Bawag has since become one of the most profitable banks in Europe.

The Austrians didn’t accomplish this feat on their own. They had help from the US hedge fund Cerberus Capital Management, which holds a majority stake in Bawag. Last week, this very same financial investor procured a modest stake in Commerzbank as well.

Cerberus owns only 5 percent of Germany’s second-largest bank, but investors hope the Americans will help to finally make Commerzbank more profitable nonetheless. After all, it’s been struggling on that front for quite some time. In spite of numerous restructurings, reconfigured strategies and savings programs, the bank’s management has only been moderately successful at turning things around – as evidenced by Commerzbank’s recent quarterly loss.

The government still holds a 15-percent stake in Commerzbank that it intends to sell when its shares are worth €3.5 billion.

Cerberus, a hedge fund founded in 1992 by the former securities trader Stephen Feinberg, invests in distressed companies with the aim of cleaning them up and selling them at a profit. Known for its assertiveness as a shareholder, Cerberus has also proved a patient operator, taking as much time as it needs to ensure its investments prove their worth. In the case of Austria’s Bawag, it took Cerberus nearly a decade to turn the bank around.

Cerberus has been looking to get its foot in the door in Germany for years. It hired the former German defense ministers Rudolf Scharping and Volker Rühe as consultants in the hopes that they could serve as useful intermediaries. Recently, it’s been tied to the troubled northern lender HSH.

With Commerzbank especially, maintaining good relationships to politicians in Berlin could pay off immensely. For one, Cerberus could forge an alliance with the German government that would benefit both sides. After all, if the investor manages to increase Commerzbank’s value, the German government could sell its own stake – and save face in the process.

Taxpayers in Germany haven’t forgotten how the government forked out €10 billion, or $13.6 billion at the time, for a capital increase and a 25-percent stake in the beleaguered bank during the financial crisis. The 2009 buy-in saved Commerzbank from going under, but it came at a steep price. Today, after numerous capital increases, the government holds a 15-percent stake that is only worth about €2 billion.

10 Commerzbank Share Price-01

To be sure, Commerzbank’s share price has risen by almost 20 percent since early June (see graphic above). But the government is still a long way off from selling its shares for what it paid for them. Once next month’s federal elections are out of the way, however, Germany’s next finance minister may be willing to sell the government’s stake in the bank at a loss if it means getting rid of a pesky investment that has been plaguing the government for 9 years.

At the moment, the government’s goal is to wait until the shares are worth €3.5 billion before selling. But even that is a long way off – the bank’s share price would have to jump from €11 to €18. Such a goal is not unattainable if Cerberus can convince Commerzbank to make profitability more of a priority. But this might be easier said than done. For years, German officials watched as the bank came up with one new strategy after another – and missed every one of the targets it set for itself.

One of Commerzbank’s problems was that it had almost completely shut itself off from external input. For years, the bank recruited fresh management staff from within its own company ranks. That goes for current Chief Executive Martin Zielke, who took over the job at the beginning of last year from Martin Blessing, a long-time partner with whom he was well acquainted. Last fall, Mr. Zielke launched a restructuring program he called “Strategy 4.0,” which fused the bank’s investment banking and retail banking sectors together and laid off some 7,300 positions.

The results of that program no doubt need time to bear fruit. Meanwhile, shareholders have yet again been forced to forego their dividends. In the first half of the year, Commerzbank lost some €406 million due to the high cost of reducing its personnel, while its operating result in its private banking business declined by 41 percent over the previous year. Earnings have also sunk. The bank’s management attributed the downturn to expensive advertising campaigns aimed at winning over as many new customers as possible.

Mr. Zielke and his colleagues have been pursuing these campaigns for years. While other banks are increasing account fees and closing branches, Commerzbank is charging ahead with its strategy of growing its business. It has been just as reluctant to close retail branches as it has been to get rid of its €150 welcome premium for new customers. Commerzbank basically wants a critical mass in Germany. That’s why during the presentation of its half-year figures, the bank billed as one of its most important successes since the financial crisis the fact that it had won over 500,000 new customers.

Stephen Feinberg Cerberus CEO 64180562 Dow Jones Events
Cerberus CEO Stephen Feinberg won’t let Commerzbank just kick the can down the road. Source: Dow Jones Events.

The number of private customers did, in fact, rise by 1 million between 2013 and 2016. The bank’s bottom line, however, has shown no such growth. Commerzbank attributes this to negative interest rates, the costs for digitalizing its infrastructure and seemingly permanent restructuring efforts.

For one former high-ranking Commerzbank employee, such explanations sound like little more than excuses. “For all this growth, they’ve forgotten to make money,” he said. “If the new customers were as good as Commerzbank says, its income would have gone through the roof a long time ago.” A former board member for private customers also said that the successes of Commerzbank’s growth-oriented strategy should have been measurable by now. However, “so far, there’s nothing to see.”

It’s unlikely that Cerberus will significantly increase its stake in the bank, buy up the government’s shares or completely take over Commerzbank in order to muscle through its prescriptions for better business. It is likely, however, that Cerberus will view Commerzbank’s chosen strategy with a critical eye. This will be especially true once the hedge fund installs one of its people to Commerzbank’s non-executive supervisory board. After all, Cerberus will want to be sure its €700 million was well invested.

 

This article initially appeared in WirtschaftsWoche, a sister publication of Handelsblatt. To contact the author: saskia.littmann@wiwo.de.

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