CEO Departure

Commerzbank: Stable, Boring

Blessing3-DPA
Martin Blessing leaves Commerzbank more-or-less better off than when he joined.
  • Why it matters

    Why it matters

    Martin Blessing took charge of Commerzbank in 2008 and managed to right a tilting ship, but he needs to make sure his successor knows how to drive profits at the institution.

  • Facts

    Facts

    • Commerzbank’s share price shot up 18 percent on Friday.
    • The bank achieved a billion-euro profit in 2015 for the first time in five years.
    • Commerzbank was the beneficiary of a government bailout six years ago. The government still holds a 15-percent stake.
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    Audio

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Martin Blessing describes his time at the head of Commerzbank since May 2008 as a roller coaster ride – and with reason.

First the bank needed to be bailed out by the state, just months after he took office. Three years later, just when most of the state aid had been paid back, it suffered major losses through writedown of its Greek debt holdings. The bank barely survived a stress test by Europe’s regulators soon after that, and finally, in the last two years, it seemed to be back on the right path.

“You understand that I will leave with very mixed feelings,” Martin Blessing said Friday at his last annual press conference.

Mr. Blessing is set to step down as chief executive of Commerzbank after eight years in charge. The 52-year-old surprised many last October when he announced that he did not want his contract renewed. Instead, he plans to leave the bank in late September.

As mixed as Mr. Blessing’s emotions might be, so too are the results of his tenure.

“Blessing had a weak start, but is ending quite well,” said Klaus Nieding, a lawyer and vice president of the German Protection Association for Security Holdings, an association for private investors.

Things do seem to have improved significantly at Commerzbank. For the first time in five years, the bank achieved a billion-euro profit and for the first time since 2007 it’s paying out a dividend to shareholders. Commerzbank’s share price surged an impressive 18 percent Friday on the release of its annual results.

“It must be stated that right now, Commerzbank is better off than Deutsche Bank,” said Philipp Hässler, an analyst at Equinet Bank.

“Blessing has stabilized the bank, but had to demand a lot from the shareholders along the way.”

Klaus Nieding, VP, German Protection Association for Security Holdings

No one anticipated such successes when the government had to pump €18.2 billion ($20.45 billion) into the bank to keep it afloat six years ago. Just before the U.S. investment bank Lehman Brothers’ bankruptcy triggered the global financial crisis, Mr. Blessing had coordinated Commerzbank’s purchase of eastern German financial firm Dresdner Bank, which turned out to be among the worst-affected by the U.S. mortgage crisis.

For years, every stress test conducted by European regulators to examine the financial sector’s health was a nail biter for the bank. Its capital buffers barely passed the requirements.

Now Commerzbank’s capital buffer is one of its strengths. Its core capital ratio has risen to 12 percent. The leverage ratio of the bank, a measure of its assets against its loans, is more than adequate at 4.5 percent – above the minimum of at least three percent. Even if the rules set by regulators of the industry were to become stricter, as appears likely, Commerzbank is in a good position.

The bank’s reduction of bad debts has also been very successful. What was once 160 billion in government bonds and ship and real estate loans has shrunk to just 63 billion. A special processing unit for the bed debts, known as a “bad bank,” is to be dissolved and the remaining loans will be dispersed across the rest of the bank. Only the most toxic18 billion will be kept isolated.

 

Commerzbank 2015 Results-01

 

The restructuring phase is now complete. “Blessing has stabilized the bank, but had to demand a lot from the shareholders along the way,” said Mr. Nieding. That’s because Commerzbank didn’t generate reserves because of its impressive profits, but rather at the expense of shareholders.

Since becoming chief executive in May, 2008, Mr. Blessing presided over 11 recapitalizations that increased the total number of shares 19 times over. The share price has lost more than 90 percent of its value. And because there are so many shares, the first-ever dividend under Mr. Blessing’s tenure ever is just 20 cents per share.

The German government still owns 15 percent of Commerzbank shares and is set to get €39 million in dividends. This might serve as a consolation since the market losses have shrunk the value of state’s Commerzbank shares to €1.47 billion, a third of its original value.

Since the beginning of this year, the stock has lost a further fifth of its value. The market value of the bank is equal to 30 percent of its net worth, or book value, which is a relatively weak rate in Europe. However, given the years of restructuring, Mr. Hässler of Equinet said that Blessing’s balance sheet was “satisfactory.”

“What Blessing or his successor need to work on now is profitability,” he added.

Profitability and efficiency are still a major challenge for Commerzbank. Mr. Blessing has already scaled back the bank’s goals. Originally, he aimed for an after-tax return on equity of more than 10 percent in the bank’s core business divisions, which includes private customers, small- and medium-sized businesses, Eastern Europe and investment banking. In 2015, it reached a return of eight percent.

But as long as interest rates in the euro zone remain at record lows, Mr. Blessing has said he now sees banking industry returns “more in the high single digits” as realistic.

Even these lower expectations are still ambitious for Commerzbank. Right now, after-tax return across the entire company is just 3.8 percent.

Some areas have been turned around. The private customer business, long the problem child, is very profitable. But that division was the only one to grow, while business with medium-sized companies and with investment banking, including in Eastern Europe, shrank.

“I lack the imagination to see how the bank could get to seven to eight percent in return to equity as long as interest rates remain so low,” said Mr. Hässler.

Should the company focus on growth or saving? That choice will now be up to Mr. Blessing’s successor, for whom the search is ongoing. A decision is likely in the coming months.

“We want to complete this process before the general meeting in April, so nothing gets in the way of an orderly passing of the baton,” said Klaus-Peter Müller, chairman of Commerzbank’s supervisory board.

 

Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. To contact the author: osman@handelsblatt.com

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