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Commerzbank, Six Years and €18 Billion Later, Scales Back in London

Michael Reuther Commerzbank_DPA
Michael Reuther, Commerzbank's director in charge of investment banking, may have to deal with a smaller London office.
  • Why it matters

    Why it matters

    Commerzbank has already sharply reduced its foreign presence since the 2008 financial crisis. But that alone hasn’t helped right the bank.

  • Facts

    Facts

    • Commerzbank halved its investment banking staff in London after the 2008 financial crisis.
    • Commerzbank, Germany’s second-largest bank, in 2009 received an €18.2 billion, or $23 billion, bailout from the German government, which still holds a 17-percent stake.
    • The bank is in the middle of its second restructuring program since 2008.
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Six years after Germany rescued its second-largest bank with €18 billion ($23 billion) in public funds, Commerzbank is still apparently struggling to gain traction, preparing to retrench its operations in Europe’s financial capital.

The bank is now targeting it back-office operations in London for significant cost savings, a source familiar with the situation told Handelsblatt. The move is the latest in a broader restructuring at Commerzbank, based in Frankfurt, that is expected to last until 2016.

Commerzbank’s London operation has already been stripped of much of its responsibility through cutbacks in its investment banking activities.

“There are considerations to move part of the back-office functions to another country,” one insider said. It includes non-trading sensitive functions such as information technology, office infrastructure and even cleaning services.

Commerzbank, through a spokesman, declined to comment. It remains unclear just how much of the bank’s London back office will go, and if so, where.

The focus on outsourcing comes as Commerzbank has struggled to return to profitability in a low-interest rate environment, which has hurt operating margins in its traditional businesses of private banking and commercial lending. The bank is also still working off a series of bad loans and acquisitions made ahead of the 2008 financial crisis, and which have acted as dead weight on the firm’s ability to turn a profit ever since.

Commerzbank received €18.2 billion of state aid in 2008 and 2009 and the German government continues to hold a 17-percent stake, which it is not expected to sell until at least 2016. The state aid and lessons of the 2008 crisis led the bank to shrink many of its foreign operations to refocus on lending to Germany’s Mittelstand, the network of small and medium-sized, often family-owned businesses that form the backbone of the German economy.

 

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London has suffered at the hands of Commerzbank ever since the bank’s 2008 takeover of Dresdner Bank, which lost €6.5 billion that very same year and was a major reason Commerzbank was reduced to taking a state bailout.

The number of investment bankers on Dresdner’s payroll was halved to around 1,600 by 2010. The reductions have made analysts skeptical that Commerzbank will ever be in a postion to make meaningful savings in its already-starved London operations.

While all banks tend to look at back-office operations in cost-cutting, “the sustainability of this has not been proven,” said Dieter Hein, an analyst at Fairesearch near Frankfurt. “Commerzbank remains far from where it needs to be.”

Sources said there is no talk of moving any more front-office operations – the workers who deal directly with clients – out of London, which still manages areas such as investment banking, wealth management and international corporate banking. The city remains an “important location for the bank – nothing will change for customers,” one financial source said.

This is not the first time London has been targeted this year. The bank in June moved a small investment banking team responsible for mergers and acquisitions out of the British financial center, with a majority of the 10-person team being relocated to Commerzbank’s headquarters in Frankfurt.

“Commerzbank remains far from where it needs to be.”

Dieter Hein, Banking analyst, Fairesearch

Commerzbank is in the middle of its second restructuring since the 2008 crisis and hopes to right the ship by 2016. Financial accounting services are also being outsourced from its Frankfurt headquarters to cheaper locations in eastern Germany or Poland, the bank confirmed in July.

“We have to reach a point where we view cost discipline as an ongoing management task,” Frank Annuscheit, the management board member in charge of human resources, told Handelsblatt in August.

The cost-cutting has had some effect. Commerzbank’s net profit more than doubled in the second quarter of 2014 to €100 million ($135 million) from last year. However, much of the improvement was artificial, the result of last year’s high level of loan-loss provisions and negative investment income rather than a major increase in the profitability of its core lending business.

Yasmin Osman is a financial correspondent who covers banks and regulatory issues out of Frankfurt. Christopher Cermak is an editor with the Handelsblatt Global Edition in Berlin. To contact the authors: Osman@handelsblatt.com; cermak@handelsblatt.com

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