BIG BANKS

Idols With Feet of Clay

commerzbankhq, RC134B4E18B0
Commerzbank had to sell its skyscraper in Frankfurt and then lease it back. Picture source: Reuters

Germany’s giant banks still loom large on the European horizon but they have feet of clay when it comes to earnings.

The second-biggest bank, Commerzbank, reported a bigger-than-expected loss for the second quarter after it consolidated its restructuring charges to take the hit all at once in this quarter. The extraordinary charge of €807 million ($957 million) resulted in a net loss of €637 million ($755 million), slightly higher than the consensus estimate.

As with last week’s report from Deutsche Bank, however, the underlying revenue situation remained weak as both banks struggle to win new customers and market share while trimming costs. Ten years after the onset of the financial crisis, both banks remain mired in the legacy of misguided strategies and missed opportunities.

“We have booked the provisions for the personnel reductions early and in full and have made further progress in the implementation of our strategy.”

Martin Zielke, CEO, Commerzbank

“We have booked the provisions for the personnel reductions early and in full and have made further progress in the implementation of our strategy,” Commerzbank Chief Executive Martin Zielke said in a statement on the quarterly results. “We are ahead of target for client growth, partly because we have invested.”

Bigger profit will have to wait, however. Mr. Zielke added that this year and next will be “transformational years,” which will lay the foundation for higher profitability on a sustainable basis, but only in later years.

The scale of the layoffs reflects the challenges faced by the two banks. Commerzbank plans to cut 9,600 positions by 2020, from the 41,500 employees most recently reported. Deutsche Bank, meanwhile, has dipped below the 100,000-plus it employed a year ago, to just 96, 652.

Deutsche has made more progress than Commerzbank, but it had more to contend with. Germany’s biggest bank settled with US authorities over toxic mortgage securities with a payment of $7.2 billion (€6.1 billion) and agreed to pay $630 million over allegations of money laundering in Russia.

At Commerzbank, the “bad bank” holding its €15.3 billion ($18.2 billion) in real estate and shipping loans gone sour was able to reduce these toxic holdings by nearly a billion euros in the first half. Deutsche has long since wound down its “non-core operations unit.”

But both banks face the challenge of reinforcing their capital base and increasing profit in an environment still marked by low interest rates, stricter regulation and stiff competition. Streamlining staff and operations is only half the battle. Attracting new customers and making a profit on them remains a struggle.

Last year, Commerzbank set a target of 2 million new retail clients by 2020. So far, it has added half a million, but only with aggressive marketing campaigns that included monetary incentives, such as crediting new accounts with €150 to start with.

“We wanted to take advantage of the opportunities for growth,” Michael Mandel, managing director for the retail business, told Handelsblatt. “It will take time for these new clients to do business with us, but we will have recouped the costs within 18 months on average.”

Analyst Markus Riesselmann at Independent Research is skeptical of these numbers. The new customers seem to be “expensive” purchases, he suggests.

Commerzbank did get a vote of confidence last week when it was disclosed that US hedge fund Cerberus Management had taken a 5-percent stake in the bank. Cerberus has a reputation for being a demanding shareholder and its other investments in European banking are doing well.

The Vienna-based Bawag bank, which is majority-owned by Cerberus, has staged a convincing turnaround since the hedge fund first took a stake nine years ago. “We see ourselves as an exemplary model,” the former Bawag chief executive, Byron Haynes, told Handelsblatt two years ago. “We cultivate a good and very close relationship with our owners.”

In fact, Mr. Haynes and his successor, the American-born Anas Abuzaakouk, don’t undertake any action without consulting Cerberus. Last year, Bawag, with nearly €40 billion in total assets, reported a net profit of €484 million, a record for the bank and a gain of 20 percent over the previous year. Return on capital rose to nearly 16 percent.

These are results Commerzbank, or Deutsche for that matter, can only dream of right now. Bawag has pursued an aggressive acquisition strategy, including a Stuttgart-based regional bank in Germany, and invested heavily in information technology.

Commerzbank, meanwhile, while promising shareholders fatter profits down the road, could only muster a weak forecast for this year as a whole, promising a “slightly positive” result, but only after the one-time gain from selling its Frankfurt skyscraper and leasing it back.

Commerzbank’s stock fell 2 percent from the previous day to close at €10.96, still close to its 12-month intraday high of €11.30. Deutsche Bank was also down on the day and is down nearly 14 percent so far this year.

 

Michael Brächer, Yasmin Osman and Hans-Peter Siebenhaar reported this story for Handelsblatt. Darrel Delamaide adapted this story to English for Handelslbatt Global.  To contact the authors: braecher@handelsblatt.com, osman@handelsblatt.comsiebenhaar@handelsblatt.com

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