Commerzbank Recovery

Leaving the Bad Bank Behind

Commerzbank CEO Martin Blessing and CFO Stephan Engels 54871659
CEO Martin Blessing and CFO Stephan Engels had reason to smile on Friday.
  • Why it matters

    Why it matters

    Shares of Germany’s second-largest bank could recover if the profits prove sustainable and lead the German government to sell its stake in Commerzbank.

  • Facts

    Facts

    • Commerzbank needed two German government bailouts totaling €18.2 billion in the crisis years 2008-2009.
    • Bad loans to the real estate and shipping sectors weighed on the bank’s profitability over the past 8 years.
    • CEO Martin Blessing has said he will resign in October after having led the bank since May 2008.
  • Audio

    Audio

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Presenting the bank’s annual results for the last time, Martin Blessing can be happy he was able to present some good news. Commerzbank’s chief executive on Friday announced a net profit of €1.1 billion, or $1.2 billion, the bank’s highest earnings since 2010.

“I am satisfied that the bank is more stable and more stress resistant than it was before the financial crisis,” Mr. Blessing told reporters on Friday.

For Germany’s second-largest bank and its investors, it marks an end to a seven-year long struggle to overcome bad loans and bad decisions. Mr. Blessing confirmed the bank would pay a dividend for the first time since 2007, and announced it was winding down a bad bank created in the aftermath of the crisis to do away with billions in failed loans in real estate and shipping, among other things.

Mr. Blessing, who will resign in October, has led the bank since May of 2008, taking over shortly before Commerzbank was plunged into the worst crisis in its history. Just before the financial crisis, he had engineered the acquisition of Dresdner Bank – an expensive merger that along with other errors was blamed for Commerzbank needing two German government bailouts totaling some €18 billion in 2008-2009.

It’s been a rough time at the top: Commerzbank achieved below-average profits the past five years, posting losses in 2009 and 2012, and cut hundreds of jobs as losses on bad loans weighed on earnings. The German government still owns around 15 percent of the bank.

“I am satisfied that the bank is more stable and more stress resistant than it was before the financial crisis.”

Martin Blessing, Commerzbank CEO

The five years following the financial crisis felt like a “roller coaster,” including the repayment of state aid, a capital hike and Greek bond writedowns. Now, Mr. Blessing said he feels the bank had turned the corner.

The bank’s earnings last year were nearly quadruple the level from 2014, when it made €266 million in profit. In the fourth quarter of 2015, the bank earned €187 million, compared with a €280-million net loss in the same period a year earlier, when earnings were hit by special charges to settle U.S. fines for violating sanctions and money laundering regulations.

“At the end of 2015, we have achieved many of the targets we had originally set for 2016,” said Mr. Blessing, who delivered on his August promise to pay a €0.20 dividend per share, or €250 million, the first since 2007.

Investors greeted the bank’s improved results by sending its shares up almost 17 percent by mid-afternoon in Frankfurt. The stock had dropped 6.6 percent on Thursday amid a global sell-off on equity markets.

 

Commerzbank Net Result annual-01

 

One of the bank’s other key targets was to reduce the amount of bad loans in shipping and real estate to €20 billion by the end of 2016. This goal is now already within reach.

Commerzbank’s portfolio of troubled public finance, property and shipping loans was bundled into a bad bank unit in 2012, separating the bad loans from the rest of its operations. The portfolio had been reduced from €167 billion in mid-2012 to around €63 billion at the end of December.

On Friday, the bank said another €46 billion in loans have now been deemed less risky, allowing them to be transferred back to Commerzbank’s core operations, while keeping the toxic ones in a separate vehicle.

“We will not transfer any distressed assets or so-called non-investment grade assets to the core bank,” Commerzbank’s chief financial officer, Stephan Engels told reporters.

That leaves just €18 billion in bad loans left to wind down. As a result, the bank announced that it would be winding down its bad bank over the coming months.

Progress has also been made in finding a successor for Martin Blessing. In a letter to Commerzbank employees, the company’s non executive chairman, Klaus-Peter Müller, said the bank could announce a replacement by April.

“We would like to close this process before the annual general shareholders meeting in April so nothing stands in the way of an orderly handover,” Mr. Müller said in the letter, seen by Handelsblatt.

“We have some of our own, strong internal candidates included in our selection. External candidates will have to measure up against their qualifications, background and organizational power,” Mr. Müller said.

The non-executive chairman also said the bank has already begun the search for a new chairman to succeed Mr. Müller, though it has been difficult to find qualified candidates. Mr. Müller said he would definitely not remain chairman beyond 2018, and he was willing to resign earlier than 2018 if a suitable successor was found.

 

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Elisabeth Atzler, a banking correspondent with Handelsblatt in Frankfurt, contributed to this article. To contact the authors:  kreijger@handelsblatt.com and osman@handelsblatt.com

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