Commerzbank’s new chief Martin Zielke didn’t mince his words at the end of August.
“The upheaval now is brutal, rapid and radical,” said the head of Germany’s second-largest bank about the current tumult in the banking world. “Banks are being forced to take every stone in hand, turn it over, re-sort it or completely eliminate it.”
Two weeks later it is clear that Mr. Zielke already had concrete plans to bring his bank out of crisis.
Hardly five months into his new job, Mr. Zielke appears to have left only a few stones unturned. Commerzbank’s small and medium-sized enterprise (Mittelstandsbank) division, the one-time cash cow, will be split up, according to plans. Smaller customers will go into the private customer bank and the medium-sized business sector will be looked after by the investment bank. Many jobs are likely to be cut in the process.
If rival Deutsche Bank succeeds in reducing its legal risks and even more consistently cuts costs, Mr. Zielke and Deutsche Bank chief John Cryan could pick up their discussion of a merger in one or two years.
These are urgently needed steps. After a short interim high in 2015, with a billion in profits and dividends starting to be paid again, this year is again showing that the bank remains in a desperate situation.
Return on equity, an indicator that measures profits per dollar of investment, was a meager 3.2 percent in the first half year. The consolidated result, at €372 million ($417.5 million), was far below the level at which future investments can be financed long term.
Also, the share price speaks volumes. At the current €6.50, the stock is bobbing at its lowest level in three years. And with a valuation of 30 percent of book value, investors are sending a message: “We have no confidence in the bank.”
At the top of the bank’s list of woes are costs that are far too high. Add in negative interest rates in the euro zone, stricter regulations and a lack of lucrative areas of growth and it’s clear where the problems are coming from.
They apply most of all to the SME unit. The bank’s former engine of profit has lost power. Costs increased in the last couple of years, while earnings declined. As the former head of Commerzbank’s retail division, Mr. Zielke proved that it can be the other way round.
To make matters worse, the negative interest rate is ruining business. Existing high-interest contracts are running out, credit margins have shrunk and there is hardly any demand for loans from investment-shy firms.
In addition, things have so far been packed together in the SME unit that don’t belong together. Smaller companies are better taken care of in retail banking.
And the fact that large, globally active family enterprises were assigned to the SME unit, and international corporations to the investment bank, defies all logic. A division with investment bank expertise strictly tailored for every shape and size of large corporate customers seems to make more sense.
Mr. Zielke is also likely to considerably lower costs with the new strategy. But whether it will lead to unqualified success remains to be seen, since costs are still excessive in the whole bank — and are even considerably higher in the retail unit than at the SME unit.
That is also partly due to the dogmatic approach of steadfastly holding on to the industry’s most lavish network of branches. It is also due to the fact that their administration, as with many other banks, is too inefficient and too little automated.
It is hoped that Mr. Zielke will deliver a convincing concept on these points with the new strategy to the supervisory board at the end of September. The key would have to be to radically digitalize the bank — from management all the way to customer contact.
This makes the concept of branches curiously anachronistic — for pressure on the bank will only continue to increase in coming years. The negative interest rate will also eat its way through profits, new digital competition will compete with the bank for customers and credit risks won’t stay this low forever.
What is so far known of Mr. Zielke’s restructuring plans, however, indicates he is headed in the right direction and that it’s also in the interest of the federal government. The latter has a 15 percent stake in the bank as a result of its near-demise after the 2008 financial crisis and is still a major shareholder. It is very much interested in having Commerzbank finally make its business model weatherproof.
Mr. Zielke has moved quickly with his new strategy, but the steps taken so far are not yet brutal and radical. For even a new division of corporate customers doesn’t solve the dilemma of not being able to gain enough advantage from size, in an extremely fractured banking market with the lowest margins in Europe.
But a more radical solution is in sight in the mid-term. If rival Deutsche Bank succeeds in reducing its legal risks and even more consistently cuts costs, Mr. Zielke and Deutsche Bank chief John Cryan could pick up their discussion of a merger in one or two years.
Then the banks would be a far better fit, as Germany’s industry leader will also likely have to further curtail its retail business in coming years.
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