Commerzbank’s head of corporate finance, Roman Schmidt, speaks to Danielle Myles about the bank’s new approach to coverage, blockchain’s investment banking potential and the Schuldschein market’s ability to reinvent itself.

Roman Schmidt

Roman Schmidt

Over the past 18 months, Commerzbank has been repositioning its corporate finance business to better utilise the group’s huge corporate franchise. Indeed, the German lender has established a reputation as Europe’s leading bank for small and medium-sized enterprises (SMEs), counting about 50% of German companies as clients and becoming the go-to firm for the Mittelstand, the middle-ranking companies which are a key driver of the national economy.

In line with the Commerzbank 4.0 strategy, the lender's corporate finance division has been merged with the Mittelstandsbank to form an enlarged corporate clients division. This is a way for corporate finance to become more interwoven with the bank’s DNA, and provide customers with a one-stop-shop that offers the full spectrum of corporate solutions, from bilateral loans to the most sophisticated capital markets advice.

A unique approach 

The change strengthens the bank’s commitment to being on the ground, side by side with its clients. For years now, the corporate finance division has operated from the country’s major corporate centres, rather than remote hubs across the continent. “Throughout Germany we have more than 100 regional corporate client locations and 10 financial engineering units with about 100 specialists where we offer our Mittelstand clients capital markets advisory on a local level,” says Roman Schmidt, the bank’s head of corporate finance. “So we are very close to our customers.”

This set-up – allied with Commerzbank’s long-standing relationship with Europe’s traditional industries, such as automotives, energy and engineering – has allowed Mr Schmidt’s division to implement a somewhat unique approach to sector coverage. While most banks’ coverage teams focus on top-tier firms, Commerzbank’s have extended their focus to include smaller clients, different sub-sectors and even suppliers.

“Sector expertise that comes from banking the top few companies in key European countries is something many other banks can also provide,” says Mr Schmidt. “But the knowledge that comes from a collective of several thousand automotive suppliers? There’s probably no other bank in Europe today that has that depth of understanding of the key German industries that we have.”

Career history: Roman Schmidt  

  • 2004 Divisional board member for corporate finance, Commerzbank
  • 2000 Head of debt capital markets, Commerzbank
  • 1997 Head of debt capital markets, Barclays
  • 1990 Head of debt capital markets, Deutsche Bank
  • 1987 Head of European government trading, Credit Suisse First Boston
  • 1987 Trader, Commerzbank

This holistic approach to coverage is possible because local bankers have intimate knowledge of the relevant sector, based on regular conversations with the full range of clients and their business partners. Customers have quickly caught wind of Commerzbank’s unrivalled ability to offer an overall picture of many industries. “Making these insights available to the larger clients is something many have bought into straight away,” says Mr Schmidt. “We aren’t trying to come up with the same sector-based strategic advice that a lot of our competitors are offering. Instead we are trying to gain and pass on insights.”

Capital market debuts

Smaller companies have also greatly benefited from the Commerzbank 4.0 strategy. They gain better insights based on their larger competitors, and exposure to more sophisticated forms of finance. Germany’s fragmented, and therefore highly competitive, banking market has kept loans cheap and given corporate treasurers little impetus to explore the capital markets. But a combination of factors including quantitative easing, record low yields and bond flexibility has prompted many to now consider new types of financial instruments.

Their capital markets journey does not start with a bond, however. The first step is making the switch from a bilateral loan to a club deal or small syndicated loan.

“That is a corporate treasurer’s introduction to the capital markets. It’s the first time they need to provide certain covenants, work with multiple parties and so on,” says Mr Schmidt. Commerzbank’s success in helping corporates make this transition is highlighted by the fact that nearly 30% of its loan financings to corporate customers in 2017 were debut transactions.

Tech revolution

A pillar of the Commerzbank 4.0 strategy is digital transformation. Investment banking is digitising at a slower rate than the likes of retail banking and wealth management, due in part to its highly customised products. This is in stark contrast to payments, for example, where repetitive processes have helped it become banking’s innovation leader.

This distinction indicates which areas are primed to lead investment banking’s innovation journey. “I expect high-volume, commoditised businesses to be the first to digitise,” says Mr Schmidt. “So within corporate finance, it’s really the commercial paper, export credit agency-covered trade finance and trade-receivable businesses.”

Commerzbank has already played a pioneering role in this process. In September 2017, it led the first commercial paper sale via blockchain, a €100,000 issuance by development bank KfW on R3’s Corda platform. The commercial paper business has razor-thin margins, and the work required of bankers is disproportionate to the instrument’s one- to six-month maturity. 

This pilot blockchain transaction creates a more efficient route to market. “All the items that usually require confirmations occurred instantly,” says Mr Schmidt. “It took the investor’s orders directly, KfW got the investor’s money straight away. It was all done in a couple of seconds.” Regulators monitored the deal in real time via an online portal. It is hoped that this sneak preview will lead to some legal changes that make it easier to create securities via distributed ledger technology.

KfW’s commercial paper deal is just one example of how technology could minimise banks’ roles within corporate finance. In the equity space, the popularity of initial coin offerings and direct listings, such as Spotify’s in April, are seen by many as threats to banks’ equity revenues. But others, including Mr Schmidt, believe these developments simply raise the ante for bankers by making them prove their worth. “In a digitised world, banks must explain their value-add to customers every day,” he says. “Customers must have a reason to use a bank. They must think: ‘Commerzbank is price efficient, quick, offers good advice and provides a full analysis of the capital markets, so I’ll use it for our next deal’.”

Long live the Schuldschein

The Commerzbank corporate finance division’s advancement of tech-driven solutions has not come at the expense of its leadership in more traditional areas. Its share of the international Schuldschein market, often described as the German law equivalent of US private placements, hit 27% in 2017, up from 23% two years earlier.

“The Schuldschein market has been declared dead three or four times over the past 20 years, but it keeps being resurrected,” says Mr Schmidt. It is particularly attractive today, he adds, because it has caught the attention of international investors who like the product as a way to gain exposure to German credit risk, and because they know the deal will not be shown to a huge number of investors, which gives them greater certainty over the allocations they are likely to receive. Borrowers, in turn, have realised that Schuldschein offers them access to a new set of investors who would not necessarily have bought their bonds.

Clearly, the instrument’s internationalisation is now being driven by both issuers and investors. The latter has seen the size of German Schuldschein deals explode in recent years. “Many companies are now looking to do €1bn-plus transactions,” says Mr Schmidt. In recent years, the average size is about €100m, according to Scope Ratings.

All of these developments are further proof of Schuldschein’s resilience. “It’s always been a nice model of raising debt due to its convenience,” says Mr Schmidt. “You only deal with one bookrunner, you talk to a few potential investors, and the documentation is light, which is something that obviously appeals to corporate treasurers.”

Germany’s generational shift

Schuldschein aside, other revenue generators for Mr Schmidt’s division in the coming years will be debt capital markets, alongside structuring and financing mergers and acquisitions (M&A). Regarding the latter, research by KfW shows that the Mittelstand sector is undergoing a generational shift which has prompted the search for new owners.

There are two key reasons for this. First, a large number of SMEs were established after the Berlin Wall fell, and their founders are now looking to retire. Second, the next generation are more interested in pursuing their own ventures rather than taking over a family businesses. “We believe some 20% to 30% of all German SMEs, amounting to about 500,000, will be succession planning in the next four years,” says Mr Schmidt. “This signals huge M&A opportunities in the years to come.”

The corporate client division’s strategy is underpinned by, inter alia, leveraging its strong position in Germany to grow in European core markets. This is one reason why Mr Schmidt sees Deutsche Bank’s retreat from international investment banking as having little bearing on his division. “We’ve developed in different directions,” he says. “[Deutsche Bank has] been more dependent on international markets, while on the trading side we are doing what we do best: covering our corporate customers and making sure we can offer whatever they need.”

In truth, Commerzbank faces more competition from Germany’s swathe of smaller banks. Ironically, some of these firms have turned their attention to bigger clients at the same time Deutsche refocuses on firms that are aligned with the strengths of the European economies. “In this respect, I think we are in a sweet spot,” says Mr Schmidt. “Around every second German corporate is a client of Commerzbank and our coverage extends across the full size spectrum. So I think our scale and focus are working well.”

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