Commerzbank corporates and markets chief Michael Reuther has nearly 30 years of banking experience, yet his appetite for innovation still burns strongly, as his work to 'industrialise' the German lender's investment bank shows.

After more than eight years in senior positions at Commerzbank and before that nearly 20 years at Deutsche Bank, Michael Reuther is an experienced figure within the banking world. But Commerzbank’s head of corporates and markets, non-core public finance assets and group treasury is not afraid to embrace new ways of thinking.

In his years at Deutsche Bank, Mr Reuther headed the bank’s liquidity management department globally for 11 years, where he devised a global cashflow-based liquidity system – a real innovation in the 1990s, when capital planning mattered more than liquidity management – providing him with useful experience when liquidity management took centre-stage during the financial crisis of 2008 and 2009.

Mr Reuther joined Commerzbank in 2006, running treasury operations and public finance work, and assumed office as investment banking head in 2008.

In 2009, Commerzbank created a so-called portfolio restructuring unit, where its structured credit derivatives were singled out and wound down separately “so that our experts in the flow business could concentrate on the client rather than on winding down illiquid positions in non-strategic areas”, says Mr Reuther. “Once it was small enough, we re-integrated the remainder into our ongoing business. It was then at a size where it wouldn’t affect performance and distract from client business.” 

Industrial strength

In his most recent project, Mr Reuther is working on plans to industrialise Commerzbank’s investment bank. “Business cannot be conceived as a horizontally structured operation with flashy traders in the front office and a different world in the background processing and operating it,” he says. “The process needs to be re-thought as a vertical operation front to back. You need to flawlessly deliver from discussing a deal with the client, through to executing and settling it, and that is how we are organising ourselves.

“We are thinking like our corporate clients by designing an industrial-type production process for the plain-vanilla business and then adding on top the solution-based business.”

This means an entire reorganisation of Commerzbank’s investment banking operations: the so-called ‘plain-vanilla’ businesses will be conducted in Frankfurt, Prague and Singapore, with the bulk of the IT business relocating to these cities too, while London will remain the centre for structured products, across the front office, sales and IT.

Meanwhile, interest rates and foreign exchange traders will also partially move from London to Frankfurt, while further staff will be hired locally in Frankfurt, according to Mr Reuther.

The transformation process started at the beginning of 2015. “The client shouldn’t notice a difference, while we are industrialising production in the background,” he says. “To reflect our approach, we have extended our corporates and markets executive committee and have, in addition to our front-office heads – in equity markets and commodities, fixed income and currencies, corporate finance and credit portfolio management – recently added the head of investment banking IT and the head of market risk to the team.” 

The right message

Still, investment banking is a tricky business to be in. With the recent abundance of fines in relation to proprietary trading, Libor rigging and other scandals, the business is not particularly loved within the industry at present.

Yet, Commerzbank’s Mr Reuther has made the brave decision to tackle the topic in public – through a marketing campaign. The TV commercial in German and English is running on channels such as Bloomberg and shows a Commerzbank employee running to work.

“Our new campaign starts off in a critical way,” he says. “It says the industry made mistakes but we at Commerzbank have learnt from them, want to move on and do the right thing.

“We think as an investment banker you can contribute a lot to society, to the economy, by providing clients with hedging solutions for the risks they are running such as rates, foreign exchange [FX], and commodities. We help them with access to capital markets, plus as a universal bank it is also our strength that we can commit our own capital. When you focus on the client and only on the client, investment banking feels right.”

The time was right for the campaign, according to Mr Reuther, and incidentally, Commerzbank can pride itself having been one of the first banks to discontinue its dedicated proprietary trading desks in 2004.

“Of course, when things were going well, you could reap a lot of profits from dedicated proprietary trading, but when the market became less liquid and tanked, this could also create a lot of problems,” says Mr Reuther. “Commerzbank decided it would be much better to rethink investment banking from the client’s perspective and put the client at the core of what it does.” 

A client-centric model

Commerzbank’s client-centric model is bringing in the results. In the first quarter of 2015, corporates and markets reported 26% of operating return on equity (ROE), a 7.2 percentage point increase compared with the same quarter in 2014. On a group level, ROE reached 5.5% – still significantly off the bank’s aspirations to reach returns of 10%.

“The first quarter went quite well. Why? Because usually our two divisions – fixed income and currencies, and equities markets and commodities – perform differently in the cycle,” says Mr Reuther. “But this first quarter we were able to help clients to position themselves on [European] Central Bank quantitative easing, we saw a lot of activity in the FX business after the Swiss National Bank removed its peg, and we had increased interest from our clients in structured products, where we are one of the market leaders in Europe.”

However, with regards to Commerzbank's performance for the rest of the year, Mr Reuther warns: “The first quarter is usually our strongest because our clients are quite active doing business. And of course with a client-centric business model you need clients to do deals.” Therefore, as per the bank’s 2016 roadmap, the target for the investment bank is an ROE of 15% before tax. 

Eye on Asia

One of the areas for future growth that Mr Reuther is looking at is Asia. While the bank’s offices in Singapore, Hong Kong and Shanghai have between them a slim 100 investment bankers, revenue generation within Commerzbank's Asian clients has mushroomed over the past five years, growing on average by more than 30% per year.

“We are not a dominant player in Asia, but it is a big enough market for someone like us to do the things we are good at,” he says. “In March, we helped to bring to market the first renminbi-denominated [Undertakings for Collective Investments in Transferable Securities-regulated] money market exchange-traded fund in London. We are also supporting Chinese firms to make acquisitions in Germany – we are well tuned-in with the German Mittelstand [the country's small and medium-sized enterprises].”

Commerzbank is also seeing opportunities in supporting German corporates doing business with China, as well as helping German and European investors accessing Asia’s fixed-income, FX or corporate finance markets. In South Korea, Commerzbank is bringing Korean bond issuers to the market and is selling structured products for the South Korean retail market. 

Issuer role

From providing capital market access to seeking it, Mr Reuther’s job does not finish with looking after corporates and markets. In his role as treasurer for the bank, he is also in charge of working the financial markets for Commerzbank as a borrower.

“Over the past couple of years, we have reduced the balance sheet – like nearly every other bank – reduced the leverage, but then we have also replaced quite a bit of the non-core assets and have substituted them with lending to retail clients – mostly residential mortgage lending but also some consumer financing – and to small and medium-sized enterprises,” he says.

Commerzbank is a frequent issuer in the pfandbrief market – effectively the German covered bond market – which offers low spreads at or below swap-rates. In late April, Commerzbank executed a €1.4bn capital raising through an accelerated book building. The 113.85 million new shares represented a 10% increase in Commerzbank’s share count to raise the bank’s Basel III fully loaded core equity Tier 1 (CET1) ratio from 9.5% in the first quarter of 2015 to pass the 10% mark. The leverage ratio also edged closer to the bank’s 4% target – from its previous 3.7% to 3.9%.

“We had to do an ad hoc announcement because our results in the first quarter were considerably better than expected by the market, which created some really good momentum,” says Mr Reuther. “Separately, we have been told by investors before that they would consider a CET1 ratio of 10% as an important threshold for investing, so we thought if we can get [to 10%] much quicker than by building it organically, then we should take advantage of the momentum.” In the future, however, the intention is for Commerzbank to build CET1 through retained earnings over capital markets, he adds.

And as the future of bank funding gets more regulated, banks will have to issue so-called total loss-absorbing capacity, or TLAC, bonds in the next four to five years.

While none of this long-term unsecured debt, readily available for write-down or conversion to equity in a resolution scenario, has so far been issued, it would not be surprising if Mr Reuther’s pioneering spirit saw Commerzbank become the first bank to do so.


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