Germany’s second largest bank by assets and Tier 1 capital, Commerzbank, has gone through a lot in the past few years, from the acquisition of Dresdner Bank in 2008 to continuous asset reductions thereafter, and from the Lehman and eurozone crises to its resulting €18.2bn bailout by the German government. But with the first of its 2016 strategy targets achieved, the signs point to a stronger and more profitable business emerging within the next few years.
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Commerzbank's 2016 strategy, launched in 2012, aims to create post-tax return on equity of more than 10% for the core bank, compared with 9.5% in 2013. And despite a challenging macroeconomic environment, the bank expects an increase in operating profit in 2014 from 2013’s €725m. According to analysis conducted by Vara Research, Commerzbank is set for 2014 profits of €970m and further growth in the coming years.
Company targeting
“We are growing the number of customers and credit volume in our mittelstandsbank [targeting a 15% increase in customers until 2016], especially among the smaller companies,” says Martin Blessing, CEO at Commerzbank.
Through its most profitable business unit, which deals with small and medium-sized enterprises (SMEs), Commerzbank already serves some 40% of Germany's SMEs. “But due to the low-interest environment and low credit spreads, we also see larger corporates tap the capital market,” says Mr Blessing. “We can offer [this] too, but you need a lot of customers to make up for losing a large corporate from your loan book. This change is ongoing and there is a certain pressure on revenues.”
Commerzbank's fixed-income and currencies trading operations – located within the corporates and markets division, the bank's second most profitable arm – felt the impact of increased regulation and the challenging market environment in the first quarter of 2014, according to Mr Blessing. Commerzbank is looking to save €150m by 2016 in its corporates and markets division, while at the same time boosting its private customer segment.
Wooing retail clients
In retail banking, Commerzbank is looking to attract 1 million new customers by 2016, and for operating profits to climb above €500m. In 2013, the division reported profits of €225m, and analysis from Vara Research predicts that the €500m profits mark will be broken in 2016.
Commerzbank is also focusing on customer satisfaction and diversification through a multi-channel offering involving its direct bank, Comdirect, and mobile banking through smartphone and tablet apps.
The bank’s fourth division, its central and eastern European operations, only consists of mBank, the fourth largest bank in Poland by profits and assets which has retail businesses in the Czech Republic and Slovakia. Commerzbank has sold its Ukrainian business, Bank Forum, and its stake in Russia’s Promsvyazbank. This reduced division posted profits of €254m in 2013, and surpassed its 2016 target of a loan-to-deposit rate reduction of 115%, with a percentage of 111% recorded in 2013.
“Profit at mBank was strong in 2013 and growth was OK but not as much as the capital generation we had, so we took a dividend for the first time since we started our investment in 1994,” says Mr Blessing. “We always used to help our Polish subsidiary with funding lines but the ability of mBank to fund itself independently in the market has increased and we are taking advantage of this [with its first bond sale in March].”
Ahead of the game
Non-core assets (NCAs) and capital ratios are other areas in which Commerzbank is ahead of schedule with regards to its 2016 strategic targets. It improved its NCA portfolio from €160bn to €102bn as of March this year, and met its target of a 9% common equity Tier 1 ratio in 2013.
“Our key goal is to focus a lot on capital,” says Mr Blessing. “And while we said in 2012 that we wanted to be at 9% Basel III phased in [by 2016], we now want to be beyond 10% fully phased in through reducing or selling assets, generating profit and thereby reducing the risk-weighted asset demand, and increasing the capital supply.”
Commerzbank has also reviewed the strategy on its NCA portfolio and further reduced its target from €93bn to below €75bn. It most recently lowered its non-core commercial real-estate (CRE) lending by selling €5.1bn of portfolios in Spain, Japan and Portugal in June, to about €27bn.
Commerzbank’s Schiffsbank subsidiary, which finances the troubled shipping industry, is also non-core. Shipping assets is one of the areas that the upcoming EU-led stress tests are taking a close look at. Commerzbank has so far reduced the shipping portfolio from about €25bn in 2009 to €13.5bn at the end of the first quarter of 2014.
“We believe that we have covered most of the issues within the portfolio,” says Mr Blessing. “But one of the reasons for the review is to have independent forces check whether they agree with what we believe is right.”
A lot has been achieved at Commerzbank. In 2013, it repaid the silent participation stake to the German government and as well as funding from the European Central Bank’s long-term refinancing operation.
But with a 17% majority stake in the group still held by the government, Commerzbank’s future is unclear. While a spokesman of the German ministry of finance confirmed that the government has no current plans to sell its stake, several banks are said to be interested.
