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Western EuropeApril 1 2007

Nick Teller

The CEO of Commerzbank’s corporates and markets division is meeting his brief to cut costs and risk but, he tells Geraldine Lambe, under his aegis there will also be selective growth.
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When Nick Teller was appointed CEO of Commerzbank’s corporates and markets division in November 2004, following the sudden departure of his colourful predecessor, Mehmet Dalman, his brief was clear: cut costs, trim the investment bank’s ambitions, and reduce risk and earnings volatility.

Mr Teller was no stranger to restructuring. As a member of the board of managing directors since April 2003, his previous role included a revamp of the German group’s mittelstand (small and medium-sized enterprises) division, which “wasn’t making as much progress in key areas, as we would have liked”.

At the end of 2003, Commerzbank began centralising its product lines (taking them out of the branch network) to harmonise targets and push growth, centralising interest, currency and liquidity management to improve their control, and incorporating the larger mittelstand clients (those with some capital markets demand) into the bank’s large-cap centre, therefore refocusing the mittelstand division on the smaller clients.

“We set the corporate bank ambitious growth targets. One example was to secure 9000 new clients by the end of 2006,” says Mr Teller. “In fact, it exceeded this target by more than 30%.”

His new job specification therefore held few fears. Mr Teller had a dispassionate and pragmatic view of the investment bank. “By the autumn of 2004, it became apparent that the investment bank had some serious issues. The operation was geographically and strategically too broad for the overall size of the bank: we had extensive operations in Tokyo, in equity trading our New York office was competing with domestic US players and we had a high-cost business in London.”

As important, Mr Teller says that, vis-à-vis the bank’s revenues, the investment bank suffered from high volatility in proprietary trading. “It was high risk and complex, necessitating an expensive back office.”

To cut costs, Mr Teller closed Tokyo, and substantially reduced the bank’s presence in New York and London – cutting the front office headcount by 40%. He says that he had total buy-in from all the board members, who committed to cutting their own divisions’ costs by about 25% over two years by reducing complexity and shifting or merging platforms. “This is mostly complete: in the front office, targets were met in 2005, and in the back office full savings will come into effect this year,” says Mr Teller. “We have removed about €300m from the cost base.”

Risk averse

Mr Teller’s second attack was to reduce risk by eliminating trading losses and reducing overall value-at-risk (VaR), which was slashed by two-thirds; the last dedicated prop unit was closed in May 2005. “VaR continues to be at a lower level than planned; we reduced it by 60% between 2004 and 2006 – to an average of €8.4m. This shows that [trading] revenues are clearly customer driven.”

In addition, he says that the bank is becoming more efficient with its capital. “In 2006, we reduced our average regulatory capital from €2.7bn in the previous year to €2.4bn. Through an active credit portfolio management strategy, we aim to reduce our regulatory capital further, to between €2bn and €2.2bn.”

Two years on, the restructuring is almost complete. The last element of the project is Commerzbank’s equity platform, the weakest segment in the bank’s franchise. The bank has hired a new head of equity research and refocused the platform based on where it could shine – by concentrating on German corporates in a European context – rather than letting it be drowned in a tidal wave of global research from global investment banks. “Releasing research reports on companies or sectors where we had no natural advantage didn’t earn us any credit. We have aligned it closely to our client base,” he says.

The bank has notched up some success. Last year’s highlights include industrial gases and engineering group Linde’s capital increase to finance the purchase of industrial gases company BOC (it was also the mandated lead arranger for the accompanying debt financing) and the flotation of Air Berlin, Europe’s third largest low-cost airline. “[The cash equities business] had to perform better, and it’s now smaller, but stronger and profitable with a clear focus on our client base.”

Mr Teller says his reign so far has not only been about cutting, there has been investment, too, although he declines to say how much. His favourite analogy to describe the business is that of a hot-air balloon: if risk and costs were two sandbags that had to be thrown overboard, more heat (investment) had to be fired into the balloon to fly higher. The idea has been to pick spots that would generate the best return for the most sensible investment, in areas where the bank had an edge. The focus has been on equity derivatives, and the credit trading and FX platforms; and an additional €300m in revenue has been added, he says.

When fielding questions about the success of the restructuring project so far, Mr Teller is cautious. Despite the fact that the corporates and markets division increased its 2006 operating profit by 76% on 2005, and that the group’s trading profit rose by 81% (about 90% of which is from the investment bank) in the same timeframe, he acknowledges that Commerzbank is not as profitable as many of its peers. But he is wary of comparison: “We could be making more and we are positioning ourselves accordingly for this growth,” is his only comment.

Principal investments

Commerzbank does make some principal investments – it played a leading role in the European aerospace corporation EADS placement and has a 1% stake in Deutsche Börse – but it is largely absent from the proprietary business.

Now that risk controls have been tightened, will the bank be re-entering the more high-risk businesses that generate such juicy revenues for other banks? Mr Teller does not say a definite “no”, but stresses that before expanding or going into more volatile areas, the bank needed the right structure to support those activities. “[And] until we have run out of non-proprietary ideas, I see no reason to go back into the proprietary business in a big way,” he says.

In the meantime, there is plenty more growth that Commerzbank can squeeze out of the business that it has spent the past two years reshaping, he says. “For example, we have a strong retail equity derivatives platform that we are extending to our corporate and institutional client base. [Commerzbank is number one on the Euwax in Germany where it has a 25.8% market share, is number three in France and number two in Portugal.] We can grow our institutional credit trading business by structuring and distributing diversified risk from Commerzbank’s loan portfolio.”

Regaining lost ground

The bank is also rebuilding its FX presence. “Germany is the largest exporter in the world and so many of our clients have currency exposures. We had lost some ground in our traditionally strong FX business but in the past two years we have worked hard to reclaim this position. As a result, we have increased our revenues by around 60% in the past two years.”

On the debt side, Commerzbank has a strong position in the covered bond and public finance markets in Germany, and a solid leveraged finance business. The acquisition of Eurohypo has not only created the second largest bank in Germany and cemented Commerzbank as one of the leading property financers in Europe, but has added a new dimension to the debt capital markets business.

“We are now the number one jumbo covered bond issuer in Europe, the number one European CMBS [commercial mortgage-backed securities] conduit originator and the number one lead arranger of eurozone real estate loans. This is attracting more corporate business. For example, we recently secured a benchmark bond lead mandate to Deutsche Bahn [the national railway],” says Mr Teller. “There is a lot more growth that can be generated on the back of Eurohypo’s integration.”

International comeback

Further growth can also be extracted from international business. Mr Teller says that Commerzbank never gave up in New York or Asia, but merely slimmed down operations. Now, the bank is adding sales and structuring to sell products created largely in London but adapted locally for Asian and US investors. “This effectively taps Asian and US liquidity, and the aim is also to source Asian assets for Commerzbank’s European customers,” says Mr Teller.

The key watchwords will be sustainability and right-sized ambitions. “We do not intend to build an Asian product trading platform; we will leverage our European platforms and structuring expertise. This means we can also diversify our product range for our European clients,” he says.

To critics who point to rebuilding the international business only two years after cutting it, Mr Teller stresses that growth will be selective and will be focused on gaining critical mass and generating more revenues. “Nevertheless, I still plan to be prudent when adding staff numbers to the business,” he adds.

Commerzbank may not have vast mergers and acquisitions (M&A) ambitions, says Mr Teller – he admits that, although there is budget to expand the segment, M&A is not a priority area for the bank outside of the mittelstand – but he is convinced that the bank is well positioned to grow the business and to capitalise on a German recovery. “Yes, M&A generates intimate corporate relationships but in Germany, we have had these kinds of relationships for a long time,” he says.

“Our position now, as the second largest bank in Germany, is strengthening. A couple of years ago, Commerzbank would not have been asked to structure, for example, the EADS share sale from DaimlerChrysler to a group of financial institutions. Increasingly, there is hardly any major German transaction in which Commerzbank is not involved in one form or another.”

CAREER HISTORY

2004 Appointed CEO of Commerzbank’s corporates and markets division

2002-2003 Regional Commerzbank board member since April, 2003. Member of the board of managing directors

1999-2001 General manager of Hamburg Commerzbank office

1994-1999 General manager of Prague Commerzbank office

1982-1994 Commerzbank corporate banking department, London

1979-1982 University of Birmingham, UK. degree in Commerce

1970-1978 Max-Planck-Gymnasium, Düsseldorf, Germany

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