Commerzbank

Das slog

The second-biggest bank in Europe's strongest economy still faces an uphill task

Jul 27th 2013 | Berlin |From the print edition

COMMERZBANK'S marketing materials show a woman running in a grey, hooded jumper, headphones in her ears. Her eyes are locked on the path ahead in determination to finish her workout. This is probably meant to flatter the bank's customers as gritty and hard-working. But it is a better metaphor for the bank itself. It is on a long, hard road back to health, a journey that exemplifies the painful reshaping of Europe's troubled banking system to be smaller, safer and more domestic.

Commerzbank's initial trajectory through the crisis resembles that of another European lender, Britain's Lloyds Banking Group (LBG). Like LBG, it was a big bank but not the biggest in the country—Deutsche Bank is Germany's colossus. Like Lloyds, it undertook a disastrous domestic transaction at the worst possible time, buying Dresdner Bank in the summer of 2008 just weeks before LBG gobbled up HBOS. And like the British bank, it quickly ended up tapping state coffers to survive.

The parallels between the two are less obvious now. LBG's shares have risen by 33% in the past three months, and by 133% in the past year. The bank's share price hovers just below the price the British government paid to buy its 39% stake, which will soon be sold. Things look far less fizzy at Commerzbank. At the time of the rescue deal the bank's boss, Martin Blessing, declared that state ownership should last a maximum of 36 months. More than four years on, its shares still lag the broader index of European banks; its price-to-book ratio is one of the lowest on the continent (see chart). Its 2012 net profit came in at a mere 6m euros(7.7m dollars).

Rumours that the German government might sell its 17% stake to a foreign bank were scotched this week. Newspapers speculate whether the bank might exit the DAX, the country's benchmark stockmarket index, leaving Deutsche as the only member bank. Deutsche itself still labours to plump up its own thin capital cushion.

Commerzbank can point to several forces beyond its control. The euro-zone crisis weighs heavily. The restructuring of Greek government debt handed it a big loss. Historically low interest rates have depressed income. Competition from Germany's many small savings banks and co-operatives puts pressure on fees; online banks are adding to the pressure. A downturn in shipbuilding has hit Commerzbank's big portfolio of loans in that industry. The Basel 3 rules have prompted the bank to retain capital rather than dole it out to shareholders. (The bank estimates that its Tier-1 core capital ratio under Basel 3 is 8.4% after a May capital-raising.)

For one bank to have had so much bad luck prompts the question of just how much carelessness, not misfortune, is to blame. Like many European banks, both Commerzbank and Dresdner invested in subprime-mortgage-backed assets before the crisis. And like many of its continental peers, the bank was also a big international lender against chunky assets in areas like shipping, aviation and property. About a quarter of its 18.3 billion euros shipping portfolio is non-performing; it is expected to take a charge against lending in Detroit when it next reports results.

Analysts want Commerzbank to keep shedding these “non-core” assets, which stood at 151 billion euros at the end of 2012. Some are easier to offload than others. Holdings of peripheral euro-zone government bonds can be gently unwound by letting them run off. But shipping and property loans are longer-term and less liquid, which is why they are now being treated more harshly under the Basel 3 rules. Commerzbank did this month at last manage to sell the British operations of EuroHypo, its commercial-property arm.

As Commerzbank slims down these parts of its balance-sheet, a more Germanic lender is slowly emerging. The strategy is plausible. The combination with Dresdner gave Commerzbank an enviably big retail-branch network and customer base in Europe's strongest economy. The Mittelstandsbank, the division lending to Germany's small and medium-sized, mostly family-owned businesses, is in decent health: 30% of Mittelstand companies are customers, and the pre-tax return on equity in this unit was 28.6% in 2012, against 3.1% for the group overall. As these firms go into global markets, where savings banks cannot follow, Commerzbank has a shot at boosting its business with them. Expansion in Poland looks sensible.

Yet the bank is still some way from turning this vision into reality. A banking consultant quips that the maths of the Dresdner deal amount to “one plus one equals one”. And a domestic focus has its downsides. Fierce local competition from the savings banks and co-operatives will not go away. Nor will the drag from the euro zone's economic prospects: interest rates will remain low as long as inflation stays subdued.

So Mr Blessing and his team have little choice but to concentrate on the nuts and bolts. That includes making more cuts in branches and staff (branches have already fallen from about 1,500 to 1,200), controlling their tempo so that the bank can reap savings without battering its franchise. One part of this is greater flexibility in the offerings at each branch. Not every location needs an expert in everything; more advice can be given online or over the phone. Another is growth in its online division, comdirect. Commerzbank has the scale to build a sophisticated offering; savings banks and co-operatives may not.

Such strengths should eventually return Commerzbank to fitness. But the miserable share price suggests that investors expect a period of plodding before it is back to running at full tilt.