Restructuring: Commerzbank in new push for middle of the middle
Exits structured products businesses; splits Mittelstandsbank between corporates and retail division.
The biggest Germany-focused private bank hopes painful restructuring measures will help it adapt more rapidly than domestic rivals to a tough and changing banking environment, winning it market share in more profitable and less capital-intensive businesses.
The overall aim of Commerzbank’s new strategy is to “expand in what we are good at, and discontinue activities that aren’t linked to the core client base or where we don’t have enough market share”, board member Michael Reuther tells Euromoney.
The emphasis for growth will therefore tilt further away from the biggest corporate clients, while Commerzbank builds up its retail division and scales back the trading activities of what was its investment bank. It is closing its exotic structured rates businesses, as well as some emerging-market flow business on the credit side, especially anything that does not tie in with its primary bond and loan franchise. It is ringfencing its structured equities business, with a view to a potential sale.
The bank is instead doubling down on trade finance, cash management, basic corporate hedging, and debt capital markets, particularly in smaller corporate clients. To help do so, it is merging its Mittelstandsbank with its corporates and markets business – what was essentially its investment bank, targeting multinational corporates. Markus Beumer, formerly head of the Mittelstandsbank, has left. Reuther, who was head of the corporate and markets business, will instead oversee a successor unit for corporate clients.
Meanwhile, whereas the private customers division, headed by Michael Mandel, previously only served firms with less than €2.5 million in turnover, the upper limit for the retail unit – now called private and business customers – is increasing to firms with up to €15 million in turnover.
Reuther says putting smaller corporate clients with less complex financial needs in the retail division will help it increase its 5% market share among small businesses to 8% - a level more in line with its market share for bigger clients.
One Frankfurt-based banker notes that this to some extent mirrors Deutsche Bank’s decision three years ago to remodel domestic coverage by transferring 11,500 mid-sized corporate and public-sector clients to its retail and small businesses unit. Deutsche CEO John Cryan scotched rumours of a merger of Germany’s two biggest private-sector banks over the summer.
But in contrast to Deutsche’s more multinational focused business, the essence of Commerzbank’s strategy is to focus further on the great German banking middle, plus online and consumer finance. Commerzbank’s thinking is that competition is harshest and margins lowest at the bottom – in retail mortgages and transactions, due to the cooperative and savings banks – and at the top, in large corporate clients, due to the international banks.
Reuther says Commerzbank’s biggest market share is in the bucket of German firms with turnover between €100 million and €1 billion. Now his division will also seek to grow and provide more hedging and trade finance products to clients with less than €100 million in turnover, where he sees cooperatives and savings banks gaining enviable margins due to lower competition.
Merging the two units should also help it serve smaller European corporate clients outside Germany with bonds, loans, trade finance and hedging, in sectors he says Commerzbank has special expertise: such as automotive firms and their suppliers, pharmaceuticals, renewable energy or engineering. Previously the bank targeted other European companies, but only in its investment banking division. Now it will go down to European firms with €250 million in turnover.
Combining the two central functions of the Mittelstandsbank and corporates and markets business, as well as exiting the trading business and slimming down and digitalizing other areas including at branch level, will all contribute to workforce reductions. But branch closures are not part of the push. “Our regional presence is important for small businesses,” says Reuther.
The bank, he says, will reallocate capital from the securities trading businesses to retail, where it targets an increase in risk-weighted assets.
Commerzbank has acquired a million retail customers over the past four years. In the next four it wants to gain two million more, partly at the expense of the dispersed cooperative and savings bank networks.
“Digitalization will lead to a redistribution of market share in German retail banking,” says Reuther. “We are well-positioned, as we can make centralized decisions. We think our less centralized competitors will need more time to adapt.”
Turkey’s more youthful retail banking scene, notes Reuther with envy, is well in advance of its German equivalent in terms of digitalization. Commerzbank plans to spend €700 million a year on IT and digitalization.
Increasing its asset base in retail – focusing more on a digitalized asset management and consumer finance business rather than on mortgages – will further help counter what Reuther says is a low loan-to-deposit ratio at around 90%. “This was a virtue after the global financial crisis, as wholesale funding dried up, but in this environment it’s an issue that needs to be addressed,” he concludes.