Commerzbank Worst Among Peers Needs Disposals for Turnaround

Commerzbank Worst Among Peers Needs Disposals for Turnaround
A sign sits above the entrance to a Commerzbank AG branch in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

Commerzbank AG has lost more value than peers in continental Europe outside Greece and a swing to profit in the third quarter is unlikely to boost the shares unless management cuts costs more quickly.

Germany’s second-biggest bank lost 95 percent of its value in the past five years, the most among Europe’s financial institutions outside Ireland and Greece. After an 8.5 percent rally this quarter, the stock is expected to fall 3.2 percent over the next 12 months, data compiled by Bloomberg show. Four of 37 analysts recommend buying the shares.

“Commerzbank has been a sick patient for many years, burning shareholders capital,” Christian Hamann, an analyst at Hamburger Sparkasse in Hamburg, Germany said in a telephone interview on Nov. 5. “The shares will only recover if its retail and investment banking gets leaner and its legacy assets from ship financing and real estate are reduced.”

Chief Executive Officer Martin Blessing will present a review of operational activities tomorrow, when the bank announces third-quarter earnings.

The Frankfurt-based lender has pledged to wind down non-core risk-weighted assets valued at 67.5 billion euros ($87 billion) after getting an 18.2 billion-euro bailout during the financial crisis. Deutsche Bank AG has already embarked on an overhaul of its business, cutting 1,200 of a targeted 1,993 jobs by the end of September to help achieve annual savings of 4.5 billion euros by 2015.

‘No Strategy’

“A clear strategy is missing,” Christian Muschick, an analyst with Silvia Quandt Research GmbH in Frankfurt, said by telephone two days ago. “Without a strategy, one cannot shape the bank. It just hasn’t embarked on any big sell-offs.”

Blessing will probably say he’ll reorganize the retail business, extend branch opening hours and hold costs steady for four years, the Financial Times reported Nov. 5. Commerzbank may cut 5,000 to 6,000 jobs, though the bank won’t announce the plan tomorrow as talks with labor unions are ongoing, Die Zeit reported today.

German labor union Ver.di warned Commerzbank’s competitiveness can’t be achieved at the expense of its employees, in an e-mailed statement today. The union represents workers at banks and at companies in other service industries.

Commerzbank’s shares fell 3.2 percent to 1.507 euros at 5:30 p.m. in Frankfurt. Swings in their price are the greatest among the top 25 banks traded on the Stoxx 600, according to three-month implied volatility measures.

Nils Happich, spokesman at Commerzbank, declined to comment on any further restructuring plans the bank has, when contacted by telephone yesterday.

Back to Profit

Commerzbank is expected to earn 94 million euros in the third quarter after a loss of 687 million euros a year earlier, according to the average estimate of 11 analysts surveyed by Bloomberg. The bank had a loss last year due to a 798 million-euro writedown of its Greek debt holdings.

The lender, 25 percent owned by the German government, is winding down its real estate and public finance unit Eurohypo. It’s also exiting shipping finance and all commercial real estate activities to bolster capital and reduce risks.

While Commerzbank repaid 14.3 billion euros of its 18.2 billion bailout, partly by raising 11 billion euros in a two-step capital increase last year, it has sold only selected assets. Those include the former headquarters of Dresdner Bank in Frankfurt for an undisclosed amount and its Ukrainian unit Bank Forum, which resulted in a 286 million-euro charge in the second quarter.

Blessing is exploring the sale of the custodian business, which may fetch more than 200 million euros, two people with knowledge of the matter said on Oct. 22.

‘More Challenging’

“The quality of Commerzbank’s portfolio does not seem to be good, which makes it hard to sell without a discount,” Muschik said.

Commerzbank once ran the world’s third-largest shipping portfolio and was Europe’s biggest commercial real estate and state financier.

In September, Blessing forecast a “more challenging” second half as lower client activity and regulatory costs weighed on earnings.

The bank’s revenue is also being squeezed by narrower margins in retail banking after competition increased and interest rates fell.

Commerzbank gets 33 percent of its revenue from retail clients, according to second-quarter earnings. Net interest income from lending to consumers and businesses fell an annual 26 percent to 1.3 billion euros in the period.

Deutsche Bank last week unexpectedly reported a three percent advance in third-quarter profit to 747 million euros as it made more money outside Germany, increasing global investment banking revenue to 58 percent of total revenue.

Business Environment

“The bank needs higher interest rates and more client activity in the retail unit,” Dirk Becker, an analyst at Kepler Capital Markets in Frankfurt, said in a telephone interview two days ago. “It can only wait for the business environment to improve.”

Margin pressure on banks operating in Germany is raising concern about the sustainability of some franchises, Moody’s Investors Service said in a report on Oct. 19. Further deterioration of “asset quality” is expected, especially among lenders focused on “highly cyclical sectors” such as commercial real estate and shipping, Moody’s said.

Blessing is unlikely to come up with a strategy that will satisfy shareholders when he presents his review tomorrow, Hamburger Sparkasse’s Hamann said.

“This won’t be the big leap forward,” he said. “The bank has a bad track record of presenting strategies and its credibility is strongly shaken.”

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