Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Commerzbank has become the latest big European lender to switch CEOs, a major trend of recent months that says much about the troubled state of the region's banking industry. Unlike the rest of his cohort, though, Commerzbank's Martin Zielke is an insider, stepping up from within the bank.

If that seems uninspired, think again: whereas many of Commerzbank's rivals are in need of a top-to-bottom overhaul, the German bank should stick to its existing plan. The last thing it needs is a newfangled grand vision.

Certainly, Zielke inherits some major challenges from his predecessor, Martin Blessing. Commerzbank's shares trade on a measly 0.3 times book value. That's lower than any of its European banking rivals and less than half the average of its peers, according to data from Bloomberg Intelligence.

Low Down
Commerzbank trades at a lower price-to-book value than other European banks with new CEOs.
Source: Bloomberg Intelligence

There are good reasons for this. The bank, which took an 18.2 billion-euro ($20 billion) taxpayer bailout during the financial crisis, is weighed down by bad loans tied to shipping and commercial real-estate, and faces a long road ahead to tackle this problem. 

Also, expenses are relatively high as a proportion of revenue, while net interest margins are relatively low, partly reflecting the difficulty generating a decent return in Germany's saturated banking industry. Citigroup analysts noted last year that the three biggest German banks have only about a fifth of the domestic loan market, and about 15 percent of deposits, due largely to competition from state-owned and co-operative banks.

Commerzbank's focus on the domestic economy raises another concern -- the global headwinds confronting the German exporting powerhouse will come home to roost, weighing against the benefits to the local consumer of cheaper oil prices.

This all adds up to an outlook for fairly weak returns. The bank will deliver return on tangible equity of lest than five percent for the next few years, among the worst in the bank's European peer group, according to Bloomberg Intelligence.

Base Case
Commerzbank's shares have underperformed the broader German market over the past year.
Source: Bloomberg

It's a good thing the new CEO is home-grown. Zielke has spent a large chunk of his career at Commerzbank, and got the top job after successfully restructuring the bank's retail banking division. Between 2011 and 2015 he increased its pre-provision operating profit by 42 percent, overcoming the drag from an ultra-low interest rate environment. 

Whereas his peers now in charge at global investment banks Barclays, Deutsche Bank and Credit Suisse, for instance, are faced with tough and messy decisions on where to allocate capital -- and where to slash back -- Zielke mostly has to execute on the bank's current strategy of focusing on retail and small business banking, while rebuilding the balance sheet, cutting costs and delivering steady dividend payments.

There has been some progress already. The ratio of costs to income for 2015 was still high at 73.3 percent, but that's down from 79.1 percent a year earlier. Its core capital ratio of 12 percent is up from 9.3 percent a year earlier. Last month, the bank also said it will pay a dividend for the first time since 2007.

Slow Build
Commerzbank's rising core capital ratio shows it's made progress repairing its balance sheet
Source: Company

Zielke's task then is to deliver more of the same, steadily repairing the balance sheet and boosting profitability too. He inherits a bank whose shares are unloved by investors, but Zielke also benefits from clarity of purpose and a low expectations reflected in a weak share prices.

Investors looking for a massive overhaul that will fuel a rocket under the shares are likely to be disappointed -- but they shouldn't be looking for that in the first place.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net