Catching Up At Commerz

The crowd of 22,000 at Frankfurt's Waldstadion soccer stadium yelled "Martin! Martin!" as the lanky pastor's son rose to speak. But the object of their enthusiasm was neither evangelist nor rock star. It was 59-year-old Martin Kohlhaussen, CEO of Commerzbank, celebrating with shareholders the bank's 125th birthday on June 10. And while the buttoned-down banker may seem an unlikely celebrity, he had given his audience plenty to cheer about in 1994: net income up 80%, to $760 million, on assets nearly 20% larger than the year before.

Kohlhaussen's next act may be harder to pull off. As the smallest of Germany's Big Three banks, Commerzbank has to run faster than its rivals, Deutsche Bank and Dresdner Bank (table), in the race to build a global banking presence. While its competitors are aggressively hiring top U.S. and British investment bankers or spending top dollar to buy Anglo-American operations outright, Commerz has so far pursued a cautious strategy.

And although Kohlhaussen's stick-to-your-knitting approach has worked wonders for the bottom line, some observers question whether he has the broad vision to take his bank into the increasingly competitive future. He insists that he does have a vision, but that it's less important than the new profitability hurdles he has set for Commerz. "A vision has to have goals and targets to be met," he says.

LONDON PURCHASE? Still, without taking undue risks, Commerz has launched a number of innovations since Kohlhaussen moved into the top job in 1991. Last year, Commerz became the first German bank to start selling money-market funds. It was also the first to start up a full-scale, low-cost, direct-banking service, ComDirect Bank, combining a discount brokerage with electronic banking by phone, fax, and mail, in February, 1995. In April, it snapped up London-based asset-management company Jupiter Tyndall Group PLC for about $265 million. In mid-July, Commerz was rumored to be bidding for London brokerage house Smith New Court, with a price tag around $700 million. But the bank would not comment. Industry sources also believe Commerz is shopping for an American fund-management company--perhaps even one of the big mutual-fund families.

But the bank's strong domestic presence is the linchpin of Commerz' strategy (table). Kohlhaussen is stressing Allfinanz: cross-selling financial products from partners such as Switzerland's Winterthur Group (for insurance) or its own savings and loan subsidiaries (for mortgages). That overlaps with Commerzbank's drive into asset management, in Germany and abroad, which in turn shades into a third major goal of developing international business. "You might call it a patchwork strategy," concedes Kohlhaussen. "Nevertheless," he adds, pointing to a large quilt in autumnal shades--made by his wife--that adorns his office wall, "patchwork and quilts can be beautiful."

SCOOPING UP FUNDS. They're also difficult to assemble. As CEO, Kohlhaussen started with a serious bout of housecleaning at the bank. First, he shook up the domestic network, to consolidate unprofitable branches. Then, in 1993, he slimmed down and reorganized the Frankfurt head office into three operational and two support divisions. The result: a sharper focus on core businesses--domestic banking, asset management, and international finance.

Because of those moves, Commerz is no longer seen as a stodgy also-ran. Kohlhaussen's progress in the past year, says Olaf Conrad, banking analyst at Morgan Stanley International Ltd., is "establishing Commerzbank as a leading and innovative German universal bank." The payoff, he figures, will be a healthy rise in operating profits this year and next (chart). The bank's shares are already up about 40% since Kohlhaussen took over.

Given Commerzbank's history, that's a major change. When Kohlhaussen joined the bank in 1982, he was part of a rescue squad. Commerz had skipped its annual dividend for three years and was reeling from losses on an $11 billion wad of fixed low-interest loans. Along with Walter Seipp, then Commerz CEO, Kohlhaussen cut those loans in half and refinanced the remainder at better rates.

Indeed, a hard-nosed insistence on profitability has become Kohlhaussen's trademark. He has set four different measures of profitability the bank aims to hit consistently by 1998. Why such a complicated system? "With just one target, you can reach it largely by creative accounting," says a bank insider--for instance, by tinkering with hidden reserves. "With four, it's impossible to do that."

The principal goal is 9.5%-to-10% return on equity. Kohlhaussen beat that--and both Deutsche and Dresdner--last year with an 11.2% ROE, sharply up from 7.6% in 1993. But other targets will be harder to reach, such as a 1.45% operating profit margin on overall business, up from just 0.8% last year, or operating profits running at 71% of personnel and administrative costs, vs. 48% last year.

But Kohlhaussen has a good chance of meeting his targets. For one thing, he was particularly aggressive in pioneering the lucrative money-fund market, tapping into the deep pool of German savings. In a heavily advertised promotion last August, Commerz introduced the products to Germany as soon as the Bundesbank permitted, beating rivals by several weeks. As a result, it scooped up $9.3 billion worth of funds by yearend, a 23% market share--and half the investors were new clients.

Building a major presence in more international businesses could be harder. Until now, Kohlhaussen has been leery of diving into London's bustling global markets by buying an investment bank there, as Deutsche and Dresdner have done, even though such a move would help what one banker rates as "Commerzbank's weakest area--mergers and acquisitions."

BIGGER FISH. Asset management is another area where Commerz runs a distant third to Deutsche and Dresdner. In April, besides buying Jupiter Tyndall, it acquired a 20% stake in Taipei-based fund manager Capital Investment Trust Corp., giving it entree into booming Asian markets. Commerz is close to completing a deal to buy a small asset-management house in Boston. And Kohlhaussen is always on the lookout for bigger fish. He was, for example, negotiating to buy GT Asset Management until Bank in Liechtenstein decided not to sell.

Yet in general, Commerz' international expansion has tended to be slow and steady. The bank has branches around Easter Europe and is opening one in South Africa. Its new derivatives business, Commerz Financial Products, is expanding to New York, London, and Tokyo. And in 1992 it set up a commodity clearing house in Chicago. But the huge U.S. markets underline Commerzbank's dilemma in megabuck global markets. "We would like to strengthen our position [here]," says Hermann Burger, co-head of Commerz' New York-based North American operations, "but we don't want to grow at any cost."

Burger's attitude sums up rather well the challenge for Kohlhaussen: overtaking deep-pocketed competitors that have a more cutthroat approach to global banking. Clearly, Commerzbank is going to have to run fast just to hit all of his profitability targets. But as the smallest of Germany's Big Three, it also has the most room to grow.

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