Commerzbank Revival Falters as Targets Seen Eluding CEO

Martin Blessing is one of the most resilient bank chiefs in Europe. He has remained at the top of Germany’s Commerzbank AG since 2008 even after an ill-fated takeover, a record loss and a writedown on Greek debt.

Now, after he revamped the bank by selling assets and cutting costs, shareholders are questioning whether the chief executive officer can generate profits that meet expectations in the face of a sluggish economy, tough capital requirements and a European Central Bank review of asset quality.

“Commerzbank has pushed along a turnaround as far as it could itself,” said Michael Seufert, an analyst at Norddeutsche Landesbank Girozentrale in Hanover, Germany. Now “profitability depends on customers losing their euro-crisis fears and interest rates picking up.”

Shares in the Frankfurt-based company, which more than doubled during the second half of last year, have fallen 19 percent since April 4. The bank’s 0.51 price-to-book ratio, a measure investors use to gauge a firm’s value, is lower than that of any of the 42 other members of the Bloomberg Europe Banks & Financial Services Index.

Germany’s second-largest bank handed over a 25 percent stake to the government in 2009 in return for an 18.2 billion-euro ($24.8 billion) bailout. In an effort to turn around the firm, Blessing, 50, added about 245,000 new consumer-banking customers last year and cut so-called noncore assets by 36 percent in the 18 months through the first quarter. While the former McKinsey & Co. partner has shrunk those unwanted soured shipping and commercial real estate loans as well as government debt, it has become more difficult to generate profit with the remaining parts of the bank.

Missing Estimates

Commerzbank last month reported first-quarter profit of 200 million euros, less than the 227.1 million-euro average estimate of eight analysts surveyed by Bloomberg. While profit compared with a loss of 98 million euros a year earlier, it was about half of the average 397 million euros reported in the four quarters before Blessing became CEO in May 2008. Net interest income, the difference between the interest the bank earns and pays, fell 17 percent.

“They’re not making money, and that won’t change anytime soon, even without noncore assets,” Dirk Becker, an analyst with Kepler Cheuvreux, said by telephone from Frankfurt.

Banker Family

Blessing, who earned a master’s degree in business administration from the University of Chicago in 1988, comes from a family of bankers. His father, Werner Blessing, was on the management board of Deutsche Bank AG; grandfather Karl was a former president of the Bundesbank; and wife Dorothee was co-head of investment banking for Germany and Austria at Goldman Sachs Group Inc. until last year.

After seven years at McKinsey, Blessing joined Commerzbank in 2001 and became CEO in May 2008. He hung onto his post after leading a costly takeover of Dresdner Bank in August 2008 and surviving a record loss of 4.54 billion euros in 2009 and a 2.23 billion-euro writedown on Greek debt in 2011. More than 25 of his counterparts in Europe lost their jobs during and after the financial crisis.

While investors have shifted their sights to weak earnings, Blessing remains optimistic about the bank’s turnaround.

“At the moment, the glass is a little bit more than half full,” Blessing said at the bank’s Frankfurt headquarters, a 259-meter (850-foot) skyscraper that’s the city’s tallest. “Cost management isn’t done. It’s an ongoing process, and it probably won’t go away for the next 10 or 15 years. Two percent to 3 percent efficiency gains are needed on an annual basis.”

‘Boat Afloat’

The turning point, Blessing said, came last summer as he used funds from a 2.5-billion-euro capital increase to repay financial aid and sold the bank’s U.K. real estate unit, which had 5 billion euros of loans, to Wells Fargo & Co. and Lone Star Funds to comply with conditions of the bailout.

Commerzbank has received offers in excess of 3 billion euros for Spanish real estate loans with a face value of more than 4 billion euros, Bloomberg News reported in March. Blackstone Group LP and Lone Star are among the bidders, two people with knowledge of the matter said.

The remaining unwanted assets comprise almost one-fifth of the bank’s 574 billion-euros total.

“Blessing has kept the boat afloat, even though it’s still moving very slowly,” Klaus Nieding, vice president of DSW, a proxy-voting group for small investors with almost 500 million euros invested in German firms, said in a telephone interview. “He’s making progress.”

Nieding’s words contrast with comments a year ago that “management is not at all credible” after “an orgy of capital increases.”

Revised Goals

Blessing set more ambitious goals for strengthening capital and reducing unwanted assets in February. The bank will shrink those assets to 75 billion euros by the end of 2016 rather than to a previous target of less than 90 billion euros, he said.

The revisions came after the euro-area economy exited its second recession in five years in the fourth quarter, expanding 0.5 percent, and the ECB’s main refinancing rate dropped to a record low of 0.25 percent.

“The search for yield is driving investors toward riskier investments, which has pushed along the reduction of noncore assets faster than you would have expected a year ago,” said Philipp Haessler, an analyst at Equinet Bank AG in Frankfurt, who recommends investors hold Commerzbank stock.

Commerzbank’s capital-adequacy ratio under Basel III rules, a measure of financial strength, will exceed 10 percent by 2016, beating a previous target of 9 percent, Blessing said. The ratio was 9 percent on March 31, unchanged from the end of December.

Past Failures

Some analysts and investors don’t believe he will deliver on his targets, pointing to past failures. They also question a plan to invest 1 billion euros in the consumer bank because margins of 5.7 percent at the end of last year were less than one-third those at Mittelstandsbank, the most profitable unit, which serves small and medium-size companies. Blessing is spending the money on online banking and revamping branches.

Blessing failed to meet profit goals he set in May 2009. At the time, he forecast 2012 operating profit of 4 billion euros and an after-tax return on equity of 12 percent. Operating profit ended up at 1.2 billion euros and return on equity was zero. In November 2011, he said the plan was no longer achievable, citing volatile global markets.

Government Support

Blessing joined Commerzbank as the management board member responsible for consumer banking. He was known for his drive and down-to-earth communication style during his tenure at McKinsey, which included working with German banks looking to modernize during the 1990s, said Frank Mattern, a managing partner at the firm who worked with Blessing.

“Martin was not only great at conceptual, strategic work, but also at motivating and energizing,” Mattern said in a phone interview. “He could implement change -- do it himself.”

Blessing steered the bank clear of the scandals involving manipulation of benchmark interest rates and currencies that led to the departures of CEOs including Robert Diamond of Barclays Plc and Rabobank Groep’s Piet Moerland. He also kept the support of the government as some investors sought a change in management last year, a German government official who asked not to be identified said at the time.

Commerzbank was founded in Hamburg in 1870, the same year Deutsche Bank, Germany’s biggest bank, was formed. It was privatized during the financial crisis of the 1930s, and at the end of 2013 had about 1,200 consumer-banking branches with more than 11 million customers.

Luring Depositors

The bank is paying cash to new deposit holders. It set a target in November 2012 of adding 1 million consumer-banking clients by the end of 2016. In April, Commerzbank began offering 100 euros to open a deposit account, raising the payment from 50 euros. Deutsche Bank, Commerzbank’s main competitor for deposits, charges account-holders a monthly fee of five euros, according to its website.

While analysts including Becker of Kepler Chevreux criticized the strategy on cost grounds, Dennis Bartel, a spokesman for the company, said upfront expenses are lower than for traditional advertising. New client business becomes profitable in the second year on average, he said.

Investors also are eyeing any moves by the government to sell all or part of its remaining 17 percent stake in the bank. In August, Finance Minister Wolfgang Schaeuble said no immediate sale is planned and the ministry is accounting for the price at which it bought the shares when deciding when to sell.

To break even on its investment, the government would need to find buyers for its remaining 193.5 million shares at about 25.90 euros each, more than twice the current stock price, data compiled by Bloomberg show.

Legacy Assets

In the meantime, Commerzbank remains weighed down by its legacy assets, which generated an operating loss of 1.1 billion euros last year, offsetting the 1.1 billion euros of operating profit at its Mittelstandsbank.

In a few years, those assets will no longer be a major burden on earnings and the bank “will clearly be profitable,” Haessler of Equinet said.

“They’re on the right path with the reduction of noncore assets but still need to work on profitability at the core bank and particularly retail banking,” he said. “It’s not time for a pat on the back yet, but the bank’s definitely stronger now than this time last year.”

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