Commerz BankDas Slog

“The Second-Biggest Bank in Europe’s strongest economy Still faces a difficult task”

Commerzbank's Marketing Materials

It shows a painful reshaping of Europe’s troubled banking system to be:

SmallerSaferMore domestic

Commerzbank’s Initial Trajectory

Commerzbank’s initial path through the crisis look like that of another European lender, Britain’s Lloyds Banking Group (LBG)

Like LBG, it was a big bank but not the biggest in the country

Deutsche Bank is Germany’s Giant. Like Lloyds, it undertook a disastrous domestic transaction at the worst possible time, buying Dresdner Bank in the summer of 2008 just weeks before LBG eat up HBOS. And like the British bank, it quickly ended up selecting state assets to survive

Parallels Between LBG & Commerzbank

LBG’s shares have risen by 33% in the past three months, and by 133% in the past year

The bank’s share price floats just below the price the British government paid to buy its 39% stake, which will soon be sold

CommerzbankThings look far less fizzy at CommerzbankAt the time of the rescue deal the bank’s boss, Martin Blessing, declared

that state ownership should last a maximum of 36 months. More than four years on, its shares still holdup the broader index of European banks

ContinuedIts price-to-book ratio is one of the lowest on the continent (see chart). Its 2012 net profit came in at a mere €6m ($7.7m)

Rumors about German GovernmentRumors that the German government might sell its 17% stake to a foreign bank were

scotched this week. Newspapers speculate whether the bank might exit the DAX, the country’s benchmark stock market index, leaving Deutsche as the only member bank

The euro-zone crisis weighs heavily

The restructuring of Greek government debt handed it a big loss. Historically low interest rates have depressed income. Competition from Germany’s many small savings banks and co-operatives puts pressure on fees; online banks are adding to the pressure. A downturn in shipbuilding has hit Commerzbank’s big portfolio of loans in that industry

For one bank to have had so much bad luck prompts the question of just how much carelessness, not misfortune, is to blame

Like many European banks, both Commerzbank and Dresdner invested in mortgage-backed assets before the crisis. And like many of its continental peers, the bank was also a big international lender against durable assets in areas like shipping, aviation and property

About a quarter of its €18.3 billion shipping portfolio is non-performing

What Analysts Want?

Analysts want Commerzbank to keep shedding these “non-core” (non central) assets, which stood at €151 billion at the end of 2012

Some are easier to offload than others. Holdings of external euro-zone government bonds can be gently unwound by letting them run off. But shipping and property loans are longer-term and less liquid

The combination with Dresdner gave Commerzbank a desirably big retail-branch network and customer base in Europe’s strongest economy

The Mittelstandsbank, the division lending to Germany’s small and medium-sized, mostly family-owned businesses, is in decent health: 30% of Mittelstand companies are customers, and the pre-tax return on equity in this unit was 28.6% in 2012, against 3.1% for the group overall

As these firms go into global markets, where savings banks cannot follow, Commerzbank has a shot at boosting its business with them. Expansion in Poland looks sensible

Vision to Reality

Yet the bank is still some way from turning this vision into reality. A banking consultant quips that the maths of the Dresdner deal amount to “one plus one equals to one”. And a domestic focus has its downsides

Aggressive local competition from the savings banks and co-operatives will not go away

Interest rates will remain low as long as inflation stays quiet

Mr.Blessing and his team have little choice that includes making more cuts in branches and staff (branches have already fallen from about 1,500 to 1,200), controlling their tempo so that the bank can gain savings without beating its franchise

Not every location needs an expert in everything; more advice can be given online or over the phone

Another is growth in its online division. Commerzbank has a balance to build a stylish offering; savings banks and co-operatives may not. Such strengths should eventually return Commerzbank to fitness. But the miserable share price suggests that investors expect a period of difficulty before it is back to running speedily

Decision