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Major shift in Commerzbank's strategy expected after CEO, chairman step down

The sudden resignations of Commerzbank AG CEO Martin Zielke and supervisory board Chairman Stefan Schmittmann are likely to be followed by a major shift in the lender's restructuring plan, according to credit analysts.

While there is agreement among credit analysts that another revamp is needed, the departures of Zielke and Schmittmann could create complications in the near term. Commerzbank will have to find a chairman who can "mend the strained relationships with shareholders and trade unions," Dierk Brandenburg, head of the financial institutions group at Scope Ratings, said in a written comment. S&P Global Ratings said in a bulletin that the resignations will make the restructuring more difficult and that it expects the bank to continue with the same strategy until a CEO is appointed.

The group announced July 3 that Zielke and Schmittmann will leave so that it can make a "fresh start" in executing its 'Commerzbank 5.0' strategy. The resignations came after growing pressure from Cerberus Capital Management LP, which holds a 5% stake in the bank. The U.S. private equity firm has been pushing for a revision of the strategic plan, which it called "ill-conceived" and "unambitious" in an internal letter sent to the supervisory board in early June, the Financial Times reported at the time. The bank has also come under pressure from the German government and supervisors.

Commerzbank has announced that it is exploring deeper cost cuts and will present a new plan with the release of its second-quarter financial results Aug. 5. Due to recent events, however, the bank may not be ready to present a new plan as early as August, Brandenburg said. Without a chairman and a CEO in place, it is hard to see how Commerzbank can produce a credible restructuring plan by then, Brandenburg said.

Although the departures of the CEO and chairman give Commerzbank "the chance of a more decisive reset in strategy further down the line," it "complicates matters in the short term," he said.

"Commerzbank has suitable internal candidates to replace the CEO and push ahead with its restructuring," Brandenburg said. "However, the more complicated task is to find a chairman," he said.

German trade union Verdi has criticized Cerberus' call for further redundancies, saying a strategy influenced by the U.S. group is not in the interest of Commerzbank staff. Internally, the two best candidates to succeed Zielke are acting Commerzbank CFO Bettina Orlopp and Roland Boekhout, head of the group's corporate clients business, who joined Jan. 1 from ING Groep NV, Handelsblatt reported July 7, citing insiders.

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Strategy shift expected

The departure of the group's two most senior managers is a clear indication of an upcoming shift in Commerzbank's strategy, according to credit analysts.

"The news highlights significant disagreement among shareholders about the bank's strategic direction and is likely to cause the board to adopt more substantive measures to address the bank's inability to deliver on its financial objectives," Fitch Ratings analysts said in a July 6 note.

The new CEO will likely pursue "further substantial cost measures" given the pressure on the group's revenues and that the negative effects of the coronavirus pandemic are expected to further inflate the bank's credit losses, S&P Global Ratings analysts, said in July 6.

Under new management, Commerzbank would probably update its financial targets, including "more severe adjustments to its business model and franchise" because of the weaknesses of the existing strategy, analysts at rating agency Moody's said July 6. Even with the originally planned cost cuts, Commerzbank was aiming at 5% return on tangible equity by 2023, which also came with a hefty restructuring bill that would limit the lender's ability to generate capital for the next year or two, they said.

Commerzbank 5.0

The original plan, unveiled in September 2019, encompassed the reduction of 4,300 full-time equivalent positions and the closure of about a fifth of its nearly 1,000 branches in Germany. Cerberus has criticized the bank's management for lacking the resolve to make deeper cost cuts and for continuing to focus on unprofitable revenue streams.

Even after Commerzbank was said to be open to raising the number of job cuts to 7,000 and increasing branch closures to 400, Cerberus expected cuts well above that, Reuters reported June 29, citing a source familiar with the shareholder's demands.

Cerberus had previously called for two seats on Commerzbank's supervisory board to halt the lender's "downward spiral," according to the FT report. After Commerzbank rejected that demand, Cerberus told the bank in a letter that it would seek a management reshuffle if none of its calls for a strategy change were heard, Reuters reported June 16. Following the announcement that both the CEO and chairman were to resign, Cerberus warned against rushed decisions and has called for a structured succession process whereby the bank first chooses a chairman and then appoints a new CEO, Handelsblatt reported July 6, citing a spokesman for the private equity group.

Commerzbank said Schmittmann will end his tenure Aug. 3, while Zielke's departure date is as yet undetermined. The supervisory board is meeting on July 8 to discuss when the CEO should leave.

Plans derailed

Since its inception last year, the Commerzbank 5.0 plan has proved challenging to execute. The onset of the coronavirus pandemic in early 2020 caused a market meltdown that forced Commerzbank to give up the planned sale of its 69.3% stake in Polish unit mBank SA. Keeping the lucrative Polish business was good for group profitability but put immediate pressure on Commerzbank to cut more costs as the scrapped sale left it short of funding for the strategy, which created €850 million in additional costs.

Before Cerberus began to push for a radical change in the strategy, Commerzbank 5.0 was criticized by the European Central Bank, which said the annual cost reduction target of €600 million, or about 10% of total expenses, on a net basis, was not ambitious enough. In April, the German government, which holds a 15% stake following a financial crisis-era bailout, replaced two Commerzbank supervisory board members — a sign of frustration with the bank's weak financial performance, according to the FT.