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Commerzbank's 'ambitious' 6% return target provokes skepticism

NewCommerzbank AG CEOMartin Zielke's €1.1 billionstrategic plan left the stock market and bank analysts unimpressed.

The planfeatures 9,600 job cuts and a cessation of dividend payments "for the timebeing," while targeting a return on tangible equity of at least 6% by theend of 2020.

Thebank's shares fell about 3% in Frankfurt trading Sept. 29 and have halved invalue over the past two years. The 6% return target, which is unlikely to meetCommerzbank's cost of capital, could rise to 8% and above if interest ratesincrease.

"Sixpercent returns seem very little but the target is still very ambitious. Whendid Commerzbank last make 6%?" said Markus Riesselmann, a bank analyst atIndependent Research in Frankfurt. "Its costs are far too high and it issuffering greatly from the low interest policy, which we do not expect tochange in the foreseeable future."

Headded in an interview that the bank has little alternative but to cut costs andthat taking the necessary restructuring measures would not be possible withoutstopping the dividend.

"NowCommerzbank has to convince markets that it has a clear vision," he added.

Thebank recorded a 5.06% return on average tangible equity in 2015, the highestsince 2011, according to S&P Global Market Intelligence figures. It hasforecast "a small net profit" for 2016 after a roughly €700 milliongoodwill impairment to be booked in the third quarter.

"IfCommerzbank were to reach 6% ROTE, that would be an improvement," DieterHein, a bank analyst at Fair Research, said in an interview. "It did notachieve that despite the last two restructuring programs. It is frighteningthat management thus far has completely misunderstood the possibilities andrisks of the bank and its markets. It is one thing to announce goals for fouryears hence, but it is evidently quite another to achieve them."

Akey question is whether Commerzbank can sustain its revenues while cuttingstaff and costs. Should interest rates stay at current levels, itexpects revenues around €10 billion and costs near €6.5 billion in 2020,compared to operating income of €9.8 billion and costs of €7.3 billion in 2015.

Citianalysts observed that the revenue target for 2020 is some 9% higher than 2018consensus, while costs are 7% lower. These goals would effectively double netprofit by 2020 compared to 2018 consensus, assuming that loan losses remainconstant.

"Theprofit targets are ambitious and Commerzbank has a poor track record ofdelivering against targets," the analysts wrote.

AlthoughCommerzbank is planning to cut 9,600 posts, it expects to create 2,300 new jobsin growth areas, disruption that Riesselmann noted will add to thechallenge of achieving its targets.It is investing significantly in digitization while restructuring its businessinto segments called "private and small business customers" and"corporate clients." Trading in the investment bank is to be "scaledback" so that Commerzbank can invest in its core client business.

"Commerzbankhas changed its segments and business structure very often during the last 15years," Hein said. "That did not strengthen the bank but made itsmanagement more difficult in my view. The [chosen] strategy is not as importantin my view as its successful implementation."