Anew man has moved into the hot seat at Commerzbank AG, raising hopes of better times forshareholders.
Aweek ago, Martin Blessing vacated the CEO post for Martin Zielke, head of theGerman bank's private customers business since 2010.
YetZielke was not in evidence when first-quarter figures were announced May 3. Despite awarning from Blessing, who was still responsible, they disappointed market expectationsand sent the shares spiraling downwards, dropping more than 10% at one pointduring that day. The stock has fallen by 40% during the last year and by 70%during the last five years.
Inthe first quarter, net interest income fell by a notable 11% year on year andnet profit halved, despite falling costs and impairments. Given that the netinterest margin was only slightly weaker, this reflects significantdeleveraging at the bank, which resulted in stronger capital and leverageratios.
Whilethe balance sheet looked good, profits looked awful. The mittelstandsbank,serving small to medium-sized businesses, was hit by on an increaseddeposit base while the wholesale bank faced weak markets and low levels ofactivity. Citi analysts, in a May 3 note, said both the noncore and coredisappointed consensus when excluding one-off items.
Theprivate customers business held up relatively well, however. This went some wayto justifying the appointment of Zielke, Dieter Hein, a bank analyst atAlphaValue, said in an interview.
Accordingto a May 3 Handelsblatt report,Zielke is already reviewing the bank's current goals and strategy
ButHein said he saw Zielke as a "close ally" of Blessing and did notexpect immediate or dramatic change, particularly since former CEO Klaus-PeterMüller will continue to head the supervisory board. Hein said Blessing had"failed" given that, during the latter's tenure as CEO, the shareprice had declined by 94% and the bank had required €19 billion in freshcapital. This compares to a current market capitalization of less than €9billion.
"Shareholderswould have been better off if the bank had foundered," Hein said.
Asecond bank analyst, who asked not to be identified, said the shares "willnever recover" to their former level, and said the capital increase wasthe main reason for the share price decline. Cutbacks in investment banking,exiting markets and restructuring businesses have also taken their toll.
However,the analyst took a more positive view on Blessing's reign, describing therundown of the noncore bank as "a very difficult task donecompetently." He said he did not foresee radical strategic change fromhere and hoped Commerzbank would avoid, for example, expanding internationally.
"Ido not think any radical change in direction is needed," the analyst said."It is now about delivery."
Thiswill be tough for Zielke. Revenues and margins look unlikely to recover fast,given low interest rates and uncertain markets.
SimonAdamson, a bank credit analyst at CreditSights, told S&P Global MarketIntelligence that Commerzbank has been "chronically unprofitable" foras long as he can remember.
"[Thisis] largely a reflection of the structural difficulties in German banking — andthat is being exacerbated by the ultra-low or negative interest rateenvironment," he said. "I am not sure the bank can do much about thepressure on revenues from mainly external factors."
Hesaid additional cost-cutting will have to be considered.
Theunnamed analyst said Commerzbank had done well to keep costs broadly flatdespite pressure from regulation and litigation, as well as ongoing investmentin digitization. This, he said, represented an opportunity of to contain oreven reduce costs.
"Themain long-term priority is making retail much more efficient by going with theflow [growing] mobile and online banking. I expect them to say that 2020 costswill not be above current costs despite volume growth," hesaid.
Akey concern for analysts remains the €5.5 billion shipping exposures.Commerzbank CEO Stephan Engels admitted on the results call that shipping markets "are farfrom recovery and remain very difficult, which explains the unchanged high costof risk level of more than 500 basis points."
Theunnamed analyst thought the new leadership would aim to exit shipping by 2020.
Hefurther emphasized that low rates and market conditions were out of the controlof Commerzbank management and that the bank was in good company in reportingsingle-digit returns. Like Hein, he did not expect Commerzbank to earn its costof capital in the medium term but observed that the bank trades at between 3xand 4x tangible book which implies a 3% to 4% return on tangible equity. Givenflat costs, investment in digital and a continuing successful runoff of thenoncore assets, he thought an improvement in returns to twice the current levelmight happen.
"Ido not expect 10% ever but 6% or 7% in the medium term is possible," theanalyst said. In the first quarter, Commerzbank reported a 2.2% ROAE.
Givenrecent experience and the lack of a clear management change, Hein was gloomyabout the outlook for returns. He observed that Commerzbank had managed just €1billion in attributable profit on €30 billion in capital in 2015 and is noweven predicting a worse performance in 2016.