Commerzbank Cuts Growth Goal in ‘Soberingly Realistic’ Plan

(Bloomberg) -- Commerzbank AG is giving up its goal to increase revenue this year as an economic slowdown and lower interest rates force Chief Executive Officer Martin Zielke to announce a new a round of cost reductions.

The new strategy is “soberingly realistic,” Chief Financial Officer Stephan Engels said in a Bloomberg TV interview. “It may not look very fantastic or very optimistic -- but again, it’s realistic.”

Zielke is trying to reverse years of falling revenue and low profitability by focusing on lending to individuals and corporations in its home market. But a slowing German economy, trade conflicts and continued negative interest rates in Europe have undermined the plan, forcing Commerzbank to announce more job cuts last week, as well as the sale of its majority stake in Polish subsidiary MBank to pay for the restructuring.

The lender will use part of the proceeds to fully take over its online subsidiary, Comdirect, and it’s offering to pay 11.44 euros a share for the roughly 18% it doesn’t own. Activist investor Petrus Advisers said on Friday that it has recently increased its holding in Comdirect to just over 3%.

“The market environment has continued to deteriorate further. This has been particularly evident in the corporate clients business,” Commerzbank said in a statement Friday to explain the weaker outlook. “The bank is therefore no longer anticipating a rise in underlying revenues for the year 2019.” Engels later said during a meeting with analysts that he’s not ruling out another revenue decline in 2020. That would mean a falling top line for a fifth consecutive year.

Zielke has pledged to achieve a return on tangible equity of 4% in four years and dividends at the current level. The bank’s stock plunged as much as 7.5% on the first trading day after the strategy announcement and several analysts have labeled the new measures as insufficient to address the bank’s problems.

Commerzbank was up 0.7% in Frankfurt trading as of 1:59 p.m. That narrows this year’s losses to 7.6%.

The bank’s comments “suggest a deteriorating environment,” Anke Reingen, an analyst at RBC Capital, wrote in a note to clients. “The main upside driver for the shares remains an improvement in the economic and interest rate environment.”

Engels said he expects the return on tangible equity to be between 2% and 4% in the years to come, rising above 4% in 2023. The bank expects to post a profit this year, but whether that will be repeated in 2020 largely depends on when the bank books its restructuring costs of about 850 million euros.

Compliance head Bettina Orlopp was appointed as chief financial officer, the bank announced late Thursday, after incumbent Engels said earlier this month he will join Danske Bank A/S. Sabine Schmittroth was named head of human resources. Bloomberg previously reported the appointments.

Elusive Profits

Buffeted by intense competition in its home market and low interest rates that are eroding margins for lenders across Europe, Commerzbank has long struggled to achieve meaningful profitability. Its shares fell to a record low last month as Germany’s economic contraction and expectations for even lower interest rates threaten to undercut Zielke’s strategy.

Commerzbank isn’t currently considering passing on the European Central Bank’s deposit charges to its broader retail client base, said Engels. The lender will have “focused discussions” about doing so with clients who have funds that surpass “certain thresholds,” he said in the Bloomberg TV interview.

“Negative interest rates, increasing regulation, a weaker economy and tough competition -- and on top of that social trends that call on banks to adopt a clear position: the challenges facing banks are enormous,” Zielke told reporters in Frankfurt. “Revenue growth is challenging.”

--With assistance from Matthew Miller.

To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Keith Campbell

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