Commerzbank Confronts Tough Choice as Virus Forces CEO’s Hand
Commerzbank Confronts Tough Choice as Virus Forces CEO’s Hand
(Bloomberg) -- For four years, Martin Zielke has tried to make Commerzbank AG more profitable while largely holding on to the vast branch network he once oversaw as its retail head. The coronavirus outbreak may finally force his hand.
Germany’s No. 2 listed lender said on Monday the virus had derailed a disposal intended to finance planned cost cuts. On Wednesday, it is expected to report the weakest revenue of Zielke’s tenure as chief executive officer. With the crisis driving up bad loans, analysts predict a first-quarter loss that will swell to the worst annual shortfall since Commerzbank was bailed out in 2009.
That prospect, against the background of the deepest global recession in almost a century, is adding urgency to a strategy update that started this year as an effort to come up with more ambitious targets and has since evolved into Zielke’s third -- and possibly last -- shot at turning around the bank. With his previous plan in disarray less than a year after it was announced, the CEO has enlisted McKinsey & Co. to help with a full-fledged review of the business model, Bloomberg has reported.
“Commerzbank needs a deep strategic overhaul,” said Dieter Hein, an analyst at Fairesearch and AlphaValue who has a sell rating on the stock. “But Zielke and the entire management have consistently missed their targets since 2009 in a much more benign economic environment and I doubt they will do better this time around.”
The outcome of the review probably won’t be made public until after the second quarter, but Zielke will almost certainly face questions from analysts and shareholders on Wednesday, when the bank also holds its annual general meeting.
People familiar with the matter say Commerzbank will likely discard core tenets of Zielke’s initial strategy announcement in 2016 under the new plan. The bank could partially reverse a controversial decision to scrap a unit catering to Germany’s small and medium-sized businesses, known as Mittelstandsbank. It may also give up Zielke’s dogma that Commerzbank needs a strong branch network to compete and further water down a focus on client acquisition, the people said, asking for anonymity to discuss internal deliberations.
Commerzbank currently has about 1,000 branches and Zielke made a conscious decision to keep them in order to set the bank apart from rivals cutting back. He said last year that about 200 of them will have to be closed, but some shareholders now argue their number should be cut by half, the people said. Zielke’s new strategy may also double the existing cost reduction target and raise the mid-term profitability goal by at least half, the people said.
A spokeswoman for Commerzbank declined to comment.
Zielke’s previous plan, outlined in September, was privately criticized by top stakeholders including the government as not going far enough, forcing the CEO back to the drawing board and adding to a series of setbacks, including cuts to key targets and a failed merger negotiation with Deutsche Bank. The share price has declined almost 99% from the peak in 2007, and by about 60% since Zielke took over.
On Monday, Commerzbank abandoned the sale of Polish subsidiary mBank SA which Zielke had counted on to finance his current plan. While the sale had been criticized by investors, who questioned why the lender should divest its best performing unit to fund the restructuring of less profitable ones, scrapping it raises the question how Zielke wants to fund more ambitious steps.
Paradoxically, the current crisis has thrown an unexpected lifeline to the embattled CEO, the people said. As one of the biggest lenders to the country’s exporters, Commerzbank is a key conduit for the government’s emergency loans, insulating Zielke at least temporarily from any threats to his tenure, they said. The crisis has unified the management board and galvanized the workforce, boosting morale, according to the people.
It has also afforded Zielke a face-saving opportunity to reverse course on key elements of his strategy, several people said. Companies across the globe have been reassessing the need for real estate after employees worked from home for months and clients started doing more business online.
Need for Branches
Like rivals, Commerzbank closed some of its branches because of the pandemic and has only gradually re-opened them since the beginning of May. Zielke has repeatedly said the crisis has accelerated digital adoption by clients, which reduces their need for branches.
People close to Zielke said he has a passion for technology, is good with numbers and an ardent believer in the need for banks to digitize, but it’s difficult for him to convey that passion in larger groups. His bank’s role in handing out government loans and his new side job as chief lobbyist for Germany’s privately-owned banks show he’s a sought-after interlocutor for other bankers, regulators and politicians. He has also largely rid the bank’s balance sheet of non-performing loans -- a crucial accomplishment as the corona crisis hits.
Still, many observers doubt the lender can survive as an independent company unless it manages to pull off the deep restructuring Zielke has so far avoided.
“Commerzbank faces a battle to stabilize earnings even at the current low,” Bloomberg Intelligence analysts led by Philip Richards said in a note in April. The current “restructuring plan doesn’t go far enough to ensure the bank’s future as a standalone entity.”
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