Adding More Customers Won't Fix This Bank

(Bloomberg Opinion) -- Good things come to those who wait. If you’re a Commerzbank AG shareholder, that could be a very, very long time.

The German lender is midway through a revamp that aims to revive profitability, in part, by gaining customers. On Wednesday, Commerzbank showed it has been steadily winning those new clients. But it’s still far from clear whether the company can actually increase revenue, let alone returns.

So Chief Executive Officer Martin Zielke is right – a tie-up with Deutsche Bank AG may not be what the firm needs, but another deal almost certainly is.

In a highly fragmented and competitive market, turning even the most attractive of customers in Germany – the Mittelstand companies that fuel Europe’s biggest economy – into respectable profits looks to be a mirage.

True, Commerzbank’s effort to win business by investing in technology are paying off. In the corporate division, it has added 9,700 relationships since 2016, close to its target of more than 10,000 new clients by 2020. It’s also on track in the consumer and small-business unit. Loan volumes and assets under management are in line with, if not ahead of, the firm’s targets.

But revenue fell 1.2 percent to 2.19 billion euros ($2.45 billion) in the first quarter, even if the bank expects it to increase by 3 percent over the full year. Net income dwindled to 120 million euros, less than half the figure for the year-earlier period. It’s no surprise the firm abandoned its profitability target earlier this year: return on tangible equity fell to a measly 1.9 percent in the first three months of 2019.

Chief Financial Officer Stephan Engels tried to reassure doubtful analysts, saying that he’s comfortable with the revenue guidance given the strength in net interest income, which was up 12 percent from last year. He was less bullish on commission income, down 4.2 percent. MiFID II has prompted clients to cut back on securities dealing, he explained.

The reality is Commerzbank’s business model – like most German lenders – is highly sensitive to interest rates. The bank estimates that a 100 basis-point increase in the cost of borrowing would yield an additional 500 million euros in net interest income over the first year alone. By year four, that would grow to 900 million euros.

The possibility of rates remaining low in Europe and continuing to squeeze margins, as has happened in Japan, is something that the bank will have to address as part of its strategic update planned for the autumn, the CFO said.

In the meantime, the lender still faces the same old problem: on its own, it doesn’t have the market share needed to make costly investments pay off. For shareholders, the hope must be that one of Commerzbank’s mooted international suitors follows through. BNP Paribas SA, UniCredit SpA and ING Groep NV have at various times expressed interest, lured by the bank’s Mittelstand clientele. A combination with any of those peers would be preferable to a long, hard slog alone.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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