Deutsche Bank U-turns to follow Commerzbank’s lead

They say that imitation is the sincerest form of flattery. When John Cryan revealed his latest plans for Deutsche Bank on Sunday, his equivalent at Commerzbank, Martin Zielke, might have been forgiven for doing a double-take.

Aside from the headline grabbing capital raise, Deutsche Bank plans to keep its Postbank unit to focus on domestic retail banking business; combine its global markets, corporate finance and transaction banking businesses into a single unit to better focus on corporate clients and to intensify the disposal and run-off of legacy assets.

This is all familiar to Zielke, as it is almost a carbon copy of the restructuring he announced for Deutsche’s German rival Commerzbank six months earlier.  

Zielke’s Commerzbank 4.0 strategy was clear: to make more money by focusing on what the German lender is best at. And that is financing the German economy. The first step towards achieving that was to boil the business down to two customer segments: private and small business customers (PSBC) and corporate and institutional clients.

“Consultants were telling us to treat the whole business like a car company, but it is different in banking,” points out Roman Schmidt, head of advisory and primary markets at Commerzbank. “Certain areas of the business have always been more prone to P&L volatility.”

That P&L volatility was firmly in evidence when the bank revealed its full-year 2016 results in February, with pre-tax profit down 65% at €643 million. Even without restructuring costs, pre-tax profit was still down 53% year on year.

While this demonstrates the need for the re-boot, it also emphasizes just how tough the environment is in which the bank is operating.

“Given the rates scenario in Europe, you can’t just continue as you did before,” Michael Reuther, board member in charge of corporate clients and treasury, tells Euromoney. “Banks need to adjust to the new norm.” 

Commerzbank’s plans for a nimble, digital future took shape as Deutsche Bank continued to struggle to reassert itself in the face of undercapitalization and reputational headwinds.

The latter’s subsequent eye-raising U-turns in strategy suggest that Zielke might be on to something. It would be understandable if there was a slight air of schadenfreude at Commerzbank, but there isn’t. They know how important it is for Germany to have a well-performing Deutsche Bank, and what is important for Germany is important for them.

The drive for client profitability goes hand in hand with a drive for clients, particularly German corporate clients with €250 million to €1 billion turnover. Deutsche Bank is formidable competition here, as are a number of non-German lenders such as BNP Paribas and HSBC.

Commerzbank believes that by focusing its energies at the smaller end of this scale it can turn its sectoral expertise to its advantage. What other bank has a credit specialist purely for German bicycle shops? Or German foundries?

By effectively dismantling the investment bank and cutting 9,600 jobs, Zielke has marked a dramatic line in the sand between Commerzbank’s past and future. His strategy of focusing on domestic corporate clients is the right one: Deutsche Bank’s new plans only underscore that.

Deutsche’s October 2015 decision to pull back from retail banking in Germany by selling Postbank was a gift for Commerzbank, and Cryan’s abrupt reversal of that strategy changes the competitive landscape in Germany. The smaller bank will now have to compete with a Deutsche Bank apparently discovering renewed enthusiasm for its home market after it failed to find a buyer for Postbank.

Cryan points out: “Twenty million clients give us an important size advantage in a market that has seen increasing pressure to consolidate against a backdrop of low interest rates.”

Nevertheless, Commerzbank has already added one million net new clients to its PSBC unit and tripled its profit contribution since 2012 to €1,079 million, so it is in good shape. The corporate client segment is at the mercy of the interest-rate environment, but in that it is no different to any other bank in Europe.

Commerzbank shareholders must have felt a quiet sense of satisfaction when the bank finally paid them a dividend of 20c in November 2015, the first such payment since 2007 which had the benefit of coinciding with the two-year suspension of dividend payments by Deutsche Bank.

Less than a year later, however, Commerzbank dividends were promptly scrapped again as Zielke revealed his grand plan.

Further patience will now be required as the strategy beds in – but perhaps not as much patience as is being required by Deutsche Bank shareholders facing yet another €8 billion capital raise.

“2017 will be a transitional year, as will 2018,” Commerzbank’s CFO Stephan Engels tells Euromoney. “There are milestones that we need to reach. I am happy with the progress achieved so far.

“Feedback from investors is that they are happy with the strategy, so it is now a matter of execution.”

An in-depth feature on Commerzbank will appear in Euromoney’s April issue.