Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead

Business Strategy and Outlook

Commerzbank generates about 70% of its operating income in the highly competitive German market, where banks without profit-maximizing motives (savings and cooperative banks) dominate the retail space and German as well as international competitors vie for the coveted German corporate market. In this competitive environment, Commerzbank has too long stuck to its large branch network strategy, failing to digitize processes sufficiently to compete in today’s changing banking landscape. Management is addressing these shortcomings with a highly ambitious plan. Until 2024, the bank aims to reduce its cost base by EUR 1.4 billion, or about 20% of its 2020 level. The largest cost savings will come from a reduction of about 10,000 in head count and 550 branch closures. After such a massive cut to its business, management believes it can achieve a return on tangible equity of 7%.

It is true that Commerzbank is addressing the obvious hurdles toward a more profitable future with its current plan. Yet given the competitive market in Germany, the reorganization may also provoke customer churn and bring revenue down with it. Commerzbank has been coveted as a takeover target by multiple European banks over the last couple of years. This was partially owed to its strong position in the German corporate market, but also the potential gains to be made via a heavy cost-cutting initiative. Commerzbank has now switched course, in experts view, and is taking matters into its own hands rather than hoping for a white knight. It is unexpected for European cross-border banking consolidation to commence anytime soon. As such, it is held, Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead.

Financial Strength

Commerzbank is in good financial health. The bank has cleaned up its balance sheet after its acquisition of Dresdner Bank in 2008 and derisked its exposure to bad loans in shipping, commercial real estate, and public finance. At the end of the first quarter of 2022, the bank posted a common equity Tier 1 ratio of 13.5% versus a requirement of 9.4%.

Bulls Say’s

Commerzbank is addressing its large cost base, setting the bank up for greater profitability in the future.
The bank is in good financial health and has successfully run down its bad exposures in shipping, public finance, and commercial real estate.
The efficiency program, cost-cutting efforts, and digitalization strategy will create a leaner and more agile Commerzbank.

Company Profile

Commerzbank operates primarily in Europe. Germany contributes about 70% to total income. The bank operates two business segments: private and small-business customers as well as corporate clients. In its private and small-business segment, the group runs its branch business, a mobile bank with a focus on the Polish market, an online broker, and an asset manager for physical assets. Its corporate client business provides cash management and trade finance solutions to small and medium-size enterprises and large corporates.

(Source: MorningStar)

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