The German bank is not only unprofitable right now but seems intrinsically unable to make a decent return © EPA
Martin Zielke must be blushing with all the attention he is getting. Within only a few weeks, the bank he heads, Germany’s Commerzbank, has reportedly been the subject of acquisitive intentions from the likes of Crédit Agricole, Deutsche Bank and UniCredit. BNP Paribas, Société Générale and Santander have also been cited as potential partners.
It is hard to fathom quite why. Commerzbank is not only unprofitable right now but seems intrinsically unable to make a decent return. In the first half of the year, it reported a pre-tax loss of €292m. Over the past decade, the bank has made a cumulative net profit of just €1.6bn — on the basis of today’s capital base, that is equivalent to an annualised return on equity of 0.6 per cent. Excluding the financial crisis period, and instead judging the bank over the past three years, yields a mere 2.2 per cent.
Even against the low baseline of the post-crisis years, when tougher regulation and ultra-low interest rates have crimped profits across the sector, that is pretty poor. And even accounting for Germany’s structurally low-profit banking environment, in which the majority of the market is controlled by state-owned or not-for-profit lenders, it is weak.
So why all the hype? It is certainly in the interest of at least three constituencies to make a lot of noise. First, Commerzbank’s shareholders, and in particular the biggest two. The German government, with 15.6 per cent, and US distressed fund Cerberus, with about 5 per cent, are impatient to exit with something to show for it. The stock has fallen more than 70 per cent since the government first bailed out the bank in 2008. Since Cerberus’s July investment, the stock is up more than 5 per cent, but this is largely on the back of the string of acquisition rumours.
Meanwhile, other banks, especially those struggling to generate organic growth, may feel that the acquisition of Germany’s second biggest commercial bank is too good an opportunity to pass up. Over the weekend Crédit Agricole chief executive Philippe Brassac told German business daily Handelsblatt that he would “certainly have to analyse” the idea of a Commerzbank acquisition if the bank became available for purchase. Analysts point to Crédit Agricole’s weak capital position and the bolstering effect that buying Commerzbank could have. The German bank has relatively strong capital (a 13 per cent core equity tier one ratio) and is trading at only half the tangible book value of its net assets.
Lastly, European integrationists would love a cross-border eurozone merger. It would be the perfect proof that the European project is still on track, despite the upheavals of the eurozone crisis a few years ago and the continuing distractions of Brexit.
A merger would build on the creation of a European regulator (the European Central Bank’s Single Supervisory Mechanism) and the evidence that the EU’s mechanism for resolving failing banks can work. EU officials point to the wind-up of Spain’s Banco Popular and its absorption into Santander, rather than the rule-bending exemplified by the partial bailouts of failing banks in Italy. Last week’s proposals from the ECB that banks should provision fully for future non-performing loans seem likely to be extended to a similarly tough provisioning requirement for back-book loans. That can be seen as further groundwork for full banking union, including a common deposit guarantee. Combining Commerzbank with another bank such as Crédit Agricole might help the euro project.
Yet, despite cheerleaders for the deal, in reality the industrial logic for a cross-border merger would be thin, and it is hard to see how investors or customers would really benefit. And there is another important reason to stay wary.
One of the weekend’s other news items, via a valedictory interview in the Financial Times, is the imminent departure of German finance minister Wolfgang Schäuble. Though he did not specifically advocate cross-border deals, he did say “banking union is a very important element in the process of strengthening the eurozone”.
His biggest message, however, was that the next crisis may well stem from “the accumulation of more and more liquidity and the growth of public and private debt”.
Such bubbles have in large part formed as a result of central bank monetary policies. For policymakers to compound those risks by encouraging large-scale banking mergers would be to ignore the too-big-to-fail lessons of the 2008 crisis. For all of these reasons, Martin Zielke should be jilted.