Commerzbank: How Zielke and Schmittmann’s positions became untenable

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Commerzbank’s chairman Stefan Schmittmann and chief executive Martin Zielke

The joint resignations of Commerzbank’s chief executive Martin Zielke and chairman Stefan Schmittmann may have come as a shock for many investors.

However, the news will probably be well-received, as it is clear that the bank needs a much deeper restructuring than the one it was attempting before.

Zielke’s attempts to convince investors of his ability to boost the bank’s profitability have become less convincing as the restructuring at close peer Deutsche Bank has gained credibility.

Deutsche, indeed, has been one of Europe’s best-performing bank stocks during the past year, and especially over the past few months, while Commerz has been one of the worst.

Souring relations with US private equity firm Cerberus Capital Management have precipitated Zielke and Schmittmann’s departures. Cerberus took a 5% stake in Commerz in 2017, the same year it took a 3% stake in Deutsche Bank.

Commerzbank’s shares have since lost two thirds of their value, while Deutsche shares have lost about half their value.

Board representation

In June, according to reports, Cerberus demanded more board representation at Commerz, which the bank then rejected – sparking threats by the US firm, which turned out to be real, that it would push for leadership change.

However, Cerberus is not the only one losing patience.

The German government, which is still a 15% owner of the bank after a 2008 bailout, replaced its representatives on the bank’s board in April. Even supervisors at the European Central Bank have reportedly criticised Commerz’s management for not pushing hard enough on costs.

Zielke was right to state in his resignation notice that the bank needs a fresh start and a profound transformation under a new CEO 

After the collapse of a mooted merger with Deutsche, the government in Berlin commissioned a report from Boston Consulting Group, which according to Bloomberg said in December that the bank’s cuts should be two or three times larger than the ones Zielke was then attempting.

Before his resignation, Zielke was preparing to announce deeper cuts both to employees and branches – but faced the problem that few people had much confidence in his ability to carry them out.

The bank’s three-year strategy plan in September was well short of what was needed to turn it around. Rather than fix its profitability problem, all the plan really did was lower its targets: aiming for a return on equity of just 4% by 2023.

Coronavirus pandemic

Covid-19 then brought these problems to a head, with the bank announcing a loss of almost €300 million in the first quarter. Zielke also called off a planned sale of mBank, which would have provided some of the capital for the upfront costs of the – albeit insufficient – cuts that Zielke had previously announced.

Zielke was right to state in his resignation notice that the bank needs a fresh start and a profound transformation under a new CEO. However, for years, the bank has pointed to growth in new clients as the main mark of its success, suggesting a lack of recognition of banking’s new reality, in which near-term income rather than long-term growth is key.

Ultimately, it seems that everyone wanted radical change at Commerz except Commerz itself. The question now is whether whoever takes over from Zielke will have any more success in implementing the stringent cuts that are needed than him.

This is Germany, after all, and while Covid makes cuts even more necessary, it also makes them even less socially palatable. Deutsche, indeed, has succeeded by cutting largely outside Germany.

Meanwhile, as Cerberus no doubt realises, the ultimate solution to Commerzbank’s problems is still a merger – if it can get that past its employees.