Coming up Commerzbank: turnaround lender expands IB
The German bank is building on momentum in European DCM with an expansion of its corporate finance business, writes David Rothnie.
There has been an unlikely reversal of fortunes in German investment banking.
The financial crisis was reaching its zenith when Commerzbank sealed the ill-timed acquisition of Dresdner Bank in 2008, a transaction that deepened its woes and pushed it into the arms of the German state. In this way, it shared much with Royal Bank of Scotland, which struck its value-destroying purchase of ABN Amro as the crisis peaked.
But fate has marked out two very different paths for the pair. While RBS is a shadow of its former self and retains no ambitions as a global investment bank, Commerzbank, which has frequently been regarded as a takeover target, has turned out to be one of the unlikely survivors of the turmoil in investment banking, and can see a brighter future.
The early onset of its woes contributed much to its survival, forcing the bank to take its medicine early, slashing assets and jobs, and paring back international operations. It has been a long and often painful journey, with several rounds of restructuring.
Blessing has led the bank since 2008 and is credited with turning its fortunes around. The bank took an investment of €18.2bn from the German government, which still holds a 15.4% stake in the lender.
Zielke will start on May 1, and while Commerzbank’s share price has fallen 30% over the last year, at a time when no European investment banks have much to cheer about, Commerzbank’s corporates and markets unit, led by Martin Reuther, has a clear sense of direction and sufficient confidence in its future to embark on an expansion plan in its corporate finance business by tapping into its corporate banking network.
Commerzbank may be Germany’s second biggest lender behind Deutsche, but it is unrivalled as a lender to the Mittelstand, the thousands of mainly private small and medium-sized businesses that make up the country’s industrial heartland.
In recent times, the bank has wrapped its investment banking offering around those clients, offering the full suite of investment banking products to serve both their domestic and international needs through its corporate banking business, Mittelstand Bank (MSB) and Mittelstand Bank International (MSBI). In 2014, it sharpened this focus when it moved its M&A operation, inherited from the acquisition of Dresdner Kleinwort, from the UK to focus on German clients.
Now, the German lender wants to take its corporate finance business to the next level, applying the model that has served it so well with the Mittelstand to bigger blue-chip German corporates.
Roman Schmidt, Commerzbank’s former head of corporate finance, who is now in charge of the new enlarged APM unit, told GlobalCapital that the bank received a clear message from its big European multinational clients.
"We decided to take action after discovering that, despite having a market-leading corporate bank, we were below our expectations in the perception of some of our multinational clients in terms of our capability to provide them with investment banking products and industry advice," said Schmidt. "The model we developed for SMEs at the investment bank has been quite a success story and we are now applying a similar, industry-based approach to a broader range of clients.”
Schmidt’s new division aims to strengthen its investment banking position with the firm’s DAX, MDAX and European multinational clients. The new team within APM will also support their colleagues at MSBI with tailored investment banking and market expertise.
When announcing the creation of APM, Commerzbank said that the initiative would lead to around 30 job losses across corporate finance and CRM. Annette Messemer, who has repositioned the coverage of the CRM client base over the last three years, is helping with the integration of the bank’s corporates and markets relationship managers and advisers before taking on a new role.
While the creation of APM brings cost efficiencies, there is also a growth strategy that aims to capitalise on Commerzbank’s strengths. Schmidt now has oversight of eight newly-created industry coverage groups, each headed by a senior banker who will manage a team of dedicated industry experts.
Commerzbank sees it as a fresh approach that stems from the division's industry sector intelligence. For example, it has been leading ABS transactions in Europe for German carmakers for some time, and now it sees the potential to leverage that and capture more of its clients’ international business. What makes the strategy different from others is that this is not simply an IB initiative.
“We have good credentials in debt solutions," said Schmidt. "This, combined with the breadth and depth of our industry coverage sets us apart — we’re not following a traditional bank model where global sector teams chase big M&A mandates for the top five companies.”
“The difference is that we are rooted in our industry sector expertise and can provide our entire suite of products across the platform, from funding and capital market access, through to transaction banking and cash management — over the entire value creation chain of a larger corporate, including their own suppliers. We don’t draw a distinction between corporate and investment banking products when it comes to covering clients.”
Commerzbank is finalising the heads of the new sector groups and hopes to have them in place by April 1, by which time it aims to have fully-formed teams covering automotives, consumer and retail, healthcare and chemical, industrials, infrastructure and energy, and technology media and telecommunications. The industry teams will report to Michael Kilka, who runs the advisory business and who himself reports to Schmidt.
The bank has already appointed heads to some of the teams. Roberto Bortolotti was appointed head of financial institutions & public sector, and Torsten Mueller was made head of non-bank financial institutions. Christoph Thierolf has been confirmed head of M&A advisory, which also reports to Kilka.
The other business heads within APM, aside from Kilka, are Ulrich Hoeck, head of DCM bonds, Reinhard Haas, head of DCM loans, Jens Voss, head of equity capital markets, Chris Day, head of leveraged finance and Neil Aiken, who runs structured capital markets.
‘Focus’ remains the watchword across the industry, and Commerzbank will retain its focus on Germany, but the creation of APM also signalled an expansion of its European coverage effort. Schmidt’s corporate finance business has earned its stripes, proving to be a bright spot for the German lender’s corporate and markets business in the fourth quarter, with revenues rising by a third to €198m. That’s down to a strong showing in Germany — the bank’s reputation for innovation enabled it to build a strong niche in markets such as Schuldschein.
But beyond Germany, its business is also humming, with Commerzbank establishing an early lead in the UK bookrunner tables for euro deals. In recruiting the bankers who will run the sector teams, Schmidt said he will focus on getting the right person, regardless of where he or she is based. It’s a pick-and-mix approach that has served it well in recent times. For example, its international debt and equity syndicate teams are based in London, while its covered bond base is in Frankfurt, reflecting the needs of those businesses.
The creation of APM marks an important phase in the evolution of Commerzbank’s corporate finance ambitions. Having been laid low by the crisis, the bank is now on the front foot. But those seeking to draw parallels with its previous expansion phases will be disappointed. The firm has no intention of recreating the old Dresdner Kleinwort model and building a full-service global investment bank. Rather, this is an initiative aimed at serving existing clients across a broad spectrum of products. But in the post-crisis era, when having a differentiated offering is welcomed by clients and shareholders, Commerzbank now occupies an intriguing and sustainable position in the investment banking landscape.
In Germany, it already has a leading position serving the Mittelstand, a segment of the market that every big bank has tried down the years to capture. But its expansion is necessary as well as logical. Over the last three years, Germany has become a market of strategic focus for HSBC, BNP Paribas and Santander, who all have full-service corporate and investment banking strategies as they try to catch up to the likes of Deutsche Bank and JP Morgan. The integration of corporate and investment banking is a compelling theme in a capital-constrained era, when traditional lending models are being disrupted by a rise in capital markets funding and the emergence of new sources of liquidity.
An already competitive market for investment banking has just become more so — and not just from the number of banks looking to serve it. Germany may be an important market for investment banking, but it is nowhere near as significant as the UK in terms of fee pool. Commerzbank is looking beyond the classic primary products and its new corporate finance strategy is outward looking, not simply domestic. While it does not yet pose a threat to overthrow Deutsche as Germany’s biggest bank, its bigger rival may wish that it too had taken its medicine earlier, and that it possessed that now-prized virtue of smaller scale.