BrazilBCG evaluates Commerzbank strategy for German Government
A report to Germany’s top politicians has called for Commerzbank to step up its digital transformation. The German Government is Commerzbank’s largest shareholder by far, owning a stake of 15%, and had recently hired Boston Consulting Group to review the business model of Commerzbank.
Commerzbank focuses on retail banking and lending to mid-sized German companies, and is highly dependent on net interest income. In recent times, it has been hit hard by the European Central Bank’s (ECB) policy of ultra-low interest rates. With previous efforts to win more clients to compensate for this having failed to deliver the increased revenue and profit the lender hoped for, the organisation has been facing a stringent restructuring for some time.
In late 2019, the ECB even reportedly urged Commerzbank to speed up its restructuring efforts, as the financial regulator expressed concern about lacklustre profitability and a bloated cost base at Germany’s second-largest listed lender. According to the Financial Times, which published the comments in February 2020, the ECB took issue with the lender’s 4% return medium-term goal for equity. The target, which Commerzbank aimed to meet by 2023, was well below the lender’s cost of capital of about 10%. The ECB was not the only organisation to take exception to this, either.
People familiar with the matter also told Bloomberg News that several large shareholders and regulators including Cerberus Capital Management privately dismissed Commerzbank’s new profitability target as too low shortly after Chief Executive Officer Martin Zielke presented the new strategy. The German Government – which holds 15% of Commerzbank’s shares – was among the investors expressing dissatisfaction, according to that particular report.
As a result, the German Government called on global strategic consulting firm Boston Consulting Group (BCG) to advise on its Commerzbank investment – and the resulting report has since piled pressure on Zielke to take more drastic action to turn around the lender’s operations.
While BCG’s report was only delivered to top officials and has not been made public, sources speaking to Bloomberg said that the damning study criticised the firm’s medium-term profit targets as too low, and recommended Commerzbank should double or even tripling cost-cut targets, while moving quickly to a digital strategy.
At present, Commerzbank already states it is ‘accelerating’ its move digital into digital banking, having previously failed to achieve initial turnaround targets for digitalisation set by Zielke in 2016. However, the campaign of cuts lobbied for by the report is at odds with Zielke’s current plans, with the embattled CEO insisting the bank should maintain 800 of its approximate 1,000 branches in order to achieve growth in Germany’s competitive retail market, despite extremely thin margins.
Officially, BCG will now share its findings with Germany’s Finance Agency, which oversees the government’s Commerzbank stake. The Finance Agency will then share the report with the Finance Ministry, before officials discuss the results with Commerzbank’s leadership.
