This morning, Commerzbank, based in Frankfurt, Germany, released earnings, showing a loss of 809 million euros, which was better than expected. Shares are rallying in European trading as a result. However, the big news was the draconian solution the bank has taken to eliminate its dividend and halt all bonuses to preserve cash and increase capital — an example I expect to set the gold standard for beleaguered banks going forward.
Chief Financial Officer Eric Strutz said the bank, which is integrating newly acquired Dresdner Bank, “had a good start in January,” driven by net interest income and trading profit. The company, which isn’t paying bonuses for 2008 after it was forced to seek 18.2 billion euros in capital from the German government amid the credit crunch, expects a “very difficult year.”
“This year will be very challenging because of the integration of Dresdner and the economic slowdown,” said Manfred Jakob, a Frankfurt-based analyst at SEB AG. “Commerzbank couldn’t dodge the financial crisis.”
Commerzbank, which has declined 89 percent since the start of 2008, gained 12.5 cents, or 4.4 percent, to 2.95 euros as of 9:25 a.m. in Frankfurt, valuing the company at 2.6 billion euros. The 64-member Bloomberg Europe Banks and Financial Services Index has dropped 73 percent since the start of last year.
The integration of Dresdner Bank is proceeding “according to plan,” Strutz said. Commerzbank won’t pay bonuses to employees or management board members for 2008, he confirmed.
Commerzbank reported writedowns of 334 million euros on asset-backed securities in the quarter, the bank said in a presentation on its Web site. The world’s largest financial- services companies have racked up more than $1 trillion of losses and writedowns on credit-related assets in the worst financial crisis since the Great Depression, according to Bloomberg data.
Commerzbank also said it won’t pay a dividend for 2008 after paying 1 euro a share for the previous year.
Loan-loss provisions in the quarter jumped to 638 million euros from 61 million euros a year earlier. Commerzbank expects provisions to rise by 10 percent to 20 percent this year, Strutz said on a conference call today.
The company had a trading loss of 701 million euros, including a loss of 271 million euros on credit derivatives. It recorded a 303 million-euro writedown related to $2 billion of U.S. municipal bonds, Strutz said.
The new Commerzbank, merged with Dresdner bank, is looking to become Germany’s ‘retail’ bank, leaving Deutsche Bank as the prominent wholesale bank. Their focus will be on retail depositors and Germany’s famous Mittelstand medium-sized business. Dresdner had cultivated an image as ‘Beraterbank’ (fund manager or consulting bank). However, the merger has seen a wholesale closure of most of Dresdner’s investment banking division which focuses on those activities.
I should note that the word on the street in Germany is that the integration of Dresdner Bank is not going as well as the Commerz CEO believes. Commerzbank and Dresdner Bank are two of three well-known ‘national’ bank brands in Germany, Deutsche Bank being the third. Therefore, there is significant brand loyalty amongst retail customers and employees at each institution. My understanding is that retail branch employees are in an uproar over the merger integration, some threatening to quit.
But this should not detract from the importance of the Commerzbnk announcement. I see the elimination of the dividend and all bonuses as very big news because it will force other institutions to meet this standard or explain why they have not.
To date, bank CEOs have suggested that banks must pay bonuses to employees because failure to pay star performers meant a risk these stars would walk away. This was one argument used by former Merrill Lynch head John Thain after he infamously moved up Merrill bonuses to before the Bank of America merger completed. With Commerzbank’s announcement, such claims will assuredly come under greater scrutiny going forward.
Commerzbank Loss Narrower Than Expected, Has Good Start to 2009 – Bloomberg.com