From ugly duckling to en vogue: Commerzbank lures suitors

Bloomberg

Commerzbank AG may not be your first pick if you’re looking to expand in European banking. Bailed out by the government in 2009, it’s still struggling to make money in
Germany’s notoriously cut-throat consumer market.
Yet the Frankfurt-based company, weighed down by bad shipping loans and in the process of cutting thousands of jobs, is suddenly attracting suitors from across Europe and beyond. UniCredit SpA and BNP Paribas SA are said to have been in touch with the German government to indicate interest in the lender. Cerberus Capital disclosed owning a 5 percent stake in July, making the U.S. buyout firm the second-biggest shareholder.
Their attention helped fuel a 55 percent gain in the stock this year, third-best among European lenders, and shows how, after years of restructuring and regulatory reform in the aftermath of the financial crisis, European lenders are beginning to consider acquisitions again to grow. Commerzbank is a potential target for firms including BNP, UniCredit as well as other lenders such as Nordea Bank AB.
“Commerzbank is a natural target because the bank needs synergies,” said Daniel Regli, an analyst at MainFirst who has a buy recommendation on Commerzbank. “At the same time, some optimism has returned to the banking sector, many banks are better capitalized and can expect better profits, and are therefore better situated to think about future acquisitions.”

Government’s Stake
Commerzbank would give a buyer greater access to small and medium sized companies, the backbone of Europe’s largest economy, while providing the opportunity to cut costs across the consumer businesses. Chief Executive Officer Martin Zielke has been seeking to boost profitability by slashing costs and refocusing the bank away from riskier trading to lending to companies and retail investors, businesses that would benefit once interest rates rise.
A spokesman for UniCredit said the company doesn’t comment on speculation. UniCredit announced a 2019 transformation plan last year based on organic growth, he said. Officials for Commerzbank, BNP and Nordea declined to comment. Nordea Bank Chairman Bjorn Wahlroos told reporters recently that he’s said no to “at least five” investment banks proposing a possible Commerzbank deal. “I’m not saying our conversations exclude these major reshaping things, but they just don’t seem to happen,” he said.
Commerzbank is still 15 percent owned by the government, which rescued it after the lender acquired Dresdner Bank AG at the height of the financial crisis. Berlin has said it eventually wants to sell its stake if it gets a good price. The German finance ministry reiterated on Thursday it hasn’t changed its position, but there are currently
“no negotiations” about a sale of Commerzbank.
“We are not under time pressure,” the finance ministry said. “We want to achieve a good economic result for the taxpayer.”
Commerzbank has about 1,000 branches across Germany and two online banks, Comdirect in Germany and mBank in Poland. Zielke wants to add a net two million clients between 2016 and the end of 2020.
The bank has more than 60,000 corporate clients, multinationals, financial service providers and institutional clients, and finances about 30 percent of Germany’s foreign trade.
But the ambitious plan has been hampered by continued low interest rates in Europe and a highly fragmented retail market in Germany, which is dominated by a
network of local savings banks.

The country has about 36 bank branches per 100,000 inhabitants, compared with 27 in the U.S. and just eight in Japan, according to Bain & Co. Large deposit holdings have increased the pain of negative interest rates.
“The German market continues to be very difficult in comparison to many European countries,” said Dirk Vater, head of EMEA banking at the consultant. “Margins are thin thanks to strong competition, fragmentation and very price sensitive retail clients.”
Deutsche Bank Talks
That makes a merger attractive to buyers with an existing presence in the German market, such as UniCredit, which acquired HypoVereinsbank in 2005, or Deutsche Bank AG, Germany’s largest lender. Commerzbank and Deutsche Bank held discussions last year about a possible merger, before Commerzbank announced its new strategy. After the talks broke down, John Cryan, Deutsche Bank’s CEO, called for consolidation in Europe to help the region’s banks compete.
The renewed interest in Commerzbank has been catalyzed by the investment of Stephen Feinberg’s Cerberus Capital, which already controls Austrian lender Bawag PSK Bank. Private equity firms such as Cerberus pool money from investors to buy companies, using additional debt to finance the transactions, in the hope of selling them for a profit later.
UniCredit executives have held discussions with German officials about a potential combination with Commerzbank once the lenders’ restructuring is complete, according to a person with knowledge of the talks. The German government would prefer a tie-up with France’s BNP Paribas SA, WirtschaftsWoche reported, citing unidentified insiders.
“UniCredit and Commerzbank have large restructuring plans underway, to be completed in 2019 and 2020 respectively,” Tom Kinmonth, a strategist at ABN Amro wrote in a note. “Either way, the interest and the turnaround in the German lender has brought great performance this year.”