Bloomberg News

Commerzbank Investors Vent Anger at CEO After Worst Performance

April 18, 2013

Shareholders of Commerzbank AG (CBK), Germany’s second-biggest bank, may be the most furious in Europe after the stock tumbled more than any other bank outside crisis- hit Ireland and Greece.

Investors are planning to protest against the way Chief Executive Officer Martin Blessing is running the firm at an annual general meeting in Frankfurt today after the share plunged 20 percent in the last six weeks, extending a slump since 2008 to 93 percent. Behind the latest price decline was Blessing’s announcement of a 2.5 billion-euro ($3.3 billion) capital increase last month, the fifth in four years, that threatens to dilute shareholders’ investments further.

“The orgy of capital increases is destroying shareholder wealth and the management is not at all credible anymore after all the U-turns of the past,” Klaus Nieding, vice president of DSW, a proxy voting agent representing the interests of smaller shareholders of German firms, said by phone from Frankfurt. “I am even more critical of the management than I was.”

Commerzbank, which grants more loans to Germany’s mid-sized companies than any other lender, got an 18.2 billion-euro government bailout four years ago as investments in property and shipping turned sour after the collapse of Lehman Brothers Holdings Inc. in September 2008.

Germany’s economy, in contrast, is perceived by investors as a safe haven. Yields on benchmark 10-year bonds have fallen to record lows and economic growth is among the highest in the euro-area.

Record Low

Commerzbank shares rose 1 percent to 1.17 euros yesterday, valuing the firm at 6.8 billion euros. They hit a record low of 1.11 euros last month. In June 2007 they set a record high of 30.6 euros.

Since the financial crisis erupted losses for the stock are almost double the 48 percent decline of the benchmark Bloomberg 500 European Bank Index. (BEBANKS) Royal Bank of Scotland Group Plc, rescued by the U.K. government, fell 88 percent in the period. Spain’s Bankia, which got a record European bailout, dropped 92 percent since its July 2011 initial public offering.

Blessing, 49, is asking shareholders to approve the capital increase today partly to pay Chancellor Angela Merkel’s government a remaining 1.6 billion euros from the bailout. The government will take part, lowering its stake to below 20 percent from 25 percent, Commerzbank said when it announced the plan on March 13.

Shareholders will be asked to approve a reverse share split that will reduce the number of shares to 583 million from 5.83 billion. Deutsche Bank AG, Citigroup Inc. (C:US) and HSBC Holdings Plc (HSBA) have agreed to underwrite the capital increase and to buy shares at a minimum 1.1 euros apiece should Commerzbank fail to sell the whole amount planned.

Trust Issue

Existing shares will probably be diluted by about 60 percent, Dirk Becker, an analyst with Frankfurt-based broker Kepler Capital Markets, who recommends investors sell Commerzbank stock, said by telephone.

“Shareholders just cannot be satisfied with the management,” Robert Greil, an analyst at fund management company Merck Finck & Co. in Munich, said by phone. “The capital increase is weighing on the share price and the earliest the bank may pay a dividend will likely be in 2015.”

Investors are growing increasingly distrustful of Frankfurt-based Commerzbank’s board after it failed to live up to pledges made since the 2009 government rescue, Nieding said.

In May 2009, and with the bailout secured, Blessing sought to attract investors to the company by announcing “Roadmap 2012,” a plan to turn Commerzbank into a profit-making business and increase shareholder returns. Among the targets was an operating profit of 4 billion euros by 2012 and an after-tax return on equity of 12 percent.

Operating profit was 1.2 billion euros last year. After-tax return on equity was zero.

New Strategy

Facing heckling from disgruntled shareholders at an annual general meeting last May, Blessing said he would create a special unit to merge profitable commercial real estate businesses in Germany, U.K., France and Poland with loss-making ship financing units in an effort to restructure the enterprises. A month later he decided to close them all down.

In November, Blessing announced a new strategy. He said Commerzbank will boost after-tax return on equity to more than 10 percent by 2016 by cutting costs, laying off staff and investing 2 billion euros in consumer and corporate banking.

“There was a roadmap 2012, now we have a roadmap 2016, where does this end?” Nieding said. “There are constantly new targets, which then are not met.”

Blaming Crisis

Commerzbank has blamed its failure to achieve the profit goals laid down in 2009 on the financial crisis. The 2012 targets, it said, were conditional on markets remaining stable.

Risk-aversion among retail clients and writedowns due to a crisis in shipping were also to blame, Commerzbank spokesman Nils Happich said in an e-mailed response to questions yesterday.

The German economy has rebounded in the past three years. After shrinking 5.1 percent in 2009, the deepest contraction since World War Two, it grew 4.1 percent in 2010, 3.1 percent in 2011 and 0.9 percent last year.

“If Commerzbank had been in Spain, the bank probably would have ended up like Bankia with people taking their money out over a weekend,” Becker said.

Bankia, which took about 18 billion euros in bailout aid, posted a record 21.2 billion-euro loss last year as it cleansed soured assets. A 15.5 billion-euro re-capitalization approved last month has almost wiped out existing shareholders.

‘Worst Decision’

Investors pushed yields on German Bunds to a record low of 1.21 percent earlier this month from 4.5 percent in July 2008, two months before Lehman Brothers collapsed. They’re demanding an annual return of 6.42 percent to buy the 10-year debt of Commerzbank.

Commerzbank became Europe’s biggest real estate lender and public financier after buying Eurohypo in 2005 for an estimated 5.9 billion euros. Blessing is winding down the unit, which made a loss of 3.5 billion euros in 2011. The debt crisis also forced Commerzbank to book 2.2 billion euros of writedowns on its Greek debt holdings.

“That was the worst decision ever, with that massively overpriced acquisition of Eurohypo, the bank laid the ground for the mess they are in now,” said Martin Wirth, the founder of fund manager Frankfurt Performance Management, who holds Commerzbank shares and helps to manage 500 million euros of equities. It was former CEO Klaus-Peter Mueller, currently the supervisory board chairman, “who pushed it, but Blessing was already on the board,” Wirth said.

Profit Center

Commerzbank was founded in Hamburg in 1870, the same year that Deutsche Bank AG, continental Europe’s biggest bank by assets, was established. The bank was privatized during the financial crisis of the 1930s, according to its website. By 2008, Commerzbank had grown its consumer banking network to 1,646 branches from 108 in the 1950s. At the end 2012, it had about 1,200 branches and more than 15 million clients.

The bank’s main source of profit is the Mittelstandsbank, a business specializing in lending to Germany’s small and medium- sized businesses. The unit’s operating profit of 1.65 billion euros last year meant Commerzbank posted an operating profit of 1.2 billion euros rather than a loss. The operating profit at its consumer banking unit slumped 48 percent to 245 million euros compared with a goal set in 2009 of 1 billion euros.

Credit Rating

In February, concerns about Commerzbank’s business model prompted Standard & Poor’s to place its credit rating of A on review for a possible downgrade. Commerzbank’s debt is rated A3 at Moody’s, which cut it one level last June, warning of the impact of the European debt crisis on the firm’s operations.

Blessing and the rest of his board earned a total of 12.9 million euros in 2012, more than double Commerzbank’s 6 million euro profit for the year. Blessing joined Commerzbank in 2001. He was formerly CEO of Advance Bank AG of Munich, which was shut down by owners Allianz in 2003. He gained an MBA at the University of Chicago in 1988.

“I do not care what bank managers are paid really, what I want to see is that they are personally liable for damages they are responsible for,” Wirth said. “They would have never been able to shoulder the losses they incurred.”

To contact the reporter on this story: Annette Weisbach in Frankfurt at aweisbach1@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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