Commerzbank branch in Frankfurt
For all its flawed credit decisions and weak equity analysts, there is reason to be positive about Commerzbank © REUTERS

Germany’s second-biggest listed bank has rarely seemed more deserving of its nickname. Commerzbank, or Comedy Bank as many in the City of London have long referred to it, might not be a barrel of laughs for management, or for beleaguered investors whose shares are now worth barely a fifth of their net asset value.

But there was a certain gallows humour in news early this month that accident-prone Commerzbank had been among the biggest losers from lending to the defunct corporate fraud Wirecard, taking a €175m charge in its second-quarter accounts (more than the cost of coronavirus), a few weeks after the bank’s chairman and chief executive had abruptly resigned.

Commerzbank defends its credit record, pointing to an aggregate of less than 1 per cent non-performing loans. But the €180m loan to Wirecard, equivalent to 3 per cent of the bank’s market capitalisation, was an alarmingly bold punt all the same.

Like much of the German establishment, Commerzbank had been an ardent supporter of the once booming fintech for some time. In February 2019, the day after the Financial Times published a damning early-warning article about alleged fraud at Wirecard, a Commerzbank tech analyst called Heike Pauls published a gushing defence of Wirecard, accusing the FT of “fake news” and making personal allegations against the lead reporter on the article.

The bank, which insists that robust “Chinese walls” bar analysts from being influenced by lending exposures, could not explain Ms Pauls’ knee-jerk note, but withdrew it a day later. She remains in her job, and maintained a bullish stance on Wirecard right up to its collapse in June.

And yet, for all its flawed credit decisions and weak equity analysts, there is reason to be positive about Commerzbank. Veteran German banks analyst Stuart Graham at Autonomous said the opportunity for new management is “very interesting”, if only because “it is hard to think there is anyone left to be disappointed”.

One key plus: Commerzbank has a big active investor, US hedge fund Cerberus, that is so frustrated with progress — and the paper losses on its 5 per cent stake — that it is pushing ever more aggressively for change. It tried and failed to engineer a merger with Deutsche Bank, in which it is also a leading shareholder. And the twin departure of Commerzbank’s chairman and chief executive, authors of an uninspiring turnround plan, came after growing pressure from the investor. The German government, Commerzbank’s biggest shareholder, appears to have been galvanised too, parachuting in new representatives to the supervisory board and telling prospective candidates for the chairman’s job that it would not stand in the way of a transformative cross-border deal, as it had in the past.

Contrast this mood of dynamism with one of Commerzbank’s French peers. Société Générale, France’s number three lender, has also been put through the wringer of late. Its second-quarter results were worse than Commerzbank’s — a €1.3bn net loss versus the German bank’s €220m net profit.

For SocGen’s shareholders this should be a wake-up call. SocGen has fundamentally more lucrative franchises, with a home market that is structurally more profitable, than Commerzbank’s. It is also a far bigger bank. Yet its price-to-book ratio is now identical, at about 20 per cent.

Granted, chief executive Frédéric Oudéa promised decisive action to shake up the equity derivatives business which was blamed for bad mis-steps in the first half of the year. He also rejigged management, ditching two of his four deputies.

But there seems little pressure from the board or from shareholders to go further. Mr Oudéa’s own position, 12 years after he took over as chief executive, seems as entrenched as ever despite the 75 per cent decline in the share price on his watch.

Both banks are theoretically vulnerable to takeover, if sufficiently strong-stomached buyers exist. Failing that, and if policymakers and investors apply enough pressure, a SocGen-Commerzbank combination might make some sense — it would certainly signal that everyone is serious about a single European market for banks, and throw up ample opportunity for further cost-cutting, something Europe’s relatively small, but horribly bloated banks desperately need. Maybe for good measure, throw in Italy’s UniCredit, which plunged to a €2.3bn first-half loss and has made little secret of its interest in deals with both SocGen and Commerzbank.

If Cerberus’s appetite for risk is unspoilt by its German adventures, and it fancies doubling-down on European banks, it could do worse than buy into SocGen and UniCredit and start agitating there.

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