Commerzbank and Deutsche Bank have reported strong capital ratios and stable revenues for the 2016 financial year but the focus for 2017 will be on reorganising their operations and reducing costs which will see a continuation of headcount reduction in their equity derivatives and structured products businesses.
Commerzbank has reported an operating profit of €1.4bn and improved capital ratio with full application of Basel 3 up at 12.3% as of end of 2016 (end of 2015: 12.0%), exceeding all regulatory requirements. Commerzbank is still considering its options in relation to the offloading of its Equity Markets & Commodities' (EMC) structured financial and investment products business but, as part of its restructuring efforts to cut €1.1bn from its cost base and improve profitability, approximately 10,000 employees are expected to leave in 2017.
A Commerzbank spokesperson declined to comment on the appointment of Rothschild to advise on the sale or initial public offer (IPO) of its EMC business, but pointed to comments made by the bank's chief financial officer, Stephan Engels, during the conference call on Thursday about the bank's results in which he stated that both a trade sale and an IPO are the two strategic options the bank is considering.
Commerzbank decided to separate the ECM business, stop its exotic structured rates business and scaled back its flow credit and bond trading in Fixed Income & Currencies (FIC) because of their complexity and capital requirements under Basel regulations. "We believe that there might be more appropriate owners than a bank for this kind of business," said Engels. "We will take the necessary steps this year to separate the business operational and technical and apply for the licences and then, going to market in the medium term." A Rothschild spokesperson also declined to comment.
"There's nothing new in this topic," said the spokesperson. "We continue working on the legal separation of the market making and issuance of financial products such as structured certificates and exchange-traded products (ETPs) within the EMC division which includes Primegate, our multi-issuer platform. We are in the process of getting the respective licenses to provide financial services on a stand-alone basis."
The ECM business comprises over 300 staffers between Frankfurt and London, with the headcount expected to increase after the separation as the new stand-alone business will include back-office staff. SRP data shows that Commerzbank was the most active issuer of retail structured products in Europe in 2016 with over 224,600 products marketed worth €1.68bn with Germany/Austria and France driving most of the activity. Investment and leverage certificates were the most utilised vehicle to bring products to market followed by warrants and structured notes.
The bank reported a fall in operating profit to €1.3bn (2015: €1.9bn) 'due mainly to challenging market conditions and the continued negative interest environment', which had an adverse impact on net interest income. Revenues before loan loss provisions also fell year-on-year to €9.3bn (2015: €9.7bn). The bank also reported a decrease in operating expenses to €7.1bn despite the charges arising from the new Polish banking tax and the European Bank Levy (2015: €7.1bn). The bank's pre-tax profit, taking into account the impairment on goodwill and other intangible assets of €627m in the third quarter and restructuring costs of €129m, came in at €643m for 2016. So after deduction of taxes of €261m and minority interests of €103m, Commerzbank posted a net profit of €279m for 2016 (2015: €1bn).
Martin Zielke, chairman of the board of managing directors of Commerzbank, said that the bank achieved a solid profit and improved its capital ratio in 2016. 'However, we cannot yet be satisfied with the quality of our earnings and that's why we will put every effort into the implementation of our strategy,' said Zielke, in a statement. 'We have now given ourselves the room for manoeuvre needed for this and can proceed with the transformation as planned. We want to make Commerzbank the most competitive bank in Germany by 2020. We will now work to achieve, step by step, the targets we have set ourselves.'
Deutsche Bank on its part reported that its capital ratio at the end of 2016 was the strongest for twelve quarters. Global Markets (GM) net revenues were €1.5bn in the fourth quarter 2016, a 3% decline from the prior year period. Debt sales & trading revenues increased driven by the strong performance of the bank's credit businesses. Equity sales & trading revenues were below last year's quarter, driven by lower client activity and lower client balances, partly offset by higher derivatives revenues. GM revenues were negatively impacted by Deutsche Bank-specific factors. Negative news flow around the US DoJ RMBS settlement in October 2016 impacted client balances, trading activity and funding costs. GM revenues in the full year 2016 were €9.3bn, a 14% decline versus 2015.
Deutsche Bank launched at the beginning of Q4 2016 a $50bn business to house its hedge fund, risk premia and retail structured products within a new global investment solutions (GIS) division in a move designed to bring together all the different businesses which produce customised products. The new unit is headed by Tarun Nagpal, formerly head of alternatives and fund solutions at the German bank, according to a London-based spokesperson for the German bank. Nagpal reports to Thomas Patrick, global head of equities. SRP data shows that Deutsche Bank was the fourth most active issuer of structured products in 2016 in Europe with over 174,000 products sold across markets and €4.2bn in sales. The German bank sold most of its products in Germany/Austria, Belgium and Italy and delivered them mostly in the form of leverage and investment certificates as well as warrants and structured notes.
Corporate & Investment Banking (CIB) revenues in the fourth quarter 2016 were €1.8bn, a 2% increase from the prior year period. The bank reported that revenues in the full year 2016 declined 7% to €7.5bn. Within Corporate Finance, Advisory and Equity Origination significantly improved in the second half of 2016, while Transaction Banking revenues continue to suffer from low interest rate environment in Europe, depressed trade volumes and internal strategic perimeter decisions. Deutsche Asset Management (Deutsche AM) net revenues in the fourth quarter 2016 of €712m declined 4% from the prior year period as an increase in performance and transaction fees was more than offset by negative fair value of guaranteed products and reduced management fees. The decline was attributable to lower management fees following negative market movements and asset outflows in active and passive and negative fair value guaranteed products.
Deutsche's chief executive John Cryan said the bank's results for the year 2016 'were heavily impacted by decisive management action taken to improve and modernise the bank, as well as by market turbulence'. 'We proved our resilience in a particularly tough year,' he said. 'We are optimistic after a promising start to this year."
However, the bank is eliminating over 50 equities roles in the US, including co-head of cash equities trading for the US, BJ Arnold, and global head of program trading, Mark Bamber. In Asia Pacific, the reorganisation has seen the head of equity flow and exotic derivatives trading for Asia Pacific, Stephane Avis, and the head of equity derivatives sales for the region, Vishal Mirpuri, parting ways with the bank. In addition, Martin Fothergill, global head of hedge funds at Deutsche Asset & Wealth Management, in London, has also left the German bank. A Deutsche Bank spokesperson declined to comment on the departures.
Click in the links to read Deutsche Bank and Commerzbank 2016 results.
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