Societe Generale snaps up Commerzbank's EMC business

Societe Generale has reached an agreement to acquire Commerzbank's equity markets and commodities business (EMC). After completion, the French bank will be responsible for the management of income payments, early redemptions and maturities on Commerz's structured products book, which includes almost 400,000 live products across jurisdictions. In 2017 Commerzbank's EMC business generated €381m gross revenues.

The transaction includes Commerz's investment and flow products, and asset management operations worldwide, including associated market making, sales and structuring capabilities.

"This is part of our efforts to consolidate our leadership," said a source at the French bank. "It is a challenging move, because, when you're number one in terms of market share, it requires a very strong focus on service and innovation across very different markets in terms of regulation, product mix, and so on. We are very well positioned to continue developing our structured products business across jurisdictions and markets, but there are other areas such as rates and equity flow where we want to do more."

SG is seeking to replicate its French footprint and adapt its offering and presence "to be able to move to the next stage in which the business structure is not driven only by the products that sell in those markets", said the source.

Commerz's EMC is a leading European manufacturer, distributor and market maker of structured and flow products as well as asset management investments. The business also has a multi-issuer platform providing click and trade functionality to structured products issuance in Frankfurt, London, Hong Kong, Paris, Luxembourg and Zurich. The transaction excludes the German bank's cash equity brokerage and commodities hedging businesses.

Under the terms of the agreement Commerzbank will transfer EMC’s trading books and client franchise, staff, as well as parts of the IT infrastructure, while EMC front office employees and certain associated support function staff will move to Societe Generale, subject to approval by employee representative committees. The transfer of trading books and its associated balance sheet and revenue implications are estimated to take place gradually and to start at the end of 2018, said the German bank, adding that EMC revenues are expected to fade out in the profit and loss statement of Commerzbank during 2019. The reduction of expenses associated to Commerzbank’s EMC business is estimated to reduce the Bank’s cost base by at least €200m by year-end2020 and to contribute to the cost reduction target announced as part of the “Commerzbank 4.0” strategy in 2016.

Since the announcement of the strategy, more than €3bn of risk-weighted assets (RWA) has been released
due to the streamlining of the bank’s fixed income, currencies & commodities (FICC) business.

Commerzbank’s EMC business comprises the Bank’s manufacturing and market making of flow and
structured trading and investment products as well as its established exchange-traded funds (ETF) brand,
Comstage, and its associated leading ETF market making platform. The equity capital markets (ECM), the
equity brokerage (equity trading and equity sales /brokerage) businesses, and the hedging business for commodity risks will not be part of the transaction and will remain in Commerzbank’s corporate clients segment as part of its strategic client offering.

The acquisition is line with the French bank's strategy to expand its global banking and investor solutions activities and will strengthen SG's global leadership in derivatives and investment solutions across asset classes as well as contribute to Lyxor's development in Europe by boosting its ETF franchise and complementing its active management offering with a set-up and a product range well-suited to answer the needs of German institutional clients in particular.

SG and Commerz's EMC franchises are complementary and present an important potential of synergies, according to Séverin Cabannes, deputy chief executive officer at SG. 'This acquisition would further reinforce our global banking and investor solutions activities in line with our 2016-2020 strategic plan," said Cabannes. While complementing Lyxor's ETF franchise, the acquisition will be transformational for our activities in Germany, according to Cabannes. 'On integration, this transaction would bring numerous benefits to clients: the reach and geographical footprint, an extended cross-asset product set, the technology and expertise from two associated leading platforms,' said Cabannes.

The transaction is subject to pre-clearance with tax authorities, approval by further relevant authorities and the required steps towards social partners as well as the finalisation of legal documentation. SG anticipates receiving clearance in the second half of 2018. The transaction would include the transfer of EMC's trading books, client franchise as well as part of the IT infrastructure. The integration of activities and associated teams are expected to take place gradually from the end of 2018.

SG expects the transaction to have a positive impact on the group's return on tangible equity (ROTE), with a limited effect on the group's core equity tier one ratio.

Commerz was the fourth most active issuer of retail structured products in Europe in 2017, with over 175,000 products marketed worth over €4 billion, according to SRP data. Globally, the German bank has a 2% market share across €8.1 billion in sales.

SG issued over 116,900 products in 2017 with an estimated volume of €4.1 billion, and has issued almost one million structured products, of which 359,328 are still live: 345,000 in Germany, 342,890 in Austria, 6,277 in Sweden, 1,478 in France and 1,133 in Finland. SG is also a prominent issuer in Hong Kong (2,282 products), the US (323), Japan (44) and Singapore (22).

The French bank recently appointed Julien Lascar to head of global market sales for Europe (excluding France), reporting to Yann Garnier, head of sales for global markets, who has introduced a number of organisational changes to the global markets division.

A source at Commerzbank said that the announcement does not come as a surprise as everyone at the bank was aware of the ongoing process. “All we know is that the terms have been agreed by the two parties,” said the source. “We know very little about the details and figures as the negotiation was carried out by the board.”

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