No one gets a bonus at Commerzbank and no dividend either

This morning, Commerzbank, based in Frankfurt, Germany, released earnings, showing a loss of 809 million euros, which was better than expected. Shares are rallying in European trading as a result.  However, the big news was the draconian solution the bank has taken to eliminate its dividend and halt all bonuses to preserve cash and increase capital — an example I expect to set the gold standard for beleaguered banks going forward.

Chief Financial Officer Eric Strutz said the bank, which is integrating newly acquired Dresdner Bank, “had a good start in January,” driven by net interest income and trading profit. The company, which isn’t paying bonuses for 2008 after it was forced to seek 18.2 billion euros in capital from the German government amid the credit crunch, expects a “very difficult year.”

“This year will be very challenging because of the integration of Dresdner and the economic slowdown,” said Manfred Jakob, a Frankfurt-based analyst at SEB AG. “Commerzbank couldn’t dodge the financial crisis.”

Commerzbank, which has declined 89 percent since the start of 2008, gained 12.5 cents, or 4.4 percent, to 2.95 euros as of 9:25 a.m. in Frankfurt, valuing the company at 2.6 billion euros. The 64-member Bloomberg Europe Banks and Financial Services Index has dropped 73 percent since the start of last year.

The integration of Dresdner Bank is proceeding “according to plan,” Strutz said. Commerzbank won’t pay bonuses to employees or management board members for 2008, he confirmed.

More Writedowns

Commerzbank reported writedowns of 334 million euros on asset-backed securities in the quarter, the bank said in a presentation on its Web site. The world’s largest financial- services companies have racked up more than $1 trillion of losses and writedowns on credit-related assets in the worst financial crisis since the Great Depression, according to Bloomberg data.

Commerzbank also said it won’t pay a dividend for 2008 after paying 1 euro a share for the previous year.

Loan-loss provisions in the quarter jumped to 638 million euros from 61 million euros a year earlier. Commerzbank expects provisions to rise by 10 percent to 20 percent this year, Strutz said on a conference call today.

The company had a trading loss of 701 million euros, including a loss of 271 million euros on credit derivatives. It recorded a 303 million-euro writedown related to $2 billion of U.S. municipal bonds, Strutz said.

The new Commerzbank, merged with Dresdner bank, is looking to become Germany’s ‘retail’ bank, leaving Deutsche Bank as the prominent wholesale bank. Their focus will be on retail depositors and Germany’s famous Mittelstand medium-sized business. Dresdner had cultivated an image as ‘Beraterbank’ (fund manager or consulting bank). However, the merger has seen a wholesale closure of most of Dresdner’s investment banking division which focuses on those activities.

I should note that the word on the street in Germany is that the integration of Dresdner Bank is not going as well as the Commerz CEO believes. Commerzbank and Dresdner Bank are two of three well-known ‘national’ bank brands in Germany, Deutsche Bank being the third. Therefore, there is significant brand loyalty amongst retail customers and employees at each institution. My understanding is that retail branch employees are in an uproar over the merger integration, some threatening to quit.

But this should not detract from the importance of the Commerzbnk announcement. I see the elimination of the dividend and all bonuses as very big news because it will force other institutions to meet this standard or explain why they have not.

To date, bank CEOs have suggested that banks must pay bonuses to employees because failure to pay star performers meant a risk these stars would walk away. This was one argument used by former Merrill Lynch head John Thain after he infamously moved up Merrill bonuses to before the Bank of America merger completed. With Commerzbank’s announcement, such claims will assuredly come under greater scrutiny going forward.

Commerzbank Loss Narrower Than Expected, Has Good Start to 2009 –

  1. Emma says

    Good morning Edward. I have a question for you, forgive me for the length of it, I want to be sure I explain properly.

    Every time an attempt is made to “buy the toxic assets” from these banks, it seems that something is discovered or happens that makes officials realize it’s not possible. This seems to have happened a few times now and every time it does, there’s no real explanation and it makes me wonder what is really going on. Now let me back up a bit…

    I used to work as a derivatives trader for a pension fund, we traded index futures, options and swaps as a cheap way of gaining exposure to international market indexes to meet our asset allocation requirements. From an accounting point of view (as an example) the futures we held on the S&P would be worth, say $1 million but would provide notional exposure to the S&P of $10 million dollars, so to make averything properly reflected on the books from a risk perspective, we actually held $9 million in cash to cover the notional exposure of the futures. So, the “asset” would be a total of $10 million, made up of futures and cash.

    Now the futures themselves DO represent $10 million in exposure but the futures themselves ARE NOT a $10 million dollar asset. Derivatives are not so much assets themselves but DERIVED from assets.

    Now, if we had wanted to, we could have just shown the futures as worth $10 million with no cash to back it up using some accounting tricks, correct? So, my question, if these “toxic assets” people are talking about are the swap derivatives (CDS), is it possible that what they keep discovering is that they listed these things as assets with the full notional amount without backing that up with real assets like cash? Did they use accounting shenanigans to do this? Is it possible to figure that out by looking at the financial statements? Or am I simply barking up the wrong tree here?

    I hope I’m barking up the wrong tree because if this IS what is going on, then all of these banks are insolvent and using accounting tricks to stay afloat. That’s pretty frackin’ scary…

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