(Bloomberg) -- Andrea Orcel suggested Commerzbank AG could be a lot more successful if it was remade to look more like UniCredit SpA’s business in Germany. That could spell pain for staff and higher returns for shareholders.
Since acquiring HVB in 2005, UniCredit has shrunk headcount by more than half, eliminated branches and moved some businesses to other countries where it operates. The result is a bank that generates about twice as much revenue per employee as Commerzbank and deploys capital more effectively.
“Commerzbank is what HVB used to be in Germany and therefore we have a blueprint of what we can do, excluding any merger,” Orcel said on Wednesday in London.
UniCredit Chief Executive Officer Orcel, who advised on the HVB deal as investment banker at Merrill Lynch & Co. almost two decades ago, is betting Commerzbank can be nudged to replicate much of that success. Going a step further and actually combining it with the lender still known locally as Hypovereinsbank would allow deeper savings and create the biggest bank by revenue in the country.
Yet his move to become Commerzbank’s largest shareholder has irked German politicians concerned about funding for the many small and mid-sized companies that form the backbone of Europe’s largest economy. Labor officials also criticize UniCredit’s overhaul of HVB as too aggressive.
“We do not need Italians to come in and wind up traditional German banks,” Stefan Wittmann, a labor union official who sits on Commerzbank’s board of directors, said earlier this month, calling the development at HVB a “disaster.”
After the 2005 takeover, HVB transferred several cash cow businesses in Austria and eastern European countries to its new parent. The same fate could await Commerzbank, which notably operates a successful bank in Poland, if a deal were to occur.
In the roughly two decades that UniCredit has owned HVB, headcount has declined by more than half, to 9,689 at the end of June, company filings show. While much of that occurred before Orcel took the helm at UniCredit in early 2021, he oversaw another 20% drop in the number of full-time employees at the division.
Branch offices declined at a similar rate since the takeover, with HVB much quicker than competitors in reacting to the rise of online banking. Defending the move in 2014, then HVB head Theodor Weimer said he wanted to take an approach similar to that of Apple Inc.’s flagship stores.
Commerzbank, by contrast, long maintained that an extensive network of brick and mortar branches was a key pillar of its strategy. Outgoing CEO Manfred Knof made deeper cuts after taking over in 2021 and poured money into digital services. Under his tenure, headcount at the company has fallen 12% while staffing in its home market has declined 16%, filings show.
That, coupled with support from higher interest rates, helped fuel record profit last year. By the first half of this year, costs had declined to about 59% of revenue, from 82% in 2020. Yet Commerzbank still trails UniCredit’s German unit, where the efficiency ratio stood at 39%.
On Thursday, Commerzbank pledged to increase profitability and pay out more money to investors. Bettina Orlopp, who is taking over as CEO, said the bank is already on a “very, very good track” and that she will hold a first meeting with UniCredit on Friday.
“We will stay very open minded,” she said at an investor conference hosted by Bank of America Corp. in London. “Whatever we get on the table as options, improvement potential and stuff like that, combination considerations, we will thoroughly evaluate and see whether we can create value for our stakeholders.”
Orcel has said he could improve Commerzbank’s efficiency in a fairly short amount of time, pointing to the past three and a half years that he has been in charge of UniCredit and, by extension, HVB.
Labor representatives at Commerzbank have said they’re “bitterly determined” in their opposition to a takeover. Uwe Tschaege, the head of the Commerzbank’s works council and deputy chairman of the supervisory board, estimates that two-thirds of the employees could lose their jobs, and half of the bank’s customers could be lost.
Speaking this week at the Bank of America investor conference, Orcel said he appreciates that a company’s success rests on the support of its stakeholders and that relations with HVB’s works council are “very good.”
“The transformation and especially the speed of implementation is a great challenge,” said Florian Schwarz, chairman of the works council at HVB. “Yet we do appreciate the close and direct dialog with Andrea Orcel and the willingness to find a joint compromise.”
Politicians, meanwhile, are probably worried a foreign owner could be more focused on maximizing earnings and willing to drop business lines that aren’t sufficiently profitable, according to Martin Rauchenwald, a managing partner at consultancy Arthur D. Little who previously worked as an investment banker at UniCredit.
Figures from HVB don’t point to any major retrenchment in Germany since UniCredit took over and previous executives said low demand actually held back their lending ambitions. The overall loan book is at about the same level as in 2007 and its exposure to Germany has risen since 2015. Orcel said he views both Germany’s Mittelstand as well as larger companies as sources of growth.
UniCredit’s revenue in Germany last year was equivalent to almost 8% of its local risk-weighted assets, compared with 6% at Commerzbank, company filings show. That suggests that HVB employs its capital more efficiently.
Orcel has also highlighted the potential for growth by offering Commerzbank clients more services. He cited UniCredit’s rebuilding of “product factories” over the last four years to develop new services and boost fees from businesses such as advisory, capital markets, trade finance and payments as a way to lift revenue.
“We find that HVB, UniCredit’s German unit, has been a success story, despite being even smaller than Commerzbank,” analysts at KBW including Hugo Cruz wrote in a note earlier this month. UniCredit apparently “has a formula that works and so it could make sense to replicate it with another German bank.”
--With assistance from Arno Schütze.
©2024 Bloomberg L.P.
