(Bloomberg) -- After almost four years at the helm of Commerzbank AG, Manfred Knof has boosted profitability and persuaded the government the lender is ready for full private ownership.
Berlin’s decision earlier this week to draw a line under a crisis-era bailout now positions him to become the first chief executive officer in 15 years to run the bank without bureaucrats on his back. That is, if he can secure a second term.
Knof’s contract runs out at the end of next year and he is seeking an extension, though pay expectations may emerge as a sticking point, according to people familiar with the matter. There’s also the question whether deputy CEO Bettina Orlopp, who was passed over four years ago, will stick around if Knof is re-appointed.
The potential contract renewal for the CEO comes at a critical point for the German lender, which saw profit surge to a record last year. The stock has more than doubled under Knof, a former Deutsche Bank AG executive who has cut jobs, stepped up the bank’s digitalization and grown the business catering to large companies.
Yet much of the higher profitability comes from the sudden jump in interest rates, a tailwind that’s set to reverse. Commerzbank is also facing a slowing economy in its home market.
“The phase of strong profit momentum is over,” said Alexandra Annecke, a portfolio manager at Union Investment, which owns Commerzbank shares.
Germany on Tuesday announced plans to reduce its stake in the lender. The government doesn’t plan an immediate exit and instead seeks to sell roughly a fifth of its 16.5% stake initially, with more divestments likely later on, Bloomberg has reported.
Berlin has long played a role in many of Commerzbank’s most important decisions, including the appointment of the current chairman, Jens Weidmann. Its position as largest investor helped shore up confidence while Commerzbank was struggling with poor profitability, and it has been a bulwark for the firm when European rivals were mulling the possibility of a takeover in previous years.
Commerzbank welcomed the government’s divestment plan, and Knof has indicated before he could live without the state as shareholder. Yet the move is likely to test just how solid a foundation the CEO has built at the lender.
Knof, Weidmann and a spokesperson for Commerzbank declined to comment.
When Knof took over at the beginning of 2021, Commerzbank was in the throes of a deep crisis, saddled with a strategy widely seen as a failure that had prompted the sudden departures of the previous CEO and the chairman.
Knof ended Commerzbank’s fixation on brick-and-mortar retail branches and poured money into digital services instead. A strategy to pay out a rising share of Commerzbank’s profits indicates an effort to patch up relations with shareholders put off by a decade or so of falling shares and meager returns.
His turnaround received a sudden shot in the arm the following year when soaring inflation prompted the European Central Bank to set out on an unprecedented sequence of interest rate hikes that boosted profitability across the banking industry. Commerzbank’s net income roughly tripled in 2022 and rose by more than half in the subsequent year. That has allowed Knof to resume dividends and kick off share buybacks.
But the big driver of that success is set to fade, with the ECB likely to cut rates for a second time this year when it convenes for a monetary policy decision next week. Analysts on average expect Commerzbank’s net income to rise only about 2% this year.
Knof has responded by investing in fee-generating businesses such as private banking and asset management. But those steps are small and will take time before they start paying off.
For all of Commerzbank’s growth over the past few years, it’s still a middling European bank that’s almost entirely focused on just one economy, and that economy is facing tough times ahead.
“There’s been a deterioration in Germany’s economic outlook,” Bloomberg Intelligence analyst Philip Richards said in a note. That “will inevitably weigh on the prospects of Commerzbank’s domestic business.”
With Commerzbank’s profitability continuing to trail much of the competition, it’s no surprise the share price hasn’t really outperformed. The lender’s valuation, measured as price-to-book ratio, still makes it one of the cheapest stocks across European financials.
That relative weakness raises the odds that Commerzbank remains a potential takeover target. In addition to official talks with Deutsche Bank some five years ago, other lenders that have previously considered making a move include UniCredit SpA, BNP Paribas SA and ING Groep NV, Bloomberg has reported.
Still, the potential loss of its largest shareholder isn’t all bad for Commerzbank, or Knof. Germany has two representatives on the supervisory board. If the stake were to fall substantially, it’s likely the government would at some point give up at least one board seat, weakening its influence — and presumably leaving more decision-making power to Knof.
Germany has previously proved a prickly owner when it prevented a quick replacement of the chairman just a few months into Knof’s term. It has also curbed bonus increases and was a key driver behind the unsuccessful takeover talks with Deutsche Bank, a deal opposed by employee representatives at the time.
“More than a decade after Germany made its entry at Commerzbank, it now makes sense for the government to take its leave,” said Andreas Thomae, a portfolio manager at DekaBank. “The retreat of the state will make Commerzbank more valuable in the medium term.”
The coming weeks will decide if Knof can see that through as he lays out his vision for the bank to the supervisory board — and how much money he expects to make in return for staying.
Commerzbank’s strong performance gives him a good bargaining position, the people familiar with the matter said. It seems he previously proved adept at pay negotiations with Commerzbank when it poached him from Deutsche Bank.
Saying his appointment “was particularly important” given the lender’s difficult situation at the time, Commerzbank paid him €5.7 million in his first year including a generous one-off contribution to his pension plan. That made Knof the lender’s best-paid chief executive ever that year.
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