Voting rights advisers criticize Commerzbank’s remuneration system

Frankfurt The Commerzbank is holding a virtual general meeting for the first time this year because of the corona crisis. But even without protests from small shareholders on site, there will be no shortage of critical topics at the event on May 13.

Added to this is the criticism of Commerzbank’s remuneration system. The influential voting rights advisor Glass Lewis and his German subsidiary Ivox recommend that shareholders reject the slightly modified remuneration system for members of the Management Board in March 2020. This emerges from the recommendations of both companies for the Annual General Meeting, which are available to the Handelsblatt.

“From our point of view, there is great potential for improvement in the company’s remuneration policy,” says the Glass Lewis study. The goals on which the variable remuneration of the Board of Directors depends are too vague and too focused on the bank’s performance in the past.

Anglo-Saxon investors in particular often follow the advice of proxy advisors such as Glass Lewis and ISS at general meetings. If the Commerzbank shareholders did not endorse the remuneration system, the Supervisory Board would have to deal with it again. Germany’s second largest private bank did not want to comment on this.

Criticism of the number of positions

In his study, Ivox also speaks out against the planned election of Jutta Dönges to the Commerzbank Supervisory Board. The co-boss of the finance agency is to be elected as the new representative of the federal government to the control committee in May – together with Frank Czichowski from the KfW development bank.

Dönges and Czichowski are to replace State Secretary Markus Kerber and Anja Mikus, who heads the State Fund for Nuclear Waste Management. After Commerzbank’s rescue from the crisis, the federal government still has a good 15 percent stake in the bank – and anything but satisfied with the development of the money house in recent years. In Berlin, some have hopes that Dönges and Czichowski can give new impetus to the supervisory board.

But at least Ivox has reservations about the Dönges personnel. There are no doubts about the manager’s qualifications, according to the study based on guidelines of the BVI fund association. “However, there are concerns about the number of mandates.”

Dönges is already a member of the supervisory bodies of the FMS Wertmanagement and the Deutsche Pfandbriefbank. In addition, there is her job as managing director of the finance agency, which Ivox rates as an “executive position” like two mandates.

According to this method of counting, your work on the Commerzbank Supervisory Board would be your fifth mandate. And that would be two more mandates than Ivox recommends for people in an “executive position”. “Therefore, this election should be viewed very critically,” said the voting rights advisor.

The finance agency did not want to comment on Ivox’s criticism. However, a spokeswoman pointed out that Dönges had resigned from the supervisory board of Eurex Clearing in order to avoid conflicts of interest.

In contrast to Ivox, the parent company Glass Lewis has no objection to the choice of Dönges. Other persons familiar with the personnel also consider the appointment to be sensible, after all the financial agency manages the federal government’s participation in Commerzbank and is in close contact with the institute anyway.

Dönges is also highly valued in Berlin because it closely monitored the Commerzbank strategy review. Some also believe that Dönges’ work at FMS Wertmanagement cannot be viewed as a full supervisory mandate.

More concrete goals for 2020

The core remuneration system for Commerzbank board members has existed for several years. In March it was slightly adjusted to take account of the new requirements of the second Shareholder Rights Directive (ARUG II) and the new version of the German Corporate Governance Code. The most important innovation is that a maximum remuneration for each member of the Board of Management of six million euros per fiscal year has now been fixed.

The variable remuneration of the Management Board depends 70 percent on the achievement of the Group’s goals and 30 percent on the development of the department for which the respective Management Board member is responsible. In addition, individual goals have an impact on the amount of bonus payments.

When calculating the variable remuneration for 2019, the development of the bank and the respective department in 2017, 2018 and 2019 is taken into account. Glass Lewis criticizes this approach as backward and advocates “forward-looking” goals. However, this would have the consequence that Commerzbank could not set the bonus payments for 2019 until 2021 – and that the actual payment to the Management Board would then be postponed even further.

Voting rights advisers also take a critical view of the fact that the expectations of the Management Board are not described clearly enough. The performance goals are “only presented in a descriptive manner, but not clearly disclosed,” complains Ivox. As a result, it is not understandable for shareholders whether the goals for the Management Board are ambitious enough, emphasizes Glass Lewis.

Strictly speaking, these comments do not refer to the remuneration system, but to the remuneration report, which the Annual General Meeting does not vote on this year. Nevertheless, there are employees within Commerzbank who find this criticism justified. According to financial circles, the goals for the Executive Board in the 2020 financial year have therefore already been formulated more specifically.

It is of course another matter whether there will be any significant bonus payments in view of the Corona crisis 2020. In addition, the payment of Commerzbank management is generally rather below average compared to other institutions. In the past year, the total remuneration of the Management Board amounted to EUR 12.1 million. At the neighbourhouse Deutsche Bank the executive committee received almost three times as much despite a loss of billions.

Assistance: Jakob Blume

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Disastrous economic data weigh on the Dax

Frankfurt The series historically poor economic datathat investors currently have to digest does not stop. That is also a burden for the German Leading index Dax. The stock market barometer closed on Friday 1.7 percent lower at 10,336 points.

“This drug had recently made a significant leap on the stock markets,” said Thomas Altmann, portfolio manager at QC Partners. “Therefore, this announcement is a clear warning to all euphoric investors.”

The puzzle is only slowly completing, how badly the corona pandemic is paralyzing the global economy. It was announced on Friday that the UK retail collapsed by more than four percent in March compared to the same period in the previous year – a decline that was not achieved even in the 2008 financial crisis.

Also in Japan the retail sector is idle: Merchants in the capital city of Tokyo reported a drop in sales of almost 35 percent in March. A similar decline to this extent is not to be found in the Bloomberg financial services time series.

There were also bad numbers from industry on Friday: The European commercial vehicle market fell almost half in March due to the coronavirus pandemic. With 105,196 vehicles, 47.3 percent fewer were registered than in the same month last year, the responsible industry association Acea announced on Friday in Brussels.

The number of registrations had already declined in January and February, but the decline in March was again considerably greater. The falls were most pronounced in the countries particularly hard hit by the Covid 19 pandemic: Italy (minus 66.1 percent), Spain (minus 64.4 percent) and France (minus 63.1 percent).

The managers surveyed by the Ifo Institute also assessed their situation as worse and are also more skeptical about the future. The published on Friday Ifo business climate index for April fell more clearly than expected: from 85.9 points in March to 74.3 points. That’s the lowest value ever measured. Economists interviewed by the Reuters news agency had expected a drop to 80.0 points. “The mood among German companies is catastrophic,” said Ifo President Clemens Fuest.

On Thursday, the GfK consumption barometer in Germany and the purchasing manager indices for the European service sector signaled that Germany and Europe were heading for a severe recession. The European Union is steering because of the corona crisis, according to EU Industry Commissioner Thierry Breton towards a drop in economic output of five to ten percent.

In addition, investors are also looking at the Federal Chancellor. Angela Merkel consults with representatives of business and trade unions on the corona crisis. This could also involve possible further easing and economic policy measures.

Look at the individual values

Deutsche Bank and Commerzbank: The rating agency Standard & Poor’s (S&P) has given it a thumbs-up because of the economic impact of the corona crisis at Commerzbank, Deutsche Bank and other German financial institutions. In the Commerzbank S&P downgraded the credit rating by one grade to “BBB +”, the outlook remains “negative”, as the credit rating officers announced on Thursday.

At Deutsche Bank, S&P confirmed the rating of the creditworthiness with “BBB +”, but lowered the outlook to “negative” from “stable”. While the creditworthiness guards doubt that Commerzbank can implement its new strategy “Commerzbank 5.0”, including the planned sale of the Polish subsidiary M-Bank, as planned, they see the restructuring of Deutsche Bank basically on track. The shares of the two largest German financial institutions fell by 6.8 percent (Deutsche Bank) and 4.1 percent (Commerzbank) and were among the biggest losers on the stock market on Friday.

Lufthansa: Down eight percent it went for the papers from Germany’s largest airline. So that leads Lufthansa the Dax’s list of losers. At € 7.20, the shares cost less than they had since the Sars pandemic 17 years ago. According to insiders, the airline plans to put together a government aid package of up to ten billion euros early next week. The loss increased to EUR 1.2 billion in the first quarter. Due to the pandemic, air traffic in Germany is almost completely stopped.

Nestlé: The Swiss food giant, on the other hand, is doing very well. Nestle accelerated its growth in the starting quarter 2020. Organic sales growth in the first three months was 4.3 percent, as Nestle announced on Friday. The share rose 1.8 percent. As the full impact of the Covid 19 pandemic could not yet be assessed, Nestle is tentatively sticking to the original outlook for 2020 as a whole. The Group expects organic sales growth and the underlying operating profit margin to improve.

Sanofi: The French pharmaceutical company benefits from the strong demand for painkillers and antipyretic due to the spread of the coronavirus. In the first quarter, currency-adjusted profit rose by 16.1 percent to 2.04 billion euros Sanofi announced. Sales climbed 6.6 percent to EUR 8.97 billion. Around half of the profit and sales growth is due to the corona pandemic. The corona effect will subside in the course of the second quarter. Sanofi confirmed the forecast for 2020. The group has set itself a five percent increase in earnings per share. The papers climbed 1.9 percent.

Eni: The Italian oil company the corona pandemic and collapsing oil prices drove a billion dollar loss in the first quarter. The net loss was 2.9 billion euros, as the Italian company announced on Friday in Rome. Had in the previous year Eni earned just under 1.1 billion euros. For example, Eni had to adjust the book value of its oil inventories to falling market prices, as well as depreciation on oil and gas activities. Adjusted, Eni achieved a small plus of 59 million euros, a fraction of the previous year’s profit of 992 million euros. Revenues plummeted by a quarter to around 13.9 billion euros. The stock lost 2.9 percent.

Look at other asset classes

Oil prices continued their recovery from the previous day on Friday despite the price losses in the meantime. The decisive factor on Wednesday, however, was not the easing of weakness in demand and excess supply, rather political tensions between the USA and Iran caused rising risk premiums for crude oil. In Asian trade, a barrel (159 liters) of the North Sea type Brent last cost $ 21.57, up 1.1 percent. The US WTI was traded at $ 17.09 per barrel, up 3.5 percent.

The euro exchange rate rose slightly on Friday. The European common currency was trading at $ 1.0804 in the late afternoon. The European Central Bank (ECB) set the reference rate on Friday at $ 1.0800 (Thursday: 1.0772).

Italy’s central bank Market insiders broadened their purchases of domestic government bonds on behalf of the ECB on Friday. The Banca d’Italia is buying slightly more titles on average than in the past few days, said a primary trader. A second insider said that she was more active on the market. Yields on ten-year bonds fell around ten basis points over the course of the day to 1.899 percent. They had previously climbed above the two percent mark when disappointment over the results of the EU summit on Thursday spread on the bond market.

With agency material.

Here is the page with the DAX course, here is the current tops & flops in the Dax. Current Short sales of investors can be found in our Short sales database.

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Sale of Commerzbank subsidiary M-Bank is a long way off

Another major project of the “Commerzbank 5.0” strategy, on the other hand, has come to a standstill: Negotiations to sell the majority stake in the Polish M-Bank are on hold, according to the Handelsblatt. Experts believe that the goal set by CEO Martin Zielke in December of completing the sale by the end of 2020 can hardly be achieved.

Because of travel restrictions and barring contacts, it is currently impossible to conduct negotiations in Poland, said several people familiar with the subject. Many things like a tightened book check could not be done by video conference. In addition, Commerzbank currently needs a large part of its resources to deal with the crisis in Germany.

Commerzbank has not yet given up its goal of selling M-Bank. The team put together for this continues to exist.

Nevertheless, according to insiders, doubts are growing at the Frankfurt headquarters whether a successful sale can still succeed. The sales revenue originally targeted by Commerzbank could no longer be realized after the corona crisis, several people familiar with the negotiations told Handelsblatt.

A look at the Polish stock exchange underpins this assessment: M-Bank’s market value there has almost halved since the beginning of the year – from 3.9 to 2.1 billion euros. The value of Commerzbank’s 69 percent stake has thus fallen to 1.45 billion euros.

Just one bidder

In addition, M-Bank sales were difficult even before the outbreak of the corona crisis. Initially, a large number of institutions expressed interest in the fifth largest Polish bank, which is considered to be one of the most innovative financial institutions in Europe. These included the Polish subsidiaries of the major European banks BNP, Santander and ING as well as the Austrian Erste Group.

However, given the positioning of the national conservative government in Warsaw, which is committed to the “repolonization” of the financial system, foreign buyers have now said goodbye to the sales process.

The only serious bidder left, according to financial circles, is the second largest Polish bank, Pekao. The Polish state is indirectly involved in this through the insurer PZU. That other Polish institutes like Alior and PKO BP have not made an offer, was probably a political decision because the state also participates in these institutions, says banking expert Filip Mazurek from the consultancy firm Sollers.

The development is anything but encouraging for Commerzbank. Due to the lack of competition, negotiations had been difficult for the people of Frankfurt before the outbreak of the crisis, several insiders report. “Of course, if you only have one bidder, you won’t get the price you want,” said one of them. Commerzbank and Pekao were far apart in their ideas.

Speakers from Pekao and Commerzbank did not want to comment on the topic. CFO Bettina Orlopp said in mid-March that Commerzbank was still trying to sell M-Bank, but not at any price.

When its new strategy was announced in September, Germany’s second largest private bank assumed that it would have to sell M-Bank in order to finance its upcoming restructuring. Since the capital situation of the institute has improved, according to Orlopp this is no longer the case. “It still makes sense to sell M-Bank – but only if we can achieve the target price and if the transaction structure is right,” said the CFO. “Otherwise there will be no deal.”

“Sales process impossible at the moment”

The transaction structure is primarily about dealing with a multi-billion dollar loan portfolio in Swiss francs. M-Bank, like other Polish institutions, had awarded these on a large scale before the financial crisis. Because the Polish zloty subsequently depreciated significantly against the Swiss franc, the borrowers’ loans became unexpectedly expensive.

In October 2019, the European Court of Justice (ECJ) ruled that such loan contracts could become ineffective if they contained unfair terms. Polish courts have to decide in each individual case whether this is the case.

Since the ECJ ruling, the number of lawsuits and the number of cases in which Polish courts have ruled in favor of customers has increased significantly. M-Bank therefore had to significantly increase its provisions for these loans.

According to financial circles, Commerzbank hopes that it will be able to sell the franc loan portfolio in the course of an exit from M-Bank. In previous sales processes, the Polish regulator KNF had forced foreign banks to keep the franc loans.

Handelsblatt Morning Briefing - Corona Spezial

Consultant Mazurek does not believe that an agreement can be reached in the foreseeable future. “In my view, there are little to no chances that the transaction will advance in 2020,” he says. The prices are in the basement, the problems with franc loans are getting bigger.

The corona crisis would also pose many additional challenges for the banks. “There will be economic problems, bankruptcies and debates about loan extensions,” Mazurek said. “That makes a sales process impossible at least at the moment.”

The rating agency Fitch also has doubts as to whether Commerzbank can implement its strategy as planned. “Commerzbank is in the middle of a substantial restructuring that we believe could be thwarted by the ongoing crisis,” warned Fitch at the end of March.

From the perspective of those involved, it is difficult to predict how the M-Bank sale will continue after the end of the corona crisis. It would be no problem for Commerzbank to keep M-Bank, some say. However, this option is not particularly attractive because the Polish authorities have forbidden the M-Bank to transfer a dividend to Frankfurt for several years.

In addition, there is hope in Poland that Commerzbank will need the sales proceeds and the risk relief associated with an M-Bank sale sooner or later – and will therefore return to the negotiating table. “It is all just a matter of time,” predicts a person familiar with the negotiations.

More: Commerzbank board members warn – “The peak of the crisis is still ahead of us”

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Commerzbank CFO considers cost reductions “more important than ever”

Frankfurt Bettina Orlopp has the position of CFO of the Commerzbank just taken over a few weeks ago. And she could hardly have chosen a worse time for it.

Because of the corona crisis, financial institutions are also under massive pressure. The Commerzbank-Course has plummeted by around 40 percent since the beginning of the year.

Orlopp was therefore at an investor conference on Thursday Morgan Stanley obviously trying to exude confidence. “We feel very comfortable with our capital and liquidity situation,” she said. But Orlopp also made it clear that the corona crisis is increasing the pressure on the bank to tighten its austerity measures.

In autumn 2019, Commerzbank announced that it would reduce its costs by 600 million euros to less than 6.3 billion euros by 2023. In February the institute then declared that a project team was looking for additional savings potential.

“Nothing has changed because of the crisis – on the contrary,” said Orlopp. “It is more important than ever that we think about additional savings measures.”

Germany’s second largest private bank could increase further efficiencies in its existing business model, said Orlopp. In addition, it can reduce the complexity by reducing the number of products and offers. The bank plans to announce details of the additional savings measures, which investors and supervisory authorities have also advised, at the latest when it presents its half-yearly figures.

In the wake of the corona crisis, Commerzbank is in close contact with its corporate customers, said Orlopp. “We see that they are drawing their lines of credit and taking out new loans.”

Many customers would draw their credit lines, but would then immediately park the liquidity in their accounts. “So right now it’s just a shift in liquidity.

How credit demand will continue to develop also depends on government aid programs, said Orlopp. But: “We clearly expect that there will be more.”

Commerzbank wants to be there for its customers. “It is our job to be there for the customers and to support them with everything they need.”

Flexibility in paying the dividend

According to Orlopp, the bank has sufficient liquidity and capital buffers for this. The institute ended the year 2019 with a core capital ratio of 13.4 percent and therefore started the crisis from a good position, said Orlopp. In addition, the institute had access to the latest liquidity aid from the European Central Bank (ECB) and the British central bank, thereby securing additional funds.

In addition, regulators eased capital requirements for all banks in the wake of the crisis. “It is good to be flexible and have the opportunity to lower the capital ratio,” said Orlopp. “But we clearly stick to our goal of having a very healthy capital ratio.”

Orlopp was asked by investors whether, in view of the corona crisis, they were considering canceling the dividend that was promised for the 2019 financial year. Orlopp replied that a distribution of 15 cents per share is currently still planned – but left a back door open. “The decision is ultimately made by the general meeting,” said the chief financial officer. “Until then, you have the flexibility to rethink your decision.”

The Commerzbank shareholders’ meeting is currently scheduled for May 7. But whether the event will actually take place in the face of the Corona crisis remains to be seen.

Expected more loan defaults

As part of their “Commerzbank 5.0” strategy, the Frankfurt-based company wants to fully integrate the Comdirect direct bank and sell the Polish subsidiary M-Bank. The Corona crisis did not change the plan, said Orlopp.

However, M-Bank will only be sold if the price and transaction structure meet its own expectations. “Otherwise there will be no deal.”

In the operating business, earnings in the private and corporate customer business developed “very well” in January and February, said Orlopp. Loan loss provisions for loans at risk of default were very low.

Orlopp does not expect a wave of loan defaults in March either. However, as part of the new IFRS 9 accounting standard, the bank may make precautionary loan loss provisions.

Orlopp expects loan loss provisions to increase in the second and third quarters. How high it is is currently very difficult to estimate. A lot depends on how the federal government’s aid measures worked for companies.

According to Orlopp, Commerzbank is not very active in industries that are particularly badly affected by the corona crisis. The oil sector accounts for less than one percent of total credit exposure, the airline 0.5 percent. Financing travel providers and restaurants is also not part of Commerzbank’s core business.

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