COMMERZBANK chief executive officer Bettina Orlopp is seeking to unlock more capital to pay out or invest, as she makes the case for an independent bank in the face of a potential takeover by rival UniCredit.
Orlopp is working on a plan to keep the expected growth in risk-weighted assets (RWAs) several billion euros below a goal presented just a little over a month ago, sources familiar with the matter said. She wants to achieve that partly by using more significant risk transfers and potentially backing away from some low-yielding clients, the sources said, asking not to be named discussing the internal deliberations.
The move, which has not been previously reported, would reduce the additional amount of regulatory capital tied up by anticipated RWA expansion to 2027, creating more room for shareholder distributions or investments including acquisitions, the sources said.
A spokesperson for Commerzbank declined to comment.
The capital release strategy is at the heart of Orlopp’s plan to convince shareholders that Commerzbank is a compelling investment case on its own. She increased profitability and payout targets in September, shortly after Italy-based UniCredit swooped in to take a major stake, saying it’s considering a full-blown acquisition of the German lender.
UniCredit CEO Andrea Orcel has since signalled he does not believe Commerzbank’s existing strategy is ambitious enough. Orlopp has presented her plan for the German lender in a virtual meeting with him and she has indicated a preference for Commerzbank to stay independent.
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Commerzbank on Monday (Nov 4) announced it has received ECB approval for a share buyback worth 600 million euros (S$861 million) that it will launch after it reports third-quarter earnings on Wednesday. The bank has so far promised to pay out 1.6 billion euros on profits generated this year, with as much as 1.1 billion euros of that to happen through buybacks.
One element of Orlopp’s new plan is a substantial increase in transactions known as significant risk transfers, which are designed to release regulatory capital, the sources said now.
Commerzbank has recently obtained approval from the European Central Bank for its internal risk models, which will free up some capital as well, they said.
Commerzbank will also seek to cut exposure to clients who earn it little money compared to their risk profiles, a situation known as low RWA efficiency, the sources said. The move would help the lender achieve lower RWA growth.
More business
By contrast, Orlopp is planning to get more business out of existing clients as a way to lift profitability, the sources said. Measures could include raising prices, asking for more collateral, or selling more products to them, they said.
The move is the restart of a programme initiated by Corporate Clients head Michael Kotzbauer a few years ago, the sources said. Since then, higher interest rates boosted lending income and put the programme on the back burner. With rates falling again, the lender is now taking a fresh look at such measures, they said.
Orlopp has indicated in a recent Handelsblatt interview that she expects her strategy may end up lifting Commerzbank’s share price to at least 25 euros over an unspecified period of time. It currently trades at a little over 16 euros.
Kotzbauer was promoted to deputy CEO in September when Orlopp was named to replace Manfred Knof at the helm of the lender. The corporate clients head in 2021 unveiled a strategy to either boost revenue from clients with low RWA efficiencies or get rid of them.
RWAs define how much common equity tier one capital a lender needs to keep as a regulatory safety cushion. Commerzbank in September cut the expected RWA increase to 2027 by seven billion euros, compared with guidance given a year ago. The new measures Orlopp is considering now are aimed at reducing that growth even further.
In an SRT, a bank typically pays institutional investors for agreeing to cover losses on the riskiest portion of a given credit portfolio, effectively providing some insurance for bundles of loans that frequently total billions of euros. The protection means the bank can release some of the regulatory capital it was previously required to keep as a backstop for the loans. BLOOMBERG
