Higher risk vs.. lower growth: The challenge ahead. Mehmet Dalman

Transcription

1 Higher risk vs.. lower growth: The challenge ahead Mehmet Dalman October 2002

2 Contents Setting the scene Financials Investment Banking - the story so far The future 2

3 Commerzbank: the current situation One of the best lessons children learn through video games is standing still will get them killed quicker than anything else Jinx Milea 3

4 Higher risks AND lower growth 140 European Equity Issuance (USD bn) Moody's W European Upgrades & Downgrades (number) Dow ngrade Upgrade ann'd -70 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 S&P 500 Credit Spreads (bp) BBB A AA AAA J F M A M J J A S O J F M A M J J A S O 4

5 Is Germany mid-90s Japan all over again? Bubble economy Unprofitable Lending Declining equity markets Under-capitalised banking sector Hidden Losses Structural Rigidity Deflation? 5

6 Parallels are overblown Disinflation vs.. Deflation German banks become more, not less, prudent Cross-shareholdings much less of an issue in Germany Debt/GDP 110% in Germany cf 175% in mid-90s Japan Spectacular scale of property collapse in Japan Problem is structural rigidity in labour laws, not asset quality Broad similarities tell us nothing about particular outcomes 6

7 So, what is going on in Germany? Fragmented domestic banking market Consolidating European banking market Increasing competition domestically and abroad Distortions in domestic market through state guaranteed entities Restructuring difficult under German law Corporate governance makes change difficult No overnight fix, but already in the price There is a restructuring play, eg Italy 7

8 It has been noticed 25 Commerzbank J F M A M J J A S O 8 AA S&P AA- A+ A A Mehmet Dalman s mission appears to be to pour shareholders money down a hole labelled Investment Banking FT, Lex Column, 24 April 2002

9 Rumour vs.. Reality Sunday Sport Sunday Sport 9

10 Rumour vs.. Reality NOTE ON POSSIBLE DERIVATIVES LOSSES ADDS TO ANXIETY ABOUT EUROPEAN SECTOR FT, 5/6 October

11 Rumour vs.. Reality Commerzbank Securities: Credit Trading Revenues 2002 J F M A M J J A S 11

12 H Financials: key business areas Retail Asset Corporate customers Investment Banking Management and institutions Banking EUR m Income, Total , Operating Expenses Profit from ordinary activities Taxes on income After-tax profit Profit/loss attributable to minority interests Profit contribution from business passed on Result based on internal accounting Average equity tied up 1, ,213 1,565 Return on equity (%) Cost/income ratio (%)

13 Divisional overview Retail Banking High fixed cost, low margin business Rationalisation in train; branch closures Ultimate position dependent upon structural change Asset Management Quality brands; sub-scale platforms Integrate where appropriate; exit where not Corporate Banking Excellent client base Low return on equity 13

14 Integrated Investment Banking Investment Banking Corporate Banking Retail Banking Infrastructure 14

15 Development of IB strategy Environment Emergence of equity culture in Germany Growth of retail sophistication Importance of Germany in Pan European framework History Relationships and franchise Resources Shape of business determined by need to support high margin businesses: IPOs & Derivatives: need Brokerage, Research Structured Fixed Income: need league table footprint Key themes: Minimise investment Punch above our weight An integrated part of the strategy of Commerzbank AG 15

16 Investment Banking: Our objectives Relevance to Commerzbank AG Safeguard corporate client base Diversify revenues Increase profits by offering wider product range to clients Leverage international platform Leverage retail distribution capability and branch network Necessary build-up in Primary Capability Secondary distribution Research Derivatives 16

17 Equities - Performance Income (MEUR) Pre-Tax Profit (MEUR) 1,200 1, A 1997A 1998A 1999A 2000A 2001A A 1997A 1998A 1999A 2000A 2001A 17

18 Equities - Cumulative Performance 2,500 2,000 1,500 1, A 1997A 1998A 1999A 2000A 2001A 18

19 Fixed Income - Performance Income (MEUR) Pre-Tax Profit (MEUR) A 1997A 1998A 1999A 2000A 2001A A 1997A 1998A 1999A 2000A 2001A 19

20 Fixed Income - Cumulative Performance Cumulative Income and Pre-Tax Profit (MEUR) 1, A 1997A 1998A 1999A 2000A 2001A

21 Securities - Performance Pro-Forma Income (MEUR) Pro-Forma Pre-Tax Profit (MEUR) 1,400 1,200 1, A 1997A 1998A 1999A 2000A 2001A 0 (50) (100) 1996A 1997A 1998A 1999A 2000A 2001A Pro-Forma Cost-Income Ratio Pro-Forma Allocated Cost Ratio 160% 40% 140% 35% 120% 30% 100% 25% 80% 20% 60% 15% 40% 10% 20% 5% 0% 1996A 1997A 1998A 1999A 2000A 2001A 0% 1996A 1997A 1998A 1999A 2000A 2001A 21

22 Securities - Cumulative Performance Cumulative Revenue and Pre-Tax Profit (MEUR) 3,500 3,000 2,500 2,000 1,500 1, (500) 1996A 1997A 1998A 1999A 2000A 2001A 22

23 Securities - History Cbk launches new Equity Initiative London, NY, Tokyo, Frankfurt Offices opened Equity & Fixed Income Integrated Corporate Finance integrated CFP and ECM Integrated CGE Launched Extel & Reuters Awards Commerzbank Securities Launched FX & TDT integrated Pro-forma Income (EUR) 34m 91m 340m 569m 1,147m 1,019m Average headcount n/a

24 ComSec Financials: H Income EUR 373m 34% below 2001 H1 Direct costs controlled 25% below 2001 H1 Allocated costs 95% above H % of total costs (EUR M) 2001 H H1 change Income % Direct Costs % Alloc Costs % Total Costs % Net P&L Pre-tax 71 (118) Tax 28 (42) After-tax profit 43 (76) Profit contribution from business passed on Result based on internal accounting 65 (54) -183% Capital 1,277 1,068-16% Return on Equity 10% -10% Cost/Income Ratio 87% 135% 24

25 Extel Survey Recognition for our Research, Sales and Trading across Equity and Fixed Income Extel th 9th 17th & "Rising Star Broker" th Extel Survey 2002: Overall Pan-European Brokerage Firm 1 UBS Warburg 2 Schroder Salomon Smith Barney 3 Deutsche Bank 4 CSFB 5 Merrill Lynch International 6 Morgan Stanley 7 Commerzbank Securities 8 Goldman Sachs International 9 Dresdner Kleinwort Wasserstein 10 ABN AMRO 11 JP Morgan 12 Lehman Brothers 13 HSBC Securities 14 Cazenove 15 Credit Agricole Indosuez Chevreaux 16 ING 17 SG Securities 18 Exane 19 WestLB Panmure 20 Enskilda Securities based upon aggregation of votes in all categories 25

26 Selected H Highlights - Capital Markets ECM Joint Lead Manager of EUR111m IPO of Astaldi - A successful issue completed in difficult market conditions M&A Advised RWE on the EUR4.1bn acquisition of Transgas in the Czech Republic DCM Joint Bookrunner of EUR250m 10 yr bond issue for Republic of Iceland Appointed Joint Bookrunner for Iran s debut EUR625m Eurobond issue Arranger and Lead Manager of an EUR1bn synthetic RMBS issue for Rheinhyp Joint Lead Manager of a EUR500m 10 yr Landesschatzanweisung for Free State of Bavaria Joint Bookrunner of a GBP200m 10 yr issue for GKN plc 26 Syndicated Loans Completed first round syndication of the EUR830m Vaillant syndicated loan facility Sole Arranger EUR300m revolving credit facility for Epcos

27 Adapting to changing circumstances Loans no longer play the dominant role here which they played in past decades. They have become one product among many. They have to be combined sensibly and creatively with other products -K-P Müller, October 29,

28 Our historical business model Investment Bank Institutions Capital Markets Integrated Relationship Management MNCs Major customers Corporate Bank SMEs We lend money to companies We can up-tier the relationship They will buy high-margin products and services from us because we lend them money But This is no longer valid 28

29 What should our value proposition be? Value comes from Commitment Insight Providing a scarce resource Commitment means greater allocation to fewer clients Insight means integrated understanding of capital structure and credit Providing scarce resources means leveraging economic and intellectual capital 29

30 Strategic drivers for corporate & investment bank Investment Banking capability fundamental to overall strategy Utilise investment in intellectual capital Corporate banking is about asset quality and cost control Investment banking is revenue-driven, and should enhance banking returns 30

31 Corporate & Investment Banking We are a corporate bank We need a proper, integrated corporate & investment banking capability We have built the investment bank to strengthen our corporate relationships We have positioned ourselves for what we believe will be the dominant theme in Europe: Capital Structuring 31

32 Capital Structuring Abundant opportunities for capital restructuring in Europe not least in Germany not just Banks! Commerzbank well positioned to benefit close link between corporate and investment banking integrated platform for equity, credit and quantitative research to give a holistic view Integrated capital markets business with specialist capital structuring group A major opportunity to leverage the bank s corporate lending franchise 32

33 Alignment Investment Bank Corporate Bank Sector Sector Sector Sector Sector Central Credit Management Know-how in Corporates Cross-Selling Lending and High Margin Business Risk Management Quality Credit Portfolio Sector Sector 33

34 Conclusion Difficult market conditions with much speculation German banking under the microscope We have a strategy Attacking costs and unlocking revenue potential We will remain focused 34

35 Higher risk vs.. lower growth: The challenge ahead Mehmet Dalman October 2002