Eugene Grygo, Chief Content Editor, FTF News
While the USA was gearing up for the Independence Day holidays in early July, Commerzbank in Germany announced the sale of its equity markets and commodities (EMC) business to Société Générale (SocGen) for an undisclosed sum.
On the face of it, the deal helps Commerzbank streamline operations as part of its much-publicized Commerzbank 4.0 strategy, and helps SocGen expand into key markets in Europe. The 4.0 strategy is intended to cut complexity and make capital available for investment in Commerzbank’s core franchise.
But I think the transplant of a key business is another in a long line of bold moves for Commerzbank, which in recent years has faced changing and challenging markets. If the sale pans out, it may be instructive for other global firms contemplating similarly profound changes.
As FTF News reported last year, Commerzbank’s 4.0 strategy consists of three main thrusts: focused growth, digital transformation, and increased efficiency. The firm’s aim is to concentrate on its core businesses of private and small business customers and corporate clients. In addition, the plan is for the bank to digitize 80 percent of relevant processes while also simplifying systems and cutting costs.
With 4.0 in mind, Commerzbank is selling a jewel of a business.
The EMC group, which consists of the “manufacturing and market making of flow and structured trading and investment products as well as its established exchange-traded funds (ETF) brand, Comstage, and its associated leading ETF market making platform,” according to Commerzbank officials. The EMC business has been around for 29 years and last year generated €381million ($445.2 million) in gross revenues, officials add.
The transaction will require the transfer of EMC’s trading books and client franchise, parts of the IT infrastructure, EMC front-office employees and other staff associated support functions. Commerzbank will retain its cash equity brokerage sales and trading activities, and the hedging business for commodity risk services, officials say. These areas will stay as part of Commerzbank’s corporate clients business segment.
Once the move is complete, the complementary EMC franchises of Société Générale and Commerzbank have the potential for synergies and will reinforce the global banking and investor solutions activities for SocGen “in line with our 2016-2020 strategic plan,” says Séverin Cabannes, deputy CEO for SocGen, in a statement.
“Upon integration, this transaction would bring numerous benefits to clients: the reach and geographical footprint, an extended cross-asset product set, the technology and expertise from two associated leading platforms,” Cabannes says.
The scope of this transaction covers business activities in Frankfurt, London, Hong Kong, Paris, Luxembourg and Zurich, according SocGen.
The SocGen strategy is to “reinforce the bank’s global leadership in derivatives and investment solutions across asset classes” and would add to SocGen’s exchange traded funds (ETF) development in Europe. (An ETF pioneer, Lyxor Asset Management merged with SG Asset Management Alternative Investments in 2009.)
Thus, the Commerzbank acquisition could quickly boost SocGen’s ETF franchise and could complement “its active management offering with a set-up and a product range well-suited to answer the needs of German institutional clients in particular,” say SocGen officials.
For Commerzbank, the deal will allow it to simplify its “IT infrastructure and business model,” and will help with cost cutting and the risk weighted average (RWA) reduction targets that are at the heart of the Commerzbank 4.0 strategy, Commerzbank officials say.
“The transfer of trading books and its associated balance sheet and revenue implications are estimated to take place gradually and to start at the end of 2018,” according to Commerzbank. “Therefore, EMC revenues are expected to fade out in the profit and loss statement of Commerzbank during 2019.”
The drop in expenses caused by the sale of the EMC business may shrink the cost base by at least €200 million ($233.7 million) “by year-end 2020 and to contribute to the cost reduction target announced as part of the ‘Commerzbank 4.0’ strategy in 2016,” according to the German bank.
Since the 4.0 strategy was launched, Commerzbank has realized more than €3 billion ($3.5 billion) of RWA largely because of the streamlining of Commerzbank’s Fixed Income, Currencies and Commodities (FICC) business, officials say. The sale of the EMC business would yield more benefits from the release of RWA. “Further to that, the sale would contribute to avoid the RWA impact expected to apply with the Fundamental Review of the Trading Book (FRTB) regulation,” officials add.
The transaction will be subject to pre-clearance with tax authorities, approval by other authorities, the support of employee representative committees and the finalization of legal documentation, officials say. Société Générale officials add that they anticipate receiving clearance during the second half of 2018.
“After integration of activities, this transaction would result in a positive impact on the Group’s ROTE (Return On Tangible Equity) and it would have a limited impact on the Group’s Core Equity Tier One ratio,” SocGen officials say.
The EMC sale to SocGen follows several other forward-looking steps by Commerzbank:
- Commerzbank and HSBC are strategic partners in an effort that will see the German bank transferring its securities settlement operations to a newly created joint venture with HSBC Transaction Services. Commerzbank will have a 20 percent stake in the joint venture that will begin operations in early 2020 and continue for an initial period of 10 years. An intensive testing phase began this year to ensure a seamless transition of the securities settlement operations, officials say. Commerzbank has said that its investment and expected medium-term savings have been fully accounted for via the digitization aspect of the 4.0 plan. More about the partnership can be found here.
- Commerzbank, the KfW Banking Group, and MEAG, the asset manager of Munich Re and ERGO, have embraced distributed ledger technology (DLT) for a Euro Commercial Paper (ECP) securities transaction simulation. All involved are encouraged by the efficiency gains that DLT may provide. The trio jointly traded an ECP instrument “issued by KfW, and simultaneously replicated the transaction in a blockchain,” officials say. The trio used an application based on the Corda DLT platform from technology vendor R3. (Corda developed it with input from Commerzbank and more than 100 banks, financial institutions, regulators, trade associations, professional services firms and technology companies.) More details are available here.
In another area, Commerzbank two years ago was the first sell-side institution to use OpenGamma’s hosted margining service as the bank grapples with the rise in demand for pre-trade margin comparison requests, bank officials say. The hosted OpenGamma for Margining was targeted at Category 2 market participants. More information is available here.
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