Second-ranked German lender Commerzbank (CRZBY) will cut almost 9,600 full-time jobs, write off about €700 million ($784 million) of assets and suspend its dividend as part of a plan to shrink the bank to cope with negative interest rates and slow client activity.
The plan, announced Thursday, amounts to a full-scale overhaul of the Frankfurt-based bank by its new CEO Martin Zielke, after its a return on tangible equity, a measure of bank profitability, fell to 2.9% in the second quarter, or half of the target 6% rate.
Commerzbank shares fell Thursday to €5.92, down €0.11, or 1.9%, on their Wednesday close.
"Given the likely persistent margin pressure, weak...credit demand and an increasing cost of risk from deteriorating shipping exposures, it (a cost savings plan) was inevitable," said Berenberg Bank analyst Adam Barrass. "A focus on cost is something we have argued is needed for a long time."
The Commerzbank job losses, which will cost one-in-five of the bank's employees, are bitter medicine for a German banking sector already vulnerable amid concern about the capital strength of its biggest lender, Deutsche Bank (DB) - Get Report .
Deutsche has faced repeated questions about its ability to pay a $14 billion fine levied by the Department of Justice and has had to deny that it will need a government bailout. Deutsche Bank shares traded Thursday at €10.94, up €0.17, or 1.6%, on their Wednesday close but remain down 12% over the past month.
Deutsche and Commerzbank became the subject of merger speculation after Deutsche CEO John Cryan said in August that Germany could benefit from banking consolidation and admitted he had spoken to Commerzbank about a "hypothetical" deal. Cryan later said a merger was not in his plans.
Commerzbank announced its own merger Thursday, albeit an internal one that will combine its investment bank, called corporate and markets, with its Mittelstandsbank unit, which caters to small and medium-sized companies.
"In the context of the decision of the new strategy, goodwill and intangible assets of both Corporates & Markets and Mittelstandsbank will be subjected to an impairment test," said Commerzbank. "This means that most probably around €700 million would be written off in the third quarter of 2016."
The asset write-off will push the bank to a net loss in the third quarter, though the bank said it expected to still make a "small net profit" for 2016.
Commerzbank said the restructuring would cost an additional €1.1 billion, which it will finance by cancelling its cash dividend "for the time being." Commerzbank paid a €0.20 per share dividend in May last year, its first dividend in seven years since receiving a total €18 billion in government bailouts in 2008 and 2009.
The merger of the investment bank will be accompanied by a reduction in trading activities that will serve to reduce earnings volatility and cut the amount of capital the bank must set aside to mitigate possible losses on its riskier assets.
The lender said its aimed to deliver a return on tangible equity of at least 6% by the end of 2020 and that the target could rise to at least 8% if German interest rates "improve." The bank's Tier One equity ratio is expected to remain at about 12% following the overhaul.
Zielke, who took on the role of CEO in May, will give further details of his strategy at an investor day conference on Oct. 4.
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