Letter from the Chairman of the Board of Managing Directors
2008 was a year that people in our industry will remember for a long time. There can scarcely ever before have been a year in which the banking sector experienced as much upheaval as it did last year. Scarcely ever before can we bankers have faced such great challenges, and rarely, if ever, before can there have been a year in which any one sector underwent such dramatic changes as international banking did in 2008.
The collapse of the US investment bank Lehman Brothers last September triggered a chain reaction on the world’s financial markets - the scale of which nobody had been able to predict. No sooner had the inter-bank market been brought to a virtual standstill than there were sharp drops in prices on the capital markets. Since then, the banking landscape - including Germany’s - has been subject to ever more rapid change, and so, for quite some time, has the real economy. Industrialized nations, and many emerging economies, around the world are in the grip of severe recession or staring it in the face.
It was under these difficult conditions that Commerzbank embarked upon one of the most ambitious projects in the history of the German financial industry, bringing together two major German banks to form a single new market leader. The new Commerzbank is a strong universal bank that draws on the wealth of experience of two banks, each with long traditions of their own. As of now, we are the leading bank doing business with discerning private and business clients in Germany, as well as the leading bank for the country’s small and medium-sized businesses.
We completed the takeover of the Dresdner Bank on January 12, 2009, over six months earlier than originally planned. That means that we are able to act more quickly and bring greater efficiency to driving forward the integration of our two banks. We are very happy with the progress of the preparations for integration so far; the completion of the takeover in January enabled us to establish a single management structure, and we were able to offer our clients the first joint product only 14 days after the closing.
At the beginning of February this year, we started negotiating with the employee representative committees about the reconciliation of interests and the social plan. These negotiations are proving constructive, and once they are completed, a start can be made on the final implementation of the new organizational structure.
To sum up, no more than seven months after the announcement of the takeover, we have already taken great strides in bringing Commerzbank and Dresdner Bank together. What has made this all the more remarkable is the fact that – as reported earlier – the market conditions were and remain anything other than easy. This has been an extraordinary achievement, and for it I would like to thank all my colleagues in the new Commerzbank.
The crisis on the financial markets hit both banks hard – that much is not a matter of doubt. It did, however, reinforce our conviction that this merger was, and is, the right thing to do from the strategic point of view, for we, together, will in the long term build a bank that is stronger, more robust, and better able to withstand a crisis than either of the two former banks were on their own. Take, as an example, our strength in foreign business: the financing of around 25% of German foreign trade is handled by Commerzbank. In many areas, we will be in a position to offer our clients an even better service, and that is a good basis for further growth.
As you can read in this Annual Report, the “old” Commerzbank, too, was hit hard by the crisis on the financial markets; in the 2008 financial year, it was only thanks to tax income that it managed to achieve, for the benefit of Commerzbank shareholders, a €3m consolidated surplus, and without that would have sustained a pre-tax loss. That was a great disappointment for everyone who worked so hard for the Bank’s success last year. There is, however, more encouraging news too, in the shape of a positive trend in our core business, where we further expanded our market share not only in private clients but also in German small and medium-sized businesses. Add to that the operating profit in excess of €1.7bn achieved by the core segments Private Clients, Mittelstandsbank, and Central and Eastern Europe, and you have evidence that our client-focussed business model is viable even in difficult market conditions.
In private and business clients business, we have performed better than ever before, with an operating profit of €551m, and we were able, in the course of 2008, to increase deposit volume by €10bn – equivalent to a 26.2% increase – taking it to €48.2bn. Over the same period, the number of our clients increased by a net 574,000, bringing the total number of private clients to 6.1 million and enabling us to achieve our goal of 6 million private clients in Germany a year earlier than planned. It is evident that our clients see Commerzbank as a trustworthy partner in times of crisis.
The Mittelstandsbank division continued to be a reliable value driver for Commerzbank over the past year, with its operations developing well and costs being reduced slightly. The volume of credit extended to small and medium-sized businesses increased to €46bn in 2008, representing growth by a double figure per centage. We have also agreed with the Special Fund for Financial Market Stabilization (SoFFin) that an additional €2.5bn in loans will be made available to small and medium-sized businesses. This is further evidence of the way in which we, as the leading bank for small and medium-sized businesses, meet our responsibility as a source of credit for German businesses even when times are hard. Full account continues, of course, to be taken of risk when credit decisions are taken.
The Central and Eastern Europe segment achieved satisfying growth in 2008, notably increasing its client base in the region by more than one half to just over 3.2 million. Although the market environment in Central and Eastern Europe has become difficult, and the economic situation increasingly gloomy, we will continue – structurally above all – to further build up our business there. In the fourth quarter of 2008 in particular, financial market turbulence caused our Corporates & Markets and Commercial Real Estate divisions to sustain heavy losses. We intend in future to focus our Investment Banking activities even more on client business; this applies particularly to Dresdner Bank’s investment banking business, in which there will be systematic reductions of the kind implemented in the course of the process completed successfully in the old Commerzbank as long ago as 2004 and in the years thereafter. We are persuaded that it will be equally successful this time round.
Unfortunately, the general market environment will do nothing to make our efforts easier. The longer the crisis on the financial markets persists, the more stringent will be the demands made by regulators, rating agencies and investors on the capital adequacy of banks, and Commerzbank has therefore taken the decision to increase its core capital by means of silent participations and a minority holding by SoFFin, which will make available equity capital to a total of €18.2bn. Even by international comparison, then, we are one of the well capitalized banks. The injection of capital ensures the new Commerzbank’s competitiveness and secures us a stable start as we venture into the future together.
So, then, the new Commerzbank enters 2009 – a year of recession – with its weatherproofing in place; we are offering our private clients the greatest possible security, can stand alongside our corporate clients in difficult times, and, once conditions on the markets return to normal, will operate from a position of strength and be able rapidly to put into effect our strategies for growth in our core business areas.
Given we are not permitted to distribute a dividend in the financial years 2008 and 2009, and the disappointing price development over the past year, we do understand that by no means all of you, our shareholders, look favourably on our recourse to state funds, and it was for that reason that the decision to take advantage of the financial market stabilization programme was not taken lightly. In the final analysis, though, our concern was that the new Commerzbank’s future should be secured – and that is also in our shareholders’ interest. My colleagues on the Board of Managing Directors and I will do all in our power to restore and build up your trust. It remains for me to add that almost three quarters of our share capital remains in private hands, and that the new Commerzbank, being the second-largest German private bank, has an earnings potential far in excess of what will be required to service the silent participations. It is our ambition to discharge our obligations and repay the taxpayers’ funds as quickly as possible.
This year will, however, be another very difficult one – for the global economy, for the financial sector around the world and also for Commerzbank. We have to face the threefold challenge of coping successfully with difficult conditions, driving forward the integration of our two banks, while at the same time focussing still more on meeting, in all that we do, the needs of our clients. The severity of the recession, both in Germany and throughout the world, will bring with it increases both in the number of defaults and the need for risk provision. On top of those, we expect, in 2009, to have to meet the costs of integration.
Even so, my colleagues on the Board of Managing Directors and I are convinced that, with the takeover of the Dresdner Bank, we have gone down the right road. We have a sustainable, client-focussed business model, we are constantly improving the range of services we offer, and our capital structure is sound, and that means that, in the medium term, we will emerge from the crisis with our strength renewed. Quite apart from those considerations, of course, our employees are committed to making the new Commerzbank a success, and are working flat out to ensure that it is one.
You, our shareholders, will benefit from that too. We welcome you to join us as we journey on down this road, and look forward to welcoming you to our Annual General Meeting on May 15, 2009.
Martin Blessing, Chairman of the Board of Managing Directors