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Gallic hug

13 February 2014 By Dominic Elliott

Commerzbank could yet jazz up BNP Paribas’ bland strategy. France’s biggest bank by assets unveiled underwhelming targets on Feb. 13: a 10 percent return on equity by 2016, a scarcely bigger dividend payout and another 800 million euros of cost cuts. A 4.5 percent drop in BNP’s share price suggests investors want something meatier.

That something could yet be Commerzbank. True, BNP Paribas Chief Executive Jean-Laurent Bonnafe ruled out acquiring the whole of his German rival in October, and an improved set of results on Feb. 13 means Commerz now trades around 0.6 times its book value – less cheap than of late. But Bonnafe wants to grow in Germany. He also has a 2.6 billion euro buffer over and above his 10 percent Basel III core Tier 1 capital target.

Unless BNP paid in shares, that isn’t enough to capture Commerz’s crown jewel business lending to German middle-sized companies, whose likely 14 percent return on equity in 2016 implies a 10 billion euro valuation, according to Morgan Stanley. But it might help buy Commerz’s retail business or its corporate and markets arm, both of which are valued below 4 billion euros.

Commerz, of course, might not need to sell. The German bank halved its riskiest shipping and commercial property assets last year, and has new, speedier targets for the run-down of its 116 billion euros of non-core assets. And the German government, which still owns a 17 percent stake, may baulk at a cross-border deal.

The key swing factor is the European Central Bank. The euro zone’s new bank regulator is conducting a harmonisation of lenders’ balance sheets, and a separate stress test will report in October. Although Commerz expects to be untroubled and has a healthy buffer above the stress test’s 5.5 percent pass mark, 12 billion euros of its non-core portfolio are peripheral euro zone assets. The test’s methodology remains unclear, but if the ECB gets tough Commerz may yet look to bolster its position by selling assets. 

BNP isn’t known for its sense of adventure, and Commerz may look to sell eastern Europe subsidiaries first. But the French bank’s shareholders will expect Bonnafe to stay alert for something more.


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