Commerzbank offloading EMC business to Societe Generale

Commerzbank has reached an agreement to sell its Equity Markets & Commodities (EMC) business to Societe Generale, it announced on Tuesday.

The company said the transaction remained subject to pre-clearance with competent tax authorities, approval by further relevant authorities and the employee representative committees as well as the finalisation of legal documentation.

It said it marked a “further milestone” in the execution of the 'Commerzbank 4.0' strategy, which the board had implemented in a bid to reduce the bank's overall complexity and free up capital for investment in Commerzbank's core franchise.

The transaction would include the transfer of EMC's trading books and client franchise, staff, as well as parts of the IT infrastructure.

EMC front office employees and certain associated support function staff would move to Societe Generale, subject to approval by employee representative committees.

The transfer of trading books and its associated balance sheet and revenue implications were expected to take place “gradually”, and to start at the end of 2018.

As a result, EMC revenues were expected to “fade out” in the profit and loss statement of Commerzbank during 2019, the board reported.

The reduction of expenses associated to Commerzbank's EMC business was estimated to reduce the bank's cost base by at least €200m by year-end 2020, and to contribute to the cost reduction target announced as part of the 'Commerzbank 4.0' strategy in 2016.

Since the announcement of the strategy, more than €3bn of risk-weighted assets have been released due to the streamlining of the bank's Fixed Income, Currencies & Commodities (FICC) business, Commerzbank’s board explained.

Through the sale of its EMC business, Commerzbank said it would benefit further from the release of risk-weighted assets.

Further to that, it said the sale would contribute to avoid the risk-weighted assets impact expected to apply with the Fundamental Review of the Trading Book (FRTB) regulation.

Commerzbank's EMC business comprises the bank's 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 ETF market making platform.

The Equity Capital Markets, the Equity Brokerage businesses, and the hedging business for commodity risks would not be part of the transaction, the board confirmed, but would remain in Commerzbank's Corporate Clients segment as part of its strategic client offering.

“With this agreement, we are delivering a further milestone in the implementation of our 'Commerzbank 4.0' strategy,” said Commerzbank chief executive officer Martin Zielke.

“We are simplifying our business, we are contributing to our cost-cutting targets, and we are freeing up capital for the benefit of our core business with private and corporate clients,' he added.”

Michael Reuther, member of the board of managing directors responsible for the Corporate Clients segment, added that as a “market leader” for corporates in Germany, Commerzbank would continue to offer a full range of capital markets products including commodity hedging products and brokerage services to clients.

The company said the current EMC business was an “attractive and value-generating” business, noting that 2017 it generated €381m gross revenues.

It said it is an important ETF market maker in Europe, amongst the major retail products market makers and amongst the leading dealers of medium term notes.

“Over the last 29 years, the Equity Markets & Commodities business has grown in Commerzbank to be one of the leading European manufacturers and market makers of financial products,” said Roberto Vila, divisional board member, equity markets and commodities.

“I am convinced that with Societe Generale and Lyxor, leading derivatives and ETF Houses, we have found the right new owners for this franchise to grow, innovate and be even more successful in the future.

“We will ensure a smooth and transparent transition process for investors who are holding our products.”