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Sale of Commerzbank subsidiary M-Bank is a long way off

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Another major project of the “Commerzbank 5.0” strategy, on the other hand, has come to a standstill: Negotiations to sell the majority stake in the Polish M-Bank are on hold, according to the Handelsblatt. Experts believe that the goal set by CEO Martin Zielke in December of completing the sale by the end of 2020 can hardly be achieved.

Because of travel restrictions and barring contacts, it is currently impossible to conduct negotiations in Poland, said several people familiar with the subject. Many things like a tightened book check could not be done by video conference. In addition, Commerzbank currently needs a large part of its resources to deal with the crisis in Germany.

Commerzbank has not yet given up its goal of selling M-Bank. The team put together for this continues to exist.

Nevertheless, according to insiders, doubts are growing at the Frankfurt headquarters whether a successful sale can still succeed. The sales revenue originally targeted by Commerzbank could no longer be realized after the corona crisis, several people familiar with the negotiations told Handelsblatt.

A look at the Polish stock exchange underpins this assessment: M-Bank’s market value there has almost halved since the beginning of the year – from 3.9 to 2.1 billion euros. The value of Commerzbank’s 69 percent stake has thus fallen to 1.45 billion euros.

Just one bidder

In addition, M-Bank sales were difficult even before the outbreak of the corona crisis. Initially, a large number of institutions expressed interest in the fifth largest Polish bank, which is considered to be one of the most innovative financial institutions in Europe. These included the Polish subsidiaries of the major European banks BNP, Santander and ING as well as the Austrian Erste Group.

However, in view of the positioning of the national conservative government in Warsaw, which is committed to the “repolonization” of the financial system, foreign buyers have now said goodbye to the sales process.

The only serious bidder left, according to financial circles, is the second largest Polish bank, Pekao. The Polish state is indirectly involved in this through the insurer PZU. The fact that other Polish institutes such as Alior and PKO BP did not make an offer was probably a political decision because the state also participates in these institutes, says banking expert Filip Mazurek from the consultancy firm Sollers.

The development is anything but encouraging for Commerzbank. Due to the lack of competition, negotiations had been difficult for the people of Frankfurt before the outbreak of the crisis, several insiders report. “Of course, if you only have one bidder, you won’t get the price you want,” said one of them. Commerzbank and Pekao were far apart in their ideas.

Speakers from Pekao and Commerzbank did not want to comment on the topic. CFO Bettina Orlopp said in mid-March that Commerzbank was still trying to sell M-Bank, but not at any price.

When its new strategy was announced in September, Germany’s second largest private bank assumed that it would have to sell M-Bank in order to finance its upcoming restructuring. Since the capital situation of the institute has improved, according to Orlopp this is no longer the case. “It still makes sense to sell M-Bank – but only if we can achieve the target price and if the transaction structure is right,” said the CFO. “Otherwise there will be no deal.”

“Sales process impossible at the moment”

The transaction structure is primarily about dealing with a multi-billion dollar loan portfolio in Swiss francs. M-Bank, like other Polish institutions, had awarded these on a large scale before the financial crisis. Because the Polish zloty subsequently depreciated significantly against the Swiss franc, the borrowers’ loans became unexpectedly expensive.

In October 2019, the European Court of Justice (ECJ) ruled that such loan contracts could become ineffective if they contained unfair terms. Polish courts have to decide in each individual case whether this is the case.

Since the ECJ ruling, the number of lawsuits and the number of cases in which Polish courts have ruled in favor of customers has increased significantly. M-Bank therefore had to significantly increase its provisions for these loans.

According to financial circles, Commerzbank hopes that it will be able to sell the franc loan portfolio in the course of an exit from M-Bank. In previous sales processes, the Polish regulator KNF had forced foreign banks to keep the franc loans.

Consultant Mazurek does not believe that an agreement can be reached in the foreseeable future. “In my view, there are little to no chances that the transaction will advance in 2020,” he says. The prices are in the basement, the problems with franc loans are getting bigger.

The corona crisis would also pose many additional challenges for the banks. “There will be economic problems, bankruptcies and debates about loan extensions,” Mazurek said. “That makes a sales process impossible at least at the moment.”

The rating agency Fitch also has doubts as to whether Commerzbank can implement its strategy as planned. “Commerzbank is in the middle of a substantial restructuring that we believe could be thwarted by the ongoing crisis,” warned Fitch at the end of March.

From the perspective of those involved, it is difficult to predict how the M-Bank sale will continue after the end of the corona crisis. It would be no problem for Commerzbank to keep M-Bank, some say. However, this option is not particularly attractive because the Polish authorities have forbidden the M-Bank to transfer a dividend to Frankfurt for several years.

In addition, there is hope in Poland that Commerzbank will need the sales proceeds and the risk relief associated with an M-Bank sale sooner or later – and will therefore return to the negotiating table. “It is all just a matter of time,” predicts a person familiar with the negotiations.

More: Commerzbank board members warn – “The climax of the crisis is still ahead of us”

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