Commerzbank Expects More Subprime Writedowns
The shrinking value of subprime mortgage investments will eat further into Commerzbank's 2007 profits, its designated chief executive said while admitting that management had blundered.
Martin Blessing's comments in a Reuters interview came as problems at state lender WestLB kept Germany centre stage in the credit market storm. It has so far been one of the countries worst affected by the crisis, resulting in the near collapse of two banks and sapping profits at many more.
Blessing said management at Commerzbank, Germany's second-biggest listed bank, had made mistakes by failing to take decisive action and ditch their investments in subprime mortgages when the market first wobbled.
Now it faces a mounting bill with further writedowns in the final three months of last year, said Blessing, who takes over as chief executive in May when Klaus-Peter Mueller moves into the role of non-executive chairman.
Commerzbank took a 291 million euros ($427 million) charge against writedowns on 1.2 billion euros of subprime investments in the third quarter.
Blessing said he did not expect the writedown to be as bad in the fourth quarter. But the bill is already significant for Commerzbank, which made a net profit of about 1.6 billion euros in 2006.
Blessing also warned that additional writedowns could come on top of those in the final three months of 2007.
"Nobody can say if that is it," he said. "Further writedowns cannot be ruled out."
Tighter Rein on Costs
"We have made mistakes and must learn our lessons," said the 44-year-old manager who sports friendship armbands. "Nobody forced us to invest in subprime."
"The decision at the end of 2006 not to buy any more (subprime) was right. But in hindsight, we should have got out of the investments immediately. We weren't radical enough."
"In the end, the hope that things would improve won out but we should have known better," said the former McKinsey partner, who earned 2.7 million euros in 2006.
Blessing's remarks sent Commerzbank's stock, which had already been trading down, tumbling further and it was down 6.3 percent, broadly in line with other German financial stocks.
He reiterated a promise to pay shareholders a bigger dividend for 2007 but at the same time warned that management would keep a tighter grip on overheads as it headed into a year Blessing said would be a difficult one for banks.
"We will have to keep a tighter rein on costs," he said.
Commerzbank's share price has slumped by more than 40 percent over the past six months, as fears about the cost of its subprime engagement grew.
Last week, it dipped after Hypo Real Estate sprung a surprise subprime writedown on investors. Investors scrambled out of Commerzbank stock, drawing a comparison between Hypo, a property lender and investment bank, and Commerzbank.
"The comparison ... is unfair," said Blessing. "Only part of our business can be compared with Hypo Real Estate.
His admission of error contrasts with Hypo's chief Georg Funke, who last week congratulated his management team on a "fantastic job," adding that they had made no mistakes.