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CNBC Transcript: Martin Zielke, Commerzbank CEO

Interviewed by CNBC's Annette Weisbach

Annette Weisbach (AW): Let's have a look at the banking union and the new proposal from German Finance Minister Olaf Scholz which was quite a surprise coming from a German Finance Minister that he is supporting a common deposit scheme for Europe. Would you say that's a good idea?

Martin Zielke (MZ): Certainly yes. I think if we understand the banking union as the platform for strong banks I think finishing the banking union is a very important task for the EU Commission and also for Europe in the whole. I think it's the right step to go this direction.

AW: What would you say will be the benefit of the banking union for European banks as such? Can they easily do more consolidation – it's not a means as such to make it more profitable, right?

MZ: I wouldn't think of things as consolidation as the first step. I think the banking union and moreover capital union will create a huge market and huge level playing field that gives banks much better business opportunities than a fragmented market as we see it now in Europe. Especially if you compare it to let's say the US banks. If we really want to compete with our American friends we really need a finished banking union and a capital markets union.

AW: Is it also because it's easier to do cross-border mergers and to have bigger banks because clearly if you look back 10 years ago after the financial crisis the discrepancy wasn't that big. So European banks were not that much smaller than Wall Street banks but now it's a completely different story.

MZ: I think the reasons are a bit more complex than only this part but it's clear. A banking union would give banks in Europe the opportunity to create real European business models and franchises. As long as we don't have this I don't expect it to be and that's not good.

AW: Is it also that it's easier to digitalise the business because clearly digitalising a bank is clearly a cross-border exercise as such. So would you say to be truly digital it is much more easier to be pan-European?

MZ: No, honestly not, it has nothing to do with it. I think you can be fully digitalised bank in a domestic market as well as pan-European market. The question of the banking union helps to work in different countries and markets. That makes the market bigger and of course that creates opportunities. Digitalisation is a topic and a task for every bank in the world I would say.

AW: If you look at different European markets which markets are most attractive if you think of doing business elsewhere?

MZ: Well it depends how you look into it. Of course because Germany is so such a strong economy absolutely an attractive market for the business relevance. If you look at a margin perspective I will see other markets that have much more juice. But of course the huge markets like Germany, France, Italy and Spain and of course the Benelux and all the others. Europe as a whole is an important market. If you ask me it's not a question of single nations and single markets, it is a single market it is a question of the single market. It's a question of whether we can use this huge market with its huge people as a market for banks but not only for banks but the real economy as well.

AW: Let's talk a bit about the real economy and also the effect it might have on banks, because currently it seems that some people think that we might get a cyclical recovery. Others think that we'll headed into a downturn next year. What's your dominant idea?

MZ: I would think not one or the other. I think we expect, our economists to expect more or less, let's say it looks kind of muddling through. So no strong effects, no negative impact, no huge recession, for example, but also not a strong impulse. And that is not good, you know. So therefore, I think, again, if you want to have a strong economy, you need to make real strong steps in the right direction. Banking union, Capital Markets Union is one of these elements.

AW: The BDI and the trade union kind of came out in a funny sort of marriage to call for more spending in Germany. Do you think that is needed to boost the German economy at that point?

MZ: Well, first of all. If we look on it from a German perspective, Germany is proud and I think that's good, that's right that we have a balanced budget last year, so what we call Schwarze Null or Black Zero, and that has been good in the last year to have a let's say, a kind of disciplined approach for all the politicians in Germany. As of now, I would say it would make sense to use the opportunities that we have in our constitution. We have the so-called debt-brake. And that gives politicians more leeway for instance, and I think and therefore, I support this idea. Politicians should use this leeway under the conditions of those debt brake, but they should use the opportunity to do this.

AW: Would you say it's right and it's forceful enough what the German government currently is doing in terms of being digitalizing our economy, especially working on getting Internet everywhere, which is a bit of a funny thing if you talk to foreigners?

MZ: If you ask me where we should invest this money, I think for me there are three priorities I would say first of all its it's kind of analogue infrastructure, streets, railways and whatever. Then, as you mentioned, digital infrastructure, of course. And third we shouldn't forget that, education, education, education, that is for a country like Germany, like Europe, so important.

AW: Let us talk also about geopolitical risk, because it seems that October has changed the mood here a little bit, at least when it comes to the trade war and Brexit. How optimistic are you that this sort of headwind is going away and that it will perhaps even be a tailwind going into the next year?

MZ: Well, right. Honestly, I'm typically a very optimistic person, but we should be clear, I don't expect fast change in this environment. So we have to be prepared. Maybe I'm wrong, would be good. Of course. But we should prepare for a longer period of uncertainties over the environment. And therefore, I think economies like Germany need, for example banks support this special kind of industry, German Mittelstand, for example, is typical for Germany and therefore banks like Commerzbank can help to bridge this uncertainty.

AW: Banks like Commerzbank though, also have a problem with their profitability like other banks as well on the ground. So how much is that also down to the ECB policy, which came out now in September, again with the big banks to even go lower and lower for longer. So now it looks like that for the next decade we could actually look into a very low interest rate environment, which kind of is a problem for many banks, right?

MZ: Well, I think it's obvious that the low or honestly a negative interest rate has influenced of the profitability of financial institutions. So that's clear. And that's true for all banks in the eurozone because all of them are impacted by this policy.

AW: But do you think that, for example, tiering which they also introduced takes away part of the pain in an effective way, or is it just not like helping you so much?

MZ: Well tiering is a step in the right direction but overall it does not cover the real burden of the overall negative interest rate environment. So if you ask me whether this is the right way to go, I clearly would say no. We should find different ways. In the beginning of this central bank policy I really supported it, by the way, maybe surprising because I think in the beginning it made a lot of sense to do this, but over time, the negative side effects of this policy grew and the initial effects of supporting the industry in corporates to invest, it decreased its effect.

AW: Do you mean the negative deposit rate or the asset purchases or both together?

MZ: I think you should see this as a connected policy. Both are kind of easing of central bank's policy. That has a sense, that has a rationale, but over time the effects as I said, they decrease the positive effects and the negative effects begin to be really burdening.

AW: Would you say the ECB, given that the economy doesn't look that bad, should reconsider its monetary policy stance?

MZ: Well I'm not in the shoes of the ECB, so it's not up me to do that. But I would expect as a participant of these markets, I would expect some, let's say, ideas how we come back to a more, let's say, rational and more sustainable, long term, sustainable, normal if you want to, policy.

AW: Let's look at Commerzbank for a little bit as well, because you have undergone a lot of changes. And also not only because of the ECB policy, obviously, but also homemade problems. Where do we stand with the new strategy? And where do you see the bank, say, in five to 10 years?

MZ: Well, I think yes as you mentioned, we had to revise our strategy because of the situation we are facing. The central bank policy and the trade war and all these circumstances and I think we did that and we made a lot of progress. And what for me is important if you look on that, Commerzbank is a very important bank in the German industry, and that makes us very strong. If we are able to support our customers even in harder times and our strategic, let's say, moves, we did it over the last years after the financial crisis had always the same goals. That means to strengthen the bank, to strengthen the substance of the bank with capital, to be able to be at the side of our customers, even in times where they need us. And obviously they need us.

AW: Looking at the share price, though, investors seem to be a bit disgruntled. Also looking at your new return on equity target, which some say might even not cover the cost of capital. So what do you tell shareholders or investors? Why should they actually buy your shares?

MZ: Well, I understand this view and it's not easy, you know, and this circumstances, this environment. But that's only one view. If you change your view a little bit and say, well, what is Commerzbank standing for? Commerzbank is one of the 20 biggest banks in Europe by capital, for example. And in the same way by business. That means we are able to support the companies one of the most important or at least the biggest economy in Europe. That creates a potential. Now, our strategic approach is clearly to strengthen this position and that gives clearly a perspective even in the environment which we cannot change and what we do we are facing in the moment and maybe for the upcoming future.

AW: When I was writing about you, I was always saying that Commerzbank is sort of a play also on high interest rates because of your business model. Is that still the case? Would you say the moment monetary policy will be a bit different also your margins would probably improve?

MZ: Well, I think in the end, it's right. But you have to understand why this is the case. We are, as I said, we are supporting the German Mittelstand. The German Mittelstand depends on the power of the German markets for exports and all of these schemes on investment and that depends on, let's say, the investment volumes and the ability of those customers to really grow. And that has to do with the interest rate environment as well. So this is all connected. And yes, if the German industry and the German Mittelstand becomes stronger and grows, that helps, of course, the bank.

AW: But to be fair, the Mittelstand once was a lot bigger inside Commerzbank than it is now in terms of operating profit generator. Is that specific area of business highly competitive? Because it seems that everybody wants to make business with the German Mittelstand, the Goldman Sachs of the world.
MZ: Absolutely. I think we are the leading Mittelstand bank in Germany. We have the biggest market share there. For example, we have are the market leader for trade finance, for example, which is very important for export oriented German economy and German corporates. We have I think two-thirds of our capital is allocated in the Mittelstand bank so it's a very, very important part of this bank. Profitability depends a lot on these topics, like interest rates and capital requirements there we have to optimize that because we cannot change these circumstances. But it's absolutely clear this is a if not the core of this bank. And I'm very, very sure that will be the future as well.


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