Gently coaxing Commerzbank to open its doors

With the German banking market in a state of dog-eat-dog competitiveness, Commerzbank will need all the help it can get. A large number of banks are operating in the market and all are thought to have market shares too small to be sustainable. Mergers and acquisitions are therefore widely expected. Meanwhile, the fight for new customers has been heating up since the government’s withdrawal of subsidies for the savings and cooperative banks, which is prompting a customer exodus from these institutions.

Commerzbank is rumoured to be a takeover target. Indeed, the firm might even be courting a merger. It has just announced a surprise E2.3bn write-down and a E760m share issue, a balance sheet clean up which should be welcomed by investors.

One industry expert remarked: “Commerzbank has until now been very secretive. Investors will be pleased that its debt is now coming out of the woodwork”. Credit Suisse in particular is believed to be on the lookout for an acquisition in the German banking market.

Domestic bias

Today, Commerzbank operates as a retail and private bank in Germany only. It manages E46bn for retail clients, of which E8bn is from high net worth customers. The bank’s branch network consists of 779 branches with 20 regional head offices.

Open architecture is now at the centre of its proposition to customers. Despite his quiet and unassuming manner, the bespectacled Mr Brock has managed to convince the initially hostile heads of Commerzbank to gradually implement this seemingly counterintuitive strategy. But he had a quite a fight on his hands at the beginning of the campaign.

“The introduction of open architecture leads to internal conflict, but there is no opportunity without risk, and no risk without opportunity,” says Mr Brock. At first, the product-manufacturing arm of the business feels that in selling external funds, the product distribution arm is some how betraying it, he says. The fear is that although some revenue will come in from the sales of third-party products, it will be less than revenue gained from sales of in-house funds. Moreover, sales of in-house funds will decline.

Experience has shown Mr Brock that both of these are inevitable. However, the latter is only temporary and after much discussion, the implementation of open architecture “has been accepted by our asset management department”.

Paths to conversion

This feat was achieved through a softly-softly approach. First Mr Brock had to persuade Commerzbank that banking customers were becoming increasingly savvy about the range of investment funds on the market – and crucially, their varied performance figures.

As falling markets began to hit the headlines, clients became less willing to blindly invest in their bank’s old faithful proprietary products. If Commerzbank was to have a hope of retaining this new, more discerning generation of clients, it would have to offer “best of breed” – even if it was at the expense of internal funds.

In order to win over both the client and the internal funds manufacturing people, Mr Brock says “our fund selection process had to be entirely fair and transparent”.

But the benefit to the in-house funds arm was still not immediately clear. In time, however, there was a recognition that this increased competition would force the in-house team to improve its funds. This should enable the team to sell more products – both through Commerzbank and rival banks – due to their higher quality. “It’s not a fast process,” concedes Mr Brock, “but eventually they will profit from it.”

Open architecture had to be introduced at Commerzbank step by step. Mr Brock concedes that when the decision was taken to open up, “we were not sure it was the right way to go”. It began in January 2001, with the launch of a fund comprised of a number of underlying external funds – the “Adig Best-in-One World”. This was followed in May with a decision to start recommending the first non-Commerzbank fund to clients – Fidelity Investments’ European Growth Fund.

The following year saw the launch of further funds of external funds and by September 2003 Commerzbank was recommending 20 external funds manufactured by Credit Suisse, DWS, Fidelity, Invesco, Merrill Lynch, Morgan Stanley, Nordea, UBS and Threadneedle. The latest addition to the product range is SEI Investments’ multi-manager solutions.

Open architecture delivery

The bank’s delivery of open architecture must now be honed, says Mr Brock. Currently, it is only economically viable to offer this more sophisticated choice of funds to top end clients. Mr Brock believes he has found a way around this problem. For its 1.5m clients with portfolios of between E5000 and E2m, the bank is reviewing their investment portfolios by comparing them with model portfolios and in some cases rebalancing them.

Once this service is running smoothly, Commerzbank will offer it to the retail market. Investors will be able step into a branch and compare the past and possible future performance of their existing portfolio with a number of theoretical ones prefabricated by the bank.

Portfolios can be economically constructed using funds of funds, says Mr Brock. “We will ask the client how much risk they are willing to take and then we will fit a portfolio to their needs. Depending on the size of the client, we fit them with a portfolio of funds of funds, a portfolio of funds or a portfolio of individual stocks. It’s a highly flexible solution.”

The service will be all the more cost-effective because the bank has already signed agreements with 10 fund manufacturers, which Mr Brock says will be sufficient to provide the range and quality of products required.

The Case for open architecture

The introduction of open architecture at Commerzbank had to be handled delicately, says Mr Brock. In order to placate in-house fund providers now being forced to compete with external providers, the selection process for external funds had to be fully disclosed. To make it onto the Commerzbank preferred providers list, fund management firms must have the following:

• an all-embracing product range;
• successful products in terms of absolute and relative performance within their peer groups;
• awards for products and for the investment company;
• a well-known brand name; and
• a service/cooperation/information policy.

Once the fund manager meets these criteria, the adoption of a particular product will be based on:

• data supplied by fund-rating agencies and investment companies;
• quantitive screening in terms of performance and risk measures; and
• qualitative selection through questionnaires and one-on-one interviews with portfolio managers.

During the one-to-one meetings, Commerzbank grills managers on their investment process, risk management techniques and the structure of their team.

Mr Brock puts the case for open architecture as follows:

• The range of third-party products strengthens customer loyalty. Clients do not migrate to competitors.
• Nobody can manage the best products in every asset class or peer group, third-party products close the gap in a group’s product range.
• Open architecture models are customer-driven, customers are demanding a broader range of funds and independent investment advice.

Brock: ‘The introduction of open architecture leads to internal conflict, but there is no opportunity without risk’