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European Banks Use Pandemic to Clean House

02/14/2021 | 05:44am EDT

By Patricia Kowsmann and Margot Patrick

European banks are using the pandemic to make changes investors have wanted for years: slash jobs, shut branches and force customers online.

Germany's second-largest lender, Commerzbank AG, said Thursday that it would cut a third of its domestic staff and almost half of its bricks-and-mortar presence after pressure from U.S. shareholder Cerberus Capital Management. Bank mergers under way in Italy and Spain are expected to close thousands of overlapping branches. Business consulting firm Kearney predicts one-quarter of Europe's 165,000 bank branches will be gone in three years.

Banks are one of Europe's economic weak links, and they have been slow to change. Compared with U.S. peers, European banks struggle to make enough money to support lending growth. They came into the Covid-19 crisis still digesting a mountain of bad loans from the sovereign-debt crisis that started more than a decade ago.

The pandemic injected urgency into the situation. The European Central Bank has leaned on banks to reform and has paved the way for cost-saving mergers. National governments, long resistant to approving bank mergers that would result in job cuts, have changed their tune. Dreary stock-market valuations have spurred CEOs to act.

"The pandemic, to some extent, has been a catalyst for banks to bite the bullet and start addressing these weaknesses in a more radical way," Andrea Enria, head of banking supervision at the ECB, said recently.

European banks' costs are high compared to the revenue they generate. One area of low-hanging fruit is bank branches. Spain's top five banks closed 8% of their branches last year, and have vowed to shut more. Despite years of cuts, the country had one of the highest number of commercial bank branches per capita in the eurozone -- 49 for every 100,000 people in 2019 -- according to the International Monetary Fund, compared with 30 in the U.S.

Caixabank SA, which is buying smaller Bankia SA to scale up, said it would save EUR770 million a year, the equivalent of $930 million, a large part of which analysts expect to come from shutting as many as half of its 6,300 branches.

The hope is that the pandemic has taught customers how to live without frequent trips to bank branches, which are expensive to maintain and staff.

Anna de Juan, a 60-year-old Bankia customer, used to go to a branch almost every day for at least an hour to make cash transfers and manage investment funds for a small asset-holding firm she works for. Since the pandemic, she has done almost everything online or over the phone.

"It has been a great change for me; I have saved time and energy," she said.

Branch foot traffic dropped 30% during the pandemic at Ireland's AIB Group PLC. That led to an unexpected benefit for the bank. Over-65s, who have been resistant to using online tools, are now the fastest-growing group on AIB's digital channels, said CEO Colin Hunt. He said branches can be an important "shop window." But it is merging some, cutting back on office space and eliminating 1,500 jobs to cut costs 10%.

So far, investors remain skeptical about whether the newfound resolve for cutting will be enough. European bank shares have languished for years. Europe's largest banks, despite having balance sheets on par with U.S. rivals, trade at a fraction of their market value.

At Commerzbank, years of slow progress on cost-cutting agitated its second-largest shareholder, Cerberus. Last summer it demanded a sharper turnaround, after which the bank's CEO and chairman resigned. The private-equity giant is sitting on a paper loss of over EUR300 million from its 2017 investment.

"If we want to make the bank future-proof, we need to carry out in-depth restructuring, and as quickly as possible," Manfred Knof, Commerzbank's CEO, said Thursday. The sharp cuts have been supported by the German government, the bank's largest shareholder, and have so far faced little resistance from unions.

A person familiar with Cerberus's thinking said the plan, which includes exiting international locations and unprofitable operations, is largely in line with what it has long called for.

In Italy, Intesa Sanpaolo SpA shed 10,000 jobs and hundreds of branches after it merged with a smaller rival last year. Chief Executive Carlo Messina said parts of the strategy were "reset due to the pandemic" as customers moved online, and the combined bank's annual cost savings rose 37% to EUR700 million.

Even still, Italy's largest bank by assets has more than 4,000 branches, on par with JPMorgan Chase & Co. and Bank of America Corp., despite operating in a smaller market. Intesa plans to keep at least 3,000 branches and turn them into advice centers to sell investments and insurance. It is also channeling customers who don't want to go online toward drugstores and espresso bars through a venture with a payments processor.

--Xavier Fontdegloria contributed to this article.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com and Margot Patrick at margot.patrick@wsj.com

(END) Dow Jones Newswires

02-14-21 0544ET

Stocks mentioned in the article
ChangeLast1st jan.
AIB GROUP PLC 0.99% 2.238 Real-time Quote.31.83%
AUSTRALIAN DOLLAR / EURO (AUD/EUR) 0.05% 0.63578 Delayed Quote.0.77%
BANK OF AMERICA CORPORATION 1.57% 40.83 Delayed Quote.32.63%
BANKIA 2.65% 1.784 Delayed Quote.23.12%
CAIXABANK, S.A. 1.54% 2.635 Delayed Quote.25.42%
CANADIAN DOLLAR / EURO (CAD/EUR) -0.02% 0.680457 Delayed Quote.5.85%
COMMERZBANK AG 0.68% 6.21 Delayed Quote.17.93%
INTESA SANPAOLO S.P.A. 2.07% 2.364 Delayed Quote.21.09%
JPMORGAN CHASE & CO. 0.92% 152.51 Delayed Quote.18.21%
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Sales 2021 8 423 M 10 055 M 10 055 M
Net income 2021 -264 M -315 M -315 M
Net Debt 2021 - - -
P/E ratio 2021 -35,4x
Yield 2021 0,15%
Capitalization 7 777 M 9 277 M 9 284 M
Capi. / Sales 2021 0,92x
Capi. / Sales 2022 0,94x
Nbr of Employees 38 823
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