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OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #4944/01 3191320
ZNR UUUUU ZZH
O 151320Z NOV 07
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3957
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
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UNCLAS SECTION 01 OF 02 FRANKFURT 004944 
 
SIPDIS 
 
DEPARTMENT FOR EUR/AGS 
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
 
SUBJECT: Commerzbank Announces Third Quarter Write-Offs 
 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
REF: a) 07 Frankfurt 4624, b) 07 Berlin 1574, c) 07 Berlin 1746 
 
¶1.  Summary.  The release of third quarter earnings reports has shed 
further light on the extent of the damage caused by subprime 
investments in the German banking industry, with Commerzbank, 
Germany's second largest private bank, reporting larger write-offs 
than originally anticipated.  While Commerzbank and its competitors 
continue to generate earnings from traditional sources that more 
than offset their write-offs, this wave of losses shows that the 
burden of subprime debt will continue to weigh on banks' balance 
sheets.  As mortgage-backed securities no longer yield high returns, 
private banks will have to develop new investment strategies to 
replace this once-lucrative vehicle.  Meanwhile the European Central 
Bank (ECB) announced that it would roll over two supplementary 
longer term refinancing operations issued at the height of the 
crisis into the new year, as an ongoing part of its efforts to bring 
stability to the still fragile interbank lending process.  End 
Summary. 
 
Third Quarter Reports: It's Not Over 
------------------------------------ 
 
¶2.  On November 6, Commerzbank AG, Germany's second largest private 
bank after Deutsche Bank, released its third quarter earnings report 
which revealed a rise in total profits of 56%, based mainly in the 
traditional sectors of tax gains and private banking.  Despite the 
overall positive trend, the report also revealed larger than 
expected write downs of 291 million euros ($425 million) in 
investments based in U.S. mortgage-backed securities.  Commerzbank's 
losses were not nearly as high as those of Germany's largest bank, 
Deutsche Bank.  Deutsche Bank, which invested more aggressively in 
subprime vehicles, wrote off losses of 2.16 billion euros ($3.17 
billion).  Deutsche Bank also reported overall profits in the third 
quarter. 
 
¶3.  Commerzbank CEO Klaus-Peter Mueller had braced investors for the 
news as early as October 20 admitting to a "further market impact" 
from subprime loans and opining that there would be "repercussions" 
when banks released third-quarter earnings reports.  The reports of 
write-offs from Commerzbank and Deutsche Bank showed that the German 
banking sector would clearly weather the storm, but the large 
private banks days of record-setting profits were in the past in the 
near term. 
 
Klaus-Peter Mueller: Voice of Caution 
------------------------------------- 
 
¶4.  Like many other large banks, Commerzbank stepped in early when 
the subprime crisis began in August to stave off insolvencies and 
calm panic.  On August 22, when reports started coming out that two 
small German banks, SachsenLB and Deutsche Industriebank (IKB), were 
facing insolvency, Commerzbank made three billion euros ($4.38 
billion) available on the interbank market to stabilize the German 
banking sector.  Joining Deutsche Bank's CEO Josef Ackermann and 
others in trying to calm investor fears, Mueller said in a September 
5 statement that he saw the market stabilizing, adding "There are 
good reasons to believe that the markets will return to calm 
waters." 
 
¶5.  Commerzbank initially appeared to be better protected from the 
crisis than its competitors.  On September 20, Mueller announced the 
bank would set aside a relatively small 92 million euros ($128 
million) to cover an estimated 80 million euros ($111.2 million) in 
subprime losses, although he admitted that Commerzbank had no way of 
knowing what a "sufficient" figure to cover the losses would be. 
Deutsche Bank announced comparatively larger potential losses of 1.5 
billion euros ($2.1 billion) in late September. 
 
¶6.  While Deutsche Bank CEO Josef Ackermann continued to go on the 
record to assure investors that the crisis was not a major worry, 
Mueller adopted a more cautious stance, saying that Commerzbank was 
largely protected but it was not clear where other banks stood.  A 
Commerzbank executive told EMIN and Congen Econoff on October 11 
that, while Commerzbank had over 10 billion euros in conduits, the 
conduits were mostly originated by Commerzbank and of good quality 
(see reftel a).  Mueller remarked privately to Frankfurt Consul 
General November 2 that the worst was yet to come, and expressed 
dismay that U.S. television was still running advertisements for 
cheap mortgages. 
 
¶7.  In a long anticipated move, Mueller also announced October 22 
that he will step down as CEO of Commerzbank on May 15, 2008 to 
become Chairman of the Executive Board. He will be replaced by 
Martin Blessing, a current board member. 
 
FRANKFURT 00004944  002 OF 002 
 
 
 
The ECB: A New Kind of Normalcy 
------------------------------- 
 
¶7.  The reports of losses have fueled the crisis of confidence in 
the German and greater European banking sectors, necessitating 
further action by the ECB.  On November 8, the ECB announced in a 
press release that it would roll over two supplementary longer-term 
refinancing operations (LTROs) valued at 40 and 75 billion euros 
that were set to mature at the end of November and the beginning of 
December.  The two LTROs had been issued in late August and early 
September at the height of the credit crunch. 
 
¶8.  In another sign of fragile banking conditions, the spread 
between unsecured three-month interbank lending and the risk-free 
equivalent remains at fifty-one basis points, while it was in single 
digits in early August.  An ECB executive told Congen Econoff 
November 13 that the distrust between banks shown in this disparity 
may be "a new kind of normalcy" reflecting a more accurate 
assessment of risk and that interbank rates may never return to the 
halcyon days of before. 
 
¶9.  Comment.  When Blessing succeeds Mueller next year, he will 
inherit a bank that, like many banks in Europe, will need to find 
new sources of earnings.  German banks such as Commerzbank have made 
record profits from a combination of high return mortgage-backed 
securities and other more traditional sources of income.  Where 
banks will turn to replace the earnings from mortgage-backed 
securities is unknown, but profits in the near future may not be as 
high as before the subprime bust and a new type of normalcy where 
interbank lending is not as fluid may take hold.  End Comment. 
 
¶10.  This cable has been coordinated with Embassy Berlin. 
POWELL