Higher risk Higher risk vsvs. lower growth:. lower growth:The challenge aheadThe challenge ahead

Mehmet Dalman

October 2002

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ContentsContents

�� Setting the sceneSetting the scene

�� FinancialsFinancials

�� Investment Banking - the story so farInvestment Banking - the story so far

�� The futureThe future

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“One of the best lessons children learn“One of the best lessons children learnthrough video games is standing stillthrough video games is standing stillwill get them killed quicker thanwill get them killed quicker thananything else”anything else”

Jinx Jinx MileaMilea

Commerzbank: the current situationCommerzbank: the current situation

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Higher risks AND lower growthHigher risks AND lower growthMoody's W European Upgrades &

Downgrades (number)

-70-60-50-40-30-20-10

0102030

Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02

Dow ngrade

Upgrade

Credit Spreads (bp)

0

50

100

150

200

250

J F M A M J J A S O

AA

A

AAA

BBB

S&P 500

750

850

950

1050

1150

1250

J F M A M J J A S O

European Equity Issuance (USD bn)

-

20

40

60

80

100

120

140

1999 2000 2001 2002 ann'd

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Is Germany mid-90s Japan all over again?Is Germany mid-90s Japan all over again?

�� Bubble economyBubble economy�� Unprofitable LendingUnprofitable Lending�� Declining equity marketsDeclining equity markets�� Under-Under-capitalisedcapitalised banking sector banking sector�� Hidden LossesHidden Losses�� Structural RigidityStructural Rigidity�� Deflation?Deflation?

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Parallels are overblownParallels are overblown

�� Disinflation vsDisinflation vs. Deflation. Deflation�� German banks become more, not less, prudentGerman banks become more, not less, prudent�� Cross-shareholdings much less of an issue inCross-shareholdings much less of an issue in

GermanyGermany�� Debt/GDP 110% in Germany Debt/GDP 110% in Germany cf cf 175% in mid-90s175% in mid-90s

JapanJapan�� Spectacular scale of property collapse in JapanSpectacular scale of property collapse in Japan�� Problem is structural rigidity in Problem is structural rigidity in labour labour laws, notlaws, not

asset qualityasset quality

�� Broad similarities tell us nothing aboutBroad similarities tell us nothing aboutparticular outcomesparticular outcomes

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So, what is going on in Germany?So, what is going on in Germany?

�� Fragmented domestic banking marketFragmented domestic banking market�� Consolidating European banking marketConsolidating European banking market�� Increasing competition domestically and abroadIncreasing competition domestically and abroad�� Distortions in domestic market through stateDistortions in domestic market through state

guaranteed entitiesguaranteed entities�� Restructuring difficult under German lawRestructuring difficult under German law�� Corporate governance makes change difficultCorporate governance makes change difficult

�� No overnight fix, but already in the priceNo overnight fix, but already in the price�� There is a restructuring play, There is a restructuring play, egeg Italy Italy

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It has been noticedIt has been noticed

“Mehmet Dalman’s missionappears to be to pourshareholders’ money down ahole labelled ‘InvestmentBanking’”

FT, Lex Column,24 April 2002

1997 1998 1999 2000 2001

AA-

A+

A

AA

A-

S&P

0

5

10

15

20

25

J F M A M J J A S O

Commerzbank

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Rumour vsRumour vs. Reality. Reality

Sunday Sport

Sunday Sport

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Rumour vsRumour vs. Reality. Reality

NOTE ON POSSIBLE DERIVATIVES LOSSES ADDS TO ANXIETY ABOUT EUROPEAN SECTOR

FT, 5/6 October 2002

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Rumour vsRumour vs. Reality. Reality

Commerzbank Securities: Credit Trading Revenues 2002

J F M A M J J A S

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H1 2002 Financials: key business areasH1 2002 Financials: key business areas

1.1.-30.6.2002 Retail Asset Corporate customers InvestmentBanking Management and institutions Banking

EUR mIncome, Total 978 202 1,036 615Operating Expenses 939 258 657 611Profit from ordinary activities 39 -56 379 4Taxes on income 16 -2 129 2After-tax profit 23 -54 250 2

Profit/loss attributableto minority interests - -8 -9 -Profit contribution frombusiness passed on 4 102 30 41Result based oninternal accounting 27 40 271 43

Average equity tied up 1,452 511 5,213 1,565

Return on equity (%) 3.7 15.7 10.4 5.5 Cost/income ratio (%) 88.3 127.7 44.7 99.3

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Divisional overviewDivisional overview

�� Retail BankingRetail Banking• High fixed cost, low margin business• Rationalisation in train; branch closures• Ultimate position dependent upon structural change

�� Asset ManagementAsset Management• Quality brands; sub-scale platforms• Integrate where appropriate; exit where not

�� Corporate BankingCorporate Banking• Excellent client base• Low return on equity

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Integrated Investment BankingIntegrated Investment Banking

Infrastructure

InvestmentBanking

Retail Banking

CorporateBanking

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Development of IB strategyDevelopment of IB strategy

�� EnvironmentEnvironment• Emergence of equity culture in Germany• Growth of retail sophistication• Importance of Germany in Pan European framework

�� HistoryHistory• Relationships and franchise

�� ResourcesResources• Shape of business determined by need to support high

margin businesses:– IPOs & Derivatives: need Brokerage, Research– Structured Fixed Income: need league table footprint

�� Key themes:Key themes:• Minimise investment• Punch above our weight

�� An integrated part of the strategy of Commerzbank AGAn integrated part of the strategy of Commerzbank AG

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Investment Banking: Our objectivesInvestment Banking: Our objectives

�� Relevance to Commerzbank AGRelevance to Commerzbank AG• Safeguard corporate client base• Diversify revenues• Increase profits by offering wider product range to clients• Leverage international platform• Leverage retail distribution capability and branch network

�� Necessary build-up inNecessary build-up in• Primary Capability

– Secondary distribution– Research

• Derivatives

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Equities - PerformanceEquities - Performance

Income (MEUR)

-

200

400

600

800

1,000

1,200

1996A 1997A 1998A 1999A 2000A 2001A

Pre-Tax Profit (MEUR)

-50

-

50

100

150

200

250

300

1996A 1997A 1998A 1999A 2000A 2001A

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Equities - Cumulative PerformanceEquities - Cumulative Performance

-

500

1,000

1,500

2,000

2,500

1996A 1997A 1998A 1999A 2000A 2001A

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Fixed Income - PerformanceFixed Income - Performance

Income (MEUR)

-

100

200

300

400

500

1996A 1997A 1998A 1999A 2000A 2001A

Pre-Tax Profit (MEUR)

-100

-80

-60

-40

-20

-

20

40

60

80

100

1996A 1997A 1998A 1999A 2000A 2001A

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Fixed Income - Cumulative PerformanceFixed Income - Cumulative Performance

Cumulative Income and Pre-Tax Profit (MEUR)

-400

-200

-

200

400

600

800

1,000

1996A 1997A 1998A 1999A 2000A 2001A

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Securities - PerformanceSecurities - PerformancePro-Forma Pre-Tax Profit (MEUR)

(100)

(50)

0

50

100

150

200

1996A 1997A 1998A 1999A 2000A 2001A

Pro-Forma Cost-Income Ratio

0%

20%

40%

60%

80%

100%

120%

140%

160%

1996A 1997A 1998A 1999A 2000A 2001A

Pro-Forma Allocated Cost Ratio

0%

5%

10%

15%

20%

25%

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35%

40%

1996A 1997A 1998A 1999A 2000A 2001A

Pro-Forma Income (MEUR)

0

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400

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800

1,000

1,200

1,400

1996A 1997A 1998A 1999A 2000A 2001A

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Securities - Cumulative PerformanceSecurities - Cumulative Performance

Cumulative Revenue and Pre-Tax Profit (MEUR)

(500)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1996A 1997A 1998A 1999A 2000A 2001A

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1996 1996 1996 1996 1997 1997 1997 1997 1998 1998 1998 1998 1999 2000 1999 2000 1999 2000 1999 2000 2001 2001 2001 2001Pro-forma Income (EUR) 34m 91m Pro-forma Income (EUR) 34m 91m Pro-forma Income (EUR) 34m 91m Pro-forma Income (EUR) 34m 91m 340m 340m 340m 340m 569m 1,147m 1,019m 569m 1,147m 1,019m 569m 1,147m 1,019m 569m 1,147m 1,019mAverage headcountAverage headcountAverage headcountAverage headcount n/a 286 n/a 286 n/a 286 n/a 286 502 502 502 502 807 807 807 807 1068 1068 1068 1068 1296 1296 1296 1296

1997 1998 1999 2000

CbkCbkCbkCbk launches launches launches launchesnew Equitynew Equitynew Equitynew EquityInitiativeInitiativeInitiativeInitiative

London, NY, London, NY, London, NY, London, NY, Tokyo, FrankfurtTokyo, FrankfurtTokyo, FrankfurtTokyo, Frankfurt Offices opened Offices opened Offices opened Offices opened

CFP and ECMCFP and ECMCFP and ECMCFP and ECMIntegratedIntegratedIntegratedIntegrated

“CGE” Launched“CGE” Launched“CGE” Launched“CGE” LaunchedCommerzbank Commerzbank Commerzbank Commerzbank Securities LaunchedSecurities LaunchedSecurities LaunchedSecurities LaunchedExtel & ReutersExtel & ReutersExtel & ReutersExtel & Reuters

AwardsAwardsAwardsAwards

2001 2002

Equity & Fixed Equity & Fixed Equity & Fixed Equity & Fixed Income IntegratedIncome IntegratedIncome IntegratedIncome Integrated

Corporate FinanceCorporate FinanceCorporate FinanceCorporate Financeintegratedintegratedintegratedintegrated

FX & TDTFX & TDTFX & TDTFX & TDTintegratedintegratedintegratedintegrated

Securities - HistorySecurities - History

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ComSecComSec Financials: H1 2002 Financials: H1 2002�� Income EUR 373mIncome EUR 373m

• 34% below 2001 H1

�� Direct costs controlledDirect costs controlled• 25% below 2001 H1

�� Allocated costsAllocated costs• 95% above H1 2001• 39% of total costs

(EUR M) 2001 H1 2002 H1 change

Income 534 339 -37%

Direct Costs 372 280 -25%Alloc Costs 91 177 +95%Total Costs 463 457 -1%

Net P&L Pre-tax 71 (118)

Tax 28 (42)After-tax profit 43 (76)Profit contribution frombusiness passed on 22 22

Result based oninternal accounting 65 (54) -183%

Capital 1,277 1,068 -16%

Return on Equity 10% -10%Cost/Income Ratio 87% 135%

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ExtelExtel Survey 2002 Survey 2002�� Recognition for our Research,Recognition for our Research,

Sales and Trading acrossSales and Trading acrossEquity and Fixed IncomeEquity and Fixed Income

Extel 1999-2002

13579

1113151719

1999 2000 2001 2002

17th & "Rising Star Broker"

7th

9th11th

Extel Survey 2002:Overall Pan-European Brokerage Firm

based upon aggregation of votes in all categories

1 UBS Warburg2 Schroder Salomon Smith Barney3 Deutsche Bank4 CSFB5 Merrill Lynch International6 Morgan Stanley7 Commerzbank Securities8 Goldman Sachs International9 Dresdner Kleinwort Wasserstein10 ABN AMRO11 JP Morgan12 Lehman Brothers13 HSBC Securities14 Cazenove15 Credit Agricole Indosuez Chevreaux16 ING 17 SG Securities18 Exane19 WestLB Panmure20 Enskilda Securities

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Selected H1 2002 Highlights - Capital MarketsSelected H1 2002 Highlights - Capital Markets

M&AM&AAdvised RWE on the EUR4.1bn acquisition of Transgas in the Czech Republic

DCMDCMJoint Bookrunner of EUR250m 10 yr bond issue for Republic of Iceland

Appointed Joint Bookrunner for Iran’s debut EUR625m Eurobond issue

Arranger and Lead Manager of an EUR1bn synthetic RMBS issue for Rheinhyp

Joint Lead Manager of a EUR500m 10 yr Landesschatzanweisung for FreeState of Bavaria

Joint Bookrunner of a GBP200m 10 yr issue for GKN plc

ECMECMJoint Lead Manager of EUR111m IPO of Astaldi - A successful issue completedin difficult market conditions

Syndicated LoansSyndicated LoansCompleted first round syndication of the EUR830m Vaillant syndicated loanfacilitySole Arranger EUR300m revolving credit facility for Epcos

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Adapting to changing circumstancesAdapting to changing circumstances

“Loans no longer play the dominant role here which they played in pastdecades. They have become one product among many. They haveto be combined sensibly and creatively with other products”

-K-P Müller, October 29, 2001

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Our historical business modelOur historical business model

CorporateBank

InvestmentBank

MNCs

Major customers

SMEs

InstitutionsCapital Markets

Integrated RelationshipManagement

�� We lend money to companiesWe lend money to companies�� We can “up-tier” the relationshipWe can “up-tier” the relationship�� They will buy high-margin products and servicesThey will buy high-margin products and services

from us because we lend them moneyfrom us because we lend them moneyButBut�� This is no longer validThis is no longer valid

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What should our value proposition be?What should our value proposition be?

�� Value comes fromValue comes from• Commitment• Insight• Providing a scarce resource

�� Commitment means greater allocation to fewerCommitment means greater allocation to fewerclientsclients

�� Insight means integrated understanding ofInsight means integrated understanding ofcapital structure and creditcapital structure and credit

�� Providing scarce resources means leveragingProviding scarce resources means leveragingeconomic and intellectual capitaleconomic and intellectual capital

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Strategic drivers for corporate & investment bankStrategic drivers for corporate & investment bank

�� Investment Banking capability fundamental toInvestment Banking capability fundamental tooverall strategyoverall strategy

�� Utilise Utilise investment in intellectual capitalinvestment in intellectual capital

�� Corporate banking is about asset quality andCorporate banking is about asset quality andcost controlcost control

�� Investment banking is revenue-driven, andInvestment banking is revenue-driven, andshould enhance banking returnsshould enhance banking returns

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Corporate & Investment BankingCorporate & Investment Banking

�� We are a corporate bankWe are a corporate bank

�� We need a proper, integrated corporate &We need a proper, integrated corporate &investment banking capabilityinvestment banking capability

�� We have built the investment bank to strengthenWe have built the investment bank to strengthenour corporate relationshipsour corporate relationships

�� We have positioned ourselves for what weWe have positioned ourselves for what webelieve will be the dominant theme in Europe:believe will be the dominant theme in Europe:Capital StructuringCapital Structuring

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Capital StructuringCapital Structuring

�� Abundant opportunities for capital restructuringAbundant opportunities for capital restructuringin Europein Europe• not least in Germany• not just Banks!

�� Commerzbank well positioned to benefitCommerzbank well positioned to benefit• close link between corporate and investment banking• integrated platform for equity, credit and quantitative

research to give a holistic view• Integrated capital markets business with specialist

capital structuring group

�� A major opportunity to leverage the bank’sA major opportunity to leverage the bank’scorporate lending franchisecorporate lending franchise

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Sector

Sector

Sector

Sector

Sector

Sector

Sector

AlignmentAlignment

InvestmentBank

CorporateBank

● Central CreditCentral CreditCentral CreditCentral CreditManagementManagementManagementManagement

● Know-how inKnow-how inKnow-how inKnow-how inCorporatesCorporatesCorporatesCorporates

● Cross-SellingCross-SellingCross-SellingCross-Selling

● Lending and HighLending and HighLending and HighLending and HighMargin BusinessMargin BusinessMargin BusinessMargin Business

● Risk ManagementRisk ManagementRisk ManagementRisk Management

● Quality Credit PortfolioQuality Credit PortfolioQuality Credit PortfolioQuality Credit Portfolio

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ConclusionConclusion

�� Difficult market conditions with muchDifficult market conditions with muchspeculationspeculation

�� German banking under the microscopeGerman banking under the microscope

�� We have a strategyWe have a strategy

�� Attacking costs and unlocking revenue potentialAttacking costs and unlocking revenue potential

�� We will remain focusedWe will remain focused

Higher risk Higher risk vsvs. lower growth:. lower growth:The challenge aheadThe challenge ahead

Mehmet Dalman

October 2002