(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

LONDON - (Reuters Breakingviews) - Commerzbank looks rudderless. Chief Executive Martin Zielke and Chairman Stefan Schmittmann both resigned from the German lender late on Friday, under pressure from labour unions and pushy investor Cerberus Capital Management. The double exit brings instability, but also the hope of real change - such as a deal with rivals UniCredit or Deutsche Bank.

Zielke has finally accepted what seemed evident for a while: investors and employees had lost confidence in his strategy. Commerzbank shares are down 25% this year and trade at just 20% of the bank’s tangible book value - one of the lowest valuations among European lenders. Labour unions last week blocked the CEO from presenting a strategy update to the board, according to Reuters. The 57-year-old offered to resign to give the bank a “fresh start”. Chairman Schmittmann did the same, saying he wanted to take his share of the responsibility for poor performance.

There’s no shortage of contenders to fill the resulting power vacuum. Cerberus, which owns 5% and whose president is former JPMorgan executive Matthew Zames, was already pushing for board seats. The German state, a 16% shareholder, has taken a more active role under Finance Minister Olaf Scholz. And Commerzbank has a ready-made replacement for Zielke in Roland Boekhout, who previously ran ING’s German digital bank.

Whoever takes charge will have to start by slashing costs. Expenses ate up roughly 80% of revenue over the past two years, compared with 65% on average for neighbours ING, ABN Amro, Deutsche Bank, Erste Bank and Raiffeisen Bank International. But cost-cutting alone won’t suffice. Even if Commerzbank was as efficient as its peers, its return on tangible equity last year would have been 7% rather than 2.4%. That’s still below a probable 10% cost of equity.

Germany’s hyper-competitive banking market is largely to blame. That is why merging with a rival, like Deutsche or UniCredit’s German unit, would help Commerzbank push through deeper cost savings and protect lending margins. Admittedly, talks with Deutsche stalled last year due to the complexity and risks of such a large integration. But like Commerzbank, other German lenders face years of ultra-low interest rates. A deal may be their only long-term hope for decent returns.

CONTEXT NEWS

- Commerzbank on July 3 said that Chairman Stefan Schmittmann had resigned and Chief Executive Martin Zielke had offered his resignation.

- Zielke said: ““I would like to open the way for a fresh start. The bank needs a profound transformation and a new CEO, who will get the necessary time from the markets to implement a strategy.” He will leave by the end of the year. Zielke had been due to present a strategy update to the board, but was blocked from doing so by labour representatives, according to Reuters.

- Schmittmann said that the German lender’s strategy was unpopular with investors and that he wanted to take his share of the responsibility for the poor share-price performance. “There are profound changes ahead for the board of managing directors, the bank and its employees. This will take a lot of strength and effort, and should be free from repeated discussions over my role”, he said.

- Commerzbank shares closed at 4.13 euros on July 3, down 25% since the start of the year.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Peter Thal Larsen and Sharon Lam)

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