Cerberus Capital Management has given up on the art of persuasion. After losing $900m on stakes in Deutsche Bank and its smaller rival Commerzbank — about half its original 2017 investments — the New York private equity firm has come out fighting. That Cerberus is turning from backer to shareholder activist says more about its miscalculations on German banking than its aspirations.

Cerberus, run by the low-profile billionaire Stephen Feinberg, has vowed to seek “alternative paths” after Commerzbank rejected its request last week to give it two seats on the company’s supervisory board. In a punchy response, Cerberus said it remained committed to “achieving substantial change to the leadership”, and that management had failed to meet targets that weren’t ambitious enough to begin with.

Commerzbank held its annual shareholder meeting just last month, so pushing for a seat at the table would mean Cerberus getting a German court to enforce an extraordinary general meeting, while winning over other investors to nominate the new candidates.

The German bank is, indeed, in an “exceptionally difficult and vulnerable position”, as Cerberus points out. The pandemic struck just as it was starting to work through its latest restructuring. The shares have rebounded from a May low but they still value the lender at just 20% of its tangible book, hardly a sign of strength. In the European benchmark bank index, only an Italian and a Spanish bank — whose governments have a fraction of the firepower of Germany to support the economy through the pandemic — trade at similar lows.

The frustration is understandable. Commerzbank’s CEO, Martin Zielke, hasn’t exactly aimed for the stars and his execution has been slow. He has targeted a paltry return on tangible equity of 4% from cutting branches and some jobs. Deutsche Bank, in the middle of its biggest overhaul in decades, aims for 8% (though it’s questionable whether that’s achievable).

New-look banking world

Cerberus isn’t alone in wanting deeper and faster cuts. At least two more large Commerzbank investors agree, Bloomberg News has reported. And the German government, which still owns 16% of the lender after its crisis-era bailout, replaced its two supervisory board members in May because of similar concerns.

However, Commerzbank’s management isn’t entirely to blame for Cerberus’s losses — even if the investment firm feels its advice fell on deaf ears in the 70 meetings it says it held with the company. The US fund’s endorsement of a Deutsche-Commerzbank merger last year overlooked the difficulty of bringing together two large German employers, including significant job cuts that labour unions resisted. The aborted merger was a distraction at a time when both lenders needed to get their own houses in order.

Nor should it have been a surprise that Commerzbank didn’t want to employ the consulting services of Cerberus’s advisory arm. While Deutsche Bank hired Cerberus in that capacity, the role was controversial because it gave a division of the private equity firm access to sensitive information (albeit across a Chinese wall).

In fairness, the banking world did look rather different when Cerberus made its merger gambit. Interest rates were expected to rise, not head deeper into negative territory, and a redesign of Germany’s fragmented banking market wasn’t inconceivable. Cerberus is also an investor in Hamburg Commercial Bank, which was privatised in 2018.

Unfortunately for Commerzbank’s shareholders, banking profitability will remain strained for some time. Loan losses from its core mittelstand [SME] customers could hit profit as Covid-19 and trade tensions curtail economic activity. Zielke, who has hired McKinsey to review the business, has pledged deeper cuts. But getting buy-in to reduce jobs in the aftermath of a pandemic will be tough. Half the bank’s supervisory board members are employee representatives, and job reductions need to be negotiated with a works council.

Shareholder activism in banking hasn’t had much success, with attempts failing at Barclays and UBS Group. Regulators need be won over to the cause, and in this case, the government too. Cerberus going on the attack may be more about saving face with its own investors, but battling a German lender that anyone would struggle to turn around is a thankless task.