Dusseldorf Thanks to rising interest rates and the robust German economy, Commerzbank started 2023 with a strong jump in profits. With its outlook for the rest of the year, however, the institute fell short of market expectations. Commerzbank shares then collapsed by around seven percent on Wednesday.
CFO Bettina Orlopp also attributes the market reaction to the increased expectations of Commerzbank. The institute has cut more than 9,000 jobs in the past two years and significantly increased its profitability.
“Of course expectations are rising – and we deal with these rising expectations because we want to achieve more profitability every year,” said Orlopp. The price slump is a “short-term interim low.” In the medium term, the price will rise again, “because we consider our shares to be absolutely undervalued”.
In the first quarter, Germany’s second largest private bank almost doubled its consolidated profit to EUR 580 million. The main reason for this was the interest rate turnaround by the ECB. It has raised the deposit rate several times since the summer of 2022, most recently to 3.25 percent.
Commerzbank is benefiting particularly strongly from this thanks to its large private and corporate customer business. In the first quarter, net interest income increased by 39 percent to 1.95 billion euros.
In the coming quarters, however, net interest income will be lower because the bank will pay its customers more interest on deposits, Orlopp said. This is good news for consumers, but it will reduce profits in the deposit business at Commerzbank.
In the first quarter, the institute only passed on an average of 15 percent of the central bank interest rates to its private and corporate customers, and Orlopp calculates with 35 percent in the next three quarters. The main reason for this is the increased competition for deposits.
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Since established institutes such as ING went on the offensive with interest rate offers, Commerzbank had to react to prevent large-volume outflows. Your online subsidiary Comdirect is now trying to attract new customers with 3.05 percent interest on call money.
For the year as a whole, Commerzbank raised its forecast for net interest income to seven billion euros. In a more optimistic scenario, according to Orlopp, 7.3 billion euros are also possible. However, the CFO’s forecast fell short of the analysts’ expectations.
CEO pleased with support from the ECB
In addition to rising interest rates, Commerzbank also benefited from significantly lower burdens from bad loans at the start of the year. Risk provisions for impending loan defaults fell by 85 percent to EUR 68 million. At the beginning of 2022, the institute had significantly increased its provisions due to the start of the Russian war of aggression in Ukraine.
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Commerzbank’s income fell by five percent to 2.67 billion euros in the first quarter. The reasons for this were the decline in net commission income and renewed charges at the Polish subsidiary M-Bank. In addition, Commerzbank had benefited from cheap long-term loans from the ECB (TLTRO) in the same quarter of the previous year.
For the year as a whole, the institute continues to expect earnings well above the previous year’s figure of 1.4 billion euros – and intends to start the first share buyback program in its history soon.
The ECB banking supervision and the federal finance agency have approved the repurchase of own papers worth 122 million euros, said CEO Manfred Knof. “We also see the go-ahead from the regulator as a signal that we are on the right track with our 2024 strategy.”
As part of the strategy, Knof is targeting a return on equity (RoTE) of more than 7.3 percent in 2024. In the first quarter of 2023, the rate was already above this target at eight percent.
Polish subsidiary increases risk provisions again
However, Commerzbank continues to worry about its subsidiary M-Bank. She had to significantly increase her provisions for controversial Swiss franc loans to 173 million euros. The operating result therefore fell by a quarter to 100 million euros. “Unfortunately, we cannot rule out further burdens,” said Chief Financial Officer Orlopp.
Because of low interest rates in Switzerland, many Poles took out loans in Swiss francs to finance their homes. Then the national currency, the zloty, lost a lot of value against the Swiss franc, increasing the burden on private builders.
Manfred Knof, CEO of Commerzbank, and Bettina Orlopp, CFO of Commerzbank, celebrate their return to the Dax.
(Photo: dpa)
Many borrowers then took action against Polish financial institutions because of possibly unlawful clauses – and were recently more and more right in court. According to Orlopp, M-Bank has now raised 1.75 billion euros for provisions, settlements and court decisions in connection with the Swiss franc portfolio.
Commerzbank holds 69.3 percent of M-Bank. Knof’s predecessor Martin Zielke announced a sale of the stake in 2019, but then called off the sale in May 2020. Due to the dispute over Swiss franc loans and the outbreak of Corona, the M-Bank share price had fallen so sharply that Commerzbank was unable to achieve an attractive price.
In addition, the Polish financial supervisory authority made it very clear to Commerzbank at the time that it would have to keep the franc loan portfolio even if M-Bank were sold, said Orlopp. Therefore, a sale made no sense.
Basically, M-Bank is a “great bank in a challenging environment,” said the CFO. Thanks to good operational business, M-Bank can cope with the burden of Swiss franc loans and other regulatory requirements. “Right now, she’s doing pretty well at spooning the soup herself.”
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