Frankfurt The turnaround in interest rates gives Commerzbank a strong tailwind. The institute made a profit of 470 million euros in the second quarter, significantly exceeding analysts’ expectations. In the same period of the previous year, the institute had made a loss of 527 million euros – among other things due to costs for the restructuring of the group and for a failed IT project.
“Thanks to the strong development of our operating business and the progress made with costs, we continue to expect consolidated earnings of more than one billion euros for the year as a whole,” said CFO Bettina Orlopp on Wednesday. In addition, the bank wants to pay out a dividend for the first time since 2018.
However, this presupposes that there is no significant increase in the burden of a Swiss franc loan portfolio at the Polish subsidiary M-Bank and that there is no significant deterioration in economic development. “In this context, the supply of gas to the German economy remains a major uncertainty factor,” emphasized Orlopp.
So far, Commerzbank has not been impacted by the slowdown in the German economy. The basic provisions for loans at risk of default amounted to only 27 million euros in the second quarter. In addition, there were charges of EUR 228 million in connection with the Russia-Ukraine war, which, however, were largely covered by a general risk provision made in the first quarter.
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The bottom line is that risk provisions for loans at risk of default rose only slightly to EUR 106 million. However, Commerzbank is now a little more cautious for the year as a whole and is assuming risk provisions of “around minus 700 million euros” instead of “less than 700 million euros” as before.
Polish subsidiary again creates burdens
Due to additional burdens at the subsidiary M-Bank, Germany’s second largest private bank is now also assuming total costs of 6.4 billion euros for the full year instead of the previous 6.3 billion euros. M-Bank has to pay around 30 million euros into a newly created fund for borrowers who are having financial difficulties. In addition, there is an additional compulsory contribution of 83 million euros to supplement the Polish deposit insurance.
The institute is even more heavily burdened by a new law suspending installment payments for real estate loans. As a result, M-Bank expects negative earnings of EUR 210 to 290 million in the third quarter.
With the law, the Polish government wants to relieve private borrowers in view of the high inflation and increased interest rates on loans. It allows them to defer their monthly installment payments on current mortgage loans up to eight times until the end of 2023.
All other banks operating in Poland are also affected by the measures. According to Prime Minister Mateusz Morawiecki, the Polish banking sector will be burdened with a total of 20 billion zlotys (around 4.2 billion euros). Nevertheless, there is no need to feel sorry for the banks, Morawiecki said on Tuesday. “They are very profitable.”
Commerzbank holds 69.3 percent of its subsidiary M-Bank. Former CEO Martin Zielke announced a sale of the stake in 2019, but then called off the sale in May 2020.
Commerzbank is through with branch closures
In the operational business, things have been going well at Commerzbank so far this year. In the second quarter, revenues climbed 30 percent to 2.4 billion euros, beating analysts’ expectations. “The strong earnings development shows that our Strategy 2024 is effective even in a phase of low economic growth,” said CEO Manfred Knof.
At the beginning of last year, Knof announced that it would cut a total of 10,000 jobs by the end of 2024 – and is making good progress. By the end of June, the institute had already separated from 7,700 employees or signed contracts for their departure. The branch network has been completely reduced from 790 to 450 branches.
At the beginning of the restructuring of the group, Knof set a target of a return on equity of seven percent for 2024. Initially, most analysts thought that was utopian, but the mood has since turned. Thanks to progress in restructuring and higher interest rates, analysts are now assuming on average that Commerzbank will even achieve a return of 7.9 percent in two years.
Commerzbank had not included interest rate increases in the euro zone in its forecasts for 2024. In mid-July, however, the European Central Bank increased the deposit rate – the relevant variable for money that financial institutions park at the ECB – from minus 0.5 percent to zero percent.
There should be even more tailwind for Commerzbank and other financial institutions if the central bank raises the deposit rate into positive territory. Experts expect this to happen at the next ECB meeting in September. CFO Orlopp has already made it clear that there is “further upside potential” for Commerzbank in this case.
Gas situation determines profitability of banks
For many investors, however, the joy of interest rate increases is currently being clouded by concerns about a Russian gas supply freeze to Germany and a recession in the Federal Republic. The Commerzbank share, the development of which depends heavily on the state of the German economy, has therefore lost around a quarter of its value since its high for the year in February.
“The gas situation will determine whether there will be a slight or severe recession in 2023 – and thus also the profitability of Commerzbank in the second half of 2022 and 2023,” the analysts at Deutsche Bank recently wrote in a study.
They assume that Commerzbank will remain in the black in 2022 and 2023 and then in 2024 “will make as much profit as in the past decade combined”. On average, financial experts trust the institute to achieve a consolidated profit of 2.2 billion euros.
Like Commerzbank, Deutsche Bank exceeded analysts’ expectations with its figures for the second quarter. However, it has disappointed investors by moving away from key targets.
After the absolute cost target, the institute also received the target for the targeted cost-to-income ratio last week. In addition, Germany’s largest financial institution admitted that the return target for 2022 was in danger because of the “current operating environment”. While the Commerzbank share has increased slightly since the beginning of the year, Deutsche Bank’s shares have lost more than 20 percent.
More: Europe’s banks are defying recession fears – but there are also losers