Commerzbank is back in the black

Commerzbank also wants to pay a dividend again for the 2022 financial year. The institute would like to distribute 30 percent of its consolidated earnings after deduction of interest payments for so-called AT-1 bonds. In the years that follow, 30 to 50 percent of profits are to be paid out to shareholders.

The prerequisite for this is that the core capital ratio is 200 basis points above the minimum regulatory requirements, explained Commerzbank. At the end of last year, the core capital ratio rose to 13.6 percent, which was 420 basis points above the minimum requirements of the financial regulator.

In addition to the dividends, Commerzbank could also buy back its own shares, said CFO Bettina Orlopp. However, this will only be an option from next year, when the institute has successfully completed 2022 and received the green light from the European Central Bank (ECB) for a buyback program.

Venture capital subsidiary celebrates success

One of the factors responsible for the return to profitability in 2021 was that Commerzbank had to set aside significantly less money for loans at risk of default than in the first year of the pandemic, 2020. Loan loss provisions fell by two thirds to EUR 570 million. In the current year, the institute calculates with less than 700 million euros.

In 2021, the money house also benefited from the flourishing securities business and cash injections from the ECB. As part of the so-called TLRO program, Commerzbank, like other institutions, received a premium of one percent if it borrowed money from the central bank and met certain conditions when granting the loan.

There were also positive valuation effects. The venture capital subsidiary Commerz Ventures also contributed income of almost EUR 220 million thanks to successful investments.

On the other hand, there were charges of around two billion euros for the restructuring of the group, provisions for Swiss franc loans at the Polish subsidiary M-Bank and a special write-down due to a failed IT project. The fact that the institute was in the black despite these extra expenses shows “the profit potential our bank has,” said CFO Orlopp.

Commerzbank wants to cut a total of 10,000 jobs and close 340 branches by 2024 – and is making good progress. More than 6,000 employees have already left the bank or signed an agreement on their departure. In addition, around 240 branches were closed. Commerzbank has also already booked the vast majority of the costs for its conversion.

Many experts initially thought that Knof’s goal of achieving a return on equity of seven percent by 2024 was utopian. In the meantime, however, the mood has turned. Thanks to the progress made in restructuring the group and rising market interest rates, analysts believe that Knof could at least come close to its goal. On average, they are currently predicting a return of 6.2 percent for 2024.

Takeover can become an issue again

In view of the positive development, insiders and experts see the likelihood that Commerzbank will become increasingly attractive as a takeover target for other financial institutions. After all, the risks associated with an acquisition would be lower for a buyer following a successful reorganization and extensive job cuts.

Even in the federal government, which has held shares in the bank since the state bailout in the 2008 financial crisis, some could well imagine a European merger involving Commerzbank. Finance Minister Christian Lindner (FDP) recently made it clear in an interview with the Handelsblatt that the state does not want to keep its 15.6 percent stake in the institute permanently. According to insiders, there are currently no concrete plans or talks to sell the Commerzbank stake in the Ministry of Finance.

The major French bank BNP Paribas is repeatedly traded on the financial market as a potential buyer for Commerzbank. The Paris institute, which does not want to comment on the market rumours, could easily afford to take over the Frankfurt company and thereby become a European champion.

According to their strategic plan, the French want to focus primarily on organic growth and targeted acquisitions in areas such as sustainability and technology by 2025. A purchase of Commerzbank would not fall into this category.

In addition to BNP, the major Italian bank Unicredit, which is already represented in Germany by Munich-based Hypo-Vereinsbank, is also a potential buyer. Insiders consider a merger between Unicredit and Commerzbank to be unlikely, especially since the Milan-based institute is currently already dealing with the purchase of national competitor Banco BPM.

Rising interest rates provide momentum

Another reason for the upward trend at Commerzbank is the rise in key interest rates in Poland and the higher market interest rates in Europe. According to experts, the Frankfurt money house will benefit particularly strongly from this because of its large private and corporate customer business.

When adopting its strategy at the beginning of 2021, Commerzbank assumed consistently low interest rates in the euro zone and calculated that interest income in Germany would fall by EUR 300 million in 2024. Should interest rates rise, as currently expected on the market, Commerzbank’s net interest income in Germany would rise by around EUR 550 million, explained Orlopp.

Despite the signs of a turnaround in interest rates, many analysts do not yet believe that Commerzbank will be able to increase its earnings to EUR 8.7 billion by 2024 as planned, given the branch closures and the withdrawal from some foreign markets.

There are also doubts as to whether income from the securities business will continue to be as high as in the past two years. “We continue to expect a strong securities business, but it is unlikely that we will achieve similar growth rates in 2022 as in 2021,” said Orlopp.

Within Commerzbank, the conversion of the IT systems is also seen as a major risk in the reorganization. In 2021, the Frankfurt-based company had to stop the planned outsourcing of securities processing to HSBC and therefore write off 200 million euros. In addition, the merger of the IT systems of Commerzbank and the online subsidiary Comdirect, which was swallowed up in 2020, has been delayed.

Some employees and financial supervisors are also concerned that the best employees will leave the bank as part of the restructuring – and that the remaining staff will not achieve the earnings targets set. In addition, there are doubts within the bank as to whether the relocation of further activities to low-wage countries in Eastern Europe, which the management is pushing for, will work as planned.

Polish daughter is in the red

Another factor of uncertainty is the Polish subsidiary M-Bank, which is under pressure because of the dispute over how to handle Swiss franc loans. In the fourth quarter, the institute again set aside 436 million euros for this and therefore slipped into the red.

Due to low interest rates in Switzerland, many Poles took out loans in Swiss francs to finance their homes. However, the national currency, the zloty, then lost a lot of value against the Swiss franc, which increased the burden on home builders.

Many borrowers then took action against Polish financial institutions because of possibly unlawful clauses. There are more than 13,000 lawsuits against M-Bank alone.

After a decision by the Polish Supreme Court on the subject had been postponed several times, the Polish financial regulator KNF advised financial institutions in autumn 2021 to seek out-of-court settlements with their customers.

M-Bank then started a pilot project in which they offered comparisons to some customers. These offers are now to be expanded. Some experts therefore see the additional provisions as positive and hope that M-Bank will be able to settle the dispute over Swiss franc loans in the foreseeable future.

Collaboration: Arno Schütze, Gregor Waschinski

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