Dusseldorf Thanks to rising interest rates and the robust German economy, Commerzbank started 2023 with a strong jump in profits. In the first quarter, consolidated earnings almost doubled to 580 million euros, as Germany’s second largest private bank announced on Wednesday.
“We started 2023 with a lot of momentum and are thus seamlessly continuing the strong previous year,” said CEO Manfred Knof. “The interest rate environment continues to give us momentum.”
In addition, the institute received the green light from the European Central Bank (ECB) and the Federal Finance Agency for the first share buyback program in its history. The money house wants to buy back its own papers for 122 million euros.
Although Commerzbank’s profit exceeded analysts’ expectations, investors were disappointed. Commerzbank shares fell by more than seven percent.
Thanks to its large private and corporate customer business, Commerzbank is benefiting particularly strongly from the interest rate turnaround. In order to combat high inflation, the ECB has raised the deposit rate several times since the summer of 2022, most recently to 3.25 percent.
At Commerzbank, net interest income increased by 39 percent to 1.95 billion euros in the first quarter. In the coming quarters, however, net interest income will be lower because the bank is paying its customers more interest on deposits, said CFO Bettina Orlopp.
For the year as a whole, the bank raised its forecast for net interest income to seven billion euros. In a more optimistic scenario, 7.3 billion euros are also possible. With the forecast, the bank fell short of the expectations of analysts, who had previously expected higher net interest income in 2023.
Return on equity rises to eight percent
In addition to rising interest rates, Commerzbank is also benefiting from significantly lower burdens from bad loans. 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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However, 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, the bank 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, Commerzbank continues to anticipate earnings well above the previous year’s figure of EUR 1.4 billion. Despite the high inflationary pressure, the costs are expected to fall to 6.3 billion euros.
Commerzbank announced at the beginning of 2021 that it would cut a total of 10,000 jobs by the end of 2024 and significantly increase its return on equity. “Commerzbank has really turned the corner with rising interest rates and a management team embarking on a fundamental restructuring,” said Deutsche Bank analysts in a recent study.
Towards the end of the year, Commerzbank intends to present a new strategy for the coming years, with which it intends to earn its cost of capital for the first time in a long time. According to the annual report, this amounted to 9.2 percent last year.
As part of the current strategy, which runs until the end of 2024, the bank is targeting a return on equity (RoTE) of more than 7.3 percent. In the first quarter, the rate was already above this target at eight percent.
Polish subsidiary has to top up 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.
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. M-Bank therefore had to increase its risk provisioning for the Swiss franc loan portfolio several times. Even with an ongoing process before the court of the European Union on the subject, there is a high probability that the judge’s decision will be unfavorable for the financial sector.
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. The M-Bank share price had fallen so sharply due to the dispute over Swiss franc loans and the outbreak of Corona that Commerzbank was unable to achieve an attractive price.
In addition, according to financial circles, the last remaining interested party, the second largest Polish bank Pekao, did not want to take on the risks associated with the Swiss franc loans as part of a transaction. Even in the current environment, insiders consider it impossible to sell the stake in M-Bank at a price that is acceptable to Commerzbank.
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