Frankfurt Confidence is growing at Commerzbank thanks to progress in restructuring the group and rising interest rates. 13 months after the new strategy was announced, Germany’s second largest private bank has therefore raised its medium-term targets.
In 2024, the institute now expects income of 9.1 billion euros instead of the previous 8.7 billion euros, Commerzbank announced on Tuesday at its capital market day. She is now aiming for an operating result of three billion euros in 2024 instead of the previous 2.7 billion. The return on equity (RoTE) should increase to “more than seven percent” instead of “around seven percent”. The main reason for this is the development of the Polish subsidiary M-Bank, which is benefiting from the rate hikes there.
“In view of the positive expectations for the coming years, we are aiming to return more capital to our shareholders than previously planned,” said CEO Manfred Knof. He now wants to distribute between three and five billion euros through dividends and share buybacks up to and including the 2024 financial year.
When the strategy was presented in February last year, the bank only said that if the restructuring program were successfully implemented, there was the potential to return up to three billion euros to shareholders.
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CFO Bettina Orlopp explained that the new forecasts do not include possible interest rate increases in the euro zone. If this should happen – as the market is currently expecting – “we see further upside potential”.
At the Polish M-Bank, Orlopp expects higher costs due to inflation. Group-wide, it is therefore now calculating at 5.4 billion euros for 2024 instead of the previous 5.3 billion euros. However, the institute explained that the adjusted cost target will be overcompensated by the higher earnings expectations. The ratio of expenses to income will fall to 60 percent in two years instead of the originally targeted 61 percent.
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 to leave. In addition, around 240 branches were closed. Commerzbank has already booked most of the costs for its conversion.
Hoping for a turnaround in interest rates from the ECB
Last year, Commerzbank made a profit of 430 million euros after a loss of 2.9 billion euros the year before. In 2022, CEO Knof expects a profit of more than one billion euros.
In addition, the institute wants to pay a dividend for the 2022 financial year for the first time since 2018. The money house would like to distribute 30 percent of its consolidated profit after deduction of interest payments for so-called AT-1 bonds. In the years that follow, the shareholders are to receive 30 to 50 percent of the profit.
With regard to the possible share buybacks, Commerzbank is hoping for the green light from the ECB for 2023. “With Deutsche Bank recently announcing a share buyback, we see little reason why regulators should stop Commerzbank from doing so in 2023,” Barclays analysts said recently.
Like many other analysts, you recently raised the price target for Commerzbank. The main reasons for this are the progress made in restructuring the group and the prospect of a turnaround in interest rates. “Commerzbank is undergoing the most comprehensive restructuring in recent history,” according to a study published by Morgan Stanley on Monday. So far, the Frankfurt money house is on schedule.
In addition, thanks to its large private and corporate customer business, Commerzbank is one of the financial institutions that would benefit most from rising interest rates. Morgan Stanley calculates that if interest rates rose by 50 basis points in the euro zone, profits would rise by 12.5 percent in 2023. At Deutsche Bank, the increase would only be 3.2 percent.
Commerzbank shares under pressure because of the Ukraine war
From the point of view of the Morgan Stanley analysts, the European banking market is basically in good shape, although uncertainty has increased due to the geopolitical situation. This could also delay the start of interest rate hikes.
Commerzbank said on Tuesday its direct exposure to Russia was 1.3 billion euros, just 0.4 percent of all outstanding loans. In addition, there are commitments amounting to 600 million euros that have a connection to Russia – above all for the pre-financing of raw material exports.
The commitment in Ukraine amounts to less than 100 million euros. The bank will continuously adapt its business strategy and risk assessment to the current situation, she explained. The greatest danger for Commerzbank and most other German banks is that because of the war in Ukraine, energy prices will skyrocket and global economic growth will slow.
Investors’ concerns can also be seen in the Commerzbank share. After the annual figures were presented, the paper initially rose to EUR 9.21 on February 18 – the highest level in around three and a half years. After the escalation of the situation in Ukraine, however, the price fell by more than 20 percent to around seven euros per share.
In addition to its new medium-term goals, Commerzbank also announced the launch of a new fund for its recently very successful venture capital division, Commerz Ventures. This has a volume of 300 million euros and is therefore 50 million euros larger than the first two funds together.
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The Commerz Ventures team intends to continue investing in start-ups from the finance and insurance sectors. In addition, the venture capital financier would like to invest more in fintechs with a focus on crypto technology and sustainability.
After its founding in 2014, Commerz Ventures has invested in the US payment service provider Marqeta, the Israeli trading platform E-Toro, the British animal insurer Bought by Many and the Berlin financial technology company Mambu – all start-ups that are now worth several billion euros .
With a team of eleven employees, the Commerzbank subsidiary made a profit of several hundred million euros. As part of the new fund, Commerz Ventures will increase its staff by 50 percent, the division said. Among other things, she wants to strengthen her commitment in Africa.
The 300 million euros come exclusively from Commerzbank and the Commerz Ventures partners, who also put their own money into all investments, said a bank spokesman. In the future, however, there is the option for other institutional investors to also participate in investments.
More: Commerzbank is fighting its way back into the profit zone – and attracts with a dividend