Commerzbank AG (CBK.DE) Earnings Call Transcript & Summary

Okay. Thank you very much for joining us for this presentation. So my name is Flora Bocahut. I co-head the European Banks Research here at Barclays. I'm very delighted to have with us Carsten Schmitt, Commerzbank CFO. Thank you for being here.

Thanks for having me.

So we are actually going to start with a couple of questions to the audience. The first question is what would cause you to become more positive on Commerzbank shares? First, the better NII; two, stronger fees; three, a better cost control, better asset quality, greater capital return or stronger German macro. You should have a kind of a phone in front of you where you can put your answer, and we'll give it a few seconds before we see the outcome. Stronger German macro, I guess this one is not super surprising, followed by better NII. I guess, I don't know if you want to comment, but I would argue, rather expected answers, right?

Yes, I would have hoped for number 7, which would have said, all of the above. But I think the starting point on the stronger German macro is clearly also the main theme in all investor conversations and has been since we've seen the government indicate very strong investment packages beginning of the year. So naturally, this is what's now expected to sim through into economy, into actual demand and then also in further growth. And being the bank that we are, being very present in the corporate landscape and especially in the small and medium-sized Mittelstand segment, which is our home turf. Clearly, this would have an immediate effect. So not surprised about this one, and happy to dive into that a little bit more later.

Yes. I think you know what, we'll hold up just 1 second before we ask the second question. Let's actually move on here on the German macro question. This is actually the first thing I wanted to ask you because to your point and to the audience outcome here, this is a very important element of the investment case indeed on Commerzbank. So maybe can you tell us, first, what are you seeing on the ground lately in terms of corporate activity, in terms of loan demand? Do you see it picking up already? And how well geared is Commerzbank to this potential tailwind from the German macro?

Yes. When talking about that, then I should start with the German economy at the moment. And we've been pretty much flat the last years. Even for this year, the current growth of 0.2%, which our Chief Economist sees is pretty much a flat line. We expect this to actually spring to life with the investment packages that have been announced to 1.4% GDP next year. Half of that actually coming from the investment packages and when I'm talking about the investment packages, what are we talking about? We're talking about EUR 0.5 billion -- sorry, EUR 0.5 trillion in investments in defense specifically set aside by the government and then also EUR 0.5 trillion that is going into infrastructure investment. And I always like to say that there's also a third piece to this, which is not seen so clearly, and that is effectively freeing the general budget that the government has by carving out these two special pots because that also opens up spending on the social side and on the, let's say, regular household items in a much swifter form. And in terms of timing, all of this has been announced pretty early on sort of with the government change we've seen in the beginning of the year. Commitment was in early and strong, and we've seen these packages land, go through official household meetings. And the interesting question is, of course, when do we see this hitting the ground with our customers? When do we see this actually in business in our books? And our expectation is that we see first impacts of this end of this year and to actually materialize also in our books in the beginning of next year. That's also pretty much what we're hearing from our customers. So when we have one-to-one conversations with them, generally, there is a quite long period that you need in order to get through all the procurement processes. Some of the bureaucratic red tape is being cut, but still, there's an expectation that this takes up to spring next year to actually create demand in the order books of the corporates. And with that, we would then also see downstream activity in the relevant sectors and with covering especially the smaller ones, we would expect to see, first and foremost, activity in the trade finance space, then likely in the financing area, so loan demand, but also when it comes to the trade chains in FX and hedging products, of course.

Okay. No, very clear. I think maybe before we get into some more questions, let's this time ask the second question to the audience, please. So this time, we're looking at what you're most concerned about for Commerzbank. Is it that weaker earnings, weaker capital, lower distributions, the regulatory or legal risk? Is it the political risk? Or is it M&A risk? So I'll let you guys take a few seconds to answer with the phone in front of you, and then we can have a quick look at the results. So we have a majority of M&A risk with 44%. And then we have weaker earnings and political risk. Okay, interesting. I think we need to discuss a bit maybe the M&A angle right after. Before we dive into this, let's go through some of the elements in the P&L. I think NII is something we have to discuss, obviously, is your main source of revenue. This is something that came up in the first question as an element -- a positive element of the investment case. So in Q2, you raised the outlook for the NII this year to EUR 8 billion. You were pointing to that as being a floor on the earnings call. Within the NII bridge, you have the replicating portfolio uplift, you have the deposit beta and the volume growth. So maybe can you just elaborate on the prospects for your NII, whether there is potentially upside risk, especially in H2 and any key sensitivities that we need to consider there?

Yes. Happy to go through the NII. So yes, for us, NII represents roughly 2/3 of the income line when it comes to distribution of NII versus commission income. So naturally, NII is important for us to manage. And as we said, we started into the year when we announced our strategy with an expectation that we would end up between EUR 7.7 billion and EUR 7.9 billion this year. I would say the interest rate landscape has not necessarily changed. So the assumptions we put out for this year and also for the next years are still intact with regard to our strategic assumptions. But what we've seen in the first half of the year is predominantly actually effects coming from management of our interest rate position. You mentioned the replication portfolio. We have around EUR 260 billion in deposits, out of which EUR 200 billion roughly can be modeled. And out of those, EUR 147 billion are modeled and are effectively what we call the replication portfolio. So in essence, we take the very short-dated deposits that we're having and model them in terms of maturity structure and invest them. And from the management that we've seen actually in this portfolio and also from managing the margin side on our deposits, we have actually gone to a point that at this stage, we were able to upgrade the expectation for the year. So mostly coming from a lower deposit beta. We started into the year with a 39% beta coming out of last year, expected 42% as an average for this year. But what we've also seen in the beginning of the year is that the management of our positions of the deposits of the margins made us end up basically still at 39% for the first half. So we only expect a moderate increase in the second half, if at all. The current interest rate landscape naturally is supporting us. We saw a decline since last year. We lost, on average, if we look at the deposit rate, 1.5%, close to 1.5% last year to the expectation this year and still managed to keep the portfolio pretty stable. So coming from EUR 8.3 billion NII last year to EUR 8 billion this year. In addition to that, we will have a few effects from net fair value. So some hedge derivatives will also pay into this. So in total, we actually see EUR 8 billion plus EUR 300 million coming out of net fair value. So in total, actually, we've kept this pretty stable. And if you're asking to upside risk, we called it the floor because we are very confident that actually the NII contribution in itself actually will end up where it does. And we modeled all of this, even expecting a further rate cut of the ECB to 175. So call that a bit of a sort of upside potential that we would have. At least it strengthens our EUR 8 billion together with the margin management. So that's how we're looking into this year. And then we'll likely end up with a very strong, i.e., stable portfolio despite the strong reduction in the deposit rate.

And that makes a lot of sense. I'm not going to discuss fees yet, but we can definitely come back also to the other part of your revenue base at a later stage. I think let's move maybe further down the P&L and get into the cost story. So you target cost of EUR 6.9 billion for this year. Again, can you maybe help us understand what are the driving parts here on your cost base? And any levers that you think you can pull to manage the cost base towards 2026 and '27?

So going into the year, we announced an upgrade to the strategy, which also entails managing the cost base this year, but also going into '28. So the natural biggest part of our cost base is effectively personnel cost, where we see a constant uplift from annual agreements in the tariffs, if you want so. But also on top of this, we expected a roughly 5% incline of costs for this year. The strategy foresees that we manage this cost base actively by addressing cost factors to go into sourcing, shoring, investing into our system landscape and also into simplifying processes. So effectively on our path towards '28, we're fueling our growth strategy by investing a bit more and only slightly increasing cost over time, but actually keeping it relatively stable even compared to the regular increases you would see on an annual basis. And looking at '25 specifically, we originally entered the year with an expectation to end up at EUR 6.8 billion in cost. I can say that from an operational perspective, the bank is running extremely stably in terms of costs and actually in a very disciplined manner, even undercutting this partially, but we also see a few additional items that we didn't anticipate. And on our end, I commented on this in the Q2 results call, we have actually one larger position, which is linked to longer-term share-based compensation, which given the development of our share price, we've more than doubled since beginning of the year, actually leaves the cost mark that we normally would manage by balancing that out with other costs sort of disciplined items. But at this point in time, it's pretty much a triple-digit million amount for deferred compensation, which, if you want so, is a positive problem to have because naturally, there's more income coming in, triggering less of a long-term incentive payment in the end, but that came on top. So we guided to slightly upwards to EUR 6.9 billion now. Still aim to manage that. But again, we're running pretty stably in our costs and also do this over the next years.

I can confirm it's a good problem to have for sure that I'm sure others would like to have as well. Okay. Quickly moving to the provision outlook before we ask the next questions to the audience. So on provisions, I would say when we look at Germany, there is obviously the tailwinds that you discussed from 2026. There is also all the exporting companies and these discussions around tariffs. So I guess, what's the outlook in your view for your provisioning impact on the P&L. Should we expect potentially some slight deterioration in the short term before an improvement in the longer term?

Yes. So again, I have to start with what we've set ourselves as a target or an ambition level until '28 and we have a pretty strong incline. We expect 7% commission income growth every single year until '28, which is quite a strong statement. You see this as being testament to our strategy aiming to better differentiate between the different income lines and actually focus a lot on commission income. The underlying activities that we're having to fuel this are coming out of the customer segments. So on the personal customer side, we are shifting a lot into asset management business and activity, a more differentiated customer and advisory model when it comes to private banking, wealth management, et cetera. But we're also increasing the running sort of commission income by addressing our -- for example, our cost model for current accounts. So there's a multitude of topics that is coming in on that side. And on the corporate client side, we're naturally looking at commission income that is linked to loan business. A lot of that is linked to the capital markets business where we're advising customers. And the reason why I'm saying this is, the first half of the year actually has shown us a strong incline of our commission income by 8% already in the first half. So we had a good start to the strategy cycle, if you want so. We definitely benefited from the activity that we saw in the market, especially when it comes to commission income on the personal customer side and the asset management side. But we also see a steady incline in the base fees that we're having. So for the next years, clearly, we want to run with that run rate, so the 7%. From the expectation that we're having regarding the business activity, I don't see any reason why this couldn't sort of come in and also don't see a big risk of that declining. So the current run rate actually gives us a good head start to the strategy cycle.

Okay. So that's super helpful on the fees side of the story and that complete the NII answer from the floor. I wanted to move to the credit risk angle of things in the P&L just to also maybe remind us of your outlook there and whether we should expect any potential deterioration on your cost of risk.

Yes. So cost of risk for 25 is EUR 850 million or less, which we've guided for. At this point in time in the year, we stand at EUR 300 million coming out of the first half. So what we are seeing in the portfolio is we generally have a relatively low cost of risk variance in our portfolio. We're running at a cost of risk of 20 basis points. Even averaging this through the cycle, we're in the higher 20s. So overall, pretty low. And that's also what we're seeing in the portfolio at the moment, relatively stable portfolio, no specific outliers, nothing that would be unexpected and good distribution, if you want so, between larger medium-sized and more smaller cases. So at the moment, the portfolio doesn't really indicate to us that we should expect more. If at all, we are cautiously looking at the run rate at the moment. And as the CFO, I'm clearly hoping that we would end up a bit below the EUR 850 million that we've planned for, but currently, we're trending actually in a proper way for that. The economic development because we had that discussion in the beginning regarding impulse, packages, et cetera, from the German government actually should, if at all, be coming in as a support for this generally positive trend in the economy once it kicks in, should definitely also have a supportive action in our portfolio. So you don't see me concerned about the current trajectory we're having on the risk side.

Understood. Let's move actually to the questions to the audience again. This time, I would like to ask you a question about the RoTE development for Commerzbank. So how do you expect Commerzbank's RoTE to develop over the next couple of years? So that would be in 2027 compared to 2025. Do you think it will be significantly higher, modestly higher, in line, modestly lower or significantly lower? So we let you answer this question, and then we'll look at it ourselves actually. Modestly higher, okay. That is -- I would say, it is -- I mean it's a good answer. The good point is you have 80% of the audience that thinks it's going to go in the right direction. So that's a very strong outcome. If I look at your targets to be fair, you do have targets that would be rather towards the significantly higher portion. So -- but yes, it's a good outcome already. Let's -- before we discuss it in more detail, let's move to the next question, please, question 4. How do you see potential risks to Commerzbank's capital and dividend? Do you think there's upside risk because earnings will be stronger, upside risk on lower regulatory requirements, downside risk on weaker earnings, downside risk on higher regulatory requirements or downside risk because of potential M&A? So we'll give it a few seconds again if looking at the results. So we have a majority of upside risk, which again is a good news and better earnings. So that's logical, I would argue, and a good outcome. And then we have also a few concerns on the downside risk from either earnings or acquisitions.

Yes. So also a picture that I would have expected actually from the conversations that I'm usually having. So I think the upside risk on better earnings is also mostly linked to the expectation regarding a stimulus package economy in Germany and then, therefore, potentially a bit of a better trajectory than what we've seen. Also, we've upgraded our expectations this year, not only for NII, but also for our results for the end of the year, but we have not amended any of the future targets. So we are also aware that the '25 ambition level has been increased, but the following, not yet. So I think that makes perfect sense. On weaker earnings, I think that's a classical risk when it comes to capital and dividends then. I should say at this point, I mean, we have a dividend or capital distribution policy of 100% of our net results for all of the next years. So it will scale clearly sort of with the net result that we're having. This year, we will technically be above the 100% distribution, given that we calculate before any restructuring charges, which we will see this year. So I think actually, it's just fair that this would swing. And then in terms of acquisitions, I mean, I can only comment on what we would potentially actively do and any acquisition and M&A, we're looking at from our side would always be to enhance the business case. So we would be looking at M&A activity to the tune of what you have seen us doing in the last 2, 3 years. So that's usually in the range of, call it, 10, 15, 20 basis points of the capital, so something that we would look at, if there's a product that's out there that's contributing to our strategy. If there's something that's commercially aiding us to achieve the '28 targets. So I don't see that as a downside risk because we have the choice on that end.

So on M&A, you're basically saying you're looking at bolt-on deals rather than any potentially transforming operation here?

At the moment, I would say that's really the point, given that we are very focused on implementing our strategy. So clearly, in a position that we've been granted a lot of credibility by the market once we had announced the strategy and also have run through the first 2 quarters, demonstrating the strength that is coming with it. But clearly, we're in the third quarter now of a 16-quarter strategy cycle. So naturally, first and foremost, we want to focus on further strengthening the current business case that we're having. And as we had the RoTE question just before, I mean, we are currently sort of having quarters that show a double-digit return on tangible equity. And for the year, we aim to close, close to this. But target is 15% in '28. So we have an ambitious plan ahead of us, which we think is realistic, but anything that we're doing is then contributing to that.

Yes. Let me follow up actually on that point you're making on the RoTE and also following the answers we saw here from the audience. So to your point, you delivered an RoTE that is 11% in H1. Again, when we exclude restructuring costs here, you have in Q2 results reaffirmed your target of an RoTE of 9.6% for the full year. That does point to a more cautious outlook for the second half of this year. So maybe that would be the first question, why be a bit more cautious on H2 versus H1. And then you talked about the target for '28 at 15%. Can you remind us the key drivers, the key levers to get there? And maybe what you think the consensus may be missing on that point, given it is a little bit below at 13.5% here.

Yes. So let's start then with this year and the second half of the year. I think the first half has been really strong in terms of return also because we've seen a strong development on the income side, clearly. What we expect for the second half of the year, though, there's a few factors that usually come in, in the second half. I mean first of all, there is still pressure going on when it comes to the deposit market. While NII is guided upwards, there is still risk that we see slightly more pressure in the second half than we saw in the first. So that's one point. Second point is that on the cost side, naturally, the second half of the year usually has an incline, especially in the beginning of a strategy cycle where a lot of the investments that we have dedicated actually for implementing the strategy also requires ramping up in terms of resources. So often, you see that coming in, in the second half of the year. There's a third portion, which is relating to our Polish subsidiary. As we are running through the last year as we expect of provisions, we have to put out for the FX-linked mortgage portfolios in Poland, we still expect provisions to be built in the second half of the year, which is also drawing down a bit. So all in all, you see there's nitty-gritty pieces that are impacting the second half of the year, which is why we see a slightly lower full year RoTE. But overall, actually pretty much in line with what we expected on the trajectory to '28. And on the 15% for '28, the main driver is the strategic change that we had. It's a growth strategy. So it's all around extending the top line. It's all around transforming the bank. So there's a lot coming in on that end. And I will discuss also over the next years, this will be one of the strong contributors. But our customer business and also extending the portfolio size clearly is exactly what we're looking at the next years in order to push sort of the income line there. When it comes to the equity side, I spoke about the 100% return. So when we're looking into the next years, we also want to end up at a capital ratio of 13.5%, which gives us, as we feel, a sufficient capitalization, also slightly above the regulatory requirement. But at a point in time where we can operate freely and then also provide a decent return. So we approach this from two sides, income side, through cost management, clearly, but then also from the capital base, which will be target 13.5%.

Okay. I think I'm just going to ask you a question also. We haven't touched about this yet, but about mBank, which is your Polish subsidiary, there's been lots of talks in Poland. I think there are several things we need to discuss. One is the news we had a couple, 3 weeks ago now, around new taxes. So that would be one question. I guess there is also the FX mortgage related burden on your P&L, where do we stand there and shall we expect some more in 2026? And then generally speaking, the macro outlook for Poland? So maybe if you could tell us a little bit about those elements for your Polish bank.

Yes. Let me start with what concerned us most the last year's in mBank and there was working off the burdens coming from the FX mortgage portfolios. Most of that was Swiss Franc, but we also had a few other currencies in there, similar to most, if not all of the other banks also in the Polish market. So we saw quite high provisions coming in mostly to settling lawsuits coming in. At this point in time, we had close to EUR 1 billion of additional provisions last year, and we expect this year with significantly less. We built EUR 286 million of additional provisions in mBank in the first half of this year, but on a declining pace. So also for Q3 and 4, I expect this to be less each quarter. And then in total, we expect this to cease this year, so that we have a well-provisioned portfolio where mBank is also actively going into settlements. And I'm usually looking at three parameters. One is the active portfolio, which is pretty much gone. So we're not only looking at what's coming in from the mature portfolio. So incoming lawsuits or claims actually at the courts, which is coming down as expected and then also the number of settlements we're actively seeking. So all of that basically means we will see the end of this, this year. That's what we expect. And then diving a bit into the Polish economy and what impact we might see from further taxation. Polish economy actually is running pretty strong at 3% plus. And as much as I can see and feel whenever I'm in Poland, actually, it's a very vibrant place. You can really feel that there is a lot of positive expectation in terms of development in the next years, and mBank is perfectly positioned in this. With a strengthened capital base with having worked off the FX portfolio soon, we're in a good position to further grow the business. And the taxation you mentioned, which is indicated at this point, but not fully acknowledged or fully agreed to and ratified, we'll see a banking tax coming in for the sector. We are currently going through the calculation what this means. I don't expect this to be a radical change at all in the strategy. mBank is actually currently reformulating its strategy, and we'll have a Capital Markets Day in a few weeks. So we will see sort of the future path of the bank there. And we will take into consideration what this means. Don't expect it to be significant to a degree that we have to change the strategy. And neither on mBank side and definitely not on our side with regard to mBank being a core part of our strategy at Commerzbank on group level. So that's the Polish answer.

Okay. Thank you. Before we open actually to Q&A, we'll have time for 1, maybe 2 questions. Just if we could finish quickly with the ARS questions, please, we have 2 more. We'll need your help on this. So question number 5, how would you view significant acquisitions for the group? You think it would be very positive, marginally positive, marginally negative, very negative or you would prefer no M&A and the capital to be returned to shareholders. So we'll give you a bit of time here. It'll be interesting after everything we've discussed. So I'm not sure how to read this one actually. It's rather mixed right? So there is a majority of positive.

Well, it's at least not too negative. So that's something. I think I mean we had this partially already, right? So we're looking into whatever sort of M&A makes sense for the business case. And given that we're returning pretty much as much as we, I think, can do in line with the regulatory sort of acknowledgment with 100%, I think we've covered five easily.

Yes. And the last question, please, question number 6, what's your view on the 2028 strategy and targets that have been set by Commerzbank in February. You have the remainder of those targets in the question. Do you think the strategy makes sense? And do you expect management will deliver on the target set? You think the strategy is not ambitious enough and they can do better than those targets? You think it is ambitious and the targets will be difficult to reach? You would have liked to see more cost cutting? You would have liked to see more distribution to shareholders? You would like to see a change in the geographical footprint of Commerzbank. So we'll let you answer that one, and then we can move to one quick question from the audience, if any. So that's a very spread outcome again. I mean the good point is there is not anything that you didn't do that they would have liked to see, right? You did right on the cost cutting, right on the distribution. They are not big fans of change in the geographical footprint is what I take from this, but it's a rather split outcome, actually.

Yes. I'm actually happy to see this outcome, quite frankly, because looking not too far back, I think the answer to these questions would have likely been totally different. So we've seen quite a step change in our ambition level and what we aim to achieve and also what the market sort of credits us to achieve over the last year, quite frankly. So first 3 points, I very happily take.

That's totally fair. We have time for one quick question, if any, from the audience. So if any of you would like to ask Carsten a question, please let us know. No one. Then conscious of time, I think I'm just going to leave it there. But Carsten, thank you very much. Thank you for attending our presentation, and thank you for this fireside chat.

Yes. Again, thank you for having me. Thanks for the audience.