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

Good morning, everyone. Thanks for joining this session. Please take your seat. So Bettina, good morning.

Good morning, Tarik.

So remember, we had fireside chat exactly 1 year ago.

That's true.

It was at the same stage. It was first day as the designated CEO. You had back then very confident message and pushing hard on the argument that Commerz has the right business mix, the potential to deliver attractive returns on a stand-alone basis. Then you followed up with a very solid earnings and most importantly, punchy and credible medium-term plan. Then positive outcome from the German elections, the surprise fiscal stimulus and strong tailwind to the shares. So since, I mean, you've been CEO, the shares are actually up more than 100%, outperforming the sector by 50%. So clearly, the market is on board. So we'll have plenty of time to discuss operationally and what to expect next.

But first, let's start with the question that everyone has in mind, and maybe you can give us your latest view on the UniCredit stake. Today, Mr. [indiscernible] announced that the full stake is now there. So what can you tell us regarding the UniCredit situation?

Yes. Thank you. And probably we should not spend too much time on it given that there are so many other good things to discuss. So I mean, most importantly, Commerzbank focus is clearly implementing our momentum strategy. It is about delivering the growth story and maximizing the value for our shareholders. And when it comes to UniCredit, I think there are some things we can agree on with them. And most importantly is that we both think that Commerzbank has shown a very good performance over the last quarters, and we intend to continue that for the coming quarters. And it somehow also seems that we agree on the point that at current valuations, a transaction does not really make sense. There are, however, no surprise also some topics where we do not have the same viewpoint. And let me just refer to 3 points. First, this situation, the actual situation is not really helpful and unsatisfactory because having a nearly 30% shareholder is in parallel, a direct competitor in our home market requires a lot of extra attention to make sure that we keep our franchise, that we grow our franchise and that we implement our strategic plan. And then constant comments on what might be done with the shareholding are clearly not helpful as they create additional noise. Second, a domestic consolidation, specifically with 2 players who have a very similar business model normally do not result in a revenue-led merger. And there would be revenue attrition because there is heavy client overlap on the corporate client side, which means focus would be on cost synergies, which we all know are not easy and not a risk-free value add, which you can just put in your axles. It requires really a lot of work, attention, time and money to achieve that, specifically when it comes to a rather unfriendly large-scale transaction. And third, and that belongs a little bit to the second point is, Commerzbank has a huge growth opportunity in the moment, given -- and we will come to that, I'm sure, in a minute, given the stimulus package, the investment needs in Germany, in Europe, and we are well positioned to explore this growth potential given our position as a bank for the Mittelstand as a bank for Germany. And our focus is really to stay focused and not get distracted. So to sum it up, I mean, for us, it's very clear to sit down and assess a plan against our very successful, very attractive stand-alone plan, we would require and we need a very concrete proposal with numbers, metrics and so on. And as long as there is no proposal on the table, which is -- that is UniCredit willing to share with us, it just means that we do what is most important and that is creating value for our shareholders.

Very clear. I will not follow up on this. I think you've given enough elements to the audience. So I guess your -- as you alluded to as well, your first line of defense is your share price and your performance. So we'll spend time on this. Maybe first starting with the everyone's topic in mind, German macro. The market welcome favorably the historical paradigm shift in terms of fiscal stimulus and policy. Some argue that capital market is actually overappreciating what the actual on the ground, what will bring. So can you maybe give us like on the ground or what's the progress of this spending? How is going in terms of coalition as well and on the infrastructure side?

So I mean, first of all, I think it's important to state that we never expected a real impact for this year. So we stay with also our forecast for the year, which is something around 0.2% GDP growth because we also have the tariff situation kicking in and it takes -- as you said, it takes time to really see the investments unfolding. However, we stay very positive for the year 2026 and after that, because there is really an important stimulus to happen. So we basically have 3 factors you need to keep in mind when thinking about German economy, and there's probably lots more, but I will just mention 3. One is clearly a headwind, which is the tariff situation, which you always have to keep in mind, but where we also now see that the corporates are arranging with it, they are repositioning their portfolios, and they will manage. And then we have 2 clear tailwinds. One is -- and that's a little bit overlooked in all the debate is that interest rates have come down to a significant amount, which means that it's much more also attractive and easier to implement investment programs. So that is also a stimulus for whatever we might see in the next quarters. And then most important tailwind is clearly also that there is momentum in the moment. There has been a lot of momentum before the summer break. We had a little pause and now we definitely request from the German government that they really start implementing the reforms and they are working on a lot of initiatives, but we really also need to see actions now. But my impression also from the dialogue with Berlin is that they are very committed to do so, but we will all wait for the delivery. And the stimulus is not only that we have stimulus on the energy sector, the defense sector, infrastructure, but it's also that you see it in the sentiment. And that one, you actually see already today. If you take sentiment indicators like the EFO data, it has improved 6 times in a row. I have just seen the latest data on construction. It's improving. The data on retail revenues are improving and mortgage activity actually, which is a reflection of consumer behavior is increasing. So there is already momentum today. And what we already see is that it's not only restricted to defense and energy and infrastructure, but it will have an impact also on other areas, and we can definitely also leverage that across the value chain. And one should also not forget by the extra fund, some of budget needs haven't been moved out of the normal budget into the special funds, which means that there is more space in the normal funds to invest in certain areas, which again then will have a positive effect. But that is also very clear. We will see that next year. So 1.4% real GDP growth is what we expect. If you then add, which is important for us as a bank and also when it comes to business, the inflation to it, then we talk about something around 3.5% nominal growth.

Very clear. So we'll watch that closely. And what do you think is the next milestone in terms of government communication we should track to see how if it's progressing well?

Well, my understanding is that, first of all, they need to get the budgets done. That is in parliament now in the next...

Yes, a few countries at the moment.

Yes. And then clearly also, I mean, energy cost is a key focus point. They have lots of debates around social reforms. And the whole labor law and bureaucracy thing is a key topic. And I think what is also important to state that there's a very close alignment and cooperation probably better than we have seen in the past years between government and corporates. There's this Made for Germany initiative where a number of large corporates, including also Commerzbank, are really supporting and working hand-in-hand with the government to really make sure that important reforms hopefully will be implemented. But -- and we also should watch out what's happening in the coming months.

Very clear. Let's move on to your '28 business plan. You had a good start. I mean this plan was transformational for you. I mean, waiting for from a low single digit or mid-single-digit RoTE to 15%, which was came as a surprise to everyone. I mean, now a few months into the plan, maybe a quick overview before go in detail on what's the areas that you think are on track, exceeding your expectations or a bit lagging?

So on net commission income, loan growth, we are fully on track, feel very comfortable not only for this year, but also for the years to come. NII, we are always seen as rather conservative on it, and that seems to be also the case. So we feel very comfortable. And I think it was the right decision to really base the plan back in February also on rather conservative GDP and macroeconomic numbers because that is clearly now helpful. And there, we are always talking about a floor. So that's a good one. Risk result is as expected also. And when it comes to costs, there's a high cost discipline in the bank. We had some one-offs and also a pleasant surprise, which is a burden for the cost side that due to the very good development of our share price, the cost for our LTIs or long-term incentives for our staff has increased quite significantly in the past half year. I would say that's a good one. And we stick fully, fully committed to the targets, which means 57% for this year cost/income ratio and then 50% for 2028. And what we also see is that specifically on the IT side that the use cases when it comes to AI are really delivering what we expect. And that will be also the most interesting part also for the next quarters to explore what we can do in addition in this area. And so therefore, all in all, it's good. I mean FX provisions clearly have put more burden on us than originally at least planned. But this is something we believe should be over by the end of this year.

Okay. Very clear. So let's start with the net interest income. This is an area where you had a beat and raise for the last 2 quarters in terms of guidance. And now consensus is actually ahead of your guidance on '25 and also in 2028. And in this area, I think that the area will be probably conservative is on the deposit beta in Germany, maybe the shape of the curve as well and the level of the curve. Starting with deposit beta, I mean, in Germany, you're guiding still for 40% by year-end. Can you tell us a bit on the dynamics in Q3 in terms of competition on deposits and why you think that, that will go up because that could be the big part of...

Yes. that's true. But I have to say that most -- I mean, the importance of deposit beta is becoming smaller because other things, specifically when you look forward for 2028, the replication portfolio, the mix of it development on that is much more important than at a steady interest rate level, the deposit beta should -- will always fluctuate a little bit, but it will be rather stabilizing. And I mean, what we have seen in the third quarter, we have been out with our own attacker products. We said that after Q2, we would be out with our own attacker products, very attractive ones. We had to stop the initiative basically after 2 weeks because we got so much inflow that we thought that's enough. And clearly also moves the deposit beta. But it's always good to explore to see how sticky things are. And I mean, there is a lot of competition anyhow in Germany, there's also a lot of competition on the deposit side. But we have the feeling that we have a very good role in that, and we feel very comfortable with the floor now of EUR 8 billion, might be more. We will see how things are developing. But as I said, loan growth and the replication portfolio are the 2 things I think one should watch out when looking in the next quarters.

So how would you see the stickiness of these deposits after attackers campaign? Because some of your competitors that were very active in Q1, the migration out is quite rapid. So how do you compare to competition on this?

Yes. I mean we only have past experiences. With the past experiences, we have been very, very satisfied. This time, it's too early because these programs still run. Most of them have a duration of 6 months. So we will definitely see in January and February, how things are developing. And it's very dependent on which clients you have in there. We also see that [ Corporate ] Clients are reacting differently to our Commerzbank clients. And then we have mBank, which is despite the fact that they have seen a sharp decline also in interest rate levels, they kept the NII pretty stable by a number of measures.

I mean you mentioned the Poland that was my follow-up on the net interest income. We had discussions a few times together that the forward curve assumptions in your plan were too low-ish and also the growth prospects were -- but you argue this is mBank's targets, so you have to go with that. So if you have now a few months in and who was right, who was wrong, I mean, versus these targets? And how do you see you qualify those as conservative?

Yes. I think mBank is also similar to us conservative on NII assumptions. But I mean, we really need to wait. We also expect still the interest rate levels in Poland coming down. So I think it's also wise to just wait and see and then perhaps get a pleasant surprise in it.

So Poland is 20% of your revenues and business. How are you optimistic about this region and the opportunities for growth there given the momentum we see in the region there?

Yes. I mean, Poland is the largest economy in this region. It's faster growing. It's also now maturing, which is for us a very attractive thing because we have a very attractive customer base at mBank, young, very well educated, getting now more wealthy. So when it comes to net commission income, it's a very attractive area because we believe that you can really grow in Asset and Wealth Management. And Poland itself is well positioned also. If you think at a moment that there might be at a certain point, hopefully, peace in Ukraine, I think they're also well positioned to support the rebuild. I mean there's a political situation. We always have to analyze. There's a discussion about potential banking tax. That is something we all need to keep in mind. But most importantly, the thing where we have discussed every year, which is about the FX provisioning that should now come to an end.

Then we'll move to the large part contribution to net interest income, which is volume growth or lending growth. You had really significant growth in the first half, 8% coming from international corporates and also Mittelstand. I mean some cynical view would be alluding that this is basically the way for you to kickstart this growth and -- but can you really give us in substance where this growth is coming from and how sable, I mean, this is ex fiscal stimulus. So this is you in a stand-alone and with no help.

Yes. And some of you could even relate it already to the stimulus because we also said that part what is reflected in the Mittelstand numbers is due to the fact that it's also public institutions, which come at a lower margin on the one side, but also with less RWAs connected to that. And so it's also attractive business. And the core medium-sized corporates there, we see a lot of activities and planning investment plans, but we haven't seen that yet. So I would say there, the best is still to come. So this is something where we believe we will see even more growth in the coming quarters.

I mean if you go a bit granular in terms of industries that are actually starting to show a bit of revival in activity or at least confidence. Maybe you can give us some indication.

I mean, it's everything around defense. That's no question. You can see that also on all conferences and had our own conference last week and the defense companies have a lot of demand in any aspect. But also infrastructure is clearly important. The whole energy sector is very vibrant and a lot of things happening. So that I would say, the most important.

So you mentioned as well the -- you have to deal with the tariff situation, which came slightly better than initially feared, but still much higher than the previous levels. And before the potential real benefit kicks in, do you think this 8% growth is sustainable in this transition period? It's part of your plan.

Yes. Yes, it's sustainable because there is anyhow a lot of need also to invest in Germany and in Europe. And it's -- you can really observe that corporates -- I mean, they also have all the scenario planning and stuff like that. They adapt pretty quickly to certain situations, which is a good one.

And then moving to the loan growth on the private customer side. This is still muted. So what's the outlook you see there? And do you see any sign of green shoots?

Yes. I think that is a pleasant surprise, which you see in the past months because, I mean, we have been very cautious when laying out the plan with respect to volume growth on the mortgage side because we thought that it will be tough to repeat really this high activity levels, which we have seen in previous years, and that will still create new business, but it would have an impact on the absolute volumes. I would say this one, we are getting a little bit more positive on because we see -- as I said at the beginning, we see really more activity on the mortgage side than envisaged. So we are back basically on levels back in 2019 and 2020, and that should be seen. But it's always -- I mean, on the mortgage side, there's always a play between volumes and margin. And we also want to keep the margin at a healthy level. So that will be something we need to balance out.

So moving to the fee parts of the business. You have also quite a bunch of targets, 7% CAGR across the plan. So you have been delivering that. So first of all, can you discuss what have been the main drivers and sustainability of those? And then I have follow-up questions on how you can boost that through nonorganic.

Yes. So the good part is really that when it comes to our net commission income plans, it's just not one area. It's really across the bank. It's all 3 segments. So it comes from Corporate Clients, Private Clients and mBank. When it comes to mBank, you basically see it because the economy is maturing, our clients are maturing. So Asset and Wealth Management is becoming more important and payments plays a big role in that. And there are also a number of fees connected to loans, which are basically net commission fees. When it comes to Private Clients in Germany, it's clearly securities and Asset and Wealth Management, which plays the most important role. It's on the one side, really creating volumes on the Corporate -- on the Commerzbank side, comdirect is all about number of transactions and activity. And -- but then one should not forget that you also have the payment areas, which is of increasing importance. We also have the joint venture with Global Payments and things like that, which have not yet seen a lot of results, but we expect more in the coming years. And then we have also introduced a new account fee model, which pays in -- for this year and also next year with respect to the growth rates. And then on the Corporate Clients side, it's also across all products and areas. We have -- and we constantly enlarge our offering when it comes to hedging also on our EFX platform. We have trade finance, which is apparently very important for us as a Mittelstandsbank. And payments, again, plays an important role. And we also know also on the Corporate Clients side, some of the fees of net commission income fees related to loans.

And do you see any opportunities to do bolt-on M&As in this area? I mean, have you been looking at some parts of the business on this and anything interesting there?

Yes. I mean we are exploring different opportunities, but the thing is that the bar is pretty high. I mean -- no, the bar also our threshold before we do it because, I mean, we would not do anything which will hinder us in realizing the 15% RoTE and the 50% cost-income ratio. So that is part number one. And part number two, and that is also very important for us is we do not want our IT department to spend too much time in migrating legacy systems, be it small or larger because that would prevent them doing the necessary innovation. And that is always something which is also very important to judge how much integration effort is necessary, and we really want to stay focused.

Yes. Moving into your cost efficiency, which was a key pillar in your business plan. Can you update us what's the progress so far? I mean the last 2 quarters where there's some progress, but probably a bit softer in some areas. Yes, I mean, just on the ground in terms of FTEs, rationalization.

Yes. So first of all, we just concluded last week the negotiations with the workers' council. So now also the partial interest agreements, which are necessary to do really the structural changes are in place. Communication is up and running this week. So now this week, basically, everybody knows where changes are, where we do the reductions and we have full transparency. It's also now the time where all social instruments are available for all employees who want to take that. And we have started already in the first quarter with a so-called part-time retirement program and the acceptance rate is actually very high. So we are very satisfied with it. So overall, when it comes to FTE reduction in changes, we are making very nice progress, so everything according to plan. And more importantly also is that on the IT side, when it comes to AI use cases, which are also an important element to not only increase customer satisfaction, but also improve our efficiency, we have some very nice progress there.

So your restructuring costs came lower than initially guided for in during the plan. Can you explain what's the reason because it's very early into the process and what actually was overestimated?

Well, it's just a matter of fact that whenever you prepare the detailed plans and you think about who in which area is now really eligible for certain instruments. It's just that we realize that there might be in some points, less reductions necessary than in others, and it comes cheaper. It's just a mixture of a bottom-up versus a top-down estimate at the beginning. There's still a little bit to come because there are some, also, restructuring fees, which might be booked next year, but we definitely will stay below our original number.

And then on cost on the FX mortgages. I think we are at the end of this saga. Maybe can you give us the latest updates on what you expect in terms of the provisioning? And could there be any reversals as well?

Well, the latter one, I do not believe, but I take pleasant surprises. But I mean, we always said that quarter-by-quarter, we would see less provisioning, and we will also see provisioning most likely in the third and the fourth quarter. But the clear target is also to close the story, as I said before. And it seems to be that this is a realistic assumption.

There was some news yesterday about this fund in Germany, EUR 2.3 billion. Were you part of this as well? Is there any...

We are part of it. Also, I have to say that this fund was built up in a time where Commerzbank was rather in big difficulties. It was shortly after the financial crisis. Everybody remembers that. We were in the middle of the Dresdner Bank integration. So our volumes have been much lower. We talk here about a higher double-digit number. And we took note of the ruling, but we also now wait what happens next. There is a potential of an appeal. And it's also just a onetime effect. So we also take positive onetime effects, but we just wait and see how things are.

What will be the time line on this?

Well, actually, it depends now -- I mean now the Berlin authorities, the Ministry of Finance needs to think about whether they do an appeal. We all assume that they will do an appeal, but it's their decision and it will go on the next level. And so we all need to stay tuned on that. But I think it's also important to keep in mind that this is a onetime effect and nothing more.

So clearly, Europe have turned the base on. Moving to asset quality. You raised a little bit the guidance with the -- of the full year to EUR 850 million with the plan. And you've done EUR 300 million or you booked EUR [indiscernible] million as of first half. Are there any concerns that there will be higher provisions coming in the second part of the year? Maybe you can link that to tariffs as well, if there's any stress there.

No. I think everything is developing exactly as we assumed so. Why I'm always talking about a floor when it comes to NII, I would say it's fair to say that we are talking about a cap when it comes to our risk guidance, if everything is developing as planned. It's just, I think, why do we not adjust that in the moment is just because we know there's a third quarter to come, and there is a very long fourth quarter to come, which always has a higher risk result normally than the other quarters because it basically lasts until mid-February. So it's just that we feel very comfortable with the guidance.

Yes. Moving on to the capital side. Your payout ratio is 100%. This year is even higher when you adjust for the restructuring costs. And with that, your CET1 is kind of stand still, which is a good problem to have. In your discussions with the ECB, I know it's a bit early already doing a lot of buyback and so on. But do you feel you can actually break this 100% on reported earnings, but on underlying to speed up the convergence towards your CET1 because that's an important part of your RoTE target, I understand.

Well, I think we've made good progress in our capital return. When you look on the past years, we are now a very steady dividend payer with a steadily increasing dividend, and we intend to keep it like that. We now have done or collected some experience on the share buybacks. The next one, we said that is due to come. We have applied for EUR 1 billion. And so therefore, we really focus on the things we want to deliver now. And then when it comes to -- I mean, the plan for 2025 is pretty clear. And when it comes to 2026, I think we take it in a step-wise approach and see how things are developing.

And can you help us maybe on the mix of the cash components and the buyback? This is something a bit wide in the range. How do you think about it?

Well, I mean, we have now applied already for EUR 1 billion. If you keep in mind that we said that we want to pay out our net income before restructuring and after AT1, you know that there's still quite a number which you have to pay out. And I think we will think about it in November, December, what the right mix is. There will be clearly, again, a share buyback component in it. And our target clearly is to have a steady dividend and a steadily increasing dividend. But we also will be cautious to not increase dividend too much and then face the risk that we have to reduce it in the years to come. So that will be the interplay.

Clear. Now in terms of the regulation on the capital side, the German banks came surprisingly higher in terms of RWA inflation on the outflow 2033 into the Pillar 3 latest report end of June. What are the discussions you have now with the Central Bank in terms of rating of corporate -- non-rated corporate semis? And are you confident to mitigate a large part of those?

I think that is the absolute objective. We also -- as you know that we are -- all European banks are in constant debate with the regulator and other institutions to think about whether also in light of what's happening in the U.S., whether we anyhow should not rethink the Basel regulation still out there. So that is an ongoing debate. And I mean, we focus on the moment on the short-term things, but we keep the midterm things in mind. But we think there are also good arguments to reconsider Basel.

Maybe a bit -- getting technically a bit, but on the SRT part, it was also part of your capital optimization. So where are you in this program? And are you still confident to push as much as part of the capital efficiency?

Yes. I mean it's in the moment, it's something also which is attractive given the cost attached to it, and we are planning to do something in either third or the fourth quarter. So our plans have not changed. We have also made it very clear that it's part of our momentum strategy. And besides that, we are also very active in lobbying for the securitization file, which is currently in debate at the European level. And I think it's very important that we see progress there because it would be a real chance for Europe if we have I would say more securitization because if you compare it to the U.S., we still have a lot of volumes that could be done, and we think it would really help when it comes to the investment programs of Europe and Germany.

And then I mean, the German are clearly pushing as well the agenda of the saving investment union and more financial integration in Europe. What's on the ground and what's really actually is pushed. Do you think this is aligned with actions and there will be a key play on this?

I mean I said the securitization file is now out, and it's now in discussion and in review with the different institutions. And we -- there was just a conference yesterday in Frankfurt organized by the banking association together with also representatives of the EU to make sure that we are heard because it's a good starting point, and it's great that there is a willingness of the EU to move forward with respect to the savings and investment Union. And the securitization topic is probably one of the most efficient measures. And therefore, it's good that I have started with that. But the proposal which we have now is something we still need to improve to be really effective and to really create more volume. And that's what all the debates are on the moment. But I also understand there has been this French, German meeting between the 2 governments that -- also France and Germany really want to push that together with Denmark to make sure that by the end of the year, we have something in place.

It's good to hear. And just for the audience, we have a keynote speaker later on, Christian Lindner, who will be talking about more German and growth in Europe and see if this agenda is going ahead. Maybe we'll finish where we started about interactions with your key shareholder. And in terms of the share buyback, so this is fresh news, 29% and there's always a risk that mechanically goes above 30%, then they automatically have to do make a bid and so on. How that impacts your thinking about the buyback, if at all?

Not at all because, I mean, they are professionals. They know exactly what we do. It's not coming like a surprise that we do a EUR 1 billion share buyback. And then at a certain point in time, we take back the shares. That is something everybody can plan with. And if you do not want to accidentally move above the 30%, there are clear measures in place, which you can take to prevent that from happening. And otherwise, they would be pushed into a mandatory offer, which I think they do not want. And I have my trust in the professional teams of UniCredit that this will not happen.

Brilliant. Do you have any closing remarks?

No. I mean we are very eager to deliver for the rest of the year. We're very positive. And we think we are on a very good path delivering even more shareholder value.

Fantastic. Thank you very much, Bettina.

Thank you.