Commerzbank AG (CBK) Earnings Call Transcript & Summary

Hello, and welcome back. I am Izabel Dobreva from the European banks team here at Morgan Stanley. And next up, we have Commerzbank live from Frankfurt. I'm delighted to be joined by Dr. Bettina Orlopp, who is the Chief Financial of Commerzbank. Hi, Bettina.

Hi, Izabel.

So to summarize what we have discussed in our conference so far, the main themes have centered around the asset quality outlook of the banks, the liquidity situation and, of course, any implications for capital. I would like to discuss all of these themes in our fireside chat as well as progress on the key transformational targets announcing Commerzbank's strategic plan.

But first, maybe let's start with COVID-19, given that is the most important topic in the market currently. I know there is a lot to talk about here. So I will go straight to asset quality. You recently gave the market a guidance for provisions this year. Could you give us some color as to how you expect that provisioning guidance to change in light of the slowdown and what risk result that we can expect for the year?

Yes. Thank you for the question. Yes, I mean, it's clearly still early in the year, and things are moving pretty fast. If I just look on the first 2 months, January, February, we had a very good 2 first months for the private client side and then the corporate client side on the revenues. But also with respect to the loan loss provisions, they have been very low. It is now -- yes. We need -- now need to see what's happening in March. I probably do not expect a lot in March as real LLPs coming in. However, we have IFRS 9 coming into play. So it might be that we book some -- yes, some precursory LLPs in light of potential adjustment to expect. But I mean, it also depends a lot on all the programs, which are currently launched by the governments. I mean, Germany is doing a lot. There's an announcement of the KfW program you are aware of, which is targeted to the Mittelstands and the large corporates. Then there is in discussion in the moment, I think, by German government a EUR 40 billion program for really the small entrepreneurs, who are probably not eligible to a KfW program. And then the banks, itself, like Commerzbank, we are clearly at the side of our clients supporting them with respect to credit lines and credits.

That's very clear, and you touched on a lot of my follow-up points. So maybe to go back a little bit. You mentioned IFRS 9, which introduces an additional level of per cyclicality when it comes to booking provisions. How are you thinking about the timing of booking those provisions? Is it possible that we already see some front-loading in the first quarter? And maybe if you could give us some sensitivities around how the cost of risk fluctuates depending on GDP and unemployment rate assumptions embedded in the IFRS 9 model?

Yes. I mean, it's really tough phase. It's specifically an accounting theme, so I expect, in the moment, that we will see something. But it's really tough to say how much because, as said, it really depends also with respect to the measures now coming into play and then the effects, which you basically will see in the market, and the effects which we'll see on economy, et cetera. So it's probably rather something which will be more viable for the next quarters. And you will see something in the Q1, but probably Q2 and Q3 are more relevant for that.

Also, in your first answer, you mentioned that the German government has recently announced a very substantial fiscal package, as part of which there is also a special guarantee fund to support lending to otherwise viable businesses. I would love to get your take on how do you see the likely effectiveness of those guarantees. Do you believe that banks can be part of the solution in the ongoing crisis? And also, how are you thinking about the risk-sharing agreements between yourself and the KfW when a new credit line is extended?

Yes. I mean, the idea is on the table. It's -- all the credits should go over the house banks of the corporate clients. And it's -- there's an agreement of 80%. 80%, KfW will take; 20%, the respective banks, in our case, Commerzbank would take. And that is related to the RWAs clearly, the credit volume, but also with respect to the revenue splits and at the very end also is...

We have spoken a lot about the asset quality point, but I would also like to look at the other side of the credit equation. How are you seeing the demand for credit evolving? Because a few of the banks, who have presented so far as well as general news flows, suggest that corporates are increasingly tapping the credit lines. Is that something which you're also seeing in your own business?

Yes. I mean, we have very close interactions with our corporates. And what we clearly see is that you see an increase in drawing credit lines, asking for new credits. It is not yet substantial, but you see it. What you also can see is that clients draw the lines, but then take the liquidity and put them again on the accounts. So it's just a shifting in the moment of liquidity, and we expect clearly more to come, again, very much also dependent on the combination of the different programs we now have in the market. But yes, we basically are there. It's our task to be open for the clients and to provide them whatever they need, yes.

So it sounds like, for the time being, a lot of corporates are being precautionary when they're tapping these credit lines, and a lot of the liquidity actually ends up flowing back on the balance sheet in the form of deposits. I know the situation is very fluid, but, as we progress, how are you thinking about any potential impacts on your liquidity ratios and your capital ratios from this trend?

I mean, in the moment, we are -- we feel very comfortable with our capital situation as well as with our liquidity situation. And we should also not forget that ECB regulators in sum have been very supportive in the last weeks with also the released they have announced for the banks, which are also clearly giving us some headroom to react with respect to certain buffer reductions, countercyclical buffer, which has been taken away at least temporarily. And this also gives us as bank clearly some flexibility. And you should also not forget that we had a very healthy capital ratio at the end of 2019. It was 13.4%, which is now clearly also a good starting position for the situation we are currently in.

Yes. As you just mentioned, the ECB recently announced very substantial, well, [ givers ] relief for the banks in the form of various buffers. Could you remind us what the net relief might be for yourself between the countercyclical buffer, the Pillar 2 relief and the fast forwarding of 35. And more broadly, the ECB is talking about banks being able to run below capital conservation buffers. Based on your own analysis, is that something you're thinking about, too?

I mean, it's very much depending on the RWA, due loans, et cetera, we feel, at the moment, very comfortable on what we get in as requests. And there'll also be effects that we believe that we will stay above our requirements. Yes, I mean, the minimum requirements has been taken down a little bit. The P2R buffer, the relief on that would have an effect. The taking away of the countercyclical buffer would have an effect. And I think it's a good flexibility that you have the opportunity to go eventually down and use some of the buffers like the P2G, also the CCB, but we clearly target to stick to a very healthy capital ratio. And we have a very thorough and diligent RWA planning in place to make sure that, yes, we have a strong capital ratio.

Another topic to follow up on the theme of capital, which the market is currently debating, is whether some of the banks, who have announced dividends already for 2019 may hold them in preparation in order to be conservative for capital planning purposes. Could you give us an update of your most recent thinking regarding your dividends?

Yes. I mean, we have clearly also the discussions, and we are about to -- for the invitation to general meeting, AGM, et cetera. And at the very end, the last decision on the dividend will be taken at the AGM. So -- and until then, you have all flexibility to basically consider your decisions. At the moment, we assume that we will pay the dividends as announced for 2019. But at that, we still have some flexibility in place given that, I mean, our AGM is currently targeted for beginning of May. We all knew that there's a lot of debates ongoing in the moment with respect to on how you can have the AGMs, et cetera. So we will definitely discuss that with you all the time, given that we have quite some changing times here in the moment.

Yes. Away from the most recent developments, before we entered the slowdown as a result of COVID, there were signs that the regulator was becoming more flexible when it comes to setting capital requirements. And most recently, the ECB has signaled that they would like to also be more flexible in the current environment. For example, our conversation with Elizabeth McCall a few days ago also highlighted that. So would you expect to see any delay in the implementation of TRIM remaining through this year or even Basel IV?

Yes. I mean, Basel IV is still quite some time out. I hope we are through the curve on corona crisis until that one is really coming on the agenda. On all of the other efforts, our impression is also that regulator really wants to be helpful to support the banks to do really their task, meaning providing liquidity and credits to our clients. And therefore, I think, there are discussions ongoing. And my impression, at least, is that regulator are very open and flexible to support us in any way. And I mean, moving the stress test for a year and things like that are definitely helpful because they allow us to really concentrate on the things we really should concentrate in the moment.

And to follow up on the theme of capital. As part of Commerzbank's strategic plans, one of the key decisions, which were taken was to dispose mBank and potentially unlock some capital gains there. Now given the current market conditions, there are increasing press reports that the sale may be postponed. Could you give us an update on the disposal of mBank?

I mean, I said it pretty clear also in the press conference in mid-February that situation is clearly different to September when we announced that we would sell mBank specifically because we thought that the RWA relief will be important to do the implementation of Commerzbank 5.0. That has clearly changed based on regulatory changes, but also based on the much better starting position end of 2019 with a 13.4% capital ratio. And so I can only stick to what I have said in mid-February. We still think there is a rationale of selling mBank, but only, and that is important to state if the price is the one we really want to achieve to really lock in the value on the one side and then also transaction structure, given Swiss franc portfolio and other things is an important one. And therefore, those 2 things have to come together, and otherwise, yes, we will not see a deal. And that has not changed over the last 6 weeks.

Okay, that's very clear. A follow-up regarding the sale of mBank and the potential booking of restructuring charges over the course of this year, which were also part of the strategic plan. If mBank is not disposed, and given the ongoing environment, how do you think about the time line of achieving the cost savings, which you're targeting, and the booking of the restructuring charges?

I mean, first of all, this is -- the cost reduction program is a program until 2023. So we will see the full effects of the EUR 600 million net cost reduction we will, anyhow, see in 2023. What we have already announced for 2020 is that we would start with an early retirement program, which we have negotiated already with workers' council, and we will basically start with this program beginning of April. There's no reason why we shouldn't start with the program despite corona, so people, who are eligible, will be approached. And so specifically, also, what we have, again, targeted for 2020, we are pretty convinced that we will achieve that. Whether we will really book full restructuring costs in 2020 depends on how fast we are also with the negotiations with workers' council. There might be some delays, meaning that there might be some restructuring costs still be rather booked in 2021. But that very much depends now we can really advance, how long we are basically in this situation of a lot of people working in home offices, et cetera. But for our plans, with respect to 2023, nothing has changed. And nothing has changed, as I said, in February, that we have started an additional cost manager initiative to identify even further cost reduction potential. And also, this one has not changed through the crisis. Rather the contrary, I think it's more important than ever that we consider additional cost reduction measures, and we are currently doing that.

Yes. Moving away from costs to a slightly different topic. I would like to ask you a question on the funding side. The ECB recently launched a new TLTRO III operation, where the terms are very generous. Now historically, Commerzbank hasn't participated in the latest TLTRO round because your liquidity position is very strong, but how are you thinking about the current round of TLTROs and the auction results we just had this morning of over 100 billion?

Yes. I mean, as you said, we haven't participated so far. Conditions have now, again, improved, and we also have decided to participate. So yes, we participated in this round, and we will also definitely consider what we do with the TLTRO program. So I can only confirm that we are also participating.

Okay. And a follow-up on that. Could you give us some color as to how you're thinking about your broader out strategy in the current environment? Given where bond yields are, are you looking to maintain the portfolio of bonds at its current size? Or are you changing anything in your thinking regarding geographic mix or maturity mix?

I mean, we are constantly reviewing that. And where we have flexibility, we look at that. But at the very end, we are not planning any change in composition so far.

Okay. And also, the interest rate headwinds is clearly a big focus for everybody currently, and Commerzbank has been very successful in repricing deposits on the corporate side so far. In your recent results, you mentioned that you would be looking to extend that deposit repricing further. Could you update us on how that is progressing, and what revenue offsets we can expect there?

So yes, indeed, I mean, it's a very common tool and very used now or everybody is used to it. On the corporate client side, we have started with a pilot back in Q4; 2019 to test it with private clients because, as you know, with private clients, we really have to reach bilateral agreement with each and every client. We then announced that we would start in January to do a rollout. I have to say, this is only targeted in the direction of clients with deposits over EUR 250,000, which means that the broad majority of our clients is not affected by this deposit pricing. It's really whether the wealth management part of our clientele. And as such, there are bilateral agreements to be done. There has been a reach-out since beginning of January on, call it, client group and to reach agreements. And you can basically see 3 different things which are not very surprising. There are clients who are basically signing the agreements. There are clients who are basically shifting liquidity into securities. To be very honest, we -- on the private clients side, we see that even yet in this situation quite often that clients are now using the low markets to basically enter and buy securities. And yes, we also see some outflow of liquidity. And to be very honest, we now need to reflect on that and to review it in the light of what's happening in the moment, because if that -- the clients are anyhow following up now on very different strategies with respect to their deposits and securities, et cetera, given the corona crisis. And in the moment, however, we expect positive effects out of it, specifically on this one side with respect to the deposits who are going in the direction of securities, but also a small double-digit amount of revenues stemming out of agreements with the clients.

To follow up on the topic, we have just received a question from the audience. And as a reminder, you are welcome to submit questions via the webcast, and I can read them out. So the question is regarding fees. And it is -- do you expect to see an impact from the current lower activity on your fee line? And also, what trends are you seeing at comdirect, which, as a reminder to the audience, is the brokerage business of Commerzbank? Commentary from industry players suggest that volumes have spiked a lot. Is that something which you're also seeing?

Because it was tough to understand the question, but I think it was about the development of the fees and also the situation of the comdirect and how comdirect is currently developing. That's what I understood from the question. Is that correct?

Yes, correct.

Okay. Great. So as such, I mean, January and February have been very strong months for Commerzbank, but also comdirect, and also March proves now to be quite active with respect to securities because we see a lot of activity. And comdirect will definitely also have a very, very good Q1 revenue-wise, because they are very much having also a lot of traders, et cetera, in their client portfolio. And that's clearly something which you currently see in the revenues, yes.

Okay. Another question from the web, and I'll read the question as it is worded. It's in the topic of capital and dividends. And it asks, can you confirm that the dividend announced in 2019 is safe? And can you rule out that it may not be paid?

So we confirmed, and we will also propose to the AGM, the payment of the dividend of EUR 0.15, as we have announced next February. And that, I think, is describing the situation as is the best. I only can also just indicate that the decision is not made by the Board or the Supervisory Board, but it's made by the AGM. So the latest decision and the final decision, whether there will be a dividend or not, will be taken by the AGM in -- hopefully in May. But as you know, it's unclear what's happening in the moment with the AGMs these days.

Okay. That makes sense. Another question we have been receiving is regarding the cost announcement you made at the time of your last results, where you mentioned that you're looking to extract additional cost savings on top of the ones announced on the Commerzbank 5.0. So the question is, what areas do you see potential to see additional cost cuts? And is there any risk that we might see revenue dissynergies if further cost cuts are implemented?

I mean, we are currently looking into it, and I said that I would come back after Q2 or with the Q2 results on giving more details on the additional cost reduction plan. And I would like to stick to the time line, given that we still also need to work out the details. And I mean, you always see different cost reductions, which you can see. One is within the existing business model by just looking for additional efficiency levers, et cetera. And the other one might be also something where you take out complexity out of the system by taking out products or services. And that might have an impact on revenues, but some clearly only the smart ones, where you basically lose much more on the cost side than on the revenue side. So profitability-wise, it should be a positive one. But I mean, I think it's important to look everywhere. So we are really doing a complete review of our business models on the Private Clients side and Corporate Clients side, front office and back office. And that is something we are currently doing. And yes, I will come back with details, later hopefully after Q2.

A broader question on the topic of profitability. Given that we are now likely in a lower for longer environment, more augmented by various metrics than other European countries, do you see scope for further consolidation in Germany, particularly a result of any revenue headwinds, which might start materializing post the slowdown?

I'm not sure because it's sometimes very tough to understand, but what I understood is, first of all, longer -- lower for longer, I think, is anyhow the strategy or the perspective we believe in. This is why also our Commerzbank 5.0 strategy was embedded in the -- or it was based on the assumption that we will not see any positives stemming out from the interest rate environment for the next at least 4 years. With respect to consolidation, to be very honest, probably tough to evaluate. And given the situation we are currently in, I think nobody is really thinking about consolidation in the moment. And cross-border consolidation is anyhow difficult, as we all know, because we still need to have, yes, some regulatory alignment across Europe before you really are able to do eventful cross-broader consolidation.

I have just received a few questions from the web. As a reminder, you can submit them online. And the questions are going back to the theme of asset quality. Could you outline your exposures to areas which may be high risks, such as oil, aviation and leisure?

So what was the last one, sorry?

Leisure. So hotels, hospitality.

Leisure. Okay. Leisure. Okay. So oil is -- I can say is less than 1%. Airlines is 0.5% of our overall exposure. And leisure is now a difficult one because leisure is a lot. I mean, what we not do is a lot of restaurants and stuff like that. So we are not very much into that one. So I probably have difficulties to really provide a number, but I would say rather not in our core area.

Okay. And if we delve a little bit deeper in those exposures, could you comment specifically on the oil and gas, and whether there are any subsegments which you would perceive as high risk at the moment for an asset quality?

I mean, given the situation we are currently in, I think the thing is that -- and that is specific to this crisis now, that you can't say, well, this is -- this industry is more under pressure than others because nearly everybody is under pressure given the lockdown and the restrictions, which you see. And there are very few ones who are really benefiting currently from the crisis. So the important topic is really a, whether it be the government measures and also the regulatory measures are supporting the companies to basically live through this crisis, number one. For us, clearly, it's also important, the share of Tier 1 and Tier 2, Tier 3 players. And the good thing is that we have in most of the industries, we rely on this Tier 1 players, where we believe they are much stronger in surviving to such a crisis. And I think it's very much dependent now on the measures taken, and whether they really unfold the effects they hopefully -- I mean, we all hope they will unfold.

Okay. Away from the oil and gas exposures, when I think about your core customer base, so German mortgages, SMEs, based on your discussions with the government and the regulator so far, do you believe that any loans, which are credit lines being drawn or being guaranteed by the government, will be able to be not classified as Stage 2 when we think about IFRS 9 criteria? So in other words, would you be able to get an exemption from having to treat those loans?

I mean, that is a very valid question. And you can be sure that this is probably the one question debated in nearly every bank, at the moment across Europe with its accountant. But I said it's a European regulation. And I think if we wanted to change something on that, which most likely would make a lot of sense, specifically where we have guarantees out and stuff like that, but that is something which has to be decided on a European level because then you give also guidance to the different accounting firms and auditors how to basically apply that in cooperation with the different banks. So I think we all have a very clear opinion on that to -- specifically, it would be very smart to exclude this portfolio. But that is something which has to be decided at the European level.

And from a loan growth perspective, it sounds like, in the near term, there will likely be a boost, given all of the measures which have been announced. But on a more medium-term view, how do you think about a sustainable loan growth profile in the core German business?

Hey. I mean, that's really too early to tell. I mean, if I would have a crystal ball, I could tell you. Given that, I mean, at the moment, things are moving so quickly. I think it's really tough to say because a lot of the things now very much depend on the question on how long are we in this status as we are currently in. And I think nobody is able, in the moment, to really predict how long we all will be in this status. And therefore, I think, yes, it's really hard to predict. I think it's important now that we introduce the measures that we provide stability to the system, and then we take it from there.

I'm going to go back to a few questions from the web. There is a question on how you see the competitive trends in Germany, specifically when it comes to pricing, adjusting to the current environment? And do you believe that there is possibility to offset potentially lower rates if the ECB cuts through higher asset spreads in Germany?

I mean, we saw already kind of a positive trend already the end of Q4, where we saw a small increase in margins on the corporate side, but also on the mortgage loan side. And trend has not stopped in the first month. I think now it's too early to tell on how the actual crisis now really is impacting the margin levels. However, what we definitely see now is also that we have a proactive reach-out also from non-clients, who, basically, come back to us and want to have our support, et cetera, which might be a hint that there are some players probably rather reluctant to act in the moment. And the national banks are the ones which are now important to provide, yes, credit and liquidity to corporates -- to German corporates.

And on the topic of liquidity, clearly, a lot of the thinking behind these guarantees is that if companies can receive a bridge loan for the next 3 months or so, and they're otherwise viable, that can be a way out. What is your view on this? And what do we need to see in the fine detail of these guarantees to ensure that they are successful and that companies have full access to them?

I mean, as you said, there are a number of clients which business -- where the business model is completely intact. And what you have is they have been put on a pause. And the question is they need to live through now the ports, and then they will take it up again and business model privy is healthy. And I'm pretty sure that the guarantees, et cetera, now given will support that and will help them on that. To be very honest, clients, who have corporates -- who basically had already a problem beforehand, or even -- I mean, we have also a group, which is basically unbankable to say like that because they are not really eligible to credits, et cetera, this problem you can't even solve through measures like that. So if you are -- if you have been in difficulties before the crisis, you will be also in difficulty within the crisis and afterwards. It will just rather accelerate. And I think that one is something we will not change and we shouldn't change because, I mean, if the business model is [ currently ] not working, you probably also need to take decisions.

We're nearly out of time, so I think we have room for one last question. And I would like to touch on Poland because we haven't really discussed that so far. Your Polish subsidiary has some exposure to Swiss francs loans. Could you give us an update of your expectations here when it comes to booking to any potential losses, and also how you're experiencing the cases progressing through the courts currently?

Yes. I mean, in Q4 2019, we booked additional provisions for the Swiss franc portfolio in the size of EUR 57 million. That was also based on the fact that we had different legislations. We had the EU court decision, et cetera. To be very honest and then, situation has not changed. So I don't see currently that we will have any impact on Q1 stemming out of that. I mean, one part is also that Poland is clearly also in a kind of a shutdown stage in the moment. So there are also no news so far on the development and so on. So nothing has changed basically to Q4 communication from our standpoint.

And with that, our presentation has come to an end as well as our 16th annual financials conference. On behalf of Morgan Stanley, I would like to thank all of those who joined us over the past 3 days and helped us to make this conference happen in what has clearly been very challenging conditions from all sides. We hope that you have found the conference useful. And myself and the team would love to hear from you if you have any questions, so please do reach out. Thank you, and goodbye.