Commerzbank AG (CBK) Earnings Call Transcript & Summary

Yes. Hi, good morning. Thank you for joining us. My name is Benjamin Goy. I'm part of the European banks team. And in that role, I am very happy to welcome Dr. Bettina Orlopp, Chief Financial Officer of Commerzbank today.

Thank you.

For the audience -- good morning, thank you -- or good afternoon in your case. For the audience, you might be aware of the format. We will run this as a fireside chat. So we'll kick off with some questions from my side. But please feel free to ask any questions via the webcast, and we'll get to those as well.

Yes. So maybe to start off, Bettina, this crisis feels a bit different to the last one, meaning banks are much more part of the solution rather than the cause of it. So if you could give us maybe some insights on how Commerzbank assisted customers in these times? And in particular, with KfW loans, where you see the most demand for those?

Yes. So first of all, we are there, which is important. We are open. We are there. We have -- I mean, in high times, we had 200 branches open. By now, we are back to approximately 400 branches which are open for our clients. But still, everybody is working either in the offices or from home for the clients. So high accessibility of all staff, and actually, high activity. And KfW is clearly one of the key programs for the small business clients, but also for the Corporate Clients. We are there. We help the clients on their liquidity planning, on their financing. And there has been quite a run on the KfW program at the beginning. That has, I would say, calmed down a little bit, specifically on the Corporate Clients side. We now see also, first of all, alternatives. They have also access to capital markets, given that capital markets have calmed down as well. And -- but on the small business clients side, we still see good inflow of requests, and we're handling them. And yes, we are at the side of our clients.

This sounds good. In addition, I mean, KfW is certainly, as you said, one of the key support schemes, but there's also a number of other important schemes launched by the German government to dampen the negative impact of COVID-19. So I was just wondering how do you think these measures might impact your future cost of risk? And how, yes, you kind of model these with IFRS 9?

Yes. I mean we announced, as a guidance, during Q1 communication that we would see the cost of risk for this year, it's one -- so the LLPs at EUR 1.0 billion to EUR 1.4 billion, which is clearly above the original guidance for this year. However, it's -- probably if you also compare it, it's still, I would say, a good number and take into account that we have these programs in Germany. So what we basically did, we differentiated clearly the different portfolios. So on the one side, you have the Private Clients where we also have the moratorium, and we see some payment holidays and stuff like that. That's on the one side. Then we have mBank as a key subsidiary internationally where we see clearly higher cost of risk than, for example, in Germany. And then we have the international clients and the German Corporate Clients. And what we basically did is really very different approaches for the different portfolios, taken into account that we believe that specifically in Germany, programs are very efficient and effective. And we also took into account, by that time, forecast for the economic development in Germany but also in Europe. And we now need to see how this will develop over the next couple of months. And -- I mean if you look up the -- on the real LLPs, you do not see so much so far. You see a little bit. But I think expectations are that we need to see how things are developing over the summer, given that we now see also some smoothening and -- of the lockdown and some return to normal life, at least in some parts. And what we now need to see is how this develops over the next couple of months.

Okay. So fair to say that the government programs certainly help a lot, but in some cases, there might just be a delay in terms of when kind of financial stress emerges. Any sectors you, in particular, have on the watch list at the moment in that context?

Yes. I mean that's the specific thing of this crisis that you nearly have every sector you have on your certain watch list to say like that because this is a crisis which is not starting with one sector and is then moving to another. It's basically touching, yes, a broad range of sectors. I think, first of all, it's important to keep in mind that we have an NPE ratio of 0.9% or even 0.8%. And if you take that one into account, I think, that's important. We have a very well-diversified portfolio. However, there are some sectors which are, yes, putting specific headaches, it was oil, it's retail. And there, the good thing is that, specifically, the subsectors where you see, yes, probably more trouble and impact than the others like fashion and retail, our exposure is very limited. So we really go through our portfolio and have a review, and it's -- and there, it helps if you basically have a high share of investment-grade companies in there, if you are very well diversified, and yes, if you have a good coverage.

That certainly helps. Maybe one more on asset quality. You mentioned loan deferrals. Just wondering whether you can put it a bit more into context, the amount of loan deferrals in portfolio context across retail and corporate, which you have seen so far?

Yes. I mean we have announced that in Q1, and the numbers have not really changed now the last, I would say, 2 weeks. So it's basically on the Corporate Clients side, loan deferrals are nearly negligible so far, I would say. You see it more on the Private Clients side. And there, we see -- I mean, it's less than -- or approximately 2% of our Private Clients portfolio where you see an impact on them. So -- and it's increasing a little bit. I think the key question is what's happening when the moratorium ends and how the behavior then -- yes, how the behavior will develop of the Private Clients.

Okay. No. Fair enough. One more, and then we come to the first question from the audience. Competition. Previously, a number of banks planned to grow in Germany, in particular, with corporate customers. Do you see already some changes to the situation? What's your expectation going forward? And could this crisis be a medium-term opportunity for Commerzbank when you say you're assisting corporates and customers in general in this crisis?

So first of all, I think it's too early to tell how the real impact is and how really the players and the competitors are behaving. We could just say that we are really at the side of our clients. We are supporting them. I'm pretty sure that clients will remember in, I would say, 2 years from now on who was helping them and who was stepping away. And I think that will definitely help us in our position. We have already a very strong position among our Corporate Clients. And it's clearly our intention to basically not only strengthen it but to expand this position.

Okay. Makes sense. And the first question from the audience is, late last year, you suggested there is a significant potential to pass on negative interest rates, in particular, to low return customer accounts. Maybe you can give us an update where you stand in this development?

Yes. I mean on the Corporate Clients side, this is an established process, and we do that already since last year, and nothing has changed on that. So we continue to do so. On the Private Clients side, indeed, we announced that we would first start with a pilot, which we have done in the last quarter of 2019 to test a little bit behavior and how clients react. And based on this experience, we started to roll it out to -- I have to say, to the more wealthy Private Clients in our portfolio. So the reach out was really limited to a small number of clients, however, with large liquidity boost with us. And this -- I mean we have continued it until March. We have then posted for really -- when the crisis was really beginning and emerging, and we took it up again now in May and continued the conversations. And you have to keep in mind that you can't just introduce such a deposit fee, but you really have to settle bilateral agreements with each and every client, and that's what we currently do.

Okay. Then coming to capital. With Q1 results, you updated your 2020 guidance, or at least, the floor to it to more than 12.5%. Now in Q1, you're still well above that level, but maybe you can give us a bit more insight into the moving parts for the rest of the year, basically how your capital ratio could develop? And what are the positives and negatives over the next 3 quarters?

I mean, why did we lower it? We lowered it also because we took into account the regulatory relief, which we received from the regulator, which was expected already for 1st of January 2021, and we already got it now, which is the P2R relief that we could use Tier 2 and AT1 to fill the minimum requirements -- capital minimum requirements instead of just CET1. So that's basically what we did, and we took part of it, and then we lowered the guidance down to 12.5%. What do we expect until year-end? You will see -- I mean, also given our guidance on the risk cost, et cetera, you will see an impact on rating migration, that's for sure. Second, you will definitely also see some growth impact on the RWAs, which we expect just because we grow, we gain net new clients, and that you will also see in the numbers. We will probably also see some increase on the market RWA size. And that's all together we took into account, but I'm very confident that we pay above the 12.5%.

On the risk migration, would you expect a more benign development this time given the moratoria and say less stage migration? Or could it also be a significant part of it?

I mean that's very much dependent on how the programs now really unfold and how fast, I think, the recovery is you see in economy, et cetera. So at the moment, we basically -- I mean, we take into account different effects. But as said, I mean, we assume that there will be rating migrations. And -- but the size definitely depends on the development over the next couple of months. And the question on -- I mean, all the guidance I gave in Q1 -- for Q1 was based on the assumptions that we would see a U-shaped recovery of economy. So that's really, really important. And I can only stress that point because at the moment, we assume that we will -- I mean, we saw now quite a bit of -- that we see a rather quick recovery by the end of this year or beginning of 2021. So our assumption is the 2 months lockdown and then a step-by-step return to normal life. Clearly, the pace will be very different in different sectors, but that's what we currently assume, and that is also on which we based our guidance on.

Okay. In that context, you also launched last night a new additional Tier 1 program, EUR 3 billion in total. Maybe you can speak a bit about the framework, the opportunities and optionalities you get out of this program?

Yes. I mean it's basically referring back to what I said earlier, meaning that we got now the relief on the P2R buffer, which is, in our case, 44% of the 2% buffer, meaning 88 basis points, which really makes the difference. We already did 1 AT1 issuance last year very successfully. And what we now wanted to achieve by launching this program is to have the maximum flexibility in the coming months to act whenever we want to act and be fully prepared whenever markets -- market conditions are the ones which we want to have for this program. That's basically the key reasonings to have a program instead of a single issuances.

Okay. Understood. And the program is in euro billions. Your first AT1 was in U.S. dollars. So just wondering is there any specific reason for that? Or was it just because last year the funding conditions in dollars were, in particular, favorable?

Well, last year, it was very favorable to do it in U.S. dollars. There's no specifics behind it. And I mean we have all flexibility also to do it in a different currency, if we want. But that's just the working hypothesis we have.

Okay. And maybe one last on this capital complex. And the European Commission is also discussing further capital relief, in particular, like a more lenient or more favorable approach for European banks on software intangibles but also SMEs and infrastructure lending. Maybe you can share your views on those? And what potential impact could be on your capital ratios?

I mean it's quite interesting and appealing, and I hope that they will act on that. I think it makes a lot of sense to go in this direction, given that banks are becoming more and more, I would say, have IT companies, digital companies and so on, so there's no reason why we really need to deduct that from our capital. And it would have an impact. I mean if you look at our numbers, et cetera, the question is how big the impact is, and that's very much dependent on how the regulation or the requirements look like, but it could have an impact up to 50 basis points for us.

That's significant. So that's only the software intangibles or in everything in combined.

That's the software intangibles side, but -- yes, it's really up. So it could start also with a lower number, but there is a broad range. It's very much dependent on what is then exactly SaaS, on how to apply it, et cetera. So I'm rather cautious on that. I mean it would be indeed a good signal and a good step, but we need to wait for the final -- yes, for the final decisions, the final regulations.

Yes, fair point. I guess the fine print, whether it's acquired software or also internally developed software makes a big difference. So maybe it's certainly...

Yes. That makes a big difference, actually -- yes, exactly. You're -- you -- you get my point.

Okay. So we'll keep that in mind then. No, perfect. And we'll move on to the next question from the audience regarding mBank. So you announced this is now -- mBank remains within the group. So people are just wondering what's the strategy with mBank now?

Yes. I mean we've -- it's pretty clear why we decided to not sell it. But first of all, the original plan why we wanted to sell it back in September were really not entirely valid already by beginning of this year, given that capital situation has changed, and then also regulatory requirements, et cetera, changed quite significantly. That's the one side. The other side is that we've been in February, where we said that we would sell it if it makes sense and if the conditions are the right ones, I think, specifically the price. And yes, we continued negotiations. But clearly, corona played a role in that, and we realized it doesn't make any sense to sell it. It's a very good bank. It's a great bank. And we will definitely incorporate them now in our strategic review, and we'll come up on how we'll proceed with mBank.

Okay. Now maybe there are 2 follow-ups on that. First, are there any more greater synergies or benefits available also cross-border? Or is it still a bit tricky between Germany and Poland? And then the second question on that is, are you able to receive dividends from mBank? That's a question from the audience as well.

Well on the latter one, I think dividends are not very appropriate on the moment for banks. And in some, I think, for companies, in total, dividend policy is probably nothing, which you really debate in the moment, and that's also true for mBank. But clearly, I mean, it's a very profitable bank, and our expectations are also that we will get dividends out there also in the coming years. But that also very much depends on, yes, the overall environment, the regulatory environment and things like that. With respect to synergies, I mean, they have been also a part of the group in the past. And given the markets which are pretty distinct and -- but also given the operating model, et cetera, synergies -- real synergies that were always rather limited. However, what we have done and what we will definitely continue is to exchange on digital trends, digitization. There are a number of things where one party either mBank or comdirect or Commerzbank started to develop something, and then it was copied by the other one, and that is a trend we will definitely continue.

Okay. Understood. Moving back to the P&L. And maybe starting more specifically with loan growth. So can you give us some flavor on how you expect this to develop across retail and corporate? And specifically in times of lockdowns, I mean, it has eased a lot in Germany, but still some comments around your mortgage pipeline would be interesting in that context?

Yes. I mean starting with Private Clients, what you see there is the consumer loan growth was -- even in the last weeks of the quarter, were -- was pretty strong. There, you now see some weakening, which is not very surprising given that this consumer behavior is rather silent in the moment, so that's also true for consumer loans. On the mortgage loan side, that's probably the biggest surprise that we haven't really seen a dip so far, because at the beginning, it was clear that these are things which have started earlier, but even now being, I don't know, 10 weeks in the crisis, we really do not see it slowing down. So we expect an increase there might be less than probably arguable thoughts. On the SME side, we expect growth also because of the KfW loans, et cetera. There, you need to keep in mind that clearly, the margins are different ones, whether you do a KfW loan or a normal bank loan. And on the Corporate Clients side, there also you have the 2 effects. You have on the one side, you see still KfW loans coming in. On the other side, I mean, we have seen a very strong increase in March and April, and that has clearly slowed down now. And even there were some larger Corporate Clients who basically draw -- have drawn lines. And then get to the -- got to the capital markets, and now they paid that back. So it's a very mixed picture, I would say.

Understood. On the margin, you already mentioned that even though loan growth is there, and particularly on the corporate side, the mix might be less favorable. But I'm just wondering how do you see price competition at the moment in the market? It looks like it moved out a bit on the mortgage side, but you might share a bit more here.

Yes. I mean it's -- you see some improvement, not a lot, but nothing really significant, I have to say. Expectations would be that you see some normalization of the margins, et cetera. And have we seen it already, not entirely, but yes, expectations are there.

Okay. And then moving on to fees, before we go to another question from the audience, you had a very strong start in the first quarter, clearly helped by a very strong retail brokerage. So just wondering, did you keep the momentum largely into the second quarter now? Or should we expect it -- yet to tail off significantly as activity potentially falls?

I mean there's still quite some activity, which you can observe. However, it has calmed down, clearly. What is more that you also need to see the fees on assets held on securities accounts, that's always been averaging. And there, we all know that this amount went down. We also reported that on Q1, and there you will see an effect. However, given that in the moment we also see that market prices rebound, our assumption is also that we will see an increase there. So it's a mixture of different things.

Okay. And you have one more question from the audience. There have been reports about there is a McKinsey investigation, or basically, a study at Commerzbank, and people are just wondering what is the essential questions of this consulting exercise?

I'm not commenting on specific projects or something like that. But let me just state it like that. I mean we always do -- in this time of the year, we always do a strategic review, which then leads into an updated multiyear planning, et cetera. And it's pretty normal that you get some support in strategic reviews, and that's what we also have done.

Okay. Fair enough. So we might rather move to cost. And yes, maybe you can give us -- or you can share some more light on your cost management initiatives, and particularly, in COVID-19, how this affects the speed of existing plans? What you might do additionally? Yes. Any more thoughts welcome.

Yes. I mean we -- I already adjusted the cost guidance in -- for Q1 stating that because the original cost guidance for 2020 was EUR 6.7 billion plus EUR 0.2 billion investments -- IT investments for the implementation of the Commerzbank 5.0 strategy. And after now being 3 months or even 5 months in the year, we basically adjusted the guidance clearly stating that we expect that we stick rather to the levels of last year, but then including the IT investments, meaning that we basically lowered the guidance by EUR 150 million, which is the clear signal of cost management and cost discipline. Actually, corona has done that on costs. I have to be very honest because we, clearly, there have been some cost items where we definitely will spend less than we originally would have. The most obvious one are travel, qualification, marketing and stuff like that, which is very different to normal times. And yes, there, you will most likely also see a long-term impact. And we also clearly will take now into account also for our cost reduction program, the changed -- yes, the changed behavior, not only on the clients' side, which you'd definitely see with respect to use of mobile banking apps, et cetera, but also on our own internal view with respect to share of home office and mobile working, which definitely is different than we probably would have thought of from 6 months ago.

That makes sense. But on the other hand, you also have a restructuring program going on. Any impact on the speed of execution here or the discussions with labor unions?

Well we have started basically the headcount reduction program by launching a first program where we booked already the restructuring costs for last year, which is -- which started literally 2 weeks ago when we sent out letters to approximately 2,000 eligible colleagues for so-called age -- part-time age retirement program, which is part of the Commerzbank 5.0 strategy. And we plan to basically start negotiations with Workers' Council at the end of the summer. And honestly, things have not changed. I would rather say that the crisis clearly shows that profitability is key and that we need to move as fast as possible with respect to our cost-reduction measures.

Understood. And yes, you mentioned the remaining restructuring charges could be not entirely booked in 2020. So this depends on the progress you make with the labor unions, I assume?

Yes. I mean the restructuring costs are twofold. One is for the headcount reduction programs on the one side, the other thing is also for branch closures, et cetera, and both very much depend on the speeds of closing branches on the one side but also from the speeds of the negotiations with Workers' Council. And depending on that, you will see either the booking this year or next year, or probably, it will be basically split between the 2 years, I expect.

Okay. Very clear. It's actually almost perfectly in time. So thank you very much for joining us today, and we hope to welcome you next year in person in New York, and also to the audience for dialing in.

Thank you. Goodbye.

Thank you. Bye.