Commerzbank AG (CBK) Earnings Call Transcript & Summary

Good morning. Good morning, and welcome to the 26th Annual Financials Chief Executive Conference. Our second live, we're looking forward to #27 being the second virtual, and looking forward to 27 being live again next year. But we've an intensive schedule these next 3 days, perhaps more intense because we're online, 170 companies presenting or hosting meetings, and I thank you for your endearance ahead of time. Just before we open with our first Chief Executive, and we're delighted to be hosting Commerzbank. To highlight on your screen, you'll have some questions. We ask these at the beginning every year. We have found them to be fascinating, not always the best indicator of what then happens. A year ago, you were collectively pretty miserable. Things worked out better than that, we're all relieved to say. Just briefly then highlighting the questions. Number one, the bank index is up 50% prior to this conference. But the 12-month earnings multiple of the industry is only about 9x the cash yield, is over 6%. This means number one, the bank's trade is over, so I don't want to wait. Number two, the bank's trade has barely, I'm enthusiastic. Number three, I don't really like these banks, but it's too risky to be answering them, I'm neutral. Question two, which subsector of European banks, do you expect to perform best in the next 12 months? France, Italy, the Nordics, Spanish, the Swiss or the U.K. And question three, what happens to 2022 consensus earnings for European banks? Last year, you expected substantial downgrades, and we've seen substantial upgrades. This year, are you looking for, number one, essentially unchanged; number two, upgrades, but only from lower impairments, so it doesn't really matter; number three, upgrades in the sector can grow now; or number four, downgrades, these are banks there's always something? We'll come back to you through the day with the responses to take your time, but please do let us know your thoughts. We'll publish later on. And with that, I'll hand over to Rohith, and thank you all for joining us, and thank you, particularly to Commerzbank for opening.

Thank you very much, Alastair, and good morning, everybody. Before we get started with the Commerzbank session, just a brief reminder that you can submit questions online, and we'll certainly try and drop those into the conversation. So with that, I'm very pleased to welcome Manfred Knof, CEO of Commerzbank. Good morning, and thank you very much for joining us.

Yes, good morning, Rohith.

So you announced a new strategy soon after joining targeting significant cost cuts, improved capital efficiency, revenue and revenue growth. And you've been able to move quite quickly in terms of putting agreements in place that have enabled you to charge the vast majority of the restructuring costs. So could you perhaps start by giving us an update on your progress so far?

Yes, of course, and thank you very much for giving me the opportunity to kick off the conference. I'm very delighted, and I feel honored that we have this opportunity here. Yes, the transformation of Commerzbank, we have started January 1. It's a very aggressive one here in the German financial industry, and I'm happy to report that we are making good progress. As you said, it was vital for us to reach agreement with employee representatives about the reduction of staff. And as you know, we targeted about 10,000 employees here in Germany. And just to put it into perspective, it's about every third employee in Germany. And this is massive that really hurts when you have to start a program like this. On the other hand, it was unavoidable and it was no discussions that we had to do it. So therefore, due to the German Labor Law, it's a very complicated situation. So you need to reach agreements with the stakeholders and the representatives so that you're getting the people off the payroll. So that's why it is basically a 2-part -- a 2-stage system. First, you need an overall contract with the employee representatives and then with each division, you need to have a separate agreement on exactly what does it mean to the employee and private clients and corporate clients in the CEO area. And therefore, we're very happy that we were faster than everybody expected with the general agreement before the shareholders' meeting. And now until the end of the year, we're closing the agreements for each division. So that means that we are fully on plan with the reduction of staff and getting the team reduced. And yes, in Corporate Clients, to go to the divisions, we basically said we're going to increase RWA efficiency. That's super important for us because we stated that, again, profitability is more important than growth in Corporate Clients, and we basically focused our strategy in Corporate Clients as we say German connectivity is all what matters. So we as a Commerzbank, we are supporting and still be a part of our customers going abroad. So the SMEs and the German corporates, we follow them internationally, so that has not changed. And on the other way around, we are doing business with foreign companies inbound to Germany. So what we are not doing in -- on the Corporate side is local business abroad anymore without any connectivity to Germany. We found out that this is not the most profitable business. And also from a risk perspective, that is not what we want. So a very clear and focused strategy in Corporate Clients. In the Private Clients division, we really took into account what the change in customer behavior was and we accelerated actually the closure of branches. At the beginning of the year, the Commerzbank footprint in Germany were about 2,000 branches with -- in the light of COVID and the experience of customer behavior during the pandemic is not what we need anymore. And therefore, we accelerated the closure of branches. We're going down to 450 at the end of next year. And this is basically 220 in total, where we're offering the full service from private to corporate clients, and then we have 230 smaller branches where we offer just Private Clients business to our customers. So therefore, we're happy that accelerated the -- yes, the reduction of branches. And also, on the other hand, we're building remote advisory centers because if you close down the branches, you want to be sure that you are -- you can be reached by phone, by call center as well as the digital site. So this is in line in our strategy to be the digital advisory bank. We're taking advantage of the com-direct and building now our remote centers up so that customers have a smooth transition in those areas for simple and easy banking issues where they don't need to visit anybody in the branches. Yes. On the -- as I said, on the redundancy program, we're making progress. And yes, also on our near-shoring you know that part of our cost savings strategy is to reduce expensive external consultants on the operations COO area and reappoint internal in our nearshore locations in Sofia Czech Republic, and that is also working full speed ahead. So all in all, I'm happy with the strategy going forward. And so we are in plan with what we have communicated. That's maybe for the beginning work.

And so a big part of the plan to improve profitability is to cut costs by more than 20%. What are your expectations of when and where we will start to see those costs coming out of the business?

Yes. Basically, it's more or less equal between personnel costs and administrative costs in the Private Clients business, excluding. It's more than on the Corporate side. But we are going to see now the effects kicking in. We have the agreements. So with an ex voluntary program, we then will be able to have already 60% of 10,000 already signed in, and we start as the next voluntary program. So in the years, as we have communicated in the years '23 and '24, we have the full effect of the personnel reductions kicking in. And that's also when the cost savings from the branch closures and the exits of the location will be fully effective. So next year, still a little bit -- yes, a year in transition and in '23 and '24, then we're seeing the full effect. And then we are reducing according to plan. So for us, it's important that a [ 6.5 ] and [ 6.2 ] for the year as we have communicated on the cost side are still in place, and we're working on that.

And then an impact of some of that repositioning of the business was that you were expecting EUR 0.9 billion revenue attrition, partly from churn, so closure of the German -- or reduction of the German branch network and also exiting some of the international locations in Corporate Clients. But then also a headwind from interest rates. So I guess the churn impact so far seems to be a bit less than it had been initially expected, and the interest rate environment is a little bit more positive. So have your expectations for revenue attrition changed at all?

Yes, I want to be cautious in the first place. The thing is things are, yes, developing better than expected. So revenues are ahead of plan, which is good, and churn is less than what we have expected and accounted for. And I think -- I mean now the pandemics in this place is playing in our favor because customer behavior has been changed significantly, so they are -- during the pandemics. They get used to use digital and phone and video contacting. So -- and our home-office facility is working fine. So this was playing in our favor. I think it's still a little bit too early to judge. So I want to be cautious on that. But it's also true with -- that all banks are now charging for net interest. I mean even if a customer is not happy with 1 bank, he will probably have problems finding another bank. So I think that the normal change what we've seen on shopping around and leaving 1 bank and going to the other bank is significantly reduced because customers don't find and happen where everything is for free, to think. All the bank managers in Europe, at least here in Germany, have understood that, yes, anything for free, free accounts in those times are not feasible anymore so. And that has an effect on the customer churn. So customer churn is less, what we see. But also on the flip side of the coin is that new customer attrition is also less what you've usually seen. So it's a little bit frozen, I would think. I described that in the right way.

And so broadening that out a bit in terms of the revenue environment, could you give us an update on where the German banking landscape is now you talked a little bit about deposit charging, but more broadly in terms of product pricing and demand. What are you seeing at the moment? And how do you expect that to evolve?

I think, of course, the overall topic is how we're calming during the crisis. And I think it's good to tell that the banks are really part of the solution, not the problem anymore. So we have seen less insolvency. We basically see 0 risk results, demonstrating that the banks, also together with the government, has done a really good job here in Germany. So that's why on the risk side, we are not seeing a lot. So now we're coming now to the end of the programs. I mean this has 2 effects. On the negative side, I would like to see a little bit more business on the credit side, on corporate credit. So companies are still pretty much reluctant for new investments because they're full of liquidity, and they're also waiting for the election right now happening next Sunday. So we are hoping to see more growth coming on the Corporate side, on the credit side in the second half of the year. That was a little bit postponed due to the liquidity and the fact that especially the SMEs were reluctant with investments and new activities. So I'm expecting to balance that out. On the other side, as I said, risk no insolvencies, risk side, very positive. So we will see that there will be a little bit more calming after the end of the government programs, but not dramatic. We believe that we basically manage through. And as it looks now, we are -- yes, the next waves of COVID basically should be managed by the politicians. So there will be not a lockdown anymore coming. So that should give us more optimism on going forward also for the growth output and for the activity of the Corporates. So all in all, I'm quite optimistic that we have the worst behind us. And given the fact that there will be not a lockdown anymore coming, what the politicians have said, that should be positive on the Corporate side and the SMEs. So we probably will see activities popping up, and that should be good for the economy and then also good for our Credit business.

So coming back to deposits, I guess there've been a few developments there. So on the Corporate Client side, you've seen good price deposit growth. On the Private Client side, you've again reduced the threshold for deposit charging. Given your experience of customer churn and what you're seeing in the broader industry, do you think there's more to go in terms of deposit charging? And how much benefit do you think that might have in terms of revenues?

Yes. I mean the thing is on the Corporate side, we're probably at the end of the program right now. So I mean this is already fully priced in. On the Private side, we then started 100,000, then we've seen our banks going down to 50,000. But then from now on, the effect will be not huge anymore. So I mean we're working our way through. That is -- so with the charging, I would say, that from the 50,000 going down, it's not very efficient anymore to hunt every single customer, anymore. I think what we're seeing here is and what is probably more important is that, that investment business, savings plans on the investment side and also insurance products are definitely seen more as a good alternative even in Germany. So we know that the Germans are very keen on the savings product. But I think this basically shows now. It is a slowly process, but we see more and more right now a changing customer behavior that good alternatives available on the investment side, our insurance products and now a reasonable alternative. And whenever we talk to customers, we see more willingness to shy away from the traditional product. So I wouldn't see it as much as there's so much more to come from the pricing effect because in Corporate, we are almost through and on the Private then, if you're going 50,000, 50,000 down, there's a lot more to come. What we're seeing are positive effects on the fee side, that the customers are really now picking more and more savings plans, investment plans and insurance products to come.

And you've had a very good performance in terms of the securities fee income and a very strong platform, particularly through comdirect. And I guess you talked a little bit about it already. But do you see more structural change in terms of that ongoing shift from deposits to securities?

Yes, absolutely. I mean -- and that is a major part of our strategy going forward. So on the upper end, we want to be also a significant player in the Private Banking and Wealth Management business. So this is super important for us. I mean -- and we have a lot of other customers already in the bank. So personally, I'm also always talking with our SME customers and our Corporates about also giving us their assets under management on the Private Clients and Wealth Management side. So I know that everyone wants to do it, but I'm basically telling my team, "Hey, listen, they are our customers. We have 25% market share. We're doing -- we have a great relationship with a lot of trust on the Corporate side. So it should be also doable to ask them for assets under management on the Private Banking and Wealth Management side." So this is working. And of course, it's a process and it also depends on a better working relationship and alignment between our consultants from the Corporate and the Private Banking side in the field. So therefore, I'm optimistic that we can continue. We also see a huge inflow in our sustainability forms from Commerz Real. So our customers here, especially in Germany, are keen on green investments. Of course, we are in the process of taxonomy and everything where customers are actively asking for investments in this part. And the Klimavest is one of our most successful funds from Commerz Real and yes, we're having them in the shelf in the Commerzbank distribution network. So this is going fine. And for longer-term investments still, there is always more opportunity due to the tax situation also for life insurance products and there, we're also expecting a push until year-end. So all in all, we are optimistic that we can continue. And that should result in that we'll probably at least be at plan or meet -- beat our plan on the revenue side for this year, which was highly debated in the beginning of the year and basically nobody thought given the restructuring we're doing, that will be doable. So I'm pretty optimistic and said that we will beat the plan, and that is a good outcome in the year of transformation.

So just sticking with Germany. The account fee issue, how is that customer contact process going through the third quarter? And does the progress there change your expectation in terms of either the provision or the revenue outlook?

Yes. This is again something which is then yes not paying into the advantage of banks in general because I mean we have the system that there should be an automatic price increase possible from a legal perspective. This has now changed. So basically, what we need to do is right now contact all the customers directly. So for comdirect, we can easily use the online contact form to get in touch with our customers. For Commerzbank account, we use digital channels. We have online platform or apps and talk to the customer and branches. This process will now take some time. And so there is a reduction for the originally planned fee income this year. But as I said, given the overall development of the good revenue situation, we expect that we can compensate for this lower effects from the fee income pricing. So we need to contact every customer directly. But I would put it in a way, so with those customers who are having a good relationship and we are really the house bank, and we are the #1 contact bank, there is no problem at all talking with the customer about prices and prices for the accounts. It's only those customers who are just shopping around. For them, we are not the house bank and we are not the #1 bank. I mean there it's more and more difficult. And they are also probably not the customers having the highest profitability. So I think what we're seeing in the process is for customers where we are the house bank, it's not a problem at all.

Perhaps if we could switch to Poland. I wondered if you could give us an update on the situation on Swiss Bank mortgages. Seems to still be very uncertain with quite a broad range of potential outcomes. So what's your current thinking there, please?

Okay. So I don't even have a crystal ball on that one. So we have hoped that the would get a ruling in September, but it has not been the case. So again, 2 sides of the coin. The one thing, they still hope that it will be not as bad. On the other hand, we don't know. And of course, uncertainty is not what we want to do. We want to see. We see now a situation that the Polish court also getting pressure from the European Union, and now they're asking the European Court of Justice whether the way how they set up the new Supreme Court is constitutional with regard to European law? Is an overshadowing position and question which needs to be checked before. So all in all, I don't expect clarity in the near term, meaning this year, because there are so many questions right now between Poland and the European Union. What actually I'm seeing is a good thing about this is that I think the Polish government and even now the judges now putting questions, direction to the European Union shows that they also feel that that's not what they are doing, and the way how they treat this topic and others is not good for the EU-Polish relationship. I think Poland is a very important country in the European Union. They have developed very nicely. And so far, I think it's also important and beneficial for them that they have a good relationship. So there will be now a legal question sorted out on the constitutional issues, on the setup of the Polish Supreme Court. And this should be sorted out and then they will probably come to the mortgage question. So therefore, I'm not expecting anything this year, and then we will see for next year. So we will update our model parameters for provision calculation. And so we're going our way a case-by-case provision, and that's what we are doing and what we're seeing, and then we will see. So otherwise, it's not more than I can say. There's a little bit of hope that we're asking the European court that the things are not going as bad as expected, but we don't know.

Okay. And has there been any change in the volume of case flow versus your -- what you've modeled in the provision to date?

No. Basically, this is still -- I mean it's probably slightly increasing over the summer. That's what I would say. So -- but I mean it's not that we're changing anything. We are seeing a little bit more individual cases popping in and we will provision for that. So our models are okay. So it is a case-by-case provision. It's true that we've seen a slight increase over the summer where we are taking account for. It's all what we were asking for. So we'll probably see a slighter increase for the provision of the mortgages during the end of the year. But yes, this is just a moment, a case-by-case situation.

And then mBank revenues so far have been relatively stable, but it's a key driver of the revenue uplift that you expect for the group, and I think you're expecting something like 60% increase in revenues in mBank up to 2024. I wondered if you could break that down a little bit between growth and interest rates?

Yes. I think there are 2 parts to the model. The one assumption is if interest rates are changing and turning, then they will start in Poland. That will start in Poland before the Eurozone. So mBank will be benefiting from them. Hard to see when this will be the case. So I don't want to be cautious on giving any kind of idea when this will happen. But it is most likely that the situation in Poland will change before the Eurozone. So therefore, mBank will be a beneficiary of a slight -- even a slight rate increase. But I think more and more important is a business model of mBank, which has, what I would say, an in-build growth trajectory in their business model. I mean contrary to most other banks in Europe and also definitely in Germany, they have a very young customer. The average age of the customers is relatively young, and they're definitely 20 years younger than what we see here at Commerzbank and what the German banks had. So we have a lot of customers in their 30s, and their growth in assets under management and their personal wealth is just ahead of them. So even without not doing anything, there will be -- there is a significantly growth of the mBank business model built in their model, which should lead to a growth of assets under management going forward. And that is a good thing. And the position of mBank in the Polish market is excellent, so we will see a continuous inflow of new customers. and those customers, which expect to have a positive assets under management growth going forward. And therefore, most important is very robust business model of mBank, which has this growth inside the business model. And therefore, we're very happy, and that's why we are convinced that the growth trajectory of mBank built in the Commerzbank plan is not at all aggressive or not going to happen. So what we are seeing is that they are very stable and they are very well progressing on their growth trajectory.

And so coming back to asset quality. You mentioned earlier, 0 risk currently. In that context, the less than EUR 1 billion of loan loss provision for the year that you've been guiding to looks quite conservative. So what are the key areas of uncertainty that you see there? And there's also a significant top line -- level adjustment still in place. So I guess questions are, what are the uncertainty that makes you cautious in terms of the guidance? And what are the circumstances under which you'd start to think about releasing some of the top level adjustment?

I think from the starting place, I would -- I'm happy to have it this way, it's better than the other way round. So it's better to have a provision. Yes, it's true that we are probably a little bit more on the conservative side. But the very low risk result in the first half, I think, reflects the high asset quality of our portfolio. We are very well diversified. And those sectors, which are hit the most like retail or travel, are very low with 1.4%, even less than 1% of our overall portfolio. But as I said, we are coming now to the point where the government programs are running out, and we will need to see how things are developing. In general terms, I'm quite optimistic that we are not seeing huge problems of insolvency coming on going forward. Again, travel and retail issues, also on the airline industry and others, but we need to see how we are developing this going forward. And yes, we also need to put it in the context of what the ECB is doing and how the buying of the government bonds is going to continue. So overall, we like -- we feel very well with our cautious position, but we can definitely be sure that the risk result will be lower than what we have communicated in the beginning. And Bettina Orlopp, the CFO, she has already said that, in our Q2 conference, that we're definitely, yes, in the area of [ 800 ] or below. So we will see that. And therefore, it's cautious, and then we will need to see what we're doing with the top level adjustment. But again, the supervisory authorities and the regulators, they're always -- they're happy with our cautious approach, and let's see how things are now developing after the ending of the government programs and what then happens. As I said, I'm cautiously optimistic a little bit going forward, but we will see how the measures are popping out at the end of the year and the beginning of the next -- of the year. I mean you have seen yesterday that even small effects on the other side of the oceans have a significant impact on the capital markets here. So I think it's very prudent and good to stay cautiously on this.

And then on capital, you've guided for EUR 4 billion to EUR 5 billion of risk-weighted asset inflation in the second half of the year. How should we think about the CET1 ratio, I guess, through to the end of this year and then also medium term? And then when would be the right time to start considering starting capital distributions?

Yes. Okay. So I think probably to the end of the year, anything around 13 is the -- CET1 ratio is very likely. Indeed, we are expecting an increase in RWAs from the final TRIM effect in Q3, rating migrations and regulatory model adjustments. So it's important that's coming from this part. This is a source of the RWA increases. On the other hand, we are working on the profitability of our portfolio. So -- but with this effects, I think a CET1 ratio of around 13 is very likely. So we have a very clear capital plan going forward. So after the low point, now we are going to build it up from 2022 onwards. We are going to increase the capital again. As we said, it's not the time now to talk about capital distribution or returning excess capital to shareholders now because it's very important that we do our homework first, that we are increasing our profitability. And then I think '23 is a good point when we should talk about this again, for '22 and so in the beginning of '23. I think we need to be a little bit patient on them and we need to come where we cross the bridge. I think if we do our homework and everything is developing on plan, then it's a good point to take up the discussions again at that point in time. I need to manage all the regulatory side as well here. And they are very cautious about these topics and basically tell them before you talk about this, do your homework first, and then we can talk. And I think that's what we're actually doing. So it is still -- as we have communicated, we do our homework first. We increase profitability. And then from 2000 onwards, where we could start returning the process of discussions on '23 onwards. And this has not changed at all.

Okay. And on the Corporate business, particularly the international locations, is there any update on your plans for closure or disposals of those business? And then more broadly, is there any other type of M&A that you would consider?

No. I mean on International Corporate, we are reducing the locations and the volumes in line with what we have communicated. We will be targeting exit 3 international locations by the end of this year, 15 by the end of 2024. And this is the preparation and that will take time because you need to talk to the national banks, to the regulators of the countries and that takes time. I think all locations, all the 15, we are in preparatory work. We are in discussion with regulators, national banks and we are in full preparation. So again, there's also everything on plan in execution, which is important. So that is in line. The overall average RWA efficiency in that part is now more than 5% now. So we are seeing the positive effects of saying goodbye to local business abroad. And so this is what we're going to see. And I think I missed the second part of your question.

Yes. It was just whether you would consider any other type of M&A.?

Well, I basically said, I mean -- again, what I said on the capital markets is still valid, and I'm convinced of our strategy. I think this is a super aggressive transformation program. We are fully committed to executing this strategy. That's why everybody here is coming to the office every day and working very hard. We are the bank for the German SMEs and the German. They need us and they need our support, and they need Commerzbank at their site, especially in those times. Now even after the pandemic, there will be a higher use of credits and financing the transformation of the German industry from a brown to a green economy. And so there's a lot going to happen, and that's why the customer definitely want to have Commerzbank at their site, and that's what we're working here every day. And so that is what we have under control and what we are working here. I know there are always press rumors here and there. But yes, what I'm doing with my team, you see working on the execution of this program and the strategy every day. That is what we have under control.

And then perhaps as a final question and actually coming back to some of your earlier comments. There's obviously a lot that you're doing to improve the profitability of Commerzbank. But one of the key challenges historically has been really just the structure of the German banking market. And you talked about some changes in a competitive environment earlier. Do you see a structural change in profitability in German banking, particularly with negative rates, looking like they're set to persist for some time?

I mean let's see what happens after the German elections. I mean the thing is so many people and managers are already talking since 20 years about the structure of the German banking sectors. Of course, as the CEO of a private bank, I'm not in favor of the 3-pillar system here, that is absolutely clear. All countries in Europe have overcome this kind of structures. Only Germany has it. And of course, it would be better for the profitability of the German banking system to overcome this model. But I'm very cautious, and I'm not convinced that I will see that during my tenure here. But again, election -- a new election and a new government is always a good starting point to put some fundamental and structural issues on the topic and discuss it, and that's definitely what I'm going to do, what my colleagues are doing. Let's see what's happening next Sunday. And then with the new government, there's always a good start to have some fundamental discussions. And it's vital for the German economy that the banks are profitable and they can support the German corporates and the German economy. So you can be absolutely sure that this topic will be addressed by myself and my colleagues, and we are going to discuss it. Whatever the outcome will be, I'm not quite sure, but you can be sure that we will address the topic.

That's been great. I really appreciate your time this morning. Thank you very much, but we're going to have to wrap it up there. Thank you again for your time.

Thank you very much.