Commerzbank AG (CBK) Earnings Call Transcript & Summary

Okay. So thank you, everybody, for joining us here. It's my pleasure today to be joined by Dr. Bettina Orlopp, Chief Financial Officer and Chairwoman of the Board of Managing Directors of Commerzbank. Bettina's held the CFO role now for the past 3 busy years. Thank you very much for joining us again at this year's conference.

Thank you very much.

The format is very similar to other sessions. We have 35 minutes. Bettina and I will run through some questions to begin with, and then we'll jump into audience Q&A. Please just stoop your hand in the air, we'll try and see you through these lights. And there are some roving microphones so we can hear your questions clearly.

Bettina, thank you for giving us your time. I wanted to begin with perhaps a fairly broad question just on how Commerzbank is currently performing halfway through June, but also maybe give you the opportunity to talk about some of the more recent headlines both today and also earlier this week, I think you were in the Financial Times talking about a buyback in the second half. So sort of a mark-to-market on everything that's going on today.

Yes. So let's start first probably with the Commerzbank on how we are doing. So we are now halfway through the transformation program, and we have been apparently very satisfied with the 2022 results. There is a very strong result with the EUR 1.4 billion at it's the strongest results since more than a decade. So at also a cost-to-income ratio of 69%, I think we clearly have shown that we are on track with respect to reaching our targets for 2024, which is a 60% cost-to-income ratio. And then first quarter was also really good, exceeding the expectations. And so I can't speak about the second quarter now, but it seems to be that we continue this very, very good trend and we make progress on our transformation. We also have launched a very large marketing campaign to really reposition ourselves again to show that we want to be at the side of our clients that we are up for growth and that we really are able to attack and to serve clients.

And the -- I think the comment was made around the buybacks through the second half. I don't know if there is -- I mean, you've already spoken a bit about the commitment for the first half of the year and how you think about that capital allocation policy and the broader transformation.

Yes. I mean we have a clear capital return policy laid out, which says we want in the first year of the transformation at a 30% payout and for the years to come at 50% payout. And as part of it, our top [indiscernible] could be share buybacks. And the thing is what we currently have is in that what I said in the Q1 communication already and also then in the FT article is that we clearly will consider further steps after half year results because we always have to take into account that there are some [indiscernible] time on it. There is required approvals by Supervisory Board by the, in our case, the biggest shareholder in the bunch. And also, most importantly, the ECB and the latter one takes up to 3 to 5 months and just taking that into consideration. We would clearly wait now for the first half results and then see how we think about the next program.

Okay. Maybe pivoting slightly towards the macro. Clearly, the business is very much in the German economy. And so I'd just be interested to hear your perspective from where you sit and what you see in terms of performance within the German economy. Which sectors are maybe doing slightly better? Which sectors are giving you a bit more cause for concern?

Yes. I mean in the moment, economy is holding up nicely. I mean, yes, we have seen or we expect still a light recession for Germany this year. And also you see that in the numbers with respect to GDP growth, but this is rather stagnating or even slightly negative. I don't know how you look at it. . But if you look on our result of the first quarter, you see that we see nothing. So the resilience of the corporates is very high. However, we stay cautious because we think that there are certain sectors specifically exposed. And if you also follow the headlines, we have seen some defaults like in the automotive industry, et cetera, on the supplier side and also we stay cautious specifically on the SMEs because there is a lot of burden on their shoulders, given the inflation, given the energy costs, given also the slow economy. And therefore, you see it in the G&A of Q1 where we basically shifted our top-level adjustment from corporate clients to basically PSBC because in the moment, we are probably more worried about the smaller SME side than about the large class.

Very clear. Now obviously, we've had this huge move in rates since we last spent some time together in Rome last year. But looking forward into 2024, I mean, our economists are forecasting that rates stay higher for longer, but the market is already starting to price cuts for next year. If the ECB were to start cutting rates in 2024, what's your expectation as to how that would impact Commerzbank? Is it as simple as thinking if the rates move down at all, revenues need to come down?

First of all, we assume also that rates will be pretty stable in 2024. That's our most important. And the development specifically between '23 and '24 also depends very much on how much do we still expect as interest rate increases this year because that will then also define the basis for 2024. So is -- I mean, everybody expects something to happen today. Is there another step up coming? If so, when is it coming? And when would we see any decreases, which we do not expect. So that's very much a part of the mass because you always have -- if you compare '23 to '24, you always have to compare the average interest rate level of the year. And also this year, we have seen quite some increases. So we started lower and ended higher or will end higher, and that's the one point. The other point is clearly what happens on the deposit volumes, which we are keen to keep stable. And the third important factor are clearly -- is clearly the pass-through rate to deposit beta. And we have seen still a very low deposit beta for the Q1. And we said that we explicitly assume an increase, significant increase over time. And also here, the comparison '23 to '24 very much depends on how fast we reach the peak to say, on the deposit beta. And in the moment, Q2 is probably slower than we thought with respect to the interest of the deposit beta, which is positive apparently, but we still expect an increase. And the fourth point, clearly then also playing into the whole NII theme as model deposits because we will see revenues coming in on an also positive factor as long as we do not turn into a negative interest rate environment again out of the model deposits. So putting all these things together, it's tough to really give a clear guidance for '24 in relation to '23.

I think going 10 minutes into the discussion before we mentioned deposit betas is probably a new record for the last few quarters. But just on that deposit beta topic, and I'm going to get the number wrong, I think you're assuming it sort of normalize back to 30% or 35% Q2 onwards. And my sort of question on that is, was that assumption really just conservatism or thinking that something would occur through Q2 or Q3 that would naturally lead to a big uptick in deposit betas?

Well, first of all, we said that we would expect, for the quarters to come, something rather at a 35% level and on average something around 30%. I mean, the only evidence we currently have is historic evidence. And there, we have seen that the average deposit beta, and it's always a deposit beta on all deposits, including the ones where we do not pay, including site deposits for private clients that we would we have seen in history, something between 35% to 45% deposit beta dependent on interest rate level. And there's no reason to believe that we will not reach this level this time. Clients are equally sophisticated, probably even more sophisticated. It's much easier even to move deposits around. So therefore, I think it's more -- it's not the question of do we reach this level, but it's more the question how fast do we reach the level. And that depends on competitive behavior or the competitive landscape on the one side, but clearly also customer behavior and also clearly the level of each with respect to the interest rates.

And if I look across the larger European banks or the Eurozone banks, in general, you tend to see NII peaking Q2, Q3, right, in terms of absolute euros. But you've been very clear, please don't take our Q1 NII and multiply it by 4. So maybe you could just speak a little bit about why shouldn't we just take Q1 and multiply it by 4. What are the factors that will come into play in the next few quarters?

Well, all the factors, which I've just mentioned, I mean, one is that, that all depends on how the deposit beta is developing as long. As you assume that there is a steady interest rate level and it's not further increases, and you -- on the other side, you have an increase in deposit beta. And that one is sharper than the benefits out of the model deposit at a certain point in time, you would see a decrease. And partly you have seen that already when you compare Q4 with Q1 with respect to private clients where you have seen that in Q1, we started to pay interest to clients, and therefore, you see a slight decrease. Whether you would -- I have seen the peak already in Q1 or whether Q2 is also equally in this level, we will see. But at a certain point in time, the deposit beta will play in and show its effect, except if you see further interest rate increases by the ECB and then the whole thing is different. I, however, also said in Q1 that we feel very comfortable with the analyst estimates of 7.4%, and that still holds true.

And we tend to spend all our time talking about NII when we have these discussions, but it's easy to forget that I think in the first quarter, around about 1/3 of your group revenues were essentially commissioned. And so what do you see the outlook for that, your noninterest income line going forward, particularly around customer activity levels, et cetera?

Yes. So the corporate client side, it's stable. Also the factors contributing to the net commission income are different because it's always depending on the situation. But there, we see a quite stable situation on the net commission income. On the private client side, it's very much dependent on markets development because the whole net commission income on the private client side in large part depends on volatility and number of transactions specifically for comdirect and the other large part is dependent on the market development. And if the DUCs is 2,000 points higher, we clearly see that in the volumes in our client accounts. And therefore, we then see also an increase in revenues.

Turning now to costs. I think the wage agreements are in place for this year. SRF is dropping away next year. Inflation, you would assume is cooling next year as well. And so should we expect that 2024 OpEx picture, particularly on a year-over-year basis, to actually be pretty supportive?

Well, I don't know whether I would say supportive because inflation is still out there, and we have clearly the negotiations, but we are very confident with respect to our targets of 60% and we will definitely achieve that. And we also had -- have an absolute cost target for this year out there, the EUR 6.3 billion, and we have no reason to believe that we can't achieve this number. So there's an active management necessary, and there are a lot of things playing in. Just think about the inflation conditions you normally have and nearly all rental contracts for branches, office space, et cetera. And I mean, a lot next year will also depend on how the negotiations run between the union and the banking association about the pay scale workers. And hopefully, by the time inflation has come down significantly. And then we see, but we clearly took into account a certain outcome of the negotiations.

could you talk a little bit about the sort of tangible steps you've taken on the cost side because you rewind back a couple of years, it was a big focus on branch closures, maybe rationalization of technology spend, for example. But more recently, I think I would sort of say you've maybe reinvested some of the rates upside in your technology budget. And you talked about the full-time employee headcount changes. So maybe just how are you cutting costs now? And how is that different to how you were cutting costs 2 years ago or a year ago?

I mean what we had -- in the last 2 years that we really had to launch this large transformation program, the layoff of nearly 10,000 FTEs, we have closed on agreements with nearly all of the 10,000 and not everybody has left already. There are some who will leave in the next 1.5 years. But besides that, we are now very much into continuous cost improvement. So really thinking all the time on how we can make things more efficient. And we have started in February a group-wide project called Keep it Simple. And what we try to do here is to really, yes, free up resources, making processes easier to allow a higher efficiency and to give room for potential other resource needs. So if there are new compliance regulations, cybersecurity requirements coming that we do not get these things always necessarily on top, but that we can compensate within our existing FTE and cost base. And that's clearly the targets besides the fact that customer satisfaction levels and employee satisfaction levels can be increased if you make things simpler.

And you referenced earlier that the 60% cost-to-income ratio target, that's your preferred steering metric really rather than the absolute cost target. If we think about that, how much of the sort of, let's say, the difference to go towards a cost-to-income ratio is due to there just being variable costs in the P&L, variable compensation, et cetera? And how much of it is because there are specific areas where you would like to invest more, et cetera, and try and reinvest some of the benefits? How much of it is automatic versus a deliberate choice to reinvest some of the costs?

Yes. I mean we always said that whenever we have a competitive cost-to-income ratio, we also have to play the right to play and to invest again. And therefore -- and also in our internal device when we now look at business cases, clearly, it must be a cost -- they must come with the cost-to-income ratio, which is much even below the 60%, but it's much easier now to think about it and to decide certain things as long as the overall cost income ratio is a competitive one. And that's the driving factor.

The first quarter call, I think the words you used on credit costs were well below EUR 900 million. And I think consensus is below that EUR 900 million as well. And your credit -- cost of risk for Commerzbank was very low in the first quarter. We know Germany was in technical recession. Does it surprise you that credit costs so far this year have been so low?

I mean no, because I mean, corporates are -- have proven to be very resilient. They have been very cautious also during the pandemic. There have been also, we should not forget, very, very extensive government support measures. And I mean, the costs of risk for the first quarter were exceptionally low and we always said this will not stay like that. But still now, we do not see really a pickup in default rates. I mean we are still in Germany below the levels which we have seen before the pandemic. We also believe that at a certain point in time, we will see a return to normal default levels. But even then, our, I would say, normalized cost of risk results with our portfolio should be something around EUR 600 million to EUR 700 million. And then we would be basically back on prepandemic level. Therefore, we feel comfortable in the [indiscernible] of this guidance well below the EUR 900 million.

Could you talk a little bit about the top-level adjustment in the TLA. There were a few adjustments made during the first quarter. What drove those adjustments -- and how do you think conceptually about utilizing the TLA over the coming quarters?

Yes. I mean this top-level adjustments, we are now having quite a while. I mean, we started with it during the pandemic but the composition is totally different because it started to be really there to equalize potential burdens out of the pandemic. And then last year, Russia came in, and we really took something explicitly for Russia. So the composition always changes. And what we did in the Q1 was really seeing that we believe that there is less overlay necessary for the large corporate client side, but that we think that there is more evidence that we should be careful with respect to the SME side, and therefore, we have seen this shift basically. And there has been also some use and release on the corporate client side, but then there has been an additional booking on the private client side to be just protected against potential effects.

So if I try and wrap that all together, we spent a lot of time talking about NII, fees, OpEx, credit costs. How do you think pulling it all together, how confident do you feel on profitability for this year and for '24, '25?

I feel very comfortable. I mean this year's results clearly are dependent also on mBank, which we probably will have as next question and the outcome of it. But even putting mBank aside, I'm very convinced that we will show an improvement of the profitability. And we have no evidence that the story should not continue in the years to come. And we can only reconfirm that we believe in our targets for 2024. And we also believe that achieving cost of capital is something which is clearly on our target list. And we will, at a certain point in time, also provide details on that, but it's too early now.

Okay. So my next question is what's the outcome for mBank. And maybe just if we could start the answer by giving a bit of a summary of how we got to where we got to today, and what today does in terms of changes going forward?

Yes. I mean, really right in time, I have to say, the ECJ ruling us out and as feared, I would say, because of 80% of the cases, the ECJ is following statements of the general attorney. It seems to be that they have followed very much on the lines of the general attorney. We are still analyzing the details because I think on the details of the ruling are still to be expected in the course of the day. And I mean, it will put additional burdens on the Polish banking sector. It will create questions also on what does it mean on the treatment between polish zloty holders and Swiss franc holders. And I think our strategy to really push settlements is the right one, and we will clearly continue that to find agreements and settlements as with many customers we can. And it's clearly that it might have an impact on Q2, but for that, we really now need to get into the details of the ruling. Plus, I think we should all keep in mind and I think the text is also saying that, that's not -- it's not binding for the Polish courts. The Polish courts now need to decide what to do with it. So we also have to wait on how -- this decision is now taken up by Polish courts, which we only will see over the next months. But we clearly now will get into the details of our model and see what we might change and what it means also with respect to the settlements and stuff like that.

And I'm almost certain it's far too early to actually -- for you to know the exact number of what the provision number needs to be. But just to think about it is I think the coverage ratio for Swiss franc mortgages was around 58%. I think you gave that number in the first quarter. Do we just need to think about where that 58% goes to in percentage terms and what that means in euro terms? And I think you've got on the record before saying that is a sort of 3-digit euro number, not a 2-digit number.

Yes. I mean if you take on the worst-case scenario calculations done by also the supervisor in Poland, KNF then you can just calculate the share of mBank and then our share in mBank and then you get to numbers like that. But I think it's really too early to tell what and -- because I think that is happening now in the next, I would say, 2 to 3 quarters because you will see how the settlements are now developing. We have seen quite a pickup lately. And also, if you look on the statement today of the authorities, I think it was KNF or the National Bank, I'm not sure, something came in just short before on this fireside chat. And they clearly also indicated that they expect banks to now move on with the settlements. So we will see in the next, I would say, 2 quarters what Polish courts do with the ruling and also how settlements are evolving. And we will consider what we need to consider for this quarter. And then I think by the end of this year, I think we should have a very, very clear picture on where we end.

Okay. Okay. At this point, I just wanted to see if we've got any questions at all in the audience. No, we're good. Maybe just on capital then. We've talked before about the capital target of around 14%. Consensus probably is slightly above that at this point. So there is optically excess capital. Right at the beginning of the discussion, you talked around the potential for future distribution, how long it takes to get buybacks approved. But a, is the level of capital you have at the moment something you feel very comfortable with? And b, how much sort of excess capital is there in your mind if you think about running bank today at above 14%?

So yes, we think that we have very comfortable capital position. We always made that relative to the MDA. The MDA currently stands at 10%. Let's assume for a moment that it stays like that, might go up a little bit, but we don't have any incident to believe that there should be a big movement or something like that. And we clearly made the math and that hasn't changed that we should have at least a buffer of 250 basis points with our business model to also be able to absorb shocks, et cetera, out moving into the MDA. And that brings us to something like a 13%. Would I now go from our 14.2% to right away 13%? I'm surely not, but it's something which we have as a target. And what you need to see is that if we continue our profitability path, which we intend to do, then we will pile up more and more capital even with a 50% payout. And then we need to think about what to do with it because we also know that otherwise, it will be much harder to really achieve cost of capital. And in this equation, we believe that there is potential, but we will really take a step-by-step approach on that. And -- but I think it's a good thing to further think about it after the first half results.

Could you remind us the Basel IV headwinds you have and someone's very excited outside of our Basel IV headwinds. The Basel IV headwinds you have and are you getting sort of more comfortable knowing what that number really is as you get closer to the date?

Yes. I mean, in the moment, we always said that short term we do not really feel a lot of things happening, number of the Basel effects we have already seen in the TRIM results and we have absorbed that. There are certain things coming. There are also some transition period that just doesn't change. I think for us, it's manageable. And specifically, I would say short term, mid-term, there are no real effects which worries us.

The Investor Day -- the ambitions you outlined at the Investor Day last year had the -- you probably know the scatter chart I'm looking about with sort of RET on one side and total distribution on the other, and you could sort of infer from that, that if the bank is able to deliver an 8% or more return next year, then you'd look to do EUR 5 billion of total distribution. I mean that EUR 5 billion number is a big number, and it's sort of ahead of where we're currently run rating with the buyback in place. Does that mean that there is at some point a big decision to make in 2024 about, to your earlier point, on capital, about how to think about growing that dividend sustainably, but also complementing that with excess capital returns?

Well, I think it's a gradual development because it's all dependent on progress and we do on the profitability we achieve. And there are different factors, which you have on the one side. We have the allowance of the AGM of 10%, which defines one level. The other level is clearly the net income we achieve after subtracting the AT1 from it because I think it's also hard to mention that you do any capital return in excess of your net income. And then it's also dependent on where we stand with the MDA and with our CET1 ratio. And therefore, we will really take a very -- yes, a step-by-step approach, but we want to be really also ahead of the curve. So we plan on going forward, but we also want to do that clearly in close alignment with the regulator because apparently the approval of the regulator is of the essence. And therefore, the order will be always before we go out with any detailed numbers or timing definitely will help the alignment with the regulator.

And that's a good segue for my penultimate question around supervision and regulation, which I guess is twofold. Number one, if you think about all the turbulence we've seen in the U.S. recently and also Credit Suisse here in Europe, do you expect there to be any sort of tangible changes or measures needed to be taken from the supervisory authorities for you? And the second question is, we have the stress test in July, they're the sixth stress test that maybe is stressful of all the stress tests. But what do you expect to learn from that stress test process?

I mean you always learn from the stress test about where you stand also in relative terms, but we do not expect any big surprises out of that. With respect to turmoils and potential reactions, I think all what we have seen in the past months clearly underpins the importance of profitability because the more profitable you are, the more trust you have and it's all about trust because apparently, even if your LCR is 20 percentage points higher, if you lose trust for whatever reasons, that's difficult and the dangerous part. And therefore, I think we all need to work on keeping the trust even increasing the trust and also look out for early warning indicators in this respect. I think it's less about now increasing buffers, ratios, et cetera. It's really more working on profitability on the one side, clearly keeping the ratios on a healthy level. But that is a prerequisite anyhow and really watch out on certain signaling and early warning indicators and then we act fast if something is moving in the wrong direction.

Okay. Final question. What makes you most sort of cautious and optimistic looking ahead?

Most cautious. I mean I'm given the ruling today. That is clearly something which keeps me cautious in the moment. And optimistic I am because I -- as long as we have a stable also interest rate environment, which we just view, I think it gives us a perfect opportunity to further grow, to transform, to increase profitability, to get it back to our stakeholders and meaning really delivering good service to all our customers, but also being attractive employer, and returning attractive capital and dividend and share buybacks to our shareholders. And I think we have seen specifically through the events of the last months that we're in Europe and Commerzbank is very resilient. And I think that makes me optimistic that we can also cover certain crisis shocks, et cetera, given where we are.

Great. That's a good note to finish on. Bettina, thank you so much for joining us again this year. And I hope to welcome you back next year in the group.

Thank you.