Commerzbank AG (CBK) Earnings Call Transcript & Summary

Afternoon, everybody. Thank you very much for joining us for this last session today. Thank you for sticking with us. Very pleased to have Bettina Orlopp, CFO of Commerzbank with us this afternoon. Thank you so much for joining us Bettina.

Thank you very much.

Maybe we just start with the high level and possibly -- well, not necessarily the best place to start, maybe a question that you might not be able to fully answer just yet, but in terms of your existing strategic targets, you look well on track to exceed your targets of more than 7% ROTE for both this year and next year, and you've got a Capital Markets Day coming up on the 8th of November. I wonder if you could give some insight as to -- I guess the key question going into that is how do you lift the ROTE from where it is this year into double digits? What are the big moving parts or all the things that you're thinking about?

Yes. I mean it's pretty clear that the capital markets update coming. So all the details will follow there. But it's also very clear that I think we have set of very good fundament by Strategy 2024. All the things which we have done on the Private Client side, but also on the Corporate Client side now give us really the flexibility for growth and the potential for growth, which is so important because they have done a lot of cleanup work in Private Clients, which is best to the branch network with respect to the digital offering. And I would say on the Corporate Client side, we clearly had some areas where we weren't efficient. And now we can build on that because we are nearly done with it, and we can take it from there. And on the Private Client side, it's clearly that we have 2 types of customer groups. One is the -- are the digital clients where we want to further develop our digital offering your comdirect but also Commerzbank, and specifically on the brokerage part, that is a very important growth area for us. And then the other part where we have a lot of untapped potential as a whole private wealth management and asset management. That's on the Private Client side. On the Corporate Client side, I mean, we have the luxury and benefit to have a very, very strong position in German corporate business, specifically the Mittelstand, we are the trade finance provider for German Mittelstand, we finance 30% of German export. And this is clearly a strength we want to further build on. We have very strong cash management, lending, fixed income operations. And yes, there is some a lot of potential and we will provide more details on that during Capital Markets update.

Thank you very much for that. So you talked about the -- or you touched on some of the potential future growth drivers. The other part of ROTE is the [ E ] part. And you're currently 170 basis points above your capital target, roughly EUR 3 billion of capital. So how should we think about that in terms of your current plans for distributions and getting closer to the target level of capital.

Yes. I mean we are very well aware that probably on the pages on the capital return will be 1 of the most important ones for the update. I mean, we had laid out a very clear plan and our actual capital return policy where we start first year where we see decent results, which was 2022, we would do a 30% payout. And then onto follow 50%, which is the case for '23. And then we started, we move forward and with the transformation, we could also foresee where we will payout beyond 50%, always subject also to approval of the different stakeholders and most importantly, clearly, on ECB, the regulator. And this is where we are. We are now in the middle of '23, '23 looks pretty good. I think the current consensus is that we will make a EUR 2 billion net income approximately for this year, which leaves us at a very decent payout if you deduct EUR 200 million of [ 81 ], then we stick with EUR 1.8 billion times 50%, EUR 900 million. Now assume a nice split between dividend and share buyback, and it gives you a good flavor of where we are heading for. And we are clearly now in the dialogue of what comes next for '24, which is important because it's still part of our Strategy 2024 and we are very well aware that we have set out some expectations with respect to EUR 3 billion number. And we then also will provide details on what is the way forward after '24 for the years '25 to 27, waiting the different stakeholders in there. And we will have a very clear proposal on that beginning of November.

And in terms of -- when you think about uses of capital obviously returning to shareholders is 1 of them, growing the business is another, M&A is the third. So when you think about uses of capital and shape of the business and growth, where does M&A feature?

I mean we pursue selective opportunities whenever we see them. There are smaller ones, specifically now on the asset management side, where we keep looking for things which we can add into our value proposition. But I mean there's a clear profitability target we have to meet. So therefore, it's always a waiting on is it better to return the capital to our shareholders or do we have a better idea what to do with it. And that stand for everything, growth initiatives, but also M&A opportunities. And we always measure that against the clear target to earn our cost of capital.

So then starting to move through the P&L. You've obviously been a big beneficiary from higher interest rates, net interest income is up 85% from its trough level already. You started to call some -- or you started to indicate some reduction there. Could you help us scale that in terms of is it a gradual reduction presumably, you were not going back down 85%, obviously, but how far -- how down do you think we're going?

Yes. I mean '23 has been exceptional and even the Q3 seems to provide us again, it was a positive surprise because pass-through rate deposit better is increasing, but slower than we thought. So therefore, I think we are now also more following the analyst estimates, which are around EUR 8 billion now for NII, and I think there's a good guess for this year. And now you have to think about what happens next and what is impacting '24 and the year ongoing. And that's, I think your question referred to. And you have several factors impacting the NII going forward. One is clearly, if I start with the easiest 1, mBank just had a tremendous year this year, with respect to NII, but apparently, there has been a rate cut by 75 basis points, and that will have not really an impact on this year already, but you will see an impact on next year and you have to deduct that actually from the starting point, if you take the EUR 8 billion. You then have also, and I think it's heavily discussed also during this conference, the minimum reserve decision on the ECB. This 1% no longer reimbursed, which means that we will see EUR 100 million less in revenues NII than we have seen last year. And then thirdly and most importantly, we have the deposit better. So we will end most likely this year something around a deposit better pass-through rate of average 40% or something like that. And that is a good basis also to think about as an average for next year. A little bit higher, but an average is that a good guidance. If you now take the full year of this year that has been clearly the average much lower, like something around 25% like that, which means that there is a differential of 15%, and you will see that basically in the run rate in the Q1, Q2 in the following quarters. But now the positive part comes back, we have cleared the benefits out of our replication portfolio, which also kicks in. And that brings the NII up again. And that will lead us, and I said that already after Q2 to NII from our current estimates of around EUR 7.5 billion, EUR 7.6 billion, that will be less than apparently this year, but this year has been exceptional. And then the question of what happens in '25. If we now assume for a moment that we will see in constant interest rate environment with some decline in the years to come and a stable deposit better, we think that we will have a constant increase on NII starting from '24 onwards, just also because we have the [ location ] portfolio, and we also believe in deposit growth, at least on the Private Client side. So we will provide again also that 1 further details during the capital market update. But we're very confident that we will have a nice trajectory also in the years to come.

So can we perhaps dig into the deposit side of things a little bit more. So as you said, your expectation is 40% beta by the end of this year. The German deposit market has historically been quite competitive. So to what degree do you think either the market has changed over the years or Commerzbank's franchise has changed? And that 40% beta, so how would you compare deposit rates with that 40% beta to the last time that rates were around this sort of level.

I mean it feel pretty comparable, at least on the Corporate Client side, we do not see really a difference to what we have seen in the past, at least the ones who have been around, can remember, and it feels very much the same, which also has to do that you have, I mean, professional treasurers on the other side, they come and they negotiate on pass-through rates for term money and coal deposits. And the thing what we currently see is really because site deposits get also interest rates much lower than term and coal money that there's an active cash management ongoing. So there are still movements from side depicts into coal money and term money, and therefore, you're also seeing still an increase in the pass-through rates, but this is much more manageable and actually competition has been very disciplined altogether. But also pass-through rates are pretty high on the Corporate Client side. And on the Private Client side, I think the competitive landscape is probably even more tense and more intense than we have seen in the past because there are more players out there, which we haven't seen before, all the neo banks are really defining at least at a public perception on price levels. That's 1 thing. And that also clients have clearly changed because there are more -- I mean, we wish there would be even more digital. But with respect to the deposits, sometimes it's better that they are as digital as we thought, but there are more digital people. So the movements, and we see that specifically on comdirect are much faster than probably they have been in the past, but I think we have found a very good way from Private Clients to keep up with this thing and really get a good feeling about the market dynamics and mentioning that. So we have a very stable deposit base.

And it's very different from Commerzbank historically the quality of the deposit base.

No. I mean comdirect and Commerzbank are -- I mean, we treat comdirect and Commerzbank differently. But still, I think it's, the numbers are also specifically because they are now moving still up. It's very comparable to what we have seen also in the past. It's not a big difference.

And you talked about them on deposit portfolio or the replicating portfolio. And how much additional income do you think that can contribute? So if the refinancing from virtually no yields to 3.5%, 4%.

We have seen the flip side over the past 10 years when we got into -- specifically we've got a negative interest rate environment where you really saw the drag on our NII year-on-year, and some of you might remember that even in -- when we announced the Strategy 2024 because we still were in a negative interest rate environment by the time and we thought it would go forever. We still calculated even in 2020, a EUR 300 million drag on our revenues on the Private Client side for the year 2024. That's clearly off the table, but it also shows you that on the other side, it's now really getting positively into our P&L and it's -- I mean, it's a huge fact we talk about a replication portfolio of EUR 130 billion, which comes in month by month, and it's really piling up. So you really talk about 3-digit million euro numbers, which are constantly increasing until we basically went through once the complete portfolio.

And that refinances over 5 years?

Yes. I mean the average duration on Private Clients is 4.5 years. Yes. And part of the [ EUR 130 million ] is Corporate Clients, EUR 20 billion to EUR 25 billion. This is shorter, but still for Private Clients, you can assume 4.5 years.

And then from a growth perspective, what are you seeing in terms of credit demand, in terms of your Corporate Clients and PSBC Germany.

Yes. I mean it's not an easy environment. I would say, I mean, sentiment is worse than probably actual situation, which we also see in the risk result, which you'll probably touch later on. But on the demand side, if I start with Private Clients, we have seen a very, very low activity first quarter that has recovered and it has stayed up at a certain level, not as we have seen in the great years 2020, '21, '22. But it has recovered. But we see clearly that there are constraints given that the available household income has come down because of inflation. And the other side, the interest rate burden went up for mortgage taker and prices have not really come down. They have come down to a certain momentum, but not enough. So that is slowing down activity. But -- we are sure that our book will keep stable and then we assume that there will be a further increase in the years to come. Consumer loans is anyhow difficult because, I mean, we assume stable book given that we are not the most active player in this area. Corporate clients is something where we have seen, yes, I would say, constant volumes, slight increase, but we clearly assume that there would be more because there is a lot of need for investments, specifically among Mittelstand client. Apparently and do you feel that also by the sentiment there is still a lot of unsecurity about the situation, and they see very cautious and skeptical and wait for energy prices coming down political systems, stabilizing and yes, getting a better feeling about the perspective. We think that must change just from also an economic perspective for Germany because we really need to have these investments in order to ensure that our Mittelstand is staying competitive. So there should be a change in the coming years. But currently, I would say there is rather very -- yes, cautious loan demand.

And are there areas where you've identified a particular market share opportunities where Commerzbank can grow?

I mean we have very much concentrated really on the backbone of German economy, the Mittelstand. And we think that we have a perfect position there. We also have very good ratings from our clients on that. And that's clearly something where we want to grow and that we also see and we have spoken about that opportunities in Austria and specifically Switzerland. We want to tap on because these are our 3 core markets, and this is where we want to have and want to see connectivity wherever we are also with respect to our international network.

So is that expanding into Austria and Switzerland or is it doing more business for your clients in those countries?

No, also expanding specifically in Switzerland, yes.

And when we're thinking internationally, you mentioned mBank earlier, you mentioned the 75 basis point rate cut. I want to think back to the last strategy that was -- it was the driver of growth really before we got into the rates environment based on the demographics of the country essentially. I guess our bank has been -- the outlook is more mixed now. There's been, obviously, the Swiss Franc mortgage issue. There's been various interventions into the banking system. So all of those things together, how do you think about the prospects for mBank now and where does it fit within the group?

Well, first of all, I think mBank is a very high-performing bank. They really have a excellent business model. You see it also when you take the cost income ratios and take the burden aside, they -- and you speak about it, they have a very attractive customer portfolio. They have very innovative digital offering. I think they have a very good setup tools to show further growth, and this is also their strategy. So it's a clear growth strategy also in the future. And -- but it is -- and you also spoke about it as a very difficult environment, political environment, but also the Swiss Franc topic is still clearly impacting the profitability of mBank. I think we are not at the end, but we see light at the end of the tunnel. So we also made very good progress on the settlements, which are very important to get this thing done. And the strategy is really to offer clients attractive settlements because we think it's beneficial for both parts, clients who do not have to go to court and to have lengthy court trials on the 1 side, but us also putting an end to the story. So that will be also focused of the strategy of the next months. I mean the political situation, we need to see how there is election time in the mid of October. We have to see how this turns out. But besides that, I mean, we are very satisfied with the just imagine for the moment that I mean, mBank really had already this first half of the year, very, very high burden out of Swiss Franc but they still manage to absorb their own profitability, which would be even nicer if they would add positively to our profitability, that's for sure. But I think there are 2 good messages, first of all, whenever we are done with it, they can really contribute to our profitability, but more importantly, Commerzbank also without mBank is showing a very nice profitability and that has been different in the past. We were very much also with respect to cost income ratio, et cetera, relying and they had a very positive impact on our cost income ratio. And that's -- I mean, it's not that we are not near -- we do not need it. But also stand-alone without mBank, Commerzbank profitability is very good, and we have a very decent cost-income ratio. And that is also an important message.

It's a nice lead into the next question. So you're expecting a slight reduction in costs this year, mainly, I guess, as a result of lower compulsory contributions. But there are also higher operating expenses. So when we think beyond this year, is there much further gross cost reduction to come out? And how do you balance that with inflation and investing for growth in order to getting the cost income ratio coming down?

So first of all, I mean, this year, operational costs are also higher because given the very nice results, we already plan and accrue for higher variable compensation, which we think makes a lot of sense because motivation of people is also an important ingredient for success. And we have never been really excesses on that. So it's -- everything was in a very, very clear limits. I mean the cost reduction program of Strategy 2024 is still ongoing. So we still see also people leaving. We have contracts with still many people who believe this year or even next year, which will provide benefits to our cost base on the 1 side. And then on the other side, we clearly have a fact like inflation also in the form of wage inflation, we have some rental cost increases and many things. But I think we managed very well. We are very convinced that we will see the 60% next year and that we will keep this level and even further improve it. Plus, we also did back on the envelope calculation that we said, what would have been if we would have not implemented the transformation program, Strategy 2024. And then the cost base would have been much higher. We would probably have now EUR 1 billion more costs added to our cost baseline just because of all the inflationary effects, which we have seen all the regulatory requirements which have hit our agenda, the compliance on ESG, things like that, but also, I mean, think about the moment of what banks have invested 3 years ago, 4 years ago on cybersecurity, what they invest now. So many things which we were able to balance out. And that is clearly also something which we need to continue. So I would say cost efficiency and cost reduction is never over. So it's a continuous improvement process. It's a continuous process due to digitize processes to become more efficient and to reduce complexity, which is important, specifically for our institutions because there are many things where we are far too complex. That will not change. And we need that to also keep the cost-income ratio intact. We are clearly now given that we have a decent level, we are much more into steering cost income ratio to allow also business cases. If we have good business cases to really implement them and get them done. There must be good business cases. Otherwise, we will not do that.

Okay. So you're managing to a cost income ratio because you need to consider growth opportunities as well?

Yes, we want that. Yes.

Okay. And then the risk results. So you talked about the Mittelstand being quite cautious. How does credit quality look there, in particular and then more broadly across the book? Are you seeing any lead indicators that give you cause of concern?

Yes. I mean, situation has not changed in comparison to the second quarter. We basically do not really see a lot. There are single cases which you see. It's very quiet, very high resilience of our Corporate Clients, but also on the Private Client side, which also has to do with the fact that, I mean, on the Private Client side, you would only really see something if unemployment rate would go up, and that's not the case. And on the Corporate Client side, very quiet, why we also believe now that the likelihood that we will take the top-level adjustment, which we currently still have probably, we consider structure and composition. But just if possible, move it to 2014 because at the very end, we still think that there must be some cleanup of business models, and there must be an increase of default rates at a certain point in time because we are still with respect to the default rates below pre-pandemic level and there might be a normalization of that. And given that and given also that our economics experts are not as optimistic as, for example, the ECB, we still believe that there will be a stagnation next year, no growth of the GDP. We just stay cautious but we definitely will not be really needed this year. So we would rather move it to next year, which leaves us then to the guidance on the risk result itself, which is smaller than [ EUR 800 million ], and I would say that will be well below [ EUR 800 million ] from my current standpoint.

So well below [ EUR 800 million ] without any TLA release?

Yes.

We've got some time for questions from the audience. If anybody question. Bettina, you might be able to help me because I'm struggling to see...

Yes, me too. Probably people can just wave.

There are some roving mics in the room to do, please. So while you're all thinking about it, something that we haven't really talked about for a long time is the Russian exposure. So net exposure, less than EUR 0.6 billion, twice that, I guess, if you pull in the central bank liquidity? How are you managing that going forward? And what's the plan for it?

Managing it down is clearly the plan constantly and I think you can see that, I mean, there was a big movement down at the beginning, it's getting more and more difficult given also sanction regimes, et cetera, and you always have to do that fully compliant. But the target is clearly to get this portfolio further down. And yes, and I think we show that we also are successful on that quarter-by-quarter. I mean we said we are not doing any new business. And we are now in very intensive interactions with our clients about what their perspective or -- I mean, there are still a number of clients active in Russia, and we are discussing with them whether -- what their strategy is on that.

I mean it is relatively small though, but is there a natural runoff to that book?

There is clearly a one-off, but we are also not just relying on the natural one-off, but we are really trying to find additional solutions. So for each and every item of the portfolio.

Okay. Any questions?

In the crisis in America, you see a lot focused on property companies and so on. And in Europe, there has been placement of many bonds and property companies. And it doesn't seem to me that there's a big crisis in the property or forthcoming a big crisis, but do you see any issues on the property side of your businesses? And you were saying you expecting more defaults next year, but in general, but if you can comment?

Thank you for the question. So first, I mean, we have a commercial real estate portfolio, about EUR 9 billion, but nothing which is really worrying us now because it's not -- was the 1 which is currently very much under pressure, which is to see real estate developers. We are more -- it's more about doing financing with our Corporate Clients, we suspect if they need factory new office buildings and stuff like that, and also the other part, wealths management and residential and office buildings for investment purposes. I mean we see -- basically, I mean, Germany, there's the number of real estate developers under pressure or even announcing insolvency. It is not really tackling us as an institution because we had our lesson, if you remember, out of financial crisis. We have been big times into this business after a financial crisis, and we never returned luckily and so we wonder the legacy, and we stayed out of new business, which now proves to be quite right. On the mortgage business, as I said, we really do not see big worries and that's for several reasons. One is we are in a fixed rate environment in Germany. That makes a huge difference. Many of our clients are locked in for the next 10 years. And this is back to low interest rates. That's number one. Number 2 is we have, I think, a very conservative approach in Germany on how to calculate what clients need to have to really get mortgage finance, and there are many scenario calculations in there on what happens when the interest rate agreement stops, how much needs must be buffers so that they can also afford a much higher interest rate levels. And then there is a large part of our clientele, who even came out of a higher interest rate level, which was very comparable to what we see now and what they have done in the low interest rate environment, they just switched interest rate payment with repayment and now they can basically switch it around again. What you just see is a slowdown in activity because there's also a client who probably is not able to now do what they were able to do 2 years ago, buy a little family home and finance it by the rental they save because this play of exchange rents into interest rate payments and repayments given that we are now at a much higher level, it doesn't work anymore because price levels have come down to a certain extent, but not to the volume that you need to make the play again attractive.

Any other questions in the room?

Just a question on your CET1 target is 200 to 250 bps minimum MDA buffer. Is that a comfort zone? Or is the comfort zone higher than that in the -- which will correspond to a 30-ish CET1 ratio, for instance?

I'm sorry, I probably didn't get the question fully. Can you just repeat it once?

Yes. The -- your CET1 target is a minimum MDA buffer of 200 to 250 bps. Is it the level where you will be comfortable? Or is the comfort zone actually higher than that?

Well, I mean, we laid that out in our capital return policy like that. And that's the comfort level we have. Clearly, you always think about also keeping space for opportunities and stuff like that. But it's also more a debate which we have to have with our stakeholders because they also need to feel comfortable, and we will provide a good update on that during the Capital Markets update. But yes, we stick to that, we -- with our business model, we clearly do not need the capital ratio we currently have, which stands at 14.4%. We don't think that we need that one.

Sounds like there's a lot to look forward to at the Capital Markets. I'll say, it's on the 8th of November.

Yes, indeed.

Thank you. I think we'll wrap it up there. Thank you very much, Bettina.

Thank you very much. Have a nice evening.