Commerzbank AG (CBK) Earnings Call Transcript & Summary

[Audio Gap] really something to worry about. And I would say even sentiment is improving, surveys among corporates are improving. And we also see a lot of talks about investment plans and that's good. So overall, we are very optimistic also for Q2.

And then perhaps staying with the macro picture for a little bit. There's clearly been a lot of press noise recently on Russia. Maybe you could just give us an update in terms of the latest facts on the ground as you see them.

Yes. I mean Russia is difficult. I think we are very happy that we have managed down the net exposure on to very significant amount. You think where we started at the beginning of the war and we are now at down to 171 net exposure. That's clearly something which is any more of a worry. We, however, have a subsidiary there, and we see a lot of claims filed against U.S. and European banks in Russia at the moment. And that is a worry and it's also a worry for our entity there. But we closely monitor the situation. That's what we can do. We act in compliance with all of the sanction regimes. We are basically in a complete hibernation mode. So no new business running further down things. We have proactively reached out to every client, asking them to switch banks to stop business with us there but still states that we have EUR 460 million of equity in this legal entity. So the impact -- the maximum impact, however, on capital can be only something around 10 to 15 basis points because we have already a negative currency reserve booked against our equity and our capital with half the effect anyhow on the capital side. And then yes, we might see something on the P&L side. But we just stay closely to the situation, and yes, try to manage it.

And then if we switch gears over to NII, you raised the '24 NII outlook to around EUR 8.1 billion, and that was despite seeing higher-than-anticipated deposit beta trends in Germany. So perhaps run us through your latest expectations and some of the key moving parts.

Yes. I mean, as always, there are basically 4 factors really influencing our NII. And there are 3 positives and 1 you could say, a negative one. So the 3 positives are clearly that starting with mBank that mBank is doing better NII-wise than we thought because National Bank of Poland clearly communicated that they wouldn't see big rate cuts this year. This improves the guidance on mBank. Second part is that the average level of interest rate level for ECB is higher than originally thought. We now have put into our calculation, something around 3.8%. We will see even whether we reach that or if it's even higher. But for the moment, we have the 3.8%. And the third thing is that has a link to the deposit beta is that we have seen much higher inflow on the deposit volumes than we originally thought, which also had a positive effect. And then clearly, the higher deposit beta is a flip side to that. But this is why we are saying you really have to -- you can't see isolated only on the deposit beta because we explicitly intentionally increased deposit beta by having very attractive offerings out there on the private client side for core money and you have seen the effects on that. Yes, on the deposit beta side but also on the volume side and therefore, on the NII side.

I wanted to focus a bit on the replication portfolio for a moment. So that's now at EUR 124 billion. In Q1, you reduced slightly the contribution you expect from that in 2024. Could you maybe run us through what are you trying to achieve with that portfolio, how it's constructed and how we can think about it as a supporting element to NII over the next few years?

I mean, replication portfolio is clearly there to smoothen effects of interest rate developments. And it's really something that sets the basis for constant growth on NII, which we expect until 2027. What we have said in Q1 is that we would even increase the replication portfolio again to also further stabilize NOI for the years to come. I would still say that the additional -- we always talk about additional benefits from the replication portfolio for this year will be up to EUR 400 million. So that is not really a change and then it will drop the additional benefits in '25 because of all the changes, but then it will pick up again, which is why we still are very optimistic to achieve our midterm target of 2027, the EUR 8.4 billion NII and the replication portfolio clearly plays an important part, at least on the private client side specifically.

And then if we go a bit deeper into the deposit pass-through effects in Germany, how do you see that evolving in a scenario of rate cuts? Are you going to be pricing volumes or the pricing of those incremental deposits? And how do we think about the competitive dynamics as well in that regard?

But first, I think we need to differentiate between corporate clients and private clients. So corporate clients is a very different thing, the changes that we have seen in corporate clients with respect to the deposit beta is less that the agreements with the corporate clients have really changed. They're pretty stable. It's more about corporate treasurers really also maximizing and optimizing their cash management and still moving some surplus liquidity from side deposits into call money or term money where they just get higher interest rates. So you can put that one aside. On the private client side, it's very much a management, as you said also dependent on customer reactions, but also competitive reactions. We have actually decreased quite significantly our offerings for the expiring volumes and as we speak for May, for example, the offer for Commerzbank is now lower to 3% in parts even to 2.5% coming from higher levels like coming from 3.5%. So that should bring the deposits beta down. But automatically, it will come up again this afternoon if we believe that ECB will do what we all expect, at least lowering the interest rates by 25 bps. And that's what we will observe also in the coming weeks and months. So in the moment, the volumes are more sticky than we thought, so positively speaking, but we know that can quickly change whenever there's a competitor out there with a high reach, with an attractive offering out there, you will see the interest rate hoppers to move around. That is specifically true for the comdirect clients, it's less true for the Commerzbank clients because they are much more sticky.

And then if we think about volumes, particularly in Germany, the bank has seen the loan book reasonably flat over the last year, but mortgages did pick up by about 70% sequentially in Q1. So how do you assess the outlook for mortgage growth from here?

So mortgage, I mean, activity has recovered, but we still stay cautious on it. As long as we do not see really a significant decrease in interest rate level, mortgage business will stay lower than the high times, which you have seen 2, 3 years ago. And that's also due to the fact that prices have come down, but not such a significant amount that they equals that out. However, I mean we have assumed in our strategic plan that the absolute mortgage volume would come down. We haven't really changed that. I mean, probably a little bit more positive on it and we will see over the summer when we do the planning for the next years, whether we adjust that and increase it further. But it has stabilized much more than we probably have thought 6 months ago. On the corporate client side, it stays what we said we see and we believe that there will be loan growth, we actually really start also to see it. So that's positive, and we have embedded in our plans towards 2027 loan growth from the corporate client side, which is we really believe in the need for investments being it for sustainable transformation or digital transformation.

And then turning to mBank. You've mentioned before you'd expect NII this year to be higher than last year. In the context of the lower rate environment in Poland, which segments would you be focusing on? And how do you see the more medium-term outlook for margins there?

I mean, the thing is if you look on mBank, what they have managed to do is despite the fact that you have seen already in last year low of 100 basis points, the interest rates have come down by 100 basis points. They have kept or they keep their interest NII level pretty stable. And then clearly, it has to do with the fact that they are improving the thing. So they have lowered the offering to the clients, but kept the volume. So they have had a very successful, I would say, strategy not only on deposits, but also on loans.

And then if we switch over to fees. Fees are roughly 1/3 of revenues last year. How are you thinking about that revenue pool on the go forward? And especially, I think if we talk about allocating capital, when you look at that plus 4% fee growth objective, is that the right sort of run rate when you put all those different parts together?

Yes. I mean the 4% is really something which we want to manage year-on-year, which is -- I mean, this is not an easy thing, but we think we can achieve that. And we will clearly prove this year that we will manage to do that. And I think Q1 has given a flavor on that. But it also means that we expect that different to the last year's specifically Q3, Q4 will be probably lower than Q1 and Q2. That's a natural thing, but less -- much less reduced then we have seen that in the years before, which is good. We also have the closing of Aquila on this Monday as we speak. So we will also fully consolidate Aquila into that and that will also clearly benefit. Specifically, we have plans to further increase net commission income by the offering of Aquila.

So maybe on that topic, what does Aquila enable you to do, I guess, differently? Or what does it bring to the business?

It's just an addition to our value proposition. I mean we have very solid and very good relationships with asset management partners, which we use for our offering but yet often, but also Aquila serve to enhance our value proposition to make it special to have something which you can't get when you're not coming to Commerzbank.

And then if we look at costs, so clearly, cost-to-income ratios have been getting better across the industry, mainly due to the momentum we've seen on revenues. But if we look at absolute costs, for yourselves in Q1, they came down Q-on-Q but also year-over-year. So maybe if you can help us understand what's happening beneath the surface there on the various moving parts. Obviously, Q1 included the lower burden from the SRF but then you also have the labor agreements, which are starting to kick in. So just -- how do we think about all those headwinds and tailwinds on that forward?

Yes, it means lots of management, lots of cost discipline, which we also need for the coming quarters. You have -- I mean we still benefit also from some parts where we have effect from strategy 2024. So there will be still people leaving in the next quarters, which have signed agreements with us out of strategy 2024. That's one part. But then you spoke about it. We have about to start negotiations with unions about the pay scale workers in Germany. That will be interesting. They have already announced the first strike before they have even started negotiations. That tells you a little bit how the atmosphere, et cetera, is. I think that will not have a big impact on 2024, but it will definitely have an impact on 2025 onwards. And also, we see outside of Germany that the inflation trends are high. Take Poland, they see wage increases year-on-year at 10%. That's a lot. So you have to work against that. And in our case, it's really about sourcing. We think about still moving staff and people to neutral locations or even further away on to Kuala Lumpur and things like that to reduce costs. We think about using AI to increase efficiency and we explore already different opportunities on that. We're also looking very carefully on our -- on nonpersonal cost side and how to improve purchasing processes and stuff like that. So it is an ongoing thing where we need to, on the one side, we see increase of costs also because of regulatory requirements are still increasing as we speak and we need to balance that out. I mean the new AML directive is about to come in 2 years' time when they really reduce the review cycles from 10 years for low risk clients to 5 years. And you imagine we have EUR 10 million of private clients which are not due every tenth years, but every fifth year, that makes a difference. People need to reflect on that.

And then if we think about asset quality trends, you did 11 basis points cost of risk in the first quarter. Notwithstanding the comments you made at the beginning about the macro environment in Germany uncertain but improving, what is really driving that in kind of your benign sort of outcome on cost of risk? Is this -- are we realistically going to see a sort of lower for longer backdrop in terms of cost of risk?

Yes. I mean in the mainland, we really benefit from a very well diversified portfolio. And then we also benefit from a high resilience of all corporate clients and it's very clear that it's getting tougher and tougher to really defend our top level adjustment out there because the macroeconomic conditions are improving. So we will definitely have a talk about that one in the next quarters, what to do with it because we still have the top level adjustment of more than EUR 400 million out there. And I think the guidance of less than EUR 800 million is also given Q1 results also what we see in the moment ongoing Q2 will be interesting where we end up. And we said that we are rather positive on that side. And we always said that I mean, for our size of our business model, probably a normalized risk result is rather something around EUR 600 million to EUR 700 million.

So you can obviously see the questions on my paper because the next one was about the EUR 423 million TLA adjustment. But so just on that EUR 423 million, so how should we think about -- what are the trigger or the hurdle that makes you think about whether we can really keep holding on to it?

Well, actually, I mean, we have a base -- I mean, it has changed the top level adjustment. At start, it was top level adjustment for the pandemic and then it went on to energy prices and Russian invasion and things like that. Now it's overall macroeconomic situation that we thought that we would enter or that we would be in a recession in Germany. So things are changing. So it's really something which we are currently analyzing from our risk management team to see because it's also on a single name basis, on a sector basis on what's still valid and what is still worth to keep and what is no longer necessary and should be released. That's basically an exercise as we speak.

And then considering all those different moving parts of the P&L, you're guiding for higher net profit year-over-year '24 versus '23 and ROTE of at least 8%, but Q1 was 10.5% headline. If I take out the Swiss franc mortgage headwinds, it was closer to 15%. So maybe can you outline some of the headwinds or the risks that you could see evolving through the rest of the year?

Yes. I mean it's always Q1 is a special one because costs are normally -- anyhow, the running costs are lower because January is normally a slow start. First quarter is always higher because we have also the final booking of variable compensations and stuff like that. That's number one. Then the risk reward is always the lowest one because it's a very short quarter because the fourth quarter is such a long quarter. So whatever really happens until end of February is still in the year before. And so it's only in March, we talk about the risk result. So there are many, many factors why you can't compare it, and then you all know that also Q1 from a revenue side is always one of the strongest quarters. And taking that all together, that brings the mix. But I mean, we are very convinced that we can further get the cost-to-income ratio down. The target is unchanged for '27. We want to show a 55% cost/income ratio coming from 60% for this year. And beside all the inflationary things, which we talk about, we are still very confident that we can achieve that.

And as we sit here now, we're maybe a couple of hours away from what could be the first rate cut. There's a debate about sustainability of bank ROTE as we go through rate cuts. Your targets for this year and '27, there's clearly a step-up in ROTE through that period of time. So what gives you the confidence that you are going to see that improvement? And what do you think is maybe perhaps most misunderstood from the outside as to why that question is posed about ROTE sustainability when clearly, you have an option to drive it higher?

But first of all, I think capital markets are really rather focused over the next 1 to 2 years and '27 is still a little bit out. That's number one. We said pretty clearly that as long as we have an interest rate level something between 2% to 3%, we should be really robust in the setup. I think for us, it's really important that we make progress on the net commission income side to decrease at least to a certain extent, dependency of NII and I think the biggest point is really also keeping the cost discipline while really organizing RWA efficient growth because we clearly want to grow and part of our story is now also really about growing the revenues and no longer decreasing it, but really growing it, but it must happen in a cost-efficient way.

And then that leaves us, I think, nicely on to capital distribution. You're targeting a 70% or at least a 70% payout ratio for this year. Maybe talk us through how that conversation with the ECB goes when we think about the -- just the quantum of the step-up versus what you did in '23 and '22? And do you think there's a sort of ceiling they're comfortable seeing either for yourselves or for the industry more broadly?

I mean we have laid out very clearly in our capital return policy. So it's very transparent for every stakeholder of what we want to do on which is that -- what we said that, we think that any payout ratio between 50% to 100% is a good one. We also said that our target capital ratio, which we target to have is 13.5%, still much higher than that. And we also said that for the years '22 to '24, we want to pay out or target a payout of EUR 3 billion. We have done so far in '22 and '23 of EUR 1.4 billion. You can do the math on what's left for 2024, and we are very committed to also deliver our promises. And I think we have find it very nice and you could say cautious, but I think a good approach, given our history on what we have seen over the last years since the financial crisis, I think it was a wise decision to take it slow and really start with a 30%, 50%, rather 70% plus because we really -- I mean, we move forward really very much in accordance to our delivery, which I think gives a lot of comfort to all stakeholders, which is important. And it however, also means that most likely we'll then have a different debate next year because we probably need to step up further with respect to the payout ratio to really get in the direction of our target capital ratio.

And then sticking with this year, you've mentioned before the application of the buyback after the first half results have been published. If we think about Q1 and what you've seen in Q2 so far, I guess, what's your current confidence level on that application? And how have you seen the timing of execution?

Yes. I mean, confidence level is very high. So we are -- it's -- I mean it's still some weeks to go until August, but it's clearly that we start to prepare for that. And we are also very confident that we will submit the request and then it's very clear, it's up to 4 months, it takes to get the approval. And then we plan to start. We'll see how we really do that. Whether we do that in 1 tranche, 2 tranches, we haven't made up our mind. It's also based on the discussions which we have with the ECB. But it's clear that we want to be finished with share buyback before end of March because then the season for the next AGM starts, and we always have this approval of 10% and we want to make full use of that for 2024 and then apply for the next one in the next AGM. So there's a clear logic which we have to follow.

Yes. And then if I think about sort of in the medium term, and you referenced some of this before, the ambition to take the distribution of the payout ratio closer to -- equal to the net result post AT1s, could you kind of help us understand within that ambition to get the capital ratio down, the role of regulatory headwinds, Basel IV and also the RWA inflation, how that kind of works alongside a 90%-plus payout ratio?

Yes. But first of all, I think it's important to say that we always need to have the approval of the regulatory authorities for a share buyback. And I think that is always important to keep in mind. And in our case, we also need to have the approval of the financial agency, Finanzagentur in Germany because of the shareholding of the bond. But besides that, I think it's really important as long as we show the profitability that we show the ability to also, yes, generate capital is necessary and have enough profitability to be very independent, I think we have a very good argument to further go down this road. And I mean we have -- if we look at our strategic plans, which we have presented back in November last year, we made it very clear that we also put things like growth into our calculations and also Basel is reflected in our calculation. So we assume that we will have the introduction by January 1 for Europe, at least, 2025, and that's basically also included in our plans.

And then just one last question for me before we open up to the audience. There's obviously been a lot of headlines in the space recently with regards to M&A. I want to sort of ask you 2 questions. First of all, how do you see M&A fitting in? You said you were sort of open to opportunities for yourself on that medium-term plan? But then secondly, as the CFO of a major Eurozone bank, how insurmountable do you think those cross-border frictions are really in the absence of a banking union to really enable that kind of cross-border consolidation that we've talked about for several years?

Yes. I mean speaking for Commerzbank, we said that we would always explore add-on acquisitions, smaller ones. I mean take Aquila, the impact now on -- the capital impact that we would see by the consolidation by the closing is something around 10 basis points. That's really limited. Plus we don't -- we are not eating up in a very intensive complex integration because we keep it as a separate unit, it's really someone who is supporting us in our value proposition. We are rather critical on getting too much involved in things where we do have to do a lot of IT integration work, movements of retail customers from one to another because we know it's very complex, also because of consumer protection, very difficult, very costly, and it prevents you of really focusing on other parts, on innovation parts and et cetera, because we're too much eaten up in putting legacy systems together. That's our standpoint, how we see on that. So add-on acquisitions, we will definitely always consider as long as they do not slow us down. With respect to the greater picture, I think we need to have the banking union, the capital market union before really cross-border consolidation makes sense because we will know how difficult it is to get synergies out because of consumer protection on what I have said before. So specifically, cross-border consolidation makes a lot of sense when you can do really efficient resource management with respect to liquidity, but also capital. But as long as we do not have the banking union, you don't have that. You really are very much still also focused on the legal entities in the different countries. And that is something which is making cross-border consolidation much harder to argue against shareholders that this is really beneficial. As I said, I'm a strong believer that we should see cost order consolidation whenever there is a banking union in place because I believe that Europe is in need of larger banks who can invest more, who can bundle forces to stay competitive and provide an answer against some of the U.S. banks.

Very clear. Okay. With that, I think we'll just see if there's any questions from the audience. Okay. So maybe one final one for me then before we wrap up. We haven't spent a lot of time talking about sustainability and technology, but they're very much sort of at the center of how do you think about taking the bank forward. So maybe if you could just touch upon your key focus areas or your key focus endeavors in those 2 areas. And then also, if we had this conversation 3 or 4 years ago, neobanks, particularly in Germany, the competitive threat. So has that changed at all, I guess, in the -- as you see it today versus the year last year?

The competitive environment, not really has changed, I would say no. It has been always a very intensive and competitive environment and that has not eased, but also not deteriorated from my standpoint. With respect to what's up on our agenda. I mean, clearly, getting sort of ready for the -- all the ESG topics which all come from a regulatory standpoint, but also what do we have on our agenda to support our clients to -- on their path, how the sustainable transformation is an important one. So we think a lot about products on the corporate client side, but also on the private client side, lots about what's the trainings from our relationship managers to really make sure that they can be supportive, specifically with our medium-sized corporate clients who -- most of them are overwhelmed, I would say, about the wave which is coming over them with respect to the requirements. And I think we have a good -- we can play a very good part in that. And I think that's more an opportunity for us as a bank than a burden. And then on the technology side, I mean, everybody is talking about AI, we also do. We see that as a, I mean, a real lever for us to equally also increase customer satisfaction. But first and foremost, at the mainland, it's for us an efficiency point because we clearly explore things how we can, yes, make things easier with AI and different via chat bots and stuff like that and increase our sales support, efficiency, for example. And also, I would say, in the whole area of AML, KYC, sanctions screening, this can really make a difference to really absorb some of the burdens we currently see.

Very clear. Okay. Well, as we said is, thank you so much again for coming and sharing some of your thoughts and giving us some good time, and we hope to see you again next year in Berlin.

Yes, definitely. Thank you.

Thank you.