Commerzbank AG (CBK) Earnings Call Transcript & Summary

Hello. Good afternoon. Thank you very much for attending this presentation. So I'm Flora Bocahut, Co-Head of the European Banks Research at Barclays. And we're delighted to have with us today Dr. Bettina Orlopp from Commerzbank. Chief Financial Officer of Commerzbank. So thank you very much for attending. And thank you also, of course, to the audience. So look, I think we are going to start, we're going to discuss obviously a few questions. We're going to discuss the macro, the political environment, we're going to discuss different items of P&L, capital distribution. But just before we head into the discussion, I'd like to ask a few questions just to the audience. So if we could actually start with the very first question, which is going to help us, I hope, set the theme for this discussion.

The first question is, what would cause you to become more positive on Commerzbank's shares? Is it a better NII, a stronger fee on noninterest income, better cost control, better asset quality, greater capital return or an improvement in the German macro? You have those little phones in front of you to answer the questions. Okay. So interesting. Okay. So that's the first answer is actually an improvement in the German macro so looks like there's if you [indiscernible], we need to discuss here around the context. And then obviously, [ half, half ] actually on the NII and greater capital return, which wouldn't be unlike the things that have been discussed so far across European banks. Just before we start discussing these elements, just second question from the audience, please. Question 2, what are your most -- what are you most concerned about at Commerzbank? Is it weaker earnings, is it weaker capital, lower distribution, regulatory and legal risk, political risk or M&A risk? So let's have a look. Okay. So earnings here, interestingly remaining the main driver, the concerns on the macro, but earnings are still the main drive. Okay. So let's start actually by a question regarding the context environment. I'd like to ask you on Germany specifically, both on the macro and then the political environment. On the macro, the GDP growth has been near 0 for some time now on Germany. There's been a slight increase actually in the level of bankruptcies. So probably the view you have on the German economy and how concerned you are on this and the potential impact it could have on your earnings? And just a word also, please, on the political environment. There were obviously elections in some regions of Germany 10 days ago. We have seen a rise of fixed [indiscernible]. So could that have somehow interference into your P&L and results?

Yes. Thank you. So I mean, first of all, we always have assumed again as a weak year for Germany. Our economic department has been a little bit less optimistic for this year than others. And the good thing now is we have embedded that already at the beginning of the year in our plans. So now that we have a 0 growth after a slight negative growth in GDP for this year, it's not a total surprise for us, and it's embedded in our forecast and our guidance. Second thing is, and we said that now, since two years and we have to accept that the default rates, which we have seen for quite a time since the beginning of the pandemic are not normal, have not been normal. And what you now see and people get a little bit surprised about that, but there shouldn't is that we get back to pre-COVID levels. But it's nothing where we are really deeply worried about because it's just something which is part of a healthy economy that some companies go out and some new ones are coming in. And one would also expect that it's even a little bit accelerated or higher at the moment, given that we have an environment of 0 growth. However, when you look in our own loan portfolio, credit portfolio, we really are not worried about industries weakening or something like that. We are worried about single cases. You also have seen that in the Q2, risk [ result ] in our case. And there will be further single cases in the upcoming quarters. We expect that. And this is also why we have been always very cautious on our top level adjustment, which we capital because we said at a certain point in time we will see an increase, we will see a worsening and we need to be prepared. So all in all, that's where we are. We, however, are worried about the political situation in the moment in Germany. Because it's very clear that Germany needs reforms in many areas and reforms need very strong government and strong decisions, unpleasant decisions at a certain point in time, and we don't have that. And the elections, you also see, there have been some elections two weeks ago, which created a not really great results on the contrary. And so there will be another election coming up next week. And hopefully, that will create enough momentum also for the government in Berlin to really now get some of the measures they have actually developed, really implemented because that would help to also increase confidence of, specifically our corporate clients, our German corporate clients to really invest in Germany, and we need to have investments in Germany to get the economy growing. That's a simple fact, and that will not happen with our tax relief, will not happen without a clear guidance on immigration. It will not happen without a reduction of bureaucracy, which we definitely need in Germany.

You touched on this a bit already in your answer, but I wanted to discuss a bit further the risk results, so a lot of provisions that we may see. You talked about this management of [indiscernible] that you have at the moment. So the idea is that you're going to progressively use that overlay, which will help you contain the level of provisions over the next couple of years. Would that be the right way of looking at it?

Yes. I mean if you look on the Q2, we had a risk result of 20 basis points. That is below even a normal risk result, which we would expect. We say that for Commerzbank, 25 to 30 bps is something which you should expect a normal time. So we even stay below that. And actually, what we have done in the second quarter, we even have not released it or used the TLA buffer. Untechnically speaking, we use the TLA buffer and the reduction to basically build some Stage 2, both I would say we changed one buffer to another buffer. And we clearly will see how the next quarters will run, whether we use it, whether we release it or whether we basically transform it into, for example, Stage 2.

Will give you flexibility.

Exactly.

Okay. One more broader-level question before we start moving closer in to show the revenues. There's been the news last week that Germany, the [indiscernible] is looking to, now disposal of their stake in Commerzbank. I understand it will be doing step by step. Obviously, you have buybacks on your side. So is there a way for you to somehow participate here in the transaction? Or is there any comment, broadly speaking, that you'd like to make around it this [indiscernible]?

Yes. Well, I mean, first of all -- I mean, timing was clearly surprising and we also didn't know when they would have this decision. But it was very clear that at a certain point in time, they would have formed this decision and the reasons are multiple. One is, I mean that's a good one, is that it was very clear whenever the bank is stable, strong liquidity and capital ratios profitable, there's no reason for anchor investor like the state. And I would say we have a clear tick mark on that. The second one was that they had it in their correlation treaty, the finance minister had in his election campaign that they always said the government should be not owner of companies, banks, et cetera. And they started with other corporations already beforehand to sell down the stake of the state. So it's just a consequence of some promises they made also during the last election campaign. And the third reason is that we indeed put a little bit pressure into the system because we have done already two share buybacks. And without an official decision, they couldn't participate, which meant and it resulted in that they increased their stake from 15.5% to 16.5%. And if they wouldn't haven't had now this decision, consequence would have been, we are at the edge of the next share buyback. We have filed for approval or request for approval, and we hope to get it until end of October. So we will start most likely something in November, and they needed this decision to participate. It is important to note that in Germany, you can't have a direct relationship between us and the [indiscernible]. It's different in other countries, but they can use the market momentum when we increase the demand by the share buyback program to also participate and then they can decide whether they want to participate in the size of their stake or whether they want to do more, but that's entirely their decision, and there's no debate between us and them on that. That is completely [indiscernible] to say it like that.

Okay. Understood. Okay. We're going to go into revenues now. But just before we do that, actually, I have one more question for the audience, the Question 3. What do you expect for Commerzbank's revenues going into 2025? Do you think they will be growing driven by NII, growing driven by noninterest income, flat year-on-year, fully-driven by NII or fully-driven by the noninterest income? So let's have a look at the results. Growing, that's good news.

That's good news.

Driven by noninterest income. That's comes first. Interesting because it looks from the answer. There's like hope that there's going to be growth outside NII, but it looks like there's obviously worries around the NII. So that brings us to the next two things: NII, which, of course, has been a key part of the equity story on the bank for the last now three years. You reiterated the NII outlook for '24 and '25 with your Q2 earnings. You've actually provided quite a detailed guidance on the different moving parts. You talk about the assumptions you're making on the CD rates, the deposit beta, the [indiscernible] portfolio, the contribution from mBank. So I think maybe to start there, can you remind us of the different moving parts you see into your NII over '24, '25 or beyond if you are too? And then obviously, where there could be risk to that guidance, whether to the upside or the downside?

So to make it first clear, we are planning and the target is to grow our revenue. So that's important to note. We are not assuming that we will see falling revenues, importantly. Hence so what's the reason? On NII, we actually, yes, forecast a decline. We now believe that we will end up with a very good 8.1. And we said that for next year, we assume that it will be somehow at a 7.9 or slightly below. What are the reasons? Reasons are very simple. If you take the average interest rate level for this year, still it's something around 3.8%. Next year, it will be somehow between 2.5%, 2.8%, depending on who you believe, so much lower average number and that would impact clearly negatively our NII. And then there is the deposit beta, where we believe that there will be happen something, but not a lot coming out of this year. But then there are the positive part, which is volume because we have seen higher volumes and an increase in volumes over time. And then clearly, we also expect that we will see volume growth on the loan side and that will partly balance it out, but it will not be able to balance it out completely. And then we clearly have additional benefits from our replication portfolio, which will be not as high as this year. This year, the additional benefits will be around EUR 400 million. Next year, it's something around EUR 150 million to EUR 200 million. That's the point.

Okay. Very clear. I think maybe we can move to fees. So fees, they represent roughly 30% of your revenue base. You have a target to grow fees by 4%...

Each year.

Each year, year until 2027. At this stage, you're on track to achieve that target for this year. So as we saw from the answers, it's of particular importance in light of the declining NII. Can you maybe talk about the main drivers for the fee growth and how confident you are on the continuation of the growth?

So this year, indeed, we are very confident to achieve the 4% growth. It is mainly organic growth we plan, which will be supported by some add-on acquisitions, as you have seen this year, one was [ Globalpace ], which really starts from 0. So it will take some time when you can see really additional benefits from that, but it started nicely. And then we have Aquila, our acquisition on the asset management side, which clearly will benefit, but the biggest benefits will come organically. And that will come from basically three areas also very equally distributed. One is mBank, one is Corporate Clients and one is in Private Clients in Germany. And if you take Corporate Clients, it's really across different product groups, which you can assume. So Capital Markets, a fairly important one, but also trade finance and also the loan business. And on the Private Client side, it is retail banking, where we are very much actively enrolled in the whole security savings plans. It's a comdirect where it's more about more customers, more transactions and therefore, more revenues. You then have the wealth management part, which is an important part to test a single group. We have a big group of wealth management clients rather neglected over the last years, and there is a complete shift in [indiscernible]. We also hired a number of experts for these customer groups. And then you have the SME clients in there were also Globalpace fit into where we really want to grow for the payment fees, which are also part of net commission income.

Okay. Excellent. I think that's clear for revenues. We can probably move on to costs. Obviously, if there's other questions from the audience later on, on revenues, we can come back to that. On cost, important, this is something on which you have the controlling, hence, at least [indiscernible]. We have seen there is going to be revenue pressure from NII, although you aim to grow revenues next year net-net. So maybe can you talk about your cost guidance? I think you've guided for 5% year-on-year cost growth next year. I think this would be after mitigating efforts. So maybe just to better understand here what are the main drivers on your cost base? And yes, how you see cost develop from here?

So first of all, it's important to say that we plan and -- to increase profitability further, which means that most likely, we will end on this year with a cost-income ratio of 60%. Next year, it will be definitely better, which means it must be at least 59%. And we target for 2027 and that has not changed, the 55%. So what happens next year, there are different drivers in the cost side. One is clearly salary driven cost increase, and that has to do with the German specific phenomena that you have there for the pay-scale workers. You have negotiations between unions and the banks, the banks in total, it's not only Commerzbank alone, it's for all the private banks together. And we did have an agreement there, which was for the next, I would say, 24, 27 months, and it's a 10.5% and there will be already an increase this year and then next to comment. We need to take that one into account, and it's approximately 5% on that. We then have to also adjust that or adopt that for the non-pays co-workers in Germany, which we will start a little bit later, 1st of January. And then we see basically salary increases also in all our international locations. And in some locations, even more like Eastern Europe, you still have a very high inflation in Eastern Europe. So [indiscernible] cost increase there, because of that. That's one, but you could say it's an investment on staff. And so it's also kind of investment in our growth and our satisfaction of people. So I think it's an important topic. The second investment we need to do is in regulatory compliance. We have a number of things, which I think equally all other banks have to manage. That's be a [indiscernible]. We just got the [indiscernible] requirements clarified. We have investments in cybersecurity, and we also have the IML directive not yet decided, but our German regulator already announced that they would apply that in any case. And that's most importantly, one can remember that there is a shortening of the review cycle for lowest clients, which was 10 years so far, and it will be reduced to five years. If you then know that, for example, Commerzbank has approximately probably 9 million private clients as low-risk clients. You know that this creates some pressure on your cost base because a part of it you can do clearly with systems, but most of us think you also need some manual and manual meaning people resources involved to that. That's the regulatory part. The third part is mBank, which is coming revenue and cost side. They intend to grow. We also have some FX effects in there. They also have salary increases and stuff like that. But it will come to us as a nice cost-to-income ratio, which we all know from mBank, they. They have a very decent cost-to-income ratio. And the fourth part is really investments again, investments as, for example, Aquila because, I mean, we can't only get the revenues out of Aquila. There is also a cost part in it that is part of it. But also -- I mean, we want to grow and we said we will grow, and we also will invest in profitable growth, and that includes also that we invest in innovations, that we invest in AI and stuff like that. And all in all, that is the picture. The cost increase after that, otherwise, we would not clearly come to the 55%. We will be not -- I mean, that's year-on-year 5% because we also have this agreement. That is something you need to keep in mind, we have this agreement not only for next year, but it's something which we now plan for the next two to three years because this is now an agreement not short-term, but rather mid-term.

Okay. Very clear. Okay. Look, I think we discussed already most of the P&L items so we probably can move now to capital and distribution aspects

Appear to be very important.

Exactly. So actually, I'm going to require some more work from the audience now because we have another two questions to ask you. So if we could get the question for, thank you very much. What will Commerzbank's capital and dividends do versus market expectations? Do you think they will beat on better earnings and volume growth? They will beat on lower regulatory requirements? They will miss on weaker earnings or volume growth, miss on higher regulatory requirements or miss because of inorganic acquisitions? We'll give a second to audience to answer. It's a good news. So the answer is, as you can see, are first of all, largely a beat on stronger earnings and volume growth. So that's good news. Any comments you want to make on this? Or we can move on?

No. I think -- I mean, we have been very clear on our capital return policy. I mean, for the -- until now, we really stick to the promises and also for this year, we are very confident that we will deliver. We always said that we want to return a minimum 70%. And we would also like to return for the last three years, including 2024 up to EUR 3 billion. That looks pretty good if we can achieve that. So it's EUR 1.6 billion for this year. We did a starting point already by applying for the first tranche to pay back that of share buyback program for the year 2024 with a 600 million application back in August. And that is something when you look at our capital return policy, which we clearly want to continue in the upcoming years. We also put a target capital ratio in there. And if you take that, it's a 13.5%, we are now at 14.8%. You see that there is lots of potential, including that we want to increase further our profitability year-on-year, which means also net income is coming higher. So I would say there is, if you look at it, lots of potential. And if we just take EUR 3 billion and put that into perspective to our market capitalization, I would say of course it's is a good deal on capital return and also for the future.

Yes. No, absolutely. Okay. Very clear. I was actually planning to ask you about capital distribution, but I think -- no, I think you made it very clear here. I guess maybe one question still on this would be, so what would be the usage of your excess capital in your mind? Do you have like another off preference there for the usage between distributing to shareholders, growing further organically or targeting some more external growth? Is that something that you have a clear order of preference on your side?

Well, first of all, I think we want to provide a decent return to our shareholders. That's very important. But on build side, when we see potential for profitable growth, we will clearly also take that because, I mean, shareholders will also benefit from that. And it's also clear that if we see attractive potential add-on acquisitions, which makes sense to enhance the value proposition, and therefore, enhance also our revenue growth potential, et cetera. We will also do that. But I mean, they will always have a limited effect on it because we tend to look on rather smaller acquisitions and not big ones.

Yes. Okay. I think we have actually the question five to the audience. So let's ask this question. Where should the management focus their energy in the next 12 months in your view? Should that be on maximizing capital return, as we just discussed, doing bolt-on acquisitions and business growth, further efforts on the cost optimization or, and so far, more investment into technology, AI and new ways of doing business? Let's have a look. Interesting, cost optimization efforts. That's really well spread on the other elements, the maximizing capital return. It's interesting. Cost optimization. Okay. That's interesting to note. Okay. I'm going to check maybe if there's questions from the audience at this stage. If anyone wants to ask a question. If not, I'll give you some more time to think about this. You touched on the willingness on your side to further improve the profitability of the bank. You've set our targets actually on this. So if we discuss the ROTE, you target 8% this year. You want to progressively improve each year so that you would reach over 11% in 2027. You are so far on track to achieve this target. But when I look at the consensus, it is still slightly below. Consensus has a forecast of 10% in '27. That is over 11% target. So what is it do you think that we are missing or what is it that you have the confidence that you can do better than what we expect today?

Well, first of all, I think seeing is believing. So I think what's now necessary given that we are seeing first interest rate costs. I mean we said that very clearly that we believe that we can grow profitably even if the interest rate level is between 2% to 3%. And I think we just have to prove that and most likely 2025 will give us the opportunity to prove it. And that will hopefully help also then to increase confidence for the years '26 and '27 that we are able to increase profitability. I think that is important. And when I come back to the chart on that, 3 and 4, you probably have to combine because we believe very much that we need specific DAI, et cetera to further improve our cost efficiency and the whole cost topic, efficiency and effectiveness are a key theme also in the upcoming years, that's for sure.

Yes. No, absolutely. Absolutely. Just checking if there's, at this point, any questions from the audience. Maybe one thing we haven't discussed is the Polish FX loans. I mean you have now significantly increased the coverage on the Swiss franc mortgage portfolio. So that would be obviously in your Polish subsidiary. As of Q2, it stands at 130%. Maybe a word there, how concern are you that you may have to do some more provisioning over the coming quarters or even actually looking forward towards '25, '26?

I think we have -- I mean, we have done a lot already, and I think we feel very comfortable with the active population, so the ones who are still having a loan with us on FX that we have covered that to a very substantial part. There might be some additions because settlements are getting more expensive or more people still go to [ court ] that they haven't foreseen. But overall, we feel very comfortable with that, and therefore, that's -- this part where we have stability. There's unfortunately a group, which is not so clear and that are the repaid loans. So the ones who have never had a damage actually, who have repaid, I don't know, five years ago, eight years ago. And theoretically speaking, we don't know whether they still could come and ask because it's not about the damage, it's only, do you have this contract with this FX clause in there? And that's I think unknown. What we basically do or [indiscernible] team is doing is settlement as much as possible. I think mBank is now the most active player in the market with respect to settlements. They settle approximately 1,000 every month. And we are -- we will just continue that. And most likely the problem will become smaller and smaller. And luckily, the profitability of mBank is so strong that they can really absorb that on their own. And our intention is to close the thing as fast as possible. But it's really something, which will most likely occupy us still.

When do you think the visibility is going to improve, especially on the retail loans?

Well, I mean, at some point, there's also the time bar element in there and things like that. But I think it will occupy still in year '25. I assume that after that, it will be less of a topic. Even if you have something, it will not be really something you would discuss given the very strong profitability of mBank.

Right. Okay. I have actually one more question I wanted to ask you, which is regarding your Russian unit. If you have any news that you want to discuss on your Russian unit?

No. I mean I have been very clear. We have some -- we have run down the exposure significantly quarter-by-quarter. It's now no longer really a number which is concerning us. We clearly have the subsidiary there. It's in hibernation mode. And what we basically do is stay and be very compliant to all sanction regimes and the rest we'll see. I mean, we said it very clearly that people should be aware of the fact that there is a subsidiary, but the important thing is, whatever happens, the impact on our capital side would be very, very limited. Because if we would have to completely wide it off, it's a 10 to 15 basis points impact on the capital ratio, and I would say, it's a 14.8% capital ratio, we can absorb that totally. It's not nice that we wouldn't like it, but it's something which we can definitely [indiscernible].

One last check if there's any questions from the audience. Now is there a chance, but if not. I think we've discussed most of the things, just checking with you was there anything else that maybe you think we should have discussed today. We haven't. I mean, we went through.

No, thank you. Thank you, and we cover that. So pretty comprehensive.

I thank you. Thanks very much for this presentation is still very clear, very interesting, and thank you, everyone, for your attention. Thank you.

Thank you.