Commerzbank AG (CBK) Earnings Call Transcript & Summary

Thanks all for coming. Another very interesting session in this conference, very eventful as always. Thank you, Bettina. Thank you for coming. Must be a very, very busy time, and thank you very much for switching agendas and joining us today. Really appreciate to welcome you as the new CEO. Congratulations for the appointment. And I'm very glad to be the first one to interview you and I guess people here has [indiscernible] see you in this new role. I think everyone has the same topic in mind, and I think there's no point dragging that and start with this. [ Andrea Rachel ] was sitting here yesterday at your place.

I'm sure you had all the summaries, but he's talking about 21% stake as the investment. He is ready here to help Commerzbank unlock the value. So instead of bombarding you with questions, I will let you comment on what you can say at this stage, and then I can follow up.

Okay. Great. Thank you very much. Yes, indeed, a very interesting times, but I'm very grateful for the opportunity. So I mean, clearly, the events of the last 2 weeks were kind of a surprise for us. So we have to deal with it but we do. And I think for us, it's very clear what we have to do now. And there are 3 things actually. One is -- and that's the most important part. We have a base case and that's the implementation of our Strategy 2027. We just did an update of the strategy during the summer. We discussed it with our Supervisory Board in the last 3 days. And we also update you might have seen that this morning, the numbers because we did some adjustments which will lead nicely to a higher return on tangible equity until 2027. So we rather focus now to see 12%. In 2027, it was a 54% cost-to-income ratio and it will also lead to more capital return because besides revenue and cost efficiency measures, we also strongly look to our RWA development and given also our very strong stocking position this year, it will lead to a very high payout ratios above 90% in the coming years. So that's, a, the first step. The second thing is clearly, given the events of the last 2 weeks, we will stay very open-minded. And whatever we get on the table as options, improvement potential and stuff like that, combination, considerations, we will surely evaluate and see whether we can create value for our stakeholders. And that's for clear, for sure, and there is no doubt about that. And the third one is something which we also now need to do in our new management setup we are in is to think about what can we do beyond 2027 to unlock -- to use this word even more value. But the focus of the event is clearly on one and 2. But in parallel, we also will pursue 3.

Thank you, Bettina. I mean the -- you've been very vocal and straight away when the information about the higher stake from your credit was public that you were defending a stand-alone or independent status of commerce. What I think we want to understand today is, are you opposed or engaged in potential consolidation?

I mean you are engaged in any topic and any combination, which creates value for our stakeholders, and specifically for our shareholders, that's for sure. So the only thing that we said is that we need to put stability in the situation because you need to imagine that -- I mean our whole ecosystem is really working with the thing that we have clients and staff also contributing to the system. And when we have a lot of instability and in security specifically on the staff side, that's not helpful. So we really need to make sure that people work on the strategy, that they do what they are supposed to do. And then in parallel, we clearly will avoid any option.

So as the new CEO, the question actually from the investors we get a lot in the last 2 days is are you, Bettina, will be working for shareholders? Or actually, you will be working for or considering a lot what you hear from government, unions, as you mentioned, stability. By that, I guess, you believe impacts of any consolidation on resources. So what's your priority? What's your mindset now?

I think there is no contradiction. There is no either or, not at all. Because at the very end, we only exist with all 3 stakeholder groups in parallel. When we create value for our shareholders, that will also create value for our clients because we have more money to invest to develop a better value proposition. And it also means that we can remove for our staff because we can pay better, we have better working environment, et cetera. So I think waiting value is nothing against the other 2 stakeholder groups rather the contrary, but we have to keep in mind that we also do things which are also then beneficial, for example, for our clients and not scaring them away to say like.

So there are a few reports that some other large German banks would help to build a strategy to basically defend dependence of Commerz. Some others were talking about potential poison pills that you do to deter any bid talk in Poland or -- so can you comment on that?

Yes. I mean there's a lot of talking about all they have now with defense team, et cetera. And I think you all know defense team just means that -- we have a team which is defending the interest of our 3 stakeholder groups, investors, clients, and staff, nothing else. And I can only also reiterate which I've said already in bilateral meetings, we will not do any stupid things. Our main objective is to protect the value and the business model and the franchise of Commerzbank, and that's what we do. And any idea of now doing some crazy acquisitions or fast sell-downs, et cetera. Not with us. We won't do that. It's really -- yes, we have a value, and we want to increase the value and not destroy the value.

Very clear. Now if I want in a little bit discussion and see, for example, where [indiscernible] is coming from. We've been talking about consolidation in Europe, I will not even say cross-border because this is not a cross-border M&A. This is an in-market in Germany, M&A because between -- in a fragmented market. So Europe needs these larger banks, needs solid banks that can be more profitable, more solid and find better the economy. So I'm not sure how you can comment already on the rationale of such a deal. That's from the EU integration perspective and from actually the strength of both parts. What do you think?

I think we have to evaluate the options. It's pretty clear that if you're putting 2 franchise together in a country that you have cost synergies and if you migrate systems, there are cost synergies. You have, however, to evaluate how fast we can do that, how much it's distracting you from other things, how much it causes the execution risks and stuff like that. And that's something which you usually do. And sometimes it makes sense. Sometimes it doesn't make sense, and that is something we need to find out jointly. And same is true for the clients. Is the overlap of clients can create revenue synergies, are there negative synergies and things like that. That is a work to be done and then we can also evaluate what option is better, is a fast and quick and security execution or is there a higher value proposition, but is probably also a slightly higher execution risk. That is something we need to jointly then analyze.

Clear. So from here, you sound more open to discussions and to contemplate potential something and see how can cooperation we go further. Now in terms of stake, you've been actually calling government to pose government's stake sale. What's the status on that? Is there any -- I mean we hear a lot of different messages from government. In Germany, there's some political instability as well. So what's your take on this?

I mean what we wanted to have is a stability to really evaluate our options because the last thing which we want is any disruption, any harm to our to our bank, to Commerzbank and the core values there. And this is why, given that the whole -- how it happened was kind of a surprise. We thought it's better that we all sought out before anybody do -- does the next step. I think that was the reasoning what the government now is doing, we will need to ask the government. They had a very clear statement out on last Friday. So that one is the one which is valid for us at the moment. And besides that, I can only repeat myself. We have a bank to one. And we are on a very, very good track. 2024 seems to create -- generate again record results. And definitely will use the strength to further improve because we are also very well aware of the fact that there is still a lot of improvement potential within the bank. And if we can get even better by other things, we will consider that.

Last question, I promise this and then we'll move into the standard operations. Are you in discussions now with UniCredit management?

Actually, we'll have a meeting tomorrow, first meeting. And we'll see. I think it's --

Are there hidden stakes somewhere?

No. I mean it's -- I think it's basically a good starting point. Yes, UniCredit is now a shareholder, an investor, and it's very normal that you exchange news.

Thank you. What I will do is that before we move for the other remaining 20 minutes, 25 minutes to operation, I will open the question to the floor because I'm sure there is some question on this topic, then we move on to it. Any questions? Actually not surprisingly.

Got an answer in the question you're asking.

Very clear. That's perfect. Okay. Well, if you change your mind just -- great. So you -- I mean, I was on stage in first thing at [ 8 ], so I didn't see your press release but you put press release after your Supervisory Board, I think yesterday and you've alluded to it as one of the 3 points about your targets and so on. Can you go through this again and then we take it from there?

I mean what we -- and it is a normal price as everybody actually is doing it. We had our strategic alignment process over the summer, which normally results in November in a new multiyear plan, and we discussed the strategic adjustments and updates traditionally in our September meeting with the Supervisory Board, which happened to be the last 3 days. And -- we now -- I mean, the strategy 2027 is clearly articulated in our strategy paper back in 2020 in November last year. But now we have done some alignments on the revenue side with respect to further growth, specifically in some of our international locations. And it's also all related around asset management. We now have fully consolidated our pillar, and we see basically revenues unfolding there. And we also have on the cost side, given that we have a lot of cost upside to say like that due to inflation and also salary increases and investments. We have implemented a number of cost reduction measures, be it on procurement, be it on sourcing and also some digitization, AI initiatives, which will help us to become more efficient. And then very importantly, we had a very conservative, I would say, RWA development plan towards 2027. We reviewed that in the summer and we have now come up, I think, with a plan which still fits our growth ambitions, but probably took out some of the buffers we had in there. And that really makes the difference, specifically because we have a different starting point. We had end of July 14.8% CET1 ratio. We also target that minimum for the end of the year. And if you then imagine that we want to have a target capital ratio by 2027 of 13.5%. This gives you a lot of capital return potential in the coming years, plus given the increased and improved profitability, which we see until 2027. Also the ROTE as said before, will be better. We thought it would be 11% by 2027. Now we target 12%. We are very confident in achieving that execution which was limited. And most importantly, it's not a hockey stick event. It will be a continuous improvement from now 2024 to 2027, so year-on-year and improved and partly even accelerated profitabilization.

Thank you. I mean the interest rate [ share ] hike has been very significant boost to your revenues. And now with the normalization of rates, how we are confident to deliver even higher ROTE target 12? And once the level of terminal rates you'd be comfortable with reaches targets?

Yes. So what we have now is the plan is something that the interest rate environment will be between 2% to 3%. And also on long term, it has come down quite significantly, and we have taken that one into account but also given what we now see in 2024, specifically on the net commission income side, we have an even better starting point for the years to come. So we also increased our growth aspiration for the net commission income, which was 4% year-on-year. It's now above 5% because we really see that we have set the foundation for further growth in this area. And on the side, we're still confident despite the very different interest rate environment in comparison to last November or when we did the plans, we still believe that the EUR 8.4 billion for 2027 are achievable on the NII side.

So on the sale NII, the deposit beta in Germany has been lower than expected. Yes, you go for expensive deposits lately. So what's the rationale for that? And is there a franchise issue in terms of deposits or [ lot's of branches here ]?

No. I mean I think we wanted not to focus too much on the deposit better because it's always a function of clearly, interest rates level but then also volumes. And we have much higher volumes than we originally planned. And we will also end the year with much higher deposit volumes but also quite some benefits for next year. As long as you stay away from ECB interest rates, you create profitable business, great growth, and therefore, it's just a pure deposit strategy we drive here.

So on replication portfolio, you've done a lot of work to reposition it and obviously capping a bit the [ speeds ] on the way up and then benefiting on the way down. How is that being instrumental into your resilience on NII?

It clearly helps and specifically on the private client side, it is clearly something which will help the trajectory for the years to come. We always said that given that there is an expected significant decrease on average interest rate level between '24 and '25 that you would see a little dip in NII for '25 but that will then turn around for the years to come, and the replication portfolio clearly plays an important part in it.

So volume is another big component there. I mean Germany has been struggling a bit lately, and the outlook looks challenging. I mean, how are you confident that actually, this is a market that will endeavor growth. I mean there's -- I'll just extend with my question maybe while I mean, how structural issues you see in the German economy versus something that can be?

So to start with the latter one. In the moment, we have not seen structural issues. We always talked about single cases and that has not changed over the last 2, 3 months. I mean we have been always a little bit more conservative with respect to the German economy for this year. We never thought that we would really see a big increase in GDP for this year. So we kept -- we're cautious in all our planning. So we are not also now taken by surprise that we probably see another year of 0 growth. I mean we are worried because apparently, second year result growth is not a good one. And hopefully, also the interest rate cuts, which we now have seen will also help to stimulate economy in Germany and in Europe. And I think what is specifically important is that also the sentiment among our corporates will improve. And for that one, we probably need to have also some kind of political stability. To be seen how this develops over the next year, but we feel very well prepared for the coming years. And we are very well diversified loan portfolio, and that is definitely helpful in years like that. And we will continue to see single cases as everybody else. But we stick to our guidance. We feel very comfortable with our LLP guidance. And we think that cost of risk of normalized 25 basis points is something we can definitely see. And for the time being for this year, our cost of risk has been even significantly more than that.

So back on growth, if you can put some numbers on what you see in terms of volume of lending growth in the different segments in the, I would say, in the next year or so?

Yes. I mean we always said that on corporate clients, we would foresee something around 3% growth. And that is something which we see, and we are confident to achieve that. On the private client side, we actually want or thought that we would see a decrease. That's no longer the case because -- also because of the interest rate cuts, clearly, that has a positive effect. And we see that the mortgage activity has come back not to the levels which we have seen a couple of years ago, but to a decent level, so that unless likely, we will not see really the decrease which we assumed. And then we have seen that -- we have been pleasantly surprised also by net commission income, and we always targeted a 4% year-on-year. For this year, we think we will be slightly higher than that.

So going to the Mittelstand, I mean that part of everyone wants and thinks this is the fastest growing. I mean if you look at the geopolitical risk and U.S. elections coming with potential tensions with China and Europe getting behind the U.S. position. I mean, everyone talks about Germany potentially being the most impacted. And as a [ single ] level, this understand. I mean in your internal reviews and scenarios. Do you see that as a risk to your strategy?

No. I mean the Mittelstand is our DNA. This is also why we think also Commerzbank has a place because it is very important to understand the clients to be at the side of the clients also in difficult times. That's our task. And that's also how we do the planning, how we do the portfolio. And I think that is also part of the reason why there is no need to debate about all the things which we have seen in the last weeks because we think we have an important place here. We finance 30% of the exports of German corporates, and that's important.

So maybe we can touch a word on your fee business. I mean, this is instrumental part of offsetting the pressure from NII, which will happen for you. What can you say there in terms of levers you can pull to just move a bit the NII normalization?

We have put in place a number of levers -- a bundle of levers on the private client side, [ comp ] client side and [indiscernible] and they're very different. If you take the private client side, it's the one side can direct where we are also invest a lot in new client generation and then more transactions, more NCI side like that. On the private client side, we have the retail banking where the whole on securities savings plans are very good lever to get the people in the direction of investments. You all know Germany is not known for being super open for investments or the investment culture can be definitely further developed and the securities savings plans are very good mean for that. And said that they are also helping us to settle on basis for the coming years with respect to net commission income. And then clearly, on the private clients, the whole asset management, wealth management, is very, very important topic for us. And by the recent acquisitions we see that this value proposition really pays off and to also state clearly we will not do crazy acquisitions, but bolt on acquisitions and are part of our strategy and will be part of our strategy, and we continue to look at that.

So looking at your operating units for draws in the next few years, is as always discussed in terms of potential resilience of the top line. I mean revenues will be challenged, while you guided for mid-single-digit cost growth given the salaried valuations and ongoing investments. How much room you have to -- headroom you have to grow costs less than mid-single digit to protect a bit the [indiscernible] and actually deliver on the ROE expansion?

You have always short-term measures on which you can implement and we are willing to implement if necessary. In the moment we all a cost income ratio steering, which helps us also with respect to the investments. But clearly, if we see that cost income ratio is not developing as planned, then we will also adjust the cost base on a very short-term basis. And to just also deliver against our targets. But our clear target is to grow, to invest to further enhance our value proposition and I think on the moment we are on a very good path and that also improves our efficiency. And there are a number of measures ongoing to further also increase the efficiency in the bank. I said it before, sourcing is a big topic for us, but also and going to low-cost locations is part of the thing still also on internalization of external staff is still an ongoing topic. And then we have the efficiency measures driven by AI, where they have several use cases now started on the sales support in operations on KYC which also will be really important and crucial to ensure continuous improvement over the coming years.

And how do you see the style renegotiations involved in Germany? In general have been one of the tough markets when the inflation where unions was asking for headline inflation. I mean, in some countries, still these debates are difficult. How is it evolving in Germany? And given the situation you're living is probably even tougher to negotiate.

But first of all, we have now an agreement which gives us kind of planning stability for the next 2.5 years, it's set. And it's -- and it's pretty clear that salary increases put pressure on the cost basis. And therefore, this continuous improvement is an important part of what we do because we need to balance out cost increases, but cost increases come also from regulatory initiatives come from investments and stuff like that. It's not only salary increases alone -- and yes, we stay very cost conscious to state that.

So maybe we can switch to Polish operations. It's, again, a good market. It's a quality bank, the area, quality franchise we have there. Are the government intervention is from mortgage issues behind you? Or this to some tail there on?

Yes, it would be great if so. But I mean, we try to get it behind us as quickly as possible. So I mean, you have seen already some bookings in the first half. There will be further bookings in the second half. And we've also -- can imagine that our 2025 will be still a year where we talk about it, but given really our push on settlements and the also continued progress on that. We think that we should get behind this topic after 2025.

And a quick word on your direct Russia exposure. I mean, you've been running down. Do you still see right down with no losses? What's the trend there?

Yes. I mean the next exposure is very limited as we speak. And I think for us, it's really the question of the operations there. We said that before. It might be that at a certain point in time that the Russian operations, which are anyhow in highly nation [ motors ] are no longer really in our balance sheet that we have to book it out because we closed that or we sell it and then there is an impact on our capital and P&L. But specifically on capital, we said that the impact will be very limited. It's really something around 10 to 15 basis points we see. So it could have a onetime effect also on our P&L. Nothing really on which keeps us sleepless.

So you added to solid asset quality with low cost of risk I mean you booked some -- there is some uptick in cost of risk there's no -- I mean you said specific cases, but do you see any pockets of asset quality concerns?

No, not in the moment. And as I said, it's really -- I mean it sounds crazy, but it is -- there were several cases and that's normal. We will also have normal cases or single cases in the future. I think what people need to get used again to it is that we're just back on the default levels, which we have seen pre-COVID. And that means if you're financing a large part of German economy, you will always also be part of that. There is no way out, and that's basically one of the rules of the banks. But it's not that it's getting into a dimension where we start to get worried. So plus I mean what we currently do is also we have the top level adjustment and we move as we have done in the second quarter, some parts of the top-level adjustment instead of just releasing it, we also have done some collective staging and things like that, which is also kind of a suffering now in the models.

I'm just checking again if there's any question in the room. Yes, there's one here.

I'm not seeing anything.

Yes, it's very bright.

[ Carli Roche ] from Bank of America. You mentioned earlier that Germany continues to be in a low growth environment. Can you give us some color on your corporate loan book? In terms of the industry sectors you're exposed to? And in particular, do you see any risk from your exposure to the auto industry?

Yes. I mean the auto industry, if you follow up on our analyst presentations, et cetera, we always show the exposures to the to the industries where we are a little bit more worried than the other ones. I mean auto exposure is clearly something which we closely follow up on. But given the diversification of our loan portfolio, it's basically just one part. So we have not really one sector who's really shining out as -- where we have a deep focus on it. It's really well diversified loan portfolio. So -- but definitely, we have a close look on specifically that sector at the moment also given recent views and stuff like that.

Anymore? So maybe we have time for -- to talk about capital and distribution. So our ROTE upgraded to 12%. I think it's fair to say that big part to achieve that would be to normalize your CET1 ratio, which is now 14.8% in Q2 the first half. So when are you -- will you be ready to accelerate running down that excess capital? Were you planning to start a share buyback soon, increased payouts M&A, all the above?

Well, M&A only smart bolt-on acquisitions whenever they fit on to our value proposition. Because we really stay away from things where we have intensive integration work system integrations, et cetera, because that is really hinders in our growth and speed. But besides that, it's very clear what we do for this year. We have announced that, and we will not change very importantly, our plans. So we have asked for the first tranche of EUR 600 million with the regulatory authorities. We expect to get approval in the month of October which means that we will write after that start with the share buyback in the size of EUR 600 million and nothing will be changed on that. And then with the third quarter results presentation, we will ask for the second tranche, which will probably be around EUR 400 million because we have this target of EUR 1.6 billion out there, capital return for this year and we clearly also want to have reserve apart for dividend payments, so around EUR 600 million. And then we take it to the next step. If you look at this little presentation, we made it very clear what we think is our targeted payout ratio for the years to come. And after now this consequent increase from 30 to 50, now to 17 to 18 will depend on where we enter with this year. Larger than 90 for the years to come, you really show -- you can really see the potential and we can all do the math. If you have net income of more than EUR 3 billion. And you have a capital return of more -- payout of more than 90%. And then you put that in perspective for our current market capitalization, it is a very, very good deal actually. And I think it's also important to know that current price levels, we have seen people tend to forget that already in June, July with our standalone strategy. So we think there is lots of upside potential also in our share price development. Also in our current base case.

I mean, Commerzbank has changed a lot. I mean, I remember when I started my career. I mean, the average ROEs were really very low. I mean improves, it's more efficient, it's more focused yet multiples didn't expand much. What do you think really needs, I mean, is your strategy? Or are we target that distribution is not yet completely as is critical by the markets and then you end up rewarded. What do you think your multiples could be rerating?

I mean you have to see we have a long way. If you look on when I took over in 2020, the CFO position and you look on the target prices back then. And now look at the target prices, which we have now, there has been quite some improvement. And I think it's really dependent on our progress. I mean we have now consequently delivered would be promised. And I think also 2024, we will do so, and that will clearly help fully everybody to see that the numbers we lay out and which represent the numbers, you can trust that we will execute and deliver them. And we can also see that at least the difference between what we say and would the endless consensus is becoming also smaller and smaller for also the years to come. And I think that will further improve the better our delivery is, and that's our objective.

Thank you very much, Bettina. Thank you for your time.

Thank you very much.