Commerzbank AG (CBK) Earnings Call Transcript & Summary

Okay. Thank you, everybody, for joining us. And for the final session of this year's European Financials Conference in Berlin, it's my pleasure to be joined on stage by Bettina Orlopp, CEO of Commerzbank. And I think done this discussion together over a year since I've been looking at the sector. So thank you for the continued support. I think it's fair to say it's been a busy period for Commerzbank. So Bettina appreciate you taking time to come up and speak with all of us today. As per the other sessions, 35 minutes, we've got a lot to run through. We'll have some time for audience Q&A towards the end.

I think let's just start by discussing the UniCredit topic right at the beginning. The German government has expressed -- clearly expressed its favor of an independent Commerzbank. That was in a letter to your workers' council. I guess what's your position as CEO? And there are any changes?

No, actually not really any changes actually. But as you have now referred to this topic, let me just do the 3 key remarks on that, which I think are important from our standpoint. And one and the most important thing is that we are absolutely committed as a management team to implement our strategy and to create value for our shareholders. That is our first and most important priority. And we are convinced that the equity story is compelling and is nicely reflected also in our share price, and it justifies our share price. And you can see that also when you take our NII and NCI prospects, which are very attractive and are getting more and more attractive also by the potential effects of the German stimulus package. And actually, you can also see that in the target price developments of analysts since our announcement of the strategy momentum. I think the second point I would like to do is that we are guardians of all our shareholders' interest. And that includes all shareholders and we remain open and are absolutely ready to consider all our shareholders. But it's also important to state that there is one important shareholder, and that is the German government and we respect their interest in Commerzbank, being a very strong and independent Commerzbank. And the third point I would like to make is that, we do not like and we do not accept any approach, which basically undermines our strategy and our share price development because we think that it's in our interest and in the interest of our shareholders, specifically that our strong performance, which we have shown over the past quarters is also fairly reflected in the share price, instead of repeatedly trying and luckily only trying to talk our share price down just because there might be also some other interests in the play.

Okay. So I'm sure we're going to maybe come back a topic in Q&A later, but given that we are sat here in Berlin in Germany and you mentioned in your comments there, just the outlook for the German economy, which has changed is dynamic, particularly in the context of the new government and the new fiscal approach. In your view, in your mind, is the German economy now set up to win? Or are there further structural reforms that need to be enacted?

We are very positive on German development. And I think the German government had a good start. I think the stimulus package is important. It's now also important that it really comes to action, which means we need to have a budget and all the things and we definitely also need some more reforms to come, but they are currently also on the agenda of the government, be it energy prices, be it the tax environment and be it deregulation. So many important things that need to be implemented. But you also see it and feel it in the numbers. If you look on the latest EFO data, if you look at the latest production data, everything is getting more positive. And we also see that when we talk to our corporate clients that there are -- the sentiment is getting more positive. And we all know that lots is about sentiment, and sentiment is getting much more positive. So we also see that they are really working on their investment plans, and we should really see more activities, specifically on the loan side, in the coming months. And you see it also when I look at our own economic research department, which was basically decreasing the outlook after the Liberation Day to 0% GDP growth for this year that at least have already increased it a little bit, but still it's the right trend to a more positive outlook. And then specifically for next year, the expectation is that the improved sentiment, combined with necessary steps from the government, combined with the stimulus package will have a very important and positive input on the German economy.

And you referenced there some of the discussions you've been having with corporate clients in recent months, they're, I guess, increased enthusiasm. Are you seeing any tangible changes in actual activity or readiness to transact amongst that client base? Or is this still -- it's coming?

It's coming. If you take my own legal department, they would say there is more activity because they have more work. So paper work is at least unprepared. So it's a good early indicator, I would say, but it's not yet that you really see a lot is happening, but it's a good activity. And hopefully, we also get a deal done between Europe and U.S. on the tariff situation, we should not forget that this date is also approaching and that could be also a good positive, hopefully, positive catalyst.

And so that's a good segue to the next question because you began the year with a better-than-expected performance in the first quarter, but a lot has happened since the end of the first quarter, particularly on tariffs, trade tensions, as you referred to. So maybe just a quick mark-to-market on how the group is currently performing in light of some of that recent macro turbulence.

Yes. I mean we are very happy also with the second quarter so far and the quarter finished. So it's absolutely developing according to plan. We -- I mean, interest rate development is exactly as we have forecasted it and also high cost discipline, net commission income developing nicely. So therefore, very much tick mark to our guidance. So no changes here. And you might have seen that we have had already our agreement on the frame contract with the Workers Council shortly before our AGM, which also means that we are ready to book the restructuring costs in the second quarter. It will be a little bit less than we indicated. First of all, there might be still some things coming in the years to come because the foreign locations are always a little bit behind. And some of the things might happen in the foreign locations, but we also did the bottom-up calculation, et cetera. So -- but you will see the booking as planned in the second quarter.

And then if we look at NII, your base case for NII, EUR 7.8 billion for this year, if I add the net fair value of EUR 8.1 million. Q1 performance was strong. You've got tailwinds from the replication portfolio. Rates, I guess, were a little bit more hawkish than we were a few weeks ago. So given all of that, how confident are you on delivering on your ambition for this year, particularly, I guess, the main outstanding issue being around deposit betas?

I'm very confident. I mean, we said it already between -- during the Q1 call that I think we used the phrase floor. So we see the EUR 7.8 billion as a floor. I'm confident that it is the floor and as said at the beginning, we -- the interest rates are developing as we have forecasted it. We foresee another rate cut by September and I think that is also when you take the language of the ECB, what you can expect in the moment, I mean change is always possible, but we feel very comfortable on it. Deposit beta is also developing as planned. We have been a little bit conservative on that, and it's good. So we have no reason to adjust anything on this guidance.

Can we talk a little bit about hedging? Maybe if you could just remind us your approach with regards to the replication portfolio. If you think about making any changes to that approach, maybe if deposit growth were, in fact, to accelerate here in Germany and maybe also what a steeper yield curve really means for Commerz.

So I mean, we are reviewing clearly the replication portfolio on a very regular basis. We have just increased on the size of the replication portfolio, as you know, in April so it's now more than EUR 140 billion, and that will create -- it's very neutral for this year because it's basically changing NII from overnight to NII from the replication portfolio. But for the years to come, it will create also additional benefits, specifically if the yield curve stays as it is and/or it gets even steeper and we all know that, I mean, our average yield in the moment is a little bit above 1%, which means every reinvestment at the moment is a positive. So we expect a lot for the years to come. And we will definitely review also the size of the deposits -- the model deposits dependent on how overall the deposits are developing, but also, I mean, the portfolio of deposits so how much call, how much term, how much site deposits is an important one.

And then if we look at the other revenue items, you've talked about or your expectation for lower FX provisions in 2025 fading, I think, effectively in 2026, given everything that's happened in the last few years, what gives you the confidence around legal and settlement risks specifically on that line item?

Well, just if you look at the portfolio, the mBank management team has done a very fine job in doing a lot of settlements. They still settle 1,000 settlements or have 1,000 settlements per month. So the problem basically gets smaller and smaller as we speak, with the provisions we now have booked we basically have covered all active clients. So everybody who still has an FX mortgage with us is basically covered. The only unknown are the ones who were passive. So who have repaid their loans years ago. And there, one needs also to keep in mind that many of them have already repaid years ago and never had a disadvantage in comparison to a Polish zloty mortgage. And so therefore, our goal is clearly to book as much as needed for this year to clarify the situation. And then there might be still some incoming lawsuits and settlements but that should be so small quarter-by-quarter, that is not worth to talk about.

Good. Let's talk about fees or net commission income. Consensus has around EUR 4 billion of NCI. For this year, you grew it by 6% or so in the first quarter, a 6% target for the full year. Can you walk us through what's driving that growth? And how would you break down what you see within NCI between sort of sticky fees and maybe some of the more episodic, more volatile items?

I mean the big benefit we have is that the net commission income and specifically, the growth comes really from 3 different areas. It's private clients, corporate clients and then clearly, mBank. Let me start with mBank. MBank, the net commission income so far is mainly -- primarily on payments that is pretty sticky. But there, the growth potential clearly for the years to come is also in asset and wealth management because the whole Polish market is developing and clients are much more focused now on wealth creation than before. So that is a big advantage. But for now, it's, specifically payments. And then you have the corporate client side, where you have parts, which is clearly volatile when it comes to capital markets, you have a quarter with lot of bonds issuance, and then you have a quarter with less. But then you also have a big part with respect to payments, which is rather sticky. So it's also a good mixture on that. And then clearly, also the lending provides you with some part, which is related to net commission income. And on the private client side, again, we have lots of different levers, we have the comdirect side, which is clearly at the moment driven by volatility. That's for sure. Number of transactions is driven by the volatility of the market. There, you see up and downs. And you can also see it we get frequently asked the question, how much of the NCI from securities comes from the transactions, how much comes from the fees for the volumes, the securities volumes in the deposits and that changes dramatically quarter-by-quarter. Last quarter because there was so much volatility. It was approximately 60% were related to transactions, only 40% related to fees on securities volumes, but there are also quarters where it's the other way around 60% on volumes, 40% on transactions. And then I want to not forget that the fees on securities volume again depend on the DAX development. So as long as the DAX is going up, apparently, we are also benefiting from it, but it also means DACs coming down specifically DAX, but also other indices, then volumes come down and then fees come down. That is 1 part. But then there is the other part, which is again, payments related, which is a very constant fee income and we have just introduced by May 1, a new fee model for our accounts. So when you're a customer with Commerzbank and you're no longer a student or you have to basically pay for your account a certain fee, a monthly fee. We have approached more than 2 million clients, the basic account is EUR 4.90 per month, you can multiply that with 12 and that is something which is coming in very steadily, except if clients terminate their account, but luckily attrition is so far very low.

And maybe you referenced earlier that the targets you talked about in February and if you think about operating efficiency, how are you progressing on those cost optimization measures you mentioned before the framework agreement, which I think is due to be concluded now. At that point, how should we expect restructuring costs, I guess, to sequence into phase through to 2028 from 57% as a starting point down to the 50% target.

First of all, we said that it will be really a steady development downwards. So for 2027, we said it will be a 53% and then 50% in 2028. As said, we have the frame contracts, the social plan we have in place. What's happening as we speak. This is a week of negotiations, now every executive area who has head count reduction is in negotiations with the workers' council for the respective area, and we want to conclude these negotiations by September, and then there will be the adjustments in structure. We have already an offer out to staff with respect to a part-time retirement program that is already happening. And given the structure of this instrument, you basically still work 1 to 3 years on average with us and then you leave and you're in a passive time, 1 to 3 years, you will see and the cost reduction will be seen in the moment where the passive phase starts, you will see now constantly basically a reduction in the head count related costs. And we also make very nice progress on the procurement side with respect to on the non headcount-related costs.

And then on loan losses, you've maintained the EUR 850 million guidance for this year. That's inclusive of some TLA usage. I guess the backdrop is reasonably benign. So what would need to change for you maybe to revise down that number? And then I think you used EUR 40 million or so of the TLA in the first quarter. Is that sort of the right run rate to assume for the rest of the year?

Yes. I mean let me start with the top level adjustment. I mean, the top level adjustment is something we're -- which we now have for quite a long time. Luckily, we didn't really use it. And so -- it's also a time where the arguments getting thinner and thinner, how you can argue that you have this type of buffer. So you will see over time this one released and what we currently look at is also given the situation and the requirements from the regulator how we can bring that into the models. So I always explain it untechnically how to move 1 buffer in another buffer, but this buffer then as part of the modeling. With respect to our guidance, I get the question quite often at the moment, but I think we stay conservative and we will keep the guidance for the time being because we have seen a time lag when we were waiting actually for defaults to increase because we always thought this was not a normal number, and it had a time lag on that. And I think now also we have to expect that there is a time lag of recovery because we have been now basically in the third year of no growth and that has an impact. And also what I said at the beginning, we really see a positive improvement in sentiment. We expect some more cases to come in the upcoming quarters. So we feel super comfortable with our guidance of the EUR 850 million, but we think it's too early to reduce that already today.

And then on return on tangible equity, you delivered 11% in the first quarter. You reaffirmed the 9.6% for the full year. What are the key sensitivities that will push you higher or lower that level for this year? And if you look at the 400 basis points of improvement, you sort of have embedded in the plan, remind us the kind of key blocks that take you from around about the double-digit level today to the medium-term target.

I mean, lower -- we have 2 main risk factors, which we always also refer to, one is clearly, if there would be any surprise on the FX side, which we do not really expect but that would be one and then we still also have our Russia subsidiary, which is always also out there, and we don't know -- I mean, it's in hibernation mode, but we also know that there might be some impact coming from that. So that's on the -- I would say, the key factors driving -- which might drive it down, but I'm not really expecting that, but that could be the case. The other way is, take, for example, we do not see another interest rate cut in September that will clearly automatically have a positive effect. Also, if you see a continued volatility, if you see basically sentiment improving even more rapidly than we thought and credit demand going up even more than we thought. Things like that could improve this year. For the years to come, and I think you referred to 2027, we expect a cost income ratio of 53%, and that will clearly also drive the profitability up. And that is very much driven by the revenue increase. That is one that comparison to today. This year, you will not have any provisions anymore for FX, you will have a nice recovery of the NII also due to the replication portfolio, and you will have continued NCI growth of 7%. So that's driving clearly, the revenues up and improving the cost income ratio and therefore, improving the profitability. Another factor, which you need to take into account is that we have the EUR 850 million this year in our plan and in our guidance. And we expect definitely for 2027 the normalized level, which will be then well below the EUR 850 million that improves profitability additionally. And then thirdly, we have quite ambitious capital return plans to release our CET1 ratio, which has been 15.1% by the end of the quarter -- first quarter and we definitely target our 13.5%. That means substantial capital return. That means also lowering of the capital basis, and that will also have a positive impact on the [ royalty ].

And then what are the items in the plan that I thought was particularly interesting is the EUR 13 billion RWA reduction via SRTs. Can you talk us through the approach that you haven't used owing to some business trends?

Yes. We think it's a good instrument to further improve our RWA efficiency. EUR 13 billion is the total number, EUR 10 billion is allocated to corporate clients, EUR 3 billion to mBank, the current plan for this year is EUR 4 billion, whether we really execute that this year to be seen. I mean the basal effect has been much less than we thought. And our CET1 ratio is very convenient. So we will see how much we do. And we always do things which makes a lot of sense, which reduce RWA density and we are also cost conscious. So we do not want to spend too much on that to still keep it profitable.

And I want to ask about CET1. You talked a little bit about where you're going in the medium term. So 14% near term, that number reduces as you laid out, there's a distribution flow of 13.5%. How did you decide that, that was the right level at which to run the bank and how would the discussions go with supervisors both here in Germany and at the European level.

So the 13.5% is basically when you take our MDA, which is around 10.3%, then you clearly have the P2G. And then we have included additional buffers for certain macro events and yes, specifically macro events and regulatory requirements and stuff like that. And then there's always a discussion which you have with your supervisory board, your supervisory authorities, how much additional buffer they need. And then finally, we came up with a number, which is also now part of our capital return policy of the 13.5%, and we feel super comfortable with this. And as said, I mean, we want to reach the 13.5%, but it's quite a challenge given where we are with our CET1 ratio now at 15.1%, the guidance for this year and is now 14.5%. It was originally 14%. But now given all the effects which we have seen, it's rather 14.5% despite the fact that we really want to return 100% of our net income and that before restructuring costs, which means we basically, we have a payout ratio above 100%. But even that doesn't bring us more down than the 14.5%.

Okay. That distribution topic is my last question before I open up to the audience. As you said, you've confirmed this 100% payout based on pre-restructuring net income. Can you elaborate maybe just on how you're thinking about the split of that between dividends and buybacks, not only for this year but also through the medium term?

Yes. I mean it's clear that we have also a number of shareholders who are very interested in dividend and they expect a dividend, which is increasing and which is not too much volatile. So what we try to achieve is constant and decent increase of the dividends over time, which means that also this year, it should be higher than last year. But overall, we want to increase our capital return, which also means that our share buyback plans -- our share buyback plans go up. And then it's very much also dependent on our own share price. How much makes sense, at the moment, we think both instruments are very attractive for our shareholders. So for this year, we said that we will ask for the first -- or we will start the approval process for the first share buyback beginning of the third quarter based basically on the preliminary first half year results. And then we will continue the story and then the final decision on dividend will be taking place as always, beginning of next year. But our goal is clearly to have a constant and very attractive increase of both dividend and share buybacks.

Okay. Very clear. With that, I'm going to see if anybody in the audience wants to ask anything to Bettina. Otherwise, I have 1 last follow-up question. So I guess my little follow-up question before we could draw this to a close, you've obviously spent a lot of time since February talking through the medium-term plan with investors and also with your team since then. I guess, as you've walk through those moving parts, how do you see or where do you see the greatest phasing risk, let's say, around the 2028 ambitions that we get to the right outcome but that different parts of the plan are phased differently further to the right that we might expect as you've broken down the different parts of the plan, where do you feel more and slightly less confident, if anywhere?

First of all, we think that this is -- I mean, there are aspirational targets but absolutely achievable. Otherwise, we would have not written it down. I think we were -- we did the right thing by being rather conservative on the GDP and interest assumptions, which helps us now. And I mean it's a lot of work because you always start at the beginning of the year with a clean sheet and specifically on the net commission income side, yes, you also start with some volumes -- security volumes in the books. But otherwise, you really have to go out and showing the 7% per annum is getting increasingly also aspirational because the basis is increasing also. One should not forget that. And also the 8% loan growth for corporate clients, we think it's absolutely achievable. And also when you look into the investment needs of our clients, I think it's something which can be absolutely done, but it needs to be delivered. And therefore, I would say, things which can really prevent us are big macroeconomic crisis and then a recession as a consequence out of it, or any geopolitical event, which we haven't foreseen, which again stops activity, things like that, that are really the things or breakdown of capital markets whatever that odds is more outside risk which we have than really inside management risk where we feel uncomfortable about, I would say.

Great. Well, look, I think on behalf of myself and everyone in the room, sincere thanks for coming here and sharing your perspectives on the situation and the outlook as well. Great. Thank you.

Thank you very much.