Commerzbank AG (CBK) Earnings Call Transcript & Summary

Okay. We're going to start, so we can be on time. So hello, everyone. I'm Flora Bocahut, I head the European banks research here at Barclays. I'm very happy to have with me today Bettina Orlopp, who's CEO of Commerzbank. Thank you for being with us. So we are going to go through a few questions. There will be time then for the audience here to ask a few questions. And then we will also put you to work. We have also 3 questions we're asking in every fireside patients to bear with us.

So let's start -- I think let's start with the obvious big topic of the moment, the M&A situation between Commerzbank and UniCredit. So UniCredit currently owns just below 30% in Commerzbank. They will be closer to 50% ownership once the offer setters, which is later this year or early next year. once UniCredit effectively own the majority stake, what do you expect the next steps will be?

Yes. I mean I think the best is to think about different phases we are in. At the moment, we will say we are on safe 0. So we have the tender completed. It's clear how much shares credit will have whenever they get the approvals from the different authorities and that will be slightly below 4%. And what we currently do is really prepare for this next step. So whenever there is a technical consolidation due that we are prepared for that and that can be the case either end of this year or beginning of next year, and we need to prepare that to make sure that this is working. Then there's clearly a phase where you have a de facto control of credit, which means they will have the majority, the simple majority in the AGM, and they can clearly influence the Supervisory Board composition and other things. However, it's also very important to note that comes back in this Phase 1 is still an independent publicly listed company with a large majority shareholder, but also minority shareholders and Supervisory Board and Management Board are employed by law, the company law to act in the interest of the institution. And we have to file the dependency report and all the stuff. So we really need to make sure that we only do things which are in the interest of the institution. We shouldn't anyhow always do that. And if there is anything we do, which is for the disadvantage of -- to the [indiscernible] of minority shares, we would have to ask for a disadvantaged compensation. But in this pace still, it's not only about the implementation of our stand-alone strategy, but we can also clearly think about things we can do together and how we can make our targets laid out for 2028 and 2030 even better by cooperating, finding joint ways of increasing the efficiency gains, increasing revenues and stuff like that. And that should be the objective of Phase 1 to deliver on the targets which we have to promised, but probably also lay out even more aggressive targets based on the new situation. And then there is a Phase II, which is, however, I'm clear when it starts, we're the real consolidation would happen where you would have kind of an integration of HVB and Commerzbank and you could create all the domestic synergies one could expect out of such a transaction. That is, however, Phase 2, and I think we should be all very much focused on this Phase 1 because at the very end, our organization, our institution needs to know what they're heading for, what's the [indiscernible]? Where do we want to go? What do we want to have? Our clients want to know -- they like apparently our business model, and they want to know how this is developing and staff also wants to know it. because our competitors are sneaking around our clients and talent, and we want to make sure that they are not successful in that. And for that, it's always important to have clear messaging.

Well, Germany has been a very competitive market for a while. So indeed, I can only imagine. One question also I wanted to ask you, there was obviously this meeting taking place yesterday between UniCredit CEO and the German Finance Minister, is there any comment you want to make around this meeting?

I mean it's very clear that we are aligned with the government because it's an important shareholder as well. And also, they have to candidates in the Supervisory Board, which are sent in from the government and they have some special rights still around and they take that. And I think it's important that there's also discussions between the 2 large shareholders specifically when it comes to a potential Phase 2 because it's those are very clear to really do structural measures meaning a merger, a domination agreement, squeeze out or what is currently in the discussion where you have a sale of HVB to Commerzbank, all this only run smoothly when you also have an agreement with the second largest shareholder on the bond. So I think it was an important step that they sit down, and I think we have to take it from there.

There's obviously many scenarios out there. It's still early days at the end of the day. If I were to ask you, and you touched on that already in your answers, but 12 months from now, what would you say is success in this situation?

Well, successes every if we have a collaborative friendly approach where we provide a lot of stability necessary for clients and for staff because that is the best way to maximize also the value for our shareholders. Successes if we stick to the targets, which we have set also for 2027 and that we most likely will have even new targets out there for 2028 and 2030 and the objective and expectation clearly is that it's not worse to what we have seen so far. Short term for us, it's really important that they will deliver on 2026, and it looks pretty good, as you might have seen from the half year results. And there's no reason to adjust that. And we feel pretty comfortable on the delivery for 2026. So it's also very important that we do not stop any change, any update, any upgrade of the business model because there's so much going on specifically when it comes to AI, that we cannot afford an institution which is frozen for a certain period of time because this is really changes and adoptions on a daily business. And it's really important that we keep doing what we are doing also providing new products, new service offerings every month to our clients and that we should stop -- not stop that. And I think that is the most important part in that -- our competitors have not been successful in getting any core clients or stuff be the other one.

So actually, let's dig now a little bit more into, first, the macro environment and then the micro, if I may say, on Commerzbank specifically. Let's start with the German outlook. We are starting to see positive signs in the factory orders on the Confidence Index. On your side, are you seeing early signs of a pickup also on the loan growth? Or what's your take from the ground on the German economy?

Yes. So first of all, it's correct, signals are better. And the [indiscernible] is an important indicator, but I would say, as you said, the production and the order data, which is developing nicely and heading in the right direction. And also, we now have an adjustment by nearly all economic research departments, and we are back to something around 1% GDP growth, which is not great as we know, but it's a starting point, and it's better than what we had before the summer break where we were, I think, down to 0.5%. And that despite all the things ongoing with the geopolitical conflicts we are currently seeing. So that's good. And we, however, also see that the default rates are still very high, and we haven't really and we haven't the feeling that we have seen the peak. So we stay cautious on that. And when it comes to the investment behavior, it's still that in Germany, people are cautious, which has probably also a lot to do with the reforms. And are the reforms now implemented? Are they not implemented? Are they progressing in the right way? Will there be more to come that other things or German corporate wait for, and there are, as you know, a conservative group. So they really need to be sure that things are implemented before they really move. So we haven't seen really something yet, and you see it also now in our loan growth numbers of the first half year that the majority stems from our international growth and less from domestic and it will take a while until you see it. But I think for us, specifically important is how the industries are developing and we have no reason to believe that we cannot keep our risk guidance. So we feel very comfortable with the risk result guidance for example.

Okay. That's very clear. Okay. So let's move maybe now to the NII, which is another big topic of discussion with investors. So for this year, 2026, you target an NII of roughly EUR 8.6 billion. In H1 so far, you've achieved EUR 4.1 billion. So you are implicitly pointing towards an acceleration of your NII in H2. Can you maybe remind us why you're confident this is going to happen.

Yes. I mean 2 main things. One is clearly that we always assumed also that there would be one other interest rate hike and that has happened last week. That is one which supports H2. And the other part is clearly the [indiscernible] portfolio because we said that the majority of the positive extra contribution. We rather expect a little bit back-end loaded and not front-end loaded. So that is the second part, which we will see. So we feel very comfortable with the guidance of the 8.6%. And you all know that forward rates have also developed very much nicely in our direction in the latest weeks, but that will less have an impact on 2026 that has more positive impact at least from our current perspective for the years to come.

As we talk about the NII, there's a question we received a lot also from investors. And you touched earlier on how competitive a market Germany can be. How is the deposit pricing ongoing? Are you seeing increased competition?

Well, the competition has been always very high, and it has not weakened with the entrance now of Chase. I mean, Chase is out there with a big campaign, and it's a very, very attractive offering from a consumer perspective. And what we, however, currently see it's always the same group of consumers, clients that are targeted by these these offering very digital native. So it's really a play mostly between the mobile banks with the mobile and online offering only, while the clients of the ones with the branch network a little bit more sticky. We call them interest rate servers or interest rate hoppers because what they basically do is -- and the interesting part is that they are now doing it also for 10, 15 basis points difference in the offer. They really move from bank A to bank B and to bank C, whoever has a good offer. The carve out the troop is moving in this direction. And retention is not really high on this group. So one really need to think about what type of offer you have, what do you want to achieve with it ideally, and that is our perspective. We do not want to have only the ones who come there, give us the money for 3 months and then move on to the next one. Plus it's also a lot of work because normally, they close down your account with you, then you have to have the cost of the closure of the account and the reopening of the account and all the stuff attached to it. So we rather target clients who then really want to stick with us as new clients and take that as an attractive entry point, but that is something we are, as everybody else, are we are experimenting on but competition is high, has never been really easy. It's just the players who are changing who are the attackers.

So if we summarize on the NII because we've had quite a move on the rate curve over the last few weeks now especially the last 1 or 2 weeks. Would it be fair to say even considering this level of competition, which maybe is captured already the deposit beta guidance you have? The risk is more to the upside maybe versus your guidance considering the rate changes we've seen so far.

Yes. Definitely, for the year 2027, the following because you know that the replication portfolio has quite an important impact for us. And such a move of the forward rates, which we currently have seen definitely impacting in a positive way. Revenues stemming from the replication portfolio. However, we also you always have to think about potential counter effect of the interest rate [indiscernible] be it increased deposit better, be it some less demand and things like that. But overall, it's definitely a plus for the years to come and for this year, we just feel comfortable with our increased guidance. One should not forget we increased the guidance on -- we feel pretty comfortable with that one now.

Moving slightly away from the P&L here temporarily. I wanted to ask you a question also on the payout policy because you have this target of 100% payout in your existing plan. And then obviously, now UniCredit is a bigger and bigger shareholder with possibly different plans here. So it's there from your standpoint, a risk on the payout policy?

But I mean, I think we have seen in the past years that we really are very solid on our capital return policy. I think that since we started the pickup of dividend payments and share buybacks. And we all know that we haven't been really reliable in the decade before. We now have returned to something around EUR 6 billion so far to our shareholders in the last 4 years with a very sharp increase. For this year, we planned EUR 3.2 billion, which is a EUR 3.4 billion net result, which we expect. And then you take away the AT1 payments and that leaves you with 3.2. And we have a clear commitment that as long as we are above our targeted CET1 ratio of 13.5%, we will return 100%, and that has not changed. And we have apparently started with it because we have a share buyback running as we speak -- and of EUR 1.2 billion -- up to EUR 1.2 billion. So in total, we believe that the EUR 3.2 billion capital return is the right one. We also said that -- we want to have a good -- and that's also what we heard as feedback from investors. It must be a good balance between dividend and share buybacks. So you can assume that there will be a 50% share of dividend. And then it's very clear, we, as Supervisory Board and Management Team, we will propose that to the AGM, and that's the AGM who will decide on that one in May. I see no reason why AGM should vote against it as long as we deliver according to plan and as long as we have this surplus capital because if you look at the capital return policy and what credit has done in the past, it's very similar. They are also -- they have a little bit lower target CET1 ratio despite similar MDA, which clearly has to do that their profitability is also still higher. But besides that, I think we have -- we have the very similar approach. So I don't see any reason why that should change. And it's always -- I mean it's backward looking. It's for the year 2026. It seems to be that we are in full delivery motors. So you will see the results, you will see the CET1 ratio. So no reason to change that. And then for the years to come, I mean, you know what our targets are there for 2027 and 2028 and up to 2030. And that is constantly increase of the net profit. So I would also assume that there will be a constant increase of the capital return, and that's also embedded in our share price, as you see.

Yes. And you mentioned profitability. This is actually the next question I wanted to ask you. In terms of RoTE, you target a significant improvement over the next few years. You target an RoTE of around 12% this year, but then 17% in '28, 21% in 2030. On our numbers, in fact, you are one of the best EPS growth among European banks in the next 3 years. So can you maybe elaborate here on the main drivers that you expect will help you achieve this RoTE development so quickly. between the revenue growth, the efficiency gains, the capital optimization and what gives you the high level of confidence that you can get through this strong improvement?

Yes. Well, as we summarize nicely, it's everything as you described it. So it's on the one side, it's clearly -- I mean, momentum is about growth. We have some aspirational target out there when it comes to NCI. The 7% growth on a yearly basis is something, but we have now proven also we will prove this year that this is the number we can achieve by multiple levers, and that will also play a role in the years to come. And that is coupled with a very strong increase of [ NRI ], which is a mixture of the one side that you will still have pressure because of the deposit better and other things but then you have a positive loan growth, and you have the positive contribution to additional contributions of the vacation portfolio, which is huge. And you can see that when you look at our analyst presentation, we always now put it in the backup, but you see basically the annual additional contribution we expect out of the model deposits. So that is the revenue side, which is clearly positive. And then the other side, with all the initiatives ongoing also supported by AI. We will balance out all the inflationary effect, all the investments we expect and keep the cost base pretty stable, which given the growth on the other side, will automatically improve our cost/income ratio down to 48% for 2028 and then 43% for 2030, and that includes compulsory contributions, that is important to state. And -- and then the RoTE is a very sensitive ratio. So it's pretty sensitive on how much you can improve the net income, plus we try to get the CET1 ratio in the direction of our target CET1 ratio, and that clearly helps to achieve this target.

Okay. I'm going to take a first pass here to check if there's any questions from the audience at this stage. We have a mic in the back. So if you want to ask a question, just raise your hand. If not, I'll give you some more time, and I will continue for now with more questions on my side. So there's another question I wanted to ask you, which is around this effort we are seeing in the EU around the competitiveness of the banking industry, very important, obviously, for the industry. Any view you want to share there on what you expect to come in the next few months?

Well, I mean we are in full support of this paper. We think it is addressing the right topics. When you look at it specifically when it comes to the level playing fields and the thing about thinking -- rethinking, reconsidering the rules still out there for the basal environment to come for the basal regime to come in, the output floor for unrated corporates, for mortgages. We're considering the implementation is something which is pretty important and would make a huge, huge difference, specifically for banks like us, I mean the German economy has a lot of unrated corporates because we have this medium-sized mitotane clients who traditionally as some of the owned companies do not see the need for a rating. So that one is an important one. Same holds true with the treatment of software assets when it comes to capital, which would be really a beneficial one and it would create and would create a level playing field because we know from the U.S. banks, that's very different to them. And also this gold plating reach is definitely something we can only support. But same one is also true about everything that is said about the savings and investment union when it comes to the securitization regime. We really need progress there. And we also need progress on the banking union. So believe it or not, but we have full support also of this European-wide deposit protection scheme because that is -- if we can really achieve that cross-border, cross-border groups, cross-product consolidation, makes much more fun because then you really can move liquidity and capital around and can really trade Europe as one market and not as the different markets as we have it today. So we are in full support. I think the only worry we currently have is that specifically the topic on the banking union and the European white deposit protection scheme, such a political thing that if it's too much connected and treated as one package, then the fear clearly is that we will see the relief that we would all really, really support, we would see it -- yes, for quite a long time, we wouldn't see that. And so we think that probably you need to decouple some of the initiatives to not try to bring everything in one program because that might have the disadvantage that it would take so long. But otherwise, we think it's super important that we make progress there. Yes.

So checking again in the room. We have one question here, please, if we can get the mic over there. If you can maybe raise your hand. Thank you. I think we can hear you, okay.