Commerzbank AG ($UCG)

Good morning, and welcome to today's conference call. Please note that we will take questions exclusively from research analysts. I will now hand the call over to Mr. Andrea Orcel, Chief Executive Officer of UniCredit.

Thank you. Good morning to everyone. Today, UniCredit has announced its intention to launch a voluntary public exchange offer for all the ordinary shares of Commerzbank. We currently have a direct voting stake of around 26% and an additional stake of around 4% held via total return swaps. This offer is designed to remove a 30% cliff edge that exists on the German takeover law and generate a period of constructive engagement with Commerzbank and its stakeholder over the approximate 12-week offer period. Our expected outcome is to exceed the 30% threshold without reaching control remaining at the equity accounting method with negligible capital impact. The offer exchange ratio will be determined by BaFin in the coming days based on the 3 months VWAPs of both Commerzbank and UniCredit. We expect this to be 0.485 shares of UniCredit per share of Commerzbank, implying a EUR 30.8 price per Commerzbank share or 4% premium as of closing on March 13, 2025. This action has become necessary to protect our position due to fluctuation in the size of UniCredit stakes caused by the continuous share buybacks by Commerzbank. Taking these steps gives certainty and transparency to the size of the stake that UniCredit holds at any one time. It also allows UniCredit to take advantage of the upside from any share buyback in the future and freely acquire shares in the open market. Our message to Commerzbank today is it is now time to talk. So we hope this offer underscore this message and our continued willingness for dialogue with Commerzbank management. We remain convinced of the significant value that the constructed value would create. We expect the start of the acceptance period to be in early May following the approval of the offer document by BaFin. This will run for 4 weeks with the end of the acceptance period in June. An extraordinary general meeting will be called for early May to seek authorization for the related capital increase. Moving to our distributions. We're still seeking shareholders' approval for the 2025 share buyback in the amount of EUR 4.75 billion at the AGM on March 31. The ECB approval for this share buyback is still pending. We will, however, commence the share buyback only after the offer period closes and dependent on the final offer take-up. There is no impact on our dividend policy. The offer has no downside vis-a-vis the aim to trigger constructive engagement and the existing stake continues to be hugely value accretive. Maybe some last comments before I open to questions. Our goal with this action is to overcome the 30% cliff edge. We can only achieve this with a voluntary tender offer, which as prescribed by German law is an offer to all shareholders for 100%. Our expectation, though, is not to go significantly above 30% given the offer price. We're not seeking control, but we are seeking constructive dialogue with Commerzbank and wider stakeholders. Thank you all, and I now open for questions.

[Operator Instructions] The first question comes from Antonio Reale of Bank of America.

It's Antonio from Bank of America. No, just trying to understand a little bit more what you were saying on the call and just contextualize this in the grand scheme of things. So why the move now, why you want to go above 30%? It's clear you want to sort of have a dialogue and force a conversation on this, but just sort of to better understand the sort of context, that would be super helpful.

Okay. So I guess why now? I think it's -- as I said, it's a number of reasons. The first reason is we are just 30% as approved by ECB and transparently communicated to everybody. We continue to have risk in managing our position because every time there is a share buyback, we need to sell down our stake to remain below 30%. And incidentally, we need to assume if and when the shares will be canceled. And making a mistake on that creates a risk for us. It also from an interest of our shareholder standpoint, prevents us from further consolidating or benefiting from the share buyback as we are forced to sell shares every time. So we be, if we're successful, we will be over 30%, we won't need to sell down anymore. That's the first point. The second point, which is connected to that, as per German takeover code, we -- in order to pass the 30% threshold, we need to launch an offer of 100%. We are launching that offer. But when we offer the 30% on the German law, we are free to buy in the open market an unlimited amount of shares up to 100% if we were to so wish, which at this point in time is not the intention post offer. But it is a possibility. Therefore, for our shareholders, it gives us full flexibility of staying where we are, moving slightly and managing the stake in their best interest. Why now? Because at this point in time, we still feel that UniCredit Unlimited will significant more value on a relative basis than that of the, let's say, the peer group in general other banks, we feel it is a good time to at least manage the situation proactively as opposed to continue to be in the current situation of action and continuous uncertainty of what could be next. And yes, vis-a-vis Italian code, I would just say that this is -- this is a personal interpretation is Italian code when you pass 30%, the question is at which level you reach control in order to be successful in their thresholds. In the German code, there are no thresholds. There is just an offer with an offer of 100% with the intention to pass 30%, but there are no threshold. So there is more flexibility than there is on the Italian code. And as I said, I'm not an Italian layer, but that is what I understand.

The next question is from Hugo Cruz of KBW.

I was just -- so a couple of questions. One on the capital impact. You said you expect negligible. Is that because you expect very little take-up? Or if you could give us a little bit sensitivity if the capital impact -- if you have more shares standard, what would be the capital impact? That would be very helpful. And second, on the timing. So you're launching this offer, and I understand from your press release, settlement would only be in the first half of '27, so almost a year from now. But so can you launch another offer in the future? Or are you stopped from doing anything more formal for a while? So again, if you could clarify the timing.

Thank you. So let me start with the last one. We can launch our offers. So fundamentally, when the offer is finished, we also would be free to launch our offer if we so wished. We don't anticipate at the moment to do anything like that. But yes, we are free. The second part was -- the first part was? Capital. Yes. Okay. So we anticipated that capital is marginal because of the expectation that we will now reach control. If we were to -- and therefore, that we will continue to equity consolidate our stakes. If we were to reach control, let me give you an order of magnitude, if we were to be at 100%, the impact on capital will be circa 200 basis points.

[Operator Instructions] The next question is from Britta Schmidt of Autonomous Research.

On the payout policy, you mentioned on the share buyback, if I understand it correctly, that the size could potentially be impacted depending on the outcome of this. Maybe you can explain a little bit what you meant with that. And on the capital impact, do you intend to hedge the stake? Or given that you're issuing shares for that, there's no need for that from a capital perspective? And then lastly, what do you expect from Commerzbank in terms of engaging in discussions? When you say time to talk with now, do you have any certain kind of time line in mind?

Thank you, Britta. So let me start with -- so first of all, if we do not reach control, we will be equity consolidated. We will have paid for the stake in shares. There will be marginal capital impact. At this point in time, we have no interest or plan to hedge the stake. But there is no limitation in doing that if we were to think that, that's a good idea for us to do. I bring -- I take to your attention the fact that if we do not reach control, the stake could be anywhere between marginal to several percentage points. So the open position would be management -- manageable and we would equity consolidate. So this is the first point. On the share buyback, you're right to raise that. So let me take a specific example. Let's suppose we were for any reason that we don't anticipate now to be at 100%. If we were at 100% at that point, there would be 200 basis points of capital impact, as you say. And you have your own trajectory, it would be significantly below our target CET1. And we would round up the -- we would review the amount of share buyback in order to remain within the range. So in that case, yes. But as long as we are in no control and equity consolidation, no. As if we go into control and line-by-line consolidation, which obviously would be a completely different scenario and a scenario where the -- you then start talking about synergies and everything else, then because of a 200 basis points impact, it would affect the share buyback. But I would also like to bring to your attention that in that case, which is not our expectation at the moment, the combined bank would then be shooting a substantial amount of capital thereafter, catching up very quickly on what we may have had to reduce or eliminate at the outset, okay, because the shock is in first year, but then it moves up very, very quickly into capital generation. With respect to engagement, look, I think we have been for reasons that are defensible in every side, we have been in a long period of let's say, positive engagement as an institutional shareholders behind closed doors, comments back and forth, et cetera, et cetera. But we have not been able to engage more substantively on areas where we really do think, given our experience that substantial more value can be created, what else could be on the table, not on the table, but more substantively, more proactively. And the answer has always been that we needed to make a proposal. Now we cannot make a proposal proactively without, a, making an offer, and b, which we just did; and b, without engaging constructive with the other side because if we make a proposal without engaging constructive with the other side, we immediately trade into aggression, hostility, et cetera. So what we're saying today is now there is an offer. The offer opens circa, it may move a little bit, 12 weeks of time where everybody knows there is an offer. And in the light of day, transparently, we can have engagement and see where that engagement brings us, hopefully, to resolve the situation that I think is [indiscernible] for everyone. But in this way, if we both agree on a path forward that is more productive, the net-net outcome would be that of a, let's say, constructive and positive reaction on both sides and next steps that we believe can add a lot of value for both institutions with or without control.

The next question comes from Giovanni Razzoli of Deutsche Bank.

A couple of questions. I'm sorry because the line was a little bit bad when you answered some. So your point is that once the offer is completed in the first half of 2027, you will be free to buy whatever shares of Commerzbank on the market without any time constraint, right? So this is the first clarification. And the second clarification, you clearly stated that you don't aim to get the control of Commerzbank. You don't plan to consolidate on a line-by-line basis, Commerzbank. So you stick to your equity method consolidation. But in the assumption that you were, in any case, exceed 50% stake as a result of the offer. We don't know what the market is going on. We don't know any about Commerzbank shareholders' reaction on that. What shall we expect in terms of dividend distribution and dividend policy going forward?

Okay. So yes, point number one, as per German law, once the offer is completed, so earlier than '27, once the offer is completed, we would be free to buy in the open market an unlimited number of shares, okay? We would be like any shareholders, we can buy whatever we would like. We would have made an offer. The offer would have allowed us to do that, okay? Only in the open market. If we were to -- so that's point number one. Point number two, and as I said, at the moment, this is not one thing that we are planning, but everything depends on where we are when the offer completes. The second point is, as I said, while the offer is 100%, that is German law, and I cannot get out of that. The expectation given the terms of the offer, which is actually a positive expectation given that the -- one of the key objectives with this offer is to trigger a positive engagement with Commerzbank is that we will not reach control. If we don't reach control, then it's equity consolidation like today, but you're adding to that equity consideration, the stake bought at this point in time for shares, so no capital impact. And it's more of the same. Hopefully, it's more of the same with a dialogue with Commerzbank that is a lot closer and a lot more constructive than we have today, if I may, a dialogue like we have with Alpha Bank in Greece. If we move to control, then as I said, taking a number at 100% is 200 basis points of capital impact. There would be, as I said, an initial impact on the share buyback, not on the dividends, which we always consider [indiscernible] and the very, very last line to touch and we don't intend to touch. Post the initial adjustment and understanding, what is the situation in terms of organic capital generation? So within that framework, that you know has ruled all the time how we address our dividend -- our distribution policy, we would be consistent with that approach, and we would go back to distribution that are consistent with that approach. I can't tell you exactly if that distribution will be 80% of ordinary or different, higher or lower, but it will depend strictly on the amount of capital we would generate in the years to come. The current expectation would be that in such a scenario, which at the moment, we consider remote, the amount of organic capital generation that would come out of the combination would be very substantial and therefore, would benefit positively our distribution going forward, not negatively. But until such a scenario were to materialize, it is premature for me to tell you. So I can only tell you the principles that have guided the way we distribute capital and we return capital to investors will remain the same. What that will entail would be dependent on where we are if indeed we are in that scenario.

The next question is from Delphine Lee of JPMorgan.

Just a couple of ones, quick ones. First of all, just to understand on the CET1 impact. So you say it's negligible, but you're raising equity. So I guess that positive impact from raising equity is offset by a bit of goodwill. Just wondering also just on your CET1 deduction from the higher stake, are you -- do you have to sort of like mark-to-market the stake at the new offer level? Or just trying to understand a little bit the different moving parts within capital? And then second quick technical question is just if, let's say, the stock tomorrow is below the offer price, I mean, you can already -- although the offer only starts in May, can you already buy shares in the market because you're anyways at the moment below 30%? Or do you have to actually wait now that there's an offer out there? And then the last question is just more -- just generally speaking, kind of like on Commerzbank and your interest in Commerzbank. I mean, you want to have more engagement and more discussions with stakeholders, but what is really your time frame? Is it until '27? I mean just to understand a little bit the time line of where you want to be? Or are you committed to holding a higher stake in Commerzbank for the very long term?

Delphine, in relation to the accounting and capital treatment, so the accounting treatment, if there is no control, will not change [indiscernible] as Andrea, meaning we will keep on applying the equity consolidation. When you apply the equity consolidation, what counts is not the mark-to-market, let's say, the market value of the stake, but it is the equity of the company. So we will keep on applying this instead of using the current percentage, if there is something more, we will equity consolidate something more. On the prudential perspective, on the regulatory capital perspective, is that there is no control. We will keep on doing what we do. As you have highlighted, we will issue more shares -- so from this perspective, the regulatory thresholds will be slightly better because we will have slightly more capital, but we're not expecting to have a meaningful impact, neither positive nor negative. Also from EPS standpoint, we're not expecting to have a meaningful impact.

So with respect to the time line, I think for us, we believe that there is significant value that can -- or further value that can be created by Commerzbank. We obviously believe in Germany. We believe in the Mittelstand -- we love Poland, and we have clear benchmarks and a clear view of what a bank like Commerzbank can achieve given our own experience in Germany and in the CEE. So we think that a constructive engagement at minimum that further aligns these points of view, maybe not completely, but further aligns them is beneficial to unlocking most of the value, if not all the value that we think is in there. If that occurs and that occurs within a dialogue that is more constructive and closer, as I said, potentially as Commerzbank as ALFA demonstrate, there will be a lot of value for us and for Commerzbank and for us to be created, and we can observe how that maps out, still creating a lot of value for shareholders. It is not for me at this point in time to discuss, but you know that hypothetically and in general, I do believe very strongly that Europe requires bigger, stronger banks. I do believe very strongly that Germany's financial services and in particularly banking market is excessively fragmented, and this is not in the best interest of clients and of the economy anywhere, not only in Germany, but in Germany, in particular. And I do believe that a combination would not only add a lot of value to shareholders, but a lot of value to Germany, to Europe, to clients and to people that work at Commerzbank and UniCredit. And I think there is a path through that. At this point in time, I have said it, so you know my opinion. To date, it has not been -- that opinion has not been shared by everybody. I hope that through a constructive engagement, we can find a path to further align our opinion and eventually land to a place that is in the best interest of everybody. Now I can't give you a date. What I can tell you, and I think you know that, Delphine, if and when I will see that the current approach no longer adds value for our shareholders and UniCredit, we will act. And one of the reasons why I acted today, or rather the Board, decided to act today is because we felt that continue to stall was a suboptimal situation for both us, Commerzbank, Germany and everyone and that this offer was a neat way to open dialogue and to try to put back both center court and try to engage with each other and find a good outcome. You can imagine the outcome I eventually hope for, but it doesn't need to be that. It can be other outcome, but our progress on the current situation. So I would leave it at that.

Sorry. And then on the question around sort of like buying in the market ahead of May, that's, I guess, still possible.

It's possible operating on the market, but still in the limitation that we have, meaning we cannot go over 30% of the voting rights because we need the authorization to do that, and we will need time in order to get an SSA authorization. So this is a very important element to be considered.

The next question is from Anke Reingen of RBC.

Sorry, I just have some questions on the technicalities. When you say control, just to confirm, that will basically translate or correspond to a 50% stake? And then you say the offer price is be defined in the next couple of days. I just wonder what's the sort of like fixed element? Is it the exchange ratio of 0.485? And then lastly, on the ability to buy shares in the market from H1 2027. Does that apply to the government stake as well? And why does it take so long? So that's the second one.

Control means, for sure, when there is a legal control, i.e., when we have a 50% plus 1 share. It will be also assessed if there are situation where we might have de facto control if the percentage is below 50%, but it's premature to assess if there is a situation like that. So for the time being, it's fair to assume 50% plus 1. The exchange ratio is depending on the average price in the last 3 months of the stock in line with the regulation in relation to what we can buy following the finalization of the offer in 2027, there is a possibility to buy in the market. So the topic is that's a very important element we need to buy in the market.

The next question is a follow-up from Britta Schmidt of Autonomous Research.

It's a very hypothetical one. But if there were constructive -- if there was constructive engagement with Commerzbank and stakeholders, would it be a possibility for you to change this offer and create a larger offer for the whole of the company?

Thank you, Britta. So 2 things. First of all, to be clear, the offer is for 100%. So the offer is for everything. Our expectation is that it will not reach there, but the offer is for 100%, okay? The second thing is -- at this point in time, we don't know. But if you ask me whether it's possible, it is possible. You know our views and our metrics on valuation of anything that we do. And I bring to your attention that the current, let's say, uneasiness in the market due to a number of factors, geopolitical and other have brought back our share buyback return to about 13% at 0 execution risk. And obviously, we have full confidence on Unlimited, full confidence. And therefore, whatever we were to do that is, in your words, more than what we are aiming to do now or what we're expecting to do now would need to exceed that return materially to offset risks. So it's not as simple as saying if it's constructive, we go. It is -- we would like to be constructive. We would like to find a path. We also recognize that this is our opinion, that relative valuation are a little bit better than they were. But at the moment, we strongly believe that the valuation does not reflect full potential and that the valuation of Commerzbank has an element of speculation in it, which is normal given the situation. And therefore, anything that we were to do needs to deal with -- would need to deal with that. But I repeat, at the moment, if we were to land below control and have a strong dialogue and a strong cooperation and further alignment as an intermediary step or other step, I would be delighted. But -- so it will depend where things go in the next 12 weeks. And like everything, it doesn't depend on us only. It depends on both sides and the stakeholders of both sides, which includes a variety of people and centers of interest, okay?

The next question is from Andrew Coombs of Citi.

It's Andrew from Citi. If I could just ask a couple of questions on the technicalities. One is just if you were to go above 30%, but not to take full control, what would be the implication for voting rights? Would you only get voting rights up to 30%? Or would you receive voting rights on the additional shares as well? Second question is just on timing, assuming you don't achieve full control, is there then a 12-month restriction before you'd be able to launch another bid? And then finally, you talk about buying shares potentially in the open market. What are the limits on the amount that you can buy in the open market?

So with respect to shares we can buy in the open market once the offer completes, no limit. Differently from other jurisdiction, hypothetically and theoretically, we could buy whatever we don't own up to 100%, without limitation, without other offers. Secondly, we -- as we said, we can launch another offer if we want to, we're not obliged to. We're not intending to at this time. And we can do so after this current offer is closed, which means June, not the settlement in 2027. Obviously, if there were other offers and the condition were different, they would extend to this offer. So there is a clear rule in Germany, 12 months. So anything that we do above and beyond after these 12 months, except buying shares in the open market, if the condition were to be better, that would extend to the shareholders that had been tendering today. Thirdly, with respect to the stake, once we complete the offer and if as a result of completing the offer, we are over 30%, we would be entitled to vote in full the entire stake that we hold at that point. If by voting that stake, we reach control, then you move in the scenario of offer where we reach control. But let's take your number that is simple. Let's suppose we are 34%. We don't have control. We can vote 34% if we want to do -- if we want to vote 34%. We're not limited to 30%.

The next question is from Jeremy Sigee of BNP Paribas Exane.

Just on the topic of further engagement and dialogue that you're keen to have. Have you had engagement with German policymakers and politicians in advance of the move you're making today? And do you have a sense of what they want in order to be supportive of a combination?

Look, we have had some conversation, not as much as we all would have wished. And I do think that this software provides us with a transparent platform to broaden and to go much deeper in those conversations. I think we have a good idea of some of the matters. Obviously, maybe not all of them, but some of them at least. And we are absolutely open to find solution in order to have everybody on board.

The next question is from Ignacio Cerezo of UBS.

I've got 2 questions. The first one is a clarification on Delphine's question before. If you need to revalue the current stake with the new price, the total one or the deduction basically you have on that doesn't change? And the second one is on the 200 basis points capital impact under a full takeover scenario. If you just incorporating the consolidation RWAs any goodwill, also issues like fair value adjustment, restructuring costs, et cetera? And if not incorporated, if the number will be very different actually to the 200 basis points.

So there is no change in the accounting treatment, we don't need to revalue the shares. If there is a change in the accounting treatment, meaning if we go for a full consolidation in that moment, yes, there is a revaluation of the previous stake, but only in such a situation. So based on the expectation with no full control, there is no revaluation of the current stake. The impact on capital of around 200 basis points are taking consideration different items, including also 100% of risk-weighted assets, goodwill and deduction. So these type of items are fully included in the calculation of the around 200 basis.

The final question, sir, is a follow-up from Hugo Cruz of KBW.

So the issue with full control, I understand the accounting on legal terms. But the problem is that the government -- German government has 2 board seats and then there's the workers' council. So if you were to revise the offer after engagement, is it fair to assume that you'd be under the assumption that the government will sell the stake to you? Would that be a sort of a requirement for a future -- a potential future offer?

Hypothetical cases. So I would say the following. We are not approaching the matter today in the way we're approaching the matter today to be aggressive or style to the German government or to Commerzbank or to anybody else, which means we hope to find a lending but everybody can join forces around and that -- which outcome is in particular interest of all of us, in my opinion, first and foremost, of Europe, given where we are today. Having said that, we do not need -- if you're talking control, okay, we do not need the government stake or everybody to tender the shares to achieve that control. I was taking 100%, Hugo, as round number. If we go to 100%, this is the impact on capital, but we can get control lower than 100% at 70%, at 60%, at whatever it is. And in which case, if the government were to elect to stay, the government likes to stay. With respect to the voting, I think, as I said, there's not an extra condition, but the approach we're taking is one where we want to create consensus. And we want to very openly create consensus and trigger this dialogue. And therefore, this is not a -- I'm going to run in and we are going to have the outcome that we're going to have, but it is one where we're going to spend a lot of time in engaging, understanding and trying to find a lending that is, let's say, compromise but is acceptable to everybody.

At this time, I will hand it back over to Mr. Orcel for any closing remarks.

So thank you very much for everybody -- to everybody to jump on the call this quickly. I'm sure we will have some more engagement and questions. And I guess I'll see you all or most of you at Morgan Stanley later this week. Thank you very much, everybody, and thank you for attending. Bye-bye.