New goals set
Central banks help Commerzbank increase profits
November 8th, 2023, 3:13 p.m
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Frugality and the high interest rate environment ensure that Commerzbank’s coffers are full in the summer. This makes the number two in Germany more confident about the coming years. None of this initially electrifies investors. But the bank is putting together an extra package for them.
After an unexpectedly strong jump in profits, Commerzbank is setting new goals for the coming years. By 2027, net profit is expected to increase by more than half to 3.4 billion euros compared to this year, Commerzbank announced. Boosted by the rapidly rising interest rates, the Frankfurt bank earned 684 million euros in the summer quarter – more than three times as much as a year ago and more than analysts expected. “In addition to the interest rate environment, we benefit from a low risk result and continued cost discipline,” said CFO Bettina Orlopp.
Revenues shot up by 46 percent to almost 2.8 billion euros. This was primarily due to a rise in net interest income by a good third to 2.2 billion euros. Commerzbank was initially able to score points on the stock market, but then turned into the red. “In our opinion, Commerzbank presented decent results for the third quarter of 2023,” commented Deutsche Bank analysts on the competitor’s figures. One trader said the price drop was related to the new targets. There were no positive surprises with these.
More for the shareholders
“We have established a new business model and put Commerzbank back on the road to success,” said CEO Manfred Knof. “We are building on this with our strategy program until 2027: We will expand our earnings base, further improve the expense ratio and increase our return on equity.” The return on equity (RoTE) is expected to increase to more than eleven percent by 2027. The bank wants to increase its income, among other things, by expanding its commission business. Simple digital processes are intended to ensure that the bank becomes more efficient overall. Net interest income is expected to increase moderately. Commerzbank wants to improve its expense ratio to around 55 percent by 2027. This year, around 60 cents were spent in the first nine months to earn one euro. For comparison: At Deutsche Bank the expense ratio is 72 percent, at the Italian UniCredit it is 39 percent.
Shareholders should also benefit from the course. Commerzbank plans to distribute more than half of its profits for the years 2025 to 2027. For the years 2022 to 2024, it is still planned to pass on a total of three billion euros to shareholders through dividends and share buybacks. Shareholders are to receive 50 percent of profits as a dividend this year, in addition to a share buyback of 600 million euros. This should also please the federal government, which still holds a good 15 percent of the bank.
Like other banks in Europe, Commerzbank is currently benefiting from the significant rise in interest rates in the euro area, which is spurring lending business. The European Central Bank (ECB) has already increased the key rates ten times since summer 2022. The Spanish bank Santander increased its profit by 20 percent in the third quarter, the French Credit Agricole reported an increase of 33 percent.
Confidence for the year as a whole
The surge in profits in the summer quarter also makes Commerzbank optimistic for the year as a whole. It now expects a consolidated profit of around 2.2 billion euros after 1.4 billion euros in 2022. Income is expected to increase from 9.5 billion euros to around 10.6 billion euros. The financial institution is targeting net interest income of more than 8.1 billion euros. CFO Orlopp had previously described eight billion as a good estimate in September. The bank wants to improve its return on equity (RoTE) to around 7.5 percent. In 2022 it was still 4.9 percent.
In the third quarter, Commerzbank quadrupled its operating profit to 1.1 billion euros. The Polish subsidiary mBank contributed 89 million euros. In this way, Commerzbank explained that it was able to overcompensate for a new provision of 234 million euros in connection with older franc loans. mBank has been struggling with the Swiss franc loan issue for years. Thousands of Polish borrowers had taken out mortgages in francs to benefit from lower interest rates in Switzerland. But the franc gained in value compared to the zloty, and costs for customers rose. Many Poles sued to get out of the expensive loans.