Commerzbank AG, Germany’s second-largest bank, said profit will fall “significantly” in the second half of 2012 as slowing economic growth results in higher loan-loss provisions and mutes clients’ demand for services.
The shares tumbled as much as 4.9 percent. Net income in the first half totaled 644 million euros ($796 million), the Frankfurt-based bank reported today, as it set aside 616 million euros for doubtful loans. Commerzbank called its target for 1.7 billion euros of loan-loss provisions this year “increasingly ambitious” considering current market conditions.
“Profit in the second half of this year will be significantly lower than in the first half,” Chief Financial Officer Stephan Engels said on a conference call with journalists. “We still do not expect the macroeconomic and market environment to stabilize in the second half of 2012,” Engels said in the statement.
The bank also said it was less likely to pay a dividend soon and will cut more costs. Commerzbank, once the world’s third-largest ship lender and Europe’s biggest real estate financier, said in June that it would exit those businesses as it conducts a “rigorous review” of its operations amid Europe’s sovereign-debt crisis. The lender is building capital by selling assets and cutting back on business which demands higher reserves under new regulations known as Basel III.
The effects of the debt crisis have spread to Germany by eroding demand for the nation’s exports, hurting earnings at companies including Bayerische Motoren Werke AG, Daimler AG and Siemens AG. While the Bundesbank last month estimated moderate growth in the second quarter, aided by domestic spending, manufacturing industry orders are contracting and business confidence fell for a third straight month in July.
“The outlook isn’t so good,” said Andreas Plaesier, a Hamburg-based analyst at M.M. Warburg who has a hold rating on Commerzbank. “They pushed cost cuts in the first half, and that’s impressive, but costs may rise in the remainder of the year.”
Commerzbank declined 4.4 percent to 1.23 euros at 1:54 p.m. in Frankfurt, giving the lender a market value of 7.2 billion euros. The stock is down 5.8 percent since the beginning of the year, compared with a 2.2 percent gain in the Bloomberg Europe Banks and Financial Services Index, which tracks 38 stocks.
Second-quarter net income rose to 275 million euros from 24 million euros in the year-ago period, the lender said in a statement today. That was more than the 270 million-euro average estimate of six analysts surveyed by Bloomberg.
Operating profit from corporate clients, known as the Mittelstandsbank, fell to 390 million euros from 515 million euros a year earlier. Earnings at the unit, Commerzbank’s biggest profit contributor, trailed analysts’ estimate of 422 million euros. The bank said the weakening German economy will result in higher loan-loss provisions for that division.
Operating profit at the private-client unit slumped to 14 million euros from 79 million euros on lower interest and commission income. That result was “not satisfying” and Commerzbank will “advance strategic development” of the division, Engels said in the statement, without further detail.
Cost Cuts, Dividend Outlook
Commerzbank will “subject the cost base to a critical review,” the bank said. It’s scheduled to present a strategic review on Nov. 8 focusing on the consumer banking unit and a strategy for portfolios it’s running down, including public finance, commercial real estate and ship finance.
That so-called non-core assets unit comprised 67.5 billion euros of risk-weighted assets at the end of June, the highest of six divisions Commerzbank provided figures for and 32 percent of the company’s assets weighted according to risk, according to a presentation the company published on its website.
The lender said circumstances for making a shareholder payout have become “more difficult.” At the annual shareholder meeting on May 23, the bank said it plans to pay a dividend for 2013, which would be its first payout since 2008.
Commerzbank said its asset-based finance unit, which comprises commercial real estate and lending to shipping companies, will drive a “significant” increase in the funds the firm needs to set aside for risky loans in the second half. The bank’s second-quarter loan-loss provisions rose to 404 million euros from 278 million euros, while the ABF unit set aside 300 million euros in the period compared with 233 million euros a year earlier.
Commerzbank surpassed the European Banking Authority’s target of raising 5.3 billion euros of capital, the biggest amount assigned to a German lender, by 2.8 billion euros at the end of June. European banks are reducing risk-weighted assets, retaining profits and selling assets to bolster their capital.
“Sustainable capital management and the further reduction of risks will clearly continue to be a priority in the future.” Chief Executive Officer Martin Blessing said in the statement.