Commerzbank AG, Germany’s second-biggest bank, said third-quarter profit rose as it paid fewer taxes and risky-loan provisions climbed less than analysts expected. The shares surged the most in three months.
Net income increased 15 percent from a year earlier to 77 million euros ($104 million), the Frankfurt-based company said in a statement on its website today. That compared with the 32 million-euro average estimate of six analysts surveyed by Bloomberg.
Chief Executive Officer Martin Blessing is grappling with losses from soured shipping and commercial real estate loans as he seeks to lower costs by eliminating employees. The firm faces added scrutiny as the European Central Bank begins a review of the assets of the euro area’s biggest banks this month and takes over supervision next year.
“There’s a lot of work left to do, but the numbers exceeded expectations,” Neil Smith, an analyst with Bankhaus Lampe in Dusseldorf who recommends investors buy the stock, said by telephone. “It’s a turnaround story. What’s important for me is capital and leverage and they’re ahead of schedule there.”
The bank paid 3 million euros of tax in the quarter compared with 118 million euros in the same period a year ago.
Pretax profit dropped 51 percent to 103 million euros, exceeding the 86.6 million-euro average estimate of nine analysts surveyed by Bloomberg as loan-loss provisions increased 14 percent and operating expenses fell 2.7 percent to 1.69 billion euros, Commerzbank said.
Commerzbank advanced 7.8 percent to 10.05 euros at 9:13 a.m. in Frankfurt trading, the biggest increase since Aug. 8 and reducing a decline this year to 6 percent. That compares with an 17 percent increase for the 44-member Bloomberg Europe Banks & Financial Services Index.
Provisions for bad loans rose to 492 million euros in the third quarter from 430 million euros a year ago, Commerzbank said. The loan-losses were expected at 521 million euros, according to the average of three analysts’ estimates.
The bank’s common equity Tier 1 capital ratio, used by regulators to gauge financial strength, rose to 8.6 percent at the end of September from 8.4 percent three months earlier.
“We have increased the capital ratios, lowered costs, considerably reduced risks and non-strategic portfolios, and successfully launched our growth initiatives,” Blessing said. “Thus we have further enhanced the stability of the bank.”
Commerzbank is selling and winding down non-core assets, which it defines as shipping and commercial real estate loans and sovereign and municipal debt, to raise capital levels and comply with the conditions of an 18.2 billion-euro government bailout in 2009. Those measures released about 208 million euros of capital in the third quarter, Commerzbank said.
The bank shrunk non-core assets 9 percent to 124 billion euros in the third quarter from the previous three months, led by a 9 billion-euro reduction in commercial real estate loans, which included lending in Spain, according to a presentation on the bank’s website.
In July, Commerzbank sold 5 billion euros of U.K. property loans to Wells Fargo & Co. and Lone Star Funds at a 3.5 percent discount to book value.
“Their business with mid-sized companies has felt the weaker environment and shipping and commercial real estate loans are helping to drive risk provisions,” said Stefan Bongardt, an analyst with Independent Research GmbH in Frankfurt who recommends investors sell the stock.
Commerzbank said the investment banking unit and a division catering to corporate clients saw declines in third-quarter operating profit. The retail banking and central and eastern European units both recorded increases, it said.
Blessing said Commerzbank attracted fewer new small and medium-sized German business clients, known as the Mittelstand, than he expected.
“Our new customer numbers are somewhat lower than the ambitious targets we set ourselves, but then we are also affected by the reluctance of our corporate customers to invest,” he said.
Standard & Poor’s cut Commerzbank’s debt rating to A-, four levels above junk, in May saying poor economic conditions mean it will struggle to boost earnings sustainably and will be vulnerable to “its high-risk lending concentrations.”
Commerzbank said yesterday that two members of its executive board will step down by the end of the year. Blessing, appointed in 2008, is downsizing top management as part of a plan to eliminate 5,200 jobs by 2016 to help boost profitability.
The bank increased capital for the fifth time in four years in May to help repay 18.2 billion euros of state aid it took in 2009 and bolster reserves to meet stricter regulatory standards.