Commerzbank AG, Germany’s second-biggest bank, stepped up plans to dump bad assets and said bad-loan provisions would shrink after its second-quarter profit more than doubled. The shares rose.
Commerzbank will cut unwanted assets to about 67 billion euros ($90 billion) by the end of 2016, more than a previous target of 75 billion euros, the company said in a statement today. Provisions for bad debt in 2014 will be “well below” the 2013 level, the bank said.
Commerzbank is expanding lending to German consumers and companies while winding down soured shipping and real estate assets as part of an 18.2 billion-euro bailout. Commerzbank’s finances are under scrutiny by the European Central Bank, which is reviewing balance sheets of the region’s biggest banks and conducting stress tests before taking over as their supervisor in November.
“The targets for non-core assets as well as loan-loss provisions are positive,” said Neil Smith, an analyst with Bankhaus Lampe in Dusseldorf, Germany, who recommends investors hold the shares.
Net income rose to 100 million euros from 40 million euros a year earlier, the Frankfurt-based lender said. The average of 12 analyst estimates compiled by Bloomberg was for a 127 million-euro profit.
Commerzbank shares rose as much as 4.5 percent and were 2.3 percent higher at 10.64 euros as of 12:53 p.m. in Frankfurt trading, valuing the company at about 12.1 billion euros. The shares are down 9.1 percent this year, while the benchmark Bloomberg Europe Banks and Financial Services Index fell 3.4 percent in the same period.
Commerzbank said it will cut commercial real estate and shipping assets at its non-core unit, which bundles holdings set for sale, to about 20 billion euros by the end of 2016. Public finance assets will be reduced to about 47 billion euros by the same time. The bank held 92 billion euros of non-core assets as of June 30. Previously, Commerzbank didn’t break down targets for different types of holdings in the unit.
“The low interest rates are leading investors to buy riskier portfolios, which pushes along the sale of non-core assets,” Christian Hamann, an analyst at Hamburger Sparkasse AG, said yesterday.
Operating profit rose to 257 million euros from 74 million euros a year earlier. The average estimate of 11 analysts was for 221 million euros. Provisions for risky loans decreased to 257 million euros from 537 million euros a year earlier.
Commerzbank said loan-loss provisions in 2014 will be “well below” the 2013 level. Previously the bank said it expected loan-loss provisions in 2014 “to be lower than the total figure for 2013.”
The bank plans to reduce commercial real estate and shipping assets by letting loans mature and persuading customers to pay off debt earlier than planned, rather than relying on large sales, Chief Financial Officer Stephan Engels said in a conference call with analysts today. “I wouldn’t expect sales in anywhere close to the sizes that we have seen in Spain and the U.K., for example,” he added.
In July 2013, Commerzbank agreed to sell its U.K. real estate lending unit to Wells Fargo & Co. and Lone Star Funds, which had 5 billion pounds ($8.43 billion) of loans.
In June this year, Commerzbank said it agreed to sell 5.1 billion euros of commercial real-estate loans in Spain and Japan and non-performing loans in Portugal, including 1.4 billion euros of loans that the bank classified as non-performing. The sale will reduce risk-weighted assets by 3.2 billion euros, Commerzbank said at the time.
“A lot of the assets they’ve sold were in the higher-risk block of commercial real estate, so that’s quite encouraging,” Karl Morris, an analyst with Keefe, Bruyette & Woods, said on Aug. 5. Morris has an underperform rating on the stock with a target price of 11.30 euros.
The common equity Tier 1 ratio, a key measure of financial strength, was 9.4 percent, up from 9 percent at the end of the first quarter. About 15 basis points of that gain came from first-half earnings and a small reduction in risk-weighted assets also helped, Engels, the CFO, said in the conference call.
Commerzbank expects its CET1 ratio under the full application of the latest Basel rules to exceed 10 percent by 2016. On the way to that goal, increases probably won’t be steady, but the ratio is unlikely to fall, Engels said.