Commerzbank Rides Again
If anyone needed proof that the meltdown in European bank shares this week may have gone too far, Commerzbank gave it in spades on Friday.
The German lender's forecast-beating results showed it has emerged from a painful multi-year turnaround in the wake of its 18.2 billion-euro ($20.5 billion) taxpayer rescue during the financial crisis. The bank swung to a fourth-quarter profit, boosted its capital cushion to above-average levels and said it would pay its first dividend since 2007. Commerzbank's stock spiked almost 16 percent -- and virtually all European financials got a market boost in sympathy.
So why is life so good for Commerzbank -- a bank which needed a restructuring and which is still trying to sell down a pile of soured shipping and commercial real-estate loans -- but bad for others like Deutsche Bank or Credit Suisse, which reported stinging losses for 2015 and which have been in the firing line of investors? (Deutsche Bank, by the way, also got a share-price boost after confirming speculation it would buy back debt to allay investor concerns about its finances.)
Firstly, in a world where financial markets are running scared after a seven-year central-bank-driven bull run, it pays to be predictable. Commerzbank has a market cap of about $10 billion (half the size of Deutsche Bank) and a focus on domestic small-to-medium-sized businesses. It has benefited from lending to these corporates but also from mortgage lending and other business with private clients. Revenues from racier trading and investment banking, which make up a big chunk of Deutsche Bank's and Credit Suisse's business, are less important.
Secondly, Commerzbank is delivering on both balance-sheet strength and dividend payouts -- two areas closely watched by investors as the banking sector tries to prove it can turn a profit and be safer at the same time. Commerzbank's ongoing slog to cut its toxic-loan portfolio has paid off, lifting its core capital ratio to 12 percent and above the sector average of around 11 percent, according to Bankhaus Lampe analyst Neil Smith. The first dividend in seven years is the icing on the cake at a time when investors fear the current downturn will squeeze future payouts.
Thirdly, the bank is winning the expectations game. In this kind of environment, lenders that disappoint do so at their peril. French bank Societe Generale's results on Thursday were by no means disastrous but its shares got a hammering as they missed analysts' expectations.
Rival Natixis, meanwhile, soared Thursday after beating forecasts for its results and earned the title "the French dividend-paying machine" from Kepler analysts. Natixis, too, is a small lender that has spent years overhauling its business model to shift more towards capital-light businesses and away from risky investment banking.
None of this is to say that Commerzbank is a perfect picture of health. After all, the bank gave a cautious outlook for the future and it still has more work to do on cleaning house. It also still faces years more work ahead as it winds down its bad-loan portfolio while trying to limit losses.
Its stock is trading at a deep discount to book value, ironically at the same level as Deutsche Bank. That looks overdone. It may not be enough to get fund managers diving back into the sector on a more long-term basis, especially with the many unknowns facing the industry as markets remain choppy. But it does go to show how a good set of quarterly profits can help dispel even the most bearish market mood.
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