Commerzbank Profit Falls on Low Rates, Bad Loan Provisions

  • Loan loss provisions more than double from previous year
  • Commerzbank capital ratio rises half a percentage point

Commerzbank CFO Sees No Near-Term End to Negative Rates

Commerzbank AG reported a 5.2 percent decline in fourth-quarter profit as it set more money aside for troubled loans to the shipping industry and low interest rates continued to weigh on income from lending.

Net income in the three months through December decreased to 183 million euros ($195.5 million) from 193 million euros a year earlier, according to a statement Thursday from the Frankfurt-based lender. Loan-loss provisions rose to 290 million euros in the quarter from 112 million euros a year earlier, Commerzbank said, adding it expects as much as 600 million euros in provisions just for shipping loans this year.

“Perhaps the biggest negative surprise was the outlook for provisions for shipping loans this year,” said Neil Smith, an analyst with Bankhaus Lampe who has a buy recommendation on the stock.

Commerzbank, among the European banks most geared to interest rates according to analysts at Deutsche Bank AG, said negative yields cut net interest income by a gross 277 million euros at its two biggest units last year. Chief Executive Officer Martin Zielke, responding to low rates and stricter regulation, in September announced plans to cut 9,600 jobs, suspend dividends and shrink securities trading in the biggest overhaul since the lender’s bailout in the financial crisis.

The common equity Tier 1 ratio, a key measure of financial strength, improved by half a percentage point to 12.3 percent as the company cut risky assets. That ratio will stay at or above 12 percent for the rest of the year, Chief Financial Officer Stephan Engels said in the statement.

Shares Fall

“The strong rise in Commerzbank’s capital ratio was a positive surprise,” said Smith at Bankhaus Lampe.

Commerzbank fell 3.1 percent to 7.50 euros at 10:41 a.m. in Frankfurt, reversing earlier gains of as much as 1.9 percent. Before today, the shares had rebounded by 49 percent from a low in August, helped by a broader rally in financial stocks.

A retail banker by training, Zielke is focusing the bank on its consumer and corporate clients and has vowed to expand they base of retail customers by 2 million over the next four years. The consumer and small business unit added about 140,000 new clients during the quarter, Zielke, 54, said in a recorded message.

The unit raised operating profit by 3.5 percent in the fourth quarter from a year earlier, as lower costs offset falling revenue. The corporate clients unit saw operating profit surge 40 percent as provisions for bad loans were reversed.

Zielke is integrating the investment bank in the corporate clients unit, where it will offer services such as primary issuance, distribution and risk management. Commerzbank’s structured equities business, which includes exchanged-traded funds, equity derivatives and certificates, is being segregated into a separate business and will be brought “to market” next year, Engels said on a call with analysts.

The measures along with the job cuts -- the bulk of them coming not before next year, according to Engels -- should lower costs to 6.5 billion euros, taking the cost-to-income ratio below 66 percent by 2020, Commerzbank has said. The company has said it won’t consider resuming dividend payments until it has carried out most of the job cuts in 2019.

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