Commerzbank Buoyed by Markets as Securities Unit Bolsters Profit

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  • Interest and trading income rose 7.7% to 1.45 billion euros
  • Bank posts 68 million-euro gain related to write-back at unit

Commerzbank AG is finding that trading can still swing profit.

After pledging to scale back some part of the business to smooth out earnings, the bank posted first-quarter income from interest and trading of 1.45 billion euros ($1.58 billion), compared with bank-compiled estimates of about 1.31 billion euros. That helped boost net income to 217 million euros, beating the 74 million-euro average of four estimates compiled by Bloomberg.

Commerzbank-- in a strategy announcement in September -- said it planned to cut back trading activities to free up about 500 million euros in capital, leading to a loss of about 400 million euros in revenue. While executives on Tuesday reiterated the plans to scale back, businesses such as equity markets and commodities saw “strong client demand” in the first quarter as markets rose.

The bank benefited from “sound primary market activity, especially in equity capital markets and debt capital markets,” Citigroup Inc. analysts wrote in a note to investors. “FX trading revenues were also strong.”

Chief Executive Officer Martin Zielke plans to cut 9,600 job cuts by the end of 2020, shelved the bank’s dividend last year and is scaling back trading activities to free up capital as the bank focuses on its two core divisions - retail and corporate clients. Still, revenue at the two businesses in the first quarter fell to the lowest level since at least early 2016.

“Commerzbank has earned more money but the source of that increase does not elicit any cheers,” said Andreas Plaesier, an analyst with Warburg Research with a hold rating on the stock. “One factor driving the result was the market environment.”

Long-Term Potential

The improved year-on-year performance of the equity markets and commodities division, which contributed 114 million euros of revenue to the group, is in line with the long-term revenue potential of the business, Chief Financial Officer Stephan Engels said on a conference call, adding that the bank isn’t planning to change its strategy on pulling back.

The bank said in September that it would integrate its corporates and markets business into its corporate clients segment, exit its exotic structured rates business and scale back flow credit and bond trading in its fixed income and currencies business. Capital freed up by the withdrawal would be ploughed back into the private and small business customers segment.

The Frankfurt-based lender also benefited from a 68 million-euro gain related to the recovery of a previously written-off hedge position at its asset and capital recovery business.

Capital Strength

The bank’s common equity tier 1 ratio rose to 12.5 percent in the first quarter as risk-weighted assets dropped, putting the metric ahead of a consensus estimate of 12.3 percent. Engels said that there was no reason to increase the bank’s guidance for a capital ratio equal to or above 12 percent at year’s end as restructuring activities would lead to further expenses. 

Commerzbank will also wait at least another quarter before deciding whether it should change its current guidance for full-year profit to remain similar to last year’s, Engels said.

The banks shares rose 1.7 percent to 9.56 euros as of 9:57 a.m. in Frankfurt after earlier gaining as much as 2.6 percent. The stock has gained about 32 percent this year, giving the bank a market value of about 12 billion euros.

Stephan Engels, chief financial officer at Commerzbank, discuses first-quarter results with Bloomberg’s Matt Miller

Source: Bloomberg)

Restructuring costs, low interest rates and risk provisions for the bank’s shipping portfolio have weighed on profitability. Overall loan-loss provisions rose to 195 million euros from 148 million euros a year earlier, largely driven by higher provisions for shipping, though Engels said there was “positive momentum” in the market.

CEO Zielke, a retail banker by training who is focusing the bank on its consumer and corporate clients, aims to add 2 million new retail customers by the end of 2020. The bank announced last month that it gained 151,000 new private and commercial clients in the first quarter. Zielke has said he will consider acquisitions to achieve its retail client growth target. Commerzbank recently announced the purchase of a small online bank, OnVista, which added about 90,000 new clients.

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