Commerzbank Predicts Third Straight Year of Declining Revenue

(Bloomberg) -- Commerzbank AG predicted a third straight year of contraction for 2018 as low interest rates and increasing competition weigh on the retail and corporate lending businesses that Chief Executive Officer Martin Zielke has earmarked for growth.

Revenue will be “slightly” below 2017 levels, reflecting lower exceptional items, Germany’s second-largest publicly traded lender said in its annual report Monday. While adjusted revenue will probably increase in its two main divisions, it won’t be enough to offset that impact as the banking environment remains “challenging.”

“Any acceleration of the improvements in income and earnings we are aiming for in the medium term, which would require a normalization of the yield curve and rising rates at the short end of the curve in particular, is unlikely in 2018,” Commerzbank said. “The priority in the current year, therefore, will be to improve the quality of customer-related income and earnings.”

Chief Executive Officer Martin Zielke is cutting costs, investing in technology and luring new clients in a bet that interest income will pick up. But the new customers have yet to generate more revenue, and the pace of client acquisitions dropped last quarter to the lowest since he first announced his plan in late 2016. Kepler Cheuvreux analyst Tobias Lukesch last week lowered his rating on the stock to reduce from hold, saying there are questions about Commerzbank’s ability to deliver on its “ambitious” revenue growth plans.

Commerzbank forecast a “strong” increase in profit for this year as restructuring expenses decline and confirmed plans to resume dividend payments. Operating profit will be “almost on the level” of 2017, the bank said.

‘Stiffer Competition’

Commerzbank rose 0.7 percent at 12:13 p.m. in Frankfurt. The stock has declined 11 percent this year after being one of the best performers among European banks last year.

Revenue growth in the corporate clients segment will be “held back by tighter margins as a result of stiffer competition in new lending and knock-on effects from activities discontinued in 2017,” Commerzbank said.

In the retail business, “higher customer numbers and business volumes remain the key driver of income,” Commerzbank said. “The unhelpful interest rate and competitive environment is such that the planned volume growth will probably not be fully felt in growth in income.”

The lender is planning to increase the pace of retail client acquisition in the spring, Chief Executive Officer Stephan Engels said on the bank’s analyst call in February. Last week, he cautioned that first-quarter revenue will probably be in line with the fourth quarter, which would suggest a decline from a year earlier. The comments sent the stock as much as 8.1 percent lower on Thursday.

Commerzbank said it remains committed to bringing to market several business activities including its EMC unit “in the short and medium term”.

To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net, Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel, Andrew Blackman

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