Commerzbank CEO Zielke Sees Signs of Turnaround Taking Hold
(Bloomberg) -- There are early signs of a turnaround at Commerzbank AG.
First-quarter net income beat estimates, provisions are dropping and the lender is resuming dividend payments, Commerzbank said on Tuesday. The bank, a perennial takeover target, also said it was on track to meet most of its strategic goals.
Morgan Stanley lead analyst Giulia Aurora Miotto pointed to “good delivery across the board,” and “extremely benign asset quality trends” with many key measures ahead of target.
The shares climbed as much as 4.4 percent and were trading 3.7 percent higher at 10.99 euros at 2 p.m. in Frankfurt, compared to a 0.3 percent rise in the Bloomberg Europe Banks and Financial Services Index.
The corporate clients unit is a central pillar in the turnaround plan of Chief Executive Officer Martin Zielke, who is focusing on lending to corporate and retail clients while pivoting from trading. He’s spent millions on acquiring new clients, which is starting to pay off in the retail business, while lending to companies remains challenged. The bank, which caters to many of the mid-sized companies that are the backbone of Germany’s economy, said the economic outlook had weakened recently.
Zielke still has plenty to do: revenue fell in year-on-year terms for a fifth straight quarter at the key corporate clients division and Commerzbank has said 2018 will probably be a third straight year of contraction.
“The first three months of 2018 were challenging for the corporate clients segment, with persistently low interest rates, stiff price competition on the German market and the regulatory environment impacting on earnings,” the bank said in its interim report.
Another part of the CEO’s turnaround strategy is the proposed sale of the bank’s Equity Markets and Commodities division, which also houses its exchange-traded funds business. The bank said Tuesday that talks to sell the unit had entered a “decisive phase” and that a sale in the near term “cannot be ruled out,” without identifying potential buyers.
Chief Financial Officer Stephan Engels said on a conference call that the deal is likely to be structured as a portfolio sale, rather than the sale of a legal entity that would affect capital and tax calculations.
Overall revenue declined 3.7 percent to 2.3 billion euros, compared with the 2.27 billion-euro estimate of six analysts polled by Bloomberg. Net income of 250 million euros in the first quarter beat the 178 million-euro analyst estimate, helped by a lower tax burden and risk provisioning.
The CFO on a call with journalists suggested that the bank will continue to set aside 5 euro cents euros a share each quarter for dividends as it did in the first. That indicates the bank aims to pay 20 cents for this year, the same as it did in 2015, when it last returned money to shareholders after a seven-year hiatus.
Commerzbank has fallen about 12 percent this year in Frankfurt trading as the prospect of another year of declining revenue weighs on the stock. The lender, seen by some investors as a proxy for the booming German economy, was one of the top-performing bank stocks in Europe last year amid speculation that it may be acquired.
Much of the decline in revenue since Zielke announced his plan in 2016 came from the corporate clients segment, headed by Michael Reuther. The business added about 1,000 net new clients during the quarter. The retail unit added 73,000 customers in Germany in the first quarter, accelerating the pace of client acquisition to the fastest rate since the second quarter of last year. Zielke plans to add a total of 2 million new customers by the end of 2020.
Commerzbank reiterated that it expects adjusted revenue in both units to increase this year.
Other highlights from the earnings report:
- 1Q pretax profit EU289 million, estimate EU274 million
- 1Q operating profit EU289 million vs estimate EU278 million
- 1Q provision for loan losses EU77 million vs estimate EU109.5 million
- Bank aims to resume dividend payments, makes accrual of 5 cents a share in first quarter
- 1Q operating expenses of EU1.94 billion vs estimate EU1.9 billion
- 1Q CET ratio 13.3% vs estimate 13.5%
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