Commerzbank Cuts Profit Outlook
Commerzbank Cuts Profit Outlook
(Bloomberg) --
Commerzbank AG downgraded its full-year profit outlook, marking a second retreat in weeks by Chief Executive Officer Martin Zielke after the European Central Bank took rates deeper into negative territory.
The bank said net income for this year will now probably be lower than in 2018, down from the lender’s target of a slight increase, after the ECB cut the deposit rate to minus 0.5% and because of higher taxes. While the more pessimistic outlook comes after the lender abandoned its ambitions of increasing revenue this year, Commerzbank did join lenders including Societe Generale and UniCredit SpA boosting its capital buffers in the third quarter.
European banks are struggling with the impact of negative rates on lending income and a worsening economic environment. German finance minister Olaf Scholz on Wednesday reopened the debate on consolidation as a potential solution to the continent’s banking ills with proposals to break the deadlock on banking union -- seen by many executives as necessary before deals can take place.
Commerzbank shares gained as much as 2.6% in early Frankfurt trading, before paring gains to rise 1.1% as of 9:07 a.m.
Several top investors and regulators have privately expressed skepticism about the latest turnaround plan, people familiar with the matter have said. In addition to promising to reduce the workforce by over 2,000, Zielke has also said he’s selling one of the company’s strongest profit engines, its Polish subsidiary mBank, while saying profitability will remain well below that of the competition for at least the next four years.
“The further monetary policy easing announced by the European Central Bank in September and the resulting pressure on margins will have a negative impact on earnings,” Commerzbank said in its earnings statement, adding that it expects a “significantly higher tax rate in the fourth quarter.”
The bank is grappling with strategy after talks to create a merger with German rival Deutsche Bank AG fell through earlier this year. Germany had been interested to create a large domestic-focused lender to ensure credit to its export-oriented economy during a downturn, but Deutsche Bank CEO Christian Sewing balked at the execution risks of a deal.
Commerzbank last week released preliminary results for the third quarter showing net income jumped 35% in the period as risk provisions and other costs declined. The bank also sold a unit in the quarter, accounting for one-off revenue of 103 million euros ($114 million).
Corporate Clients
The corporate clients division, which has long been a particularly sore spot, continued to show a weak performance as revenue fell for a fifth consecutive quarter. The current division head Michael Reuther, will be succeeded in January by former ING Groep NV executive Roland Boekhout. The bank is also seeing more change in the board, with Chief Financial Officer Stephan Engels set to join Danske Bank A/S.
Though the lender’s other core division, the one catering to retail clients, posted revenue growth, most of that came from the Polish subsidiary it’s now seeking to sell. By contrast, the German retail unit, which is the division’s biggest source of revenue by far, contracted 6%. The bank has said it’s shifting its focus from rapid client acquisition to getting existing clients to spend more money on banking services.
As part of the September revamp, the lender also decided to scrap its previous promise -- and a major element of its previous marketing campaign -- to keep a network of about 1,000 branches in Germany. The retail division under Michael Mandel said it’s going to close about a fifth of those.
To contact the reporter on this story: Steven Arons in Frankfurt at sarons@bloomberg.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen
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