Commerzbank Says Profit Target Is at Risk 

(Bloomberg) --

Commerzbank AG said it’s becoming increasingly difficult to reach a target for higher profit this year after a tough first half, underscoring the challenges for Chief Executive Officer Martin Zielke as he prepares to update investors on his strategy.

The German lender on Wednesday reported a fourth straight quarter of falling revenue after global trade tensions hit the key corporate clients unit in particular. Operating profit slumped as Commerzbank put more money aside for soured loans to companies.

The 56-year-old Zielke, a former retail banker, has bet the future of the bank on adding new clients and boosting lending to companies and individuals. But the prospect that interest rates in Europe will stay lower for longer is making it increasingly difficult to earn enough money from that business to finance needed investments in technology. The CEO earlier this year abandoned most of the bank’s 2020 financial targets and has signaled he remains open to mergers after talks with Deutsche Bank AG collapsed.

“Despite all the successes we have made, challenges continue to increase for the industry and for us,” Zielke said. “This might require further investments. And this is exactly what we are examining and assessing in our current strategy process.”

Takeover Target

Zielke, who unveiled his current turnaround plan shortly after becoming CEO three years ago, has promised to give new guidance to the markets at some point after the summer. Commerzbank has been the subject of takeover speculation for some time, though any talks have not proceeded beyond informal contacts, people familiar with the matter have said. Dutch lender ING Groep NV and Italy’s UniCredit SpA have been named as potential buyers after the collapse of the talks with Deutsche Bank.

Commerzbank fell as much as 4.6% in early Frankfurt trading and was 3.3% lower as of 9:19 a.m. local time.

The second-largest listed lender in Germany, Commerzbank has an extensive network of clients, but its focus on lending leaves it exposed to the European Central Bank’s negative rates, which squeeze margins and penalizes banks for holding deposits at the ECB. The division that caters to companies has been struggling most, and the bank recently announced it will replace division head Michael Reuther with former ING executive Roland Boekhout.

Operating profit at the unit slumped 90% from year earlier, to just 22 million euros, as higher provisions for bad loans offset an increase in income from lending. The bank said “single cases” in the second quarter were responsible for the hit, without providing details. The business catering to individual clients and small businesses, by contrast, reported a 37% increase in operating profit and higher revenue.

Rate Headwinds

“The first six months of 2019 presented challenges for the corporate clients segment, including the persistently low level of interest rates, intense price competition in the German market and a macroeconomic environment fraught with uncertainties,” the bank said in its interim report.

Net income beat analysts’ estimates, helped by lower taxes. Commerzbank said it still expects a “slight” increase in profit this year, but that goal “has become significantly more ambitious.”

Here are some key numbers from the second-quarter results:

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

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