Commerzbank Follows Deutsche Bank in Predicting Revenue Gain

(Bloomberg) -- Commerzbank AG followed potential merger partner Deutsche Bank AG in giving a muted outlook for the year, pledging increases in revenue and profit while warning on a tough market environment.

“Overall conditions for the German banking sector this year look set to remain very challenging,” the bank said in its annual report on Wednesday. “The low/negative interest rate environment will continue to weigh on profitability, as will the intensity of competition.”

Commerzbank Chief Executive Officer Martin Zielke and Deutsche Bank counterpart Christian Sewing announced the start of formal merger talks this month as the two lenders struggle to boost profits with margins under pressure from competitors and low interest rates. Zielke had quietly discarded most of the lender’s financial targets in February, saying that the underlying assumptions had been too optimistic, while promising to boost the top line.

Commerzbank rose as much as 4 percent in Frankfurt and was trading 3 percent higher as of 12:10 p.m. in Frankfurt.

While muted, the outlook given by the two German banks is more positive than the surprise comments from UBS Group AG Chief Executive Officer Sergio Ermotti at a conference last week. He warned that the first quarter was one of the worst environments in recent history and said that the bank would slow down hiring and deepen cost cuts.

Financial Targets

The only financial target Commerzbank has kept intact is to reduce costs to below 6.5 billion ($7.3 billion) euros by 2020. But the uphill battle to achieve that is increasingly becoming clear as the bank will slash IT and digitalization investments by 30 percent this year, according to the report. The lender failed to achieve its digitalization target last year and it abandoned an ambitious digital project, dubbed Project Copernicus, over cost concerns.

Commerzbank last summer scrapped its previous 2018 cost target and only managed to reach the updated one by cutting staff bonuses for last year by over 40 percent. The 2018 bonus for the management board dropped by more than 60 percent, the report on Wednesday showed.

Zielke has now promised annual revenue growth of 3 percent. The consensus forecast of 13 analysts collected by Bloomberg currently expects the lender’s top line only to grow by 2.1 percent this year. The bank in late 2016 unveiled a four-year turnaround plan centered on cost cuts to boost returns.

Zielke also did away with a past job reduction target. The bank’s headcount, measured in full-time employees excluding trainees, was unchanged last year at 41,500. Zielke currently expects a total of 38,000 at the end of 2020, compared with a previous target of 36,000. The bank has said that most of the cuts will happen in the second half of its four-year turnaround plan, which means 2019 and 2020.

Opposition to the deal with Deutsche Bank is strong, with many critics saying it wouldn’t create a stronger bank. The two banks plan to come to a final decision on whether to proceed with a merger before Easter, people familiar have said.

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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