Commerzbank’s Growth Ambitions Are Hit by Long List of One-Offs
Commerzbank AG saw earnings last quarter hit by a long series of one-time charges, undermining an otherwise solid performance and complicating efforts by Chief Executive Officer Manfred Knof to grow the lender.
The shares fell after Commerzbank reported 18% lower revenue and a net loss of 527 million euros, both worse than estimated. However, it reiterated a forecast for revenue to increase slightly this year and said a key measure of capital strength will probably come in better than planned.
“Performance was impacted by a number of one-offs,” Anke Reingen, an analyst at RBC Capital Markets, wrote in a note. Still, “we calculate that operating performance was better than expected.”
Knof in February embarked on a restructuring that aims to restore profitability by cutting 10,000 jobs and lowering costs by a fifth. The CEO has chalked up a few successes -- he has signed an agreement on the cuts with the workers’ councils and another one with Oddo BHF to outsource equities trading -- but he has also faced a number of setbacks, including unexpected expenses and turmoil in the top ranks.
The hits to earnings last quarter included compensation payments in the “double-digit million euros” that Commerzbank made to HSBC Holdings Plc after scrapping a major outsourcing project. Provisions for potential claims relating to a controversial tax practice known as “cum cum” also weighed on results. A reporting metric called “other income,” which includes revenue outside the main recurring business, slumped to a loss of 288 million euros, the lowest in several years.
Commerzbank fell 4.7% at 10:55 a.m. in Frankfurt trading, erasing all gains for the shares this year.
Key figures in million euros (except CET1 ratio)
2Q 2021 actual
2Q 2021 estimate
2Q 2020 actual
|Net interest income||1,173||1,164||1,277|
|Net commission income||852||829||791|
|Net fair value result||125||63||163|
Chief Financial Officer Bettina Orlopp postponed fresh guidance for this year’s net income until after the third quarter, saying that the multiple one-offs complicated the picture. But in an interview with Bloomberg TV, she also pointed to the positive impact from a 7.7% increase in net commission income and lower provisions for bad loans, assuming Germany can avoid new lockdowns.
The higher commission income is “very important and also very promising for the next months,” Orlopp said on Bloomberg TV. The bank is still “cautious” on loan loss provisions but if there aren’t any more lockdowns in the coming months, then “hopefully there will be quite some upside” by the end of the year, she said.
Knof wants to lower expenses to 5.3 billion euros in 2024 while increasing revenue by 6% to 8.7 billion euros. Commerzbank initially expected the cutbacks to result in declining top line this year, but it changed the outlook to a slight expansion after rapid growth in the first quarter on the back of the global boom in capital markets.
Among the one-off items was a court ruling that resulted in provisions of 66 million euros, while a Swiss franc loan portfolio at its mBank subsidiary caused 55 million euros in provisions. Most of these issue had been flagged before, but their impact still surprised analysts.
What Bloomberg Intelligence Says:
Commerzbank’s ability to achieve its 7% return on equity goal by 2024 is likely to become increasingly clear in the quarters ahead, we believe, following 92% of restructuring expenses incurred by 2Q. Along with a myriad of one-time charges, these drove a 527 million-euro loss (minus 9% ROE). Yet as underlying revenue is stable and costs 2% lower, the strategic turnaround appears on track. The CET1 ratio of 13.4% also means buyback potential remains intact.
--Philip Richards, BI banking analyst
--Click here to read the research
Commerzbank also set aside money for potential tax claims after the German finance ministry issued a new decree on the “cum cum” practice. The bank estimates a “potential financial impact in the upper double-digit million” euros range, while saying it’s unlikely that it will have to pay out the money.
On the positive side, the lender booked a gain of 101 million euros on investments made by its venture capital arm. That portfolio includes Marqeta Inc., a U.S.-based payments processor that listed in June.
Orlopp told analysts on a call that the stake in Marqeta contributed to the windfall but declined to specify how much it owns in the company. She also highlighted Commerzbank’s stake in the trading app eToro when she said the lender may book further gains on investments in the second half.
Commerzbank in June promoted Orlopp to deputy CEO and extended her contract, but the role of retail head remains vacant. Chief Operating Officer Joerg Hessenmueller has attracted criticism for his role in the failed IT project. And on the supervisory board, Chairman Hans-Joerg Vetter abruptly resigned in March for health reasons, setting off the departures of other board members.
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