The interest rate turnaround is boosting Commerzbank’s business. There are signs of a significant increase in profits for the current year. And according to the board’s wishes, this should be just the beginning.
More business with wealthy private customers and additional digital offers for corporate customers should bring Commerzbank higher profits in the next few years. After another successful quarter, the board led by CEO Manfred Knof is now targeting a surplus of around 2.2 billion euros for 2023, as the DAX group announced on Wednesday in Frankfurt.
So far, management had only promised a significant increase. The net result is expected to increase to around 3.4 billion euros by 2027. The bank plans to invest an average of 530 million euros annually over the next few years in, among other things, digitalization and new technologies.
Higher net commission income
A higher net commission income, which is expected to grow from slightly under 3.5 billion euros in the current year to 4.0 billion euros in 2027, should primarily contribute to the improved result in 2027. According to the current forecast, net interest income, which has recently risen sharply, will increase to more than 8.1 billion euros in the current year, but according to management estimates it will only grow moderately in the medium term. A value of 8.4 billion euros is expected in 2027.
After years of zero and negative interest rates, the European Central Bank (ECB) has raised interest rates in the euro area ten times since July 2022 in the fight against high inflation. Financial institutions are now receiving interest again when they park money with the ECB. In addition, banks and savings banks earn money from higher loan interest rates, for example.
Profit increased
As with other financial institutions, increased interest rates are also boosting business at Commerzbank. In the third quarter of the current year, the bank increased its bottom line profit to 684 million euros. A year earlier, the result had collapsed to 195 million euros.
In the first nine months overall, the financial institution earned a good 1.8 billion euros, almost twice as much as the year before. Net interest income increased by almost 39 percent to a good 6.2 billion euros in the period from January to September. The bank also benefited from having to set aside less money for possible loan defaults. For the year as a whole, the board only expects risk provisions of less than 700 million euros. Around 800 million euros are estimated for 2024, and in 2027 there should be 700 million euros in risk provisions again.
In recent years, Commerzbank has been on a cost-cutting path: thousands of jobs have been cut and the number of branches in Germany has shrunk from 1,000 to 400 – but it will stay that way for the time being. “The transformation work of the past few years is increasingly paying off. In addition to the interest rate environment, we are benefiting from a low risk result and continued cost discipline,” said CFO Bettina Orlopp. The fact that the bank had already earned more after nine months than in 2022 as a whole is “a strong basis for significantly increasing our distribution as planned.”
For the financial years 2022 to 2024, Commerzbank wants to distribute a total of three billion euros to its shareholders through dividends and share buybacks, as the institute announced at the end of September. The aim is for more than half of the profit – after deducting interest payments for certain bonds and minority shares – to be paid out between 2025 and 2027. After three zero rounds, there was a dividend of 20 cents per share for the first time for the 2022 financial year.
In 2022 as a whole, the financial institution, whose largest shareholder is the German state, achieved a surplus of a good 1.4 billion euros, the highest since 2007. However, Commerzbank’s profit could have been significantly higher as early as 2022 if it had not been for the more than one billion euros in charges by the Polish subsidiary mBank, among other things in connection with Swiss franc loans. By the end of September of the current year, the charges at mBank totaled 754 million euros.
Efficiency should be increased
Commerzbank wants to increase its efficiency “particularly through simple digital processes,” as the financial institution announced. “On this basis, the expense ratio should also be improved.” In order to generate a return of one euro, the bank only wants to spend 55 cents in 2027. In the first nine months of 2023, the ratio between expenses and income (cost-income ratio) was 60 percent. The board expects income – i.e. the bank’s total income – to be 10.6 billion euros in the current year, and 12.5 billion euros in 2027.
CEO Knof promised investors and shareholders: “We will expand our earnings base, further improve the expense ratio and increase our return on equity.” For 2027, the board is aiming for a return on tangible equity of more than 11 percent. In 2022 it was 4.9 percent, and the board expects 7.5 percent for the current year. This value puts the profit in relation to the equity capital used and therefore shows how efficiently a company has used this money.
Source: Stern
