Commerzbank suffers Q3 loss on overhaul costs

Bloomberg

Commerzbank AG said it expects to post a full-year profit after costs tied to Chief Executive Officer Martin Zielke’s overhaul pushed Germany’s second-largest lender into a third-quarter loss.
The net loss of 288 million euros ($319 million) compares with a profit of 235 million euros a year earlier, the Frankfurt-based company said in a statement on Friday. Analysts in a Bloomberg survey had forecast a loss of 475 million euros. Commerzbank said it expects a “positive net result” this year.
Zielke, 53, responded to record-low interest rates and increasing regulatory costs with a plan to cut thousands of jobs, suspend dividends and shrink risky assets. In a first step, the CEO pledged to merge the company’s investment bank with its corporate-clients unit, a move that led to a 627 million-euro writedown in the third quarter.
“You clearly see the revenue pain from low rates has forced a further change of structure,” said Jonathan Tyce, a senior banking analyst at Bloomberg Intelligence in London. “Though stable capital and low provisions, even incorporating shipping problems, are small positives.”
The shares closed 1.4 percent lower at 5.98 euros in Frankfurt. The company has lost about 37 percent of its market value this year.
The bank’s 416 million euros of 6.352 percent notes fell more than 4 cents to about 94 cents on Friday, the lowest since January 2014, after Chief Financial Officer Stephan Engels said on a call that he doesn’t see a need to buy back junior bonds.
The comments come after Standard Chartered Plc roiled credit markets on Tuesday, when the U.K. bank said it wouldn’t buy back its junior bonds at the first opportunity.
Commerzbank’s common equity Tier 1 ratio, a key measure of financial strength, rose to 11.8 percent at the end of September from 11.5 percent three months earlier. That compares with 11.1 percent at crosstown rival Deutsche Bank AG. Commerzbank expects the ratio to advance to about 12 percent by the end of the year.
Zielke in September unveiled plans to eliminate 9,600 jobs, or about one in five positions, suspend dividends and shrink securities trading in the biggest overhaul since the lender’s bailout in the global financial crisis.
The bank said at the time that impairments to goodwill from its acquisition of Dresdner Bank eight
years ago would result in a third-quarter loss.

Equity-Markets Business
As part of the restructuring plan, Commerzbank is seeking to lower costs to 6.5 billion euros, taking the cost-to-income ratio below 66 percent. That measure was at 71.1 percent in the three months through September.
Commerzbank is also planning to shrink risky investment-banking activities that aren’t directly tied to needs of corporate clients. The bank is preparing a sale of some of its equity-market businesses, according to the CFO, adding that it has already received interest from potential buyers. An IPO would also remain an “attractive” option which the bank continues to explore, Engels said in a separate e-mailed statement. Engels declined to elaborate on the value of the business which includes exchanged-traded funds, equity derivatives and certificates.
In the third quarter, the bank recorded provisions for loan losses of 275 million euros, the highest level since the second quarter of 2015. The charges will probably amount to less than 1 billion euros this year, despite the “continuously challenging situation” on the shipping market, it said in the statement.
Analysts at Moody’s Investors Service said last month that reserves for potential losses on shipping loans at Germany’s top maritime lenders “may well prove too low” amid a continued industry crisis. Commerzbank may be less challenged by such charges than competitors including Norddeutsche Landesbank because it has a broader business model, they wrote.
Europe’s largest lenders are under pressure to deepen cost cuts and shore up earnings, hurt by record-low interest rates, volatile markets and tougher regulatory scrutiny. While some large lenders have passed on negative rates to institutional customers, they’ve shied away from hurting consumers.
No Dividend
At Commerzbank, the corporate clients unit, called Mittelstandsbank, reported a 0.9 percent drop in third-quarter operating profit to 229 million euros as an accounting gain helped offset an increase in provisions for risky loans. The consumer-banking unit saw earnings decline 8.3 percent in that period.
Those two divisions, the bank’s biggest, saw negative interest rates cut revenue by a combined 226 million euros on a gross basis in the first nine months. Measures such as price increases will trim the “net burden” to 100 million euros in 2020 when compared with 2016, the company said.
Engels reiterated on a call that the lender won’t pay a dividend for 2017 and 2018.
“There are some subtle changes to the outlook for this year, which really reflect better-than-expected revenues more than offsetting higher loan-loss provisions,” said Neil Smith, an analyst at Bankhaus Lampe in Dusseldorf who has a buy rating on the shares. “They’re also sounding pretty confident on capital for this year.”