Commerzbank profit beats estimates but pays more for it

Bloomberg

Commerzbank AG’s long search for scale is finally starting to pay off, but it’s costing more than expected.
Profit and revenue at Germany’s second-largest listed bank beat the highest estimate in the second quarter, as it expanded its business more aggressively. However, its core capital level dropped surprisingly, due to it taking on more risk in its corporate loan book.
Commerzbank has been struggling to translate strong client growth into extra revenue, due to the low interest-rate environment and stiff competition from other banks. The bank is having to pay to hit a target of adding 2 million German retail customers in the four years through 2020, and it warned that operating costs would be slightly higher than planned this year.
“We have addressed fierce competition and margin pressure by successfully expanding our lending,” Chief Financial Officer Stephan Engels said.
“In view of investment activities, regulatory contributions and project costs, we have slightly adjusted our cost target for the full year 2018 to 7.1 billion euros.”
Chief Executive Officer Martin Zielke has vowed to lift revenue to at least 9.8 billion euros, the level at which it was in 2015, the year before he announced his restructuring plan. It’s fallen for the past two years, and M.M. Warburg analyst Andreas Plaesier wrote in a note last week that he expects the bank to miss its target.
Revenue in the corporate clients unit barely moved despite higher costs, and was supported by a single large transaction, the bank said. The bank now expects revenue in the division, led by Michael Reuther, to fall this year compared with 2017, downgrading the outlook expressed in the previous quarterly earnings report.
The retail bank under Michael Mandel, which accounts for over half of group revenue, performed better, with revenue rising 8 percent on the year. However, even here, growth in new customers slowed because the cost of winning new accounts started to bite.
The bank said it “will not engage in the current pricing competition for new retail customers at any cost.”
“Our growth initiatives are already working,” Zielke said. “Of course, it will take some time for them to take full effect.” He confirmed that the bank is on track to pay a dividend of 20 cents for the full year, having omitted a payout in 2017. The bank’s loan loss provisions, meanwhile, stayed at a low level.
Commerzbank’s profitability will rise “only gradually” due to “continued challenges” to the bank’s two core segments — retail and corporate banking, Moody’s Investors Service said. Despite that, Moody’s raised Commerzbank’s issuer rating to A1 from Baa1.