Big German banks raise 2023 earnings goals after strong H1

Many of Germany's largest banks have upgraded their 2023 earnings outlooks following strong performance in the first half of the year.

Net interest income growth boosted by central bank rate hikes drove strong first-half revenues and profits at six major lenders in the country — including Deutsche Bank AG, Commerzbank AG, Landesbank Baden-Württemberg (LBBW), Bayerische Landesbank (BayernLB), Landesbank Hessen-Thüringen Girozentrale (Helaba) and Norddeutsche Landesbank Girozentrale (NordLB) — fueling optimism about higher earnings in 2023 as a whole.

Federal state bank BayernLB nearly doubled its pretax profit target for 2023 after the result more than tripled in the first half of the year to €877 million from €277 million a year ago. The bank now targets a pretax profit of €1.1 billion to €1.3 billion in 2023, compared to €600 million and €800 million targeted previously.

"BayernLB believes it will continue to grow earnings, thanks in part to the strong interest rate environment," the bank said in a Aug. 17 financial statement.

The situation was similar across its peers, with most raising full-year earnings targets on the back of a strong first-half and expectations for further interest rate tailwinds despite inflationary pressures and a weakening economy.

LBBW raised its 2023 pretax profit target to over €1 billion after its first-half pretax profit jumped 45% to its strongest level since 2007. The bank is "very confident" that it will achieve its full-year goals despite growing worries about the stagnating German economy, board Chair Rainer Neske said in an Aug. 1 earnings statement.

NordLB raised its consolidated profit goal for 2023 to a result in the low triple-digit million euro range from the previously targeted result in the high mid-double-digit million euro range, citing margin growth on the back of rising rates.

Positive momentum

Net interest margins — measuring banks' earnings on loans against their spending on deposits — surged across the sample in the first half of 2023, S&P Global Market Intelligence data shows.

Germany's second-largest listed lender, Commerzbank, raised its 2023 net interest income target to about €7.8 billion from €7 billion previously, reiterating its guidance for a net profit "well above the previous year." The bank in its first-half statement warned of somewhat higher costs of €6.4 billion this this year with the "better net result leading to higher variable compensation."

The country's largest lender, Deutsche Bank, also warned of rising costs but said revenue could reach the upper end of its €28 billion to €29 billion forecast thanks to continued interest rate tailwinds.

Federal state bank Helaba aims to hit the upper end of its pretax profit target range of €500 million to €700 million in 2023 thanks to the better interest rate environment. Despite having to absorb €225 million of charges linked to its real estate portfolio in the first half of 2023, Helaba's pretax profit for the period edged up to €336 million, from €327 million a year ago, thanks to a surge in net interest income, bank filings show.

The cost-to-income ratios of all six banks improved over the first half of 2023 as a result of stronger profits and continued cost-cutting efforts.

NordLB, which booked the strongest cost-to-income ratio improvement in the period, also expects "a significant improvement" in the ratio for the whole 2023 versus 2022. The bank, which had to be rescued via a state-backed recapitalization at the end of 2019, is set to complete its restructuring at the end of 2024.

The banks were more somber in their risk provisions outlook for 2023. Deutsche Bank now expects credit loss provisions in 2023 to be at the upper end of its forecast range of 25 basis points to 30 basis points of average loans, CFO James von Moltke said. Helaba said it remains cautious as inflation, economic uncertainty and rising financing costs could affect its capital and real estate markets business.

Problem loans across all six big German banks rose over the first half of 2023 from a year earlier, Market Intelligence data shows.

Capitalization improved across the banks, with all bar NordLB posting an increase in common equity Tier 1 ratios for the first half of 2023.

Liquidity coverage ratios, which measure the stock of high-quality liquid assets banks can use to weather crises against total cash outflows for a given period, shrank at most German banks in the first half of 2023 following the sector turmoil in the first quarter. LBBW and Helaba were the only two to book year-over-year liquidity coverage ratio increases.