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Sale of Polish unit to curtail Commerzbank's revenues, put brake on growth

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Sale of Polish unit to curtail Commerzbank's revenues, put brake on growth

Commerzbank AG's plan to sell Polish unit mBank SA to finance a restructuring will mean giving up a profitable subsidiary, limiting its growth potential and impacting revenues, analysts say.

Germany's second-largest listed bank on Sept. 27 launched its new Commerzbank 5.0 strategic plan, under which it will cut a net total of 2,300 jobs and close a fifth of its roughly 1,000 German branches by 2023. This will allow it to cut costs by €600 million.

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The plan, which also involves heavy IT investment and the absorption of online bank comdirect, should help it win more customers and achieve higher revenues even if the market environment deteriorates further, Commerzbank said.

It plans to use the capital released by the sale of mBank, Poland's fourth-largest lender, to cover restructuring costs and invest in core domestic businesses. The deal is expected to significantly reduce risk-weighted assets and boost capital. Commerzbank's 69% stake in mBank has been valued by analysts at roughly €2.1 billion; the total estimated cost of the new strategic plan is €1.6 billion.

Commerzbank CEO Martin Zielke said management is convinced the sale is the right step, despite mBank being a "highly valuable franchise in its own right," as it will allow it to carry out the restructuring at the required speed.

'Challenged' revenue growth

But analysts point to the negative effects the sale will have.

It will limit Commerzbank's growth potential given mBank's contribution to the overall business, Michael Rohr, senior credit officer at Moody's, said in a note.

In 2018, it accounted for about 28% of group pretax profit and consumed less than 10% of risk-weighted assets, making it one of Commerzbank's most profitable and fastest-growing units, Rohr said. At 57.3%, the unit's cost-to-income ratio is also far better than the group ratio of 80.3%, he noted.

Commerzbank is seeking to expand its business at home but "the strategic overhaul and its related costs come amid significant and ever-increasing pressure on the bank's domestic revenue and earnings in a lasting ultra-low interest-rate environment," Rohr said. He said it would be difficult to stabilize revenues over the next few years.

On top of negative rate effects, the outlook for the German economy has worsened as it faces another contraction in the third quarter after shrinking by 0.1% in the second.

Citigroup equity analyst Nicholas Herman said in a note that, while it is encouraging to see Commerzbank managing costs, the sale of mBank will leave it "fully reliant on its tough domestic market." Given the downside risks for the German economy and the rate environment, it is hard to see positive catalysts, he said.

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'Uninspiring' ROTE goal

Credit Suisse analysts Marcell Houben and Findlay Williams also expect the sale of mBank to make it harder for Commerzbank to generate revenue in the next few years.

Given the group is targeting a return on equity of more than 4% in 2023 under the new plan, this implies annual revenue growth of some 3%, excluding mBank, over the next four years, they estimated. That appears "demanding, especially since mBank explained all revenue growth in past five years," they wrote in a note Sept. 23.

Even if Commerzbank achieves its 2023 ROTE target, it is "a very low figure by international standards" and leaves little room to deviate from, Moody's analyst Rohr said. Citigroup's Herman said a target of 4% ROTE "is hardly inspiring" and also noted that Commerzbank has a poor track record of delivering targets.

S&P Global Ratings analyst Harm Semder also said the sale would deprive Commerzbank of mBank's higher margin and growth prospects, and reduce its international business and revenue diversity. But he also said it would help unlock resources to strengthen the German franchise and improve efficiency.

S&P Global Ratings has a negative outlook on Commerzbank, reflecting the agency's view "that there is little room for a major setback" in its strategy.

Capital

The mBank sale is expected to reduce group risk-weighted assets by about €17 billion and save Commerzbank a potential future 50-basis-point increase in its regulatory capital requirement under the Basel framework for domestic systemically important banks.

Commerzbank is targeting a common equity Tier 1 ratio of between 12% and 13% in the medium term and intends to keep paying out dividends.

An additional challenge is mBank's Swiss franc-denominated mortgage portfolio. The Polish government has said banks must keep these legacy loans, which were impacted when Switzerland unpegged its currency from the euro in early 2015, triggering an almost instant 40% appreciation.

"Compared with the market, mBank has a materially higher proportion of foreign-currency loans, which makes the bank more sensitive to tail risks than its peers," S&P Global Ratings said. Some 16% of mBank's total loans as of the second quarter still comprise legacy, predominantly Swiss franc-denominated, mortgage loans, it said.