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Commerzbank CFO affirms 2019 goals despite tougher markets; shares drop

Commerzbank AG should meet its cost target, achieve higher underlying revenues and grow net interest income in 2019 despite growing market and macroeconomic challenges, CFO Stephan Engels said Aug. 7.

The second-largest private lender in Germany has also affirmed its guidance for a slight year-over-year increase in consolidated net income in 2019 even though the economic slowdown and an uncertain geopolitical situation make the target "significantly more ambitious," the bank said in its second-quarter earnings report.

The bank's second-quarter consolidated profit attributable to shareholders was €271 million, down from the restated €272 million a year ago; for the first half, the group recorded a 26.7% drop in profit to €391 million from the year-ago €533 million.

Commerzbank's stock fell by more than 5% during morning floor trading in Frankfurt following the release of the figures but recovered somewhat later in the session. At 12:56 p.m. Frankfurt time the stock was trading 3.63% down at €5.54 apiece.

"[W]e continue to face negative effects from the competitive banking environment in Germany which we are mitigating with our client-focused growth strategy," Engels told analyst in an earnings presentation.

Additional challenges come from a potential interest rate cut by the ECB, the ongoing global trade tensions, Brexit and the current slowdown in the German economy, he said.

"These challenges are clear and require our full attention to meet our unchanged targets for 2019," the CFO added.

Low rate effects

Commenting on a potential ECB rate cut later this year, Engels said it is too early to estimate what the exact impact on Commerzbank would be given that a final decision on the cut as well as measures to mitigate the effect on the banking sector are not final.

The ECB said after the meeting of its governing council July 25 the relevant Eurosystem committees have been tasked to explore a number of measures to ease the effects of the prolonged low-rate environment, including "a tiered system for reserve remuneration."

A 10-basis-point rate cut will affect Commerzbank's net interest income by €50 million, however, if there is any tiering the effect would change, Engels said.

Net interest income is expected to grow in the second half, albeit at a slower rate, and some of the commission income should return both from corporate and private clients, Engels said. Furthermore, there should be an improvement in capital markets activity, the CFO added.

Commerzbank is also looking to expand the relationship with corporate clients it has won over the past few years and increase earnings from those accounts, which should boost financial performance.

"We will continue with our growth strategy and expect higher underlying revenues," he said, saying the bank is on track to keep full-year costs below €6.8 billion in 2019, as previously targeted.

Commerzbank booked revenues of €4.29 billion in the first half of 2019, down from €4.40 billion a year earlier. Operating costs for the period fell to €3.15 billion from the prior year's €3.27 billion.

Capital

The bank also addressed the expected impact of the ECB's Targeted Review of Internal Models, or TRIM, on Commerzbank's common equity Tier 1 capital ratio. It expects to book the TRIM impact in the third quarter.

The TRIM-related effects alone should push the CET1 ratio below Commerzbank's 12.75% full-year target, Engels said. However, two quarters of capital build, risk-weighted asset management and other measures should help offset the impact and that is why the bank should be able to achieve a 12.75% ratio for the year, the CFO noted.

Commerzbank's Basel III fully loaded CET1 ratio was 12.9% as of June-end, compared with 12.7% as of March-end and 13.0% a year ago. The higher second-quarter ratio was attributed to capital built "mainly from retained earnings net of dividend accrual and lower regulatory capital deductions."

For 2019, the group plans to maintain a dividend payout ratio at the 2018 level, Engels said.