Commerzbank AG expects its common equity Tier 1 ratio to lose between 30 and 50 basis points on a fully loaded basis as a result of the implementation of new accounting rules known as IFRS9, CFO Stephan Engels told analysts Aug. 2.
The latest version of the International Financial Reporting Standards, which will take effect Jan. 1, 2018, has been estimated to cost EU banks up to 45 basis points of their CET1 ratios on average and raise their provisions by around 13% on average, the European Banking Authority said July 13. The primary effect of the rules will be to require banks to provision in advance for credit losses, including setting aside expected losses for the lifetime of new loans.
Commerzbank targets a fully loaded CET1 ratio of 12.5%, including the IFRS9 effect, at year-end 2017. As of June 30, the figure stood at 13.0% on a fully loaded basis, helped by a €12 billion reduction in risk-weighted assets in the first half.
Risk-weighted assets fell to €178.82 billion at June 30 from €190.53 billion six months earlier, mainly attributable to a decline in risk-weighted assets from credit risks through active portfolio management, as well as a positive impact from foreign-currency movements.
Credit risk RWAs were lowered mainly through the reduction of the shipping portfolio, which was faster than expected, according to Engels. The shipping portfolio shrank by some €1.5 billion over the first half and stood at around €3.9 billion as of June 30.
"We have seen two, or two and a half, quarters of better charter rates and values and we have used that to reduce the portfolio quicker than originally anticipated," he said.
Engels reiterated Commerzbank's focus on exiting its entire shipping portfolio as soon as possible. "We are strong believers in the structural problems that the shipping industry has, which means that there are still more ships built and delivered to the market than the market really is looking for. That is why the general view that we need to off-load this portfolio is totally valid," he said.
Commercial real estate portfolio sales and securitization transactions also contributed to the reduction in credit risk RWAs.
Commerzbank said full-year 2017 loan loss provisions in its asset and capital recovery segment — which includes shipping and commercial real estate exposures and is intended to be entirely wound down over time — will come in at the low end of a €450 million to €600 million range. Some €400 million of these provisions will go toward shipping, with the rest designated for commercial real estate, Engels said.
He added that in the second half, "[w]e will not actively manage RWAs with securitizations or other measures beyond the normal run of business." A further decline in RWAs is expected from shipping reductions, although the bank also expects to add to its RWAs through an increase in corporate and consumer loans, the CFO said.
Commerzbank expects total loan loss provisions of around €800 million for the full year. Loan loss provisions were €167 million in the quarter, down from €187 million a year earlier, though they rose to €362 million from €335 million year over year in the first half.
The group's nonperforming loan ratio stood at 1.5% at the end of June, compared to 1.6% at 2016-end.
The bank also expects a "slightly positive" consolidated result for the full year, after booking a first-half consolidated loss attributable to shareholders of €406 million, fueled by the accelerated recognition of €807 million of restructuring expenses as part of the Commerzbank 4.0 program.
Engels emphasized that the restructuring, which includes thousands of job cuts and is aimed at increased digitization and cost efficiency, is key for the lender's future profitability, but he said it will need to be completed before Commerzbank can see the full positive impact from it.
He added that he is keeping performance targets unchanged despite the full recognition of 2017's expected restructuring costs during the first half.