Higher Rates Keep Lifting Commerzbank's Outlook; We Raise Our Fair Value Estimate to EUR 11.60

No-moat Commerzbank reported a good fourth quarter, closing an overall strong 2022. Net revenue increased to EUR 2,363 million in the quarter, up 25% versus the previous quarter on a strong showing in its net interest income line. The bank is benefiting greatly from the reversal of negative interest rates in Europe and expects further upside to its net interest income next year based on the current interest-rate outlook. Having achieved EUR 6.3 billion in 2022 already, up from EUR 4.6 billion a year ago, Commerzbank now anticipates EUR 6.5 billion for 2023 while citing risk to the upside. Deposit betas, or how much of the interest-rate increases banks will have to pass through to depositors, will be a crucial metric that bank investors will track this year. Commerzbank assumes that this pass-through should increase from 10% in December 2022 to about 30% in 2023 on average, but flagged that this metric could turn out better than expected. However, we believe forward-looking estimates into client behavior on deposits should be viewed with a pinch of salt as we anticipate competition for deposits to heat up through the year. That said, we did lift our net interest income assumptions meaningfully, incorporating the higher net interest margins already achieved in 2022 as well as an additional uplift from current forward rates not yet captured in 2022 results. As a result, we increase our fair value estimate to EUR 11.60 from EUR 9 per share previously. The high operating leverage due to Commerzbank’s low profitability relative to its cost base amplifies the impact of our assumption changes on our fair value estimate.