Company Reports

Under newly appointed CEO Bettina Orlopp, formerly CFO, Commerzbank updated its strategy, which could be seen as an attempt to push back against UniCredit’s potential takeover attempt. The new strategy targets a 12% return on tangible equity by 2027, up from 11.5% previously. Commerzbank primarily sees better income generation in its noninterest-related business, which improves operating efficiency and drives slightly better profitability. The bank also highlighted its intention to distribute about 90% of profits to shareholders in 2027. We maintain our EUR 15.80 per-share fair value estimate.

No-moat UniCredit announced that it acquired 9% of no-moat Commerzbank. We estimate that UniCredit paid around EUR 1.5 billion for the stake, about 2.5% of its own market value. It seems UniCredit intends to increase its stake in the future.

Commerzbank reported a decent second quarter with return on equity of 7.1%. Unchanged guidance and an operational performance, which supports management's outlook for 2024 were positive, but a legal provision for a Russia-related court case of EUR 95 million on top of the ongoing provisions Commerzbank is booking for foreign-exchange loans in mBank left a sour taste. The announcement of a first EUR 600 million tranche in share buybacks is in line with Commerzbank's equity story of improving performance-yielding larger shareholder payouts. However, the uncertainty around further fines related to the Russia case, which could dampen distributions this year as highlighted by management, is an unwelcome distraction. We maintain our fair value estimate of EUR 15.80 per share and no moat rating.

Commerzbank reported a first-quarter return on equity of 10.5% after posting robust net interest income development and lower compulsory contributions benefitting the bank.

We are raising our Commerzbank fair value estimate to EUR 15.80 per share from EUR 11.60 after updating our model. We believe that the bank has achieved significant progress in addressing its previously lackluster profitability outlook. Partially, this is owed to the much-improved interest-rate outlook, but structural cost cuts have also contributed materially. While interest rates appear set to be cut again in 2024, we don't anticipate them to get close to or below zero again. A leaner Commerzbank in a positive interest-rate environment is ultimately a more stable bank; the lack of stability over the past years has been one of the biggest hindrances in its investment case.

Commerzbank generates over 70% of its operating income in the highly competitive German market, where banks without profit-maximizing motives (savings and cooperative banks) dominate the retail space and domestic as well as international competitors vie for the coveted German corporate market. In this competitive environment, Commerzbank has too long stuck to its large branch network strategy, failing to digitize processes sufficiently to compete in today’s changing banking landscape.

No-moat Commerzbank reported third-quarter operating profit of EUR 1.116 billion, up 25% on a sequential basis driven by a better risk result performance. With the tailwind of higher interest rates and an overall good execution on its cost savings initiatives, Commerzbank has come close to its 2024 targets early. Prompted by the good performance of late, the bank announced an extension of its strategy to 2024, now expecting to achieve a net return on tangible equity of 11.5%, a cost/income ratio of 55%, and a net result of EUR 3.4 billion by 2027. Commerzbank is looking to improve its noninterest dependent income stream, partially by moving into the asset and wealth management space. While the strategic direction is understandable, we believe Commerzbank has a steep hill to climb if it plans to gain a meaningful foothold in the asset and wealth management segment. Other European banks made such a strategic shift years ago, all going after the lucrative capital asset and wealth management space. We maintain our EUR 11.60 per share fair value estimate and no-moat rating.

Commerzbank had a good first half of 2023. Return on tangible equity of 8% was a strong showing considering the bank’s struggle to show any signs of structural profitability for the better part of the last decade. We maintain our EUR 11.60 per share fair value estimate and no-moat rating.

No-moat Commerzbank started the year well with a return on tangible equity of 8.3% in the first quarter. A low risk result of EUR 68 million in the quarter, or 10 basis points, stood out positively, but also the continued growth in net interest income is a welcome sight after the bank had been suffering from negative interest rates in Europe in recent history. We maintain our EUR 11.60 per share fair value estimate.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

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.

Commerzbank generates about 70% of its operating income in the highly competitive German market, where banks without profit-maximizing motives (savings and cooperative banks) dominate the retail space and German as well as international competitors vie for the coveted German corporate market. In this competitive environment, Commerzbank has too long stuck to its large branch network strategy, failing to digitize processes sufficiently to compete in today’s changing banking landscape.

No-moat Commerzbank reported third-quarter operating profits of EUR 282 million, ahead of the EUR 137 million consensus estimate collected by the bank prior to the release. The quarter was hit by a EUR 477 million provision for the Swiss franc loan portfolio at mBank, which was communicated already prior to this release. Excluding these effects, performance was good. Net interest income grew 45% to EUR 1,621 million as the increasing deposit rates by the European Central Bank are unwinding the strain Commerzbank has felt for a decade now. Operating expenses also showed good development, declining nearly 4% to EUR 1,429 million as the shrinking of Commerzbank’s employee and branch base has progressed. We maintain our EUR 9 per-share fair value estimate.

No-moat Commerzbank reported another strong quarter in 2022. Revenue increased 30% to EUR 2,422 million, driven primarily by 26% higher net interest income. Higher rates in Poland and Germany are filtering through to Commerzbank's income statement, reversing a headwind, which had weighed on the profitability of the banking group for about a decade now. Operating expenses of EUR 1,425 million versus EUR 1,704 million in the same period a year ago also made a positive contribution. The combination of higher revenue and cost initiatives that have started to bear fruit was evidenced in an operating profit of EUR 746 million compared with just EUR 32 million a year ago. We maintain our EUR 9 per-share fair value estimate.

No-moat Commerzbank reported a good first quarter. Pretax profits came in at EUR 529 million versus just EUR 73 million a quarter ago. Income generation and operating expenses are trending in the right direction, with total revenue up 12% versus the same period a year ago and operating expenses down 2%. We are raising our fair value estimate to EUR 9 per share after lifting our revenue assumptions for Commerzbank. With the prospect of higher interest rates to be set by the European Central Bank and market rates already reflecting such a shift, we expect Commerzbank to benefit. Negative interest rates had been one of the headwinds the bank faced over the last years. That said, we currently still only assume a return on tangible equity of 5% by 2024. While Commerzbank has started to turn things around and the shares look undervalued, we believe risks remain high, driven by macroeconomic risks in tandem with a still-low profitability outlook. As a result, we believe it is likely that investors in Commerzbank may experience greater earnings volatility relative to other banks in our coverage.

Commerzbank generates about 70% of its operating income in the highly competitive German market, where banks without profit-maximizing motives (savings and cooperative banks) dominate the retail space and German as well as international competitors vie for the coveted German corporate market. In this competitive environment, Commerzbank has too long stuck to its large branch network strategy, failing to digitize processes sufficiently to compete in today’s changing banking landscape.

The direct exposure of European banks to Russian and Ukrainian clients is insignificant. According to the Bank for International Settlements, claims on Russian counterparties from the major developed European countries' banks amount to 0.7% of the European banks' total claims reported to the BIS.

Commerzbank reported operating results of EUR 1,183 million, 6% above our own estimate for the full year, albeit driven by a lower-than-expected risk result. Other than that, performance was in line with our expectations. However, the outlook for Commerzbank has improved. Expectations for interest-rate increases in Europe have shifted Commerzbank’s rather negative outlook on net interest income toward a materially positive one. For 2022, the bank now anticipates a net result above EUR 1 billion, ahead of what we have currently in our model. We plan to update our model shortly and incorporate the more optimistic interest-rate outlook in our analysis. We anticipate an increase to our fair value estimate likely beyond 10%. We had assumed that although Commerzbank had started to implement a restructuring plan, which began to bear fruit, only macro-driven dynamics outside management’s control could lift the bank permanently from the depths of low profitability. Such a scenario is now becoming increasingly likely to manifest itself.