Commerzbank Aktiengesellschaft (CZB)
In the first half of 2019, Commerzbank continued growth in customers and assets. In a very challenging environment, the Bank increased its net interest income by 9% thanks to the additional business in the core segments and generated higher underlying revenues in the customer business. Here, the contributions of new customers again played an important role in mitigating the headwind from negative interest rates, tight margins, and regulatory requirements. However, the progress in the customer business was contrasted by a significantly lower fair value result in the Corporate Clients segment, especially in the second quarter. This led to lower revenues overall. In addition, the drag from the risk result was higher due to single cases in the second quarter and lower write-backs of provisions in the first half of the year. The non-performing loan (NPL) ratio was a low 0.8% (H1 2018: 0.9%). Operating costs have been reduced by 4% through active cost management and more selective strategic investments in growth and digitalisation. In addition to the continued growth in customers and assets, two other strategic milestones were reached. The run-off segment Asset & Capital Recovery (ACR) was dissolved with effect from 1 July 2019 thanks to the successful run-down of the non-strategic portfolios over the last few years. And the transformation of the headquarter has taken an important step forward. Since 1 July, IT and product areas have been working closely together under the name 'Campus 2.0'.
'We are continuing on our growth path and are making significant progress in our customer business. Despite all the successes we have made, challenges continue to increase for the industry and for us,' said Martin Zielke, Chairman of the Board of Managing Directors of Commerzbank. 'This might require further investments. And this is exactly what we are examining and assessing in our current strategy process.'
Group revenues came to EUR4,285 million in the first half of 2019 (H1 2018: EUR4,395 million). Also adjusted for one-off effects revenues stood at EUR4,285 million, which was below the previous year (H1 2018: EUR4,376 million). This development was primarily due to the marked drop in the fair value result mainly in the Corporate Clients segment which was adversely affected by valuation effects and the lack of contributions from legacy portfolios. Progress in customer business was reflected in net interest income which was increased thanks to continued loan growth and lower funding costs. Revenues for the second quarter amounted to EUR2,129 million (Q2 2018: EUR2,178 million). Adjusted for one-off effects, they stood at EUR2,095 million (Q2 2018: EUR2,160 million).
Operating expenses including compulsory contributions were reduced in the first half of 2019 and amounted to EUR3,487 million (H1 2018: EUR3,576 million). This development is based on operating costs which were reduced to EUR3,150 million (H1 2018: EUR3,274 million; Q2 2019: EUR1,581 million; Q2 2018: EUR1,636 million). This was mainly due to the prioritisation of strategic investments. Meanwhile, compulsory contributions rose again by almost 12% compared to the first half of 2018 to EUR337 million (H1 2018: EUR302 million). The figure for the second quarter was EUR72 million (Q2 2018: EUR58 million).
The risk result was in line with expectations in the first half of the year and stood at minus EUR256 million (H1 2018: minus EUR160 million). The increase is attributable in particular to the second quarter which accounted for minus EUR178 million of this (Q2 2018: minus EUR82 million). The higher figures are due to single cases in the second quarter and lower write-backs of loan loss provisions in the first half of the year. Overall, the Bank's risk profile remains very healthy with a non-performing loan (NPL) ratio of 0.8%. This reflects the Bank's prudent lending standards and the resilient but generally weaker German economy.
In total, the Bank generated an operating profit of EUR542 million in the first six months (H1 2018: EUR659 million), including EUR298 million in the second quarter (Q2 2018: EUR401 million). Also in the second quarter, operating profit benefited from progress in the customer business and higher net interest income. Overall, the decrease was mainly due to the low fair value result and the higher risk result. The pre-tax profit came to EUR542 million (H1 2018: EUR689 million) in the first half of 2019. This was also impacted by the lower pre-tax profit for the discontinued business area Equity Markets & Commodities (EMC), which was around EUR30 million down on the previous year. Correspondingly, the net result attributable to Commerzbank shareholders stood at EUR391 million (H1 2018: EUR533 million). While the tax burden in the first quarter was comparatively high, the second quarter benefited from exceptionally low tax expenses of EUR20 million. In the second quarter, the net result stood at EUR271 million (Q2 2018: EUR272 million). Earnings per share came in at EUR0.31 in the first half (H1 2018: EUR0.43). The net return on tangible equity remained unchanged at 4.3% in the second quarter (Q2 2018: 4.3%).
Common Equity Tier 1 ratio rises to 12.9%
'In the second quarter, we were able to further strengthen our common equity ratio as business growth continued. This means that we are well prepared for the expected regulatory burdens like TRIM,' said Stephan Engels, Chief Financial Officer of Commerzbank. 'At the beginning of July, we also optimised our capital structure and further strengthened our total capital by issuing our first AT 1 bond which was significantly oversubscribed.'
Following its continued growth, the segment increased its net interest income by more than 7% in the first six months of 2019 and thus compensated the sustained margin pressure. Revenues after adjustment for exceptional items improved slightly to EUR2,464 million (H1: EUR2,436 million). In the second quarter, underlying revenues rose year-on-year to EUR1,244 million (Q2 2018: EUR1,225 million).
Furthermore, the segment made progress on the cost side in the first half of the year despite higher compulsory contributions. The operating costs were reduced by EUR56 million to EUR1,743 million (H1 2018: EUR1,800 million). This more than compensated for the increase in compulsory contributions. The risk result improved slightly in the first half of the year to minus EUR100 million (H1 2018: minus EUR115 million), underlining the healthy risk profile. In sum, the segment improved its operating profit by 4.1% to EUR392 million (H1 2018: EUR377 million). The second quarter contributed EUR239 million (Q2 2018: EUR174 million) to this.
The Corporate Clients segment gained additional new corporate clients in what remained a difficult market environment. The segment has already brought 11,400 new clients on board since the beginning of 2016. Loan volumes increased by EUR6 billion in the first six months to EUR88 billion. Hence, the segment has already achieved its customer and loan growth targets for the end of 2020.
In the Corporate Clients segment, adjusted income increased in Mittelstand, International Corporates, and Financial Institutions and hence in all the directly customer-facing business areas. By contrast, Others was adversely affected by a lower result from hedging activities and portfolio management as well as the lack of revenues from legacy portfolios particularly in the second quarter of 2019. In addition, this area had benefited from a large individual transaction in the previous year. Consequently, the segment's underlying revenues were down overall in the first half at EUR1,668 million (H1 EUR1,775 million). The figure for the second quarter was EUR799 million (Q2 2018: EUR909 million).
While the segment's operating expenses were reduced to EUR1,238 million in the first six months (H1 2018: EUR1,282 million), the burdens from the risk result increased. The risk result came out at minus EUR155 million in the first half of the year (H1 2018: minus EUR60 million), in particular due to single cases in the second quarter and lower write-backs of provisions in the first half of the year. In total, the segment generated an operating profit of EUR142 million in the first half (H1 2018: EUR315 million). The figure for the second quarter was EUR22 million (Q2 2018: EUR218 million).
With the non-strategic portfolios successfully run-down, the Bank dissolved the Asset & Capital Recovery (ACR) segment with effect from 1 July 2019. The remaining portfolio volume of EUR4.5 billion - including the segment's ship finance portfolio of now only around EUR200 million - was transferred to the Others & Consolidation segment. ACR recorded revenues of EUR79 million (H1 2018: EUR106 million) and generated an operating profit of EUR31 million in its last first half (H1 2018: EUR76 million).
The Bank will continue its growth strategy in 2019 and is expecting higher underlying revenues than in the previous year. Overall, the Bank expects a slight year-on-year increase in consolidated net income for the 2019 financial year, although this target has become significantly more ambitious given the earnings development in the first half of the year, the noticeable worsening of the macroeconomic situation, and the increasingly uncertain geopolitical situation. The Bank is targeting a Common Equity Tier 1 ratio of at least 12.75% by the end of 2019. The cost base should remain below EUR6.8 billion in 2019, while the drag from the risk result is expected to be at least EUR550 million. The Bank is planning to maintain a pay-out ratio for financial year 2019 at a level comparable to 2018.
* Net income from financial assets and liabilities measured at fair value through profit and loss
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