Commerzbank AG (CBK) Earnings Call Transcript & Summary

Yes. I mean, indeed, our mortgage business has developed pretty nicely over the last year, and it seems to be that also 2021 appears to be a very active mortgage loan market. I think if you look at the prices, I mean, they have increased quite significantly in Germany, but they are still different if you compare that to other high price markets across the globe. So I would say it still continues. There's not really a coming down at least full-term visible because the trend also out of cities into house is still there, clearly also driven by the pandemic. On the private kind side, I mean consumer loan activity is still rather low, people sit on their savings. And I expect them more to first spend their savings before they really go into consumer loan activity. And we should also not forget that there are still a number of people in Germany on the furlough scheme and as long as they sit on that, I expect them not to really spend too much and take consumer loans. So activity there, we rather expect to start end of third or beginning of fourth quarter at the earliest. On the corporate loan side, it's different, a little bit similar to the consumer loan side, our corporate clients sit on their liquidity. They are very cautious, they do not really start large investment programs. They really wait see how the crisis is emerging or developing and therefore, activity has been rather low so far also with respect to trade finance, both expectations from corporate clients is that this will change over summer, but there will be more activity on not only on the finance cycle of the [ earned ] side and yes, hopefully you will then also see that on later into the third quarter.

Okay. But so far, it is a bit more looking at the reopening of economies, improving GDP growth and the like. So it's not like you have very specific green shoots in your portfolio or in discussions with corporates?

No. I mean there's more activity than you probably have seen at the beginning of the year, but still, it needs to really unfold into concrete deals and actions. I think it's picking up, thanks also to the fact that the lockdown has now been -- if not -- I would say nearly over, lockdown is nearly over. The activity is picking up, but people are still and corporates are very cautious. And I mean, our forecast -- GDP forecast for this year are pretty good. But again, at that, and that also holds true to for the LFP side, where we'll probably come into a minute. We still need to be aware of the fact that there are government measures in place and that they will only end until the end of this year. So I think people will stay cautious.

Fair enough. Maybe moving over to margins because it seems like deposit margin pressure seems, unfortunately here to stay for longer. But I was wondering how do loan margins look across mortgages, corporates and if you can say consumer, but as you said, there's not that much activity. So maybe focus more on mortgages and corporate loan margin.

That one I can keep rather short. It's very stable. Positively speaking, very stable. On the corporate loan side, you even see slight recovery but overall stable.

Okay. Sounds good. Moving to mBank and the revenue because mBank should contribute about EUR 600 million of revenue growth going forward and hence, be the major growth driver as part of the new 2024 plan. Can you break us -- it down a bit more or kind of increase the confidence where this significant number should come from?

Yes. I mean, first of all, and most importantly, you need to keep in mind that the 2020 revenue number of mBank was kind of depressed because there is from the ordinary revenue base, you have to -- they have been productive more than EUR 200 million provision for the Swiss franc portfolio thing. So if you add that back because you won't see that in 2024 or even in 2020, there are no more -- the revenue increase is just EUR 400 million. This is still a lot and absolutely, but mBank, I think, has also proven in the past that they can show very nice revenue growth. And the revenue is stems from different factors. #1 is that on the plan -- I mean they definitely foresee that the interest rate environment, which has been rather depressive in 2020 that this will see a sooner recovery than we expect for the year area so until 2024, they should have returned to historic levels. And there are even optimist to expect already a rate increase in Poland already this year. I'm sure the business will happen, but we'll see. And secondly, I mean, they expect on further customer growth and then you should not forget that the average age of the mBank customers is still rather low. And they basically are just increase revenues just by age by adding wealth and salary, et cetera. So they just get better year-on-year on the overall client base of mBank.

Fair enough. And given you already touched on it in your previous response, coming to the Polish, Swiss franc mortgage saga, I mean there have been recent Polish, but also EU court decisions and hearings. Yes. So could you maybe up that what is the latest in terms of where you're standing? And what is the outlook to I think after 5, 6 years, finally resolved this issue potentially?

No. I mean, nothing has really changed since the beginning of May. So I mean, the last two year ruling on from the European court, but also from Supreme Court, the 7 judges that rather supporting for the bank because they made some positions pretty clear and you have also seen that in basically share price development of Polish banks that have been rather positive in the past couple of weeks. And now the ruling of the Supreme Court, the most important one has been postponed, but also there, people think that this is rather promising that they really ask for statements from the key stakeholder groups to basically base their opinion on that and add that to their consideration. We expect now that it will take a while, I think the ruling comes down because, first of all, I think they gave a deadline of 4 weeks until stakeholders need to hand them back their statements. And then they basically need to reflect on that. So I do not expect any ruling before August or September. I mean still, it's unclear what the final outcome is. I mean, we stick to our current model, which is basically that we are provisioning or not provisioning on basically the incoming clients and lower suites and particularly the decision, the rulings of the different courts in Poland and basically, yes, based our provisioning on that. We feel pretty protected with the movement as far as provisions we have currently in our books. However, we're willing to wait or that there is -- yes, is the Supreme Court decision or and legislative action, which also is some part or some studies asked for. Or if there is some kind of a settlement solution for the industry that, however we try, it's also that this is a binding settlement for every party, and so nobody can escape from that. So I think that is going on. I think people are more optimistic. We basically stay prepared for everything, which could mean in a positive way, we can basically reduce the provisioning to -- we have to book more, everything is probable and we keep our flexibility to be very honest. And I think our hope is now that there is kind of solution at a certain point in time because volatility and clarity is at work, to say it like that.

Then maybe taking your comments on net interest income, but it was also fee income together. And comparing it to Q1, your revenues were up I think about EUR 300 million on an underlying basis, EUR 650 million on a reported basis. I hear your caution, of course, on the net fair value result, I think that makes sense. But is it fair to say that the guidance with only slightly higher revenues, considering this very strong Q1, is it particularly driven by the legal uncertainties, whether it's Poland or whether it's Germany? Or why are you not a bit more positive on the revenue growth outlook for this year?

Because it has in Q1. I mean, Q1 has been -- I mean, the 2 segments have hold up likely as you compare quarter-on-quarter and year-on-year. But we stay cautious. I mean, we have the strategic transformation program ongoing. We have announced that we would see a number of things, specifically in the corporate client side by with respect to RWA efficiency management, exiting of locations, exiting certain client groups without any German connectivity and so on. So we just stay cautious for the moment. I mean, we had a very good quarter. Specifically global segment have proved to be very stable. But as you said, there's also some -- there are some up and downs in there. There also some positives, clearly, and I'm pretty sure that I'll feel probably even more comfortable when I see how the second quarter is with respect to the guidance. But for the time being, I think we just stick to that until we also have fully analyzed, for example, the Federal Court's decisions and stuff like that.

Okay. In the absence of the questions from the audience, I might move on then to costs. In the last 2 strategic plans, Commerzbank missed the target, maybe you can outline what is different this time and where the execution risk across the various reduction measures. I mean you have voluntary fee reduction, you have a partial retirement, early retirement. So maybe you can discuss the moving parts and, yes, the execution along the programs.

Yes. I mean, we laid out clearly the path to our 2024, which is basically meaning that year-on-year, Commerz will reduce on the cost side on their -- I mean, there are different elements in the cost reduction. One is clearly the headcount-related cost reductions, which is also the one that is specifically difficult to execute because you need to have agreements in place. I think we made great progress here because we basically signed the frame contract on the official plan with Works Council laying the basis for the headcount production of nearly 10,000 FTEs, if you also look on the -- if you take the quarterly in it. And I mean we now need to basically legislate the details. That also costs some time. However, we got a lot of flexibility in there because we have a lot already launched a number of programs. Besides that the PATAM retirement program at one side, which will come into effect over the next 3 to 4 years. But more importantly, also for this year to really make sure that we -- this year, but also next year target by launching the voluntary program. And this has basically started last week. So we have sent out the conditions and the system for application, et cetera, last week. And we are pretty confident that this will support us in meeting the targets for this year and also looks at an important basis for meeting the target next year. We are very intensive controlling -- transformation controlling. It's probably also different to produce programs that we are very closely tracking the initiatives related to the headcount. But also the nonpersonal up-production to make sure that we really meet the targets that we see when we have delays and that we can basically launch counter-measures as necessary. In the Mittelstand, I would say we are pretty much on track and very confident also with respect to the target of 6.5 this year.

Yes. And to be fair, I think, in particular Q1, you had a quick start to the program, more than 600 net FTE reductions, so yes. That seems to...

Yes. What you have also to keep in mind that the voluntary program will basically also come into effect end of the year. So it's a good mixture. So -- but we are very much on a good track there.

Okay. Very good. We're almost at the end of the session, but you anticipated your question on asset quality. So certainly, we want to finish up with that one. Nonperforming loans are very low. And the remaining loan deferrals are pretty small. So what could go wrong here to reach the upper end of your guidance? I mean, you now said it's more likely to be below EUR 1 billion, but still what needs to happen to come anywhere close to the EUR 1 billion? And have you seen an impact from the end of the insolvency loss expansion at the end of April yet?

No. I mean, just to start with the last one. I mean, what we have seen already in March and April, an increase in default rate, but we haven't seen that arising yet in our portfolio and so on, but that is still -- I mean, it's a normal level, which was before corona, before the measures were announced, the default rates, which we have seen back in 2019 and so on. I mean the whole question on the loan loss provision is also something which you should not forget is in relation to our top-level adjustments. Because so far, we have come to the top-level adjustments untouched. We still have EUR 495 million to basically protect us. It's -- you will see something in the portfolio and I mean it's very clear that if I would take -- I would try to basically also protect as much as possible at the top level adjustment for 2022 because I have increasingly the feeling that some things you will might just see in 2022. So basically where we end up 2021 depends on, clearly, how the situation is evolving, for sure, but also then a mixture of how much of the top level adjustment do we use this year, how much can be basically shifted to 2022 and how overall the situation is developing. So yes, I think they are also there. We will still get smarter quarter-by-quarter, but as I already said, I'm very confident that we will sit below of EUR 1 billion of loan LFP.

Sounds good. Perfect. We are really at the end of time. So I thank you very much for joining us, and I really hope to welcome you next time or next year in person again. Thank you, Bettina.

Yes. Thank you very much, and thanks for your question. Bye-bye.