Slowly but surely, Commerzbank is moving out of the swamp of toxic real estate and shipping loans that are a legacy of the financial crisis. But despite attracting more private customers and small to medium-sized businesses, profitability has been held back by low interest rates in Europe and continued losses on risky loans.
The bank’s second quarter net profit more than doubled from €40 million ($53 million) to €100 million ($135 million), compared with last year, according to figures released Thursday. But this improvement was largely artificial, the result of last year’s high level of loan loss provisions and negative investment income rather than a major increase in the profits of its core businesses.
“It’s very clear – the relief is coming from the lower risk provisions,” said Dieter Hain, an analyst with Fairesearch. Risk provisions were halved to €257 million this year. While it is “basically positive” that the bank was able to post a profit in the last two quarters, Hain said Commerzbank “will still have to prove that this is sustainable.”
Two key gauges of how the bank is operating fell in the second quarter compared with a year ago. Income from loans and commissions, excluding loan loss provisions, was down 3 percent to €2.2 billion, and operating income, excluding loans the bank is winding down or selling, fell 4.5 percent to €440 million.
Commerzbank, which received €18.2 billion euros of state aid in 2008 and 2009 to cope with the financial crisis, is still losing money on a €92 billion portfolio of risky real estate, shipping loans and low-risk public bonds. These operations halved losses compared with a year ago but the second quarter operating loss was still €183 million.
Commerzbank said it will continue to wind down its risky real estate and shipping loan portfolio as the bank has made better progress than expected. It set a new target to cut these to around €20 billion by 2016 from €37 billion at the end of June. The €55 billion of public finance loans, for instance, debt to German states, Switzerland and Belgium, would fall to €47 billion in 2016.
Investors praised Commerzbank’s efforts reduce its risk asset exposure, for instance by selling €5.1 billion in real estate loans in Spain and Portugal in June. But while these bad loans are being drawn down, there is still some frustration that Commerzbank is not moving more quickly. Chief financial officer Stephan Engels in a conference call said most of the remaining bad assets will simply be held to maturity. That means major sales are done, unless a good opportunity comes along, he said.
The stock was up 2.6 percent at €10.70 by 0914 GMT Thursday morning – still a far cry from a price of around €125 in 2008. At the same time, many also wondered how Commerzbank could improve profitability in a low-interest environment.
“It doesn’t really matter how many customers you have….it’s simply not possible to make a decent profit right now.”
The question is whether Commerzbank can really turn a decent profit with its core business – loans to consumers and businesses – and free itself from state support. The German state stills owns about 17 percent of Commerzbank, a stake that was originally bought for about €5 billion but is currently worth only about half that. Mr. Hain said he expected the government will hold onto its stake at least until 2016, and possibly much longer.
Commerzbank won a record number of 95,000 new private customers in the second quarter, but as long as interest rates in Europe remain at record lows, this is unlikely to be very profitable, experts said.
Dirk Becker, a Frankfurt-based banking analyst at Kepler Chevreaux, noted that other banks such as Deutsche Bank have done a better job of offsetting the weak situation in commercial banking by throwing money into investment banking instead.
“The problem in the end is that Commerzbank cannot achieve decent profits as long as interest rates are low,” Mr. Becker told Handelsblatt Global Edition. “It doesn’t really matter how many customers you have….it’s simply not possible to make a decent profit right now.”
The authors are editors at Handelsblatt Global Edition in Berlin. Contact: firstname.lastname@example.org and email@example.com