Crystal Ball Required

Commerzbank earnings beat forecasts but rising costs spook investors

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Commerzbroken, amirite? Source: DPA

It is a fitting symbol of Commerzbank’s woes that it hoped sponsorship of the national soccer team in the World Cup would bring in swarms of new retail customers. But the defending champion was eliminated in the preliminary group phase and the bank actually saw new customers come from a beach volleyball sponsorship by its direct banking unit, Comdirect.

The bank’s second-quarter earnings announced Tuesday beat expectations but a failure to rein in costs disappointed investors. A net profit of €272 million ($315 million) topped a Reuters forecast of €227 million. But the bank said costs would exceed its forecast for 2018 by €100 million for a total of €7.1 billion. The bank’s shares, which have been trading below €10 since May, fell a further 1.5 percent to €8.81.

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Citibank said in a note to clients that the revised guidance on costs was a disappointment for investors. “This is the main element in management’s control,” Citi commented. And there’s not much room for disappointment since expectations for Commerzbank are already “incredibly low,” they added.

Dark clouds for German banking

The inability of Commerzbank management to reap much benefit from years of restructuring is darkening clouds of pessimism over the German banking sector. Commerzbank is seen as a proxy for the problems plaguing Deutsche Bank, the country’s largest.

Commerzbank is the subject of constant speculation for a takeover and few would miss Germany’s also-ran bank. The fate of Deutsche – still the flagship of German finance even though it is slowly sinking – is of greater concern.

Aside from its failure to draw a sufficient number of new retail customers, Commerzbank signaled another huge problem for the ailing German banks. Operating earnings in the corporate-banking segment fell 9 percent in the second quarter to €212 million, after plunging 46 percent in the first quarter.

German companies are becoming more selective in choosing their banking relationships just as foreign banks are expanding their activities in Germany in preparation for Britain’s exit from the European Union. The added competition forced Commerzbank to acknowledge Tuesday that earnings from corporate business would be down for the year.

Online bank project awaiting green light

Against this backdrop, the affirmation that Commerzbank was considering the launch of a new online bank brought mixed reactions. The bank has a project with its successful Polish online bank, mBank, to launch Copernicus, another online bank that would hopefully draw in customers from Germany and other European countries. Bank officials said Tuesday that no decision had been made, but preparations are considered to be advanced.

The bank’s experience with Comdirect, a direct bank founded in 1994, might give investors pause regarding the new plan. London investor Petrus Advisers last year wrote a scathing letter to Commerzbank management about Comdirect’s flaws. After criticizing the governance, the management and IT infrastructure of the unit, the Petrus partners concluded, “The capital market despises your leadership and goals for Comdirect.”

Chief Executive Martin Zielke put the best face possible on the results, citing “progress” in the bank’s goals of simplifying its structure and moving to digital. But he said it would take more time for restructuring measures to produce results. The bank, which last paid a dividend in 2015, said it will restore the payout at 20 cents a share for this year.

Andreas Kröner covers banking for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the author: kroener@handelsblatt.com

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