Commerzbank: Walking The Recession Tightrope

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Office Building Commerzbank successful Frankfurt

Torsten Asmus

Company Overview

Commerzbank (OTCPK:CRZBF) operates successful 2 main divisions - Private and Small Business Customers (PSBC) astatine 61.6% of underlying Q4 2022 revenues, of which Polish majority-owned (69.3% Commerzbank stake) subsidiary mBank accounted for 17.6% of underlying Q4 2022 revenues while PSBC Germany made up 44% of underlying Q4 2022 revenues , and Corporate Clients (CC) astatine astir 41.4% of underlying Q4 2022 revenues. Totals do not adjacent 100% owed to eliminations/consolidation and group functions.

Operational Overview

Private and Small Business Customers delivered a stunning 56.1% Y/Y underlying gross maturation successful Q4, good up of nan 17.9% 2022 maturation rate. Operating return connected tangible equity was 18.3% successful nan quarter, up of nan 14% for nan afloat year.

The operating return connected tangible equity varies complete nan twelvemonth arsenic it is not adjusted for compulsory contributions (bank levies) which are chiefly successful Q1 of each year.

Corporate Clients saw 27% Y/Y underlying gross maturation successful Q4, somewhat up of nan 22.8% 2022 maturation rate. Operating return connected tangible equity was 7.7% successful Q4, beneath nan 9.8% achieved for 2022.

On a consolidated basis, underlying revenues grew 28.9% Y/Y successful Q4 and 18% for nan afloat year. Net return connected tangible equity was 6.7% successful Q4 and 4.9% for 2022. Cost of risk was 17 ground points successful 2022, up of nan 12 bps successful 2021. Tangible book per stock accrued by 0.08 EUR/share Q/Q to 20.28 EUR/share. The Cost/Income ratio was 69% successful 2022. The mostly of nan profit was retained, pinch a 0.20 EUR/share dividend projected and a 122 cardinal EUR buyback, for a full payout of 30%:

Profit Allocation for 2022

Commerzbank Q4 2022 Results Presentation

Capital Position

The slope further solidified its CET1 superior to 14.14%, up 30 bps Q/Q. The maximum distributable magnitude request (MDA) is group to summation by circa 61 bps successful 2023 to astir 10.1%, from 9.48% currently. Thus nan pro-forma MDA buffer is astir 4%.

Having made bully advancement connected its restructuring truthful far, Commerzbank plans to summation nan payout ratio from 30% successful 2022 to 50% of profit successful 2023.

Quantifying nan Capital Surplus

Largest competitor Deutsche Bank (DB) expects its MDA request to summation to astir 11.2% successful 2023. With a CET1 of 13.4% DB truthful is sitting connected a pro-forma MDA buffer of astir 2.2%.

With its 4% pro-forma MDA buffer, Commerzbank has a 1.8% MDA buffer surplus comparative to DB, which tin beryllium utilized for a assortment of firm purposes. For nan liking of comparison, I will compute nan theoretical effect from Commerzbank deploying its surplus superior connected stock buybacks.

As of nan extremity of Q4 2022, Commerzbank had CET1 superior of 23.9 cardinal EUR. The 1.8% surplus truthful represents immoderate 3.04 cardinal EUR successful capital. With a existent price/tangible book of astir 0.56 nan theoretical buyback tin create immoderate 2.39 cardinal EUR successful book value.

This would summation nan tangible book by astir 1.91 EUR/share to 22.19 EUR/share. In that improbable script (it will beryllium rather difficult for nan slope to repurchase truthful overmuch astatine nan existent price, mounting speech nan regulatory and consequence hurdles successful specified an operation) nan price/tangible book would amended to astir 0.51, still supra nan 0.44 astatine Deutsche bank.

All successful all, Commerzbank is acold safer than DB successful nan existent recessionary environment, but beardown value gains person eroded nan accretive effect of imaginable buybacks.

Outlook 2023

The prospects for 2023 are awesome for Commerzbank, particularly connected nan net liking income (NII) front:

NII improvement 2021-2023

Commerzbank Q4 2022 Results Presentation

From 6.3 cardinal EUR successful 2022, NII is group to summation to astatine slightest 6.5 cardinal EUR, possibly moreover arsenic precocious arsenic 7.1 cardinal EUR.

Risk result seen astatine beneath 900 cardinal EUR (2022: 876 cardinal EUR) assuming usage of apical level adjustments (482 cardinal EUR remaining). These adjustments are provisions for in installments losses made by guidance connected a discretionary basis, alternatively than predicated by existent indebtedness losses.

CET1 seen astatine astir 14%.

Expenses targeted astatine 6.3 cardinal EUR (2022: 6.5 cardinal EUR), nevertheless shifting towards a cost/income (C/I) ratio target. For 2024 nan C/I target is 60%.

All successful all, successful 2023 pre-tax income should amended by astatine slightest 0.4 cardinal EUR aliases 20% (in 2022 pre-tax profit was 2 cardinal EUR). This should boost nan bank's profit by adjacent to 0.3 cardinal EUR pinch a ROTE of astatine slightest 6% successful 2023.

Investment Thesis

Commerzbank still expects a mild recession Germany successful 2023 (-0.5%), pinch anemic maturation successful 2024 (+0.5%):

GDP and Inflation trends

Commerzbank Q4 2022 Results Presentation

The slope is successful a comfortable position to upwind nan downturn and plans to summation shareholder distributions. However important outperformance comparative to largest home adjacent Deutsche Bank clouds nan stock value outlook complete nan contiguous future.

Over nan agelong word I would expect Deutsche Bank's comparative valuation to improve, which should unfastened nan measurement for further gains astatine Commerzbank. Furthermore, location is room for further operational betterment astatine Commerzbank. The slope ended 2020 pinch 800 home locations (bank branches) and has already trim their number to 450 arsenic of 2022. The caller target for 2023 is 400. For comparison, ABN AMRO (OTCPK:AAVMY) operates pinch 27 slope offices. While nan Netherlands has a organization immoderate 5 times smaller than Germany, moreover counting branches successful Poland, it is safe to opportunity Commerzbank tin trim home locations to 150-200 successful nan coming years.

Commerzbank is making advancement connected its ROTE target of astatine slightest 7.3% for 2024. The beardown superior position will shield nan slope moreover successful an adverse recessionary outcome. While I spot much constricted upside successful nan contiguous future, nan exit from antagonistic rates successful nan eurozone has been a gamechanger. Therefore I deliberation nan slope is simply a clasp for nan mean word and a bargain successful nan agelong term. I look guardant to nan slope updating its post-2024 targets.

Thank you for reading.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Ivo Kolchev floor plan picture

I ventured into investing successful precocious schoolhouse successful 2011, chiefly successful REITs, preferred stocks, precocious output bonds. More precocious I person been combining agelong banal positions pinch covered calls and rate secured puts. I attack investing purely from a basal semipermanent constituent of view. Currently I mostly constitute articles for various websites. Previously I person worked arsenic a information expert astatine Dynamo Software serving clients successful nan plus guidance industry, astatine nan Bulgarian banal speech rate marketplace operations table utilizing nan T7 trading system, arsenic an analyst/portfolio head focused connected Western Europe, arsenic good arsenic a inferior accountant for typical intent vehicles issuing CLOs & CDOs . I person a Master's grade successful Finance and person passed nan Level 3 of nan CFA exam.- Disclosure: I americium not a financial adviser. All articles are my sentiment - they are not suggestions to bargain aliases waste immoderate securities. Perform your ain owed diligence and consult a financial master earlier trading.

Disclosure: I/we person a beneficial agelong position successful nan shares of CRZBF, CRZBY, DB either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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