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November 03, 2005

Commerzbank interim report as of September 30, 2005

Commerzbank exceeds expectations in 3rd quarter with 262m euro consolidated net profit

Defying the tendency of recent years, Commerzbank this year achieved one of the best third-quarter results in its history, surpassing internal as well as external expectations. Both the operating profit of 419m euros and the consolidated net profit of 262m euros are not only far stronger than the comparable year-ago figures but are also well above those of the second quarter.

The figures reflect a further decline in provisioning and strong expansion in the trading profit. At the same time, the ongoing upward trend for net commission income and healthy net interest income underlines the improved earnings quality. All the major business lines performed well in the third quarter, making important contributions to the overall result. This shows that the recent tough restructuring, the various programmes to boost revenues and the persistently tight control over costs are now bearing fruit.

Confidence about the annual results and prospect of higher dividend

Altogether after nine months, Commerzbank's operating profit stands at 1,251m euros, practically a quarter higher than for the whole of last year. Not only have operating expenses been lowered again, by a good 1%, but also - and especially encouraging - revenues have improved by almost 9%.

The consolidated net profit of 832m euros after nine months was even more than double that for last year as a whole, which was affected by restructuring charges. The earnings per share of 1.40 euros - as against 0.46 euros for the comparable period of 2004 - indicates the remarkable progress made. The bank is aiming for an after-tax return on equity of over 8% this year (excluding extraordinary profits from the disposal of investments). After nine months, this ratio was an annualized 12.1%, and was thus ahead of target. The operating cost/income ratio improved year-on-year from 69.0% to 64.9%. If this positive development is maintained in the final quarter, "we intend to have shareholders participate in our success in the form of a higher dividend payment", the management board writes in the interim report.

The board also considers it encouraging that the revaluation reserve has now risen to 1.78bn euros. Two-thirds of these reserves come from equities, even though the bank has systematically reduced its non-strategic investments. While the core capital ratio as of September 30 is shown slightly lower, at 6.7%, it remains at a comfortable level. With the net result achieved up to now included, it even stands at 7.2%.

All the revenue components positive

All of the major revenue components registered marked progress in a year-on-year comparison. At 2,339m euros, net interest income was a good 3% higher, among other things because the bank has now returned to a growth course. As a result, the consolidated balance-sheet total of 458bn euros at end-September was almost 8% higher than at end-2004. There is a similar tendency for risk-weighted assets, which expanded by practically 7bn euros during this period to reach 146.6bn euros.

Provisioning continues to develop very positively. Thanks to a persistent easing of credit risk and the conservative provisioning policy pursued in the past, it was possible to reduce it again to a budgeted figure of under 680m euros for 2005 as a whole.

There is also a constant improvement in net commission income. Above all in securities business on behalf of customers and asset management, but also in payments and foreign commercial business, revenues are pointing clearly upwards.

After the setback in the second quarter, Commerzbank - with support from the markets - produced a strong trading profit in the third quarter. At 490m euros from January to September, it was 12.4% higher than last year. There was little change, however, in the net result on the investments and securities portfolio. The 79m euros for the third quarter includes a profit of roughly 25m euros from the disposal of a 10% stake in Heidelberger Druckmaschinen AG.

Segments produce excellent performance

The private and business customers segment generated a stable operating profit of 80m euros in the third quarter. Altogether after nine months, the figure was 233m euros, representing a return on equity of 16.5%.

The slight year-on-year decline is in line with the expectations of the management board and is entirely attributable to higher costs in connection with investments in the future of this business line. These relate, for instance, to the programmes in private banking, for business customers, and at the subsidiary comdirect bank as well as the setting-up of more "branches of the future".

Asset management performed far better in the third quarter than in the preceding three months. Up to September, an operating profit of exactly 100m euros was achieved. While the return on equity of 25.3% is lower than in 2004, it still represents a good level.

The Mittelstand segment reveals an impressive development. Given higher income from commission-earning and trading transactions, combined with lower provisioning, it generated a strong result of 103m euros in the third quarter as well. Included here are the good figures of the Polish subsidiary BRE Bank. In the first nine months, the return on equity surged year-on-year from 5.4% to a good 12.2%.

The sharp improvement in results in international corporate banking is partly due to one-off gains. All in all, the management board is not yet satisfied with international corporate customer business. For this reason, it is launching a programme to improve earnings power and reduce costs.

The restructuring of investment banking to form the corporates & markets segment, introduced exactly one year ago and implemented in the meantime, is already bearing fruit. By reducing risk and volatility, by cutting costs and concentrating on customer-based business, the stage has been set for achieving more stable results in the future than in the past. In this way, with support from the markets, the weakness of the second quarter has already been overcome. The 82m euro operating profit is the best third-quarter result to date in this area.

Commerzbank is deriving a lot of pleasure from its participations in mortgage banks. The operating profit rose again in the third quarter to reach 98m euros. After nine months, the return on equity stood at an impressive 34.4%, surpassing all the other segments of the bank. Here, the management board expects stable profit contributions in the future as well.

Commerzbank Group: income statement (in million euros):

Jan.-Sept.2005Jan.-Sept.2004 1QIII2005 QIII2004 1
Net interest income2,3392,266771719
Provision for possible loan losses(526)(651)(151)(199)
Net commission income1,7701,680599526
Trading profit490436217(9)
Hedging result(22)7(5)14
Net result on investments/securities portfolio4572577923
Other operating result35184635
Operating expenses3,2923,3341,0971,086
Operating profit1,25184541923
Amortization of goodwill-61-20
Restructuring expenses-132-132
Pre-tax profit1,251652419(129)
After-tax profit926346293(200)
Consolidated net profit832270262(216)
Earnings per share in euros1.400.46  
After-tax return on equity2)12.1%3.9%  
Operating cost/income ratio64.9%69.0%  

1) Retroactively for 2004 as well, the new IAS/IFRS rules valid as from 1.1.2005 give rise to minor changes compared with previous accounting.

2) annualized.

Minus figures in parentheses

The complete interim report is available on the internet here.