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August 03, 2005

Commerzbank interim report as of June 30, 2005

  • Stronger profit in first half
  • Target RoE of 8% remains realistic
  • Board confident for second half

Commerzbank made good progress in operational terms during the second quarter of the year, with a very encouraging development for net interest and net commission income in particular. The bank continues to have its costs under control, and there are signs of further easing on the provisioning front. Its trading profit alone was weak.

All told in the first half of this year, the bank achieved a consolidated net profit of 570m euros, 17.3% more than in the good first six months of 2004. The after-tax return on equity improved accordingly to an annualized 12.6%. As the management board write in the interim report as of June 30, the year¿s target of an after-tax return on equity of at least 8% remains realistic. Despite the difficult economic environment and weak credit demand, they intend to build upon the good first half of the year.


Improved quality of earnings

The decline in the consolidated net profit in the second quarter when compared with both the previous quarter and the second quarter of 2004 is due entirely to the lower income this time from the disposal of securities and investments and also to weak trading activity. By contrast, the result for net interest income was excellent, boosted among other things by higher dividend payments and stronger interest income at subsidiaries and equity participations. At the same time, provisioning, at 177m euros, was again lower than in the first quarter. Altogether 375m euros has been set aside for the first half of the year, exactly half of the amount of at most 750m euros, currently expected for 2005 as a whole.

Net commission income, which was also stronger, reflects the higher revenues from securities transactions on behalf of customers and from asset management. Payments and foreign commercial business continue to perform well.

The increases in net interest and net commission income indicate a general improvement in earnings quality. On the other hand, the trading profit of only 11m euros was disappointing However, there was a marked recovery in June and July.

The temporary market turbulence in bond business had an adverse impact, as did the reduction of non-customer-related proprietary trading activities, with the aim of achieving a more stable trading profit in future. Given the weak trading profit, the management board indicate in the interim report that they are satisfied with the second-quarter operating profit.


Business lines mostly with good performance and prospects

In both the second quarter and the first six months as a whole, most of Commerzbank's major business lines registered encouraging performance overall. This also holds true for the private and business customers area, which posted an operating profit of 153m euros for the first half of the year. This represents a return on equity of more than 16%, even though significant investments are squeezing results at the moment. Noteworthy in this connection are above all the growth programmes in private banking and at the subsidiary comdirect bank, as well as the transformation of practically 100 offices into branches of the future.

Revenues in asset management remained at the level of the first three months in the second quarter, but on account of one-off charges the operating profit was much lower. However, the operating return on equity in the first half of the year as a whole was still good, at over 20%. The management board continue to be positive about the second half of the year.

The performance of the Mittelstand area was encouraging. Its operating profit improved substantially in the first half of the year to 171m euros. The operating return on equity rose to 11.6%, while the cost/income ratio fell to 54.4%. The management board are convinced that this segment will make further progress along its successful course in the second half of the year as well.

While international corporate banking also produced a better result, the newly formed corporates & markets area suffered a setback. Due to the sharp decline in its trading profit, its entire operating profit was negative in the second quarter, at 55m euros. The bank is confident that it can achieve better revenues in the quarters ahead after implementing restructuring measures.

The mortgage banks segment produced an excellent result. After six months, the return on equity here was 32.1%, and the cost/income ratio only just over 10%.


Consolidated balance sheet expands further

The Commerzbank Group's balance-sheet total stood at 445bn euros by mid-year and thus almost 20bn euros stronger than at end-2004. The management board continues to feel well-positioned with the core capital ratio of 7.0%, which enables them to use scope for expansion, as they write in the interim report. Despite disposals of investments, the revaluation reserve stood at a high level of more than 1.5bn euros at mid-year.

The complete interim report is available on the internet here.

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