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February 15, 2006

Commerzbank with strong profit rise in 2005

  • Commerzbank with strong profit rise in 2005
  • Adjusted return on equity of 9.6% well above target
  • On the way to becoming the leading German commercial bank

For Commerzbank, 2005 was a successful year. According to an overview which, though audited, does not yet bear the auditors' certificate, the bank more than tripled its consolidated surplus year-on-year to 1,165m euros. This represents an after-tax return on equity of 12.4%. After adjustment for the income from the disposal of equity holdings, a return on equity of 9.6% emerges. The bank easily surpassed its target of 8%, therefore, achieving one of its best results to date. Shareholders are to benefit from the good result in the form of a dividend payment that is to be doubled to 0.50 euro per share. Through an innovative form of profit-sharing, employees will also participate in the surge in earnings.

Further progress with earnings and lower provisioning

The final quarter of 2005 also proved encouraging for Commerzbank. Both its operating profit (466m euros) and its consolidated surplus (333m euros) were well above the comparable figures for the fourth quarter of 2004 and also higher than those for the good previous quarter. The restructuring expenses of 37m euros are to be used for making improvements to credit-processing and at foreign outlets.

The income statement for the full year similarly shows a marked rise in revenues of almost 16%, reflecting the good quality of the results. Despite weak credit demand, net interest income increased by 5.3%. At the same time, provisioning was reduced substantially to 566m euros, leaving it not even half as high as at its peak in 2002.

Net commission income (+7.3%) benefited from stronger income from securities business and asset management. And at 707m euros, the trading profit was even practically a third higher than in 2004. The net result on participations (647m euros) reflects the actively pursued disposal of certain equity holdings, in particular MAN, Unibanco, Heidelberger Druck and Banca Intesa.

At first glance, the 3.8% rise in operating expenses comes as a surprise, but this was mainly due to an extra bonus payment to staff and a write-down of 118m euros on Asian real estate taken over from the UK subsidiary Jupiter. Without these effects, the costs would have been barely higher than in 2004.

The balance on all income and expense items in 2005 is an operating profit of 1,717m euros, which was 70% more than a year earlier. It underlines the turnaround which Commerzbank has achieved since 2001. Accordingly, the operating return on equity rose further to 16.8%, while the cost/income ratio improved to a present 67.1%.

Of the consolidated surplus remaining after restructuring expenses, taxes and the profits attributable to minority interests have been deducted, 328m euros is to be used for the distribution to shareholders and 837m euros for allocating to retained earnings.

Commerzbank's chairman, Klaus-Peter Müller, commented on last year's results: "With these figures, Commerzbank is back on the road to success. We have not only achieved, but also easily improved upon, our target of an after-tax return on equity of 8%. As the individual segments also either realized their targets or in some cases far exceeded them, we are very satisfied with 2005."

Earnings surge in Mittelstand, Corporates & Markets and Mortgage Banks segments

Last year, the focus in the Private and Business Customers segment was on extensive investments for growth, especially in private banking, the business customers area and at comdirect bank. These initiatives helped boost revenues, but at the same time led to additional expenses. This segment also has to bear the lion's share of the bank's profit-sharing scheme for staff. To this extent, the pre-tax profit of 282m is in line with internal expectations and reflects a greatly improved sales performance. It remains the bank's goal to expand further in retail business, including through external growth.

In Asset Management as well, performance in 2005 proved to be stable. Here, too, Commerzbank is committed to expansion. A current example here is the takeover of Münchner Kapitalanlage AG in two stages from Continentale Holding AG. With roughly 120,000 customers, this company manages funds worth 1.4bn euros. Fresh momentum should also be generated by the close cooperation in future with the Continentale insurance group to sell fund and banking products.

Commerzbank's Mittelstand segment took a big leap forward in 2005. Its operating return on equity improved significantly to 13.5%, even surpassing expectations, which had been revised upwards in the meantime. Results were boosted by both lower provisioning and higher revenues. By systematically catering to the needs of small to medium-sized enterprises (Mittelstand), the bank has managed, within only two years, to gain more than 9,700 new corporate clients. It is thus clearly on course to become Germany's best Mittelstand bank.

Corporates & Markets also registered an especially positive development with a 287m-euro swing in its operating profit to 212m euros. This progress is all the more remarkable as, following radical strategic repositioning, this business line now employs roughly 30% fewer people, conducts its business with the risks halved and ties up about 10% less equity. Corporates & Markets is confident that it can raise its return on equity even further.

The International Corporate Banking segment looks after the bank's corporate business in Western Europe, North America and Asia. In all three regions, the bank is profitable. The operating return on equity reached 21.5%. Nonetheless, the management board still sees considerable potential for rationalization here. For this reason, the structures of the outlets in Western Europe are being submitted to an optimization process in order to improve profitability. The Asian units are to follow in a second step.

For the Mortgage Banks segment, 2005 was a really strong year. Thanks to good performance at both Eurohypo and Hypothekenbank in Essen, the operating profit surged to 350m euros. This represents an operating return on equity of 34.8%, achieved with a cost/income ratio of no more than roughly 11%.

Consolidated income statement (in millions of euros):

2005*)2004in %Q4 2005*)Q4 2004
Net interest income3,1723,013+5.3833747
Provision for possible loan losses(566)(836)-32.3(40)(185)
Net commission income2,4152,250+7.3645570
Trading profit707539+31.2217103
Hedge accounting(22)6.-(1)
Net result on investments/securities portfolio647339+90.919082
Operating expenses4,6624,493+3.81,3701,159
Other result26193-86.5(9)9
Operating profit1,7171,011+69.8466166
Regular amortization of goodwill-83.-22
Restructuring expenses37132-72.037-
Pre-tax profit1,680796+111.1429144
After-tax profit1,271443+186.934597
Net profit for the year1,165362+221.833392
Earnings per share in euros1.930.61   
Operating return on equity16.8%9.9%   
Operating cost/income ratio67.1%70.9%   
After-tax return on equity12.4%4.0%   
Core capital ratio (according to BIS)8.1%7.5%   
Balance-sheet total (billion euros)445425   
Risk-weighted assets (billion euros)150140   

*)provisional, without audit opinion; minus figures in parentheses.