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February 14, 2007

Commerzbank earns record profit in 2006

  • Commerzbank earns record profit in 2006: Consolidated surplus rises 35% to EUR 1,597 million; operating profit up 50% to EUR 2,628 million
  • Return on equity after taxes improves from 12.8% to 14.1%
  • Dividend increase from 50 to 75 cents per share proposed
  • Fourth quarter ends with a good consolidated surplus of EUR 352 million
  • 2007 after-tax target return raised from 11% to more than 12%
  • Offensive growth strategy


Commerzbank generated a record profit in 2006 and achieved the best results in its history: The consolidated surplus rose substantially by around 35% to EUR 1,597 million, EUR 352 million of which was contributed by the good fourth quarter.

Return on equity after taxes continued to rise to 14.1% in 2006. After adjustments ? taking into account restructuring expenses on the one hand and extraordinary income on the other ? after-tax returns reached 11.2%. This figure not only surpassed the comparable figure for 2005 (9.9%), it also clearly exceeded 2006 target returns of at least 10%. The Mittelstand (SME), Corporates & Markets and Commercial Real Estate segments in particular contributed greatly to this excellent overall result.

As can be expected, Chairman of the Board of Managing Directors Klaus-Peter Müller is satisfied with the (as yet uncertified) annual accounts: "Commerzbank is back: successful, healthy, alert and programmed for growth. What we are hearing again and again is that we - as Germany's number two bank - are once again a respected and highly regarded place of business."

Shareholders are expected to participate in the bank's commercial success with dividends increased from EUR 0.50 to 0.75 per share. The Board of Managing Directors will make a proposal to this effect to the Supervisory Board.


Solid net commission income and high trading result

Last year's results were marked by a sharp increase in earnings to a total of EUR 8.7 billion, one quarter higher than the previous year.

Of this, EUR 3.92 billion emanated from net interest income, which remained steady at its 2005 level (in a pro-forma comparison including Eurohypo) despite the difficult conditions presented by the flat yield curve. Loan-loss provisions came to a total of EUR 878 million, a figure which also includes a special risk provision of EUR 293 million for the harmonization of the risk models used by Commerzbank and Eurohypo. Without this one-time charge, risk provisions would have continued to decline by more than one fifth ? a positive consequence not only of the strong economy but also of the cautious value adjustment policies implemented in the past few years. This year, the bank expects current risk provisions at the level of 2006 at the most (i.e. EUR 637 million on a pro-forma basis).

A very positive development was seen in net commission income, in part due to lively private securities trading. Of all the revenue components, however, the greatest change was seen in the trading result, which shot up by a good 70% to reach a peak value of EUR 1.18 billion. The EUR 770 million in earnings derived from the investments and securities portfolio essentially came from the sale of shares previously held in the Korea Exchange Bank and Ferrari.

On the other hand, operating expenses (in a pro-forma comparison) only increased slightly by 3%. This shows that, despite higher performance-related bonuses and an increase in the number of employees working in the Group to a total of nearly 36,000, Commerzbank still has its costs under control.

On the bottom line, this leaves a good operating profit of EUR 2.63 billion for 2006. Correspondingly, the operative return on equity increased to 21.5%, while the unadjusted cost/income ratio improved to under 60%. Five years ago, this ratio would have been some 20 percentage points higher.

As a first step, the remaining record consolidated surplus following the deduction of restructuring expenses, taxes and profits attributable to minority interests will be applied toward higher dividend payments. This translates into a total dividend payment of EUR 493 million, thus making it Commerzbank's largest distribution to shareholders ever apart from the special situation which arose in 2000. The remaining EUR 1,104 million will go into retained earnings. For 2006, Commerzbank shows earnings per share of EUR 2.43.


Mittelstand, Corporates & Markets and Commercial Real Estate are the top performers

Of the individual segments, Mittelstand was the greatest contributor, showing a profit of EUR 817 million, nearly one third of the bank's overall profit. The return on equity for this operating profit grew to an impressive 27%. An even sharper increase was seen in Corporates & Markets, where operating profit rose by nearly two thirds and the return on equity almost doubled to 26%. Another positive result was the performance in Commercial Real Estate, which improved by nearly 40% in a pro-forma comparison.

In the Private and Business Customers segment, however, high restructuring costs and the special risk provision led to a loss despite the fact that ongoing business has been good. Asset Management was able to boost its results by a good 19% thanks to an increase in assets under management to a current total of EUR 112 billion.


Facing the future with an offensive growth strategy

Based on the figures presented and in light of another good start to the year, Commerzbank is confident about the future. Previously set at 11%, this year's after-tax returns target has now been notched up to more than 12% and by 2010 at the latest, this figure should have reached a steady 15%. To make this happen, the bank intends to maintain a firm grip on its costs and further increase commission income's contribution to overall revenue. The bank also expects a boost from Germany's positive economic performance which, after having undergone drastic therapy, is currently in an upbeat mood both politically and economically. An offensive strategy will be implemented to make the most of these opportunities and the bank has set up special growth and efficiency programmes in all business areas to do just that.

It sees particular potential in the Retail Banking segment, where it is aiming for an operating return on equity of at least 18% by 2010. For this purpose, it has launched an initiative among its branch offices dubbed 'Growth for the Future' which calls for extensive investments to be made in staff and equipment. Within the scope of these investments, an additional 700 jobs will be created in sales throughout the Group in an effort to attract around 800,000 new private customers by 2009. Since the campaign's launch last autumn, the bank has already acquired a net total of more than 90,000 new customers in its branch business alone by offering new products such as Topzins investments and a free current account. The focus of its business activities will remain on the successful two-brand strategy which has been in place for ten years and which combines the advantages of a flexible brokerage ? comdirect bank ? and those of a branch bank with a nationwide presence.

In the area of Asset Management, Commerzbank is committed to Alpha, a growth programme that calls for investments predominantly in the areas of product quality, innovation and customer and sales orientation. This programme's key goal is to drastically boost assets under management by its domestic subsidiary Cominvest from their current level of EUR 58 billion to around EUR 100 billion by 2011.

Growth is also the order of the day for the Mittelstand segment which, sailing on the winds of a strong economy, intends to expand further and increase profitability. Commerzbank considers itself Germany's top SME bank, a view confirmed by the top ranking it was awarded in a new survey conducted by the Association of Independent Entrepreneurs (Arbeitsgemeinschaft Selbständiger Unternehmer). It intends to continue building on this strong position, in part by more closely linking the more traditional banking business to the modern capital-market business of investment banking.

The Corporates & Markets segment aims for a long-term return on equity of more than 20%. Among other things, structured products - an area in which Commerzbank was Germany's market leader in 2006 - are to play a key role in the bank's growth plans. Behind this offering is the bank's desire to tap into new investment circles by gaining a stronger foothold in America and Asia.

The Commercial Real Estate segment unites all of the real-estate interests of the Commerzbank Group, both on the financing as well as on the investment side. This lends the bank an expertise in the area of real estate that is unique within Germany. Its earnings target is a return on equity of around 16% by 2008.

The integration of Eurohypo - which falls within this segment - has since reached a successful completion. Müller is pleased that the takeover was so smooth and effective. From a strategic, organizational and HR perspective, Commerzbank and Eurohypo currently form one single unit.

In addition to expanding its domestic activities, Commerzbank also intends to set its sights increasingly on foreign countries. Some of these areas include boom regions such as Asia and the Middle East, where an application will soon be made to establish a branch office in Dubai. Commerzbank's main focus will still remain Central and Eastern Europe, however. The Polish subsidiary BRE Bank wrapped up an excellent year in 2006 and is currently expanding vigorously. Branch networks in Hungary, the Czech Republic and Slovakia are to be expanded as well, and attract additional SMEs.

With its array of programmes to promote stronger growth, Commerzbank considers itself well-equipped to face its competition in the future. It will systematically take advantage of any market opportunities that arise and, in the words of its Chairman of the Board of Managing Directors, Commerzbank will "be not only the leading, most widespread commercial bank in Germany, but the best bank for our customers as well."



Note:

Further information can be found in the internet here


Commerzbank consolidated income statement (€m):

20061)20052)Q4 2006Q4 20052)
    
Net interest income3,9163,167975832
Provision for possible loan losses-878-521-79-29
Net commission income2,8612,415781645
Trading profit1,177685303217
Net result on investments and securities portfolio (available for sale)77064750190
Other results-1426-4-9
Operating expenses5,2044,6621,3951,370
Operating profit2,6281,757631476
Restructuring expense253373937
Pre-tax profit2,3751,720592439
Taxes on income58742717489
After-tax profit1,7881,293418350
Consolidated surplus1,5971,187352338
    
Earnings per share (€)2.431.97  
Net RoE14.1%12.8%  
CIR59.7%67.2%  

1) Full consolidation of Eurohypo as of Q2 2006
2) Restatement due to IAS 8


Preliminary figures 2006

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