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November 05, 2009

Commerzbank: Operating profit up by EUR 345 m to EUR 122 m in Q3

  • Gross revenues up by 13% on Q2 to EUR 3.439 bn
  • Trading profit increased by EUR 588 m on Q2 to EUR 659 m
  • Integration charges and goodwill impairments burden, net result of minus EUR 1.055 bn
  • At 10.9%, the core capital ratio (Tier 1) remains at a high level
  • Totals assets were down 15% and risk-weighted assets dropped 14% compared to end-2008
  • Blessing: "The German core business is profitable, but Commerzbank will close 2009 with a loss"

Commerzbank significantly increased its operating profit in the third quarter of 2009. At EUR 122 million the operating profit was EUR 345 million above the previous quarter. The result posted by the Portfolio Restructuring Unit (PRU), which was established at the start of July, benefited from the market recovery. A review of goodwill resulted in write-downs of some EUR 650 million. The impairments on goodwill are mainly due to the previously announced realignment of Eurohypo's strategy and the respective changes in the expected revenues. These became necessary because of the new segment allocation. Planned charges for the integration of Dresdner Bank (EUR 904 million) and goodwill impairments led to a net result of minus EUR 1.055 billion (Q2: minus EUR 761 million).

"The German core business is profitable. The Portfolio Restructuring Unit, which bundles non-strategic holdings, has posted substantial write-ups. However, the second half of the year remains difficult and Commerzbank will close 2009 with a loss," said Martin Blessing, Chairman of the Board of Managing Directors of Commerzbank. According to the EU-requirements the bank is not permitted to release any reserves in the case of an annual loss. Thus, the bank is not allowed to service profit-related equity-like instruments. This, however, will not result in any changes for the 'Roadmap 2012'. Blessing: "We are systematically implementing a customer-oriented strategy and our core business provides us with the basis for long-term and sustainable growth."

Commerzbank repositioned itself during the first half of 2009. In addition to the core business, there are now the new Asset Based Finance (ABF) and PRU segments. All information for the second quarter of 2009 thus refers to pro-forma figures. A detailed reconciliation can be found here.


At 10.9%, the core capital ratio (Tier 1) remains at a high level

The revaluation reserve improved by EUR 800 million to minus EUR 1.724 billion as at September 30, 2009, against the backdrop of the recovery in the capital markets. Positive hidden reserves (fair value) from assets and liabilities on the balance sheet totalled EUR 3.6 billion (before tax). Total assets were down 15% compared to the end of 2008 to EUR 892 billion. Risk-weighted assets were reduced by 14% to EUR 293 billion. At 10.9%, compared to 11.3% as at 30 June 2009, the core capital ratio (Tier 1) remained at a high level in the third quarter despite the integration costs of EUR 904 million. This shows the progress being made as the group implements 'Roadmap 2012'. Total lending to small and medium-sized companies in Germany remained high at more than EUR 130 billion.


Net commission income slightly increases; trading profit significantly improved

The positive trend in the capital markets has revived customers' securities activities, with net commission income up slightly to EUR 953 million (Q2: EUR 947 million). With respect to net interest income, outflows of funds in investment products closely linked to the capital markets were noticeable. Net interest income therefore slightly decreased to EUR 1.769 billion (minus 4%). The recovery in the capital markets was also apparent in trading profit: mainly thanks to write-ups on PRU assets and realised gains resulting from the active reduction of the portfolio it increased significantly during the third quarter to EUR 659 million (Q2: EUR 71 million). At minus EUR 54 million, net investment income was below the figure for the previous quarter (Q2: EUR 172 million). The positive effects from the disposal of ownership stakes (GEA) were counterbalanced by the negative impact from the impairments on asset backed securities.


Loan loss provisions slightly up, operating expenses stable

In the third quarter of 2009, loan loss provisions totalled EUR 1.053 billion compared to EUR 993 million at the end of the second quarter. The rise can mainly be attributed to the ABF segment and impairments on loans to foreign banks in the Mittelstandsbank. Loan loss provisions increased only moderately in the German customer business of the Private Customers and Mittelstandsbank segments. Operating expenses amounted to EUR 2.264 billion. They remained stable compared to the previous quarter, but are down 9% on the previous year. In comparison to year-end 2008, the number of full-time employees (including partial retirement) has been reduced to some 55,000 (minus 7%). While personnel costs have fallen, other expenses, especially integration costs, have increased.


Customer business in Germany with positive contribution, BRE Bank also performed well

With more than 11 million in the Private Customers segment and approximately 3.6 million in Central and Eastern Europe, the number of customers remained at a high level. The Mittelstandsbank was able to extend its market share, in particular among smaller corporate customers. The operating profit of the Private Customers and Mittelstandsbank segments totalled EUR 46 million and EUR 64 million respectively, coming in below the figures for the previous quarter (Q2: EUR 62 million and EUR 124 million). Net commission income in the Private Customers segment increased by almost 5% to EUR 562 million, while net interest income fell by 4% due to changes in investment behaviour. Meanwhile, net interest income in the Mittelstandsbank fell by 7% to EUR 502 million. In Central & Eastern Europe (CEE), the operating result improved by EUR 46 million to minus EUR 36 million. While BRE Bank performed well in the stable Polish market, Russia and the Ukraine had a negative impact.


Corporates & Markets affected by wind-down portfolios, customer-oriented business profitable

The third quarter of 2009 saw wide-ranging changes in the structure of the Corporates & Markets segment. Public Finance was allocated to the new Asset Based Finance segment, while the Portfolio Restructuring Unit became a segment in its own right. Particularly in the customer-oriented business areas such as Corporate Finance and in the fields of Equity Derivatives & Commodities, Corporates & Markets has developed well. Net interest income rose by over one-third compared to the second quarter to EUR 265 million, principally due to one-offs. At the same time, proprietary trading activities were further cut back and non-strategic risk positions reduced. Due to charges from the de-risking portfolios (EUR 133 million), trading profit was at EUR 48 million (Q2: EUR 186 million). Administrative expenditure declined, operating profit fell to minus EUR 96 m (Q2: minus EUR 1 million). Without the charges resulting from the de-risking portfolios, operating profit in the first nine months of the current financial year was at EUR 454 million.


Net interest income in ABF segment down, PRU profits from market recovery

In the Asset Based Finance segment, net interest income fell by just over 25% to EUR 242 million. The reasons for this were both increased refinancing costs and highly selective new business. By comparison with the previous quarter, net commission income fell by EUR 9 million to EUR 66 million, reflecting the reduced new business in the area of commercial real estate. New business in real estate financing during the first three quarters came to EUR 1.4 billion, significantly below the volume of EUR 13.1 billion reported in the same period last year. Mainly as a consequence of impairments on individual commercial real estate commitments in the USA and Spain, risk provision increased slightly to EUR 367 million. Boosted by the positive developments in the capital markets, the Portfolio Restructuring Unit benefited from write-ups. It posted an operating profit of EUR 497 million; this includes EUR 311 million in gains from the divestment of holdings as part of the strategic risk reduction. In addition, there were EUR 435 million in unrealised write-ups. When calculated on the basis of nominal values, 15% of the structured credit portfolio has been offloaded since the beginning of the year.


Strutz: "Our strategy proves valid. We have strengthened our position in customer-oriented business"

"We are consistently implementing the 'Roadmap 2012'. We are on track and have reached many milestones ahead of schedule. The third quarter shows our strategy proves valid. We have strengthened our position in the customer-oriented business", said Eric Strutz, Commerzbank's Chief Financial Officer and the member of the Board of Managing Directors responsible for the PRU segment. "We are also implementing the agreements reached with the EU Commission, as announced." By concentrating on selected locations in Wealth Management, several subsidiaries have already been sold. By the end of September 2009, Commerzbank had also placed some EUR 28.7 billion of its own securities in the market. Strutz: "Our plans for 2009 envisaged a funding volume of EUR 20 billion. We achieved that as early as the second quarter. In recent weeks we have used market windows for additional unsecured issuances, which means that we have already covered some of our planned funding needs for 2010. We will continue to take advantage of opportunities in future when they arise." Guarantees totalling EUR 10 billion that were not required were given back to the Federal Government in the second and third quarter respectively.


Outlook

The global economy is developing unexpectedly well in the second half of 2009, but the possibility of setbacks cannot be excluded and the environment remains challenging. "For the remainder of the year, we anticipate solid performance in the core Private Customers and Mittelstandsbank segments. The Central & Eastern Europe and Asset Based Finance segments will continue to face difficult conditions in their respective markets", said Strutz. At the beginning of the year, the total of loan loss provisions and charges against earnings on account of the financial market crisis was expected to come at 25% below the pro-forma total for 2008 (EUR 9.7 billion). In fact, these charges will be some 38% down. However, there have been some adjustments, as the proportion of loan loss provisions will likely be higher, while that of the other charges against earnings is expected to be lower. Integration costs are anticipated to reach a total of EUR 2 billion in 2009, with EUR 1.7 billion attributable to the cost of restructuring. Q4's integration costs are expected to reach some EUR 300 million. Commerzbank's economists expect German gross domestic product (GDP) to grow by some 2% in 2010. "This will benefit our private and corporate customer operations. Loan loss provisions will also decrease in the medium term", said Strutz. Commerzbank remains confident that it will be able to commence repayment of SoFFin's silent participations from 2012 assuming normal market conditions, and as early as 2011 if market conditions are favourable.

The bank will be reporting in detail on the implementation of 'Roadmap 2012' and on the progress of the Dresdner Bank integration at the 'Investors' Day' scheduled for November 25, 2009.



Excerpt from the consolidated profit and loss statement

in EUR m Q3 2009 Q2 2009 Q3 20081)
Net interest income 1,769 1,838 1,722
Loan loss provisions - 1,053 - 993 - 898
Net commission income 953 947 1,227
Trading profit 659 71 - 660
Net investment income - 54 172 - 283
Other result 112 5 - 64
Operating expenses 2,264 2,263 2,491
Operating profit 122 - 223 - 1,447
Impairments (Goodwill) 646 70 0
Restructuring expenses 904 216 0
Taxes - 375 269 -
Consolidated profit attributable
to Commerzbank shareholders
- 1,055 - 761 -
Operating expense ratio in % 65.8 74.6 128.3

1) on a pro-forma basis

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