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May 07, 2008

Interim report as of March 31, 2008: Commerzbank maintains resilience amidst difficult market environment

  • Stable growth in the core business lines
  • Operating profit reaches EUR 435 million - consolidated surplus EUR 280 million
  • Comparatively little negative impact from financial crisis
  • New segment Central and Eastern Europe gets off to a good start

Commerzbank posted a satisfactory result in the first quarter of 2008 despite a persistently challenging environment. The core businesses serving Mittelstand (small and medium corporate customers) and private and business customers in particular, as well as the commercial real estate customers, were stable. Operating profit reached EUR 435 million (previous year: EUR 908 million). The Board of Managing Directors expressed its satisfaction with this result in view of further value adjustments in response to the international financial crisis amounting in total to EUR 244 million (of which EUR 179 million are reflected in the net investment income and EUR 65 million in the trading profit) and the charges for the restructuring of Hypothekenbank in Essen. The consolidated surplus attributable to Commerzbank shareholders fell in the first quarter to EUR 280 million (EUR 609 million). This represents a return on equity after taxes of 8.4% (19.7%) and earnings per share of EUR 0.43 (EUR 0.93).

"Commerzbank has solid foundations. We have posted a respectable result in an extremely challenging market phase thanks to our clear customer orientation on the German domestic market and the good performance of our new Central and Eastern European segment. Our business model has proven itself effective even in this time of crisis," says Klaus-Peter Müller, Chairman of Commerzbank's Board of Managing Directors of the positive performance.


Net interest income and net commission provide a strong basis

The high quality of the result is once again notable. Net interest income, for example, at EUR 1.02 billion (EUR 1.05 billion) remained slightly below the previous year's level. This figure would have been around 10% higher without the negative net interest income impact of the Public Finance and Treasury segment. A continued rise in loan volumes as well as deposits also contributed to this result. There was little change in margins. In response to the rising economic risks, the provisioning for loan losses was slightly increased. At EUR 175 million (EUR 160 million), this figure represents one-quarter of the allowances of around EUR 700 million projected for the entire year.

Net commission income, at EUR 732 million (EUR 847 million) was satisfactory once again. The adjusted decrease of 2.5% from the previous year is even more remarkable given that market conditions caused income from private securities transactions to fall. The bank reported a total trading profit of EUR 173 million (EUR 301 million) in the first quarter. Actual trading excluding negative charges in book valuation was as high as EUR 235 million, a good level in view of the challenging market conditions.

Income and expenses largely offset one another in the net investment income of minus EUR 26 million (EUR 225 million). This includes, on the one hand, book profits from the sale of the French asset management subsidiary, Caisse Centrale de Réescompte (CCR), and from the sale of a holding of BRE Bank. On the other hand, other corrections in valuation on the ABS-Portfolio totalling EUR 179 million impacted the income statement, of which EUR 109 million stemmed from securitized US real estate loans (subprime) and EUR 70 million from predominantly US companies' structured bonds. These figures are further indication that Commerzbank is much less affected by the financial crisis than many other banks.

The bank continues to have its costs firmly under control. Despite additional expenditure relating to the current push for growth, operating expenses in the first quarter were actually slightly lower than one year ago, at EUR 1.32 billion (EUR 1.36 billion).

The consolidated balance-sheet total fell slightly as at the end of March to EUR 602 billion from its level at year-end. At the same time, the risk weighted asset level fell considerably as the Basel II regulations were applied for the first time. This improved the core capital ratio to 7.5%. Commerzbank's liquidity situation, at 1.17 on a quarterly average, also continues to be excellent as measured by Principle II of the bank supervisory authority.


Mittelstand and Private Customers remain reliable sources of income

Retroactively to January 1, 2008, Commerzbank took account of the rapidly growing significance of the business in Central and Eastern Europe in its segment reporting. For the first time, it now shows a separate segment for Central and Eastern Europe and hence a total of six operating segments.

The Private and Business Customers segment was able to slightly surpass its positive result in the previous year, turning in an operating profit of EUR 147 million. The operating return on equity rose to the exceptional level of 37%, due in part to the fact that less equity was tied up. The trend in net interest income was also very positive, benefiting from private investors switching to safe bank deposits in the wake of the market turbulence. comdirect bank delivered strong results, and the branch business also showed a dynamic performance: the bank increased its customer base by 100,000 (net) domestic customers to a total of 5.6 million by the end of March.

The Mittelstandsbank was reduced in size due to the reallocation of its former Eastern European activities. It was able to increase its operating profit considerably by 23% to EUR 232 million thanks to the robust economic situation in Germany and its strong market position. The return on equity reached 35%. The continued rise in lending shows that fears of a credit squeeze are unfounded.

The Central and Eastern European segment includes the operational units in this region. The outstanding performance of BRE Bank and a one-off gain meant that this new segment started off the 2008 year with a jump in results of 60% to EUR 123 million. The return on equity reached 36%. In the medium term, the goal is for the Central and Eastern European business to make up more than 15% of the Group's total operating profit. This is evidence that the Central and Eastern Europe segment has already become a prominent mainstay for Commerzbank.

The Corporates & Markets segment was not totally immune to the sharp downturn in the international capital markets business and had to cope with a negative result of EUR -50 million. The remarkably good trading profit in light of the circumstances was partially eroded by value adjustments of structured securities.

Commercial Real Estate also turned in solid operating figures. Net interest income was stable vis-à-vis the previous year, while net commission income even saw an increase. Because, at the same time, a further EUR 84 million from the portfolio of securitized US mortgages (RMBS) was written down due to market conditions, operating profit fell to EUR 57 million. The bank has now written down approximately 35% of its total holdings of RMBS securities.

The Public Finance and Treasury segment again incurred an operating loss, which totalled EUR -144 million in the first quarter. The ongoing unfavourable interest conditions in the Eurozone, charges from the balance sheet adjustment for the Hypothekenbank in Essen and several special factors had a considerable negative impact on the result. The bank is therefore working flat out to integrate EssenHyp into Eurohypo as quickly as possible and aims to be profitable in this segment by 2010 at the latest.


The Board of Managing Directors remains confident

Klaus-Peter Müller is confident about the future: "Thanks to its balanced business model and its conservative investment policy, Commerzbank has weathered the financial crisis well, and this was also true of the first quarter of 2008. Due to the unusual market situation, it would not, however, make sense at this time to present a narrow range for the income targets in 2008. From today's perspective, it could be very difficult to reach the good result of the previous year. We are reiterating our medium-term goal of a return on equity after tax of more than 15%."

The bank will also consistently continue to pursue its profitable growth path: "Commerzbank is well positioned with its strong, customer-based business model and the robust core of its domestic business. We want to continue to grow in these strong segments and expand our position. However, in other key areas such as in Corporates & Markets, in parts of the real estate business and above all in Public Finance and Treasury, we will continue to reduce risk potential systematically," says Müller.


Dr. Eric Strutz, CFO of Commerzbank, will provide more details on the figures at a teleconference on May 7. You can find charts illustrating these figures here.



Commerzbank Group: Income statement (in EUR million):

  1st quarter 2008 1st quarter 2007 Change in %
Net interest income 1022 1045 -2.2
Loan loss provisions -175 -160 +9.4
Net commission income 732 847 -13.6
Trading profit 173 301 -42.5
Net investment income -26 225 .
Other result 31 10 .
Operating expenses 1322 1360 -2.8
Operating profit 435 908 -52.1
Restructuring expenses 25 - .
Taxes on income 80 267 -70.0
       
Consolidated surplus attributable to Commerzbank shareholders 280 609 -54.0
       
Earnings per share (€) 0.43 0.93 -53.8
Return on equity on the
consolidated surplus 1)
8.4% 19.7%  
Cost/income ratio in op. business 68.4% 56.0%  

1) annualized

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