Commerzbank AG

Core capital ratio (Tier 1) rises to 11.2%; new medium term target range of 7% to 9% set

The SoFFin silent participation will boost the core capital ratio (Tier 1) of Commerzbank to 11.2%. With this increase Commerzbank reflects the sharp rise in capital requirements for banks demanded by supervisory authorities, rating agencies and the capital markets in the wake of the financial crisis. The ratio is in line with the international competition. In view of changes in the market situation, Commerzbank has raised its medium-term target range for the core capital ratio (Tier 1) from 7% - 8% to 7% - 9%.

"We have welcomed the German Government's measures form the beginning. It is an important contribution to the stabilization of the financial market. We have decided to make use of the package because this is good for the bank, its employees and its clients. As a result, Commerzbank further enhances its competitiveness", said Martin Blessing, CEO of Commerzbank. "We will continue with our proven business model, which is strongly based on our core business of small and medium enterprises and private customers, even after the takeover of Dresdner Bank. The additional capital in the form of a silent participation also takes into account the interests of our shareholders, as there will not be any dilution of their shares."

Following the takeover of Dresdner Bank the new Commerzbank will have a core capital, in the upper range of the increased midterm target range and far beyond the currently planned ratio. The clients of both banks will profit from the boosted capital basis. As the leading German bank for small and medium sized companies the new Commerzbank will full fill its responsibilities to offer loans to companies on an ongoing basis, especially in light of the threat of an overall economic downturn in Germany.

Under the terms of the agreement, SoFFin will guarantee additional new debt securities to be issued by December 31, 2009 and other liabilities of the Commerzbank Group for a total amount of up to EUR 15 billion. Any liabilities guaranteed by SoFFin have a maximum maturity of 36 months. Respective guarantees mature at the end of 2012 the latest. Commerzbank pays a market rate for the guarantees granted.

"In recent years Commerzbank has considerably reduced its need for refinancing on the capital markets. We are comfortably refinanced for 2008 and beyond. As of today there is no current need for any guarantees," said Blessing. "However they offer additional and attractive refinancing options, in case markets should deteriorate again"

The agreement with SoFFin stipulates that Commerzbank may not pay any dividends in 2009 and 2010. The annual fixed salaries of the management board members are currently at EUR 480,000 thus below the limit of EUR 500,000 set by SoFFin. The compensation of the CEO will be capped at EUR 500,000. Bonuses for 2008 and 2009 will not be granted.

Consolidated surplus of EUR 0.9 billion for the first three months of 2008

The consolidated surplus for the first nine months 2008 amounts to EUR 0.9 billion. The operating profit for the respective period is EUR 444 million. Taking into account the restructuring costs in the first quarter of 2008 for Essen Hyp, the pre-tax profit came out at EUR 419 million. For the same period in the exceptionally strong prior year (2007) it was EUR 2.3 billion. Commerzbank posted a net loss of EUR 285 million for the third quarter of 2008 (Q3 2007: EUR 339 million). The operating profit was minus EUR 475 million. In Q2 Commerzbank reported an operating profit of EUR 484 million (Q3 2007: EUR 361 million).

"In the first nine months of the year, we demonstrated that our business model is highly robust, even in difficult markets. We are growing profitably in our core segments, and have further grown our clients, deposits and results," said Blessing. "In the capital market business and in public finance we are paring back our activities. But the worsening of the financial crisis in September and the resulting sharp drop on world financial markets have had a major impact on investment banking and public finance."

Core segments with an operating profit of EUR 451 million

The trend continued to be upbeat in the core business areas of Private and Business Customers, Mittelstand and the Central and Eastern Europe operations. The operating profit for these segments in the third quarter was EUR 451 million (Q2 2008: EUR 494 million). All segments saw an increase in clients and deposits.

The strong growth in clients was particularly impressive. Private and Business Customers gained approximately 416,000 new clients in the third quarter alone, thereof 183,000 in Germany more than in any previous quarter ever. Since the start of the financial crisis we have gained approximately EUR 25 billion in client deposits, with more than EUR 8 billion coming in Q3. The Mittelstand segment has gained more than 5,000 new clients since the beginning of the year.

The adverse impact of the financial crisis for the capital market business amounts to EUR 1.1 billion

The Commercial Real Estate segment is also continuing to perform well, although Q3 showed an operating loss of EUR 56 million. This reflects the impact of write-downs on the US RMBS portfolio totaling EUR 144 million.

The worsening financial crisis in September had an adverse affect on the quarterly operating profit of the Corporates & Markets and Public Finance Treasury units - which were reported together for the first time - with an operating loss of EUR 898 million. The Lehman failure (EUR 357 million) and the Iceland moratorium (EUR 232 million) had the biggest impact.

Net interest and commission income of EUR 1.9 billion

Net interest income of the Commerzbank Group in the third quarter was EUR 1.2 billion, up 3.1% over Q2 (Q3 2007: 21.4%). One segment benefiting from this success was Private and Business Customers, which maintained the high level of the previous quarter, along with the Mittelstand and Central and Eastern Europe segments, which significantly surpassed their results from the second quarter.

Loan loss provisions were increased from EUR 414 million in Q2 to EUR 628 million. This significant increase was primarily due to Corporates & Markets. The New York Corporates business segment was affected by the Lehman Brothers and additional write-downs on structured products. We also increased the general loan loss provisions as well as provisions for the effects of an economic slowdown in the Central and Eastern European segment.

Strong growth in the Private and Business Customers and Mittelstand core segments was particularly responsible for the good performance of commission income, which totaled EUR 720 million, in line with Q2 2008 (Q3 2007: EUR 810 million). It should be noted that in 2007 the international asset management units, which have been sold, were included in the results. In addition, Mittelstand had a positive one-off effect of EUR 105 million. Securities trading of private customers was weaker in Q3 due to turbulences in the financial markets. However, the Commercial Real Estate segment realised a higher commission income. Compared with the first nine months of last year, however, the commission income decreased by 10.2% to EUR 2.2 billion.

After the outstanding trading profit of the second quarter (EUR 375 million), Q3 saw a loss of EUR 297 million. While customer-oriented business, which is one of Commerzbank's core activities, was solid, Corporates & Markets in its new structure (including Public Finance Treasury) was impacted by the Lehman failure and the extreme widening of spreads.

Negative trend for investment income but a positive trend for operating expenses

Net investment income decreased quarter-on-quarter by EUR 143 million to minus EUR 229 million. The proceeds from the sale of ThyssenKrupp shares were offset by impairments on ABS (asset backed securities). Impairments totaled EUR 144 million on the RMBS portfolio, and EUR 55 million on Corporate CDOs. Net investment income in the first three quarters of 2008 was minus EUR 341 million, compared with a profit of EUR 249 million for the same period last year.

Operating expense decreased by 9.9% to EUR 1.2 billion, reflecting the continuing success of our disciplined cost management. In comparison with the first nine months of 2007, other expenses decreased slightly by 0.9% to EUR 4 billion. Personnel expenses fell 8% to EUR 2.2 billion. Other expenses increased to EUR 1.6 billion (+ 11.9%) as a result of growth initiatives.

Commerzbank utilized the changes in reclassifying assets under IAS 39 and IFRS 7 for a portion of the securities allocated to Public Finance (EUR 44 billion). The trading assets (investment banking business) were not affected by this. The revaluation reserve at the end of September 2008 amounted to minus EUR 1.2 billion. Without the changes, it would have totaled minus EUR 2 billion.

EUR 0.9 billion consolidated surplus for the first nine months of 2008

IAS 12 required us to capitalize changes in estimated tax loss carry forwards on domestic results, so that the item for taxation shows income of EUR 508 million (previous year: tax expense of EUR 560 million). As a result, the consolidated surplus was EUR 0.9 billion, clearly surpassing the operating result.

EUR 115 million of the surplus is attributable to minority interests. The amount attributable to Commerzbank shareholders is EUR 812 million. With an average of 663.5 million outstanding shares, operating earnings per share came at EUR 0.67 and earnings per share to EUR 1.22, compared with EUR 3.57 and EUR 2.61 respectively in the same period last year. Net ROI for Q3 was minus 8.3% (Q2: 24.4%).

Slight decrease in balance sheet total

Commerzbank has reduced the consolidated balance sheet total to EUR 595.6 billion (- 3.4%) since the end of 2007. Claims against banks were reduced significantly by 18.9% to EUR 60.0 billion, while claims against customers were increased slightly to EUR 295.9 billion.

While customer deposits grew 8.3% to EUR 172.4 billion, liabilities to banks rose only slightly to EUR 125.9 billion (+ 0.6%).

Core capital, equity ratio and key liquidity all in the target range

In September we increased equity by EUR 1.1 billion in a matter of hours through a capital increase without subscription rights. As at September 30, 2008, Commerzbank had a Tier 1 of 7.6% on the basis of the German Commercial Code or 7.3% on the basis of IFRS. Both are at the upper end of our previous target range. Key liquidity on the reporting date of 1.14 was also in the upper end of the target range (1.08 - 1.15).

Outlook

There are growing signs that the situation in the global financial markets is affecting the real economy. The worldwide economic downturn has reached Germany, and the Central and Eastern European regions will increasingly lose momentum. However, the bank's economists expect a noticeable recovery of the economy in 2010.

"We have always said that it would be very difficult to match the good result of 2007 in the current full year," said Eric Strutz, Commerzbank's CFO. "The dramatic upheavals in recent weeks have shown again that reliable full-year forecasts for 2008 are not possible in the current environment. We will continue to face challenges in 2009."

"Next year will be marked by the takeover of Dresdner Bank," said Blessing. "We are boosting our market position and realising cost synergies. Thanks to the takeover and our strengthened capital base we are well equipped for the period after the crisis."