Commerzbank AG

Good morning and welcome to our conference call. We are looking forward to present and discuss our performance of the first quarter. We had a strong start in 2024. The first quarter, with its record results, clearly supports our equity story. Our earnings power has significantly improved. Both client segments effectively manage the rates environment and successfully develop their fee business. The good development of our revenue base is the foundation of our strong net result of 747 million euros. This translates into a healthy return on tangible equity of 10.5%. Obviously, the double-digit return in Q1 is seasonally supported by high client activity and low risk provisions. But it also includes a burden of more than 300 million from Swiss franc loans in Poland. Hence, it is another good step towards achieving our targets With our client-driven business model in a rates environment between 2% and 3% until 2027, Commerzbank will be able to earn its cost of capital. On this path to 2027, we are very confident to reach at least 8% return on tangible equity for 2024. And let's keep in mind that the current rate, the current return is based on a very high capital level. With 14.9% in the first quarter, we run 140 basis points above our target ratio, which translates into more than 2 billion of capital not considering any future earnings. In essence, it has never been clearer than today that Commerzbank has a huge potential for capital return, and we will deliver on this. Strong performance in the first quarter has been achieved in a very dynamic macro environment. Recessionary trends, fading rate cut expectations, political uncertainties to name just a few require strong navigation skills of our whole management team. So far we did well and going forward we tend to see the glass half full than rather half empty. The German leading indicators point to a pickup of GDP. German PMI and IFO came in better than expected. We are however not out of the woods and challenges remain. But German Mittelstand is highly resilient and shows creativity in coping with the challenges. Overall, we do no longer expect a recession in Germany for 2024. Looking at inflation, we are not strong believers of a fast track towards 2%. We are rather convinced that the inflation problem is not yet solved. Service prices should continue to rise because of rapidly increasing wage costs. Hence, core inflation is likely to stabilize well above 2% and should prevent ECB from easing their monetary policy significantly. We expect the ECB to cut rates by 75 basic points by the end of this year, largely in line with current market expectations. The expected sticky inflation requires us to keep the high level of cost discipline to safeguard our targeted cost-income ratios. Loan demand in Germany is still muted. When talking to German Mittelstand clients, you take away three key messages. First, they are cautious regarding investments in Germany. This is because of an unstable framework for reliable investment cases. Second, they actively tackle the situation by investing abroad, especially when it comes to add-on investments. Third, Commerzbank is their key banking partner. They want us at their side not only for domestic, but especially when it comes to international business. Our deep understanding of their needs and our global presence along trade corridors significantly drive our Mittelstand business. Overall, our customer-centric business model with high asset quality pays off and provides tailwinds for our further business development. And this leads me to the update. on our management priorities for 2024, which we presented with our full year 23 disclosure. First on capital return. We delivered 1 billion euros for 2023 by means of a 600 million buyback and a 35 cent dividend. Our next step is planned for August. If H1 figures come in as expected, we will apply for a next buyback as part of the planned payout for 2024. On fee income, we had a good start in 2024. Corporate clients did exceptionally well and the run rate in private and small business customers was stable compared to last year. The additions from Akila and Global Payments GV after closing later in the year, I'm very confident to reach or exceed our 4% growth target in fee income for 2024. And our standing in the German market provides us with additional confidence. We see ourselves well positioned in a competitive market. As our new business model gains more traction every month, we convert more leads into business. This additional market share will help to offset fading tailwinds from the rates environment. This leads me to the third priority. Strict performance and execution management. Two topics are on the top of the agenda when it comes to business steering. First, stringent performance management on fee generating business. Senior sales management in the business divisions are laser focused on fee business and constantly challenged and supported by the whole management team. Second, cost income ratio steering is already well established and starts with strict cost discipline. The order is clear. Additional revenues provide leeway for business initiatives and investments, and it's not the other way around. In February, I pointed out that customer loyalty is extremely important for achieving our goals. Step by step, we make good progress in this respect, and the recent awards won proof that we are on the right track. In the field of private customers, Commerzbank and Comdirect have been awarded as Best Branch-Based Bank and Best Direct Bank, respectively. Furthermore, Commerzbank has been awarded by Global Finance Magazine as Best Bank in Germany. And also when it comes to employee satisfaction, Q1 provided us with encouraging results. The employee survey showed an improved sentiment and spirit, but there is clearly further upside potential. We as a management team are highly dedicated to improving employee satisfaction. As one part of this, we all will further strengthen the high level of interaction with staff in Germany and abroad. Let me conclude with my key takeaways for today. We have made a further step towards our targets for 2027 and to earn our cost of capital. We had a strong start in 2024 with a return on tangible equity of 10.5%. And we confirm our outlook for 2024, and especially the increase of net income compared to 2023. We are highly confident to deliver a payout of at least 70% for 2024, translating into 1.6 billion euros of capital return. And now Bettina will walk you through the financial. Over to you.

Thank you, Manfred, and also good morning from my side. Before I start with the financials, and in particular for those who have followed Commerzbank for a while, I want to quickly mention the changes in our disclosure. The aim is to simplify the disclosure but give more details in the areas where they matter. We have therefore put even more emphasis on the two key revenue drivers, interest income and fee income. On the other hand, we discontinued the differentiation between underlying and reported revenues, as exceptional items have lost relevance in the last quarters. In the appendix, you can still find a table detailing the 28 million exceptional revenue items this quarter. I hope you will find the new format helpful. Our investor relations team is very happy to take your feedback. And now to the financials of the quarter. As Manfred already said, we had a very good start to the year with a record operating result of nearly 1.1 billion despite booking €318 million provisions for ethics loans at MBank. This led to a net result of €747 million and a double-digit RTE for the quarter. We have grown customer revenues and managed costs in line with our target. With a cost-income ratio of 58%, we are well on track to reach our target of 60% for the year. The quality of our loan book remains high. reflected in the moderate risk result and the further improved regulatory capital ratio of 14.9%. So overall, we made good progress in all relevant dimensions. I will now go through the revenues in detail, followed by costs and the risk result. Overall, revenue growth has been 3% year-on-year. Adjusting for provisions for ethics loans at MBAC, revenue growth has been 8%. This is based on good customer activity in both customer segments, reflected in interest and fee income, but also the fair value result improved by 19 million based on good capital markets business with our customers. Other income, excluding provisions for FX loans at MBank, is 21 million higher, reflecting the early repayment of some legacy loans. I will touch on the FX loans later and will now focus on NII and NCI. we maintained net interest income on the same level reached last quarter, a very good result and above our expectations. Corporate clients' NII is 28 million lower quarter-on-quarter due to an increasing deposit better driven by changes in the deposit mix and overall stable deposit volumes. Private and small business customers in Germany could increase deposit volumes more than compensating a higher better. As there have been offsetting effects between others in consolidation and PSBC, it is best to compare their quarterly interest income development in combination. In total, their NII increased by 25 million quarter on quarter. MBank has maintained interest income on the same level as in Q4. The next slide provides an overview of the deposit and loan volume developments of Commerzbank ex-MBank. Loan volumes have been stable in both customer segments. we have seen slight growth from investment loans in international corporates and overall a steady contribution to P&L from the loan business. On deposits, the shift out of side deposits to term and call deposits in both segments is still ongoing. However, PSPC attracted significant new money in call accounts, growing total deposit volumes by 9 billion, or 6%. These deposits contribute to revenues but come clearly at a relatively higher deposit data. This brings me to the NII outlook for 2024 on slide 11. Interest income remained at a higher than anticipated level in the first quarter, supported by the stronger than expected 9 billion deposit growth in PSBC Germany, with total deposits reaching 261 billion. We expect deposit volumes to be only moderately higher on average in the rest of the year. As mentioned, the additional deposits have been P&L accretive but come at a higher beta, bringing the average beta to 35% in Q1 earlier than originally anticipated. Assuming average stable volumes for the rest of the year, we expect average beta to increase with lower ECB rates. To crush the effect, we have already reduced the rates offered for new call accounts in anticipation of future rate cuts and will continue to adjust our pricing. With this active management and increasing attractiveness of securities at lower interest rates, we might see some outflow of deposits later in the year. But our aim is clear, to optimize the balance between volume and price. Further, the forecast for the ECB deposit rate is now around 3.8% on average for 2024, with the first rate cut in June. This is higher than the expectations in February, where the forwards predicted an average ECB rate of around 3.5%. The benefit from the replication portfolio has not materially changed, but we intend to increase the size of the portfolio. The aim is to stabilize future NII by locking in longer-term rates. Our outlook for loan volumes and margins is unchanged. Now looking at MBank. MBank has raised the outlook for interest income. With interest rates in Poland predicted to largely remain at current levels, we now expect MBank's NRI to be above last year's. In total, our overall 2024 outlook for net interest income has improved from 7.9 billion to 8.1 billion. Let's now move to commission income. The usual seasonal pattern has driven net commission income in the first quarter. This has been more pronounced than usual in corporate clients, which had an exceptionally strong start across all product and client groups. PSPC Germany's commission income has been on the same level as in Q1 last year, when excluding a one-off from Commerz Real. And Bank also had a good start, slightly increasing net commission income. As an add-on to Agonic Growth, we will start to benefit from our recent acquisitions later in the year. Overall, we are very confident that we will reach our 4% growth targets. Given the importance for future revenue growth, we provide you with a further breakdown of the Commission income on slide 13. In corporate clients, all three main fee-generating product lines have grown in the quarter. Capital markets, and in particular bond issuances and syndications, were extremely active in the first quarter, leading to a 9% fee growth year-on-year. In cash and trade, we have seen stronger international business surpassing the level seen in Q1 last year. And finally, the lending business generated more from domestic guarantees and loan fees. PSBC Germany had underlying commission income on the level of Q1 last year. The securities business ex commercial was slightly better, supported by higher securities volume, which continued to grow in the quarter to now 230 billion, supported by the current market performance. The payment business was stable. Let's move to costs on slide 14. We have continued with our approach of maintaining strict cost discipline. Operating expenses ex-M-Bank are nearly on the same level as last year, as salary increases and investments were compensated by active cost management. Overall costs are down 11% year-on-year. Compulsory contributions decreased in 2024, as contributions to the single resolution fund were suspended after it reached its target volume. mBank has increased operating expenses as a result of business growth and ethics effects. This is in line with mBank's cost income ratio steering. Overall, we are confident that we will reach our cost income ratio target of 60% for 2024. The next slide details the risk result. As in the first quarter of last year, the risk result was moderate in Q1. It was driven by a few single cases and releases. This is again testament to the high quality of our loan book. There has been only a minor change in the top-level adjustment, with a net release of 30 million as a result of the usual quarterly review, based on slightly improved macroeconomic assumptions. This concludes the overview of the key line items, and I will now move to the results summary. Our record operating result is based on the good performance of all customer segments, with NBank being lower year-on-year only due to higher provisions for stress-ranked mortgages. Others and consolidations lower result is mainly due to adjustments in the replication portfolio, which are neutral on group level. The tax rate is again slightly elevated at nearly 30%, but below the 35% level we have seen last year. This is due to provisions for FX loans that are not tax-deductible. The full-year tax rate should be on a similar level. On the next slide, I will briefly cover the operating segments starting with corporate clients. Corporate clients' record result is broad-based. All client groups contributed to the solid fee growth. This has more than compensated lower revenues from deposits compared to the last quarter. The operating result was further strengthened by lower costs. The return on capital also improved further, not only due to the good result, but also due to lower RWA as ratings improved for several large corporates. PSPC Germany also had a record quarter. Private customer success in attracting deposits led to higher revenues and was further supported by the adjustment of the replication portfolio in Q4 last year. Small business customers also benefited from the replication portfolio, but to a smaller extent. The operating result further reflects a very benign risk result as well as lower costs. With RWA on the same level as Q1 last year, this led to a strong increase of the return on equity to more than 40%. On an operating level, MBank had its best quarter ever. MBank continues its growth path. We firmly believe they will continue to deliver a great underlying performance. as in past quarters a significant part of mBank's profitability is eaten up by provisions for the legacy Swiss franc mortgages. mBank has booked 318 million this quarter and continues to very proactively reach out to customers seeking settlement agreements for these mortgages. So far, nearly 16,000 settlements have been agreed. Nevertheless, it is quite likely that further provisions will be required in the course of the year albeit below last year's level. In Q2, we anticipate to book provisions for the prolongation of credit holidays by the Polish government. On current estimates, this will be a burden of around 80 million. Although well below their underlying potential, we nevertheless expect MBank to contribute more to group results than last year. Finally, a quick look at others in consolidation. Others and consolidations operating loss is mainly driven by the effects of adjustments in the replication portfolio that are neutral on group level. These effects should reduce over the year but will still be a drag overall. The operating result therefore should improve in the next quarters. While also highly dependent on valuation effects that are hard to predict, I nevertheless expect the operating result to be more or less neutral for the financial year. This concludes the segmental view. I will now move to RWA and capital development on the next slide. The CET1 ratio has improved to 14.9%, further increasing our buffer above regulatory requirements. This is due to 2 billion lower risk-rated assets. The driver has been improved ratings of several larger corporates. Capital has been nearly unchanged, with a targeted capital return to shareholders of at least 70%, we are not including the quarterly net results in capital into a year. When our recent acquisitions are closed, we will see a small impact of around 10 basis points in our capital ratio. We currently expect closing in Q2. This brings me to our outlook for capital distribution for 2024. With our capital buffer well above regulatory requirements and the record result of the first quarter, we are making good progress to fulfill the requirements for a substantial capital return this year. Further, we have received the authorization from the AGM to again repurchase up to 10% of outstanding shares. If Q2 develops as expected, we will have a strong basis to apply for the next share buyback with the H1 results. This will be a first step towards reaching the payout target of at least 70%, as laid out by our capital return policy. And now to conclude with our updated outlook for 2024 on slide 23. As mentioned, we have improved our outlook for interest income from 7.9 billion to 8.1 billion and confirm our target to grow fee income by 4%. We confirm our cost income ratio target of 60% and continue to expect a risk result of less than 800 million. We expect the CAT1 ratio to decrease during the year, mainly due to planned RWA growth, but to be still well above 14% at year end. Our outlook for the net result is unchanged. We continue to target a payout ratio of at least 70%, but obviously not more than the net result, consisting of a dividend and share buybacks in accordance with our capital return policy. And please keep in mind that a share buyback is subject to approval by the ECB and the German Finance Agency. With the targeted payout, the total capital return yield will be above the 9% we delivered for 2023. This confirms our commitment to return the majority of earnings to our shareholders and should be a key element of an investment case for Commerzbank. Thank you very much for your attention and we are now very happy to take your questions.

And the first question comes from . Over to you.