Commerzbank AG

Good morning and welcome to our earnings call. Before we start, I would like to make a small personal remark. I had the flu and for safety reasons and that most of us are planning to go on vacation, I'm sitting in a different room. So apologies for any potential hiccups or delays during the call. I guess we all had wished for a calmer market these days, but it's nevertheless my pleasure to present you on very good Q2 and H1 results. We have a strong business momentum across the board. Client business in all segments, including mBank, shows increasing revenues year on year and growth in fee income gains further traction. We are successfully balancing our business mix to reach our targets. Our clear focus on execution pays off, and this makes us optimistic going forward. Our increased earnings power is reflected in our half-year net results of almost 1.3 billion euros. This translates into return on tangible equity of 8.9%. These bottom line figures, however, include burdens outside our ongoing business of more than 700 million euros pre-tax. Despite these burdens, we are sticking to our target of at least 8% return on tangible equity for 2024. Obviously, this assumes no outsized negative surprises in the months ahead, be it from Poland or from Russia. On capital, we have maintained our strong CT1 ratio even without recognizing our H1 profit due to our high plan payout ratio. Our current CT1 ratio of 14.8% strongly supports our capital distribution plans for 2024 and beyond. With our strong business performance in mind, let me touch on our updated macro view. German GDP showed a slight contraction in Q2, and the latest PMY and IFO came in weaker than expected. Hence, we are not yet on a solid upward trajectory in Germany and expect GDP to pick up a bit later than originally expected. For 2024, we actually expect zero growth. It remains to be seen how strong the expected upswing thereafter will be. At the same time, core inflation will likely stabilize well above 2% and should prevent ECB from aggressively easing its monetary policy. One of the key drivers for core inflation are wage increases. This also affects us as Commerzbank. Therefore, we need to maintain our strict cost discipline to manage any cost pressures from wages. This will be very much in focus for 2025. Our client business, however, has not been affected too much by this somewhat cloudy picture. Regarding loan demand, we have seen a positive development in the last months. Our loan book with corporate clients grew by 5% compared to Q2 last year. Thereby, we clearly outperformed the loan market in Germany, which remains at a growth rate below 1%. One driver in our book is growth in investment loans, albeit from a low base. After years of postponed investment decisions, we now see more corporates deciding to invest. Important drivers are the green and digital transformation. But of course, this is only a snapshot from Q2, and it takes more quarters to actually call it a trend. Overall, our customer-centric business model with high asset quality pays off. This, however, does not mean that we are immune to larger single default cases, especially when you run one of the largest loan books in Germany. In the more general pockets of the portfolio, we still don't see a deterioration despite normalizing insolvency rates in the market. Hence, we keep on closely monitoring our books and prudentially manage the attached credit risk. Overall, while the environment may be challenging, we have again proven that we can successfully manage through it and consequently remain fully on track to reach our targets. Now let me provide you with an update on our management priorities for 2024. We continue to deliver what we promise. First of all, we deliver on our capital return plan. Based on the very good H1 result, we have just filled the application with the ECB for the next buyback in the size of 600 million euros. This is part of our planned distribution of 1.6 billion euros for fiscal year 2024. Equally important is the positive development in fee income. Q2 showed good progress with a growth of 4.5%. As we stated several times before, Growing our fee income is one of our most important strategic priorities within Strategy 2027. The acquisition of Acila will help on this journey and start contributing to P&L in the second half of this year. Regarding performance and execution management, reduction of complexity is a key topic. We simplify processes in many areas, contribute to efficiency. Let me provide you with two examples. We have improved online sales processes, which makes them more attractive for customers and provides relief for our employees. Furthermore, a certain set of customer requests can now be handed across locations. This increases flexibility and the efficiency of resource allocation. On the customer side, I want to highlight the successful launch of GrowCommerce Global Play. This joint venture with Global Payments provides mobile digital payment solution for merchants without the necessity to have a dedicated physical card reader. Instead, a normal mobile phone is sufficient. Sales have just started and provide our customers with an innovative solution that will strengthen their customer loyalty. On employee satisfaction, we know that it's not all about compensation, but without appropriate compensation, it is definitely difficult. Based on the recent agreement with unions for pay scale staff, we have decided to increase wages of non-pay scale colleagues by 5% effectively January 2025 and by another 4% effective January 2026. While this is important for our teams and the bank, it of course requires extra efforts of the team to keep costs contained. Now let me summarize with my key takeaways. We had a very strong first half of the year and delivered on our promises. We are confirming our outlook for 2024 and especially our ambition to increase fee income by 4%. We are targeting a payout ratio of at least 70% for 2024 and have applied for a further share buyback as part of this. And now Bettina will walk you through the financial. Bettina, over to you.

Thank you, Manfred, and good morning. Our customer business has been strong, and this is clearly visible in our results. We have delivered revenues above Q2 last year, and this is despite higher non-operational burdens from Russia and Poland that amounted to 395 million. The cost-income ratio is on target. The risk result is in line with our target, and we continue to be happy with the quality of our book. The CET1 ratio remains well above requirements and is 10 basis points lower than last quarter, mainly due to the closing of the Aquila acquisition. The operating result came in at 870 million, almost at the level of last year, despite the higher burdens. The net result is 5% lower, mainly due to higher minorities. The RTE is 7.3% this quarter, but if you look at the H1 figure of 8.9%, we are on track to reach our 8% target. I will now go through the revenues in detail, followed by costs and the risk result. We have seen a high level of customer activity in the quarter, which has translated into a very satisfying revenue development. Interest income is slightly lower, mainly due to net higher costs of deposits, not fully offset by growth in the franchise. This has been mostly compensated by year-on-year growing permission income in line with our targets. Improved fair value result reflects the good capital markets business of corporate clients, which benefited from higher customer activity. Other income is dominated by the burdens coming from Poland and Russia. These are 60 million for credit holidays in Poland, 240 million for FX mortgages in Poland, and 95 million for a Russian crowd case. We have been prudent in the Russian crowd case, booking the full amount at stake. However, as other banks involved in the case, see a very good chance that we can recover the claim. And total revenues are up 1.5% year-on-year, which gives us a very good starting position into the second half of the year. I will now focus on NII and NCI in more detail. Our net interest income has been resilient despite a first ECB rate cut and a further increase of the deposit beta. Our own business has been a bright spot. After stagnating for many quarters, we have seen higher demand for investment loans in corporate clients and the recovery of the mortgage business is ongoing. Let's look at the segments in more detail. In corporate clients, the mixed shift from site to call deposits has continued as expected. With volumes remaining stable, this has led to a decrease of NII in the quarter. In private and small business customers in Germany, NII from deposits is only slightly lower. Increased volumes have partially offset a higher beta. Interest income from loans has been stable. However, the reported NII of PSPC Germany is 80 million lower than in Q1. This is mainly due to the early repayment of mortgages and day count effects. These have caused technical effects from structural internal trades between PSPC and others in consolidation and resulted in a corresponding increase in others in consolidation. MBank has again increased interest income by effective margin management. The next slide provides an overview of the deposit and loan volume developments of Commerzbank ex-MBank. We have seen good growth in both loans and deposits in the quarter. After nearly stable loan volumes in the last quarter, the volume has risen by 3% as corporate customers have increased their demand for investment loans. a welcome development and hopefully a very first step to higher demand in the future. It is far too early to say if this will lead to a sustained trend in the near term. Clearly, we eventually expect corporates to invest more after many years of restraints. The German new mortgage business has continued its favorable development with again higher volumes than in the previous quarter. But still far from the peak reached in the negative rates environment, we have seen a steady recovery with new business volumes up 23% year-on-year. With deposits, we have seen an unbroken growth of call deposits from private customers. This has been despite a first reduction of rates offered. We continue to offer competitive rates to customers, but intend to improve margins by further adjusting our pricing based on the significant amount of new money gathered over the last quarters. Therefore, don't expect the strong volume growth of age one to continue and might even see declines in the next quarter. Side deposits, we have continued to see outflows, but on lower level than in the last quarter. It's probably too early to call the true. We currently expect this trend of gradually reducing outflows to continue for a few more quarters until we reach an equilibrium. This brings me to the NIR outlook for 2024 on slide 12. interest income remained at a good level in the second quarter. Deposit and loan volume growth as well as increased contributions from the replication portfolio are nearly compensating the effects of a higher deposit better and reduced ECB rates. We have increased the size of the replication portfolio supported by the large deposit base built up in the last quarter. This will help stabilize future NII but has a slightly negative impact on this year's P&L as long-term rates are below the current ECB rate. Second half of 2024, we expect headwinds from lower ECB rates and a somewhat higher deposit data. On the plus side, PSBC will adjust pricing and there will be ongoing support from the verification portfolio. In combination, this should lead to around 3.9 billion net interest income in the second half of the year. We have therefore kept our overall 2024 outlook for net interest income unchanged at around 8.1 billion. Having said this, there's upside potential after the strong first half, especially if the call deposit volume would be higher than anticipated and the volume of site deposits stabilized. Let's now look at our commission income. The income is up 4.5% year on year. This is broad-based with all customer segments contributing. Our acquisition of Aquila has only closed in June and GlobalPay has just launched in the quarter. They have therefore not yet contributed much to income. Next quarter, they will start to complement the organic growth of the existing franchise. Overall, we are very confident that we will reach our 4% growth target in 2024. And based on our initiatives, we are also very positive that we will continue this growth in subsequent years. Let's move to the next slide with a breakdown by segments. Public Times has increased fee income by nearly 3% year-on-year. The main driver has been the strong capital markets business with the primary markets for bonds and loans being very active. Trade finance and lending have been broadly stable. ESBC Germany has achieved a growth of more than 5% year-on-year. The main driver was the securities business. The fees from transactions are up as customers have been more active in their portfolios. Securities volumes are up 12%, also leading to higher fee income. Payments business was stable. Now to costs on slide 15. We must continue to be on track as we maintain our strict cost discipline. Operating expenses ex-M bank are slightly higher than last year. It's primarily due to higher personal costs, partially offset by active cost management. Compulsory contributions decreased in 2024 as contributions to the single resolution fund were suspended after it reached its target volume. However, we had an increase for the domestic deposit insurance scheme due to the strong deposit growth in the last quarter. In Q2, MBank has further increased operating expenses as a result of business growth and FX effects. This is in line with MBank's cost-income ratio steering. Overall, we are confident that we will reach our group cost-income ratio target of 60% for 2024. Looking ahead at 2025, we will see the effects of the recently agreed salary increases of around 5%. Total cost development is probably in the same ballpark. In addition to the salary increases, there are three main drivers. Plus that M-Mark will go further up because of investments, inflation, and FXFS. New regulatory requirements will necessitate additional investments. And we also intend to invest more into our franchise and operations to grow revenues and enable efficiency gains. This includes investments in digitization and artificial intelligence. These investment decisions will be made in the context of our balanced cost-income ratio steering approach, and we continue to target a cost-income ratio below 60% in 2025. and investments, we remain on track towards our target of 55% in 2027. The next slide details the risk result. The risk result was broadly on the same level as in Q2 last year. It was driven by only a few single cases with just four single cases accounting for $150 million of the $199 million risk result. In the size of our loan book, a few single cases can never be ruled out. these cases the overall loan book has continued to perform very well. Overall the cost of risk at 20 basis points remains well below our normalized cost of risk of around 25 basis points and the NPE ratio is only 0.8%. Therefore maintain our outlook for the year of less than 800 million. In Q2, we have made our regular methodology updates, and in addition have introduced collective staging in line with regulatory requirements. This has led to a one-off risk result of $34 million and increased the Stage 2 exposure by $15 billion. I want to stress that this is merely a methodology update introducing an additional cushion for potential credit deterioration. It does not represent a worsening of the quality of our loan book. In total, methodology changes contribute around 110 million to the risk result. At the same time as every quarter, we have also reviewed our top-level adjustment. Due to an improved outlook for the risks covered by the top-level adjustment, we could release 87 million. Therefore, in aggregate, methodology-driven changes in the risk result largely net out, and the risk result is determined by the single cases we have seen in the quarter. With the high quality of our portfolio and the sizable cushions we have built up, we are well prepared not only for the rest of the year, but also beyond. This concludes the overview of the key line items. I will now move to the results summary. Strong performance of our customer businesses was partially offset by the burdens from Russia and Poland. These are reflected in the operating results of MBAC and others in consolidations. Nonetheless, the Q2 operating result almost reached the previous year's level. As these burdens are not tax deductible, the Q2 tax rate has risen to 33%. The full year tax rate should be at the same level or lower, depending on future developments in Russia and Poland. On the next slide, I will briefly cover the operating segments starting with corporate clients. Corporate clients improved its operating result year on year with all business lines contributing. Following the very strong Q1, our capital markets customers have remained very active in Q2, with the bonds and syndicated loans business bringing in revenues well above last year's level. And we have seen broad-based growth in loan demand. That is also reflected in quarter-on-quarter slightly higher RWA. Overall, the operating return on capital has remained solid at more than 20%. CSBC Germany also had good customer business and increased its operating result year on year. Revenues increased from call deposits of retail and Comdirect customers that added significantly more funds to their accounts. Securities business, Comdirect benefited from a higher number of transactions. In wealth management, the main fee driver has been securities volumes that have grown strongly year on year. Business customers have maintained a steady level of activity, resulting in stable revenues year-on-year. Commerzreal grew commission income year-on-year as well. Overall, revenues are lower as Commerzreal benefited from one-off valuation effects last year. PSPC Germany total cost and risk results were on the same level as last year. With RWE on almost the same level as last year, this led to an increase of their operating return on equity to 31%. On an operating level, MBank had its best quarter ever, beating even Q1. However, as in past quarters, MBank had to book provisions for the legacy FX mortgages. MBank continues to seek settlement agreements for these mortgages and is making good progress. Far more than 17,000 settlements have been agreed. Back in half, we expect lower but still significant burdens from FX mortgages. starting the full year, we still think that the burdens will be below last year's level. Also well below underlying potential, we expect M-Monk to contribute more to the group results than last year. Finally, a quick look at others in consolidation. Operationally, the performance of others in consolidation leads to a broadly neutral operating result. The operating loss is mainly due to the brooking of burdens from Russia and the risk result that reflects the booking for one legacy position. By dependent on valuation effects that are hard to predict, I expect the underlying operating result to be more or less neutral in the second half of the financial year, leading to a negative operating result for the full year. This concludes the segmental view. I will now move to the RWA and capital development on the next slide. The CET1 ratio came in strong at 14.8%. The buffer to regulatory requirements is at 442 basis points. As a reminder, we are not including the net result in the capital position into our year. We intend to include retained earnings after distributions to shareholders in the CET1 ratio with the full year results. This brings me to our outlook for capital distribution for 2024. As guided, we have applied for the first tranche of share buyback based on the strong H1 result. Application is for 600 million and we hope to receive the approval at the beginning of the fourth quarter. Intent to apply for a second tranche with the Q3 results. Price of a second tranche will depend on the business development and in particular the outlook for potential burdens from Russia and ethics mortgages. Being committed to our payout ratio, of at least 70% as set in our capital return policy and continue to target a total capital return of 1.6 billion consisting of dividend and share buybacks as set out in the capital return policy. And now to conclude with our outlook for 2024 on slide 24. We confirm our unchanged targets for 2024. continue to target interest income of around 8.1 billion and 4% growth of fee income. Paying our target of a cost-income ratio 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. 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. Mind that a share buyback is subject to approval by the ECB and the German Finance Agency. We are committed to return the majority of earnings to our shareholders and thereby provide a yield of around 10% to investors based on the current share price. much for your attention and we are now looking forward to taking your questions.

Thank you very much. Dear ladies and gentlemen, we are opening the Q&A session now. If you are dialed in in the conference call and have a question for the speakers, please press 9 followed by the star key on your telephone keypad now to enter the queue. If you have submitted your question already, it is saved. If you wish to cancel your question again, please press nine and the star key one more time. One moment, please, for the first question. The first question comes from Benjamin Goy of Deutsche Bank. Please go ahead.