Commerzbank AG

Hello and welcome to the Commerce Bank AG conference call regarding the third quarter results 2024. Please note that this call is being transmitted as well as recorded by audio webcast and will subsequently be made available for replay in the internet. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following Bettina Orlop's presentation. Let me now turn the floor over to our CEO, Bettina Orlop.

Good morning and warm welcome to our earnings call for the third quarter 2024. I'm pleased to present our very good Q3 results and share with you our view going forward. Overall, we are delivering ahead of plan and have improved our guidance for the full year 2024. This confirms my positive view on Commerzbank also in my new role as CEO. When I took over the position as CEO, I discussed and evaluated the recent developments with my management team, and our priorities are very clear. First, execution of our strategy 2027. Every quarter, we have to perform and to deliver towards our targets. Everybody in Commerzbank is absolutely committed to do this. Second, development of an upgraded strategy. We have identified the potential key levers and the teams are in full working mode to refine them. On February 13, we will present the strategy in our recently announced Capital Markets Day. Third, handling the current situation we are in. We have a new shareholder and this has created a lot of attention. Let me emphasize, in everything we do, we do it in the interest of our shareholders and also our clients and our employees. And looking at the nine-month figures, I think it's fair to say that we delivered what we promised. Our very good net result of 1.9 billion euros has been reached with a sound performance in all quarters. This translates into a return on tangible equity of 8.8%. Hence, we are on a very good track towards our target of at least 8% for 2024. On capital, we have step-by-step increased our CET run ratio to the level of 14.8%, and at the same time increased our capital return potential to shareholders. Our next share buyback of 600 million euros will start tomorrow, and we have applied for another buyback of up to 400 million euros. This proves our capability to return significant amounts of capital to our shareholders, resulting in attractive distribution yields. Based on this overall very positive financial development, we have increased our targets for 2027 in our regular planning process. As already disclosed in September, we have in particular a more positive view on revenues, which drives our return ambition above 12% and our cost income ratio down to 54% by 2027. Furthermore, we have done a detailed review of our RWA projections. The current forecast for the end of this year RWA of 174 billion compared to 177 billion we expected in September. The relief of 3 billion not only leads to our increased CET1 ratio expectation of 15% at year end, but also correspondingly reduces our planned RWA for 2027. This results in a total 10 billion relief in 2027 compared to our former planning. consisting of the $7 billion that were already part of the update in September and the $3 billion identified in the latest forecast for year-end 2024. With this RWA relief in our target CEG-1 ratio of 13.5%, we can distribute more than 90% in the upcoming years, but at the same time keeping powder dry for potential acquisitions. We are convinced that this is a very robust case and asset in the beginning. It is our top priority to perform and to deliver on these targets. Talking about delivery, Q3 has been another quarter with good progress in the execution of our strategic measures. We have selected five concrete achievements for the presentation, and let me highlight one of them. We are expanding our offerings for ultra-high net worth individuals and family offices. We have set up a dedicated division and will open two additional locations for this client group. In addition to Berlin, Düsseldorf, Frankfurt, and Munich, specialist teams will serve these clients also in Hamburg and Stuttgart. And we will address the increasing needs for advisory services. Topics in focus are wealth transfer to the next generation, the right strategic asset allocation, and exclusive access to private markets or complex financing structures. This will support our target to grow revenues a particular net commission income. While we keep the pace in the execution of our Strategy 2027, we have started the process for a more fundamental upgrade of our strategy. We are convinced that there is significant value potential on top of our current plan and we see three main levers. The first lever is about capital and growth. We can further optimize the deployment of capital and risk-rated assets. This includes reviews of value creation with each client as well as the use of synthetic risk transfers. Any freed up capital can be invested into capital accretive growth or will provide additional potential for capital return to shareholders. The second lever is to improve our risk return profile. Based on our deep understanding of client portfolios in the various sectors and a rock solid balance sheet, we will review our risk return profile. Let me be clear, this is not about high risk lending. It is looking at the risk return profile and identifying areas that play to our strengths. The review includes credit risk as well as our capital market business, and I'm convinced that we can identify additional value potential in an appropriate risk management framework. And with the third lever, we tackle the cost efficiency of our business model and our operations. This will for sure include cost measures to further strengthen our cost-income ratio and ultimately our return on tangible equity. As already announced three weeks ago, we are looking forward to presenting this strategy in a capital markets day on February 13, 2025. And now I would like to walk you through the financials of the third quarter in more detail. The operating and net results have further improved compared to the second quarter. Based on higher revenues and well-managed costs, the cost-income ratio reached 58%. This has been achieved even though the risk result is higher, in part driven by the initial booking of collective staging for climate and environmental risks in stage two. With the RTE of 8.7% for the quarter and an unchanged CD1 ratio of 14.8%, I'm very pleased with our consistent delivery towards our targets. I will now go through the revenues in detail, followed by costs and the risk result. We have maintained revenues at a consistently high level, improving on Q2 and just a bit below Q3 last year. As expected, interest income is slightly lower as the ECB has continued with rate cuts. This could be partially offset by volumes. Lower NII has been further compensated by strongly growing commission income. The negative development of the fair value result compared to last quarter is partly due to FX valuation effects of our US dollar 81. This fluctuation exists over the lifetime of the instrument and will fully revert when the instrument is called. Other income excluding FX loan provisions shows the normalization in Q3, while Q2 was burdened by Russia-related legal provision. Overall, we are well on track to reach our revenue target of 10.9 billion this year. I will now focus on NRI and NCI in more detail. Fee income is up 7.6% year-on-year. This is broad-based, with all customer segments contributing. Our initiatives and focus on fee business are starting to pay off. Corporate clients grew fee business, in particular in transaction banking, lending, and FX trading. ESPC maintained the good level reached in Q2. The main drivers compared to last year were a better securities business, both organically and from Aquila. On the next slide, we have the drill down by product. Corporate clients grew trade finance revenues despite the sluggish German economy, demonstrating the strength of our offering in this area. In capital markets, the highlights were the strong syndication business during the summer months, as well as a strong ethics business. As mentioned, the main driver in PSPC Germany has been growth in the securities business, including Aquila. The payments business was stable. With global play just started, we see potential in the next quarters. Let's now move to interest income. The NII in PSPC Germany NCC is largely driven by the ECB rate moves and a bit higher better while volumes have been nearly stable overall. The higher NII and others in consolidation is technically driven, especially by day count effects and changes in consolidation items. Bank has again increased interest income by effective management of customer deposits and loan growth. Overall, in the first nine months, NII reached the same level as last year. Looking at volumes, these have been overall stable this quarter. A highlight has been loan growth with Mittelstand customers, where we have an upward trajectory despite the challenging economic environment throughout 2024. Thanks to this, Corporate clients has reached the $100 billion mark in their loan volume and clearly has further growth ambitions. Also worth mentioning are call deposits in PSPC, which grew by $1 billion. Also, we had noticeably reduced rates offered to clients. This brings me to the NII outlook on slide 30. Interest income has remained at a good level, and we are therefore increasing our outlook to $8.2 billion for 2024. Looking into 2025, there is an increased uncertainty around the trajectory of the ECB rates. Forward rate expectations have shown significant . We assume that overall, that average ECB rates in 2025 will be somewhere in a broad range between 2.1 and 2.8%. In an environment of lower rates, we expect continued moderate growth in deposits and loans, which will bring additional revenues. With a significant portion of our interest-bearing deposits being call deposits where we can adjust pricing dynamically, we think that the deposit better will be similar to 2024 at around 40%. The replication portfolios will continue to gradually reprice up, adding around 200 million NII in 2025. And finally, NLANG should see lower NII by 200 to 300 million if rate cuts are done as expected. Adding all these effects together, we arrive in a range of 7.6 to 7.9 billion for 2025 NII, with the main driver being the ECB rates. Hence, reported interest income cannot be seen in isolation. Due to the way we account for derivatives that hedge banking book positions, there's a partial offset in fair value to changes in NII due to lower rates. In the group account, this is true not only for Euros, but also for slotted positions at MBank. We therefore expect a material offset and fair value. Depending on the rates development in the range of 2.1 to 2.8%, the offset is in a corresponding range of 200 to 400 million. The net effect is that overall revenues from the loan and deposit businesses should approach the same level in 2025 as in 2024. Given expected growth in fee income and lower burdens from FX mortgages, total revenues in 2025 should be well ahead of 2024. Looking to 2027, we confirm our targets for NII and total revenues given our planning update in September. Now to costs on slide 14. Costs continue to be on track as we maintain our strict cost management. Operating expenses ex en banc are slightly higher than last year. This is primarily due to higher HR-related costs, but also reflects the acquisition of Aquila. The increases were partially offset by active cost management. MBank has further increased operating expenses as a result of business growth, investments, and ethics effects. This is in line with MBank's cost-income ratio steering. Q4 costs are expected to be higher than Q3, as we will book additional costs related to IT investments and see ongoing growth at MBank. We will also make a final payment to our staff as a compensation for inflation. Overall, we are very well on track to reach our group cost income ratio target of 60% for 2024. The next slide details the risk results. The risk result came in at 255 million. This is in line with our expectations and our guidance of a risk result of less than 800 million for 2024. We have decided to re-book collective provisions for climate and environment risk in stage two. This is forward-looking and not driven by a change in creditworthiness. This and other methodology updates contribute 147 million to the risk result. At the same time, we could release 94 million of our top-level adjustment following a reassessment. And subtracting these two effects, the remaining risk result is 202 We are having some funny noises, but I hope that you can hear us. So I continue. We continue to see resilience in our customer base and an overall robust portfolio. This concludes the overview of the key line items and I will now move to the results summary. I've already covered the main drivers of the operating result and therefore focus on the net result. With 22%, the tax rate is below the 31% tax rate in the first half of the year. This is due to the processing and settlement of prior year's tax returns. The full year tax rate should be around 30% depending on future developments in Russia and Poland. In the next slides, I will briefly cover the operating segments, starting with corporate clients. Overall, revenues and corporate clients held up well. This is thanks to growing fees, especially from trade finance, syndication, and the FX business. But also the rates and how much these businesses performed well. All three customer groups contributed. All dropped. Okay, can we go to the call now?

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