Commerzbank AG

Hello and welcome to the Commerzbank AG conference call regarding the first quarter results 2025. 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 Orlob's and Carsten Schmidt's presentation. Let me now turn the floor over to our CEO Bettina Orlob.

Good morning everyone and welcome to our earnings call for the first quarter 2025. The strong momentum we have created in recent quarters has continued in Q1 and we are looking to the future with confidence. We are happy to walk you through our very good results and provide you with our largely unchanged outlook for 2025. I start with an overview before Carsten takes over to present the details of the financials. Let me start with four key messages before I discuss them a little bit more in detail. First, we delivered the best quarterly net result for Comets Bank in more than a decade. Second, the implementation of our strategic program towards 15% return on tangible equity in 2028 has kicked off well the first tangible milestones already reached. Third, our business model is robust and we are well positioned to cope with the macro challenges ahead. And last, we confirm our positive financial outlook for 2025 and increase our expectation for the CET1 ratio to at least 14.5% by the end of this year, which is our forecast and not any new threshold. Let's have a closer look at the key financials in Q1. The strong start to the year is reflected in the very good cost-income ratio of 56%. As always, Q1 benefits from some seasonal support and the improvement is driven by revenues, while strict cost discipline has been maintained. This performance further increases our confidence to reach our full-year target of 57%. The same holds true for our net result and return on tangible equity. With a net result of more than 800 million euros in Q1, we are well on track to reach our 2025 target of 2.8 billion euros ex-restructuring and 2.4 billion euros including the expected restructuring charges. The double-digit return on tangible equity demonstrates our ability to earn cost of capital and supports the re-rating of our share. The targeted 9.6% ex-restructuring for the full year 2025 will be another major milestone in Commerzbank's profit generation. Higher revenues have been the basis for the increased profitability in Q1 and special interest goes to the development of net interest income and net commission income. NII is holding up well in a decreasing rates environment. While ECB rates decreased by 100 basis points in the last six months, NII decreased by only less than 1% in Q1 compared to Q4 2024. This achievement reflects good margin management and the support from the replication portfolio which will also drive NII going forward. Based on this, we still expect a very good NII of base case $7.8 billion even on current forward rates. Carsten will further expand on this in his presentation. On NCI, we are also very pleased with the performance and the revenues in the first quarter. Especially the securities business with private customers has been very strong and leads to an overall 6.4% increase in NCI. Hence, we remain confident to reach our 7% target for 2025. The strong securities business has also been the key driver for overall revenues in PSBC Germany. The respective growth in fee income could fully offset the rates-driven pressure on NII. A similar logic applies for corporate clients. Based on very good FX business, the financial markets revenues in corporate clients have largely offset the expected decline in NII from deposits. Overall revenues in MBank increased again to almost €700 million due to good margin management and volumes. With decreasing burdens of FX loan provisions, the reported top line of MBank contributes significantly to our revenue growth in the Group. Overall, the revenue development, including Treasury contribution, is very healthy and reinforces our confidence to reach our financial targets for 2025. Q1 was not only a very good quarter in terms of financials, but also regarding progress in the execution of our momentum strategy. We have reached the first important milestones. Our negotiations with the Workers' Council are progressing very well. We have already agreed on an early partial retirement offering and booked the respective restructuring charges of 40 million euros. Based on the very constructive collaboration with the employee representatives, we are confident to conclude the majority of negotiation topics in Q2. Hence, we expect to largely book the remaining restructuring charges this quarter. Still in May, we expect to agree on the employee share program which we announced at our Capital Markets Day, and we will implement it later in the year. In terms of capital return, we have delivered what we promised. Our share buyback program for the year 2024 has successfully been concluded and next week's AGM will most likely approve the distribution of 65 cent dividend per share. In total, we have distributed more than 3.1 billion euros over the last three years. Looking ahead, we plan to apply for our next buyback at ECB and the German Finanzagentur early in the third quarter. This will already be part of our planned capital return for the fiscal year 2025. On the operational side, we invest a lot in our core systems to ensure high stability, which is of utmost importance in our daily business. Besides this, we have a strong focus on AI and have set up an infrastructure which we can leverage for business purposes. Let me highlight three important use cases. Our avatar has just gone live for private customers. General questions regarding our products and services can be answered by the avatar and provide a human-like interaction that caters to customer needs and enables efficiency gains in our service units. We will continuously upgrade the capabilities based on customer experience and feedback. Second, we have implemented the AI-assisted documentation for advisory calls with corporate clients. Starting in financial markets, this saves about 30 minutes per case. Based on the good experience, we will roll it out to Mittelstand's bank later in the year and free up significant sales capacity. And third, we have introduced an AI-based tool for fraud detection. It helps to reduce losses through automated fraud alerts and creates potential for efficiency gains. These use cases illustrate the potential of AI as a significant contributor to our cost income targets. So Q1 was a successful quarter for Commerzbank, financially, as well as with respect to the strategy execution. Looking ahead to the next quarters, I guess everybody tries to make up their mind on macro impacts. Obviously, we also have done our homework. We developed an initial view on the German stimulus package and on US-imposed tariffs. Furthermore, we squared this with the sentiment in the German Mittelstand, and reviewed our view on asset quality. As a result, we do not see reasons to change our financial outlook, neither for 2025 nor beyond. April as the first checkpoint has provided us with a good set of financial results supporting our outlook. Let me discuss the different topics step by step. Regarding stimulus and tariffs, we are convinced that in 2025, current tariffs will have some negative impact why we will hardly see positives from the German fiscal package yet. This should lead to zero growth in 2025, but does not change our financial outlook for the year. In 2026, however, we model the positive impact of the fiscal package to 0.7% impact on GDP compared to minus 0.2% burden from tariffs. Hence, we expect German GDP in 2026 to grow by 1.4%. Inflation is not expected to be materially impacted in the Eurozone. The sentiment in the German Mittelstand fits to this picture. They are reluctant to invest, factoring in uncertainties from tariffs while facing a high level of bureaucracy. With the fiscal package, however, the picture might become more positive. And this is what we already see when studying the recent IFO data. While the negative impact of tariffs in the manufacturing sector in Germany is lower than expected, the business climate in the construction industry has improved significantly due to the announced fiscal package. At Commons Bank, we see clear opportunities regarding our business with clients in the field of infrastructure and defense. Being a reliable banking partner for corporates in the relevant sectors for decades, we are convinced this will pay off in the upcoming quarters and years. In terms of asset quality and our outlook for 2025, we anyway planned with conservative GDP assumptions and feel no need to adjust at this stage. And this leads me to the confirmation of the key elements of our outlook for 2025. We confirm our target to reach a net result of 2.4 billion euros, which translates into 2.8 billion when excluding the expected restructuring charges. stick to our cost-income ratio target of 57%. Regarding capital return, we plan for a 100% payout based on the net result before restructuring charges and after 81 coupon payments. And we increase our expectations for the CET1 ratio from 14.0% to at least 14.5% at the end of this year. All of this, of course, is subject to further developments with respect to macro as well as FX loan provisions and our Russian subsidiary. In summary, we had a strong start to 2025 and confirm our outlook despite the challenging macro environment. Now let me hand over to Carsten who will walk you through the detailed financials of the first quarter. Over to you Carsten.

Thank you Bettina and good morning everyone. Let's start directly with the overview of our financial performance. Our financial metrics have improved compared to the previous quarter and year-on-year. We achieved a double-digit ROTI in the quarter, providing an excellent starting point for our ambition to reach a ROTI of more than 9% before restructuring expenses for the year. And it was reached with an unchanged CT1 ratio of 15.1%. The performance is based on record-level revenues of more than 3 billion, our best quarterly revenues since 2011. Net interest income has come down a bit as the ECB has cut rates, but we more than compensated for this with higher net commission income. The positive net fair value result has also contributed. It is based on the steady performance of our capital markets business and corporate clients. The year-on-year increase is mainly due to the offset to NII at lower rates from derivatives. The relatively high other income, excluding FX loan provisions, stems largely from a better hedge result. This is mainly due to some hedge accounting inefficiencies that can produce fluctuations in the hedge result, with largely offsetting effects in the net fair value result. This is, for example, from tenor basis valuation effects and the large size of the hedge portfolio in combination with market movements. Net commission income grew by 6.4% year on year, with good contributions from all customer segments. Outstanding have been the contributions from PSBC Germany with growth of 11.4% and mBank with growth of 7.9%, while corporate clients managed to reach the level of the strong Q1 last year. In corporate clients, Betafx revenues offset lower contributions from the bond business, which had benefited from especially high issuance volumes last year. Trade finance revenues were stable despite the sluggish German economy. Private and small business customers in Germany had an exceptionally strong growth in the securities business based on high customer activity in the quarter with transaction volumes driven by volatile markets. This was especially true for Comdirect. The securities volume ended on the same level as at the end of last year. This is due to falling market values towards the end of the quarter. In asset management, we had good inflows and benefited from favorable market developments at the beginning of the quarter. Let's move on to interest income. While ECB rates were 50 basis points lower than in Q4, the net interest income is only slightly reduced. In corporate clients, net interest income is up slightly, in PSBC Germany slightly lower, and in mBank slightly higher. Therefore, the net interest income from our customer businesses is virtually on the same level as in Q4. In others in consolidation, NII is 13 million lower compared to the previous quarter. However, this is compensated for by a higher connected net fair value result from derivatives. Therefore, in total, the NII-related income is on the same level as Q4, which is an excellent result. Looking at loan volumes, CC has continued to increase the business with Mittelstand and institutional clients. Volumes with international corporates were stable before US dollar FX effects. PSBC Germany has maintained volumes as expected. In the deposit businesses, there have been some movements as rates have come down. In corporate clients, there has been a reduction of around 3 billion of high beta, rate-sensitive call and term deposits. In PSBC Germany, the term and call money volume has also decreased. An important driver was a successful sales campaign to convert deposits to investment products supporting fee income. Additionally, we had some reduction of rate-sensitive deposits in a more competitive market. Overall, with our disciplined pricing, we have kept the beta stable in the quarter and thereby stabilized our income from the deposit business. This brings me to the next slide with the outlook for NII and related net for value result in 2025. We raised our baseline NII outlook from 7.7 billion to around 7.8 billion for the year. I will now go through the drivers. The replication portfolio has been increased by 7 billion to 145 billion in April, further stabilizing our interest income. This higher volume increases the NII from the replication portfolio by 200 million, leading to 400 million additional NII in total for this year. Assuming no change in volumes, we expect additional 1.1 billion NII from the replication portfolios in 2028 versus 2025, based on current forward rates. Most of the 1.1 billion uplift in 2028 comes from the deposit models, but the equity models are also contributing more than 150 billion. Thanks to this deeper curve and the adjustments we made to the replication portfolios, The current outlook for the contribution from the replication portfolios to 2028 is 200 million ahead of our original plan. However, we stick to our 2028 targets since the curve will continue to move and there might be other effects from a steeper curve as well. But it is definitely a potential tailwind. For 2025, we have assumed an average ECB rate of 2.15% in our plan. Current forward rates are at this level. We therefore do not see a need to adjust our forecast at the moment. Our original guidance was for around 500 million less NII due to lower rates compared to 2024. As we have reinvested additional 7 billion in the replication portfolio, we have a 7 billion lower ECB rate sensitive position, reducing NII by a corresponding 200 million. In total, that leads to 700 million less NII from ECB rate sensitive positions. With 38%, the Q1 deposit beta was on the same level as last year. We expect the beta to increase in the next quarters, reaching 41% on average for the year. This would lead to an NII reduction of around 300 million. Concerning volumes, we continue to plan for moderate growth in deposits towards the end of the year and stick to our targets to grow loan volumes and manage margins supporting NII. This should add around 200 million NII. Further, we are more optimistic about the rates in Poland. While we continue to see lower rates in the course of the year, they are now expected to be higher on average than originally anticipated. This should lead to a slower reduction in NII than planned at MBank. And finally, with more than 2 billion, the Q1 NII was above expectation. This gives us a head start to the year. For the positive effect from the lower short-term rates on the fair value results, we are currently assuming around 300 million. Overall, we expect NII and connected change in fair value to be around 8.1 billion in 2025.