Commerzbank AG

This conference will be recorded. Hello and welcome to the Comets Bank AG conference call regarding the second 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 Orlobs and Carsten Schmidt's presentation. Let me now turn the floor over to our CEO Bettina Orlop.

Good morning everyone and welcome to our earnings call. In the first half of this year, we have achieved the best operating result in the history of Commerzbank. Based on this excellent performance and the momentum we have created, we raise our targets and expectations for 2025. And Carsten and I look forward to walking you through the numbers and performance drivers, including our outlook. I will concentrate on H1 and the overall strategic and macro picture. Carsten will focus on the performance of the second quarter. The financial dynamics and earnings momentum continue and our teams have developed the best ever operating result in the first half of the year. The 23% increase is especially in light of the macro impact a strong proof for the commitment of our staff at Commerzbank and mBank, as well as for the trust of our clients. The second point of my summary addresses the very good progress in the implementation of our momentum strategy. I will come back to this in a moment. Let me highlight that we are running according to plan regarding the negotiations of our restructuring program. This is thanks to an extremely good cooperation with the Works Council, which demonstrates a high degree of common interest. Third point of my summary is about capital return. Already in mid-July, we have applied for the next share buyback of up to 1 billion euros. This demonstrates our unchanged strong focus on returning capital to our shareholders. The fourth point is about macro. The investment program of the German government will provide us with ample business opportunities. It translates into a tailwind for our financial development going forward, especially combined with a somewhat more hawkish outlook of ECB. And this leads me to my last point. We raise our outlook in 2025 for net interest income and net result. Let's have a closer look at the key financials of the first half of 2025. Based on 30% higher revenues, including less burdens from the provisions for FX loans and mBank, we have reached a record operating result of 2.4 billion euros. This is 23% higher than last year and 36% higher than in 2023. This strong result comes with unchanged high cost discipline. With our cost income ratio of 56% in the first six months of the year, we are well on track towards our full year target of 57%. Bottom line, and when you exclude the restructuring charges, our very good performance is reflected in a return of 11.1% on tangible equity. Hence, we are very confident to meet our target of 9.6% for the full year. The strong revenue development is also visible when looking at net interest income and free income. NII again has proven to be very resilient in the decreasing rate environment. We managed to keep it at a high level and increase our full year guidance from 7.8 billion to 8 billion euros. And in anticipation of your foreseeable question, I would say yes. 8.0 billion is probably the floor of our NII expectation for 2025. On net commission income, we are very satisfied with the strong 8% growth we have achieved in the first six months of the year. Driven by the strong securities business in PSPC Germany, this outstanding growth makes us very confident that we will achieve our growth target of 7% in NCI for the full year. Strong client business, which is in particular reflected in NCI, forms the backbone of our momentum strategy. All three customer divisions grow significantly in fee income. 4% in corporate clients, 10% in PSPC Germany, and 14% in mBank lead to the overall 8% growth in the first half of the year. I was very pleased with the 8% loan growth in corporate clients. This clearly helped to mitigate the impact from lower rates on deposit NII. The lower reported revenues from the net fair value result in corporate clients come primarily from legacy positions and are offset in net interest income. Though many Mittelstand clients are still hesitant when it comes to the deployment of investments in Germany, client interactions are at a higher level, which provides a good pipeline for future revenues. And this leads me to the recent achievements with our momentum strategy. With our value accretive growth strategy, we are heading towards 15% return on tangible equity in 2028 and plan the full distribution of profits for every year. On this journey, we have made further tangible progress in the execution of strategic measures. First, we are completely on track with the restructuring negotiations. This is a further milestone to reach our targeted cost income ratio of 50% by 2028. All remaining negotiations with the Workers' Council about the detail of the restructuring should be finalized by September. Then we will enter the next phase of strategy implementation and value creation. Second, we have successfully introduced the new account fee structure for private customers in Germany. From overall 2.4 million free-of-charge accounts, already more than 1 million customers agreed to the new fee of €4.90 per month. Though the second half of consent is always harder to get, this is already a significant and tangible contribution to fee income of PSPC. Third, we have further enhanced our digital trading platform and corporate clients. For example, we have introduced online money market deposits for international clients. With targeted investments in technology, we have increased our market share in FX and interest rate derivatives, which contributes to the revenue growth case of corporate clients. Of course, the high customer focus, especially in the German Mittelstand, is highly appreciated by our clients. According to Finance Magazine's Banking Survey 2025, Commerzbank was once again singled out as best Mittelstandsbank. Around 75% of respondents view Commerzbank as a leading bank for the German mid-market sector, which is seen as a backbone of the German economy. Furthermore, Euro Magazine awarded Comdirect as best direct bank and Commerzbank as best branch-based bank, both for the eighth time in a row. Next, we have finalized the negotiations with the Works Council regarding our employee share program. We now plan for the rollout of the program in autumn this year. By then, every Commerzbank employee will receive shares with a value of around 500 euros and become shareholder of the bank. Follow-ups for 2026 are also already agreed. These successful initiatives are complemented by strong efforts to make further use of AI, which has the potential to be a real game changer also in banking. Now, let me briefly update you on our capital return program. With a dividend of 65 cents approved at our AGM in May, we successfully concluded the capital return of 1.7 billion euros for 2024. For 2025, we target to fully distribute the net result of 2.6 billion euros before restructuring expenses and after 81 coupon payments. To ensure a smooth execution of the share buybacks for 2025, we have already applied for a first round of up to 1 billion euros mid-July. Overall, we are fully on track to deliver on our capital return targets with a steadily increasing dividend every year. I also feel very comfortable with our targets for the year 2026 to 2028 and see potential for further tailwind. So, we have made very good progress, strategically and financially. Our standalone momentum strategy works and pays off. We remain firmly committed to creating value for all our stakeholders, and this includes our new largest shareholder. However, The shareholding situation with Unicredit is, to put it mildly, not ideal, as Unicredit is a direct competitor in the German market. We are convinced that the ongoing successful execution of our standalone strategy is the right focus. And now let's move to Marco. The German investment programs are on everyone's lips. Our view is clear. Things are moving in the right direction. The government has already tackled important topics like energy costs, corporate taxes, and depreciation rules. While defense spending is already increasing, it is now about preparation for the deployment of the infrastructure funds. German corporates demonstrate their strong support with their initiative Made for Germany and an investment spent of more than 600 billion euros. We as Commerzbank are happy to be part of this important joint effort of corporate Germany. All these activities are clearly positive for Germany and for Commerzbank as a leading bank for the Mittelstand. Also, the sentiment in the German Mittelstand is improving, and we have seen the fifth upward revision of the business climate with the recent EFU data from July. However, the Mittelstand remains cautious regarding the investment plans in Germany. We do not expect a very visible increase in 2025, but there is great potential for 2026 assuming that issues like bureaucracy and the shortage of skilled workers are addressed. On a net basis, we expect the stimulus to push GDP growth to 1.4% in 2026, despite the expected impact from the tariffs imposed by the US. This growth provides us with good tailwinds for our business in 2026. At the same time, we would also benefit from the slightly more hawkish view of the ECB. Our economists now expect ECB rates to bottom out at 2%, which would further increase the confidence in our NII trajectory towards 2028. And this leads me to the race outlook for 2025. Based on the strong performance in H1, we increase our outlook for net interest income from 7.8 billion to 8 billion euros. We also increase our target for the net result from 2.4 billion to 2.5 billion euros, which translates into 2.9 billion when excluding the restructuring charges. We stick to our cost income ratio target of 57%. Regarding capital return, we plan for 100% payout based on the net result before restructuring charges and after 81 call payments. And we maintain our expectation for the CET1 ratio of at least 14.5% at the end of this year. Now let me hand over to Carsten, who will walk you through the detailed financials of the second quarter. Over to you, Carsten.

Thank you, Bettina, and good morning, everyone. It's also my pleasure to present you record results. A double-digit return on tangible equity before restructuring expenses is a clear proof of the excellent performance of the business. we are clearly well on our way to reach our financial targets for the year, which we have raised again. The CET1 ratio of 14.6% is around 50 basis points lower than in Q1 and fully in line with our target of at least 14.5% by year end. It reflects our commitment to return more than the net result to our shareholders via share buybacks and dividends for this fiscal year. The quarter's performance is based on 13% higher revenues compared to last year, reaching broadly the same level as the record Q1 of this year. Net interest income has held up very well and is only slightly lower despite the ECB rate cuts. Net commission income has grown strongly. The net fair value result is slightly negative and on the same level as last year. positive valuation effects from investments, compensated FX effects from our US dollar 81 instrument and derivatives valuations. As in Q1, the relatively high other income excluding FX loan provisions stems largely from a positive hedge result. Now to net commission income in more detail. Net commission income grew by 10.3% year on year with good contributions from all customer segments. Following on an already strong Q1, corporate clients further improved revenues in the FX and bond businesses. Lending grew fee income from the loan origination business. Even trade finance managed a slight increase compared to last year, despite the sluggish German economy. This is a clear testament to our close client relationships. Private and small business customers in Germany grew net commission income by a healthy 8.8% compared to last year. all product areas contributed. Again, the securities business was the biggest contributor. In particular, wealth management performed well and higher transaction volumes in a volatile market helped at Comdirect. In the payments business, we see the first effect of the higher account fees, which started to meaningfully contribute to revenues in June. Let's move on to interest income. In Q2, ECB rates were on average 50 basis points and Polish rates 25 basis points lower than in Q1. Nevertheless, the net interest income is only slightly reduced, demonstrating the resilience of our business model. In corporate clients, net interest income is up slightly compared with Q1. Lower funding costs and higher income from loans more than compensated reduced contributions from deposits. The lower funding costs are, however, offset in net fair value from connected hedging derivatives. In PSBC Germany, net interest income was slightly lower. The reason are early mortgage repayments, which are always highest in the second quarter. This is an internal effect with corresponding gains shown in others in consolidation. Otherwise, the interest income was basically on the same level as in Q1. In mBank, the lower NII results mainly from a weaker Polish Zloty. Lower interest rates were largely compensated by volume growth. In others and consolidation, NII is slightly lower. There is, however, an offset in the net value result from derivatives. Looking at loan volumes, CC has continued to increase the business with all customer groups. In total, CC managed to grow the loan book by 8% in the first half. There's been a pickup in investment loan demand in Mittelstand. This is encouraging and includes growing demand from the public sector. PSBC Germany has again slightly grown the mortgage book. In the deposit businesses, we have seen stable volumes and only a small increase of the beta to around 39% as we have offset the effect of lower ECB rates with strict margin management. At the end of the quarter, we have launched new initiatives to acquire additional deposits in PSBC Germany. This brings me to the next slide with the outlook for NII and related value result in 2025. We raised our baseline NII outlook from 7.8 billion to around 8 billion for the year. I will now go through the drivers. The replication portfolio has been marginally adjusted by an increase of 2 billion to 147 billion in June, further stabilizing our future interest income. This has no big impact in 2025, where we continue to expect around 400 million uplift from the replication portfolio, but will stabilize NII in later years. Looking at the ECB rate sensitive positions for 2025, we now assume around 600 million less contribution than last year due to the lower rates. This is based on an average ECB rate of 2.17% for the year and is 100 million improved from our expectations in Q1. Current forwards are higher and there's therefore further upside potential. With 39%, the Q2 deposit beta was only around one percentage point higher than in Q1, thanks to our continued successful margin management. While we expect a higher beta in H2, also due to our attractive offers for new money, we improve our outlook for the full year to 40%. This would then lead to a NII reduction of around of only around 100 million from the deposit beta compared to last year while we were originally expecting a drag of 300 million. Concerning volumes, we continue to plan for moderate growth and deposits towards the end of the year. Due to the composition of new loans and deposits, we lower the expected contribution from volume growth from 200 million to around 100 million NII. For mBank, we continue to plan with around 100 million lower NII offset in net fair value. Given all these factors, we expect NII in H2 to be somewhat below H1, but adding up to at least 8 billion NII for the financial year 2025. When also considering the net fair value results, where we have offsetting positive effects from lower ECB rates, the total rates-related revenues should be on the same level as last year. This would be an excellent result and a good starting point from which we can grow in subsequent years. So looking beyond 2025 and assuming no further changes in volumes and the current forward rates, we now expect an additional 1.2 billion NII from the replication portfolios in 2028 versus 2025. Most of the 1.2 billion uplift in 2028 comes from the deposit models, but the equity models are also contributing more than 150 million. In total, the outlook for the contribution from the replication portfolios in 2028 is now around 300 million ahead of our original plan. But please keep in mind that part of this is offset by lower interest income from ECB rate sensitive positions which is correspondingly reduced when deposits are moved to the replication portfolio. This reduction in volume leads to around 200 million less contribution from these deposits. So we clearly see a potential tailwind, but stick to our outlook for 2028 for the time being. Now to costs on slide 19. Operating expenses have been managed in line with our target of a cost income ratio of around 57% for the year. The cost increase in the Group X mBank results from general salary increases and the effect of a higher share price on equity-based variable compensation. The cost increases were partially offset by the cost savings we have realized from our ongoing restructuring and cost optimization measures. mBank's costs increased by 16% from investments in business growth and FX effects from the stronger SLOTI compared to the last year. Furthermore, there was a significant increase in the compulsory contributions in Poland already in Q1. We have concluded the detailed cost and FTE planning for the momentum strategy in the quarter. This has confirmed our cost targets and has resulted in lower required restructuring expenses for the FTE reductions than initially estimated. So far, we have booked restructuring expenses of 534 million in the first half. The total required restructuring expenses are now expected around 600 million with the remainder to be booked in the second half. The next slides cover the risk result. The risk result comes in at 176 million. Overall, the portfolio has been resilient and developed in line with our expectations. We therefore stick to our guidance of a risk result of approximately 850 million in 2025. This quarter's risk result includes the effects of some methodology improvements. In 2020, with COVID, we introduced top-level adjustments as an overlay to the risk result and have used this approach since then. In 2024, we have started to complement the top-level adjustments with collective staging for novel risks. This quarter, we implemented changes in our risk methodology that lead to a higher sensitivity to macroeconomic effects. These include in-model adjustments for macro effects, mainly due to US tariffs, and the recalibration of our rating methodology for small and medium-sized corporate customers in PSPC and corporate clients. This has resulted in a 142 million increase of the risk result. At the same time, we have released the remaining 182 million top level adjustment since the covered issues were either resolved or are now addressed by the updated methodology. So now we have a release of 40 million. On the next slide, I will give you an overview of the total stock of overlays. Overall, we have built up additional provisions of 270 million for novel risks since Q2 2024. Around half are covering macroeconomic or sector related risks. The other half is for climate and environmental risks, as well as a one-off effect stemming from rating recalibrations. As with the TLA, the additional provisions will be reviewed on a quarterly basis and adjusted if required. This concludes the view on the key line items. I've already covered the main drivers of the excellent operating results and will therefore only briefly touch the tax rate. The tax rate was 22% in Q2 and 24% for the first half at the low end of our expected range of 25 to 30% for the year. For now, we stick to this guidance as the tax rate also depends to some degree on future developments in Russia and Poland. The next slides cover the results of the operating segments, starting with corporate clients. Corporate clients have increased loan volumes and grown capital markets revenues by 7% year on year. Also trade finance has held up well. Nevertheless, overall revenues are 7% lower compared to Q2 last year due to the impact of lower ECB rates on the deposit business. With no significant change in ECB rates expected in the next quarters, income from deposits should stabilize at the current level. This is already visible in the comparison with Q1 where customer revenues were relatively stable overall. Lower revenues than others mainly reflect the lower net fair value results in comparison to the strong first quarter and includes effects from legacy positions. TSBC Germany has again grown its fee business year on year. This has come from private customers while net commission income from small business customers was stable. During the quarter, we have made progress in our asset management strategy and are now reporting our asset management subsidiaries Commerzial, Yellowfin and Aquila Capital together. In Q2, we have impaired intangibles of 65 million of Aquila Capital, which is reflected in the cost line. The impairment results from a shift in the market for early stage solar projects in Southern Europe in the first half of the year. This has reduced the operating results to 262 million. Before impairments, PSBC Germany's operating result was on last year's level. mBank again performed extremely well on an operating level, more than doubling the operating result to 300 million euros. Revenues before burdens from FX loans and credit holidays were on the same level as last year. Burdens from FX loans are nearly half the level of last year. For the whole year, we expect the burdens to be less than half of what we have seen in 2024, as MBank continues to manage to make very good progress on settlements, reaching about 30,000 by the end of July. Next year, we should benefit from the strong performance of MBank's core business, no longer weighed down by FX loan provisions. Others in consolidation delivered a positive result of 109 million in the quarter. While net interest income was slightly lower, the net fair value result was improved compared to the previous quarter. It also includes a 51 million valuation effect related to the IPO of eToro in which Commerz Ventures has a stake. Revenues were further boosted by a positive hedge result and realization gains. For the year overall, we expect a neutral result from others in consolidation. I will now move to the group RWA and capital development on the next slide. The CET1 ratio was 14.6% at the end of the quarter, down around 50 basis points from Q1. There were three drivers. First, we will return the full net result before restructuring expenses and after AT1 coupon payments to shareholders. We have therefore deducted the restructuring charges after tax from CET1 capital and not accrued the net result. This has reduced the CET1 ratio. Second, RWA have increased by around 2 billion in the quarter, mainly from higher credit risk RWA from growth and higher market risk RWA due to the extreme market volatility in April. Third, there have been other CT1 capital changes, mainly FX effects and regulatory adjustments. With a CT1 ratio of 14.6%, we are now close to our target of at least 14.5% for the year. For H2, we expect modest growth of risk-weighted assets when considering the SRTs planned for the second half and do not anticipate a significant change in capital. This brings me to the end of the presentation and the outlook for 2025. As Bettina has already mentioned, we have raised our outlook for NII and the net result. We confirm all other targets. We continue to expect growth of net commission income of around 7% compared to last year, a risk result of around 850 million, and the aforementioned CET1 ratio of at least 14.5%. Thank you very much for your attention. Bettina and I are now looking forward to taking your questions.