Commerzbank AG

This conference will be recorded. Hello and welcome to the Commerzbank AG conference call regarding the fourth quarter results 2025. Please note that this call is being transmitted as well as recorded by audio webcast and will be subsequently 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 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. You already saw the bottom line and capital return yesterday with our pre-release, and today we are pleased to present the full picture of our Q4 and full year performance 2025. I will present to you our overview of the year and share our strategic and financial view going forward. Afterwards, Carsten will walk you through the detailed financial performance of the fourth quarter. We can report on a very successful year for Commerzbank. We achieved our growth targets and in many areas exceeded them. We delivered a record operating result and will do return even more capital to shareholders than originally planned. This is a clear proof to the fact that our momentum strategy pays off and drives profitable growth. In 2025, we created significant value. On the financial side, we achieved an operating result of 4.5 billion euros, an increase of 18% compared to previous year. Our return on tangible equity before restructuring expenses reached 10%. This is the highest return since the global financial crisis and hitting this double digit figure is an important milestone. It demonstrates the improved strengths and profitability of Comets Bank and sets our new baseline for growth from 2026 onwards. This is complemented by a capital return of 2.7 billion euros for 2025, higher than we thought back in November, and bringing the total since 2022 to 5.8 billion. This financial success translates into value for all our stakeholders. For our shareholders, the market has recognized our growth path and our transformation. Our share price has more than doubled in 2025, reflecting the confidence in our strategy and its execution. For our employees, our success is also their success. We launched an employee share program and saw a high participation rate of 90%. This creates a culture of ownership and aligns the interests of our team with the long-term success of our bank. And for our clients, our growth is a reflection of their trust. We grew our corporate loan volume by 10% and our securities volume by 9%. This shows that our clients value our partnership and our expertise, in particular in the current economic environment. We are a reliable partner for our clients, especially in the German Mittelstand. A more detailed look at the financial performance underpins the positive trend across our key metrics. Our total revenues climbed by 10% to 12.2 billion euros. This was driven by good performance across the board, particularly by a 7% growth in our net commission income and the strong results from our Polish subsidiary mBank. Even in an environment of lower benchmark interest rates, we kept our net interest income nearly stable reflecting our successful NII management. At the same time, we have maintained our consistent cost discipline. We improved our cost income ratio by two percentage points to 57%, achieving our target for the year. This was accomplished alongside strategic investments, as well as absorbing one-off effects such as higher valuation of equity-based compensation due to our share price performance. This combination of revenue growth and cost control led to the 18% increase in operating results. This demonstrates the improved earnings power of our bank. Our net result stands at 2.6 billion euros. If adjusted for the restructuring expenses, it rose strongly by almost 13% to 3 billion. This underlying profitability is also reflected on our net ROTE before restructuring expenses, which, as mentioned, reached 10% exceeding our target. I already touched on capital return and will come back to it shortly. But before that, I would like to draw your attention to the execution of our momentum strategy. We have delivered on our strategic milestones in 2025, driving both growth and transformation. On the growth side, we have leveraged our franchise for capital accretive loan growth, demonstrating our strong client relationships. Furthermore, we have taken a smart analytical approach to deposits. By using AI, we improve savings retention, apply sophisticated pricing schemes, and grow volumes through reactivation of existing customers. The strong focus on client needs has supported the growth in our fee business across all customer segments, contributing to our revenue uplift. On the transformation side, we have implemented the new enhanced service model for our private customers. As one key element, we have created more capacity for high quality advice in private banking and wealth management. This is the key step to further grow our fee income. Our restructuring program is on track with the ongoing shift to sourcing and showing locations progressing as planned. An important component of this transformation has been the introduction and expansion of AI-based capabilities. We are already realizing initial efficiencies and improve both customer and employee experience. This is happening as we speak, and I will come back to this in a minute. Overall, we are very pleased with the success of our momentum strategy, which paves the way for 2026 and beyond. Our priorities are clear. First, we are fully committed to delivering on our 2026 to 2028 strategic and financial targets. We have a clear plan and our 2025 results give us all the confidence that we will achieve it. Second, we will continue our growth path. This will be supported by an expected modest recovery in the German economy and the government stimulus package. Further catalyst from 2027 onwards will be the pension reform in Germany, which comes with government subsidized security savings plans. Third, It will further increase the usage of artificial intelligence to transform the bank. We will increase the investment in AI to drive efficiency, enhance customer service, and create new revenue opportunities. Fourth, we will continue the execution of our asset management growth strategy. This is an important building block to achieve our targeted growth of 7% annually in fee income. And finally, we will strive to optimize the deployment of our access capital including the ongoing screening of unorganic growth opportunities. Let me expand on two of these key priorities, artificial intelligence and asset management, starting with AI. AI is a fundamental driver of our ongoing transformation. We have built a solid starting point in 2025, moving from concepts to concrete applications that deliver benefits. Let me highlight a few of them. In our advisory and customer service center, our AI-powered agent assist provides real-time call transcription, generates summaries, and recommends suitable solutions. Workplace tools like Cobra GPT make information retrieval and content creation for our employees significantly faster. Our in-house tool, fraud.ai, helps to automatically detect fraudulent activities. And in our banking app, our virtual assistant, Aver, combines generative AI with avatar technology to assist customers with their banking needs. The benefits are only visible and will increase every year. In 2026, we will expand and enhance the use cases we started in 2025. We will also introduce additional general applications such as for legal contract generation and annual report analysis for risk assessment. Furthermore, we will continue piloting agentic AI in collaboration with our strategic partners to drive further process transformation. In conclusion, AI will change banking and we are well underway in this transformation. We have increased our change budget for 2026 from originally planned 500 million to almost 600 million euros and increasing share of this is allocated to AI. A key lever for growth, particularly in our fee income, is our asset management strategy. Our strategy is based on a combination of in-house asset management offerings and partnerships, creating a platform that provides a wide choice for our clients. Our in-house capabilities cover a broad range. This includes discretionary portfolio management and liquid strategies at Comet Bank and our specialist manager, Yellowfin, and in the areas of private Markets, we have the expertise of Comatreal in real estate and infrastructure, as well as Aquila Capital in clean energy and sustainable infrastructure. Combined, our in-house units manage 67 billion. Currently, we see more inflows in liquid assets and a more challenging environment for less liquid assets. Regarding early-stage investments into renewable energy projects, Aquila faces market challenges which put pressure on two specialized institutional funds. Hence, we have pulled forward the full depreciation of the acquired capitalized client value. Going forward, we fully focus on developing our existing business and adding new business to meet the demand of our clients. The in-house offerings are complemented by our partnerships, which provide a full set of standard fund and ETF solutions with a volume of 95 billion euros. This setup is designed to expand our business with our clients. It will further strengthen our position as co-apprentice partner for their investment needs. Let me move on with a central element of our equity story, our commitment to delivering capital returns to our shareholders. For the 2025 financial year, we will return 2.7 billion euros to our shareholders, 200 billion more than originally planned. This reflects 100% payout ratio before restructuring expenses and represents a total yield of 7% based on the market capitalization at the start of the year. Regarding the mix, and given that we trade well above book value, we have decided to put more emphasis on the dividend. Hence, we intend to propose an increase to 1 euro and 10 cents. On share buybacks, we have decided yesterday to start another buyback of up to 540 million euros tomorrow. This comes on top of the $1 billion buyback, which was completed already in December. Looking forward, we continue targeting a payout ratio of 100% of our net result after 81 coupon payments. We intend to further grow the dividend share towards 50%, establishing Commerce Bank as a reliable dividend stock. This capital return policy comes with a total yield increasing to 10% in 2028 and remains a key cornerstone of our strategy. Our performance and strategic execution give us confidence for the year ahead, and January has already been a very good start. Hence, we have increased our outlook for 2026, which confirms the traction of our momentum strategy. We anticipate a supportive, albeit modest, microeconomic environment in Germany with governance stimulus supporting the economy. This is reflected in the GDP growth of 0.9%, and an inflation remaining close to the 2% target. Furthermore, we expect ECB's deposit rates to remain at 2% throughout the year. Against this backdrop, we have set clear targets for 2026. We are aiming for a net result of more than 3.2 billion euros. We will continue our strict cost management and plan for a cost income ratio of 54%, which is two percentage points better than originally planned. And we are targeting a return on tangible equity of more than 11.2%. And as I just mentioned, we are committed to a total payout of 100% of the net result after 81 coupon payments. Finally, I would like to provide a transparent view of our past towards our 2028 ROTE target of 15%. Starting from our 2025 adjusted ROTE of 10%, we have a credible roadmap to reach our goals. The journey will be driven by several key factors. The diminishing burdens from the FX loans in Poland will provide an uplift, and the positive impact from the restructuring will also contribute in terms of cost measures. The main drivers, however, will be loan growth and the verification portfolio lifting net interest income and the target 7% annual growth in net commission income. We also see potential upside. The steep yield curve, a stronger-than-expected German stimulus, and an accelerated impact from our AI initiatives could all provide additional tailwinds to our profitability. They are not yet reflected in our 2028 plan, but form tangible drivers with a very good likelihood to materialize. Of course, we are also diligently monitoring potential headwinds, such as geopolitical risk, trade tensions, and intensifying deposit competition. However, we are confident that we have a very robust and credible plan to navigate these challenges and deliver on our 15% hourly target. And to use one of my favorite words, you can consider the target as our floor. And with that, I hand over to Carsten for a detailed look at the financials of the fourth quarter. Over to you, Carsten.

Thank you, Bettina, and good morning, everyone. The results of the quarter speak for themselves, strongly contributing to the excellent results for the year. In Q4, the net ROTE reached 10.1%, slightly above the level we reached for the whole year before restructuring expenses. This is driven by a near record operating result that is in turn based on very strong revenues. The CET1 ratio remained unchanged at 14.7%. I will now go through the details starting with revenues. Revenues were exceptionally strong in the quarter, up 6% compared to last year. Net interest income has exited the trough that was induced by the ECB rate cuts and will continue to grow in the next quarters. Net commission income is the best ever achieved by the bank in the fourth quarter. The net fair value results reached 74 million. The 27 million increase compared to Q4 last year was driven by a higher fair value result, mainly at mBank, offsetting lower interest income. Other income, excluding FX loan provisions, reached 79 million and mainly stems from a positive hedge result. Now to net commission income in more detail. All customer segments grew their business year on year, resulting in a record fourth quarter. This is a clear testament to the excellent work done by the teams. Corporate clients continues to grow in trade finance year on year on the back of our strong market position and despite the ongoing weakness in German exports. The biggest increase, however, came from lending where fee income linked to loan origination has continued its upward trajectory as we have maintained good volume growth. Private and small business customers in Germany continue to expand the securities business both from securities volumes and transactions. The better payments business is driven by higher account fees, while the cards business contributed less this quarter. We have continued to increase the share of customers who have signed up to the new account model to around 65% and have only lost customers with low revenue contribution. As last year, the discretionarily managed portfolios performed very well in the quarter, contributing a significant portion of the revenue increase compared to the last quarter. Let's move on to the interest income. With ECB rates unchanged to Q3, a strong loan business in corporate clients and successful deposit management, interest income in Commerzbank grew slightly in Q4. Conversely, in mBank, the effect of materially lower central bank rates is visible in net interest income. However, the effect has been partially offset in net fair value. As rates in Poland are well below last year and might be reduced further, this will also have an effect in 2026. Looking at volumes, growth has continued across the board. Corporate clients have again increased loan volumes in all customer groups. As customers improved their liquidity positions towards the end of the quarter, The average deposit balance was 2.7 billion higher than in Q3. Therefore, both loans and deposits contributed to the increase in revenues. In PSBC Germany, loan volumes have been stable. Deposits are up based on inflows in both sides and call deposits. The deposit data has come down in the quarter as high rates offered for new retail deposits in the summer started to expire. While we will have more expiries in Q1, Comdirect has initiated a new deposit campaign with attractive rates in January. We therefore will have offsetting effects in the beta. On the next slide, I will give you more details on the loan growth in corporate clients. In 2025, corporate clients achieved a 10.9 billion loan growth, of which 2.4 billion was achieved in the fourth quarter. The mix in 2025 has been weighted towards the international business. In Germany, we had only moderate demand from corporates. However, we did see growth from the public sector. Corporate demand has been across sectors with the two largest being energy and consumption. New business has been good in Q4. The new loan agreement signed will be drawn over time and start contributing to the net interest income in the next quarters. Looking into 2026, January has started well. We have seen some pickup in demand in Germany and have continued demand outside of Germany. We are therefore confident that we will continue our profitable growth trajectory in 2026. This brings me to the next slide with the outlook for NII. We raised our outlook to around 8.5 billion for 2026. The main reason for this is the more favorable forward curve in combination with the increased size of the replication portfolio. Due to these, the replication portfolio will contribute an additional 600 million in 2026. ECB rates are expected to remain at the current level, slightly lower than in 2025. In combination with the effect of moving more deposits into the replication portfolio, we anticipate an impact of around minus 200 million from the deposits invested at floating rates. For the beta, we expect an increase from 40% on average in 2025 to 42% in 2026, leading to 100 million lower interest income. This should be more than compensated for by growth in loans and deposits. Finally, interest rates in Poland have come down significantly and are forecast to go down further. We therefore expect interest income in MBank to be lower in 2026. Based on the current business mix and our assumptions for the deposit beta, Volume growth and the forward curve, we expect further increases in interest income in 2027 and 2028 with a clear potential to reach around 9.4 billion in 2028. Of course, there could be more intense deposit competition than anticipated or lower rates, particularly in Poland than assumed, which would lead to slower revenue growth. Conversely, the environment might become more favorable. Now to costs on slide 21. We have reached our target cost income ratio of 57% for 2025. This is based on strict cost management as we had to compensate two larger unplanned cost items in 2025. One is the doubling of the share price and its impact on share based compensation. The other is the accelerated impairment of intangible assets. Together they represent 3% of our cost base. including these items and due to our cost management costs increased by only 3%. The main cost drivers have been general salary increases, investments, and the build out of our shoring and sourcing centers. The cost increase in mBank is mainly due to business growth, but also higher compulsory contributions are a significant factor. We will maintain our strict cost management approach in 2026 and are therefore confident that we will reach our improved target cost income ratio of 54% for the year. While not part of the regular cost base, we had final restructuring expenses of 9 million related to our momentum strategy in the quarter. The next slide covers the risk results. The risk results came in at 207 million. This is better than expected and in line with the previous year. The portfolio has proven to be very resilient. We have maintained our approach to overlays. There has been no material change in the outstanding amount, which stood at 147 million at the end of the quarter. The risk result for the financial year reached 722 million, well below our guidance of less than 850 million. Nevertheless, for 2026, we again guide for a risk result of around 850 million. In 2026, the German economy will leave a three-year phase of stagnation and should show moderate GDP growth. But given the ongoing structural changes and higher default rates, we prudently plan with a slightly higher risk result, which is equivalent to 25 to 30 basis points cost of risk. This concludes the view of the key line items. I've already covered the main drivers of the excellent operating results and will therefore focus on the net results. Full year taxes and minorities are higher in 2025 than in 2024. reflecting material changes in the tax codes in Germany and Poland, as well as a better profitability in mBank, increasing the minorities. For 2026, we expect the tax rate at around 30% due to a higher tax rate in Poland and further rising minorities as the profitability of mBank should continue to increase. The next slides cover the results of the operating segments, starting with corporate clients. As already mentioned, corporate clients had a very good fourth quarter. Revenues benefited from the ongoing healthy loan growth and the good capital markets business. Also, the increase in deposit volumes contributed. This is clearly visible in international corporates with 13% higher revenues. Institutionals again reached a very good level of last year. Mittelstand also increased revenues in the loan business. However, year to year, this could not fully compensate the effect of lower rates on deposits. In PSBC Germany, our new client advisory model has become fully operational in Q4. This has come with the reassignment of some customers. Due to these changes, the Q4 revenues of the two units can be only compared in combination to the previous quarters. Looking at private customers and small business customers in aggregate, revenues have increased substantially in the quarter. The biggest drivers have been the securities business and the deposit business. While asset management overall showed better revenue than in the previous quarters, the asset management subsidiaries have lower Q4 revenues compared to the previous quarters as these benefited from transaction fees which tend to be lumpy and not easily distributed over the quarters. For the financial year, revenues of the asset management subsidiaries have been only slightly lower, reflecting a partially more difficult market environment. mBank has maintained its good profitability. The customer business has held up well despite being impacted by the lower interest rates in Poland. As expected, provisions for FX loans have again been lower than in the previous quarter. We maintain our outlook that the burdens from FX mortgages, which have been 483 million in 2025, should no longer be material. mBank should further increase its contribution to our results in 2026 and plans to resume paying a dividend. Others in consolidation reported a small operating loss in the quarter. For the full year, the operating result is plus 32 million in line with our expectation of a neutral result for the full year. For 2026, we again expect a more or less neutral result. Now to the RWA and capital development. The CT1 ratio was stable at 14.7%. Overall minor RWA and capital changes largely canceled each other out. In total, we have dedicated 2.7 billion for distribution to shareholders. This is equivalent to 154 basis points of the CET1 ratio and represents a yield of 7% based on the market capitalization at the end of the year. In 2026, we intend to again distribute 100% of the net result after 81 payments. Therefore, as in 2025, we will not include the net result in our CET1 ratio calculation. As already communicated with the Q3 results, we have received the SREP letter from the ECB. Our 2026 capital requirements were lowered by 10 basis points. As we must hold only part of the regulatory capital requirement as CT1, the MDA will be reduced by around six basis points, effective since January. This brings me to the outlook for 2026. As already mentioned, we have improved our outlook for NII from 8.4 to 8.5 billion. As in 2025, we target 7% growth in net commission income and expect a risk result of around 850 million. Based on the improved revenue outlook compared to our original momentum strategy, we target a cost income ratio of 54%. This is well ahead of our original target of 56%. The same applies to the outlook for the net result, which should be above the original 3.2 billion target. As mentioned, we confirm our target payout ratio of 100%. The CET1 ratio at the end of the year should still be above 14%. And the ROTE should increase from 10% in 2025 to more than 11.2% in 2026. For 28, We confirm all targets laid out in our momentum strategy and, as Bettina has pointed out, with clear upside potential. Thank you very much for your attention. Bettina and I are now looking forward to taking your questions.