Interest rate boost and new medium-term strategy: Commerzbank is setting itself new targets for the coming years after an unexpectedly strong jump in profits.

By 2027, net profit is set to increase by more than half compared to this year to 3.4 billion euros. Boosted by the rapid rise in interest rates, the Frankfurt-based bank generated a profit of 684 million euros in the third quarter - more than three times as much as a year ago. "In addition to the interest rate environment, we are benefiting from a low risk result and continued cost discipline," said CFO Bettina Orlopp on Wednesday. Income shot up by 46 percent to 2.76 billion euros. This was mainly due to an increase in net interest income by a good third to 2.17 billion euros.

Commerzbank was initially able to score points on the stock exchange. At times, the share price rose by more than six percent, putting it at the top of the leading Dax index. However, it then turned negative and lost 2.45 percent to 10.14 euros in the early afternoon. "In our opinion, Commerzbank has presented a decent result for the third quarter of 2023," commented Deutsche Bank analysts on the rival's figures. One trader said the fall in the share price was due to the new targets. There had been no positive surprise with these.

"We have established a new business model and put Commerzbank back on the road to success," said CEO Manfred Knof, who had prescribed a radical reorganization for the bank. "We are building on this with our strategy program until 2027: We will increase our earnings base, further improve the cost/income ratio and increase our return on equity." The return on equity (RoTE) is to increase to more than eleven percent by 2027. The bank intends to boost its earnings by expanding its commission business, among other things. Simple digital processes should ensure that Commerzbank becomes more efficient overall. The bond business is to be expanded. Net interest income is to increase moderately.

Commerzbank aims to improve its cost/income ratio to around 55% by 2027. In the first nine months of this year, around 60 cents were spent to earn one euro of income. By comparison, the cost/income ratio at Deutsche Bank is 72 percent and 39 percent at Italian UniCredit. According to Knof, the already considerably thinned-out branch network should not fall below 400 branches. "We believe that 400 branches in Germany is a good position," he said. The network once comprised around 1000 branches. For its targets up to 2027, Commerzbank assumes, among other things, that the ECB will lower its deposit rate, which banks receive from the central bank for parking surplus funds, to 3.3 percent by then. The bank's management also assumes that margins in the German lending business will remain largely unchanged.

Shareholders should also benefit from this course. Commerzbank plans to distribute more than half of its profits for the years 2025 to 2027. For the years 2022 to 2024, it also plans to pass on a total of three billion euros to shareholders via dividends and share buybacks. Like other banks in Europe, Commerzbank is currently benefiting from the significant rise in interest rates in the eurozone, which is boosting the lending business. The European Central Bank (ECB) has already raised key rates ten times since summer 2022. The Spanish bank Santander increased its profit by 20 percent in the third quarter, while the French bank Credit Agricole reported a 33 percent increase.

STRONG INTEREST SURPLUS EXPECTED FOR THE YEAR AS A WHOLE

The profit boost in the summer quarter also makes Commerzbank optimistic for the year as a whole. It now expects a consolidated profit of around 2.2 billion euros for 2023 after 1.4 billion euros in 2022. Income is expected to increase from 9.5 billion euros to around 10.6 billion euros. The bank is targeting net interest income of more than 8.1 billion euros. CFO Orlopp had previously described eight billion euros as a good estimate in September. The bank wants to improve its return on equity (RoTE) to around 7.5 percent. In 2022, it was still at 4.9 percent.

In the third quarter, Commerzbank quadrupled its operating profit to 1.12 billion euros. The Polish subsidiary mBank contributed 89 million euros. According to Commerzbank, this more than compensated for a renewed provision of 234 million euros in connection with older Swiss franc loans. mBank has been struggling with the Swiss franc loan issue for years.

(Report by Frank Siebelt and Tom Sims; with assistance from Anika Ross, edited by Ralf Banser. If you have any queries, please contact our editorial team at berlin.newsroom@thomsonreuters.com (for politics and the economy) or frankfurt.newsroom@thomsonreuters.com (for companies and markets).)

- by Frank Siebelt and Tom Sims