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Morningstar | Commerzbank Reports Mixed 9-Month Results; ECB Stress Test Results Satisfactory

A quick glance at nine-month results at Commerzbank is visually pleasing. Net interest income was up 10% to EUR 3.4 billion owing to higher interest income and lower interest expenses, net commission income was slightly down (3%), and consolidated profits came in at EUR 832 million versus EUR 120 million last year. However, the comparable period last year included EUR 807 million in restructuring expenses, which makes this year’s performance appear stronger than it is. Excluding restructuring charges, pretax profits were 10% lower, largely due to higher operating expenses and lower other net income. Return on equity of 4% continues to fall below our cost of equity assumption of 9%. We maintain our EUR 10 fair value estimate and no-moat rating.

Net interest income results were primarily driven by the private and small-business customer segment, which saw good growth in lending volume carried by residential mortgage loans. This was partially offset by a more competitive pricing environment in the corporate client segment as well as weaker demand for capital market and hedging products. Operating expenses increased 2% compared with the year prior as investments in Commerzbank's digitalisation efforts could not be offset by 3% lower personnel expenses, which came after recent head count reductions. As a result, the cost/income ratio stands at a high 81% versus our 66% estimate towards the end of our forecast horizon.

European Central Bank stress test results have been satisfactory for Commerzbank. The bank not only went into the exercise with a higher capital cushion, but also saw a smaller common equity Tier 1 ratio reduction in a more severe scenario than performed in 2016. Its common equity Tier 1 ratio stands at 13.2%.