Please note that this call is being transmitted as well as recorded by audio webcast, and will subsequently be made available for replay on the internet. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following Bettina Orlopp and Manfred Knof's presentation. Let me now turn the floor over to your CEO, Manfred Knof.
Good morning, and welcome to our earnings call. Before we start, I would like to make a small personal remark. I had the flu, and for safety reasons, and that most of us are planning to go on vacation, I'm sitting in a different room. So apologies for any potential hiccups or delays during the call. I guess we all had wished for a calmer market these days, but it's nevertheless my pleasure to present you on very good Q2 and H1 results. We have a strong business momentum across the board. Client business in all segments, including mBank, shows increasing revenues year -on -year, and growth in fee income gains further traction. We are successfully balancing our business mix to reach our targets. Our clear focus on execution pays off, and this makes us optimistic going forward.
Our increased earnings power is reflected in our half-year net result of almost EUR 1.3 billion. This translates into return on tangible equity of 8.9%. These bottom line figures, however, include burdens outside our ongoing business of more than EUR 700 million pre-tax. Despite these burdens, we are sticking to our target of at least 8% return on tangible equity for 2024. Obviously, this assumes no outsized negative surprises in the months ahead, be it from Poland or from Russia. On capital, we have maintained our strong CET1 ratio, even without recognizing our H1 profit, due to our high planned payout ratio. Our current CET1 ratio of 14.8% strongly supports our capital distribution plans for 2024 and beyond. With our strong business performance in mind, let me touch on our updated macro view.
German GDP showed a slight contraction in Q2, and the latest PMI and ifo came in weaker than expected. Hence, we are not yet on a solid upward trajectory in Germany, and expect GDP to pick up a bit later than originally expected. For 2024, we actually expect zero growth. It remains to be seen how strong the expected upswing thereafter will be. At the same time, core inflation will likely stabilize well above 2% and should prevent ECB from aggressively easing its monetary policy. One of the key drivers for core inflation are wage increases. This also affects us as Commerzbank. Therefore, we need to maintain our strict cost discipline to manage any cost pressures from wages. This will be very much in focus for 2025. Our client business, however, has not been affected too much by this somewhat cloudy picture.
Regarding loan demand, we have seen a positive development in the last months. Our loan book with corporate clients grew by 5% compared to Q2 last year. Thereby, we clearly outperformed the loan market in Germany, which remains at a growth rate below 1%. One driver in our book is growth in investment loans, albeit from a low base. After years of postponed investment decisions, we now see more corporates deciding to invest. Important drivers are the green and digital transformation. But of course, this is only a snapshot from Q2, and it takes more quarters to actually call it a trend. Overall, our customer-centric business model with high asset quality pays off. This, however, does not mean that we are immune to larger single default cases, especially when you run one of the largest loan books in Germany.
In the more granular pockets of the portfolio, we still don't see a deterioration despite normalizing insolvency rates in the market. Hence, we keep on closely monitoring our books and prudentially manage the attached credit risks. Overall, while the environment may be challenging, we have again proven that we can successfully manage through it and consequently remain fully on track to reach our targets. Now, let me provide you with an update on our management priorities for 2024. We continue to deliver what we promise. First of all, we deliver on our capital return plan. Based on the very good H1 result, we have just filed the application with the ECB for the next buyback in the size of EUR 600 million. This is part of our planned distribution of EUR 1.6 billion for fiscal year 2024.
Equally important is the positive development in fee income. Q2 showed good progress with a growth of 4.5%. As we stated several times before, growing our fee income is one of our most important strategic priorities within Strategy 2027. The acquisition of Aquila will help on this journey and start contributing to P&L in the second half of this year. Regarding performance and execution management, reduction of complexity is a key topic. We simplify processes in many areas, contribute to efficiency. Let me provide you with two examples. We have improved online sales processes, which makes them more attractive for customers and provides relief for our employees. Furthermore, a certain set of customer requests can now be handled across locations. This increases flexibility and efficiency of resource allocation. On the customer side, I want to highlight the successful launch of Commerz Globalpay.
This joint venture with Global Payments provides mobile digital payment solution for merchants without the necessity to have a dedicated physical card reader. Instead, the normal mobile phone is sufficient. Sales have just started and provide our customers with an innovative solution that will strengthen their customer loyalty. On employee satisfaction, we know that it's not all about compensation, but without appropriate compensation, it is definitely difficult. Based on the recent agreement with the unions for pay scale staff, we have decided to increase the wages of non-pay scale colleagues by 5%, effective January 2025, and by another 4%, effective January 2026. While this is important for our teams and the bank, it of course requires extra efforts of the team to keep costs contained. Now let me summarize with my key takeaways.
We had a very strong first half of the year and delivered on our promises. We are confirming our outlook for 2024, and especially our ambition to increase fee income by 4%. We are targeting a payout ratio of at least 70% for 2024 and have applied for a further share buyback as part of this. Now Bettina will walk you through the financials. Bettina, over to you.
Thank you, Manfred, and good morning. Our customer business has been strong, and this is clearly visible in our results. We have delivered revenues above Q2 last year, and this is despite higher non-operational burdens from Russia and Poland that amounted to EUR 395 million. The cost-income ratio target is on target. The risk result is in line with our target, and we continue to be happy with the quality of our book. The CET1 ratio remains well above requirements and is 10 basis points lower than last quarter, mainly due to the closing of the Aquila acquisition. The operating result came in at EUR 870 million, almost at the level of last year, despite the higher burdens. The net result is 5% lower, mainly due to higher minorities.
The ROE is 7.3% this quarter, but if you look at the H1 figure of 8.9%, we are on track to reach our 8% target. I will now go through the revenues in detail, followed by costs and the risk result. We have seen a high level of customer activity in the quarter, which has translated into a very satisfying revenue development. Interest income is slightly lower, mainly due to net higher costs of deposits, not fully offset by growth in the franchise. This has been mostly compensated by year-on-year growing commission income in line with our targets. Improved fair value result reflects the good capital markets business of Corporate Clients, which benefited from higher customer activity. Other income is dominated by the burdens coming from Poland and Russia.
These are EUR 60 million for credit holidays in Poland, EUR 240 million for FX mortgages in Poland, and EUR 95 million for a Russian court case. We have been prudent in the Russian court case, booking the full amount at stake. However, as other banks involved in the case, we see a very good chance that we can recover the claim. In total, revenues are up 1.5% year-on-year, which gives us a very good starting position into the second half of the year. I will now focus on NII and NCI in more detail. Our net interest income has been resilient despite the first ECB rate cut and a further increase of the deposit beta. Our own business has been a bright spot.
After stagnating for many quarters, we have seen higher demand for investment loans in Corporate Clients and the recovery of the mortgage business is ongoing. At the segments in more detail. In Corporate Clients, the mix shift from sight to call deposits has continued as expected. With volumes remaining stable, this has led to a decrease of NII in the quarter. In Private and Small-Business Customers in Germany, NII from deposits is only slightly lower. Increased volumes have partially offset a higher beta. Interest income from loans has been stable. However, the reported NII of PSBC Germany is EUR 80 million lower than in Q1. This is mainly due to the early repayment of mortgages and day count effects. These have caused technical effects from structural internal trades between PSBC and others in consolidation and resulted in a corresponding increase in others in consolidation.
mBank has again increased interest income by effective margin management. Next slide provides an overview of the deposit and loan volume developments of Commerzbank ex mBank. We have seen good growth in both loans and deposits in the quarter. The nearly stable loan volumes in the last quarters, the volume has risen by 3% as corporate customers have increased their demand for investment loans. The welcome development and hopefully a very first step to higher demand in the future. It is far too early to say if this will lead to a sustained trend in the near term. Clearly, we eventually expect corporates to invest more after many years of restraints. The German new mortgage business has continued its favorable development with again, higher volumes than in the previous quarters.
While still far from the peak reached in the negative rates environment, we have seen a steady recovery with new business volumes up 23% year-on-year. With deposits, we have seen an unbroken growth of call deposits from private customers, has been despite a first reduction of rates offered. We continue to offer competitive rates to customers, but intend to improve margins by further adjusting our pricing based on the significant amount of new money gathered over the last quarters. Therefore, don't expect the strong volume growth of H1 to continue and might even see declines in the next quarter. Sight deposits, we have continued to see outflows, but on lower level than in the last quarters. It's probably too early to call the turn. We currently expect this trend of gradually reducing outflows to continue for a few more quarters until we reach an equilibrium.
This brings me to the NII outlook for 2024 on slide 12. Interest income remained at a good level in the second quarter. Deposit and loan volume growth, as well as increased contributions from the replication portfolio, are nearly compensating the effects of a higher deposit beta and reduced ECB rates. We have increased the size of the replication portfolio, supported by the large deposit base built up in the last quarters. This will help stabilize future NII, but has a slightly negative impact on this year's P&L, as longer-term rates are below the current ECB rate. Second half of 2024, we expect headwinds from lower ECB rates and a somewhat higher deposit beta. On the plus side, PSBC will adjust pricing, and there will be ongoing support from the replication portfolio.
In combination, this should lead to around EUR 3.9 billion net interest income in the second half of the year. We have therefore kept our overall 2024 outlook for net interest income unchanged at around EUR 8.1 billion. Having said this, there's upside potential after the strong first half, especially if the core deposit volume would be higher than anticipated and the volume of sight deposits stabilize. Let's now look at our commission income. The income is up 4.5% year-on-year. This is broad-based, with all customer segments contributing. Our acquisition of Aquila has only closed in June, and Global pay has just launched in the quarter. They have therefore not yet contributed much to income. The next quarter, they will start to complement the organic growth of the existing franchise.
Overall, we are very confident that we will reach our 4% growth target in 2024, and based on our initiatives, we are also very positive that we will continue this growth in subsequent years. Let's move to the next slide with a breakdown by segment. Corporate Clients has increased fee income by nearly 3% year-over-year. The main driver has been the strong capital markets business, with the primary markets for bonds and loans being very active. Trade finance and lending have been broadly stable. PSBC Germany has achieved a growth of more than 5% year-over-year. The main driver was a securities business. The fees from transactions are up as customers have been more active in their portfolios. Securities volumes are up 12%, also leading to higher fee income. Payments business was stable. Now to cost on slide 15.
Costs continue to be on track as we maintain our strict cost discipline. Operating expenses, ex mBank, are slightly higher than last year. It's primarily due to higher personal costs, partially offset by active cost management. Compulsory contributions decreased in 2024 as contributions to the Single Resolution Fund were suspended after it reached its target volume. However, we had an increase for the domestic deposit insurance scheme due to the strong deposit growth in the last quarter. In Q2, mBank has further increased operating expenses as a result of business growth and FX effects. This is in line with mBank's cost-income ratio steering. Overall, we are confident that we will reach our group cost -income ratio target of 60% for 2024. Looking ahead at 2025, you will see the effects of the recently agreed salary increases of around 5%.
So the cost development is probably in the same ballpark. In addition to the salary increases, there are three main drivers. Plus, that mBank will go further up because of investments, inflation, and efficiency FX effects. New regulatory requirements will necessitate additional investments, and we also intend to invest more into our franchise and operations to grow revenues and enable efficiency gains. This includes investments in digitization and artificial intelligence. These investment decisions will be made in the context of our balanced cost-income ratio steering approach, and we continue to target a cost-income ratio below 60% in 2025. And investments, we remain on track towards our target of 55% in 2027. The next slide details the risk result. Risk result was broadly on the same level as in Q2 last year.
It was driven by only a few single cases, with just four single cases accounting for EUR 150 million of the EUR 199 million risk result. Size of our loan book, a few single cases can never be ruled out. Excluding these cases, the overall loan book has continued to perform very well. Overall, the cost of risk at 20 basis points remains well below our normalized cost of risk of around 25 basis points, and the NPE ratio is only 0.8%. Therefore, maintain our outlook for the year of less than EUR 800 million. Q2, we have made our regular methodology updates, and in addition, have introduced collective staging in line with regulatory requirements. This has led to a one-off risk result of EUR 34 million and increased the stage II exposure by EUR 15 billion.
I want to stress that this is merely a methodology update introducing an additional caution for potential credit deterioration. It does not represent a worsening of the quality of our loan book. In total, methodology changes contribute around EUR 110 million to the net to the risk result. At the same time as every quarter, we have also reviewed our Top-Level Adjustment. Due to an improved outlook for the risks covered by the Top-Level Adjustments, we could release EUR 87 million. Therefore, in aggregate, methodology-driven changes in the risk result largely net out, and the risk result is determined by the single cases we have seen in the quarter.
With the high quality of our portfolio and the sizable cautions we have built up, we are well prepared not only for the rest of the year, but also beyond. Concludes the overview of the key line items. I will now move to the results summary. Strong performance of our customer businesses was partially offset by the burdens from Russia and Poland. These are reflected in the operating results of mBank and others in consolidation. Nonetheless, the Q2 operating result almost reached the previous year's level. As these burdens are not tax-deductible, the Q2 tax rate has risen to 33%. Full year, full year tax rate should be at the same level or lower, depending on future developments in Russia and Poland. On the next slide, I will briefly cover the operating segments, starting with Corporate Clients.
Corporate Clients improved its operating result year-on-year, with all business lines contributing. Following the very strong Q1, our capital markets customers have remained very active in Q2, with the bonds and syndicated loans business bringing in revenues well above last year's level. We have seen broad-based growth in loan demand. That is also reflected in quarter-on-quarter, slightly higher RWA. Overall, the operating return on capital has remained solid at more than 20%. PSBC Germany also had good customer business and increased its operating result year-on-year. Revenues increased from core deposits of retail and Comdirect customers that added significantly more funds to their accounts. Securities business, Comdirect benefited from a high number, a higher number of transactions.
In wealth management, the main fee driver has been securities volumes that have grown strongly year-on-year. Business customers have maintained a steady level of activity, resulting in stable revenues year-on-year. Commerz Real grew commission income year-on-year as well. Overall, revenues are lower, as Commerzbank, Commerz Real benefited from one-off valuation effects last year. PSBC Germany total cost and risk results were on the same level as last year. The RWA and almost the same level as last year, this led to an increase of the operating return on equity to 31%. On an operating level, mBank had its best quarter ever, beating even Q1.
However, as in past quarters, mBank had to book provisions for the legacy FX mortgages. mBank continues to seek settlement agreements for these mortgages and is making good progress. Well, more than 17,000 settlements have been agreed. Second half, we expect lower but still significant burdens from FX mortgages. Regarding the full year, we still think that the burdens will be below last year's level. Also well below underlying potential, we expect mBank to contribute more to the group results than last year. Finally, a quick look at Others and Consolidation. Operationally, the performance of Others and Consolidation leads to a broadly neutral operating result.
The operating loss is mainly due to the booking of burdens from Russia and the risk result that reflects the booking for one legacy position. While dependent on valuation effects that are hard to predict, I expect the underlying operating result to be more or less neutral in the second half of the financial year, leading to a negative operating result for the full year. This concludes the segmental view. I will now move to the RWA and capital development on the next slide. The CET1 ratio came in strong at 14.8%. The buffer to regulatory requirements is at 442 basis points. As a reminder, we are not including the net result in the capital position inter year. We intend to include retained earnings after distributions to shareholders in the CET1 ratio with the full year results.
This brings me to our outlook for capital distribution for 2024. As guided, we have applied for the first tranche of share buyback based on the strong H1 results. The application is for EUR 600 million, and we hope to receive the approval at the beginning of the fourth quarter. We intend to apply for a second tranche with the Q3 results. Price of a second tranche will depend on the business development, and in particular, the outlook for potential burdens from Russia and FX mortgages. Committed to our payout ratio of at least 70%, as set in our capital return policy, and continue to target a total capital return of EUR 1.6 billion, consisting of dividend and share buybacks, as set out in the capital return policy. Now to conclude with our outlook for 2024 on slide 24.
We confirm our unchanged targets for 2024. Continue to target interest income of around EUR 8.1 billion and 4% growth of fee income. Maintain our target of a cost-income ratio of 60% and continue to expect a risk result of less than EUR 800 million. We expect the CET1 ratio to decrease during the year, mainly due to planned RWA growth, but to be still well above 14% at year-end. Our outlook for the net result is unchanged. Continue to target a payout ratio of at least 70%, but obviously not more than the net result, consisting of a dividend and share buybacks in accordance with our capital return policy. Mind that a share buyback is subject to approval by the ECB and the German Finance Agency.
We are committed to return the majority of earnings to our shareholders and thereby provide a yield of around 10% to investors based on the current share price. Thank you very much for your attention, and we are now looking forward to taking your questions.
Thank you very much. Dear ladies and gentlemen, we are opening the Q&A session now. If you are dialed in on the conference call and have a question for the speakers, please press nine, followed by the star key on your telephone keypad now to enter the queue. If you have submitted your question already, it is saved. If you wish to cancel your question again, please press nine and the star key one more time. One moment, please, for the first question. The first question comes from Benjamin Goy of Deutsche Bank. Please go ahead.
Yes. Hi, good morning. Maybe you can clarify a bit because your deposit growth remains very high and deposit beta going up as well, and what the negative contribution of that was, in the second quarter, and then you ramped up your replication portfolio as well. So could you update us what's the benefit then to come, in particular in 2025 from that? Because, yes, you wouldn't only do it if it's a net positive. And then secondly, just to clarify on the cost, did you say 2025 total costs could be up 5%? Yeah, and then on the sequencing of the share buyback, so you said you expect approval by early Q4, then in November, the second tranche application.
Do you hope to, be more or less done with your buybacks for full year 2024, call it, by full year results slightly later, maybe publication of annual report in March? Thank you.
Thank you, Benjamin. So, let's start. I mean, the deposit growth has been very favorable and it's based on the very attractive call money offerings, which we had at Comdirect and Commerzbank. So the deposit beta went up because they were very attractive rates, but they were still well below the ECB rate, which means they only contributed positively to our NII, and we do adjust the pricing as we speak. So we are well aware of the fact that we should not have offerings out there who surpass current ECB rates. So no negative impact, and I think it's very valid to always look volume and deposit beta in conjunction to each other.
The replication portfolio went up because we have seen a strong build-up of the deposit base, and therefore, we increased the replication portfolio by EUR 10 billion. That will have a very slight, small negative impact on 2024, apparently, and for the years to come, a positive impact. For 2025, we expect something additional impact from the replication portfolio of around EUR 100 million. The cost side, you understand, understood well. We target in the main event something around 5%. It clearly also comes in with revenue to revenues attached to it, but that's what we are currently planning.
On the share buyback, the timing, the timing is as follows: We have handed in the first request now. We assume that we will get beginning of the third quarter, hopefully, an approval. We will then start with the implementation of this first share buyback of EUR 600 million. That takes a while. We know that from the beginning of the year. In parallel, we will ask for the second tranche based on the Q3 results. We expect an approval by January, February. We will then implement these program, and we should be finished by end of March, also with respect to the beginning of the AGM season and, and things like that.
Okay. Thank you.
Thank you very much. The next question comes from Johannes Thormann, HSBC. The floor is yours.
Morning, everybody. Johannes Thormann, HSBC. Three questions from my side, please. First of all, on the NII, as you said, all the deposits are positively contributing to profits, and then over the next years, we see probably some more ECB rate cuts, but you also say you adjust your rates. Can you give us the NII bridge to your 2027 target of EUR 8.4 billion? How much you think it will drop and then will accelerate again in the next years? Secondly, on fee income, you mentioned that Globalpay has a nice or is generating already fee income. Can you elaborate the size of the fee potential and how much attrition is this also to the existing payments business in you have always said no attrition at all.
And last but not least, on your Polish FX mortgages, one competitor said that the closed cases are of lesser risk than the still running cases. Would you agree to this? And also, I'm a bit puzzled that you still stick to your view that this should be less cost than in 2023, as we saw higher levels in H1, and it's accelerating dynamics in the market with higher settlements and not lower settlements. So, could you elaborate why you're still optimistic? Thank you.
Yeah, thank you. So, I mean, let me do the bridge, first of all, for 2025, because that is a little bit more near term. But still, we are also very committed to the EUR 8.4 billion in 2027. We start with the forecast for this year, EUR 8.1 billion. What we then do is we have a negative rate move, which will bring the NII down by probably around EUR 600 million. We then have positive facts out of deposit growth, but also out of the replication portfolio, and probably something around EUR 150 million, and the replication portfolio, also something EUR 100 million-EUR 150 million , as I said before.
Then we also see loan and margin growth of around EUR 100 million. That brings you to around EUR 7.9 billion, and then the key question is what happens to the deposit beta? So this is why we always guided that we will be something probably a little bit less than the EUR 7.9 billion, or if we are, if we manage the deposit beta in the right way, we are at the EUR 7.9 billion. And from that on, we think that we have seen the base, and from that on, we would see further increase, always assuming that the current forward rates are the right ones.
Then we will see additional benefits out of the replication portfolio, volume growth, and things like that, which will then bring us to EUR 8.4 billion as laid out back in November. Let me also reiterate, which is an important factor. As long as we are somehow in between 2%-3%, we will manage very nicely. The path might be sometimes different, but we will very, we will manage it towards the 2027 number. On fee income, Globalpay has not yet contributed, really. They have just started, actually with the European Championship, putting the offers out there. There will be no real attrition because it is an addition to our existing business model.
What we do is we offer to our SMEs, specifically, a new payment solutions, which they didn't have so far. So we enable our merchants, small merchants, to allow card payments with a very easy solution, what they couldn't do beforehand. So it should just be revenue adding and nothing else. And on Polish FX mortgages, I mean, we have included for your benefit also in the appendix now details which are always also presented by mBank during their earnings calls. And what you currently see there is, I think we are very nicely covered for the ones which are active. There is not a lot of surprise to be expected there.
We also expect a very high ratio of court rulings, and they're actually the trend which we currently see, that we are still very successful with our settlements. And just in July alone, we had, again, more than 700 settlements, adding to the 17,000, which you see there. You see that it's helping us because there are also a lot of settlements done with people who are already in court. So basically, settlement costs are most of the time lower than if you wait for a ruling by the court. What is indeed for us, the big unknown is the passive population, so the population which has been fully repaid.
We don't see really an increase in that, but we see continuously an inflow, and that's what we are watching out, and this is why we still expect burden from this population. But still, we are convinced that at least for this year, we will see additional burden, but we will stay below EUR 1.1 billion, which we have seen last year as bookings. I think I caught it all.
Thank you.
Thank you very much. We are moving on to the next question. Next question is from Kian Abouhossein of J.P. Morgan. Please go ahead.
Yeah, thank you for taking my question. Bettina, you gave a great kind of run-through of the 2025 NII, 7.9. Can you also clearly discuss a little bit the path you mentioned loan growth replication 2026, 2027 path, kind of how you split that? In particular, if you can talk a little bit more around the contribution of replication portfolio in those two years, and if you can discuss a little bit about the strategy of replication, considering the increase by EUR 10 billion, should we expect further potential increases to bridge any gap that is required? How should we think about it, or what should we think about the maximum number and duration of that book?
The second question is on collective transfers to stage II in the provision line on page 61 in your interim report. You talk about structural difficulties in identified factors during your strategic portfolio planning exercise, and I just wanted to understand what those sectors are. Can you also talk a little bit around this topic? Is this a done topic, or should we expect further reviews and potential further risk transfers, as such, to use your collective provision? Thanks.
Thank you, Kian. So on the first question, I mean, we said on the loan growth, we do not expect really on the private client side, that the mortgage book will increase, but rather slightly decrease. I mean, we see some promising developments in the moment, but there we have been cautious, and that's what's embedded in our plans. On the Corporate Clients side, we expect loan growth of around 3%, and apparently we have shown that in the second quarter, and hopefully that is something, a trend which will continue. On the deposit side, I mean, we have seen a very sharp increase in the first six months. We don't expect that one to continue.
However, for the years to come, we also expect loan growth, but at a lower level. The Replication Portfolio, I mean, if we would see further significant inflow, then clearly we would also discuss whether we do something on the Replication Portfolio. At the moment, we have no plans for that. It's clear that, I mean, we have now the additional impact of the Replication Portfolio for this year was + 400. Next year, it's rather a + 100 to +150, and then it again should pick up a little bit more than that. So we expect continuous upside from the Replication Portfolio, and it's always additional revenues I talk about until 2027.
On the collective staging, it's specifically sectors is automotive and its supplier, and also machinery. So the classical ones, which is always worrying us, and it's more something which is the methodologic thing. And you could say that we switched a little bit the TLA buffer into a model buffer, that's untechnically speaking what we have done. And clearly, we will review the situation quarter by quarter. We have the very pleasant situation that we also still have the EUR 336 million Top-Level Adjustment out there. And whenever we feel that we need to put some caution in also the models, we clearly will do. But besides from that, we will we feel really well prepared for whatever might happen in the next quarter.
Thanks, Bettina. May I just ask the duration or if you even have it, the modified duration of the Replication Portfolio?
Can you say it again? Sorry.
Can I just ask you on the duration, or if you even have it available just now, the modified duration of the Replication Portfolio?
It's always, I mean, it was, it's a little bit coming down. It's now around 3.5 years.
Thank you.
Thank you very much. The next question is from Chris Hallam, Goldman Sachs International. Over to you.
Yeah, thank you for taking my question. So, Bettina, so very helpful, NII bridge for next year. I think you said EUR 100 million positive from volumes in 2025. So just maybe, is that right? Did I hear that correctly? So are you sort of assuming a 1% increase year-over-year in volumes, and how would that split between different customer segments? And then maybe just a more longer-term question, how sensitive is your NII to changes in deposit modeling? So you talked about the twofold increase in online term deposits for corporate clients. Has the evolution of the deposit mix year-to-date, or since we had the strategic plan, changed the way you think about reaching the EUR 8.4 billion 2027 guidance that you gave back in November? Thank you.
Thank you. So on the volume side, the EUR 100 million were attached to the loan growth. There's an additional EUR 150 million we expect next year stemming from deposit growth. So you have to split the two things, and the deposit growth should clearly come more from the private client side, while the loan growth clearly comes more from the corporate client side. And how sensitive are we? I mean, on the corporate client side, you really see basically a stabilization. So volumes haven't really changed size-wise. There has been an ongoing migration from sight deposits to call and term money, and that is something which is basically the day-to-day cash management strategies of our treasurers.
So, our influence on that is limited, but we think also that at a certain point in time, it will come to an end, because they need to have their daily liquidity on their sight deposits to do their businesses. And on the private client side, we clearly and watch out, we want to stay competitive, and we want to have attractive offers for our private clients out there, but still keep profitability in mind. So it will be a nice balance out of what is required by customers and competitors, and on the one side, but then on the other side, profitability.
Thank you.
Thank you very much. Dear ladies and gentlemen, if you haven't done already and wish to state a question, please press nine, followed by the star key on your telephone keypad to enter the queue, and we are moving on to the next question. Next question comes from Tobias Lukesch of Kepler Cheuvreux. Please go ahead.
Yeah, good morning. Three questions from my side as well, please. Again, on capital distribution and share buyback. I was wondering if you could give some reassurance in terms of current consensus expectations of EUR 1.1 billion buybacks in total. You applied for EUR 600 million. Thanks for quantifying. I'm just wondering if it's fair to assume that we might think of a similar size with Q3 results of EUR 500 million-EUR 600 million. Secondly, on NII. Here there was also some, again, some rebalancing, it looks like, between the PSBC segment and O&C, and you did some booking of mortgage effects in the O&C.
There have been some ups and downs over the last quarter, so I was just wondering, you know, what kind of run rate you would expect to see in the O&C segment or potentially for the PSBC Germany guidance. And very lastly, on Russia, you were quoted this morning that you see a high likelihood that this EUR 95 million, you know, might be regained going forward. So I was just wondering why then being so conservative in the first-time booking, was that more regulatory driven or, has anything changed here? Thank you.
Yeah, thank you, Tobias. On the capital distribution side, I mean, we start with the EUR 600 million. We said our target is the EUR 1.6 billion as included in our capital return policy. It's also clear that we want to offer a decent dividend because there are also a number of investors out there who expect a decent and also increasing dividend. So it's fair to say that the dividends will be something around EUR 500 million-EUR 600 million, and that leaves the rest for share buyback. So all in all, very similar numbers. Let me start with Russia first. Why have we been cautious? It's simply accounting.
And IFRS standard, at least from our perspective, we need to have a virtually certain to book something against the provisioning. And that one we didn't have, and therefore we stayed just cautious on it. But still, we believe that we have a very good case here. And on NII, I mean, the PSBC and NCI traditionally have that. We had in the fourth quarter, we had the recoupling and then in this year now or this quarter now, we always have in June this early repayments, which make things a little bit more complicated between these PSBC and others in consolidation.
As a run rate, I think simply speaking, you can think about EUR 550 for PSBC and something around EUR 170 for others in consolidation.
Thank you. One last one, if I may, on the deposit beta. Now we are at an average of 39% in Q2. We have basically seen a kind of 5% increase quarter-over-quarter for the past quarters. Has your kind of thinking changed around a kind of final deposit beta that you might see in the portfolio? I mean, if you go back in history, the deposit beta has clearly been higher. You know, guidance was more around ±40% recently in the industry. Do you see here changes going forward, or would you say this is unchanged given the kind of 2%-3% rates range that you highlighted earlier in this call?
Yeah, well, I mean, we think that it's now the growth should not continue further. I mean, we will definitely work against that with some pricing. At the moment, our outgoing deposit beta at the end of Q2 was 41%. And it's very much dependent on when is the interest rate cuts happening, how fast can we adjust also our pricing? So you will see, as you said, up and downs in that. And on the corporate client side, it all depends when this migration stops or when we have found the equilibrium between sight deposits and call and term money, that will define the thing.
But, we also believe that at a certain point in time, we probably have seen the end of the growth of the deposit beta. But, as said before, it's clearly dependent on the competitive situation and what the offers out there are.
Thanks, Bettina.
Thank you, Mr. Lukesch. We are moving on to the next question. Next question comes from Vishal Shah of Morgan Stanley. The floor is yours.
Hi. Thank you so much for taking my questions. My first one is on asset quality. So, clearly the provisions were up, in presentation, you mentioned due to some single cases. Could you sort of provide more color on those single cases? What was the nature of their industry geography? So any of that color would be very helpful. And would you call it as a sort of like an early signs of credit quality deterioration, given we have been seeing, you know, manufacturing PMIs in Germany are quite weak, or this is indeed like a one-off and the remaining quarters in the second half, you expect to be a resilient trend. That's on asset quality. And then the second one is more on fees and deposit growth.
Clearly, if you look at the savings rate in Germany, they have been quite high. In Q1, they were at, you know, above 21%. So I'm wondering, what is Commerzbank doing that to monetize that, you know, that level of savings rate, both from a deposit and a fee perspective, not just in near term, but also in longer term? That's it.
Very good. Yeah, and no, asset quality, we always said that all the quarters that we expect that default rates would go up, and they now finally reached pre-COVID level, and that was something we always expected. But it doesn't mean that we really see a deterioration of asset quality. It's rather the contrary. We see that corporate clients are very resilient, and the single cases we have now seen very much linked to the individual business models. Sometimes it's really mismanagement, bad management decisions. So the normal things which you see when cases go in default. And besides that, I mean, we stay cautious. This is why we also did the collective staging.
This is why we also did some methodology adjustments to be prepared. But all overall, we are not really concerned. On your second question, I mean, the savings rate is up, and you see that. I mean, we have seen this inflow specifically on the core deposits. What we also try to do, but volatility of the last days clearly doesn't help, and that is to convince clients to invest more in securities. That would be specifically in Germany, as we all know, very important, because investment culture is not really high. And when you think about the retirement phase of many people, they should and must do more.
So, we will work on that, and we will have attractive offerings out there, like savings plans, but also for investment funds, et cetera, to provide attractive products to invest in.
Thank you so much.
Thank you also from my side. Next question comes from Stefan Stalmann, Autonomous Research.
Yeah, good morning. Thank you very much for the presentation. I have three questions, please. So the first is on credit quality. There has been a roughly EUR 500 million increase compared to the first quarter in stage III exposures. Could you add any color on where this has come from? Is it more of a corporate issue or more broader retail issue? Is it Poland or Germany? The second question goes back to the cost growth. I think I just wanted to double-check if 5% cost growth for next year is after mitigation, and if so, how much mitigation is there roughly baked into this 5% guidance, please? And the final question goes back to the FX mortgage issue in Poland. Is it time already?
Do you feel confident enough to maybe give us a first outlook to 2025? Should we think of this as a further declining problem in 2025, or is it too early to think about something a little bit more specific in terms of guidance? Thank you very much.
Thank you. So, the stage III exposure, I mean, as I said, single cases have driven the picture and these are German-based, but also in a broader sense, Europe. Nothing really related to Poland. And on the cost growth, yes, this is after mitigation, because we have embedded a continuous cost improvement of around 2% every year. But it's also important to state there are many investments included in that also, then again, connected to revenues. That is something one need to take into account. And let me say it also very clearly, we are in a cost -income ratio steering, so we want to achieve a cost -income ratio below 60%, and we will achieve that next year.
Meaning that if we see that the revenues are not coming as expected, you can be assured that we will have a very close look on the cost side, to deliver, as we have done in the past years, on the cost-income ratio. So there is no, no question about that. And then the third, point on FX, we assume that the problem is further decreasing. As said before, it all depends on the reaction and the trend in this passive population, because the active population, which is a little bit more than 20,000, left, I think we have very much under control, and we know how much to expect out of that.
So it's more this other group, but, besides that, yes, and we believe it will be becoming smaller and smaller, and it's also our clear target to solve this problem as soon as possible. And this is why we push so much on the settlement side, because it appears the best strategy we have in our hands to settle as much as possible.
Great. Many thanks.
Thanks a lot. Next question comes from Anke Reingen, RBC. Please go ahead.
Hi, thank you very much for taking my question. Just small follow-up questions. When you talk about the cost-income ratio of below 60% in 2025, is it fair to assume that only includes a potential small Swiss franc mortgage provision? And then on the 2027 NII, I mean, I realize it's a long period out to the, yeah, EUR 8.4 billion you guided to. I'm just a bit confused on why that wouldn't be higher, given what you did on the replication portfolio and the deposit volume growth, to just understand why that—what I'm missing in the EUR 8.4 billion. And then one small one on the PSBC NII. Is that sort of, like, something that should reverse in Q3, or is that new, now the new run rate? Thank you very much.
On the cost-income ratio, yeah, I mean, we always assume only... Because if we would know for certain that we would have a FX booking, then we would also book it already today. But clearly, we always assume and have a little buffer in there for potential bookings. That's for sure. And the EUR 8.4 billion for 2027, I mean, simply speaking, the situation we are currently in, where you see one week after another at 20 bps up and down in the forward rates, we just wait and see.
We feel very comfortable with the EUR 8.4 billion, but the rest we will see, and we will have the task in September to decide on which forward rates we will base our multi-year plan finally, and that will be the task. But we, I think, need to stay very flexible on that, given the volatility we currently have in there. But as said, on the EUR 8.4 billion, we feel very comfortable, and see that as a minimum we want to achieve. And on the PSBC NII, I mean, clearly, it depends on what happens with respect to the ECB rates, what happens with the volumes, how much volumes will go into securities, will be converted into NCI.
It's very, very difficult to say now where we finally end with PSBC. But they will have a very good contribution on the 3.9 minimum, which we want to see in the second half of the year. And it's also clear that we keep profitability of our deposit management is key.
Thank you.
Thank you. Next question comes from Riccardo Rovere, Mediobanca. Please.
Thanks, thanks, for taking my question. So good morning, everybody. Sorry to get back to NII again. You say if, if I annualize Q1, I land at EUR 8.4 billion. You say EUR 8.5 billion, so there is EUR 300 million difference here. In slide 12, the first bullet point on slide 12, you say that 10 basis points lower ECB rates cost you EUR 45 million on an annual basis. Now, if I take that, you know, the amount of rate cuts that you would need in the second half of 2024 to get EUR 300 million lower NII is just enormous. So my question is: What should I do with that bullet point on slide 12? The first bullet point on slide 12?
The second question I have on NII is, Bettina, you stated that the replicating portfolio now is gonna give you EUR 100 million-EUR 150 million more in 2025. Now, if I look at slide 20, Capital Markets Day, you clearly show 2025 versus 2024 + EUR 300 million. Now, the replicating portfolio is getting larger, but for some reason, the contribution of that, you know, by mystery, by magic, halves or goes down by two-thirds. And, and the rate expectations today, after U.S. unveiled 4.3% unemployment rate, are not horrendously different from the one of mid-October. So they were, they were maybe a week ago, but not now. You know, so I was wondering, how can it be possible that something larger is contributing much less?
Then another question I have is: Why are you continuing to gather call deposits, expensive call deposits, is another EUR 9 billion in PSBC, Germany, in a quarter, when the country is flirting with recession again? What do you need—Why do you need this money, to pay up this money so much? What's the point of doing it? The other question I have, sorry, I didn't understand. I understood nothing of what you said on cost, to be honest. It's not clear to me whether cost will go up by 5% next year, yes or no? I need just a yes or no here. And, or what really matters here is the costing, the will, the intention to get this income ratio below 60%, whatever it takes. You know, so investments in whatever you need to invest in can be delayed or...
So it's not clear to me... What is the message? And last question I have is on Basel IV. You provided a guidance a while ago, quite a while ago, if I remember well. And I was wondering, given that January 2025 is very close, if you can provide us an update with that, if anything has changed, or what could be the impact for 2025 for first time adoption 2025 and fully loaded with the output floor in 2030, or whenever? Thanks.
So Ricardo, lots of questions, and I try to cover them all. So on the NII bridge, let me start with NII 2023, because that's easier, because that was at the EUR 8.4 billion, and you said, well, double NII first half, and you're also EUR 8.4 billion. So why are we ending up with an EUR 8.1 billion? Rate move is a positive one, because the average in 2023 was 3.3%. We now assume a 3.8%, for 2024, 10 basis points are worth EUR 45 million, so you end up with something around EUR 200 million up. So that brings you to EUR 8.6 billion.
However, then we have the beta move, which is now at 41%, and that brings down the whole thing by EUR 1.2 billion, if you take that, because we had a very low deposit beta average in 2023. You then have a positive out of the replication portfolio, +EUR 400 million. You have a minus out of the minimum reserve. We should not forget, we have EUR 100 million less than last year because of the minimum reserve, the missing interest rate payments. We have mBank, which is good for a +EUR 100 million, and deposit growth, which is good for a +EUR 200 million. And if I'm not totally mistaken, you come up with the EUR 8.1 billion, which we are currently guiding.
That's how you come, and that's the bridge. On the Replication Portfolio, I mean, it's, we always said that there has been some changes because we also had some changes in the Replication Portfolio. Remember, we also reduced the Replication Portfolio at a certain point in time. Now we have increased it, but overall, as that, we feel very comfortable with 2025 +EUR 150 million, could be even more, but at the moment, we calculate with EUR 150 million, and then it will go up for 2026 and 2027 and creeping up to something around EUR 200 million and, most likely in 2027 to something around EUR 300 million. You then ask, why are we doing that, inflow with the core deposits? Because it gives you top-line revenues. It doesn't cost us anything.
If we go out with an offer at 3% and we have an ECB rate out with 3.75%, it's a good, it's a good deal. And, we just do that. And yes, it is increasing our, deposit beta to say it like that, but, given that we also get the volume in, it's, it's a good game. And I think I recall it correctly that you said that, deposit beta is becoming, more and more irrelevant, and I tend to agree. It's always the mixture and the combination of volume, rate level and, deposit beta, which drives, the NII, and we manage or need to manage everything, except for the ECB rate, which we can't manage, but we just take it.
On the cost side, the key message is, for us, cost-income ratio steering is the key thing. We promised 60% for this year, and we will deliver 60%. We promised the 55% for 2027, and we will deliver the 55%. And in between, we promised a path down to 55%, meaning next year, we promise to have a cost-income ratio of less than 60%. Having said that, that's what we plan. On the other side, I also just gave you the guidance that, given that we also see quite some revenue increase and that we have done some investments, including acquisitions and stuff like that, that the cost base, the absolute cost base might go up by around 5% next year.
But it doesn't change that the key driving ratio for us is the cost-income ratio, and there we promise less than 60% for next year. Then on Basel, yes, indeed, it has been a while, but actually, we feel still comfortable with the numbers which we communicated back in November during the strategy update. We set +EUR 6 billion on the credit RWA side. Then we said we see mitigation effects of -EUR 4 billion, which brings us back to EUR 2 billion. And the EUR 3 billion market risk are apparently linked to FRTB. There is a delay and most likely also not an opt-in. So therefore, you can assume that the Basel effects will be limited.
There might be for a quarter higher because mitigation effects also need to come to effect. But overall, we think that the Basel effect is very good, manageable.
Thanks, Bettina. Maybe just a quick follow-up. On the call deposits, on the back of what you say, I understand that if and when the ECB cut rates by 25 basis points, the pricing of the call deposits will be adjusted accordingly. Because if it is not the case, the contribution of these things, you know, quarter -after -quarter is gonna get smaller and smaller and smaller, and it's gonna weigh on your NII, and you know how sensitive and sensible the market is on any, any million more or less on this line of the P&L. Do I get it right, that it could be adjusted by 25 basis point if they cut 25 basis points?
Definitely. You can basically see it already today. We did the first adjustment of our offerings even before the first rate cut in June. We did another one now, so we have adjusted. By the August 1st, we again have adjusted our offering. So we try to stay ahead of the pack, and otherwise we will always react shortly after that. So it is something which is really in a daily management by the deposit team, by the deposit cluster we have here within Commerzbank.
Thanks. Thanks a lot.
Thank you. Then we are moving on to the next question. The next question comes from Borja Ramirez of Citi.
Hello. Good morning. Thank you very much for your time and for taking my questions. I have two. The first is on NII 2025. If you could please provide some details on the rates move impact. I think it was EUR 600 million impact from lower rates. So are you assuming a 2.5% average ECB rate? And also, what are you assuming for the euro 10-year swap? And then also, I would like to ask on the deposit inflows. So in 2025, you assume a EUR 150 million benefit in NII from deposits. If I assume 40% deposit beta, this is roughly EUR 10 billion average inflow in deposits, if—if I'm correct.
So is this new inflows or is this deposits that you gained in the first half of this year, that you assume that they will remain within Commerzbank in 2025, even though they will not... You will pay a lower rate than the teaser rate on the call money? Thank you.
So on NII 2025, what we have assumed is indeed a reduction by around EUR 600 million, and that comes from the fact that we have planned with an average interest rate level in 2024 of 3.8%, and we took a 2.4% assumption for next year, for 2025. And then the 10-year is actually also something around 2.4 in the moment. So very very similar.
With respect to the deposit inflow next year, we assume at the moment, also in our guidance, that we will lose some of the deposits again, because we also, first of all, will lower a little bit our offerings, and that might create some outflow, but also we want to shift deposits into securities. We'll see how successful we are on that. But besides that, so we have a smaller starting point, volume-wise, for next year. And then we, however, also assume that there will be some deposit growth in the year, as said before.
That's basically and you always have to take an average and clearly for the years if you compare volume by volume. But I can assure you that we will also provide some more details when we give more details on the guidance for 2025. We will also make it very clear what we plan there.
Mr. Ramirez, are you still with us?
Yes. Thank you very much. That was very clear. I really appreciate your explanation. I have a quick follow-up, if I may, on capital distribution. If you could provide a bit more details on the potential upside for distribution for the second half of 2024 and also for the remaining years because your capital is still quite strong. Just to check if you could provide any additional details on payout or I mean, if you assume that the CET1 drops to 14% by year-end, then that could imply a good distribution. Thank you.
Yeah. Thank you. So, first of all, I mean, we have laid it out in the capital return policy. Our target CET1 ratio is 13.5%. This is what we want to achieve. There are paths towards that. We will start with it with 2024, where we said we want to do the EUR 1.6 billion, if we achieve our targets, which we assume. And then in the years to come, we assume that we will see payout ratios between 15% to basically 100% and the clear target is to achieve at a certain point in time our target CET1 ratio of 13.5%. Thank you.
Thank you very much.
Thank you. And now the last question comes from Jeremy Sigee of BNP Paribas.
Thank you. It'll be quick. Just a couple of small follow-ups, please. Firstly, in your guidance slide, slide 24, you have that language saying, subject to further developments of burdens from Russia and FX loans and mBank, and the Russia mention is new. You talked about the scope to get a recovery, of the litigation charge. Are there any other negative charges that you're worried about coming out of Russia? Is that what's implied in that, or are you just talking about the recovery potential? That's my first question. Then second, again, just to follow up on NII. You've said that you're successfully sort of reacting to rate cuts. Could you just talk about what you're seeing in the market from competitors? Are other people being disciplined about passing on those rate cuts into their deposit pricing? Thank you.
Thank you, Jeremy. So, the disclaimer on Russia is a general disclaimer, which I have done already, orally, also last quarter. I mean, the situation in Russia is very volatile, to say it mildly. I mean, our strategy also here is very, very clear. We are in hibernation mode, and we decrease our net exposure as much as we can. We have halved, basically, now our net exposure in the first half of this year, and it's now very limited, with EUR 153 million left. However, we have a subsidiary there with assets and liabilities, and the thing is that we always also have to plan for the thing where we have a complete exit, however it might look like.
And that would mean that there might be a capital impact, which is, however, really limited, because there would be just a 10 basis points-15 basis points impact on the capital side. But it would also mean that we would have to put it once through the P&L, if necessary. We did basically a first step with the EUR 95 million, actually. So, the potential for the bookings is now limited to something around EUR 367 million. But that's the only thing what we are saying, because it's very, very hard to say what's happening there, but we are closely monitoring the situation.
I think it's also very important to stress that we always act in accordance to all sanction regimes, but also in accordance to Russian regulation. On the NII side, I mean, competitors, there are always some with attractive products out there, but overall, I think there is a good discipline, at least among the big competitors. I think we all have an interest in the same similar way. We want to provide attractive conditions for our clients on the one side, but we also want to secure our profitability. Thank you.
Thank you.
Thank you very much, also from my side. At this point, we are closing the Q&A session, and I'm handing the floor back over to the hosts.
Okay, thank you very much, for all your questions. We mostly see each other, again, tomorrow. So if you have any follow-up, deep dive questions, we can discuss that tomorrow. And otherwise, I wish you a great day. And for those of you who have their summer vacation ahead of you, have a very nice summer. Thank you very much.