Hello. Hi, good morning all, and thank you all for joining us for the session. My name is Vishal, and I'm part of the Morgan Stanley Bank's R esearch team. Today it is my pleasure to welcome the CFO of Commerzbank, Dr. Bettina Orlopp, a role she's been in since March of 2020. Bettina, welcome, and thank you so much for being here. Look, I have a long list of questions for you, but before we head there, I have a polling question for the audience, and we'll get about 10 seconds to answer the question using the headsets, handsets, at your table. Can we have the polling question, please? What do you think will drive Commerzbank's share price the most over the next 12 months? First, better NII delivery versus management guidance. Two, capital returns and faster timeline on buyback application.
Three, resolution of Swiss franc mortgage provisioning issue. Four, resilient asset quality at Commerzbank and in Germany. Fifth, continued cost control. All right. We have 41% for NII and 34% for capital returns. I wouldn't say I'm surprised.
We are not surprised, are we?
That is good to know. Yeah. Bettina, we'll obviously talk about these two topics, very key topics for Commerzbank, but I just want to start with a big picture question first. Look, three very difficult years. You started during COVID, and oversaw, you know, a successful restructuring, with a stabilized, you know, bank profile now. Can you provide us a quick recap of the key targets, how has the ongoing progress been, and what will be the key goals to achieve in 2024?
Yeah, certainly. So I mean, first of all, we had a very successful 2023, important to state. I know, we know we're backward looking, but I think we had a good starting point also for 2024 with a EUR 2.2 billion of net income and a cost income ratio of 61%, very near to the targets which we have set for originally 2024. So for 2024, target is also pretty clear. We want to achieve more net income than last year. Important message. Second is, we want to achieve a CET1 ratio above 14%, but have a very decent capital return of 70%+. And we will target a cost income ratio of 60% and clearly also a ROTE above the ROTE which we had last year.
and that should bring us in a nice trajectory towards our targets for 2027 which we have laid out, which is really getting into cost of equity, returning, getting a return of tangible equity of 11% or more than 11%, a 55% cost income ratio, and then also bringing our target capital ratio into the direction of 13.5%, which clearly also requires some capital return in the coming years.
Of course, that is very helpful. Thank you, Bettina. So I think let's dive into the first, you know, big answer in the polling question, NII. Look, it continues to be the dominating driver for Commerzbank's story, and management has given a EUR 7.9 billion NII guidance for 2024 and then slightly below 2024 levels in 2025. So I think the first question is around deposit betas. It is a key element driving this guidance. And can you touch upon, you know, what you're assuming for 2024 and 2025, and how is the deposit beta tracking so far, and how are you seeing customers and competition behaving in the year?
Yeah. So, we haven't changed our guidance. It's still EUR 7.9 billion for 2024, and we feel pretty good on that. And then also in 2025, we still see, and it all depends clearly on where we end this year and then start next year with respect to the interest rate level. But also the guidance for 2025, we still feel very comfortable on it. And it's, I mean, there are several driving factors. One is clearly deposit beta, but the other one is also volume and clearly also the level of the interest rate.
If you have a close look on the forward rates, and we do that now not on a daily basis, but at least on a weekly basis, you basically see that there is also some movement, and they have come up, they are now much more again in the direction of our economic scenario which our economist has laid out. So, we'll see where we really end the year and when it starts, and with all the assumptions which we have put in place, the EUR 7.9 are absolutely achievable. Deposit beta is a very important driving factor because in the moment, one percentage point up or down means EUR 90 million up or down. But it's also, it's clearly also a result of the volumes we take in.
We, in the moment, have one with much higher volumes than we originally thought, but they come at a price which means a little bit higher deposit beta. Now the art is to also manage in the right moment the offerings down, and we do that. We have just lowered also our offerings for Commerzbank and Comdirect. We do that very different for the two brands because the client base is very different, also in their reaction behavior. We observe that the competitors are doing very similar things. So in the moment, the offerings for call money clearly have come down.
Okay.
And have been shortened, also how long they are basically fixed and offered.
Okay. And I think just to follow up on the deposit beta point because that is interesting in the sense Germany has seen a lot of competition pick up at least in the later half of the last year on the cold deposits especially. So what gives you the confidence on this 35% deposit beta number that you have, you know, guided for? And if you can touch upon the levers that you are in your control that gives you confidence on that number?
I mean, the offerings are in our control and we have a very good liquidity situation and very good benchmarking also of our competitors. And we simply also adjust and adjust the offerings. And yes, I also said that before, we will most likely also see some movements in the deposit beta because it's also clear that whenever there will be an interest rate lowering of the ECB, you can't directly in the very same moment and adjust offerings, etc. So automatically, the deposit beta will go up just by the developments. And then we will manage it down by adjusting our offerings. And so therefore we feel comfortable with the 35% average, but I'm pretty clear that we will see also some ups and downs over the year.
Then it's also clear that if we come out with, or end with higher volumes and then a slightly higher deposit beta, it would be also not a problem because at the very end for us, top line and then, net income is the one which counts for us.
Of course. And I think you, you touched upon an important point. Obviously, the liquidity is a strong suit for Commerzbank where you can manage deposit beta, but you touched upon volumes as well. Can you talk a bit about volumes and lending growth? Clearly 2023, 2022 as well because the rate hikes have been quite, you know, put a lot of pressure on the lending growth. How are you seeing those trends developing right now? What is your outlook there?
I mean, still, it's, it's still kind of depressed. This is also how we planned it. It's, it's very much as we, we have embedded it in our plans and our guidance. You see in the moment first signals that, really, and I'm not talking about corporate clients, that corporate clients start to, to, to reach out to discuss certain plans they have, and they are the early indicators that, things are moving. I mean, we always said, and it's a pool debate which we have in Europe, that there is a large, huge investment need because of the digital and sustainable transformation. This has to start at a certain point in time. The only question is when it really kicks off. That also has a lot to do with the, the macro and the geopolitical environment.
But in the moment, we see basically that there are more discussions ongoing, and that yeah, that will most likely we will only see over the summer which is it really ending up in real business or not. So we had been very cautious in our guidance for this year. We can only have a positive surprise there. And on the mortgage side, I mean, volumes have recovered to a certain level after this very low levels and end of 2022, beginning of 2023, but they have not reached the levels which we have seen in the years 2021. And there we probably would need to see a significant lower interest rate environment that you really see a change there. So that will take some time on the mortgage side.
Okay. That is very helpful. And then I think just to stick on NII topic for a bit more, I think replicating portfolio, the structural hedge, there are many names for it. But that is, that is a key driver for NII as well, to stabilize, you know, the margins and reduce the volatility. Can you share the details on the portfolio size, average time to maturity, current yields, you know, what, what kind of tailwinds do you expect over 2024, 2025, 2026?
Yeah. So we said as already mid-February, we have lowered the volume a little bit. It's now 123 approximately, which has a lot to do with the fact that we have seen some shifts in the deposits, and how clients react. That might change again over the year, but in the moment it's 123. The average duration is something around 3.6 years, and the average yield is a little bit less than 1%.
Okay. And in terms of tailwinds, if you can touch upon how much contribution do you see?
Yeah.
From the hedge portfolio?
For the EUR 7.9 billion number for this year, there's approximately a benefit out there for something around EUR 400 million. Then in 2025 you will see basically the dip, because also of our model changes, etc., and then it will raise again or increase again over the coming years. Clearly also depending a little bit on the interest rate development as we all know. And in 2025 it will be a smaller triple-digit number.
Okay. Thanks so much. I think so let's move on to the next big topic, you know, capital returns. Clearly a key pillar for the management strategy, came out with a new policy last year, you know, in November. So I think the first point is you have guided for EUR 3 billion payouts over 2022- 2024, and then 50%-100% payouts, you know, post-24s, thereafter, right? So far you have already paid EUR 1.4 billion. It implies EUR 1.6 billion is left, which it seems like you're very confident on delivering. Then why the delay in applying for the buyback? Could you give us a sense of what are the, what is the logic behind that decision?
Well, the simple logic is that we tie the next capital return, and this is a 70%+ we have talked about, very much to the 2024 results. And therefore it's probably a valid assumption to first see the first minimum two quarters and to know that we are ending where we want to end. And in the moment, we are very confident that we will then start the whole request process, based on the H1 results in summer. And that has not changed. And clearly, we then want to start earlier. The program will be most likely higher than what we have seen in the past two share buybacks. And that requires that, ideally we start by the end of the year.
At least on the share buyback, little reminder, we are always dependent on the approvals by the ECB and, in our case, also by the financial agency of the government.
Okay. Do you expect the timeline on future applications for the buybacks to be a similar process, i.e., of application with the first half results?
Yeah. Yeah. I mean, we think it's a good modus. We have always our AGM in April, end of April or in May. And the thing is that we have the 10% approval which we have to renew, which we also know we'll renew for this year because we have done the share buybacks. So therefore this modus operandi is a good one to not miss out a window. And then clearly, however, it requires that we also deliver the results. But I have to say that we had also a very good start into 2024. First two months were absolutely leading us towards our guided results.
Okay. That is very good to hear. And then just to stick on the capital returns, can you talk a bit about the mix between buybacks and dividends going forward? How do you think about that? Clearly given, you know, where the valuations are, but just even in the longer- term.
Yeah.
about the mix.
Yeah. I mean, you think that the mix, it must be a healthy mix between dividends and share buybacks. And specifically on the dividend side, I think it's very important to show a very constant trajectory and, also not ups and downs, but rather a very reliable path which people can take into account. I mean, we had started low with the EUR 0.20 and then, actually now with the EUR 0.35 which we will propose to the AGM, it's also for a long time the first time that Commerzbank pays in a row. So second time in a row because, since the financial crisis there has been 2x beforehand, where we had a dividend, it was always EUR 0.20. Now we had EUR 0.20 in 2022. We will hopefully have a EUR 0.35.
I'm pretty sure AGM will give us the approval for 2023. And then, we clearly want to see a further increase of the dividend, but be cautious so that we can also have a reliable dividend people can calculate with. So I suspect a decent increase for 2024, clearly dependent a little bit on the final results, and do this increase not have these ups and downs in the dividend. That would be our target.
Okay. That's very helpful. And then at some point in the past, I think around the capital markets, you've also mentioned that a 90% payout ratio is more out of the question. Assuming everything goes as planned, how soon do you think Commerzbank can get to that level?
Well, it depends on that we deliver. But I mean, we have said it clearly what our target is until 2027, and that is 13.5%. And if we deliver the results which we have laid out also during our strategic plan update in November, people can do the math and can know that we need to have a decent payout ratio to achieve that. So, it's basically kind of a mathematical thing. If you take the results and you take our current CET1 ratio, you clearly have to take into account Basel and things like that. But then, you have our target ratio of 13.5% which we think gives us also very decent buffer to MDA. I think it's a good approach. But that means that we have the flexibility and probably even the necessity to do a decent capital return.
Okay. That is very helpful. I think, so I'll move from the capital side a bit to the asset quality. You know, commercial real estate is a big topic. But just for Commerzbank, look, you've guided to less than $800 million of provisions.
Yeah.
Assuming usage of overlays and in 2024. Firstly, can you highlight the exposure you have to commercial real estate? How worried are you about the situation with the German regional banks, and how do you think that could impact you?
So, I mean, our commercial real estate exposure is very restricted because it's only in Germany very important message. Nothing in the U.S., which gives us already some comfort. Then it's, volume-wise, its asset base is approximately $9 billion. Very good quality from our standpoint, very good coverage ratio. Therefore, I think we have had our lessons learned out of the financial crisis. We had a really, really big commercial real estate exposure and we have stayed very cautious since then, and have not changed the strategy. That proves to be a very wise decision nowadays. So we are not really worried about this exposure.
Overall with respect to the risk results, I mean, the less than $800 is already still a little bit an elevated level where we take into account that, at least for the German economy, our own research believes that there will be again very mild, but there will be a recession. So rather a GDP development of -0.3%. The market is a little bit more positive on that, but we stay conservative. And one should not forget that we have the top-level adjustment still out there of $453 million. And if you took that one in combination, you see that we are very nicely covered if there are more movements and if there is a deterioration of the asset quality which some fear. We don't see it actually yet. Not so far. You always have single cases, and that's normal.
In the moment, we rather see a very normal level of defaults, but that might change over the next coming months. And then we are well prepared through the combination of what we have guided, plus the top-level adjustment which we still have out there.
Okay. That is very helpful. And then just if you could, because you touched that, you know, your portfolio is still performing well. You're not seeing anything out of the ordinary yet. Can you give us a bit of, you know, a bit further color on what your conversations are like with your corporate customers, your mid-cap SME customers? What are they saying on the ground is happening, and how are, how are they generally feeling about the trends for the year ahead?
I mean, I said it earlier. They are still very much in a cautious mood. I mean, they're waiting also for politics in Berlin and Brussels to take some decisions. It's clear that there is really the ask for stability also stability and regulations and probably also reduction of bureaucracy and the easing of the conditions, the investment conditions in Germany and Europe. But overall, as I said, they start thinking about their investment programs. The large corps and MNCs anyhow do that. I mean.
Yeah.
We see that. Unfortunately, they do a lot outside of Germany and Europe. But, for us as a bank, we are still in the game given that we also support them outside of Germany and Europe.
Okay. That's very helpful. I'm just going to quickly look at the audience to see if there are any questions. Any questions? Okay. We have one in the front.
I have one question about the structural hedge portfolio and the liability management risk. Are you seeing some scrutiny from the regulator about the modeling of banks?
I mean, we see the normal interaction with the regulator on the different topics and they clearly have laid out their priorities also for this year, what they concentrate on. But we do not feel anything specific on that. I think given also our overall liquidity and capital situation, it's a normal dialogue which we have with them and they clearly are concentrating and they will concentrate focus on asset quality, I'm pretty sure, this year. And they will concentrate on the whole cybersecurity environment and how we are protected. But no, nothing specific.
This is, I had this question just to know if there was a risk that banks are pushed to change their modeling by the regulator.
What? Sorry, I didn't get that.
I have asked this question just to know if there are some risks that you are pushed to change the deposit modeling?
No. No, we are not.
Any further questions? Okay. In that case, I'll continue with a few more questions and we'll come back to the audience. So I think what I want to touch next upon is, is mBank. Clearly the Swiss franc mortgage issue has been, you know, a big earnings drag over the last, you know, one or two years, especially 2023.
Yeah.
Which had much larger than expected provisions. How much provisions do you expect for 2024? And when do you think the situation ends?
Yeah. That's a good question. So, I mean, first of all, whenever we would have had the feeling that we would know what, what would be, to be expected in, in 2024 or something in addition to what we have already booked, we would have booked it. That's for sure. The booking always depends also on the directions of the, of the client portfolio. So how many of the passive or active population is going to court? How are the settlements development, developing? I mean, mBank is clearly following up with a strategy to settle as much as possible and, and we have certain average cost for the settlements booked. If we see that this one is increasing, then you have to do, booking. I honestly expect more bookings this year clearly.
And it's also very clear that we have the focus to, to get as much done this year as possible because we clearly also want to put that one to an end. To also just get it out of our heads. And we should not forget that it's also quite a burden for the organization because doing 1,000 settlements per month, someone needs to do that. And therefore the more we can get done, the better. And we do not rely that there might be at a certain point in time, perhaps the Supreme Court, that will be able to have a final decision as might that. So we, we really concentrate to end the whole thing, by our own. And then it would be very helpful if there would be also a final judgment, but it's not, short-term to be expected.
Then clearly I think we should be also open that there are further burdens which we also know from Poland on the scene. They have just decided another program, or another round of credit holidays that will clearly also have an impact on mBank as for the other banks. And that one you will also see in 2024. But the important message on mBank is that they have very strong profitability. They also had a very good start in the year. So they can really basically absorb that luckily very nicely. And one should not forget they absorbed EUR 1.1 billion last year. We do not expect a number like that for this year. Clearly not.
So, 2024 will be clearly a year where we want to make as much progress as possible to not only see light at the end of the tunnel, but probably be very much at the end of the tunnel in this aspect. Yeah.
Okay. Can you share your view, a further view outside of the mBank provisions? You obviously spoke about strong profitability at mBank. We have a new government in Poland. There's a lot of optimism about the Polish economy. How should we read that to mBank in terms of their own business, lending growth?
Yeah. I mean, they have a very efficient business model which has helped them also in the past two years. If you look on their cost income ratio, etc., very, very efficient. They're very digital, very digital also customer base which is helpful also from an efficiency standpoint. On the private client side, they have the customer profile which is the most, the best educated and also a very young one. That's a perfect mix for upcoming growth trajectory because automatically this client base becomes more wealthy. One can also see that Poland is getting much more into a society where also it's not only about savings and having a mortgage, but it's also more getting into asset management, wealth management. Their mBank wants and will clearly play a role, given their attractive customer base.
And also on the corporate client side, they have a very nice position. And they also digitalize the corporate client offering in the moment to a significant effect. So very innovative, very quickly moving bank. And therefore we think they have a very nice growth and profitability path ahead of them.
Okay. That's very helpful. So that brings me to the next question on mBank is, you know, this has been a topic that has been discussed in the past. Management has considered a sale of mBank, at some point and then it did not. Is that still on the cards?
No. I mean, the reasons why we considered the sale back in 2019 were completely different ones. We thought that we need to do the sale to finance the transformation of Commerzbank itself. That has proven to be not necessary. And also by the time it was not very smart to do any sale, because it was very clear that, by the time, the regulator would have forced us to keep 100% of the Swiss franc portfolio. And let's imagine for a moment we would have been successful in a sales process. We would now sit on, in total, EUR 2.5 billion of provisions which we have booked so far. And we would have absorbed 100% of it without having the benefits anymore of the P&L of mBank.
So I think we can be all very lucky that we haven't been successful and we have no reason why we should consider a sale. We are very happy with the bank and it also fits very nicely in our digital profile.
Okay. That is very helpful. Thank you. I'm just going to go back to the audience to see if there are any questions in the room. There's one here.
Thank you. Good morning. Evan Morris from Bell Rock Capital. You mentioned that you had had a good start to the year. Is that just volatile items and markets generally being helpful or are you seeing any, you know, positive trends emerging that you think might carry, you know, carry on forward?
Well, I mean, traditionally, the first quarters anyhow should be always a strong quarter. And it's also strong if you compare it to previous quarters. And that's in both areas, private clients and corporate clients. And it's across product lines. So it's not only NII, but also NCI. They had a very solid development of the risk results so far, and high cost discipline, because also our cost base is developing exactly as we have forecasted that. So it's basically the combination of both things which nicely come together in the moment.
One more question from Anna. The portfolio.
Good morning. Maybe if you could talk about fee income. Recently you did a small acquisition to support this item. So do you need more? How do you see fee developing, please? Thank you. Anne-Kerry from Pictet.
Yes. So we have announced two. One was a joint venture with Global Payments in the payments area. And that will help us with respect to the fee income, specifically in the SME segment of private clients. And then we have the acquisition, the signing of the acquisition of Aquila, where we bought a little bit less than 75%. Those transactions are still in the closing period. So they have not been closed yet. So you won't see that in the moment. We still are in the preparation for closing. And it's an important element, but clearly it's only one piece of the puzzle. So for organizing the growth which we have laid out also in our strategic plans which is 4% year-on-year, we specifically need to also organize the organic growth. And we think that we have very good prerequisites for that.
And private clients, if you look at our customer base, there are many, many clients who basically have a single product with us and where we have lots of opportunities to also expand that towards management. So they are not called cold calls, but there are calls which we can do. And also on the corporate client side, we have a very good basis with our product offering to expand the fee income. And that's all very much on the corporate clients' organic growth. And same holds true for mBank. So, and that's equally split. If you look onto 2027, there will be basically very, very equal shares of increase in net commission incoming from mBank, from corporate clients, and from private clients. And, yes, we will consider further add-on acquisitions.
There might be very small ones, and bigger ones, but nothing which will be so changing that you would say the majority comes from inorganic. So it's really only add-ons. And they should help us. Aquila is really meant to help us besides the partnering offerings we have with our partners, to really enhance our value proposition. That's the whole reason why we did that acquisition.
Any further questions? Okay. We'll come back to the audience again. I think, Bettina, you touched upon two very key points, costs and fees. I think we have not spoken enough about, about costs.
Nobody was interested in that. We have seen that. 0% will drive our share price because of cost control.
That's probably a good thing.
Yeah.
But look, I think the cost restructuring over the last 2 or 3 years has been very successful. So one key question we get as Germany is an economy where, you know, controlling costs on the personnel side becomes a bit difficult. So first, if you can, you know, give us an understanding of how that was achieved and what gives you confidence that you can keep on controlling costs in the same way going forward.
Yeah. I mean, we have implemented a very large transformation and cost reduction program because, in total, we have signed agreements with nearly 10,000 FTEs. And that was – the majority was done actually in Germany. And then we, on the other side, have increased our FTE base specifically in nearshore and offshore locations to also get costs down. And it's also clear that we had to invest into IT specialists, etc., to also get our external spend for external consultants down, and do also not only this shift from costly German base to nearshore locations, but also turning costly external resources into less expensive internal resources. And that story is continuing as we speak.
At least the one shift from external to internal because we also have the feeling that our efficiency will go up when we become less reliant on external, specifically in the IT area. And, I mean, you can do a lot in Germany. You just have to have the offerings in place. And then, in our case, also age structure clearly helped, because the most socially responsible thing you can do is offering age instruments. We had to have done that to a very large extent. But it's also very clear that it's ongoing. I mean, we have to have a continuous improvement process in place. And we do that.
We have a group-wide project which is called Keep It Simple, so simplification effort which goes hand in hand with the cost and continuous improvement because otherwise we will not keep the cost income ratio, etc., because there are already burdens at the horizon. With respect to that there will be also negotiations with the unions about the pay scale workers in the banking industry, that is about to start in summer. I don't know how many following up the situation in Germany. I think it's very similar to other countries. There are a lot of strikes ongoing and lots of ask for taking the inflation burden away. We have embedded clearly also certain assumption in our plans. It will be important to balance it out. So we see inflationary effects.
We also see that we have an increased demand to invest into IT, into cyber security, and other things. Therefore, there isn't continuous improvement. I mean, there will be also, but there will be not big transformation hopefully, but there will be also headcount reduction in certain areas, which will no longer be needed, because of the digitization efforts, and automation efforts we are currently implementing. So this is a story which will not end.
Yeah. Okay. That is extremely useful. So I think in a just to be on costs for a bit more, can you I think one key point you mentioned was you have made some conservative assumptions already in terms of taking into account wage inflation, etc. And then you have the cost income target of 60% or less, you know, which is the steering metric.
Yeah.
But let's say in a scenario where revenues don't perform as planned, thankfully they are doing well right now. But in a scenario where it doesn't, what sort of flex do you have to manage that cost income ratio?
I mean, first of all, you have very short-term, you have short-term measures which are not nice to enact, but they are clearly at hand. If the results aren't coming in as planned, then clearly this has an effect on variable compensation. It's also clear that we always have a so-called headroom steering where we basically also put always some costs aside to then make sure that we have that to do either investments into IT. Or last year we used the headroom which we had for paying out the inflation bonus, which was basically tax-free, a program of the German government.
Then, I mean, if you see that, you need this headroom and then you don't spend it and you keep it to also make sure that the cost-income ratio is coming at the right area. And then there are clearly also some non-personal-related costs, which you can short-term influence. But besides that, it is so important to do this continuous improvement, so that even if you then have a short-term effect that you know that you can get there by a certain cost discipline.
Okay. That is very helpful. Just quickly going to look at the audience since we have two or three minutes left if there is any questions. Okay. I think not. So I think I'll probably have a question again on NII side if I can come back on that. But I think a key question many of us are wondering is about also the lending margins. Clearly last year with the rate hikes hasn't been good for margins. How do you see the evolution of that going forward? And do you see room for expansion now?
I mean, when at the point where interest rate levels come down, you probably should see that. But it's very much dependent on how fast this is happening. If it's a slow process, it will be also a very slow adaptation. And then it also clearly dependent on the competitive environment, because we see that probably the competitive environment is even more important for driving that than the interest rate level per se. But we have been very cautious. So we haven't included in our plans, for example, an improvement of the margins despite the fact that we have included a decline in the NII in the interest rate environment. We have not assumed that margins will improve because we thought it's better to stay cautious on that.
Okay. I think that is very fair. I think if there is any further questions. If not, then I think, Bettina, we have answered all the questions. It's been a great session. Thank you so much for joining me.
Thank you very much.