Everyone, my name is Anke Reingen. I'm European Banks Analyst, Co-Head of Financials Research at RBC. I'm absolutely delighted to welcome the CFO today. Thank you for coming.
Good morning.
An interesting time.
That's true.
I mean, just, probably worth to say, I mean, you had quite a remarkable journey. Share price is up 500% since you became CFO, 200% CEO. A lot of this has been Commerzbank's doing, but obviously external factors helped as well. Here we are again, February, March, things are happening. What are you watching at the moment? What is your focus area? Have you seen any change in client behavior? I mean, I know it's short period of time, but February has been quite volatile as well.
Well, first of all, volatility is a good one, at least if you have securities business and if you have capital markets business. If I look at January, February, we're pretty satisfied with the start in the year, so that's good. What we also clearly see is that the interest rate environment is also coming a little bit in our favor when you look at the forward rates, at least from last week. That's the one side of the story. The other side clearly is that volatility and uncertainty never helps. If you think about our very traditional medium-sized corporate clients who we were still waiting that they have the courage to start their investment programs.
We are now waiting for quite a while because there was always something most of the times in March coming in, the pandemic, then it was the war, then it was the crisis, energy crisis, then it was the new election in Germany, then it was Liberation Day. Now again, it's something that is clearly not helping when you think about this very traditional family-owned medium-sized corporates who are about to launch investment programs and who have been always cautious waiting for the perfect environment, and apparently the perfect environment will be never there.
One thing you just said, I guess in your report of Q4 with us in February, you talked about a very strong start to the year. I mean, it's only like you said, you had a very strong start to the year. It says, I guess the last one and a half weeks haven't really derailed this.
No, because I mean, actually on the volatility, if you look on our comdirect brand, which is living from transactions, they had a good week. Corporate clients, and some also. I mean, the only thing where we suffer from situation, at least short-term, which we currently see is the DAX-related securities income if securities volumes come down in our accounts. That's it. I think, what we see and where we get a little bit more cautious about the risk situation, what does it mean? What does it mean for the mid-term development with respect to GDP growth? It's too early to tell.
We have been anyhow rather moderate, when it comes to the GDP growth in Germany with the 0.9%. Clearly it depends from the length of the war, but the impact will be on economy worldwide. Then clearly also, with respect to Germany, our exposure to the region, is limited to a certain extent.
Okay. Thank you. Maybe starting with your numbers a bit. I mean, your return has been on quite a journey from like closer to break even at some point last year, you had 10% and you're aiming for 15% in 2028, and a large part comes from that interest income. This year you guided to 8.5, up from 8.2. Maybe can you just talk to us a bit about the drivers and, I mean, it's obviously too early to probably guess where the rates are, but you can maybe talk a bit about the sensitivity.
Yeah, sure. I mean, to summarize, we are really on a growth path. If you just take last year, we have seen an increase of revenues, and I think everybody needs to be clear on that of 10%. We had a net commission income growth of 7%. Clearly also, NII was the important part, but we went even down or stabilized. It's really important that the growth last year came from net commission income, also a better result from mBank and things like that.
This year, we are pretty optimistic that we have seen basically the trough in NII last year, and now it comes up, and the driving factors are clearly a major factor, and that also holds true for 2028, is the replication portfolio and the net income coming from that part. You then will have a little reduction effect coming from the fact that the average interest rate level last year was a little bit higher than this year, which we expect to be stable at 2%. We still assume that we will see an increase in the deposit beta, which is due to the competition, which we see.
There's another player about to enter the German market, so we take that one into account. We clearly have a positive effect coming from volume growth both on the loan and the deposit side. Last but not least, the picture is rounded up with the belief that mBank, the Polish market will see some further interest rate cuts given that they are still at a very high level this year, and we took that also into account, and that brings the overall NII up by EUR 300 million year-over-year.
You already mentioned deposit competition.
It's kind of difficult, if you notice.
I mean, as you mentioned, a new entrant, I mean, Germany has always been a super competitive market. Has the dynamic in terms of competition changed? I think you had your own deposit initiative at the beginning of the year. Did you see any change in client behavior from before?
I mean, you have the so-called interest rate hoppers, interest rate surfers, however you wanna call them, and you see that they jump from one offer to the other. It's a group, and we see that much less with our Commerzbank brand because clients are much more sticky. But on the comdirect side, where you have pure digital users, you see more movement. I mean, competition has been always high. It's only the players who are out there with the attractive product changes. It's always the beginning of the year. Normally, ING is the one who's driving the pack. We have been rather early this year also with our own attractive product. You see inflows clearly, but.
There's a certain retention, but we also need to be aware of the fact that there is an outflow again. Last year it was BBVA entering the market. We haven't seen too much from that outflow. This year, apparently, there's the news that Chase will come at a certain point in time. They will definitely also have an attractive product out there. That is really a game between the direct banks, the neobanks, and the new entrants. It's nearly basically the similar deposits flying around, coming from one bank to the other.
When we look to 2028, you updated your net interest income guidance to EUR 9.4 billion, so EUR 900 million versus 2026. If you think about, I mean, you've been giving some indication, but if we think about the part that is more or less locked in from the replication portfolio, how important is that relative to volume assumptions, which might potentially be at risk if the economy doesn't pick up? What's the sensitivity to, I mean, I know rates are moving very fast, but I guess that would be helpful at the moment.
Yeah. All in all, you can think of that if you take replication portfolio aside, all the other effects equal out probably over the next two to three years. Meaning we still assume that there will be an increased deposit beta. We also have assumed increasing deposit beta for the years to come. On the other side, we clearly have a growth ambition out there, both rather limited for the deposit side, but more extended on the loan side because corporate clients is expected to grow by 8% per annum. That is equaling out. Then the vast majority is coming from the replication portfolio, and clearly current forward rates support the numbers which we have laid out.
I mean, I guess we all know Commerzbank too well in terms of the guidance. If we look at consensus, it's already slightly above.
Yeah.
your guidance in 2028. Does that make you nervous or-
No.
You see.
No. No, it doesn't make me nervous. I mean, what we have done now is, I mean, we have fully focused for 2026 first. I think if you look on the analyst consensus and our own guidance, it feels pretty much in sync. That fits pretty good. When it comes to 2028, we said that we will now use the strategic dialogue process, which we actually have started last week formally, to update all our numbers, thinking about the 2028 updated numbers and then also thinking about 2030. When we conclude this process in summer and have a discussion with the supervisory board thereafter, we will also update the market on it.
When looking on the analyst consensus, we feel pretty comfortable. I mean, on some parts, we have already upgraded the guidance as for NII. If you look on the return on tangible equity, I think the consensus is even still below 15%. We believe that 15% is absolute floor. We rather think that we will communicate something which is minimum 15%, rather a little bit more. On the cost-income ratio, consensus is currently at 49%. We said the 50% is the other way around. It's a cap. We also believe that we probably rather come out a little bit lower. The facts are clear because first of all, we see a lot of tailwind from the interest rate environment.
We also see potential benefits that might come from more investment, more GDP growth than we currently assume, in the coming years, clearly dependent on the macroeconomic, and the geopolitical environment. Then third and most important, and we said that we have so many use cases now, on AI. We currently explore the benefits of AI.
That's to come. First on fees, I mean, I guess this top-line growth story is not all about NII. As you said, fee growth has been very strong, and we have another 7% growth targeted for 2026. What makes you so confident? I guess capital markets were strong, but it wasn't all capital markets last year.
Yeah.
Maybe if you can elaborate a bit on the drivers.
It's a mixture because it's not one lever which we use to drive net commission income. As really, there are so many different drivers and some working better in a year and some less. It's all three segments to say like that. It's corporate clients, it's private clients, and it's mBank, if you take that one for a moment as a segment. If I start with mBank has shown very nice net commission income growth last year, specifically related to payments. But they really also have an opportunity on the whole securities asset management side. There's a pension reform coming also in Poland and the investment behavior in Poland is still really I think one of the lowest in Europe. They have lots of upside potential, specifically mBank.
If you look on the client tail, they have better educated than average, younger than average, and rather also a little bit more wealthy than average. That is a good starting point for mBank to also show additional net commission income growth for the years to come. That's one side. You have the corporate client side, which is clearly capital markets business. One should not forget that the loan growth is not always coming only with NII, but there's also a factor of NCI. If we grow our loans by 8%, you have an automatic also growth impact on the net commission income side. There's payments, which one should not forget.
On the private client side, it's again lots of different moving factors here. You have comdirect very much driven by transactions. The market if you look on current volatility. You have Commerzbank overall, which is very much driven by the securities volumes, but also transactions probably in the moment, given that we have seen some decline on the DAX more under pressure than last year. If you look on today, has recovered pretty nicely already. One should not worry too much, at least short term and look on the midterm effects. There's payments. Payments is really, really important. One should not forget that we introduced for all accounts an account fee last year.
We introduced it for half of the year. We will now have the full year effect, so there is an automatic increase expected for this year. We have the SME segment, which is part of the private client segment, which is very much we focus very much on payments. Then there's the portfolio, the discretionary portfolio management business with wealth management and asset management, which is very important.
You already touched base on your cost-income ratio target. I mean, you made a lot of progress on that measure and, you know, 57% last year, 54% this year, 50% 2028. I mean, do you have any low-hanging fruit left? I mean, how do you balance investments versus cost savings? Because I guess you have an interest in as well maximum, max out on that cost-income ratio to invest for the future.
Yeah. I mean, we have clear targets out there, and we want to improve efficiency as we speak. I think what we have shown nicely last year, if you take the cost-income ratio in the last year, we promised the 57%, we delivered the 50%, despite the fact that we had quite some unexpected cost items in place, and we overshooted our overall cost basis only to a limited amount. One of the reasons why we surpassed the cost base was a really good one because it was linked to our long-term incentive program.
If you double your share price, you also have to increase the provisions for your long-term incentive program, which I think is a good one, to meet our cost base on that. What we have shown is that we have enough measures in place to come below if we need to, and we do not sacrifice any investments, rather the contrary. Now this year, we have improved our guidance because the original target for this year for momentum strategy last year was 56% for this year. We now have decreased it to 54% because we see progress on the revenue side clearly, but also on the cost side.
That is despite the fact that we have increased our investment program for change from approximately a little bit above EUR 500 million to EUR 600 million for this year. We want to invest even more in investments, which also have to do a lot with our investment in innovative technology and AI. There's a constant efficiency program underway, and we believe that AI is supporting us in that.
Yeah. On the topic of AI, is the additional EUR 100 million, is that like AI-driven? How do you see the benefits? Are they largely cost, revenues, risk? I mean, how as an analyst or investor should we assess your benefits?
I mean, what we have now seen so far is the things which we also have included in the momentum strategy. We had parts of AI in our momentum strategy embedded because it's not that we have started just last year with AI. We have started with it basically back in 2017 when we founded an own unit called Big Data and Analytics, which is the basis for what we now have also as the AI group. What we have done last year is first of all, we have basically rolled out large language models to the entire organization.
Each and every employee now has a large language model in their hands to support them in their daily work, which was meant to really make them more efficient and also increase employee satisfaction. We also have seen quite some promising use cases now. We have an avatar, which is, I think one of the first ones, at least in Europe, embedded in our mobile banking app, which you can use, and we have 30,000 contacts each month, and it's increasing as we speak. That is something which saves, at the very end call center capacities.
We have an agent assist embedded in our call center technology, and it supports our call center agent when a client is calling in transcribing the whole call, in providing solutions, and then summarizing the call for the client history, which is a painful task to make a sensible summary in two sentences of a ten-minute call. We all know that human beings unfortunately need a little bit of time in it. The machine is doing it in seconds. We also use it for avoiding negative revenues by having developed a fraud AI tool, which is meant to detect fraud cases already when onboarding clients, which is really, really efficient.
Then you clearly have the things everybody's talking about, and that is everything around operations, complaint management and KYC, where you really see tangible benefits in it. The task for us now is to figure out how the scale-up looks like. That is exactly what we are currently doing, and seeing where we can use it. We are just introducing in the legal department and legal AI to do everything around contract management. There are some things you have to be aware of when you do that. First, you need to make sure that you convince also your employee to use it.
Because we have very different usage rates now with the AI tools, and we are currently doing everything to democratize the AI usage so that everybody is really using it and really taking the benefits out of it. But the other part is also you need to make sure that you take your clients with us. Because at the moment we have everything. We have very digital native clients who are more willing than anything else to use whatever we offer them. We have very analog clients who still enter our branch network refusing to use the mobile app, and the maximum they do is calling our call center. You need to bring the two things in balance and make sure that we can cover both clients.
Yes, the group of the digital native is increasing as we speak. There will be still for a while also this analog clients we need to cover. It's very promising what we currently see. It's, however, also very clear, even if when you take the KYC process and the example we currently have, you always also need to be cautious. At a certain point in time, there's always a human touch into it. That is the thing we're trying to figure out. Where is the right balance between the AI doing it while the human touch needs to be in there from a customer protection issue, but also from a liability issue?
Because at the very end, it's nice that you have a risk management done by the AI, but if there is a default, someone will look around and say, "Okay, who did the final decision?" There we are back to human touch. That is the thing, we are currently analyzing, but it's very promising.
Maybe from that actually to one of the topics you mentioned, risk results. You obviously guided last year EUR 720 million, this year is EUR 850 million. Consensus is EUR 800 million loan losses. What are you seeing in terms of asset quality? One thing I know it's early days, but in the past, you have been quite early in taking top-level adjustments. How would you be thinking about it?
Yeah.
At the moment?
Well, first of all, I mean, we released our top-level adjustment last year, which we had since the pandemic in different forms and types and sizes, because we really embedded it into the risk models where they should be. Sometimes you have a situation that the situation is so new and you don't know how to grab it, and then this overlays and/or top-level adjustments, however you want to name it, come into play. We feel very comfortable, first of all, with our asset quality. If you look at it, we don't see yet a number of things coming. If you also know that we have been on a nearly all-time high, at least since the pandemic, when it comes to defaults in Germany, the risk result has been really normal.
We really see that our strategy of having a very diversified portfolio, collateral management and things like that really worked out. Still, we are cautious. I mean, we still guided for EUR 850 million of risk result, which clearly is an elevated level, and it's not a normal risk result. That's due to the fact that despite that, we believe there will be growth this year in Germany, there still might be some defaults coming. Clearly, current situation is also putting all our risk slacks a little bit more up and, we're a little more diligent than we would be, or even more diligent than we would be in a situation which is not dealing with a geopolitical crisis.
Okay, maybe then just a different topic, capital. The capital ratio 14.7, target for year-end is 14, but you really want to go to 13.5. This question always. Do you think you can pay out above 100%?
Oh, we did last year. I mean, one should not forget, we did that, last year. I mean, we just have completed yesterday our second share buyback program for 2025. We intend to propose to the AGM a dividend of EUR 1.10, and that brings us to EUR 2.7 billion of capital return for 2025. That is clearly above our net income. We did that. There was this little thing that we were allowed to exclude the restructuring costs, which we booked last year for the payout ratio, and that is something which is also embedded in our capital return policy, that we can exclude extraordinary things from the payout. We take it from there.
I mean, history tells us that it's always good when interacting with other supervisory authorities about the approval of share buybacks is to first deliver and then ask for approval. We also now made the experience that processes are much more smoothly than when we started with the whole journey. Overall, we now have already returned EUR 5.8 billion to our shareholders in the last years, and more to come. We are in a very attractive capital return story, specific also when it comes to dividends, because now, given also our share price, it's clear that we put a little bit more focus also on the dividend side. What we really want to show is an increasing, nicely progressing dividend year on year.
It's also very clear that the order is first organic investment. So whenever we see a good investment opportunity, we will take that. It's very clear that we will spend the money we need on AI to make sure that we are really part of the winners. We think AI is a super big opportunity for us, and we don't intend to miss that opportunity. The second part is an inorganic M&A growth, so investments in M&A, which is always a question whether you find something which is value accretive for our shareholders. That is the minimum condition. Thirdly, you have the capital return. Overall, I mean, we will return quite an amount also in the coming years to our shareholders.
We shouldn't be worried that you keep an M&A buffer.
No. I mean, we are not keeping an M&A buffer because it's also very clear if there's an opportunity and given our ability to create capital. I mean, look at this year, we showed already a net income of EUR 3 billion, if you exclude the restructuring costs. It shows really our ability to create capital when it's needed. So there's a lot of confidence in what we do. That's probably the biggest difference when you compare it back to 2020. What was the biggest problem in 2020? We were in a pandemic with a very unfavorable profitability situation. So very contrary to many other players, we couldn't afford to take some burden and stuff like that. We really turned negatively. That's a complete different story now.
We have enough power and profitability to absorb any kind of shocks which we all know might always happen. We can also always afford to think on the positive note certain M&A opportunities if we believe that makes sense.
I think I have to wrap up with my question here, but hopefully it's for investors as well. If we think about all the moving parts we discussed, you used to be a strong buy for higher rates. It became a capital return story. Where are we now in this journey? Is it we raise-
It's a growth and it's really a growth story and transformation story. I mean, we have given also our cost-income ratio and the growth opportunities we have with also our business model and the ability to really make use of AI because we are really quick on that and we have started luckily early. We will be definitely benefiting from that.
Well, thank you very much, Bettina.
Thank you.
Thank you. Please come to see Bettina and Christopher for any questions you might have.
Thank you.