Commerzbank keeps adding clients, but not making much money

[FRANKFURT] Commerzbank AG investors got more of the same after the breakdown of merger talks with Deutsche Bank AG.

The Frankfurt-based bank kept adding clients and boosting lending in the first quarter, with interest income rising 12 percent. But turning that business into real money remains a challenge for chief executive officer Martin Zielke as profit declined by more than half.

Halfway through his four-year turnaround plan, Mr Zielke can point to the jump in customer numbers and lending volumes as signs of progress in his turnaround, even as negative interest rates and rising competition erode growth and profitability. Five weeks of talks with Deutsche Bank to build a larger, more competitive bank through a merger collapsed last month, fuelling speculation that another bidder for Commerzbank may come forward.

"We are addressing the right issues with our strategy," Mr Zielke said in a statement. "Our growth with customers and assets is enabling us to strengthen our revenue base, thereby compensating the effects from low interest rates and margin pressure.

Commerzbank rose 1.3 per cent at 9.02am in Frankfurt trading. The stock has gained 36 per cent this year, the best performing of the large European banks, as the breakdown of merger talks fuelled speculation that other lenders may seek to bid.

The bank's extensive retail network and exposure to Germany's mid-sized companies have made it a potential acquisition target for rivals including UniCredit SpA and ING Groep NV, people familiar with the matter have said.

Mr Zielke, who has refocused the bank on lending to corporate and retail clients and away from investment banking, has told employees that the bank needs to gain market share for costly investments to pay off, whether that's through a deal or on its own.

Commerzbank added 123,000 new retail customers and 800 business clients during the quarter. Revenue still declined 2.8 per cent, in line with estimates, as it revalued assets on its books that were also a key issue in the merger talks with Deutsche Bank.

The bank's growth strategy relies on heavy marketing to attract clients, but that's expensive and new clients take time to translate into business. After conceding it was too optimistic in setting growth targets, the bank has set a goal to grow revenue by 3 per cent this year. It confirmed its 2019 guidance on metrics including revenue and costs.

More importantly, the lender - which plans to update investors on strategy after the summer - had to slow down much-needed investments in technology to balance out weaker growth. That makes it harder to boost profitability as long as benchmark interest rates in Europe are still negative.

While much of the 54 per cent decline in net income was due to a higher tax burden, operating profit fell as well, declining 5.6 percent. The bank's return on tangible equity, a key measure of profitability, stood at 1.9 per cent in the first quarter. European banks on average have a ratio of around 10 per cent, according to Bloomberg Intelligence.

"We will continue to work on our profitability," Mr Zielke said in the statement.

BLOOMBERG