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Commerzbank Q2 profit growth comes at a cost

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Commerzbank has been struggling to translate strong client growth into extra revenue, due to the low interest rate environment and stiff competition from other banks.

Frankfurt

COMMERZBANK AG's long search for scale is finally starting to pay off, but it's costing more than expected.

Profit and revenue at Germany's second-largest listed bank beat the highest estimate in the second quarter, as it expanded mortgages and consumer loans in its home market and sought to fend off competition for corporate clients. But the growth dented both profit margins and the bank's core capital level, sending the shares lower.

Commerzbank has been struggling to translate strong client growth into extra revenue, due to the low interest rate environment and stiff competition from other banks. The bank is having to pay to hit a target of adding two million German retail customers in the four years through 2020, and it warned on Tuesday that operating costs would be slightly higher than planned this year.

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"The results are a bit of a mixed bag," said Tomasz Grzelak, an analyst with Baader Helvea, who has a "buy" recommendation on the stock. "It's a nice beat on the analyst expectations, but the adjustment in the cost outlook is a disappointment."

Commerzbank fell 3.6 per cent at 9.25am in Frankfurt trading, bringing losses this year to 31 per cent. The stock is one of the worst performers in the European financial sector this year.

Chief executive officer Martin Zielke has vowed to lift annual revenue to at least 9.8 billion euros (S$15.5 billion), the level at which it was in 2015, the year before he announced his restructuring plan.

"Our growth initiatives are already working," Mr Zielke said in the bank statement. "Of course, it will take some time for them to take full effect." He confirmed that the bank is on track to pay a dividend of 0.20 euros for the full year, having omitted a payout in 2017.

Commerzbank's two main units had mixed fortunes in the quarter. It revised down its revenue outlook for the corporate clients unit, led by Michael Reuther, after another year-on-year decline in the quarter. That's despite the fact that the unit has added customers faster than expected.

The retail bank under Michael Mandel, which accounts for over half of group revenue, performed better, with revenue up 8 per cent from a year earlier. However, even here, growth in new customers slowed due to the cost of winning new accounts.

The bank said it "will not engage in the current pricing competition for new retail customers at any cost".

Goldman Sachs Group Inc analyst Jernej Omahen said in a note that operating profit in both main divisions was worse than consensus, and that the net result was due largely to non-core segments. BLOOMBERG