Commerzbank: a decent capital ratio and a rising dividend (OTCMKTS: CRZBF)

introduction

When Commerzbank (OTCPK:CRZBF) (OTCPK:CRZBY) and Deutsche Bank (DB) confirmed that they were in merger talks, I wasn’t too excited as I felt Commerzbank’s stronger performance would be dragged down by Deutsche Bank. The latter is still trying to recover from the uppercuts received by the global financial crisis and the ensuing European sovereign debt crises, while I believe Commerzbank has now turned a corner.

Source: Yahoo Finance

Commerzbank’s primary listing is on Deutsche Boerse, where it trades with CBK as its ticker symbol. The average daily volume in Germany is almost 7 million sharesit is therefore certainly the most liquid quotation to trade the shares of the bank.

Decent earnings results, but ROE lags

The first quarter was a bit mixed for Commerzbank. Its first results were excellent, but the net result showed a 54% drop in the company’s net income. Despite this weak net result, I am not too worried.

Source: financial results

Commerzbank saw its interest margins rise as it announced a 7.2% increase in interest income while interest expense only increased by 1.7%, resulting in a 12.1% rise in net interest income to EUR 1.23 billion. This is around 130 million euros more than in the same quarter of 2018, and this helped to cover the slightly lower net commission income (which fell by 4.2% or 34 million euros). Commerzbank was also able to reduce its operating expenses by just over 4%, but what ultimately hurt the business were lower trading income (income from financial assets and liabilities) and net income. “other” inferior. Pre-tax income decreased by 6% to EUR 244m, resulting in net income from continuing operations of EUR 147m. After deducting the loss from discontinued operations and profit attributable to non-controlling interests, net income showed net profit of 120 million euros, or 10 cents per share.

This is significantly lower than the EUR 0.21 per share in the first quarter of last year, when Commerzbank recorded tax income rather than tax expense. In addition, the heavy “bank tax” is not deductible and increased to 265 million euros in the first quarter of the year, which pushed the average tax rate in the first quarter to nearly 40%. Keep in mind that around 60% of these so-called “mandatory dues” are paid in the first quarter, so if we could use 2018 payments as a model, net income could easily increase by $150-200 million. euros per quarter. due to the fact that this tax/levy is levied at the beginning of the period. Based on this, I wouldn’t be surprised to see Commerzbank generate an annual profit of around €1 billion, but the bank might be just short of my target.

Source: Commerzbank presentation

The ROE is indeed quite low (4.2% based on Common Equity Tier 1 capital), but given that Commerzbank trades at only a fraction of its book value, the returns relative to market capitalization are quite decent. . Of course, it does not even approach the ROE of 15.6% that Belgium KBC Group (OTCPK:KBCSF) (OTCPK:KBCSY) is able to generate, but that is why KBC is trading at a steep premium to its book value while Commerzbank is trading at a discount.

Commerzbank has now also restarted its dividend payments and has paid a dividend of EUR 0.20 on its FY 2018 result. There is no firm dividend policy in place as the management and board of Directors of Commerzbank will declare dividends based on the bank’s capital position and capital requirements. For the current financial year, Commerzbank is aiming for a dividend “at a level comparable to the 2018 dividend”, but I expect a small (and symbolic) increase.

Commerzbank lags behind stress test results

Some European banks have fortress-like balance sheets, others still have work to do before they are ready for the next financial crisis. Unlike Deutsche Bank, whose capital ratios are still somewhat fragile, Commerzbank CET1 ratio of 12.7% (on a fully loaded basis) meets all the required criteria.

According to the latest SREP report (which determines the minimum required capital ratio per bank in the Eurozone on an annual basis), Commerzbank’s required capital ratio for 2019 is 10.11%. Considering this is significantly lower than the current capital ratio, Commerzbank’s balance sheet appears to be just fine.

Source: company presentation

Considering that risk-weighted assets are estimated at €185.2 billion at the end of March, the “surplus” capital ratio of 2.59% indicates a surplus of €4.8 billion, which isn’t bad at all for a market cap bank. of only 7.7 billion euros (and a book value of around 29 billion euros).

Despite these encouraging figures, Commerzbank’s capital position lags behind European Banking Authority reference scenariowhich estimated a year-end CET1 ratio of 14.14% based on a CET1 capital of €23.9 billion and a total RWA of €169.2 billion.

Source: EBA stress test report

Looking at the balance sheet and summary of risk-weighted assets, the main culprit appears to be the size of RWA’s portfolio which stood at €185.2 billion. This is about 10% higher than the estimate used in the stress test, which explains all the difference since the total level of CET1 capital is almost exactly in line with the baseline stress test scenario. As such, I’m not particularly worried about Commerzbank’s balance sheet, despite having a lower capital adequacy ratio than would have been expected.

Investment thesis

Commerzbank’s capital ratio is healthy and the bank is now working to restore profitability. Return on assets and return on equity remain quite weak, but for Commerzbank shareholders, operational weakness is mitigated by the low price-to-book value ratio of the shares.

After a long suspension of dividends (profits were hoarded to strengthen the balance sheet), Commerzbank paid a dividend of EUR 0.20 on its financial results in 2018, and dividends can reasonably be expected to continue and increase as Commerzbank’s profitability and bottom line will increase. continue to increase.

I currently have no position in Commerzbank, but have sold put options which are currently in the money.

Sallie R. Loera