Commerzbank must preserve revenues to succeed with new strategy – analysts

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Commerzbank AG’s new plan to cut 10,000 jobs and close 340 branches by 2024 will reduce its cost base but may fail to generate sustainable profits if the bank cannot maintain revenues in the current tough economic environment , analysts said.

In its latest restructuring attempt, the German lender on January 28 launched the new Strategy 2024, which targets a return on tangible equity of between 6.5% and 7% – mainly thanks to a cost reduction of 1.4 billion. euros – by 2024. The bank revised its previous Commerzbank 5.0 strategy and reshuffled senior management after coming under pressure from investors and regulators to make deeper cuts and aim for higher profitability in the medium term.

Although more important, the recently announced cost reduction may not be enough to bring Commerzbank back to sustainable profitability if the group loses too much of its revenue base over the next few years, analysts said. The earnings outlook will likely be the key theme for Commerzbank’s capital markets day on February 11, as the market questions the group’s ability to preserve revenue while cutting costs by around 20% and reducing employment. out of three in its main German market, UBS analysts said in a note. January 28.

Income issues

“We currently lack, in particular, information on the measures the bank is considering to defend its income base in an environment of ultra-low interest rates and intense competition,” analysts from S&P Global Ratings said in a newsletter from January 29. Achieving sustainable profitability remains a challenge under the revised strategy as Commerzbank has to shoulder more restructuring costs and provisions related to COVID-19 in the years to come, they said.

The restructuring of the group is already long and its past efforts to improve profitability have had “limited success” so far, analysts at Ratings said.

Commerzbank said earlier in February that it expects to record a net loss of around € 2.9 billion for 2020, mainly due to restructuring charges of € 800 million and the write-off of goodwill. of 1.5 billion euros. The bank also raised its risk result forecast for 2020, which includes provisions related to the pandemic, to 1.7 billion euros, against a previously expected range of 1.3 billion euros to 1.5 billion. euros. The group will publish its annual results before its capital markets day on February 11.

The low interest rate environment is expected to result in a single-digit percentage decline in Commerzbank’s revenue for the full year of 2020, with loan growth also slowing due to the deteriorating economy in Germany, due to the negative effects of COVID-19, CFRA Research equity analyst. Firdaus Ibrahim said in a note on Jan.30.

The average analyst consensus for Commerzbank’s revenues in 2020 is 8.34 billion euros, compared to 8.62 billion euros reported by the bank for the year 2019. For 2021, analysts expect revenues of 8.52 billion euros and 8.53 billion euros for each of fiscal years 2022 and 2023.

Downside risks

With the weakened performance of the bank in 2020, the risks weighing on profitability over the next few years remain “favored” and the “significant” reduction planned in the branch network could has a negative impact on revenue generation as the bank becomes “more dependent on the successful acquisition of customers and assets through digital channels,” Fitch said in a report on Feb. 5.

Extended lockdown periods due to COVID-19 in the first half of 2020 or setbacks in the efficacy or distribution of coronavirus vaccines may affect Commerzbank’s profits in 2021. The group’s capitalization may also be under pressure as the loan portfolio begins to deteriorate after the COVID-19 aid plans expire, Fitch said in a previous report.

Commerzbank’s asset quality has been “fairly stable” so far during the pandemic, its funding and liquidity are strong, and its adequate capitalization, Fitch said. However, the bank’s transformation is still seen as a challenge, especially as a new senior team will have to manage it after the departure of key board members, including the CEO, the rating agency said. . The execution risks of any new restructuring measures could increase if they meet resistance from staff, Fitch said.

Shortly after the launch of Strategy 2024 by Commerzbank, union representative Stefan Wittmann, who sits on Commerzbank’s supervisory board, said the 10,000 job cuts included in the new plan were “just crazy”, Reuters reported.

Given Commerzbank’s current cheap valuation, the downside to the stock is limited even though the bank’s strategy is unlikely to be executed transparently in the current tough environment, according to CFRA Ibrahim. Despite the ups and downs associated with COVID-19, Commerzbank’s share price at the time of Strategy 2024 launch had barely changed from the price at the time of Commerzbank 5.0’s strategy launch on the 26th. September 2019.

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