Commerzbank AG Chief Executive Officer Manfred Knof is likely to raise a key profitability goal when he unveils his next financial targets, as the German lender benefits from rising interest rates.
(Bloomberg) — Commerzbank AG Chief Executive Officer Manfred Knof is likely to raise a key profitability goal when he unveils his next financial targets, as the German lender benefits from rising interest rates.
Knof wants Commerzbank to aim for a return on tangible equity of more than 10% under the new plan, compared with the more than 7.3% that he has pledged for next year, according to people with knowledge of the matter. The lender is also considering increasing shareholder payouts as part of the new strategy, which is likely to cover the period after the current turnaround plan concludes at the end of 2024.
Commerzbank’s leadership is currently discussing the new plan and intends to formally adopt it in late September, the people said, asking not to be identified discussing the private information. No final decision has been made and the details as well as the timing may still change, they said.
Commerzbank’s shares gained on the news, rising 3.4% at 2:14 p.m. in Frankfurt trading. A spokeswoman for the lender declined to comment.
A return of 10% means Knof would have to more than double profitability from last year, a challenge that would require a substantial jump in revenue and probably expense cuts. While Knof’s next plan will include additional savings as well as targeted investments, he doesn’t see the need for more sweeping changes after he embarked on steep cost reductions more than two years ago, the people familiar with the discussions said.
Commerzbank, which is heavily dependent on retail and commercial banking, has been a key beneficiary of the European Central Bank interest rate increases, which have made lending more profitable across the region.
A 10% RoTE is possible, “should management utilize capital buffers and continue to divert capital to higher-yielding areas in the Corporate Clients division,” KBW analysts led by Thomas Hallett said in a research note last week. That and higher payouts would be “a marked shift from the endless restructuring seen over much of the last decade.”
Commerzbank has long been one of the least profitable banks in Europe, and it has also returned very little money to shareholders through dividends or buybacks since it was bailed out by the German government in the financial crisis.
“We’re working to update our strategy,” Knof said at the annual general meeting in May. “Our medium-term goal is to earn our cost of capital.”
Commerzbank has estimated that its cost of capital was 9.2% at the end of last year, and rising interest rates have since increased that cost, the people said. By comparison, Commerzbank only returned 4.9% on tangible equity last year.
Commerzbank earlier this year mandated the consulting firm Bain to support work on the new strategy, Bloomberg has reported. Potential ideas include winning wealth management mandates from existing business clients, getting more companies to use digital services, and selling more products linked to sustainability considerations, people familiar with the matter said at the time.
(Updates with analyst note in seventh paragraph.)
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