Commerzbank AG declined the most in two weeks after the German lender’s upgrade for full year net interest income disappointed analysts and investors.
(Bloomberg) — Commerzbank AG declined the most in two weeks after the German lender’s upgrade for full year net interest income disappointed analysts and investors.
The bank expects net interest income of about €7 billion ($7.6 billion) this year and said there’s “additional upside potential” to that figure. While that compares with previous guidance of more than €6.5 billion, analysts were already predicting it would make about 7.3 billion euros, according to estimates.
Quarterly net interest income “probably” peaked in the first three months of the year, Chief Financial Officer Bettina Orlopp said on an analyst call alongside the bank’s first quarter results on Wednesday. That’s because intensifying competition for deposits will continue to drive up what Commerzbank needs to offer clients to attract their savings, she said.
The shares pared declines to close down 3.8%, after earlier falling as much as 7.9% in Frankfurt. That would have been the steepest drop compared with the previous closing price since mid-March.
While the results are evidence of how the European Central Bank’s radical monetary policy tightening has shifted the fortunes of the continent’s lenders on lending income, it also demonstrates that the effect is beginning to taper. Still, rising rates have allowed Commerzbank Chief Executive Officer Manfred Knof to increase revenue targets several times, while he’s also boosted the profitability outlook and vowed to resume investor payouts.
Commerzbank also saw several other pressure points, including a continued increase in provisions at its Polish unit mBank, taking the total amount of money set aside for legal risks in the country to 1.4 billion euros. The lender confirmed previous guidance for full-year net income “well above” 2022 and costs at about 6.3 billion euros despite inflationary pressures.
The bank also said it received approval for a share buyback worth 122 million euros.
The lender “continued to benefit from higher interest rates and a good fee business,” it said in the statement. “Underlying net interest income reached a record high, even though the momentum slowed slightly compared to the previous quarter due to higher interest rates on deposits.”
Key Results Overview
It’s a theme seen across the European banking industry as lenders currently earn 3.25% on money they park at the ECB, while most are still passing on only a small fraction of that to their clients on deposits. The trend is expected to stay intact for the remainder of the year even though intensifying competition means that many banks are starting to raise the rates they offer.
Read More: Europe’s Banks Stay Upbeat on Profit Even as Loan Demand Ease
Knof’s headwinds including a struggle to wind down a portfolio of foreign-currency denominated mortgages in Poland. He’s also missed several cost targets, prompting Orlopp to instead focus on improving the cost-income ratio, a key metric which measures the gap between expenses and revenue.
Costs rose slightly in the first quarter as Commerzbank set aside more money for bonuses to pay for the “strong” performance in the period, it said. The ongoing job cuts had a “positive effect” on costs, it also said.
(Updates with closing share price in fourth paragraph)
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