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What happened? After politician comments and press reports over the past few days and weeks, Poland''s Finance Ministry has announced plans to increase corporate tax for banks. BNPP Exane View: According to initial reports, the Polish Finance Ministry plans: . To set the corporate tax rate for banks at 30% in 2026, 26% in 2027, and 23% in 2028 versus 19% currently ... implying a 14%/9%/5% reduction in post-tax profits over those 3 years. . To cut bank asset tax by 10% in 2027 and 20% in 2028 to increase availability of loans. . And they say they are not currently working on the previously considered solution related to the taxation of mandatory reserves held at the National Bank of Poland. There are a number of European banks for which Poland is a material proportion of group earnings, including Erste Bank (we estimate c23% of 2027E), BCP Millennium (22%), and Commerzbank (19%).
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The sector''s total return is almost 50% YTD, strongly outperforming the Stoxx 600 at ~11%. 2Q was another win (absolute and seemingly relative to other sectors), earnings upgrades continued and multiples keep expanding. Heading into the next quarter, the main question is still the same as since the start of the year: How much further can this go? The quarter pounder - keep the evidence coming We know we might sound repetitive, but we can''t skew the facts: it was another good quarter for the banks. NII continues to be better than anticipated (whilst the downside risk keeps narrowing), whilst cost strength and better CoR ''offset'' in-line fees, leading to an 8% PBT beat for the sector. Also going forward NII trends continue to look healthy, as June back-book spread exit rates were higher than 2Q overall and data, banks commentary and surveys around lending trends imply a further pick-up. It''s been a long road for the SX7P - heading to ~10% implied CoE? The SX7P surpassed 300 last Friday, its highest level since 2008. At 8.7x 2y fwd P/E and outperforming the market by almost 40% YTD, the #1 question remains unchanged: how much further is there to go? The events over the quarter have aided the bull case: tail risks have reduced further (trade deals + improved interest rate outlook) whilst earnings momentum continues to benefit from healthy NII resilience, and capital generation and outlook remain strong. Investment thesis intact - continue to be positive on the sector We continue to be positive on European banks, despite their strong rally YTD (relative and absolute). Our top-picks list remains unchanged, favouring highly profitable domestic retail banks: UCG, LLOY, NDA, CBK, BIRG and BCP, being more profitable (+2ppt in 2027e), offering more capital return (+1% yield p.a.) and trading on a P/E discount to the rest of the sector.
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Delivering robust operating numbers Commerzbank put up another good quarter, with results ahead of estimates as-reported and underlying. In the details there were small beats (NII, fees, loan loss provisions) and misses (costs), but the overall performance remains strong. Raising guidance for 2025, and potentially 2028 Management raised the FY25 guidance for net interest income (from EUR 7.8bn to 8.0bn), net profit (from 2.4bn to 2.5bn) and shareholder distributions (from 2.8bn to 2.9bn). They also see scope for further improvement in the current year and in their medium-term targets out to 2028. Seeing some encouraging loan growth Corporate clients'' loan volumes are up 3% QoQ and 8% YoY, which is encouraging for the business plan (which includes 8%/year corporate loan growth) and for the German investment theme. Management say that companies of all sizes are becoming more active. Continuing large capital distributions The bank has requested approval for a new EUR 1bn share buyback tranche, with another to come with 3Q as well. We increase our dividend estimates somewhat, and trim buybacks, expecting that the higher share price may alter the distribution mix. We update numbers, keep a positive view We revise our financial forecasts with PandL upgrades offset by slightly smaller share buybacks. We raise our target price, with the new numbers and reducing our cost of equity from 12% to 10% to reflect significantly changed perceptions of German risk. We maintain our Outperform rating.
Commerzbank AG
What happened? Commerzbank reported 2Q results ahead of estimates, raised guidance for the full-year, and has applied for a further EUR 1bn share buyback (with more to follow). BNPP Exane View: As-reported net profit 462m is 25% ahead of company-compiled consensus of 369m. This includes a number of one-offs, mostly expected, including -494m restructuring charges, -128m FX loan provisions in mBank, and -67m hedging and valuation adjustments. Adjusted underlying PBT 1,364m is 10% ahead of consensus (+9% YoY). ... This is driven by revenues 3% ahead of estimates (+5% YoY), costs in line (also +5% YoY), pre-provision profits 7% ahead (+6% YoY), and loan loss provisions slightly lighter. ... Divisionally, the operating divisions are 3% below consensus (-9% YoY) and the corporate centre has driven the beat (benefitting from various one-time gains). They are raising guidance for FY25, NII from 7.8bn to 8.0bn (consensus 8.039bn), with an unchanged 57% cost/income (consensus 57%), net profit from 2.4bn to 2.5bn (consensus 2.471bn). CET1 capital is down from 15.1% to 14.6% (vs consensus 14.8%). This is driven by capital -2% QoQ (including FX effects and regulatory adjustments, -17bp off the CET1 ratio) and RWAs +1% QoQ (on total assets +1% also). They have applied for EUR 1bn share buybacks, similar to guidance/expectations, with a further tranche expected with 3Q, maintaining their guidance of 100% payout of net profit before restructuring expenses and after AT1 coupon payments. TBVPS is -2% QoQ to EUR 24.91, shares at yesterday''s close are at 1.26x P/TBVPS. The conference call is 09.00 CET.
Erratum: This report is a correction to the document published today at 06:01 UK time adjusting our drawdown calculation to align with EBA policy. Celebrating the start of August with the EBA stress test Ahead of the weekend, the EBA released its 2025 stress test results - something that sparked a lot of attention in the past. Recently, the results have been less of a driver of share prices - but this iteration highlights the benefits of positive interest rates beyond the short-term PandL boost. In this report we highlight sector and stock conclusions arising from the 2025 exercise. Another confirmation of the sector''s transformation For several quarters European banks bulls have argued that we need to have a discussion about ''fair'' multiples for the sector. We''ve surpassed the long-term average P/E level, but as this stress test has showed again, the environment for European banks has changed. The adverse capital ratio drawdown has come down by 100bps for the sample as a whole to just 370bps - not because of a more benign scenario (credit losses were actually higher), but because of the vastly improved revenue generation profile, whilst capital and observed asset quality continue to be solid. On a stock level this means: Many winners, no real losers Looking at the stock-specific news, we see close to no negative developments here: not a single bank faced a slip in their P2G CET1 bucket, whilst half of the banks moved into a better bucket - which could potentially lead to lower capital requirements. We would say that AIB emerges as the winner of this exercise (closely followed by BMPS and BPER), whilst looking for ''losers'' would be a very ''glass half-empty'' approach. A transformed sector with improved resilience to macroeconomic shocks The EBA stressed the banks not just for a recession this year, but also for elevated geopolitical and trade tensions - thus, the scenario is highly relevant for the current debate. The conclusions? Encouraging. We...
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What happened? Yesterday, the EU and the US agreed on a new trade deal, imposing 15% tariffs on most EU exports, including automotives, pharmaceuticals, and semiconductors as well, which was not clear initially - see link. BNPP Exane View: We''ve previously analysed tariff implications in reports like Tariffs back on? (May 23rd), A helping hand (April 9th) or Tariff Reaction (April 3rd). European banks are not directly impacted by these tariffs, so the immediate direct effect of the tariff rates is minimal. However, there are several key considerations following yesterday''s announcement: . Second order implications on the economy: With credit losses being less of a cause for a concern today, the economic growth aspect is perhaps the largest moving part for European Banks. Here we see the largest downside risk removed, reaching a deal ahead of the August deadline and cars, pharma and semiconductors being included in the deal. Most directly, this should lead to greater confidence about a better growth picture in the EU, resulting in more borrowing (hence supporting top line growth). Most importantly, however, this should improve sentiment, thus supporting the multiple expansion for European Banks further. . The reduction of elevated uncertainty and volatility: In connection to the above, we believe that yesterday''s announcement should also reanimate borrowing and primary corporate activity again in the near-term. Even though credit growth remained resilient post-Liberation Day and the Bank Lending Survey continued to expect a moderate improvement in lending demand for Q3 (see here), some banks flagged a ''wait and see'' attitude adopted by corporates - holding larger investments and strategic decisions back. The improved visibility of the trade landscape should help activity in the near term. . Rates levels: This was initially one of the biggest fear-factors amongst banks specialist - could trade tensions bring us closer to a low-interest rate...
What happened? The ECB has published its quarterly Bank Lending Survey this morning. Whilst data on the volume development thus far is only available up until May, this data gives us helpful insights into: Liberation Day''s impact on quarterly demand and how banks foresee demand developing amid uncertainty and trade tensions - a concern from investors. BNPP Exane View: In short, the demand picture remains relatively constructive, particularly on the mortgage side. Rather than just being a fundamental relief to European banks, this is even more helpful in the context of defending and further expanding their multiples and a positive signal as we head into Eurozone banks'' reporting season (kicking off tomorrow). Three things stand out to us: (1) STRONGER housing loan demand continues to be resilient and is picking up further (and expected to continue to do so), (2) MIXED BUT SLIGHTLY POSITIVE corporate demand also saw some slight improvement despite Liberation day - comforting, however it seems 1H was particularly driven by residential real estate whilst uncertainty had some dampening effect on sectors like manufacturing (3) GEOGRAPHICALLY France stands out with some weakness for corporate demand and consumer lending (both expected and realised), whilst Germany and Italy appear to be relatively strong. Corporate loan demand: . Improved slightly in 2Q (better than anticipated) supported by lower policy rates. This was mainly visible in Germany and Italy, and more broadly for long-term loans and SME''s, whilst French demand has reported a net decrease in demand. Global uncertainty / trade tensions had a dampening impact on demand, ''possibly leading to a postponement'' of investment decisions. . Differences by sector: The increase in loan demand in 1H was mainly driven by residential real estate and some service sectors, whilst a net decrease was clearly visible in energy-intensive manufacturing. For 2H25, an improvement is also mainly expected for...
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Speaker: Bettina Orlopp, CEO What we learned: The German policy context is changing positively, and the change is really happening, the government is active, and focused on a 100-day plan. Companies have delayed investment for years but are now preparing plans. The company is confident about its business plan, including 8% corporate loan growth and 7% fee growth (despite limited GDP growth) and 15% RoTE (even though local peers make less). The plan is realistic about the context and focuses on specific areas that give the right opportunities. No real comment on UniCredit. For now, they are a major shareholder (9.9%) but just a shareholder. Commerzbank would take any proposals for value creation seriously, but has not received any proposals yet. Talks remain just at a shareholder level. Overall tone: Overall tone is positive. They know they are running ahead of plan, and increasingly view the FY25 guidance as a minimum.
Dear Client, It is my pleasure to welcome you to the 27th BNP Paribas Exane CEO Conference, the flagship event for our Global Cash Equities business. This year we are proud to welcome over 1,000 investors, with 130 blue chip corporates attending. Our private markets track also features speakers from 20+ innovative private companies. In addition to maintaining our leading platform in Developed Europe, BNP Paribas continues to expand our scope in APAC and the Americas. We have quickly ramped up to cover 7 sectors in APAC, and now cover over 300 stocks in the Americas. We''re incredibly proud of the Cash Equities team we have assembled here at BNP Paribas. This allows us to provide a top-ranked Research franchise, a top-quality Distribution team, an award-winning Execution platform and a dynamic Corporate Access program. We continue to add Conferences and Field Trips to our annual roster, with 2025 seeing the first edition of our Global TMT Conference in London, the third edition of our Global Electric Vehicle and Mobility Conference in Hong Kong and the launch of an expanded industrials, materials and energy conference (TIME) in London. None of this would be possible without you. We hugely appreciate your support for this conference and we welcome your feedback about how we can continue to evolve and improve this event. I personally look forward to catching up with as many of you as possible over the coming days. Thank you for attending - I wish you an enjoyable and productive conference. Ben Spruntulis Global Head of Cash Equities BNP Paribas Exane
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What happened? US president Trump tweeted this afternoon to implement a 50% tariff on EU goods starting from June 1st. Share prices reacted negatively to the news, with the broader market (Stoxx 600) being down -3% and the SX7P and SX7E underperforming (-4% and -5%) at the moment of writing. BNPP Exane View: We''ve covered the risk posed from trade tensions extensively in Tariff Reaction and A helping hand - below a summary on the ''need to know'' and our key conclusions: European banks do not face direct effects from tariffs, but second order implications and elevated uncertainty in connection to economic growth, rates levels and consequently credit risks are driving the market reaction. 10-20% sector earnings downside in a range of scenarios, from ''realistic'' to ''severe'': . We think the announcement will again trigger two main debates. If we slide into a recession, will the benign asset quality environment continue or are we reaching its end? What if rates come down further than expected? . In our A helping hand-analysis we checked in with our proprietary cost of risk and X-NIM models and squeeze earnings for different sensitivities, cutting IB banking fees in half - whilst neglecting mitigating factors. . We found that 10-20% of 2027e earnings could be at risk, but the impact varies widely across our coverage. . In particular on credit cycle fears, we''d like to point out that the environment today has changed significantly: European banks have learned their lesson post-GFC and de-risked their balance sheets massively, for example NPL ratios have come down significantly in Southern Europe. Simultaneously, household and corporate balance sheets today are still in a healthier position that they have been in most of the past few decades, as we''ve explored in detail in our Loan Ranger series (Part 1, Part 2 and our Rocky Balboa Economy update). Finally, we are also just coming out of a period of low lending growth in Europe, thus not following the...
The sector has re-traced back to Pre-Liberation Day levels even quicker than we, European bank bulls, had envisaged. What next? The latest quarterly results and the outlook for NII suggests the core strands of the investment case remain intact. We run our annual Peacocks and Squirrels assessment, with ''excess'' provisions having moderated, but a handful of banks still set to benefit. Overall, we stay positive, but sector upside has moderated. The quarter pounder Another good quarter for banks (not yet tired of saying that). NII was resilient and the top line nearly 3% ahead, buoyed by strong performance on fees, above and beyond a positive IB contribution. With other lines behaving the bottom-line beat was greater still. The Italian and UK banks arguably stood out most positively. Even more so than usual, investors are looking to the future examination rather than the past - here bank provisioning matters, despite some easing in tariff concerns. Peacocks and Squirrels 3: Assessing sector coverage We re-run our annual exercise assessing the size of ''pro-active provisions'', a source of cushion to absorb future losses or a PandL tailwind if released. Either way they offer value. In aggregate, the sector has just c5bps of higher ECLs on the performing loan book today relative to pre-covid, having peaked at 20bps. But AIB, Erste, Danske, UCG and BIRG all stand above this, with ''pro-active'' provisions equivalent to 2yrs of ''normal'' impairments. 2024 demonstrated this value, with AIB and UCG, previously categorised as the ultimate squirrels, the biggest beneficiaries. Investment thesis intact, we stay positive The banks are no longer excessively cheap (c8x 2yr forward), but the ingredients remain in place to trend higher, including earnings momentum with NII resilience, healthy balance sheets and distribution appeal. Our top-picks list is biased to highly profitable domestic retail banks: UCG, LLOY, NDA, CBK, BIRG and BCP, with a 2% RoTE and Yield...
A strong start to the year Commerzbank had guided confidently about performing well in 1Q, but still managed to exceed expectations. Net interest income is holding up better than expected, thanks to repricing efforts, volume growth and mix shifts, as well as replication portfolio benefits and a steeper yield curve. Fees are growing as planned, costs are well managed, and credit quality remains benign. Maintaining the forward targets, balancing tariffs against stimulus Executives are keeping their financial targets unchanged, for FY25 and 2028. With NII running ahead of plan they acknowledge upside potential. On the other hand, they note the macro uncertainties, with tariff impacts likely to keep 2025 GDP flat, but German stimulus expected to provide a boost from 2026 onwards. German companies are analysing the situation and making plans, with potential to start investment projects in 2Q-3Q, assuming no worsening, and some form of US-EU trade pact. Moving ahead with capital distributions, bigger and earlier this year The bank aims to distribute some 120% of reported earnings this year (EUR 2.5bn), and plans to apply for its next share buyback permission at the start of 3Q (ie early July rather than mid August as in previous years), to give more time to implement the larger quantum of repurchases envisaged. We update numbers, keep our Outperform rating We revise our financial forecasts in this note, improving 2026E EPS but reducing 2027E a whisker due to buybacks coming at a now-higher share price. We raise our target price, based on our forecast return on required equity (12.6%) rather than the previous 12% medium-term assumption.
What happened? Commerzbank has reported 1Q numbers nicely ahead of consensus estimates. The FY25 outlook is unchanged on the PandL, slightly higher on capital. They say they are making good progress with restructuring. BNPP Exane View: Reported net profit EUR 834m is 20% ahead of consensus 698m, +12% YoY. Adjusted underlying PBT 1437m is 12% ahead of consensus 1284m, +5% YoY. ... Driven by revenues 5% ahead (+8% YoY), costs 3% heavier (+9% YoY), LLPs lighter. ... Cost/income is 52% underlying, unchanged YoY. Both business divisions are contributing to the beat (retail banking 6% ahead of cons, corporate banking 4% ahead). RoTE in the quarter is 11.1% (as-reported company basis) / 12.5% (our underlying calculation). TBVPS is up 4% QoQ to EUR 25.48, shares at 24.30 are 0.95x. CET1 ratio is unchanged QoQ at 15.1%, above consensus 14.9%, despite accruing 100% of profits for payout. The PandL outlook for FY25 is unchanged (7.8bn NII, 57% cost/income, 850m LLPs, 2.4bn net profit). The CET1 outlook is slightly higher (14.5% vs previous 14%), with unchanged payout plans (100% of profits pre-restructuring / 100% reported). On restructuring efforts, they say they are making good progress in negotiations with workers council, EUR 40m for early partial retirement programme already booked, framework agreement to be concluded in Q2, employee share programme to be formally agreed in May. The conference call is 9.00 CET.
Commerzbank is likely to report good 1Q figures The CEO said in a March conference presentation that the bank has had a good first quarter, reflecting the benign conditions during that period. We expect NII to reduce only slightly QoQ, while fees should be growing healthily. The CHF mortgage provisions in Poland are reducing. Costs are increasing somewhat, but appear well managed. Loan loss provisions are likely to be seasonally smaller, and with little indication at this stage of any additional reserves for the more negative macro scenarios that have become possible with US policy shifts. We reduce 2026 estimates to reflect NII and LLP risks in adverse scenarios We make some precautionary adjustments to 2026 forecasts, with lower net interest income (reflecting market expectations of ECB rates closer to 1.75% rather than 2%), and higher loan loss provisions (33bp versus previous 27bp), to allow for a more adverse macro scenarios. There is no impact at this stage on our 2027 forecasts. We keep target price and Outperform rating unchanged With no change to 2027 estimates, we keep our fair value unchanged, around 1x tangible book value. We believe the bank has the capital and PandL strength to weather a range of conditions. The political progress in Germany, and stimulus proposals, should remain supportive. We maintain our positive view on the stock, and our Outperform rating.
Spring chaos once again This is our attempt to offer a helping hand. Trying to pin down the earnings risk We keep it short: in our update last week we already explained why the fundamental case for banks remains intact. But whilst the appeal of the sector in the medium to long-term remains, the question of the hour is a rather different one: what if things go against the banks and retaliatory tariffs realise recession fears? This note is trying to pin down the earnings risk - for the sector and single stocks. 10-20% sector earnings downside in a range of scenarios, from ''realistic'' to ''severe'' We think there are two main debates in the room. If we slide into a recession, will the benign asset quality environment continue or are we reaching its end? What if rates come down further than expected? We check in with our proprietary cost of risk and X-NIM models and squeeze earnings for different sensitivities, cutting IB banking fees in half - but neglect mitigating factors. 10-20% of 2027e earnings could be at risk, but the impact varies widely across our coverage. Our playbook remains unchanged Our stock picking preferences are reinforced in the current environment: highly profitable retail banks with a domestic focus, strong franchises and competitive distributions do not just help block out the noise, but as we show here, also limit your earnings downside. UniCredit comes out on top in both scenarios, but most of our other top picks, Lloyds, Nordea, Commerzbank and BCP, also screen favourably in an environment with a heightened cost of risk and a 50-100bps rates shock.
Trying to see through the macro noise This year has been filled with macro noise: back-and-forth tariff news, elections, stimulus packages and ongoing Ukraine / Russia talks. But with only two weeks to go until 1Q results kick off, it is time to have a look at what''s happening on the ground for European banks. In this note, we examine the most recent pricing trends in the Eurozone and show how the quarter is shaping up against expectations. February data points to a pause in margin compression After a relatively harsh movement in product spreads in January, February data is surprisingly encouraging, with back- and front-book spreads showing a slowdown or even reversal in margin compression. Whilst deposit rates continue to fall, lending rates are stabilising - leading to very stable back-book margins. Against consensus, NII looks broadly in the right place for the Eurozone and particularly supportive for Southern European banks. Valuation still looks unchallenging We also take a look at valuation levels for the sector. Banks'' outperformance continued over the past month, but European banks still look unchallengingly valued at 7.5x 2y fwd P/E vs. their own history, the broader market and global banking peers - especially against the supportive operating backdrop. In the very short term, elevated uncertainty and cyclical fears are potentially weighing on further multiple expansion, but we continue to see mid- to long-term appeal in the sector. Stock-picking preference reiterated Since the start of the year, we''ve shaken up our top picks list somewhat, now consisting of Unicredit, Lloyds, Nordea, Commerzbank, Bank of Ireland and BCP. This reflects our preference for highly profitable retail banks with a domestic focus, strong franchise, competitive capital distributions and scope for a re-rating.
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What happened? Last night President Trump announced eagerly anticipated, and arguably larger-than-expected tariffs impacting most global trading partners (latest thoughts from our Equity Strategy team can be found here). While the banks do not face direct effects from tariffs, the impact of second order implications such as higher recession risk will be watched closely for the sector and understandably European Banks have initially reacted negatively to this news (SX7E -c3% this morning). BNPP Exane View: We believe European Banks are well positioned to absorb potential economic shocks and still deliver resilient earnings, attractive capital return and in the medium to longer term, multiple expansion. But having been on a strong run, the market reaction this morning (and in recent days into the tariff news), is understandable given the level of uncertainty. We detail below some further thoughts relating to tariffs for European Banks. . The context, higher Tariffs: Our house view (BNPP Exane Strategy and BNPP Markets 360) is that the tariffs are larger than expected on average. The effective US tariff rate is set to move from 2.5% to 22%, the highest it has been since 1910, even accounting for exemptions. This compares to our prior surveys pointing to expectations in the lower end of a 10-20% range. This said the EU (20%) has been spared some of the most aggressive rates and UK lower still (10%). . Higher uncertainty, unwinding the stimulus and recession risk: Nevertheless, the impacts are material and hard to gauge with certainty. The US may prove to be most negatively impacted, but ultimately everyone is likely to suffer. Our strategists point to the risk of 1% growth now in both Europe and the US. We don''t know if compromises will be reached, or if counter measures turn up the pressure further. For Europe, and particularly Germany, the benefits from Fiscal measures are now estimated to be countered by tariffs, with a timing mismatch such...
Darling, you got to let me know... It was easy to shout ''buy banks'' from the rooftops when they were unarguably cheap. With European banks now reaching 8x P/E on average, many are asking if they can trend higher. But not much is indicating that the rally should stop here. We remain bullish on European banks. Bottom-up: every little helps On the ground, trends continue to look favourable: some slight (seasonal) cost disappointment is more than offset by strong revenue dynamics across the board, with the strongest NII beat in two years. We dive into the details of 4Q, positive and negative surprises across NII, capital distributions and costs. We also have a look at recent industry data, showing continued strong margin dynamics and improving volume growth trends, reiterating our stance that the newfound profitability of the sector is long-lasting. Fundamentally, we see little to be concerned about. Top-down: Coming out of the winter depression The start of 2025 was more than just an unwind of rate jitters from the back-end of 2024 - the 20% rally so far has surprised even us banks bulls. The discussion now is turning more nuanced as banks return to their long-term 8x P/E multiple. Can they trend higher? In our view they can - based on historical and international context, as well as relative valuation still being subdued and a vastly improved environment for banks. One day is fine and next is black? (Hopefully) not this time around. Top Picks: Removing Natwest and Bawag, adding Lloyds, BCP and Bank of Ireland Our stock-picking themes remain unchanged, and we continue to favour highly profitable domestic retail businesses offering competitive capital returns and scope to re-rate. However, and especially due to the latter and strong moves YTD, we see new opportunities arising: we keep Commerzbank, CaixaBank and Nordea in our Top Picks list, but remove Natwest in favour of Lloyds (see our separate UK note), and replace BAWAG with BCP and Bank of...
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A strong end to the year Commerzbank rounded off a strong 2024 with a strong 4Q, with NII and fees ahead of expectations, benign credit quality, capital ratios even further in surplus, and bigger than expected dividends. They have completed the first tranche of 2024 buybacks and started the second. New business plan continues the positive direction The strategy update last week aims to continue the revenue growth (6% CAGR) with flattish costs (2% CAGR), and greater balance sheet efficiency, to raise RoTE to 15%. The market will naturally wait to see how the plan progresses, but the direction of travel is positive. Capital returns will be very powerful The bank is already making large capital returns to shareholders (EUR 0.7bn dividends and 1.0bn buybacks from 2024 earnings, total 1.7bn or 8% of market cap) and we estimate that this should rise to EUR 2.5bn for FY25 and 3.2bn FY26 (12% and 15% of today''s market cap respectively). UniCredit bid interest remains on hold The Italian bank is waiting for ECB approval to increase its stake from 9.9% to 29.9% (due in March), for a new German government to be formed and to express its views on the potential combination, and to make progress with its domestic consolidation efforts first. We update numbers, keep Outperform rating In this note we revise our forecasts, with lower 2025 profits (restructuring), and limited change so far to 2026. We increase our price target, based on an 11% medium-term RoTE assumption (previously 10%) and a 13.5% cost of equity (unchanged). We keep an Outperform rating.
What happened? On Saturday, President Trump issued an executive order applying additional tariffs of 25% to all imports from Canada and Mexico, with the exception of Canadian oil and energy products, which will face a 10% levy. Imports from China will face a 10% tariff over and above existing US tariffs. To apply these tariffs, President Trump used the International Emergency Economic Powers Act (IEEPA), an executive authority that allows him to respond to emergencies through economic means, for the first time. These tariffs will come into effect on 4 February. Canada has already announced retaliation including similar tariffs on US goods. On the other hand, Mexico''s President Claudia Sheinbaum directed her economy minister to implement ''Plan B'' countermeasures, including tariff and non-tariff actions. Sources familiar with the matter suggest Mexico is considering levies of 5 to 20% on American pork, cheese, fresh produce, steel, and aluminium products, whilst initially sparing the automotive sector. BNPP Exane View: Besides the direct implications of the tariffs addressed earlier in the morning in BBVA, SANTANDER: Implications from new tariffs in Mexico, below are our thoughts on the implications for the broader sector: Implications for the European banking sector. . While we think trade war implications are likely to weigh against broader European banks in a context where outlook for economic growth remains weak, we think this is likely to keep inflation risks to the upside, which should reduce potential interest rates cuts. . As we''ve outlined in Five For 2025, the start of the year was expected to be bumpy due to the risk of Trump tariffs. However, a lot of this downside risk should already be discounted in share prices. . On the other hand, there are some counterbalancing potential positives to watch throughout 2025 - as for example potential retaliation / policy response in China and Europe - which could be helpful to mitigate the...
The ECB published its 4Q24 lending survey on Tuesday - the mortgage demand continues to stand out The quarterly credit ''check-in'' from the ECB continues to point into the right direction - in particular for households. As we highlighted in Five For 2025, we don''t necessarily need a loan growth acceleration fundamentally, but it is needed for a multiple expansion. Recent conversations with investors have reinforced this view, with concerns about the Euro area''s lack of GDP and lending growth being a common theme. Borrowing demand is expected to further increase, except for non-financial corporates (flat): . Mortgages: the expectation last quarter was to be the best reading since 2005, reality came just slightly below that and higher vs the previous period. The realised demand reading is the best reading since 2Q15 (again) and, more importantly, the improvement was observed across the region. The main driver behind this was a lower interest rate level, but also improving housing market prospects were supportive. Into 1Q25, the recovery of mortgage demand is expected to continue - at a slightly slower but still strong level, for a third consecutive quarter (to this extent last seen in 2015). . Consumer credit: saw a broadly stable demand, lower than the increase that banks had anticipated and a lower reading than in 3Q. Looking across major countries, this development seems in particular driven by France - decreasing strongly QoQ as a result of weaker consumer confidence and retail sales. For 1Q25, the banks'' expectation is for demand to improve at a somewhat higher pace and in particular for France. . Corporates: slightly increased in line with what was expected. This is a continuation of what we''ve previously observed: a continued disintermediation of corporate demand from the bond markets due to more generous bond market terms. In 1Q, banks expect demand to remain broadly unchanged - with similar expectations for large firms vs SMEs and short-...
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We expect robust PandL trends in 4Q Operating trends look healthy for Commerzbank in 4Q. Net interest income seems likely to remain around EUR 2bn, with pricing discipline holding well. Net commission income should also be robust, with management efforts and recent investments. Costs are likely to be somewhat higher, with seasonal and revenue-related increments. Loan loss provisions should be steady. Capital ratios are likely to increase, adding more surplus The bank has accrued no retained earnings in 1Q-3Q, so with the planned 70% FY24 payout ratio should be adding the remaining 30% of earnings at the full-year stage. In our estimates, with limited RWA growth, this gives a CET1 increase from 14.8% to 15.2% (vs 13.5% target). All eyes on the strategy update There will be a lot of focus on the Capital Markets Day in the afternoon of the results date, with updates to the business plan and financial targets, effectively representing the bid defence against UniCredit''s takeover attempts. We discussed some of this in our recent Top Picks note. No real news on UniCredit bid interest UniCredit reportedly now has options on up to 28% of Commerzbank''s shares, but its next steps are on hold, pending German elections and the pursuit of its domestic MandA project. We keep our Outperform rating, one of our sector top picks We reiterate our positive view on Commerzbank shares and our EUR20 TP. This is based primarily on standalone fundamentals, with resilient NII and large share buybacks, and a discounted valuation. MandA scenarios may give support but are not our main focus at this stage. We make minor changes to our estimates ahead of Q4 results.
Our 2025 convictions In December''s ''Five For 2025'', we outlined 5 key themes likely to drive bank shares this year. Choppy as the macro might be, healthy micro, high free cash-flow and unchallenging valuations should lead to a 5th consecutive year of sector outperformance, we argue. In this connected report, we give you the elevator pitch on our 5 strongest stock convictions: NatWest, Nordea, Commerzbank, CaixaBank and BAWAG, with a focus on where we are different to the consensus. Some defensive diversification Some diversification from the Eurozone seems sensible, whilst politics and growth underwhelm, and inflation and rate expectations wobble. Guy explores the appeal of NatWest''s 5% revenue CAGR into falling rates, whilst Bettina lays out the New Year''s Resolutions needed for Nordea to return to its former glory. At a below sector average 7.5x P/E25, risk/reward here looks particularly appealing. Long-dated balance-sheet appeal In the Eurozone, Jeremy demonstrates that BAWAG and Commerzbank both offer monster capital returns and slow-rolling balance-sheets at discounted valuations. With share-counts reducing c.8% p.a., both show that yes, banks can enjoy double-digit EPS CAGR into falling interest rates. But not afraid of retail into falling rates Owning floating-rate banks is not a taboo, where NIM expectations are too low, volumes are growing and the fee-machine is whirring. Such is the case at CaixaBank, as Nacho shows. In sum Our top picks offer superior ROTE, at 17% in 2026e (vs the sector''s ~13%), and higher capital returns (13% total return yield vs 11%), at a cheaper valuation of 6.5x P/E (vs the sector at 7.2x). We wish you a happy and successful year ahead.
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Your true love may get you 5 golden rings for Christmas, but we give the gift of our 2025 outlook for the banking sector: a forecast of a 5th consecutive year of outperformance. The macro may be bumpy, but compelling micro will win out, we argue. We explore 5 themes driving the sector: the macro, NIM sensitivity (using our proprietary XNIM tool), balance sheet growth, capital generation, and valuation risk/reward. We assess rate scenarios and the risks of stretching the ''Trump Trade'' too far. We also refresh our Top Picks list to select the 5 strongest names for the new year, prioritising simple and self-help: Nordea, NatWest, BAWAG, CaixaBank and Commerzbank.
Beat, raise, distribute, repeat. For the 17th consecutive quarter, banks have positively surprised, despite falling rates and a rising consensus. Here, we extract the lasting lessons from Q3, look at implications of the Republican clean-sweep, and consider stock selection priorities. We stay bullish, blending attack with defence whilst macro is choppy, awaiting clearer skies. Bottom-up: boring is good Q3 was a homerun, with industry revenues, costs, provisions and capital generation all surprising positively. At a stock level, we''re most enthused by Nordea''s progress on capital and the widespread resilience of ''domestic'' NII: yet more evidence that, yes, you can own banks beyond peak rates. Our Top Picks offer access to this underappreciated NIM resilience and buyback-fuelled EPS growth, with some diversification away from the interminable debate around Eurozone terminal rates. Top-down: Trump and more 4 years of operational strength is not, on its own, enough to command a sector re-rating. Macro must play ball. Trump talk currently dominates, and with US banks at an historic premium to their European counterparts, the market is pricing US exceptionalism and perennial European decay. 5 cycles in the past 2 decades argue that European banks'' re-rating day will come; we consider what to watch. Stock selection - the low premium for high RoTE: blend attack with defence We remain enthusiastic about stock-picking opportunities, particularly as high profitability commands little premium (a 1x P/E pick-up will buy you double the RoTE in some cases). Throw in some anti-consensus EPS upgrade opportunities, and we believe you can build a basket of banks which is more profitable and more generous than average at a relative discount. We revert back to NatWest over Lloyds in our Top Pick list: still enthused by the UK retail outlook, without the regulatory overhang. Top Picks: Unicredit, Commerzbank, CaixaBank, Nordea, NatWest, BAWAG.
Mixed signals for 2025 earnings outlook Net interest income and fees are running ahead of expectations, prompting further FY24 guidance upgrades. However loan loss provisions are heavier than expected, the NII outlook for 2025 is softer with rates moves, and the burden from Polish FX mortgages will drag on into next year too. Moving ahead with capital return ramp-up Distributions continue in increasing size, EUR 0.4bn-1.0bn-1.6bn in 2022-23-24 (30%-50%-70% payout), fulfilling the 3bn 2022-24 plan target (although not exceeding it, as we had hoped). In any case the goal for next year is a further big step-up to c2.5bn (90-100% payout). Building towards a stronger medium-term value proposition Management is focused on delivery of their existing Strategy 2027 plan, but also upgrading it further, to reflect the vision of a new CEO, and to maximise the company''s value relative to UniCredit''s bid interest. Potential levers include optimising capital and RWAs, improving risk/return profiles, and additional actions on costs. Living with uncertainty around UniCredit''s interest In the meantime Commerzbank appears to have had limited contact with UniCredit, say they are open to dialogue should the Italians initiate it. But they focus on their own plans for now, and seek to stabilise sentiment among customers and staff members, and to protect the franchise. We maintain our Outperform rating We update estimates in this note, but keep our price target and rating unchanged. We see significant upside for Commerzbank in both standalone and MandA scenarios, and it remains one of our top picks in the European bank sector.
What happened? None of the banks are directly linked to the ''Trump trade'' - but as a sector, which is sensitive to the health of the economy, banks could react in anticipation of the impact on the European economy of weaker trade and higher tariffs. Additionally, a reduced focus on regulation in the US could put the focus on FRTB, the B4 impact on market risks RWAs. BNPP Exane View: The European policy response (or absence of) could have a significant impact on economic forecasts and inflation expectations. While it is too soon to quantify the GDP impact on Europe, we believe that weaker growth would impact banks as it could lead the ECB to cut rates further (c.4% EPS per 25bps rate cuts below 2% all else equal), reduce lending volumes (somewhat revenue neutral as less loans can be offset by more savings or insurance income) and trigger higher cost of risk expectations (c.2% EPS impact per 5bps higher COR). On the regulatory front, we would have expected that a possible reduced bank regulation in a Trump administration could trigger a quid pro quo reaction in Europe - but recent comments by Claudia Buch (see Les Echos yesterday) suggest that a cancellation of FRTB in Europe is by no means certain, even if the US cancels it. The decision will be a political one, not a regulatory one, but the risk exists. SG would be the main beneficiary of FRTB cancellation (capital saved would be equivalent to 7% of market cap) but the European response is a significant uncertainty. All the banks exposed to FRTB (typically the IBs) can absorb the 30-50bps impact, but for their global markets division the hike in capital requirements is significant and would need pricing response to maintain profitability. This in turns would hit market shares and could destabilise breakeven points of weaker IBs in Europe. For reference, the impact per bank in terms of bps of RWA and % of market cap are: SG (c35bps, 6%), DB (c55bps, 6%), Barclays (c30bps, 3%), and UBS (c30bps, 2%)....
CBK in demand, will ING get involved? As we explained in our report Can UniCredit run a German bank better?, CBK is now a much more profitable bank, largely due to higher rates and significant cost-cutting efforts implemented over the last few years. Given UC''s 21% stake (including derivatives) and a request to build a stake up to 30%, the bank now appears ''in play'' despite the German government and CBK management apparently being opposed to a transaction. Will European governments and supervisors block a deal? This would be a very negative signal to send to bank investors at a time when many voices argue for a faster implementation of the Banking Union and Capital Markets Union. Will another combination be on the table? Will DB react? Will ING react? ING to the rescue? Some investors have wondered, given ING''s presence in Germany and Poland, whether the Dutch bank, perhaps more culturally aligned with Germany, could come to the rescue and fend off a hostile bid with an orange-knight bid. This possibility is the main motivator of this report. Where would the synergies be? EUR900m seems a realistic number We believe the main synergies would be in German + Polish retail businesses, though ING''s German cost base is low, suggesting these may not be very significant. We also see synergies and capital release in CBK''s wholesale division. Central functions could benefit, even if only in procurement. A fairy tale or a horror movie for Halloween? Our maths on a theoretical transaction is not convincing either way. We assume that ING would have to pay c50% more than the price prior to UC''s move, capital requirements would increase, and ING would have to issue a significant amount of new shares. All in all, we would expect a deal to be broadly EPS neutral - a lot of work for little near-term reward. We have an Outperform on both ING and CBK, the latter is one of our top picks in Europe as is Unicredit.
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We have adjusted our estimates ahead of the quarter reporting, mainly by incorporating the PLN952.8mn announced cost of legal risk related to FX mortgages in Poland by mBank. We do not consider the changes to be material; our rating is unchanged.
Facing rate cuts: strength but who is strongest? Banks'' investors have faced six months of range-bound trading. We expect a decent reporting season but one which may not move the investment debate on. For the bears: little EPS momentum, NII uncertainty in the face of falling rates and unsettling geopolitics. For the bulls: appealing valuation levels, generous distributions and resilient relative EPS developments. For us, this suggests that at worst a pause, rather than a correction, is warranted. Our optimism for banks has not waned as we explained in I Know What You Spent Last Summer and we remain bullish on the sector with our top picks (BAWAG, CABK, CBK, LBG, Nordea and Unicredit) offering a blended c.30% upside from here. This note tackles the biggest pushback on that piece, the sector''s vulnerability to lower terminal rates. A re-rating story but investors are paid to wait In our view the next leg up for the sector will likely come from re-rating rather than EPS revisions given that falling rates are likely to mean low-single-digit earnings growth for the sector in FY25e-26e. But until macro data improves and higher wage growth translates into higher consumption and improving manufacturing PMI, a lag is possible. In the meantime, investors are paid to wait, while the recent ECB lending survey showed reasons to be optimistic (see ECB lending survey - credit demand picking up further). We continue to expect a healthy 10% shareholder return annually for the sector (13% for our top picks), courtesy of c.7% dividend yield and c.3% buy-backs. But how much negativity is there in the banks'' valuation? In this short report, we flex banks'' PandLs for different levels of target P/Es, to assess ''what is in the price''. We capital adjust for distribution and B4 and assess how much is implied by the banks'' current valuations. We model the revenue hit that banks would need to face to warrant a set P/E 26e. Our scenario is not one of a recession that would...
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The ECB just published its 3Q24 lending survey - the message is largely positive. The quarterly credit ''check-in'' from the ECB gave grounds for optimism, particularly from thawing household credit demand. As per yesterday''s ''I Know What You Spent Last Summer'' - this topic is less relevant as a driver of NII resilience, since deposit growth is already high, nicely profitably and underappreciated - and as much about the signal value of a consumer learning to save less, and to borrow and spend more. This theme holds the key to the economic recovery and sector re-rating in our view. Borrowing demand picked-up across all three categories: . Corporates: positive, driven by SMEs - if lower than expected 3 months ago. We don''t see this as surprising: as we highlighted in our recent note, some disintermediation of corporate demand from the bond markets should be expected due to more generous bond market terms. In 4Q, banks expect this to continue at a similar pace. Interestingly, demand for fixed investments credit is turning a slight positive now, after being a drag for two years - a positive signal to us on economic activity and confidence. . Mortgages: the expectation-bar from the previous survey was high, but demand came in even higher - this is the largest pick-up in demand since 2Q15. Lower mortgage rates and a stabilisation of housing prices are a clear driver here. Into 4Q, banks expect this rebound to accelerate even further - implying the largest demand increase since 2005. . Consumer credit: saw a moderate increase in borrower demand, broadly in line with expectations and driven by improving consumer confidence. Banks anticipate a slightly stronger demand increase in 4Q. On a country-specific basis two countries stand out As we highlighted in our recent report, Italy faced sluggish lending growth this year. For corporates, however, they are now expecting a swift turnaround from declining demand to a strong increase in 4Q. The political situation...
The waiting game For six months, bank stocks have been range-bound, with healthy micro squashed by muddy macro. In this report, we look for turning points in both. We stay bullish: the potential reward of +45% TSR compensates for the risks. The micro Bottom-up, it''s going rather well. Balance-sheets are growing, pricing is rational, credit quality is benign, share counts are shrinking. The market is fearful of curve-driven downgrades. We use XNIM to show that these curves bark more than they bite. The benefits of recent deposit inflows seem underappreciated. The macro For the sector to work, macro must improve, which requires consumers in Europe and China to ease off their deleveraging impulse. This will not be immediate. Europeans typically run down their bank balances over their August cocktails, this summer they saved at the highest pace in 20 years. Rising real income, wealth, and confidence suggest better days to come. For China, the market has decided that only ''FISCAL!'' and ''CREDIT!'' will do. But, in a nuanced cycle, we suggest other, quieter trends, may matter more. Is it worth the wait? Europe''s banks are in the 90% percentile cheap versus US peers, despite now offering superior RoE: a hint at the re-rating prize as macro thaws. Stock-picking Keep it simple. We prioritise highly profitable, generous retail banks, with top-line resilience. We recently added Nordea to the Top Pick list, at the expense of AIB. Our preferences: Unicredit, Commerzbank, Lloyds, BAWAG, Caixabank and Nordea are more profitable than average, buy back more shares than average, and trade cheaper than average. We are less risk-on and less rate sensitive than we were. Our Top Pick list is +44% YTD vs the sector +26%.
UniCredit has cut costs and RWAs in Germany, raising its RoTE to 19% Revenues have improved in UniCredit''s German business, but only in line with peers. What is different, however, is c20% reductions in operating costs and in risk weighted assets, over the past 3 years. These have boosted the division''s RoTE to an impressive 19%. Commerzbank and Deutsche Bank have also improved, to 15% and 12% German RoTEs The other quoted banks have also improved, with better revenue yields, and better cost efficiency, with more volume growth as well. These changes have raised their profitability, with RoTEs in German businesses now reaching 15% for Commerzbank and 12% for Deutsche Bank. Commerzbank''s revised strategic plan and 12.3% group RoTE target look credible Group RoTEs for all of these banks are lower than these slightly flattering segmental-reporting numbers. Commerzbank will be around 8% group RoTE this year, and plans to reach over 12% by 2027. We review the details here, and find them credible, with good delivery so far. Commerzbank could potentially raise profitability further utilising UniCredit techniques It is debatable how much of UniCredit''s cost cuts and RWA optimisation could be replicated at Commerzbank, without hollowing out the bank in an unsustainable and undesirable way. But some elements probably could be applied, either by UniCredit or by Commerzbank itself. We keep Outperform ratings on both banks, waiting for further developments With regulatory approvals pending for UniCredit''s stake-building, and some form of talks between the banks, we watch and wait. We think both banks have sustainable earnings, strong capital returns, and cheap valuations. We see value creation in a deal, but standalone upside as well.
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It has been an eventful few days UniCredit bought 9% of Commerzbank. The German government said this was a surprise and they didn''t like it. Commerzbank said they didn''t like it either. UniCredit bought options on a further 11.5% of Commerzbank, taking it to 21%, subject to approvals. Commerzbank changed its CEO. UniCredit''s CEO gave a conference presentation, and raised earnings guidance. Commerzbank''s new CEO gave a conference presentation and upgraded financial targets and capital distribution plans. She also said the two banks are having their first meeting today (Friday). We summarise here some of our comments and analysis We have published a series of comments and analysis as we have gone through these developments. We bring them together here for reference, in summary form, with links to the longer notes and our merger model. Looking forward, there are multiple moving parts, and a range of outcomes Key variables from here include regulatory and political reactions, in Germany (hostile so far) and at the European level (seemingly more favourable). And crucially the talks between the companies, and whether a friendly cooperation can be found. We remain positive on both stocks, both Top Picks We have Outperform ratings on both UniCredit and Commerzbank, and have them both in our sector Top Picks list. They have strong earnings, substantial capital returns, and cheap valuations. We see strong synergy potential in the event of a combination, and value creation through other outcomes too.
Adding more context to our initial reactions and merger maths We made a series of comments yesterday on UniCredit''s new 9% stake in Commerzbank, including merger maths around what a potential full combination of the two might look like - see our research note for more details: COMMERZBANK, UNICREDIT : Tying the knot? There are reasons why German banks need MandA The quoted banks are stronger and more profitable than before, but are still struggling to raise returns to cost of equity levels. They also have small market shares (5-10% each) in the German banking market, competing against 2 huge competitors (with 20-30% and 30-40% shares). There are not many potential partners for the German banks There are constraints on quoted banks consolidating with non-quoted rivals. Other possible quoted partners are few in the German market, mainly UniCredit/HVB and ING, each about half Commerzbank''s size in Germany. So there are not many choices, and there is a risk in being left out if others link up - potentially problematic for Deutsche Bank, if UCG and CBK combine. Commerzbank has de-risked a lot over the past few years German banks have a chequered past, but Commerzbank has streamlined itself dramatically, putting half the balance sheet into run-off 15 years ago, and exiting the various exotic activities (shipping, real estate etc) that had caused bigger losses in previous times. Those are gone now. Commerzbank has potential fair value adjustments, but not what they seem The EUR 11.6bn fair value mark-to-market that Commerzbank discloses is mainly interest rate related, which would fully pull to par over time. Some might be given regulatory exemption, as in the UBS/CS case. We model with 1/3 impacting, pulling to par over 4-5 years.
UniCredit made a move on Commerzbank Here we go. UniCredit has acquired a 9% equity stake in Commerzbank after acquiring c4.5% in an accelerated book building offering from the government yesterday, while the rest of the stake has been acquired through market activity. UniCredit reiterated that it is supportive of Commerzbank''s management and supervisory boards, and it will be exploring value creating opportunities. The impact from the transaction is 15bp on a CET-1 basis. A broad range of scenarios... but here''s our merger model A potential merger could take different forms. Without all the facts yet, the EPS implications to UniCredit should be considered within a range of scenarios. Included in this report is one such scenario, and a link to an Excel-based merger model where you can flex core assumptions. UniCredit owns a bank in Germany, meaning costs synergies and some revenues losses could arise from a potential deal. As our first take, we do not view the merger as particularly accretive (nor dilutive) for UniCredit, given our EPS26e is based on a materially reduced share count which already ascribes value to UniCredit''s excess capital. We expect UniCredit to stick to the 15% RoIC target for its capital deployment, which has been discussed multiple times in the past 12 months. UniCredit distributions are here to stay Commerzbank''s improved position both in terms of profitability and capital as well as the valuation gap is quite supportive and would provide room for UniCredit to absorb mark-to-market impacts from the CBK balance sheet as well as restructuring charges to fund cost savings. Additionally, UniCredit''s c.EUR6.5bn excess capital could be partly or wholly deployed, which would materially reduce the capital needs for the acquisition and improve the EPS accretion. We think a comfortable capital ratio at or above 14% should allow the combined institution to absorb potential G-SIFI surcharges - and more importantly allow it to maintain an...
Hello darkness my old friend Bank investing requires a thick skin and a steady hand. Once again in this 4-year banks bull market, we find ourselves examining a scare, concluding that fear creates opportunity. This report addresses common incoming questions, looks for odd dislocations, extracts the lasting lessons from Q2, and sifts through industry data for clues on H2. We remain bullish. The top-down We start with what''s spooking markets. Rate expectations are tumbling, but do not demand NIM downgrades. The economic recovery is sluggish, but banks are priced for recession. Credit spreads are widening, but don''t look menacing. Consumers are deleveraging, but via deposit growth which brings NII growth. Markets are down, VIX is up, suggesting lower market-reliant revenues, but only faintly. Meanwhile: as share prices fall, buyback potency rises. It''s not paradise, but banks in Europe, more than anywhere else, are priced for worse. Climbing the wall of worry will be powerfully positive. Bottom-up: the past The industry''s Q2 was notable for the breadth of earnings surprises, clearing a high bar, and the healthy generation and deployment of capital. Accidents were few and mild. The EPS upgrade cycle continues, a touch quicker than we''d expected. Bottom-up: the future The early signals from a falling rate environment are positive: deposit pricing is falling, deposit mix-shift is slowing (or reversing), credit demand is improving. Peak rates do not equate to peak EPS. Stock-selection, our top picks Our Top-down and Bottom-up convictions overlap in a host of retail banks with high profitability and generous capital return: Unicredit, Commerzbank, CaixaBank, AIB, Lloyds, BAWAG.
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Debating the details, but the earnings outlook is robust Commerzbank''s 2Q numbers were very close to consensus estimates, but guidance items caused some discussion. Net interest income is expected to dip slightly in 2H24 and 2025, but remain on track for EUR 8.4bn 2027. Costs are expected to grow 5% next year, but management insist the bank remains on track for cost/income and RoTE targets. Credit quality remains benign. Poland and Russia one-offs remain in focus The as-reported earnings remain subject to uncertainties from Poland (CHF mortgage settlements) and Russia (if required to make a hard exit). For now we include EUR 200m more in 3Q-4Q, but there is obviously a risk that the burden is heavier. Capital returns are moving ahead, brought forward Management confirm plans to distribute at least EUR 1.6bn from FY24 earnings, completing their 3bn 2022-24 goal, with 500-600m dividends (~50c/share) and 1.0-1.2bn buybacks. They aim to undertake a first 600m buyback tranche in 4Q (earlier than expected), and the remainder in 1Q. We bring forward future year buybacks in our model to half intra-year / half following year, which (given their size) has a meaningful positive impact on sharecount and EPS. We keep a strong positive view We expect Commerzbank to deliver on its earnings trajectory and capital returns, and expect the share to re-rate substantially as the market gains confidence in the new financial profile of the company. We update estimates (small changes only to profits), reiterate our Outperform rating, and keep Commerzbank as one of our team''s Top Picks in the European bank sector.
Commerzbank is booking c.EUR400m one-off charges in 2Q24e In Poland the bank has pre-announced EUR233m additional charges relating to CHF mortgages, and EUR80m provisions for the government''s prolongation of credit holidays. Also Commerzbank expects to book EUR 95m provision for Russian litigation. In total, EUR408m one-offs. Operating trends appear to remain strong In the meantime, Commerzbank''s operating trends look solid. We expect 2Q net interest income just above EUR2.0bn (vs 1Q EUR2.1bn), fees close to EUR900m and costs around EUR1.6bn (both similar to 1Q), and loan loss provisions approaching EUR150m (vs 1Q EUR76m). Full-year guidance may be improved. Capital surpluses may reduce slightly with the Aquila acquisition The Aquila Capital acquisition is due to close in 2Q, with a c10bp CET1 impact. We model 14.7% CET1 ratio down from 1Q''s 14.9%, with modest RWA growth and no profit retention (100% payout accrual like 1Q), but remaining 120bp / EUR2.1bn above the bank''s 13.5% target. Management are likely to clarify plans for the next share buyback The 1H results give the basis to apply to the ECB for the next round of share buybacks. There is EUR1.6bn remaining for the 2022-24 EUR3bn total distribution goal. We expect a little more (EUR0.6bn dividends and EUR1.2bn buybacks) but the planned c70% payout ratio will be a constraint. We tweak estimates slightly, reiterate our positive view on the shares We make minor changes to estimates, mainly relating to 2Q one-offs, and slightly lower buybacks. The shares remain cheap (0.62x P/TB for 10% RoTE, 5x 2026 PE), and fundamentals continue to improve. We reiterate our Outperform rating, one of our top picks in the sector.
We''ve got you covered We follow up our first Peacocks and Squirrels report, delving into the detail of provisioning across the European Banks to assess the extent that ''pro-active'' provisions add to system level resilience and aid the outlook for earnings and dividends. At a stock level, divergences remain stark between the peacocks (it''s all on display) and the squirrels (with rations buried away for a colder climate). Starters being served for the ''squirrels'' 2023 highlighted the benefits of being a squirrel, with a host of banks leaning on pro-active provisions to supplement earnings. This was most evident at UCG and, alongside underlying loss experience, supported delivery of minimal reported impairments. We screen across the sector to show how movements in provisions supported or hindered impairments last year and who is positioned best. Aggregate buffers have come down but continue to provide insulation At a sector level, provision releases helped deliver below ''normalised'' impairment charges in 2023. This has brought down aggregate buffers in the system, with provisions on the performing loan book now at EUR56bn (50bps), or just over EUR10bn (or c10bps) higher relative to 2019 levels. Spotlight on CRE In this report we refresh our views on the CRE market, setting out latest trends and disclosure from the banks, highlighting the wide divergence in provisioning for this asset class. Typically differences between banks are understandable but this doesn''t always hold true. Investment implications ''Proactive'' provisions are less elevated today but look set to still play a useful role in limiting reported impairments alongside favourable underlying loss experience. AIB and UCG (sector top picks) continue to feature prominently in our list of ''squirrels'', alongside Erste, CBK and BIRG.
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A strong start, more to go Increasingly, investor meetings start with: ''Urgh, I missed it'', or ''When do I sell?'' given the banks'' rip-roaring start to 2024. This report addresses those concerns, extracts the lasting lessons from across the industry''s Q1, and lays out the next chapter of the ''rising PMI playbook''. This framework is key for navigating the sector and stock-picking during economic recoveries. We stay bullish. Encouraging signals in industry data Understanding NIMs remains the key to alpha. We scour industry data for the latest signals, which are encouraging. Even prior to the first rate-cut, rates on savings products are falling, and mix-shift is slowing. The conservatism adopted by some banks'' guidance on these topics looks misplaced. EPS upgrades await, particularly for some quick re-pricing banks, which will challenge consensual thinking. When does the fun stop? Macro will trump micro for most stocks this year. We look at the history of cycles and global banking comparisons to scale the sector''s re-rating opportunity. We''re not there yet. Stock-selection We retain high conviction for our Top Pick list: Unicredit, Commerzbank, AIB, Caixabank and NatWest. A group where we are 10% above consensus, and which boasts higher profitability and capital returns than the sector, at a cheaper valuation.
PandL drivers continue to improve Commerzbank continues to deliver strong net interest income, consolidating around the EUR 8bn level. Meanwhile fees and commissions are improving too, with supportive market conditions as well as strategic efforts. Revenue guidance is raised again, with indications of more to come. Credit quality is healthy, even if loan growth still weak Recession fears have reduced, although growth remains anaemic. Credit quality indicators are benign, and problem loan formation is limited. Loan loss provisions are likely to come in below the previous guidance. Meanwhile loan demand remains weak, and waits for greater confidence. Capital returns are well underpinned The 2022-24 plan aims for EUR ~3bn of capital returns, of which 1.4bn delivered, leaving ~1.6bn from FY24. The consensus is looking for 1.7bn (50c/0.6bn dividends plus 1.1bn share buybacks, and we have 2.1bn in our model). This is well supported, with EUR 2.4bn surplus capital at 1Q (14.9% vs 13.5% CET1), 2.2bn consensus 2024 earnings, and 0.4bn unused provision buffers. Valuation continues to normalise The price / tangible book multiple is now around 0.6x, much improved from the 0.3-0.4x lows, but still well below what medium-term RoTEs would suggest (consensus 9-10%, our estimates 10-11%, company target 11.5%). We raise estimates and target price, maintain out positive view We update our model, with slight further upgrades. We raise our target price, based on 10% sustainable RoTE (unchanged) and 13.5% CoE (from 15.0%). We maintain our Outperform rating, and Commerzbank remains one of our top picks in the European bank sector.
Ahead of the European elections, focus is increasing on the Capital Markets Union to channel some of Europe''s abundant savings to fund strategic investments in defence, digital and the energy transition. French finance minister Bruno Le Maire suggests EUR600bn of annual investment is required. We believe greater emphasis on securitisation could release a substantial EUR2.9trn in lending capacity. Greater usage of synthetic securitisation could release EUR2.9trn of lending capacity In this report, we delve into synthetic risk transfer for the banks we cover. We estimate that they have saved c.EUR25bn of ET1 capital from synthetic securitisation and the growth of the market is pronounced from a low base. We estimate a further EUR50bn of potential savings for corporate exposures alone (c.5% of market cap). We believe this could facilitate an impressive EUR2.9trn of additional lending capacity over time in Europe. The winners in our analysis: ABN Amro, CBK and SG Using banks'' disclosures on securitisation, we can estimate that on average the banks we cover have already securitised c.3% of their loan book, with Barclays already at 13% and SG, SAN and Nordea seemingly the most active in the last couple of years. For the time being, we restrict our analysis to corporate exposures in PD buckets 2.5% with RWA density 40% as the main source of RWA optimisation potential. In total, we believe that RWA could be reduced by a non-negligible cEUR400bn, or 5%. The banks to benefit most in our analysis are ABN Amro, CBK and SG. And much more in the long run? A generational opportunity to be explored at a later stage If Europe decided to embrace securitisation to a similar extent as the US, with mortgage agencies like Fannie Mae and Freddie Mac, we could see significant savings in funding, leverage and capital. This would also provide significant pricing discipline in the market and represent an additional revenue opportunity for investment banks...
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Positive operating trends should continue in 1Q numbers The first quarter appears to have been a supportive operating environment for Commerzbank. We expect net interest income to remain around EUR 2.1bn, a whisker below 2Q-4Q23 levels, with deposit beta rising only gradually, and more than on track for the FY24 guidance of ~7.9bn. Fees and commissions are likely to show the normal seasonal strength, similar to last year''s 1Q levels. Loan loss provision charges are likely to be small, reflecting seasonality and the absence of any deterioration in credit quality. We expect operating costs to be well managed as previously, and compulsory contributions settling to a lower level this year. mBank is booking extra CHF mortgage provisions The Polish unit has pre-announced PLN 1,058m (EUR 246m) extra charges for CHF mortgages, mainly updating estimates of interest costs in relation to pending claims, so part of the tidying up exercise (rather than any adverse developments) as they continue to settle cases. On track for increasing capital distributions We expect the group to accrue a 100% payout ratio, preparing for increased ordinary dividends (we estimate FY24 50c from FY23 35c) and substantially increased share buybacks (we estimate FY24 EUR 1.5bn / 9% of market cap, from FY23 0.6bn / 4%). Raising estimates and price target slightly We update our model, with slight positive revisions again, and increase our target price accordingly. We reiterate our Outperform rating. Commerzbank is one of our top picks in the European bank sector.
What the data is saying ahead of Q1 All of a sudden, Banks are the best performing sector on a total return basis year-to-date. The sector is winning the ''war'', with low valuations responding exuberantly to PMI recovery, as they tend to. But how will it fare at Q1 results, when recent quarters have been a high volatility ''battle''? This report sifts through hot-off-the-press industry data for insight. We believe Q1 won''t be a huge EPS upgrade trigger, stock selection is increasingly important, and the most encouraging NIM trends will likely be seen in Southern Europe, yet again. Here, ''peak rates, peak margin'' is too heavily discounted in consensus, we show. Are we there yet? Still no The sector''s near +20% move since mid-February has surprised many, and most investor discussions of recent weeks have begun with, ''Are we there yet?''. We continue to firmly believe the answer is ''no'', show why we expect a further +30% from the sector, and lay out the conditions needed to deliver this re-rating. Macro trumps micro. Convictions reiterated, we remain bullish As banks take on the battle of peak and subsequently falling rates, we continue to prefer highly macro sensitive retail banks (which respond to PMI improvement) with low loan-to-deposit ratios (which equates to deposit pricing power) and high buybacks (which equates to EPS growth in a low earnings growth environment). Our top picks remain: AIB, Caixabank, Commerzbank, Natwest, Unicredit and UBS.
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For two years, the market has been slugging it out with some heavyweights: the ''jabs'' of inflation, the ''hooks'' of rate-hikes, and a few bond-market ''uppercuts'' along the way. Our Loan Ranger series is here to help you duck and weave, using a differentiated lens to make sense of a differentiated cycle. Today, as some of these heavyweights seemingly run out of puff, we re-check the vital signs of consumers and corporates to provide you with an investing playbook as the cycle turns. That Rocky ultimately wins the fight in the US is increasingly well understood. But much remains misunderstood and mispriced. We recommend ''heavy weights'' in Europe: cyclicals, SMIDs and banks.
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Never dull Take mixed Q4 earnings, add widely-diverging guidance, super-charged buybacks, changing macro signals and sprinkle on the occasional burst of banking fear, and you get a breathless start to 2024. This report looks at what we''ve learned and what matters for the rest of the year. We stay bullish. Have a steady hand The sector has entered a new phase in the PandL cycle, with lower growth and less surprise. Is that the end of the sector bull-case? No. We outline the path to a blue-sky 60% TSR. History suggests you should be listening to the urgent, bullish signals sent by the credit markets and the economy currently. Detailed work where it matters NIM resilience is the industry''s key battleground as rates fall. We use our differentiated, proprietary framework, ''XNIM'', to help investors navigate a complex, opaque topic. We sift 20 years of pricing data across products and geographies to outline the ''new normal''. The Italian banks and Caixabank emerge as relative winners, with significantly different margin profiles to consensus. The broader industry''s top-line is reassuringly resilient. Stock-picking We continue to argue against consensual diversified defensives. Instead, our Top Picks are a basket of concentrated retail banks with underappreciated top-line resilience and juicy capital returns, along with UBS'' unique self-help story: Unicredit, Commerzbank, AIB, NatWest, Caixabank, UBS. Ex-UBS (patience required), our Top Picks trade at 0.75x TNAV for a 13% RoTE 2025 and offer an average 16% p.a. total return ''yield''. That is: superior profitability and capital return to the industry, at a cheaper multiple.
Continued focus on rates and NII, with sensible and positive guidance As with other banks, at this turning point in the rate cycle, Commerzbank''s net interest income remains a key variable. Management are raising the near-term guidance, provide useful sensitivity analysis and mitigants, and give a confident view on medium-term NII levels. Confirming big capital returns, should be an important driver The bank is putting a big emphasis on capital returns, accruing a 100% payout for FY24, implying share buybacks around EUR 1.5bn (11% of market cap) starting later this year, on top of a 5% dividend yield, and repeating/growing in subsequent years. We think this will move the shares. Some noise around other smaller items There are other smaller moving parts worth noting too. Fair value revenues are now expected to remain negative in FY24, which dents near-term estimates, but should normalise later. Meanwhile volumes and commission income should contribute increasingly to revenue trends. RoTE progressing from 8% to 10% Taking these elements all together, the bank improved its RoTE from 5% in 2022 to 8% in 2023, is likely to stay around 8% in 2024, and is set to improve further to 10% in 2025 onwards. The shares trade around 0.5x tangible book value, well below what those returns would suggest. We maintain our positive view We update estimates, with cuts in 2024 from the fair value revenues, but little change to 2025 or beyond. We increase our target price, rolling forward to 2026 as a reference year. We keep our Outperform rating, and expect the shares to rerate as the market increases confidence in RoTE levels and share buybacks. Commerzbank remains one of our top picks in the sector.
On track for EUR 2bn FY23 profit, with stronger 4Q NII offset by weaker fees and trading Deposit beta in Germany remains benign, giving a stronger 4Q NII. Meanwhile there is an offset in negative trading income, and softer fee and commission volumes. Costs and loan loss provisions should be close to expectations. Legal provisions in mBank have been pre-announced. This should allow 35c FY23 dividend, as well as the EUR 600m buybacks underway We expect EUR 2bn net profit (after AT1s), as guided, allowing the planned 50% / EUR 1bn distribution, comprising EUR 400m ordinary dividend (we estimate 35c per share) and EUR 600m share buybacks (being implemented from early January to mid-March). We expect an update on 2024-27 NII, reflecting potential rate cuts The company is likely to update NII guidance to reflect lower rates expectations. We expect little impact on 2024 (especially with betas continuing to rise slowly), but 2027 around EUR 7.5-8.0bn (vs previous 8.4bn, consensus 8.5bn, share-price-implied 6-7bn). See our recent research report. We also expect some guidance on FY24 dividend and share buybacks We also hope for clarification on the next round of capital returns, both in terms of size (we estimate 45c DPS and EUR 1.2bn buybacks), and also timing (perhaps starting buybacks earlier, eg 2H24 rather than 1Q25 to allow time to execute the larger size). This should be positive. Commerzbank remains one of our top picks in the sector We think the NII update is positive, a cut to guidance and consensus, but well above what the share price implies is sustainable. And the capital returns should be powerful. The bank is well restructured and derisked. We tweak estimates, and reiterate our Outperform rating.
5 x 5 Can banks ''work'' into sharply falling interest rates? Today''s report addresses this dominant investor question, including fresh work on our five strongest top-down convictions for the industry this year, and our five highest conviction Outperform ideas. We remain Bullish. Table Mountain or Matterhorn? Central Bankers have abandoned the ''higher for longer'' mantra, and financial markets have rushed to discount a rate cycle which is more ''Matterhorn'', less ''Table Mountain''. We adjust our forecasts for a speedier cut cycle, with modest EPS downgrades (4% on average for 2025e for Top Picks). Top-down convictions Are these downgrades the beginning of the end? We don''t think so: our top-down work shows: (i) how to position with trough PMI behind us, historically a catalyst not to be ignored (ii) why consensus earnings discount 2% ECB base rates (iii) why rate cuts could trigger some underappreciated positives, with lead indicators pointing to a ''credit catch-up'' (iv) how to position for increasing capital distribution (v) why there''s no such thing as a European refinancing cliff. Bottom-up convictions Guy lays out the ''hidden value'' at AIB, and argues the merits of NatWest, following his recent double-upgrade. Nacho champions CaixaBank, whose balance-sheet structure creates underappreciated NIM resilience. Jeremy lays out the idiosyncratic case for the new UBS and demonstrates the appeal of Commerzbank''s slower-churning balance-sheet. Ex- the idiosyncratic UBS, our Top Picks trade at a below-average 5.3x 2025e P/E despite offering above-average RoTE (12.7% in 2025e) and include 3 of the 5 most generous capital returners in coming years.
• Total revenues increased by 46% to €2.75bn in Q3 23 compared to Q3 22 • Further provisions relating to Swiss franc loans of mBank of €234m in Q3 23 • Consolidated profit was up from to €195m for Q3 22 to €684m for Q3 23 • Commerzbank upgraded its profit target for the FY2023 from well above 2022 (€1.4bn) to €2.2bn (+57%) • Commerzbank announced a share buy-back of €600m
Operating trends remain robust Commerzbank expects EUR 8bn NII for FY23, implying a 3Q figure around EUR 2.05bn. Fees and commissions appear to remain healthy, and operating costs well controlled. The bank continues to see little NPL formation, and expects FY23 provisions well below EUR 800m. mBank is taking extra litigation provisions The Polish subsidiary has pre-announced EUR 230m extra provisions for CHF mortgages in 3Q, resulting in a small loss for the quarter (but healthy operating business results). In our model we include a further EUR 250m CHF provisions in 4Q23 and EUR 400m in 2024. Capital should continue to build Retained earnings combined with limited balance sheet growth should allow the CET1 ratio to continue building in 3Q. We estimate an increase from 14.4% to 14.6% QoQ. Strategy update should bring NII and earnings positives The company has pre-announced capital plans (EUR 3bn distribution from 2022-24 earnings) and an 11% 2027 RoTE target. We expect further positives around NII, dipping in 2024 but building strongly in 2025-27 even with ECB rate cuts (see our recent note), supporting the RoTE uplift. We maintain our Outperform rating We keep a positive view on Commerzbank shares, one of our top picks in the sector. The restructuring has gone well, NII has further upside even at normalised rates, credit quality remains low risk and well covered by provision buffers, and the valuation remains heavily discounted.
If you want to see a bad bank, go to the top. The Fed? USD1tn in unrealised bond losses. Bundesbank? 100x leveraged. BoE? A QE bill equivalent to 1 million nurses'' salaries for 10 years. Riksbank? Recapitalisation to come. But it doesn''t matter, does it - not when you control the printing presses? Except, unfortunately, the money is real. It is profits no longer wired to treasuries, it''s underwritten losses and it''s enforced recapitalisations. Not to mention it makes QT harder, ramps up political pressure for lower rates, and could put bank businesses in the firing line. And then consider what happens to your portfolio if a central bank crunch takes future QE off the table. It''s time to get ready: In our third Loan Ranger report, we provide a detailed guide to what''s wrong with central banks, what the consequences could be, and how to fix the problem.
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Policy rates are moving again, up in the Eurozone and down in Poland Central bankers remain active. In Poland, policy rates were cut last week by 75bp down to 6%, in a surprise move that may have political influences ahead of elections. In the Eurozone, somewhat less surprisingly, the ECB this week hiked another 25bp, up to 4%. Commerzbank''s NII has different drivers, and seems to be poorly understood The market has been surprised in recent quarters by step-ups in Commerzbank''s NII and changes in guidance. We analyse here the main moving parts, and use a simplified model to gain visibility on likely NII levels in 2024 and beyond under different interest rate scenarios. NII should settle at higher levels even with lower mid-cycle policy rates Rising deposit beta may cause a dip in NII in 2H23/2024. But the repricing of the replication portfolio should bring a bigger positive impact, taking NII to higher levels in 2025-27. Even with lower through-the-cycle interest rate assumptions (ECB 2.5%) we see Commerzbank''s NII around EUR 8.7bn, versus 2Q23 reported 8.5bn / underlying 7.7bn, and versus 2025 consensus 7.9bn. We raise estimates for 2025 onwards We incorporate these NII findings into our financial forecasts, with no impact in 2023-24 but driving upgrades to 2025 and beyond. That benefit may seem distant right now, but fairly soon the deposit beta will have played out and we should be looking at strong growth from there. We maintain our positive view We reiterate our Outperform rating on the stock, one of our top picks in the sector. We see positive surprises on NII, credit quality and capital returns, and expect the valuation discount to reduce.
Enough lost and invested in operational risk-related issues for it to make a difference We estimate that the banks we cover spend c.EUR6-9bn annually on KYC/AML, lose c.EUR7bn to operational losses and spend c.EUR80bn on ICT incl. EUR5-7bn on cybersecurity. In a context of a covered sector generating c.EUR200bn+ of PBT and after c. US$150bn paid on settlements since the GFC (wider European scope) we believe investors ought to invest some time understanding an issue that is increasingly on supervisors'' radar screen: operational risk. If they care, so should we. Operational risk: 4 reasons why we focus on it now (1) From the outset of B4 European banks will have to disclose the amount of operational losses they incur, this should attract more scrutiny, (2) the nature of losses is evolving from high profile conduct cases to smaller yet more complex losses in a cyber world, but legacy still has a cost, (3) the impact of the new B4 operational risk RWA Approach might have been underestimated and might make playing fields less ''level'', (4) supervisors may sometimes lack the digital skills but increasingly focus on digital change and the operational risk framework. This report delves into the subjects of operational risk impact, ICT, cyber and GenAI and we provide numerous screens to assess which of the banks seem best positioned. There might be more link than we think between operational risk and Pillar 2 We argue that the sizing of P2R is not as sophisticated as we previously thought. However, B4 will discriminate less between the banks while the risks supervisors have to monitor are more complex. This could trigger further P2R adjustments. We rank the banks and adjust our ESG scores We marginally adjust our ESG scores and TPs to reflect our perception of possible operational risk winners/losers. BBVA, CA, Deutsche Bank, Fineco, SAN and UCG appear best placed in our op risk rankings while AIB, BCP (now one of our ESG laggards), BKT, Danske and...
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An uphill battle Despite it all - the US bank crisis, Credit Suisse, recession fears, bank taxes - banks have outperformed this year. Imagine what good news might do. This report looks at the lessons from pan-European earnings season, and what matters for the rest of the year. We stay bullish. Beat, raise, distribute, repeat Q2 set a fresh record for industry profits: the 12th consecutive quarter surpassing an ever-rising consensus. We use fresh industry data to show why the NII-led upgrade cycle has further to run. Policy-makers taking a slice of the pie On the back of the Italian bank tax, we review the risks of ''where next?''. Of more interest to us was the ECB''s move to pay no interest on required reserves. The impact is small (3% of EPS) but the move highlights the ECB''s nasty predicament: a balance-sheet like SVB, contributing EUR100bn p.a. to bank profits, and facing underappreciated challenges to ''QT'' its way to a smaller balance-sheet. We explore an important, if not immediate, topic for European markets, politics and banks. The current playbook has worked, what''s next? The ''slowing growth, rising rates'' playbook has worked in H1: own banks, retail over IB, with low loan-to-deposit ratios, and low beta. Whilst we expect this playbook to continue to work at an earnings level, history argues investors now need to dust off the ''trough PMI'' playbook as well. As uncomfortable as it sounds, this playbook reads: buy more, buy soon, buy ''cheap''. Thankfully, our Top Picks list offers above-average PMI sensitivity, and above-average profitability, all at an undemanding sector multiple: Unicredit, Commerzbank, CaixaBank, AIB, Bankinter, Erste.
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NII is beating expectations Commerzbank continues to book stronger-than-expected net interest income, and is (again) raising full-year guidance. Meanwhile medium-term expectations are more stable, assuming higher deposit beta, replication portfolio repricing, and eventually some normalisation in rates. Share buybacks are proceeding more slowly than hoped Management are pursuing further share buybacks, but more slowly than we had hoped, with lengthy approval times, making it harder to reduce capital surpluses and reach the capital return goals. This may reflect caution by the company, or restraint by the supervisory authorities. Costs and credit quality are well behaved In the meantime operating expenses and credit quality are proving well managed, with a slight increase in full-year cost guidance, and a slight reduction in loan loss provisions. Strategy update being scheduled for November With the 2021-24 strategic plan well advanced, management are planning an update in November with 3Q results. This should be a chance to clarify the NII trajectory and share buyback plans, as well as setting out the next phases of strategic development and financial targets. We keep our Outperform rating, and this is one of our sector top picks We update estimates in this note (small changes), and keep our existing target price. We reiterate our positive view on Commerzbank shares, based on a sustained improvement in RoTE, well managed costs and risks, and accretive share buybacks.
• Revenues increased by 9% to €2.6bn driven by higher net interest income • Further provisions relating to the Swiss franc loans of mBank amounted to €347m in Q2 23 • Administrative expenses including compulsory contributions declined by 2% to €1.5bn • Consolidated profit was up by 20% to €565m for Q2 23 • Commerzbank confirmed its 2023 net result target well above FY2022 and indicated that it had asked the regulators for a share buy-back approval
Do they matter? European stress-tests tend not to move markets much: their impact on both capital ''requirements'' and ''distributions'' is low and opaque. But all that regulatory effort and disclosure does tend to throw out some industry talking-points. We focus on those here, while each analyst in our team considers stock-specific conclusions. The ECB: less ''stressed'' than the market? Currently, if there''s a segment the market wants to stress it''s CRE. Here, despite harsh assumptions, the ECB finds lower impairment risk in CRE lending than in a typical corporate loan. Take BAWAG - hotly debated as it has been - it passes with flying colours, with the lowest CET1 risk of the banks in our coverage, and with cumulative CRE losses below what''s proactively provided on balance-sheet already. As was the case in 2020, the regulator seems less concerned than the market. Other snippets Santander, BBVA and Deutsche''s results have improved since the last iteration, perhaps helping to ease capital requirements marginally. The Benelux banks - ING in particular - fare less well. For all the market focus on unrealised bond portfolio losses post-SVB, there is confirmation of Europe''s lower challenge here (EUR73bn) than the US system''s ($620bn). Investment implications Ultimately, what matters to you as a shareholder is how the regulator acts in the real-world vis-a-vis capital returns, not what''s found at the bottom of the stress-test spreadsheet, and the two do not always match. The growing list of buybacks announced in H1 - even by some banks which fare poorly here - is encouraging. Our Top Pick list - Unicredit, Commerzbank, AIB, Caixabank, Erste, Bankinter - is heavy with rate-sensitive retail banks throwing off increasing free cash, useful in stress-tests and base cases alike.
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Net interest income may be setting a new high in 2Q We increase our 2Q NII estimate to 2046m (vs 1Q 1947m), with benefits from rate rises and slower-than-expected increases in deposit pricing. We expect some offset from negative fair value results, as in 4Q-1Q. Fees and commission income should be decent, although down QoQ and YoY. Loan loss provisions are likely to be heavier, in line with full-year guidance We expect a more normal quarter of loan loss provisions (EUR 225m), after a light 1Q (68m), and quarterly volatility last year (464m/106m/84m/222m). The full-year guidance is for 900m including usage of buffers (''top-level adjustment''). Capital should be steady We do not expect any abnormal capital changes in the quarter, and model an unchanged 14.2% CET1 ratio, with slight increases in capital and in RWAs. We would expect to hear more about the company''s plans for further share buybacks in 2H23. We have already included further CHF provisions, now adjust tax treatment We had already amended our forecasts a few weeks ago to include EUR 900m further CHF mortgage provisions in Poland over 2H23-2024. We now need to adjust our tax calculation to reflect the fact that this is expected to be non tax deductible. This is the main reason for the EPS cuts in this note. We maintain our Outperform rating We reiterate our positive view on Commerzbank, one of our top picks in the sector. The business is successfully restructured and derisked, and benefitting from interest rate normalisation. The valuation remains well below what the recurring earnings power should indicate.
Are you sure? Human beings hate change, and even ChatGPT''s knowledge is out-dated. So we can forgive the market for taking its time to adjust to today''s near-unthinkable banking realities: bank earnings are thriving whilst the economy flirts with recession, the European system is resilient where the US was not, European banks are now as profitable as their global peers. In this brave new world, this report adds fresh work on 2 topical debates: ''do peak rates mean peak margins?'' and ''is the sector stuck at 6x P/E forever?''. (Spoiler: No and No). Do NII beats matter? Are you suffering NII fatigue yet? After 18 months, substantial upgrades, and a raft of uselessly conservative management guidance, we know you know banks like rising rates. But the scale of consensus mis-modelling in the Eurozone still looks egregious. This matters: higher peak NIM means higher sustainable profits. We feed yesterday''s industry price data through proprietary models to show why Q2 will contain more blow-out beats, and why the obsession with ''deposit beta risk'' is one-eyed. Follow the ''Golden rules'' The market is de-rating these upgrades, will that ever change? We look back in time, and across the globe, for some ''golden rules'' to bank investing. This work argues now''s the time to be overweight, and for a sizeable re-rating as cyclical angst fades. Investment conclusions The fact that European banks delivered better TSR than the market in H1, during a banking ''crisis'', speaks to the appeal of owning stocks near trough multiples with sizeable EPS upgrades and positive change afoot. We stay bullish retail and commercial banks, particularly in the Eurozone. Top Picks: Unicredit, Caixabank, Commerzbank, Erste, AIB, Bankinter.
Updating estimates after recent developments Over the past few days, we have learned more about net interest income (stronger than expected), CHF mortgage provisions (more required), and share buybacks (more to come in 2H). We update our estimates to reflect these points. Net interest income is strong in 2Q and has upside into the medium term Commerzbank has enjoyed favourable NII developments in 2Q, with slower-than-expected increases in deposit beta, and further ECB rate rises. NII could dip in 2H23 or in 2024 if/when deposit beta drifts up, but beyond that the continuing rollover of the replication portfolio underpins further improvement for several years to come. CHF mortgages require further provisions in 2Q in 2H23-2024 Commerzbank and mBank have pre-announced a further EUR 342m of provisions for CHF mortgage remedies, after the adverse ECJ ruling. We now also include a further EUR 900m of charges in 2H23 and 2024 in an attempt to align with the KNF estimate of further costs. The company now plans further and bigger share buybacks in 2H Commerzbank has completed its EUR 122m 1H23 share buybacks, part of the 30% payout of FY22 attributable profits. The company now plans a further and bigger share buyback in 2H23, to reduce surplus capital. We include an estimate of EUR 400m in 4Q23 and then 1bn in 2024. We maintain our positive view on the shares Our 2025 estimates are a few percent ahead of consensus, and place the shares on 3.7x PE (or 0.45x trailing P/TB for 9.6% 2025 RoTE). The restructuring has gone well, and the bank is well positioned to cope with a range of economic conditions. We reiterate our Outperform rating.
You''ve been here before, right? Blockchain, the Metaverse - and now GenAI. Could this time really be different and the hype justified? The answer to this question is rooted in how GenAI can be used in the real world. In this presentation we thus challenge our sector teams to identify GenAI use-cases within their industries - and those companies likely to pioneer them. The result is perhaps the broadest consideration yet of how GenAI can diffuse through the economy. Efficiency is the common theme, prompting our Strategists to raise the prospect of a productivity supercycle ahead. We also put forward a selection of baskets to play the GenAI theme, including digital pioneers, productivity winners, digital enablers, and those at risk of disruption.
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Fears vs Fundamentals (again) For 2 years, European banks have enjoyed potent earnings upgrades. For 2 years, valuations have been trapped between ''unease'' and ''outright panic'' multiples. This note looks at the latest fears and fundamentals behind this ongoing struggle. We extract lasting lessons from Q1, a record profit quarter, and extend our work on the fears of the moment: ''peak NIM'', CRE and credit contraction. Peak NIM - no, not yet We refresh our top-down margin work for the latest industry pricing. ''Peak rates'' do not equate to ''peak NIM''. Management guidance to the contrary is likely aimed at other stakeholders. Consensus remains too low - in many cases what is priced as ''peak'' is more like ''normal'' in a 2.5% rate world. Applying trough multiples to ''new normal'' earnings is nonsensical. CRE - fears stoked, but are they founded? US regional bank stress has triggered surprisingly intense CRE fear. We collate fresh CRE disclosure, run credit loss stress-tests and argue for relative calm in Europe vs US, and 2023 vs 2008. The debate may not resolve quickly, but we prefer ''Squirrels'' (BAWAG) to ''Peacocks'' (SHB). Shrinking balance-sheets The market is preoccupied by ''deposit walks'', bank liquidity and credit crunch risks. We probe balance-sheet trends on both sides of the Atlantic. Europe''s enormous liquidity pile, previously a weakness, is now a strength. Credit demand is low: we question the economic significance of this. Valuations and Stock Selection History argues to buy banks when fear is high, multiples are low and earnings are rising. i.e. today. Disproving negatives is hard, hence re-ratings will require patience, which will be rewarded by double-digit distribution yields. Correlations suggest that the macro mood matters most. We stay bullish Eurozone retail and commercial banks, Top Picks: Caixabank, Unicredit, Commerzbank, Erste, AIB and Bankinter.
NII is ahead again, guidance raised again, looks conservative again Commerzbank continues to grow net interest income (+5% QoQ underlying), and is again raising full-year guidance (+8%). As before the updated guidance still looks conservative (EUR 7.0-7.3bn versus 7.8bn 1Q run-rate), with volumes and reinvestment yields offsetting deposit beta. Deposits continue to grow, albeit with mix shifts Deposit volumes are up 2% QoQ, with growth in corporate clients and Poland more than offsetting 3% shrinkage in German retail banking. The mix is shifting too, with retail deposits moving from 70/30 sight/term to 66/34 during the quarter, after relative stability over the previous year. Credit quality remains very benign, with buffers in place as well The latest loan loss provision charge is low (10bp in 1Q after 68/22/33bp in 2020-22), with stable IFRS-9 metrics across stages 1-3. The top-level adjustment buffer remains intact (EUR 0.5bn or 20bps), and the full-year guidance of 900m (33bp) looks likely to be bettered. Capital is strong, buybacks beginning Stronger earnings are helping capital ratios (14.2% CET1 vs 10.0% MDA). The first round of share buybacks has just received ECB approval and should be implemented forthwith. Further larger buybacks should follow, most likely at year-end. We make minor estimate changes, maintain our Outperform rating We update our model, increasing FY23 estimates but with only very minor impacts on 2024-25. The valuation is around half what the profits should justify. As the bank demonstrates its lower risk profile and a sustainably higher earnings level, it should attract greater ownership and re-rate.
• Total revenues decreased by 4.5% to €2.7bn in Q1 23 compared to Q1 22 • The risk result (loan losses) improved from €464m for Q1 22 to €68m for Q1 23 • Consolidated profit was up by 95% to €580m for Q1 23 • Commerzbank confirmed all of its 2023 financial targets
Underlying PandL trends should be robust in 1Q23 Commerzbank reports Q1 results on 17th May. We expect NII to improve further QoQ (underlying ex TLTRO), with additional rate rises and replication portfolio benefits more than offsetting the gradual deposit pricing increases. Fees should be decent, but trading may be a small drag. Costs should be well behaved, increasing only slightly underlying, plus the seasonal bank levies should be smaller YoY. Loan loss provisions are likely to be limited in the absence of observable problems. mBank is booking a further EUR175m CHF mortgage provisions The Polish subsidiary has pre-announced that it will book PLN808.5m (EUR173m) additional provisions for CHF mortgage litigation (flowing through Commerzbank''s Other Income line), but also stated that it expects to report a net profit in spite of that. Capital should be stable/improving, awaiting share buyback approval We allow for some RWA increase QoQ, more than offset by retained earnings, giving a CET1 ratio up slightly from 4Q''s 14.1% to an estimated 14.2%. The 20c FY22 dividend will be voted by the AGM on 31 May. The EUR122m share buyback is awaiting ECB approval, perhaps also in May. CRE and other risk exposures are limited Commerzbank has massively reduced the risk exposures that caused it problems in the past. The FY22 annual report discloses EUR8.3bn commercial real estate exposure, but much of this is multi-family residential and low risk in nature. We maintain our Outperform rating, raise estimates and target price slightly We update our estimates here ahead of 1Q reporting, with some modest increases, and we raise our target price accordingly too. We maintain our positive view on the shares.
Hidden buffers - the who, where and how much Whatever your view on the credit loss outlook, one thing''s for sure: proactive provisions are valuable. If your glass is half empty, these are your first line of defence. If your glass is half full, these will be written back: a source of better earnings and dividends for an industry already enjoying its healthiest trends on both fronts in over a decade. But, after a volatile few years for provisioning under IFRS9, who''s got what? We''ve done the heavy lifting, probing provisions, coverage levels, stage 1/2/3 disclosures and macro-economic assumptions across the European banks. We use this to sift the sector into its peacocks (it''s all on display) and the squirrels (with rations buried for a colder climate). Supporting sector resilience Headline total provisions held on bank balance sheets may be no better than in 2019 but don''t let that fool you, banks are better protected. By isolating provisions on the performing loan book, so-called ''pro-active provisions'', we can see that banks have c40% greater protection, equivalent to 2% of the sectors market cap. These provisions are currently equivalent to nearly 2 years of ''normal'' impairments. In prior cycles, pre-IFRS 9, this figure was negligible. This provides an important additional layer of support and aids our constructive sector call and expectation for net impairments to remain manageable. Divergences largely explainable but stark, ''Squirrel'' AIB added to sector top picks Divergences within the sector are stark. At one end of the spectrum are the ''Squirrels'', with recent earnings dampened by pro-active provision build in advance of a colder climate. This includes AIB, RBI, UCG and ERST, that have increased stage 1 and 2 provisions since 2019 by 4% of their respective market cap and hold total stage 1 and 2 provisions equivalent to 2 years of ''normalised'' impairments. Conversely, the ''Peacocks'', which include many Nordic banks, have experienced...
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Jitters through the AT1 market Markets were jolted today by the Swiss authorities'' decision to ''zero'' CHF16bn of Credit Suisse''s AT1 securities. This short report is a quick refresher on the AT1 market: the differences between Switzerland and elsewhere, who''s issued what, what matures when, and the implications for bank earnings if AT1 costs remain structurally higher. Switzerland - different rules and a different attitude The AT1 market was particularly affronted that CS'' AT1 was fully written down, whilst equity holders were not. This reverses the natural hierarchy in a bank''s capital stack. We show that this is a particular feature of Swiss regulation, and attitude, towards AT1. We look at where regulations differ in Europe and the UK, and why this particular element of Sunday''s news need not have a long-lasting read-across to the continent. But costs may be higher Still, Credit Suisse was 7% of the AT1 market, and its demise could make issuance dearer for others. AT1 yields are, at the time of writing, up +2.5% since Friday. We estimate EUR20bn of call-dates in 2023, and even a +500bp structural increase in AT1 costs would equate to a mere -1% p.a. headwind to sector earnings in the coming 5 years. Both are manageable figures. The Wall of Worry is back Bank rallies tend to start with a cathartic moment - a vaccine, a ''whatever it takes'', or a trough PMI. Could the orderly demise of the sector''s weakest link be that moment? It doesn''t feel quite as euphoric, does it? But this sector doesn''t need euphoria. The structural process of re-pricing its customer margin from 2% to 3% - a process already underway, and not extinguished by recent events - is transformation enough. It now needs (again) to climb the ''wall of worry'' and this was a helpful first step. Sentiment is likely to be choppy near-term, but the EPS upgrade cycle is unbroken, the risk/reward in valuation is appealing, and the channels of ''contagion'' within the European...
Market-friendly outcome, first thoughts The US authorities have moved swiftly and decisively in response to two US bank failures, delivering a market friendly outcome. This report is our first take on events over the weekend, considering the immediate implications for markets and the longer-lasting ripple effects for the banking system. The cavalry has arrived The US authorities have not pulled any punches. SVB depositors - both insured and uninsured - will be made whole today, which should reduce ''deposit flight'' risk. A new Bank Term Funding Program (BTFP) backstops the system''s liquidity and removes the ''vicious cycle'' of underwater securities books harming solvency ratios. This will likely leave scars So, can the market ''move on'' and chalk this down as an idiosyncratic problem, now solved? We don''t think so. Credit creation will likely to slow now, as US banks ease their foot off the deposit-less loan growth of the past year. We look at why deposit beta will rise further, why the Fed may want to reverse recent de-regulation, and why US bank levies may well need to rise. For the system, we ponder whether new-found ''reserve-hoarding'' could impede future QT. Sacrilege In the past 15 years, to suggest European over US banks was sacrilege. What about now? Europe has deposit inflows, lower deposit beta and has recognised bond revaluations in CET1 properly. European deposit levies should now fall, whilst the levies could rise in the US. Europe is winding its emergency funding scheme down, as the US launches a fresh one. The profitability and buyback ''gaps'' are narrowing, valuations are more compelling and EPS revisions are in your favour. Food for thought. Our top EU bank picks are: Caixabank, Unicredit, Commerzbank, Erste, Bank of Ireland and Bankinter.
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Long car journeys and banks rallies The new banking super-cycle is off to a strong start. But with the sector outperforming both in bad markets and in good, investors increasingly ask: ''Are we there yet?''. This report extracts the lasting lessons from Q4 and looks at the key themes for the rest of the year. No, we''re not ''there yet'', the work argues, neither for NIM expansion, EPS upgrades nor multiple re-rating. We stay bullish. Lower Beta, More Alpha - new work Valuations and the consensus continue to underappreciate the magnitude and duration of rate-rise benefits. Recently, fears have emerged that rising ''deposit beta'' will spoil the party. We deep-dive on why it shouldn''t, and why the answer doesn''t always lie at the bottom of a spreadsheet. From their take-home pay, a European consumer will typically save twice that of their US counterpart. A married Brit is, sadly, just as likely to get divorced this year as they are to change their current account provider. Banks have more pricing power than you''d think, and they''re using it. Staying ahead of a fast-moving curve - new work Markets have lurched to price even higher rates, for even longer. We provide a sensitivity analysis to help investors navigate these moves. In a conservative scenario, the industry offers 20-30% structural NII growth, even to a ~2% neutral interest rate. Consensus looks substantially too low. Valuations - still near recessionary ranges Earnings upgrades have done the heavy-lifting in this rally. That leaves valuations still near recessionary ranges, at ~7x next year''s earnings, with a ~7% dividend yield and the tap turned on for 2% p.a. buybacks: the industry''s new-found growth and above cost-of-capital returns look poorly rewarded. We favour Eurozone retail and commercial banks, Top Picks: Caixabank, Unicredit, Commerzbank, Erste, Bank of Ireland and Bankinter offer above-sector returns at below-sector valuations on our above-consensus forecasts.
Net interest income is strengthening further The return to more normal interest rates has boosted Commerzbank''s NII from a EUR 4.5bn/year run-rate in 2021 to 7.5bn in 4Q22 annualised, and new guidance of 6.5-7.1bn for 2023, allowing for some interest rate pass-through on deposit pricing. This is transforming the bank''s PandL. Restructuring appears to be going well, costs well managed The bank has reshaped its domestic network and evolved to a more digital service proposition, and seems to have protected its franchise well through the process. Costs are well managed, with some impacts from inflation and revenue strength, but substantial positive operating leverage. Loan loss provisioning seems sensible The bank expensed EUR 876m of loan loss provisions in 2022, compared to a normal run-rate around 600-700m/year. It has a ''top-level adjustment'' buffer of 482m, and expects a PandL charge of less than 900m in 2023 in a mild-recession scenario, assuming partial draw-down of that buffer. Capital returns begin, and the question now is how much Commerzbank is restarting dividends (20c / EUR 250m) and launching buybacks (EUR 122m), totalling 30% FY22 payout. It plans to increase to 50% payout in 2023-24, but with capital well above requirements and rising, there is scope for much more, subject to continued operating performance. We raise estimates and target price, keep Outperform We increase our financial forecasts, remaining well ahead of consensus, and raise our target price too (now based on 9% sustainable RoTE, from previous 8%, still using a 15% CoE). We maintain our Outperform rating, and keep Commerzbank as one of our top picks in the sector.
• Total revenues were up by 12% to €9.5bn for 2022 compared to 2021 • Poland contributed negative revenue of €278m plus a further €650m of provisions for the Swiss franc loans of mBank • Net profit attributable to share increased from €291m for FY2021 to €1.24bn for FY2022 • Commerzbank is targeting a net result in 2023 well above the 2022 level. In addition, the Bank intends to increase the pay-out ratio to 50%
We expect further improvement in NII and revenue levels Higher rates should boost net interest income further in 4Q and into the future, above consensus and company targets. Fees and commissions are likely to be seasonally softer in 4Q, but remain healthy. Other income will be impacted by extra CHF mortgage provisions in Poland. Costs may be a little higher seasonally, but remain well managed We allow for the usual 4Q cost top-ups. However all the indications are that costs remain well under control, including wage settlements and other inflationary pressures (which we have already made some allowance for in our estimates). We expect more precautionary provisions in 4Q The company guidance has been for EUR 700m loan loss provisions in 2022 (a normalised 25bp of loans) including drawdown of the top-level adjustment buffer. We continue to expect a more conservative approach, maintaining/building buffers, with a 1.2bn provision charge for the year. Capital ratios should be improving, dividends and buybacks starting From 13.9% in 3Q we expect further improvement in CET1 ratios in 4Q, thanks to strong PandL results and seasonal asset reductions. We estimate EUR 1.2bn attributable profit for the year, and expect the company to pay out 30% as planned, being 20c DPS and c100m share buybacks. We reiterate our Outperform rating, one of our top picks These trends continue our very positive view on Commerzbank, with substantial NII improvement continuing to flow through, and credit quality remaining benign. We reiterate our Outperform rating, and the stock''s position as one of our team''s top picks across the sector.
New Year, New View? No, but... 2023 should confirm that banks are more rate-sensitive and less macro-sensitive than perceived. Both earnings expectations and valuations will enjoy the surprise, we expect. While our super-cycle view has not changed, rate expectations, macro risks, industry pricing and valuations have all moved sharply lately. We appraise what''s new and address some recent investor questions. Q: Margins - still bullish? The bulk of the new work here is margin-related: still the most important and misunderstood industry trend. Investors are unsettled by market-implied ECB cuts, ''peak NII'' guidance in the US and early signs of behavioural change from depositors. We use the latest industry data and our proprietary XNIM tool to show why consensus is still significantly too low on margins. Q: Time to switch from ''quick'' to ''slower-churning'' balance-sheets? With the help of some significantly anti-consensus forecasts, we show why we''re not there yet. Q: Can the system take the strain? We show why we expect a soft-landing, despite the rates + inflation consumer cocktail, and how significant a re-rating catalyst this, twinned with China re-opening, could be. Stock selection We re-appraise our Nordic bank forecasts, with 2-11% EPS upgrades to 2023e. But we persist with a preference for Eurozone retail and commercial banks, comfortable in ''quick-twitch'' markets, Top Picks: Caixabank, Unicredit, Commerzbank, Bankinter and Bank of Ireland.
Question: What do you call a business with its finger in every ESG pie, as likely to be damned for a villain as hailed as a hero? Answer: a bank. Leveraging new work by BNPPE''s top-ranked sector teams, we update our energy transition story, bringing greater depth and detail. Not to mention size: in the key markets of renovation, renewables and EV/batteries, we identify EUR3.2tn of incremental private-sector lending by 2030, or a 3.3% annual bump for the European banks. As a result of our work, we have four ESG leaders and five ESG laggards. What''s more, for the first time we apply an ESG-driven CoE benefit to a bank: Nordea. It''s all perfect timing for a green Christmas.
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Keep it simple For a complicated sector, at a complicated time, our message is simple. European banks have entered a new super-cycle, one which demands that the market shed many of its deeply ingrained views of the past 15 years. Recessions are not terminal. Margins will expand, revenues will grow, returns will surpass the cost of capital. This report extracts the lasting lessons from Q3 and uses the latest industry data to survey the landscape beyond. The new era is shaping up better than we''d hoped. Consensus is rising, but still too low, and valuations are compellingly distressed. Buy. Misunderstandings It''s well understood that banks enjoy rising rates. What''s misunderstood, we show, is the magnitude and duration of the benefit. Consensus looks absurdly low in the Eurozone, pricing barely any margin expansion from Q4 into 2023-24. The EPS upgrade cycle will continue. The next leg Banks have pricing power relative to the bond market and are using it. September saw the sharpest re-pricing of corporate lending on record: the next leg of the margin case we''ve been looking for. Overall new business spreads are 30% wider than the backbook creating an underappreciated runway for growth. With mortgage growth set to slow, and a growing number of housing markets showing price decline, we consider the changing merits of retail and corporate exposure. Catalysts The market is hooked on ''central bank pivot'' catalysts, banks care about PMIs. We show valuations discount a bloody recession. History suggests a PMI back to 50 would drive +40% re-rating. Stock selection We stick to a preference for retail and commercial banks in the foothills of their rate-hike cycle. Top Picks: Caixabank, Bankinter, Bank of Ireland, Commerzbank, Unicredit, SocGen.
Updating NII trajectory, expect 10.7bn 2024 revenues vs 10bn company target We align our forecasts to a 2% ECB rates scenario across our coverage, similar to Commerzbank''s base case scenario, although below the forward curve. We include some volume growth too. The company increased its 2024 revenue target from EUR 9.1bn to 10.0bn. We model 10.7bn. Allowing for cost inflation, estimate 6.2bn 2024 costs vs 6bn company target The company has also increased its 2024 cost projection, from EUR 5.4bn to 6.0bn allowing for inflation and slightly higher compulsory contributions. We model 6.2bn, to make some allowance for extra costs accompanying our higher revenue forecasts. We include 550m extra loan loss provisions in 4Q for gas/recession risks Management guide for EUR 0.7bn FY22 loan loss provisions, after 9M 654m, ie just 50m in 4Q, assuming drawdown of a majority of the 500m top-level adjustment buffer. We include an extra 550m in our numbers (FY22 1.25bn), and elevated levels next year as well (FY23 1.2bn). We still expect 1bn net profit for the year, and the start of capital returns Even with our additional provisions, we still see the company making its EUR 1bn net profit target for the year (after 772m 9M net of AT1 coupons). This should allow them to proceed with their 30% payout plans, split between dividends and share buybacks, which will be a positive step. We maintain our positive view of the shares, see substantial upside The net impact of our estimate revisions is a cut to our numbers, but remaining above consensus, and putting the shares still on exceptionally low multiples. We reiterate our Outperform rating. Commerzbank is one of our top picks in the European bank sector.
• Revenues decreased by 6% to €1.9bn in Q3 22 due to one-off charges of €270m for so-called “credit holidays” at mBank • Further provisions relating to Swiss franc loans of mBank amounted to €477m in Q3 22 • The pre-tax result declined by 33% to €267m for Q3 22 due to a pre-tax loss of €528m for mBank in Q3 22 • Commerzbank confirmed its net result target of more than €1bn for the FY2022
Poland impacts are significant but pre-announced Commerzbank has pre-announced EUR 490m additional CHF mortgage provisions, EUR 290m charge relating to payment holidays, and EUR 30m compulsory contributions to the distressed borrower fund in Poland. These will not be tax deductible, but will have minority interest offsets. Net interest income is likely to be strengthening further Underlying operating trends are strong, allowing management to reiterate the 1bn net profit target for FY22 despite the Polish charges, and we expect a major part of this to be improving NII in both Poland and Germany, with volume growth and ECB rate moves driving QoQ uplift. Loan loss charges are likely to be limited in this quarter The bank''s (reiterated) financial guidance assumes EUR 700m loan loss charges in FY22, net of potential releases of the top-level adjustment, implying 100m/quarter in 2H. We expect 3Q to reflect this view, although we still expect bigger precautionary provisions to be booked in 4Q. Capital metrics should be stable There is no indication of any regulatory change or other unusual factors impacting capital ratios in the quarter, so we expect metrics to remain similar to 2Q''s levels, which included a 13.7% CET1 ratio well above the bank''s 11.5-12.0% requirements. We update estimates here, keep Outperform rating We incorporate these elements into our financial forecasts, with improvements to our 2023-24 numbers. We maintain our positive view on the shares, based on powerful NII uplift and restructuring benefits, and credit quality remaining very manageable, as we discussed in our recent research report (COMMERZBANK, DEUTSCHE BANK: Recession risks and resilience).
Valuations are pricing in big risks or big long-term earnings disappointment Commerzbank and Deutsche Bank are trading at half the levels that consensus earnings estimates suggest they should. The market appears to be pricing in either that the long-term earnings outlook is half what analysts think it is, or that something big and bad will destroy value in the near term. The banks need to be ready for a gas stoppage and recession The very obvious risk at this point is energy disruption and damage to the real economy. We review analysis from our top-down experts and industry research teams. Some of the hits could be beyond GFC/pandemic levels, but there are encouraging signs of preparation and mitigation. In the past, non-core credit and non-operating losses have been the big problems The quoted German banks have a horrible history of losses and capital raises when things have turned nasty in the past. But exploring the details, most of the damage came from asset types that are no longer part of the business model, and from non-operating items in the PandL. More provisions are likely, but should be covered by profits and capital surpluses We need to expect heavier loan loss provisions in 2H22-2023, potentially much bigger than company guidance or consensus estimates have so far acknowledged. But both banks now have stronger pre-provision profit levels and capital surpluses that can cope with even very negative scenarios. We reiterate our Outperform rating on Commerzbank, Neutral on Deutsche Bank As this note is mainly about exploring the lessons of the past, and a range of scenarios for the future, we make no change to estimates or target prices. Both stocks are very cheap. We continue to prefer Commerzbank, with its simpler business model, retail and commercial banking focus and NII upside.
Commerzbank AG Deutsche Bank Aktiengesellschaft
Are Spain and Belgium a flavour of things to come? In July the Spanish government announced its intention to extract EUR1.5bn of additional tax from banks annually over 2023/24 to reduce the budget deficit. And in August the Belgian government announced its intention to increase DGS contributions. This has led to concerns that the sector, which is about to enjoy the tailwind of higher rates, will lose it to higher levies. This report explores all existing taxes paid by the banks we cover and discusses the outlook in each country. Banks today are much improved, but they are far from over-earning. Over FY14-24e, European banks will have paid c.EUR150bn of Bank specific levies and taxes and added c.EUR250bn of capital in order to improve ET1 ratios. Added to the bail-in directive, the taxpayer should feel insulated even in the face of deteriorating economic conditions. This report argues that it is way too soon to talk about banks overearning: the sector would generate c.EUR65bn more revenues if it had maintained its revenue margin at the level it generated in FY12 when Euribor approached 0% for the first time. Who is the most penalised currently? Who will benefit from a reduction in contributions? Our analysis suggests that French, CEE-exposed banks and Fineco are the most penalised by Bank levies and taxes, with 2pp of ROTE lost to them. As the European Single Resolution Fund and Deposit Guarantee Schemes reach target levels in the next couple of years, we expect a halving of Bank levies and taxes to c.EUR8.4bn in FY25e. On average, 12% of the sector''s PBT growth over 22e-24e should come from falling levies with 100% for some of the banks. Where are we vs consensus after trimming our Spanish (8-9%) and KBC (1-2%) forecasts? After the increase in levies we have implemented in Spanish and Benelux banks models we find consensus (when available) too pessimistic for Unicredit, ABN Amro and to a lesser extent CBK, RBI and ING. By contrast, some...
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New work, stronger conviction Short-termism creates opportunity. By de-rating banks on recession fears, markets underappreciate the magnitude of structural improvement underway. This Pan-Euro report offers fresh work on 3 key investment debates and extracts lasting lessons from Q2. We are bullish. NIM expansion - more to come Q2 was the sector''s best quarter in a decade for NII surprise. That was just the start. Fresh work on the sector''s pricing response argues that consensus remains substantially behind the curve. We address growing market debate on ''deposit beta'' - which is distracting from fantastic ''credit beta'' - and show why rate sensitivity is set to be higher today than during previous hike cycles. Corporate borrowing: ''The fourth age'' Seismic change is underway in how European companies borrow. Counterintuitively, the pace of bank lending recently surpassed pandemic highs, this time unaided by policymakers. Nor is this purely corporates stockpiling cash into a recession: the current pace of long-term lending would have been nigh-on a record in the leveraging era of 2000-2006. Banks are competitive with the bond market again, ushering in a ''4th age'' for corporate borrowing. The previous 3 did not end well (too hot - too cold - too cheap). We outline what success and failure look like this time around. Impairments - recession priced Investors want to know whether European corporates can stomach lower consumer demand, rising input costs and rising rates. We delve into national accounts across Europe to test corporate indebtedness, liquidity and debt-service capacity. In a harsh stress-test, debt-service would remain healthier than at any point in 1999-2013. Gas interruption looks priced by the consensus, we show. Near-trough multiples and positive EPS revisions combine for compelling risk/reward We like retail banks, Top Picks: CaixaBank, Lloyds, Bank of Ireland, SocGen, Commerzbank, Unicredit. A group which - at 0.5x TNAV for 10.7%...
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NII is strengthening and remains a big positive Net interest income is rising already (+5% QoQ, +26% YoY), with volume growth (+5% YoY) and rate rises in Poland. Management see EUR 300m uplift from ECB moves in FY22 and 800m in 2024 (with 25% beta), which appear to be more than the consensus has factored in. Credit quality scenarios will remain a debate, but seem entirely manageable Commerzbank discloses a potential 20bp extra provisioning need in a gas stop scenario, over and above their 25bp base case for the year, same as Deutsche Bank disclosed last week. As with DB, the assumptions can be challenged, but it is a positive number and informs the debate. Poland is causing additional cost burdens The mBank subsidiary has added a lot of extra NII this year, but is now also adding extra costs, including bank levies (119m 2Q, 30m 3Q), credit holidays (210-290m 3Q), and base rate changes still to come (unquantified), as well as possible further CHF mortgage costs (also unquantified). Capital is strong, giving protection and potential returns The CET1 ratio has improved to 13.7%, This represents a EUR 3bn buffer above the business plan target (12.0%) and a 7.6bn buffer over the regulatory minimum (9.4%). This, with improved earnings power, gives extra protection against recession risk, and scope for capital returns before long. The shares still have scope to double Commerzbank shares trade on 3x our 2024 earnings estimate, or 4x consensus. That is 0.34x P/TB for 8-9% RoTE. If the market gains confidence in those earnings levels, and the bank''s ability to withstand recession risks, the shares should be in a very different range.
• Revenues increased by 30% to €2.4bn driven by higher net interest income • Restructuring charges were €25m in Q2 22 compared €511m in Q2 21 • The net result was a profit of €470m for Q2 22 compared to a loss of €527m for Q2 21 • Commerzbank confirmed its net result target of more than €1bn for the FY2022 despite no contribution from Polish mBank • Risk costs of 20bp forecasted in a “no gas from Russia” scenario
We expect good numbers for 2Q Operating trends remain strong for Commerzbank. Net interest income should grow from 1Q levels, with volumes and rate moves. Fees and commissions should remain strong, down QoQ but up YoY. Trading and other income are likely to be impacted by negative valuation effects, netting to around zero. Operating costs should be similar to 1Q. Loan loss provisions should be benign in 2Q but heavier in 3Q-4Q Management have reiterated the guidance of EUR 700m loan loss provision charges for FY22, implying around 100m in 2Q, similar to 2Q21 (87m) and to 1Q22''s underlying level (104m, ex the 360m Russia and top-level adjustment charges). However with energy supply and economic risks increasing, we expect heavier precautionary provisioning in the second half of the year. Charges for consumer relief in Poland will impact 2Q and 3Q Some of the populist proposals from the Polish government are likely to cause financial charges. There is already the indication of a EUR 80m compulsory fund contribution in 2Q, as a one-off. Additionally payment holiday proposals are being considered currently, which could require charges in 3Q, for which we now allow EUR 300m (pending clarification), non-recurring. We update our estimates, keep Outperform rating We revise our model to reflect the above items, but with little impact on future-year forecasts. We make no change to our target price, double the current share price. We keep our positive view, we think additional loan loss charges are likely to be manageable, and the benefit from higher NII levels for an improved RoTE will give lasting valuation uplift.
Call it the rate/recession dilemma. There''s little as settled in banks analysis as the mantra, ''Buy on a rate hike journey, sell into a recession,'' but it''s not much help with tomorrow''s ECB meeting likely to call time on negative rates in the autumn. With the macro still cloudy, should you go into the summer risk on, risk off, or a bit of both? We''re risk on. We dig into fresh industry data and pricing trends to uncover major potential in new business, now pricing above the back-book for first time in 15 years and leaving us over 10% above consensus EPS on a dozen banks. With some higher beta banks plausible doublers, the time for half measures is over. We lift Commerzbank and Unicredit into our Top Picks at the expense of HSBC and UBS, while we downgrade DNB to Underperform.
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Clues on some key questions ''You can''t buy banks into a slowdown''. We understand why the mantra exists but disagree that it''s the appropriate one for this cycle. But whether we like it or not, investors are scouring for clues on key macro questions before allowing themselves to gaze at the paradigm shift of higher rates. ''Hard or soft landing for the economy and for real estate?'' ''How will consumers behave in the face of the real income squeeze?'' and ''How pro-cyclical will bank earnings prove this cycle?''. Watching the monthly borrowing and savings habits of European consumers and corporates gives insight into these questions. This report focuses on developments in April, using data released on Friday. Watch the corporate sector A year ago, corporate borrowing stood at +3% YoY. In March, +4%. In April, +5%. We explore the drivers and the outlook. Near- and medium-term prospects look decent. More to the point, as corporate bond markets tighten, this rising volume is likely being written at a rising margin. Households standing firm Mortgage activity is holding up. We lay out why rising rates will not break the borrower, and why a house price correction need not weigh too heavily on volume growth. Meanwhile, household savings rates are falling: a helpful counterbalance to the real income squeeze, if it continues. The ''Animal Spirits Award'' goes to the German household, we show. One swan One data-point will not cure all macro angst - these are trends to monitor through 2022. But with a high ''wall of worry'' erected in front of the bank sector, any indicators of a soft economic landing paired with rising volume growth and widening margins should not be ignored. We continue with a bullish view, largely expressed via rate sensitives: HSBC, Lloyds, UBS, Bank of Ireland and CaixaBank, along with the stock-specific turnaround at SocGen.
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Two heavyweights Bank shares are caught up in a heavyweight boxing bout. In the blue corner: Cyclical Fear with a menacing ''never buy banks into a recession'' robe. In the red: Structural Shift, wearing ''Rates matter most'' shorts. This report adds fresh work on the merits and weaknesses of each fighter. A knock-out will not come soon, but Shift will win out, we expect, and looks undervalued. Cyclical fear overdone - new work Investors are focused on recession risks. We dust off two analyses which were anti-consensual and ultimately correct in 2020. The most provocative work here looks at the relationship between credit spreads, bad debts and equity market valuation. It argues that impairments will remain benign. If you disagree, it suggests you sell broader equity and credit exposure, not bank equity. Structural opportunity underappreciated - new work Q1 was the sector''s best quarter for NII surprise in years. We use real-time data to show how much better March was than January, and the sizeable improvement since. Right about now, banks are writing new business at wider spreads than what''s on their balance-sheet for the first time in fifteen years. Consensus still looks well behind ''the curve''. Lessons from Q1 We look at the lessons from Q1, and the valuations, catalysts, and stock selection considerations for the rest of the year. ''NII up, costs up, EPS up'' could well be the chorus of 2022. That''s fine - in a market fearing the P/E of defensives and the EPS of cyclicals, for banks we fear neither. Investment conclusions Opportunistically, we upgrade SEB (to ''+'' from ''='') and downgrade Swedbank (to ''='' from ''+''). Our Top Pick list expects defensive rate-sensitives to continue to outperform: HSBC, Lloyds, CaixaBank, Bank of Ireland and UBS. Over-sold beta - Unicredit, SocGen, Erste - is agitating to get onto the list. We hold off for now: history suggests not to be too bold until PMIs trough.
Incorporating part of the rate rise benefit to net interest income We raise our revenue forecasts to reflect the higher run-rate in the Polish business. Elsewhere in the group we include a part of the expected benefit from interest rate increases in the eurozone, as well as some ongoing volume growth. We now have group revenues close to EUR 10bn, compared to 8.5bn in 2021 and 9.1bn in the company''s business plan targets. Allowing for higher operating costs We increase our cost estimates here too, to make allowance for inflation, viewing that as the flip-side of the improving rates environment. We now have EUR 6bn in 2024 compared to 6.7bn in 2021 and the company''s 5.5bn 2024 business plan target. Assuming heavier loan loss charges We had already increased our loan loss provision estimates in the wake of the Russian invasion of Ukraine, and keep this assumption, with nearly EUR 1.4bn in 2022 compared to 1.7bn in 2020 and 0.6bn in 2021, and the company''s 700m guidance for FY22, which assumes a rather benign economic scenario and draw-down of their ''top-level adjustment'' buffers. Watching the Poland risks We include some further CHF mortgage provisioning in 2Q-4Q22, totalling EUR 300m, compared to 41m in 1Q22 and 600m in 2021. We make no specific adjustment for the unfavourable consumer relief proposals currently being discussed in the country. We keep our Outperform rating Commerzbank is currently caught between the upside of better net interest income and the downside of recession risk. Meanwhile the bank is making good progress with its restructuring and profit improvement programme. We raise estimates and price target and keep our positive view.
• Revenues increased by 12% to €2.8bn for Q1 22, driven by higher net interest income • The risk result rose to €464m for Q1 22 compared to €149m for Q1 21, owing to charges due to the war in Ukraine • The net result was €298m for Q1 22 compared to €133m for Q1 21 • Commerzbank confirmed all its 2022 financial targets
• Revenues increased by 12% to €2.8bn for Q1 22, driven by higher net interest income • The risk result rose to €464m for Q1 22 compared to €149m for Q1 21, owing to charges due to the war in Ukraine • The preliminary net result was €284m for Q1 22 compared €133m in Q1 21 • Commerzbank confirmed all its 2022 financial targets
Pre-provision trends appear intact, improving All indications are that Commerzbank should have decent pre-provision trends in 1Q22. Management comments throughout the quarter indicate continued growth in net interest income and commission income, continued progress with restructuring and cost reduction, limited CHF mortgage provisions in Poland, and general satisfaction with performance. Rate rise expectations have increased, but obviously with other risks now too Forward interest rates wobbled after the Russian invasion of Ukraine but since then have risen to new highs, which presents substantial upside to NII as the bank has guided. For now though the market is viewing this as counterbalanced by increased economic risks in Europe and in Germany in particular, including the possibility of recession and the potential implications that would have for revenue levels and for credit quality, as well as inflationary pressures on costs. The bank is likely to consider precautionary credit provisions The stated guidance is for a FY22 risk result below EUR 0.7bn, after 0.6bn/1.7bn/0.6bn in 2019-21, and there has been no update to this post Russia/Ukraine. There is likely to be some limited provisioning (EUR 100-200m?) on direct Russia exposures (EUR 1.3bn), but these are small numbers. The real debate is about the outlook for Germany, on which very little has actually happened yet in terms of observable credit quality, but the bank might consider a ''top-level adjustment'' precautionary provision as it did with the pandemic (EUR 500m, still sitting in reserve). We keep our Outperform rating We make minor adjustments to our estimates here. We already have an extra 0.6bn of loan loss provisions in our FY22 estimates (1.3bn vs the guided 0.7bn). We keep our price target and our Outperform rating, with very large upside from the RoTE and NII outlooks, but (for now) up against the rather binary risks that the market is debating round the macro.
An established play-book The sector is facing its fifth major shock in fifteen years. This Pan-Euro report draws on lessons from the previous four to work through the key issues: capital, credit markets, asset quality and revenue. We re-appraise our forecasts across 39 stocks, aiming to be precise about balance-sheet risks, and flexible to a range of PandL scenarios given the host of macro uncertainties. Credit quality: considering 1st and 2nd round effects We sift through direct Russian and Ukrainian exposures and stress-test to harsh scenarios. CET1 ratios and share-counts come out intact, dividends do not always. We look at the ripple effects of spiralling energy costs and European stagflation risks. We are sanguine on asset quality, and outline what would need to change to shake that confidence. Credit markets and funding check-up Credit markets are tightening, is it any wonder? We look at what spreads are ''saying'', and outline why the ECB should prolong and re-cheapen TLTRO. The Wall of Worry is being assembled The sector''s de-rating is equivalent to 5x the earnings damage in our core scenario. Valuations demand an outcome which is far worse than what is priced in other corners of financial markets. Risk/reward looks appealing on a host of valuation measures, and a traditionally reliable insurance-into-banks valuation indicator is flashing green. But timing is tough. History suggests ''Not yet'' - the last two shocks required tail-risks to be extinguished for the sector to outperform sustainably. A case for baskets No bank investment case now sits in a vacuum. We suggest a range of baskets to reach for as visibility improves - Oversold quality, De-escalation Plays and a Rate-rise basket. Our Top Pick list is defensive reflecting poor visibility - UBS and Bank of Ireland join HSBC, Lloyds and Caixabank, at the expense of Intesa. We aim to be agile as the facts change.
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Every member of our team, every bank under coverage, every number in our grids. In a world of rising rates, we chart out a new path for the sector. Big changes? You bet. It''s a real re-set both bottom up and top down, with significant EPS and TP shifts across our universe. At base, however, the news is good, with structural growth trumping cyclical concerns. One path Listening to investors recently, we hear frustration at the challenge of comparing bank investment cases with differing rates outlooks priced by consensus. With this report each member of our team re-appraises their forecasts, harmonising around a common rate scenario. This is less hawkish than fixed income markets but throws out sizeable positive surprises. ~20 EPS changes, well above consensus in places We upgrade our 2024 forecasts by a further 4% on average. But this is not a year for averages. For the most rate sensitive, we are 20-30% above consensus. Top-down: this has further to run Wherever we look from the top-down - at correlations, positioning, valuations, and earnings estimates - we find evidence of a market struggling to keep up with the positive paradigm shift of rising rates and expanding margins. The sector rally has further to run, so too the relative outperformance of rate-sensitive banks. Stock selection Our Top Pick list is unchanged: Intesa, Caixabank, HSBC, Lloyds and SocGen, all large-cap stocks which marry the benefit of higher rates with a broader equity story. With this report we suggest a basket of geared rate-rise plays with the biggest scope for positive earnings surprise: Caixabank, Lloyds, Commerzbank, BCP, Bank of Ireland, BAMI and Bankinter. We upgrade Unicaja to ''='' from ''-'', and downgrade CREDEM to ''-'' from ''=''.
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Improving NII outlook with volume growth and rising rates Commerzbank is one of the more rate-sensitive banks in the European sector, and the company''s analysis of forward curve impacts attracted a lot of attention with 4Q results. We incorporate about 2/3 of those impacts in our numbers now. Allowing for some cost inflation too The bank is already seeing some elements of cost inflation, and is likely to experience more, both in Germany and in Poland, and we incorporate increases into our estimates, albeit still with substantial positive operating leverage relative to the revenue increases. Restructuring seems to be going well so far, with more to do The first year of the 4-year plan has gone well, with significant reductions in branches and headcount, restructuring charges booked, and franchise impacts limited so far. Further network adjustment lies ahead, with related risks, but the successful implementation so far is encouraging. Capital returns will be an increasing focus The bank is already firming up its dividend guidance for 2022 (30% payout) and 2023-24 (30-50%), and aims to add share buybacks on top of this in 2023-24 if restructuring measures and financial results continue to develop favourably. We raise estimates and target price, reiterate Outperform rating We raise our financial forecasts materially in this note, with a more decisive incorporation of rising interest rates, as well as heavier costs. We raise our target price accordingly, and with a shift in focus to 2024 numbers. We reiterate our Outperform rating on the shares.
• Net profit increased from a loss of €2.9bn for FY2020 to a profit of €430m for FY2021 which was higher than consensus expectations of €95m. • Risk result declined from €1.75bn for 2020 to €570m for 2021. • Restructuring expenses were €1.08bn in 2021 compared to €814m in 2020. • Commerzbank expects a net profit of more than €1bn, and aims to pay a 30% dividend for FY2022, thereafter 30-50% plus potential share buy-backs.
''When and how much?'': very different to ''if'' We think it''s no exaggeration to describe the ECB''s hawkish pivot yesterday as a game-changer for the sector. We knew already that the ''rates trade'' was the top investment debate of 2022. But the ECB''s stance yesterday changes the prevailing question from ''if'' Eurozone rates will rise, to ''when'' and ''by how much''. For an investor community scarred by failed rate-hike bull cases of the past, this is a crucial distinction. This short note supplements the recent ''Hope is cheap''. Both aim to answer the key questions which follow: the implications for sector and stock valuation, what to watch next, how rate sensitive banks profess to be and how sensitive they may be in reality. 2017 a useful benchmark It will surprise you not even slightly that the sector and cheap ''floating-rate'' banks will continue to outperform. What may surprise you is the magnitudes involved. The sector could re-rate by 30-35% (absolute and relative) to previous ''rate frenzy'' multiples. Positive EPS revisions will compound this. Since valuation dispersion within the sector is unusually wide for this point in the cycle, the push to switch from defensive to rate-sensitive banks is particularly strong. Hikes are not evident in forecasts The consensus forecasts stable NIM in the Eurozone in 2022-23. This seems to mildly underestimate some near-term damage caused by the end of the TLTRO, but sizeably underestimate the positive EPS revisions which would be triggered by 50bp higher rates. We estimate a +50bp hike is equivalent to a 12% boon to Eurozone bank profits, and up to 26% for a rate-sensitive stock such as Caixabank. Top Picks and other liked rate sensitives Our Top Picks offer a blend of US, UK and Eurozone hike exposure: HSBC, Lloyds, Intesa and SocGen. Caixabank, Unicredit, Commerzbank, Bankinter and Bank of Ireland are purer plays on fast-changing Eurozone rate expectations, where our analysts have positive...
Rate expectations This is a detailed refresh of our pan-European banks view, with a focus on (i) the topic we expect to dominate 2022: fast-changing rate expectations and (ii) where consensus EPS may be surprised. Macro first, Micro second The first section of the note is a survival guide for dealing with the sector and stock selection during periods of rate-rise fever. In short, the sector could still re-rate by +40% in a 2017 rates-frenzy scenario, with low RoE banks leading the charge. It may be costly to be a rates cynic this year, even if you are ultimately right. It''s never straight-forward It could be a bumpy road, as consensus earnings looked priced for perfection. The ''meat'' in this note is margin-related: (1) We refresh our XNIM analysis, looking for pockets of near-term margin risk using real-time pricing data. (2) The ECB is set to change its TLTRO and deposit-tiering mechanism in H2. We look at the implications. (3) If rates were to rise, what is the realistic earnings benefit? We look at what the banks disclose, and make our own estimates drawing on lessons from credit betas a decade ago. Elsewhere We outline other earnings drivers to monitor this year. Credit demand picked up noticeably in late-2021 on both sides of the Atlantic. Provision releases should drive 1 percentage point higher dividend yields for this year, while the scheduled end of Resolution Fund contributions is coming into view. Changes: Risk-on We upgrade Commerzbank to Outperform, and downgrade SEB to Neutral. We remove Swedbank from our Top Picks list, which is now as tilted to ''value'' as it has been in recent memory: Lloyds, Barclays, Intesa, SocGen.
In this report we are extending our ESG framework to the whole of our European banks coverage. We see ESG more as a risk than an opportunity. As such we see substantial motivation for banks to engage swiftly with this new environment. We have identified three new laggards: Rothschild and Co, Unicaja and Millennium BCP, while we have added one industry leader to our ESG coverage: BAMI. We also monitor the ESG implications of the new EC Banking Package, which are supportive for the renovation market - the largest green opportunity in our view. All European banks coverage now within our ESG framework We have expanded our ESG framework to the whole of our European coverage, adding 15 for a total of 41 banks. As a result, we add BAMI to our industry leaders while we have identified three new laggards: Millennium BCP, Rothschild and Co and Unicaja. We end up with four leaders, BAMI, Lloyds, SHB and CaixaBank and seven laggards, Credit Suisse, UBS, Deutsche Bank and Erste Bank, as well as the aforementioned three new names. ESG becoming prominent in banking regulation In the recently published Banking Package, which drafts the new finalised Basel III rules into EU regulation, ESG is more prominent than it was before. The European Commission empowers the ECB and the EBA to monitor ESG risks, invoke climate stress testing and even opens the door to increase Risk Weightings for brown assets relative to green assets. Renovation market remains the greatest opportunity We continue to believe that the largest opportunity for the sector is the renovation market. Improving energy efficiency of the EU building stock is crucial to getting close to net zero emissions by 2050. The fact that regulation allows banks to take into account energy efficiency improvements as a factor increasing the valuation of an asset should be quite supportive to increasing renovation rates. We think a lot is yet to be done by banks, consumers and governments to create the right...
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It''s early, but... Friday saw some of the sharpest moves in Rates and Equity markets since the pandemic''s first wave. Banks: buying opportunity or falling knife? Clearly, it''s too early to be making bold calls on the implications of the variant. Instead this note lays out what will matter next, the plausible EPS risk, and surveys valuations following the pull-back. What it is and isn''t Whatever economic disruption is to come, there is unlikely to be a debate about credit or dividends. This limits how much the sector will de-rate. That''s the good news. The bad news is that with the sector still near mid-cycle multiples, revenue/rates optimism is needed to drive material re-rating. With pre-provision expectations set high, central bankers likely in wait-and-see mode and a host of niggling revenue questions for the industry to answer, the sector could now be in value-trap territory until we get more clarity. We show 8-15% EPS risks to a more challenging revenue outlook. Looking at EPS risks Revenue monitoring is now crucial. To that end, we look briefly at ECB credit data released on Friday, and the results of a survey of 10,000+ SMEs released two-days prior. Both show the fragile nature of the recovery in corporate credit demand, a reminder that any nagging economic uncertainty will likely weigh on the volume outlook. The stock-picking challenge It''s highly unusual for the sector to go into a pull-back with valuation dispersion as wide as this. The typical ''flight to safety'' urge is made challenging by some champions trading at historically high multiples, often pricing hikes which may now slow. We put forward Swedbank as an attractively valued defensive with a decent bottom-up case, adding it to our Top Picks list to offer some defensive ballast.
What did we learn? The branding at the top of this report may be new, but the idea behind it should be familiar. This is our typical look at the new investment themes to emerge from pan-Euro bank earnings season, including our ''heat-map'' of earnings and capital surprises and a summary of capital return prospects. A clear signal We may have learned more about the market than the banks in Q3. The sector easily beat expectations, yet stocks tended to underperform on the day. The market rewarded upgrades of any quality from low P/E banks, had little patience for strategic updates which struck the wrong tone and penalised high P/E banks at the faintest hint of revenue weakness. Valuation dispersion is high, unusual for this point in the cycle, and the hurdle for success now varies widely across the sector. What next? Low provisions, rebounding fees and capital return were 2021''s key themes, which could be played via good-night''s-sleep favourites. But valuation, rate hikes, self-help, and consumer re-leveraging are the key questions for 2022. We look at why stock selection needs a rethink into 2022. Focus-theme: Basel III in Europe It''s hard not to comment on the landmark moment of the recent Basel III proposal for Europe, but it has few near-term investment impacts. We wrap-up on what''s new and who is most impacted. Investor positioning and sentiment We look at the latest positioning data towards and within the sector, thanks to our Strategists, and provide feedback from meeting investors in New York last week. Sector / Stock view In a separate report today, we remove BBVA from our Top Picks list, which now consists of Lloyds, Barclays, SocGen and Intesa, representative of the battles we are willing to fight into 2022.
Near term numbers are improving Current operating trends at Commerzbank are encouraging. Revenues have picked up again after a 2Q dip, and are down only slightly YoY. Meanwhile costs are starting to reduce in line with restructuring plans. Credit quality remains benign, and capital ratios are healthy. NII is improving, and rate sensitivity is helping the outlook Underlying net interest income (ex TLTRO) has started to improve, including deposit repricing and retail loan growth. Management also highlight a EUR 200m revenue benefit by 2024 from movements in the forward curve, removing most of the headwind that they had expected. Restructuring is progressing, moving into the delivery phase More than half of the 10,000 job reductions have been agreed, a third of the near-shoring realised, and most of the restructuring charges booked. Operating costs are starting to reduce, but the bigger reductions are still to come in 2022-24, which will be key for improving returns. Customer attrition is so far benign but will be tested more next year The branch closures so far have caused very few customer departures. However these were mainly branches that were already closed in the pandemic, and the bigger test will come as additional currently-open branches start to be closed. We raise numbers, remain Neutral We update our estimates in this note, with material increases, reflecting these various factors. We raise our target price, but see the shares as broadly up to speed, and we keep our Neutral rating.
Know your neighbour Following a busy month of results, strategy reviews and central bank navel-gazing, we have a good idea of what industry practitioners are thinking. But what about investors? We''ve held 100+ meetings since publishing ''X-rated'' a month ago. Frequently, we were asked ''what are others thinking?''. This report summarises the feedback and debates from those discussions. Bullish, but stock-selection is getting tougher No doubt: investors are generally bullish, citing relative valuation, capital return, benign credit and the hope that ''trough rates'' and ''peak regulation'' are behind us. Most bank investors prioritise quality and, so far, quality has worked. So far, so good: but what now? Our valuation dispersion indicator is flashing a warning light: urging rotation out of some max-ed out quality. The first section of this note deals with the question of stock-selection, which is clearly becoming more challenging. When does it end? Many investors are cyclically positive, but structurally not getting carried away, so ''timing'' is a common discussion. We''ve laid out three ''traffic-lights'' to watch: one is green (bond yields), one is green-turning-yellow (valuation) the other is red (EPS expectations). Since the latter is fundamental and anti-consensual, interest in our ''XNIM'' work has been high. We re-iterate here why the EPS implications may be meaningful but are not immediate. Near-term, banks likely have further to run. Is it different this time? Could higher loan growth, less wholesale funding, bolder deposit re-pricing or the scale of ''capital return'' cushion the margin issue? We review these common questions, partly by consulting our colleagues in Credit on the outlook for bank debt issuance. On capital return: beware that bank yields are close to falling below insurers'' yields, a bearish relative signal not to ignore in the past. Adding Lloyds to Top Picks We like quality which has lagged, and exposure to hikes....
• Total revenues decreased by 1% to €2.0bn in Q3 21 compared to Q3 20 • Net profit increased from a loss of €60m for Q3 20 to a profit of €403m for Q3 21 • Risk result (loan losses) declined €272m for Q3 20 to €22m for Q3 21 • Commerzbank expects now a net profit for FY2021
Revenues should be reasonably robust We expect net interest income to be stable in 3Q, as it was in 1Q and 2Q (underlying ex-TLTRO), with margin pressure easing and some volume growth. Fees and commissions are likely to be strong, in between 1Q and 2Q levels, with buoyant retail investment activity and improving corporate payment volumes. We estimate trading profits to be similar to 2Q. The group has pre-announced further CHF mortgage provisions in Poland (booked in other income). Costs should be reducing in line with plans Costs should be improving sequentially with the non-recurrence of bank levies (1Q) and software write-downs (2Q), and reducing YoY thanks to underlying cost reduction efforts, on track for the EUR 6.5bn FY21 guidance (plus 2Q''s 200m software charge). Loan loss provisions are likely to remain very benign After EUR 0.6bn PandL provisions in 2019 and 1.7bn in 2020, guidance for 2021 has been gradually improving from 0.8-1.2bn to now 0.8bn, while quarterly charges have been even lower (149m 1Q, 87m 2Q), and macro indicators suggest that 3Q should be very benign again. Capital ratios should be stable, around 2Q''s 13.4% Management have indicated some TRIM inflation to RWAs in 3Q, but ongoing corporate RWA reduction and efficiency efforts seem likely to offset this. With our estimates of a positive PandL this quarter, we see the CET1 ratio edging up from 13.4% to 13.5%. Restructuring seems to be on track, we stay Neutral but raise price target The bank seems to be making decent progress with its turnaround plan, including union negotiations and network reductions. There is a new COO joining in October, and a new head of PSBC in January, which may lead to further business plan updates thereafter. We stay Neutral but raise our target price slightly, reflecting the PandL and balance sheet improvements.
What''s scarier, an X-rated horror film or losing half a trillion euros in market cap to a five-year margin squeeze? Sadly, to a bank investor or analyst, the local cinema''s fright night can seem like a well-earned respite. We think it''s time to take the terror out of banking''s key trend and its most opaque and hard-to-model variable: net interest margin. We''ve crunched and harmonised 120,000 datapoints in a proprietary new model to give you one simple, comparable metric for margin pressure across 23 banking businesses in 11 countries: ''XNIM''. There''s no sugarcoating the truth: we''re less confident than consensus, with some serious frights once you open the XNIM door. But fight back the panic, defy the dread, and our model picks out where - and more importantly when - you can best exploit what safe havens there are.
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The appeal With payment companies usually trading at multiples of 20x earnings and Fintech companies usually valued at elevated multiples of their sales, banks'' managements might be tempted to demonstrate that some fee generating jewels exist in the vast scope of their activities. Alas, investors do not seem convinced, as indicated by banks'' persistently low P/Es, c. 9x FY22e. In this report we discuss fee generation as a source of possible growth and re-rating potential. The reality In this report we use banks'' disclosure of fees and commissions (FandC) - despite an unfortunate lack of consistency - in order to analyse four broad categories of FandC income at the largest European banks: AM and insurance fees, payment fees, banking services fees and financial markets fees. Our main conclusions are somewhat disappointing: we see margin pressure offsetting volume growth on most components, suggesting lacklustre FandC growth except for AM and insurance fees where volumes have been strong enough to offset an annual c. 3% margin pressure. Digital performance to become more and more relevant? Using D-Rating data we compare fee growth and digital performance. Tentatively banks offering rich and efficient content seem to have experienced accelerating fee generation in the run-up to Covid. This might highlight that investments are starting to pay-off and could pave the way to greater customer loyalty, and pricing power, but further investments are likely to be required. The winners and losers The winners of our FandC theme are banks heavily reliant on fees, with stronger growth and a rising weight of fees in the mix, able to absorb a large proportion of costs with FandC income, and if possible with reasonable growth expectations and undemanding consensus FandC forecasts. Topping our league are the small Spanish banks, most Nordic banks, KBC, CS and ISP. Meanwhile, UK banks, Frenelux banks and the large Spanish banks do not feature particularly well.
CBK DBK CSGN GLE KBC SAN NWG STAN INGA BCP BARC LLOY HSBA BBVA UCG BKT SEBA ISP AIBG SWEDA SHBA DANSKE EBS BPE CE MS BMPS SAB SAB ACA GS BIRG RBI CABK BAER LBK FBK UBSG ABN MTRO BAMI UNI DNB 0RJN 0H7O 0RK6 0MU6 0ILK 0HAI 0K93 0NVC 0O84 0MJK 0QVF 0R3G 0HBC 0EYG L6BA 0NE1 0K7F 0NXR 0GUX 0J6Y 0R7R 0H6T 0RLS PIEJF
So much for a quiet summer Bank investors deserved more of a summer lull than they got. Q2 earnings were strong, the dividend ban was lifted, bond yields plunged, stress-tests did not surprise, but an accompanying regulatory change did. This report focuses on the lasting lessons from a busy few months and the key themes to watch for the rest of the year. Quarterly snapshot We wrap up Q2, including our usual heat-map, with a focus on changing fundamentals: NII, fees, provisions and capital. But Q2 was as much about single-stock debates as it was about top-down thematics - we explain our five recent ratings changes, including upgrades of SocGen, Unicredit and Bank of Ireland. Our Top Pick list retains a quality bias, but the improving breadth of our bottom-up convictions is encouraging. Earnings risks up and down Consensus upgrades have been meaty. Low provisions could yet drive an average +15% near-term upgrade, and an unignorable +7% to 2023e. But pre-provision expectations look increasingly bold and recent front--book lending rate pressure is troubling. Stock selection is pivotal. 22 in 2 We focus on capital and capital return. The good news: the most generous quartile of the sector will yield 22% in the next 2 years. The bad news: the ECB has made regulation more complex and opaque. You now need more disclosure than you''re getting, we argue. Checking in on valuations and correlations The sector has de-coupled from bond yields, helpfully. But such divergence tends not to last long. For the sector to outperform, bond markets need an abrupt change in mood. Investment implications We stay positive, buoyed by the bottom-up progress, with a few ''buts''.
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Stable underlying performance in the operating divisions Commerzbank''s retail and corporate banking activities are maintaining pre-provision profits at a stable run-rate, similar in 2Q21 to 2Q20 and 2Q19. That is good in a sense, to hold steady despite the costs and disruptions of the change programme (and low rates). But it is also inconclusive, in that we are not yet seeing clear evidence of progress towards better levels of profitability. Multiple and material one-off items causing group losses Alongside this the bank is incurring a lot of large non-operating charges, including restructuring (as planned), but also the Polish CHF mortgages, the German fee consent ruling, the cancellation of the securities outsourcing project (rather more unexpected), and a number of fair value revenue items. These push the group into loss, and cause some anxiety about the risk of more to come. Credit quality remains benign, but uncertain After low 1H loan loss provisions (EUR 236m or 18bp of loans annualised), the FY guidance is improved from ''=1bn'' to ''1bn'', with an implication that it could be well below 1bn (as the 1H run-rate suggests). But management emphasise how uncertain the outlook remains, with all the variables that we are familiar with. Restructuring work is progressing, but perhaps too early to assess The bank is pressing ahead with its extensive transformation programme, and indicates good progress on digital service enhancements, branch and headcount reductions, near-shoring, and action on less profitable corporate relationships. Customer attrition is said to be less than expected too. But we are only a few months on from the mid-February plan, so it remains early days. We update estimates and target price, remain Neutral In line with the somewhat inconclusive nature of the latest datapoints, we make relatively limited changes to our forecasts and fair value. We keep our Neutral rating on the shares.
• Net loss was €527m for Q2 21 compared to a net profit of €183m for Q2 20 • Swing from a profit of €42m for “other income” in Q2 20 to a loss of €288m in Q2 21 • Risk result (loan losses) declined from €469m for Q2 20 to €87m for Q2 21 • Restructuring charges of €511m in Q2 21
Investors now need better visibility We were fully expecting to write that Friday''s stress-tests taught us little we didn''t know already. But in the end, one bit of disclosure from the ECB genuinely did surprise us, leaving behind some important, longer-lasting questions relating to banks'' CET1 needs. Investors should assume that the dispersion of capital needs between the high/low risk banks in the Eurozone will now widen. This report unpicks what we learned, why it matters and who may be impacted. Our key messages: (1) as investors, you need more capital disclosure than you are currently getting. (2) Quality wins. To P2G or not to P2G? Until now, a bank''s Pillar 2G need has been (rather bizarrely) a closely-held secret. Disclosure, where it has existed, has implied a very narrow range of P2G demands around 1%. New ECB disclosure implies a future range (on paper) of 0-4.25%. Even two banks in the same ''risk quartile'' could have a 275bp different CET1 need, one from the other. Frankly, following this disclosure, we don''t see how investors are expected to remain in the dark on single-stock P2G needs from here. Banks which fared poorly in the stress-test are most at risk. Also... Each member of the EBNPP Banks team looks at what they learned in the stress test for their stocks. The results are pretty close to those we anticipated in ''A Stress Test Tool-Kit''. Bankinter impressed, Danske, SocGen, AIB, Sabadell and Deutsche Bank may face more investor scrutiny. Investment implications We like the sector for its positive earnings revisions and undemanding valuation. But the regulatory agenda in Europe remains disappointingly unpredictable, and opaque enough to be an impediment for most Portfolio Managers. This news is a step in the wrong direction, a hint at something troubling which only increased transparency can appease. At a stock level, our Top Picks - Credit Agricole, Intesa, BBVA, Erste and Barclays should not be directly impacted,...
We expect a reasonable operating profit, but a loss after restructuring charges We expect stable net interest income (ex TLTRO), and decent fee and commission income (below 1Q but above last year). However trading revenues are likely to be lower, and other income is likely to be materially negative including charges following the German court ruling on account fees. Operating costs should be slightly lower year-on-year, and bank levies too (with the Greensill deposit guarantee top-ups booked as payment commitments instead). Loan loss provisions should be small, with limited defaults in Germany so far. The company has guided for EUR 550m restructuring charges this quarter, which results in an overall net loss in our estimates. We expect the CET1 ratio to reduce slightly from 13.4% to 13.3%, still healthy We expect RWAs to be roughly stable sequentially, but capital to reduce slightly with the PandL losses, reducing the CET1 ratio a little from 13.4% to 13.3%, but leaving it still well above the 12.5% target and the 9.6% regulatory minimum. Restructuring progress remains an obvious focus We are only a few months on from the CEO''s start at the bank (1 January), and the new strategic plan presentation (11 February), but with restructuring efforts well underway now investors will be looking for any update on cost delivery and revenue resilience. Polish mortgage rulings still seem to be some way off We do not expect any significant update on mBank''s CHF mortgage portfolio at this stage, legal rulings seem to be delayed until September. We adjust 2021 estimates, with no change to 2022-23 or to our Neutral rating We update our financial forecasts, with slightly larger 2021 losses, but make no change at this stage to our 2022-23 estimates, our target price, or our Neutral rating on the shares.
Two questions Reflation is still the dominant theme for Financials investors. This report addresses the two questions which arise most frequently: ''why didn''t Insurers participate in the rally?'' and ''Is it over?''. The reflation trade is dormant, not dead, and insurers are due an H2 catch-up, we conclude. The past In the first section of the report, we look at the lessons worth remembering from H1 if, as we expect, the reflation trade re-emerges in H2. Banks have so far followed the ''reflation playbook'', insurers have not. We explore the possible reasons why; none appears convincing or long-lasting. The present Given their diverging performance, Section two of the note compares the valuation set-up for both sectors. There''s a case for owning both, but the tactical appeal of banks over insurance is waning, and medium-term risk/reward now looks better for insurers. The future Section three of the note looks ahead, questioning whether ''capital return'' will be an H2 catalyst. For banks, we show that active income funds have re-built positions already and that yields are not superior to the insurers'', capping the re-rating potential. Near-term, bank dividends will likely surprise as provisions reach historic lows, but dividend futures markets may be the best way to play the theme, we suggest. For insurers, we see scope for rising extraordinary payouts, with some caveats. Investment Conclusions Within Insurance, valuation dispersion is high: our sub-sector preference is for Life (Top Picks LandG, NN, Phoenix) reinsurers retail PandC. Within banks: valuation dispersion is tighter, arguing for exposure to superior profitability and pre-provision growth at a reasonable price: Credit Agricole, Intesa, BBVA, Erste and Barclays.
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Sacrilege The Chinese Credit Impulse (CCI) might just be the most bearish chart in the world currently. It warns of plunging PMIs, disinflation and urges investors towards defensives. It feels like sacrilege to pick holes in such a traditionally reliable indicator, and it''s never comfortable to conclude ''this time it''s different'', but this report does precisely these two things. A new measure We dig into Chinese credit trends to show what the negative CCI is and isn''t saying. The CCI''s shortcoming is that it''s one-eyed - looking at borrowing, not saving. That hasn''t mattered much in previous cycles, but it matters today. We propose a new measure - ''the EBNPP net credit impulse'' - which gives a more holistic picture of Chinese borrower confidence. Historically, it gives a better read of the cycle than the CCI. Today, it disagrees with the traditional credit impulse and is more optimistic. Signals from the credit market, and bank and business surveys, corroborate the view. It''s your ''debit impulse'' that matters We update our work on lockdown savings. The US consumer is in an eye-wateringly strong position: $25trn wealthier than a year ago (2x the previous record), with ''lockdown savings'' equivalent to 11% GDP at the ready. Surely the reflation debate can''t be settled until we see how an unrestrained consumer with this firepower behaves? Financials - why care? Near-term, the reflation debate will define how to position within Financials, hence the importance of correctly interpreting signals from China. But what is happening to the CCI is part of a global ''Savings Glut'' theme, with far-reaching implications for Financials: impacting housing markets, credit quality, NII and AuM flows inter alia, not to mention a rather era-defining battle between reflation and Japanification. We include a mind-map to outline the key themes, scenarios, and stock-picking conclusions. Today, we also publish Strategy Q3 outlook which considers the role of...
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ESG is on everyone''s lips, but few are talking about a sector that neither pollutes nor builds green tech. Banks can seem bystanders, but like policemen it''s less what they do than how they help - or hinder - others. Indeed, where banks decide to put their money will, in many cases, determine if the transition succeeds or fails. As ESG bites, we take on the vexed questions. Which banks are pivoting to new, green growth opportunities? Can the sector build a reputation for social responsibility on the back of a good response to the crisis? Are management incentives really aligned with shareholders? The opportunities are big, but the risks are bigger: we derive a +15%/-30% ESG spread on our sector valuation. We also identify current leaders (Lloyds, Caixabank and SHB) and laggards (Deutsche Bank, UBS, CS and Erste).
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What next? This was the sector''s best quarter for earnings surprise in a decade. But as share prices ''complete the V'' to pre-pandemic levels, how much is left to go? This report looks at the new themes to emerge from Q1 and their implications for the sector bull case and stock selection. Better: Provisions Q1 surely put the provisioning debate to bed. We use our proprietary provision model to show why ''normal'' earnings expectations will still rise mid-single-digit, and 2021-22e forecasts might still be ~20-40% too low, implying the sector could yield 1-2pp more than expected in the next 2 years. Faster: Fees European households are showing a growing taste for equity markets: each of the last four months have seen record inflows into equity mutual funds. We assess the sector''s AuM opportunity through the lens of the household''s rapidly changing balance-sheet. The trillion euros added to savings in the last 12m, largely sitting on deposit at a real cost to banks and savers, looks a juicy opportunity. We continue to like Asset Gatherers. Harder: NII It wasn''t all plain sailing. NII missed more often than it beat and the sector''s loanbook shrunk YoY. We look at the lead indicators which continue to warn of deleveraging risks. Stronger: focus on the bolt-on The list of bolt-on acquisitions has quietly grown in recent months. We look at the sector''s ''dry powder'' to buy earnings diversification and/or shares. It''s a topic of growing significance. Valuation and stocks We add Erste to our Top Pick list, joining Credit Agricole, Intesa, BBVA and Barclays. This is a group with superior profitability and revenue opportunity, trading in line with sector multiples.
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Making a good start with the latest restructuring plan Commerzbank has been restructuring for a while, but launched a new plan with a new CEO at the start of this year, and appears to have made a good start. It is pressing ahead with planned branch closures (-55%), and has secured union agreement on headcount reductions (-20%). Improving the capital trajectory The CET1 ratio is holding up better than feared a quarter ago, improving in 1Q (to 13.4%), and with less adverse impacts in 2Q-4Q, allowing the group to stay above 12.5% this year (rather than 12.0%), and perhaps even remaining closer to 13%. Deriving PandL benefit from favourable conditions Like many other banks, Commerzbank enjoyed strong commission and trading income in 1Q together with lower loan loss provisions, which boosts the FY21 guidance, but is recognised as somewhat temporary. Meanwhile NII has a bit more downside, and costs are on track. Consensus has 3-6% RoTE in 2022-24 vs 7-8% company target and 0.3x P/TB Sellside estimates (pre 1Q) have the bank loss-making in FY21 as guided (with restructuring charges and transition impacts), but improving to 2.6% RoTE in 2022, 4.3% 2023 and 5.8% 2024, compared to the group''s 7-8% 2024 target. We update estimates and price target, keep Neutral rating We update our own estimates here, with relatively limited changes (although some small numbers / large percentage moves). We raise our target price slightly but keep a Neutral rating.
• Net profit of €133m for Q1 21 compared to a net loss of €291m for Q1 20 • Swing from a loss of €304m for the fair value result in Q1 20 to a profit of €360m in Q1 21 • Risk result (loan losses) declined from €326m for Q1 20 to €149m for Q1 21 but increase expected from H2 21 onwards • Restructuring charges of €465m in Q1 21 and another €680m in Q2-Q4 21
Strong fees and commissions and trading, slight NII decline, TLTRO credit Commerzbank is likely to see a little more underlying NII pressure in 1Q, but with a one-off EUR 120m TLTRO credit likely on top. Strong securities volumes should drive higher fees and commissions and trading revenues. Other income is likely to include a minor drag from further CHF mortgage provisioning in Poland, but with important court decisions still to come in May. Lower costs, loan loss provisions and a positive tax contribution Operating costs should continue to reduce as the cutbacks continue, although 1Q includes a larger amount of bank levies and they appear to be increasing somewhat YoY. Loan loss provision charges are likely to be limited. They have guided for a positive tax credit this quarter. Restructuring continues After the February strategy update, restructuring activities continue, and the company announced earlier this month an agreement on a voluntary redundancy programme involving 1700 FTEs and EUR 470m of one-off charges in 1Q (out of the EUR900m FY21 budget). Lower operational risk RWAs, improving capital position Capital should be steady QoQ with limited net PandL impacts. RWAs may reduce slightly, with limited growth and the possibility of a slight reduction in operational risk RWAs. This should result in a stable or slightly improving capital ratio, better than feared after the previous quarter. Updating estimates, keep Neutral rating We update our estimates to reflect these expectations, giving smaller 2021 losses and slightly better 2022-23 forecasts. We leave our target price unchanged, and keep our Neutral rating. Commerzbank reports 1Q numbers on 12th May.
Lessons from the US The US bank earnings season had three recurring features: excellent Markets income, reserve releases and sagging NII. These themes will likely repeat in European Q1''s, but the topics of NII challenge and benign credit quality seem less well appreciated on this side of the pond. This report explores where the European consensus may yet be wrong on these debates. Provisions beats - do they matter? The market was generally unimpressed by the US banks'' sizeable reserve releases. But there''s an important distinction to this debate in Europe: provision expectations are still elevated in 2022-23e, where they are not in the US. Provision ''normalisation'' could yet be worth +29%/12%/6% to consensus EPS 2021-23e. This is slack in future forecasts which shouldn''t be totally overlooked. Demanding By now, it''s well understood that households and corporates exit this crisis unusually cash-rich. What will be done with this cash is still open for debate. Deleveraging is underway in the US, but still appears an underappreciated risk in Europe. The latest batch of ECB Bank Lending Surveys (published this week) warns that the US trend is on its way to Europe. Tactical vs Fundamental ''Low quality beats'' may not be enough for investors to re-evaluate the sector over earnings season. History suggests that bond yields will matter most near-term and fundamentals will re-assert beyond. Stock selection and the distinction between these two time periods are crucial. Stock selection Positive operating leverage will come at a premium given this NII backdrop. Credit Agricole, Intesa, BBVA and Barclays look the best positioned.
We suggest three (and sometimes four!) key questions to ask the European financial names if you happen to see them in the coming weeks. We include the following names: Banks Austria: Erste, Raiffeisen Benelux: ABN, ING, KBC France: BNPP, Credit Agricole, Societe Generale Germany: Commerzbank Ireland: AIB, Bank of Ireland Investment Banks: Credit Suisse, Deutsche Bank, Julius Baer and UBS Italy: BAMI, Intesa, Unicredit Nordics: Danske, DNB, Nordea, SEB, SHB and Swedbank Spain: Bankinter, BBVA, Caixabank, Sabadell, Santander UK: Barclays, HSBC, Lloyds, Natwest and Standard Chartered Insurance Multiline: Ageas, Allianz, Aviva, AXA, Generali, Talanx , Zurich PandC: Beazley, Coface, Hiscox, Lancashire, Unipol/UnipolSai Reinsurance: Hannover Re, Munich Re, SCOR, Swiss Re Life: Aegon, a.s.r, CNP Assurances, Legal and General, MandG, NN Group, Phoenix, Prudential. Diversified Financials Asset Gatherers: AJ Bell, Hargreaves Lansdown, IntegraFin, Quilter, St James''s Place Asset Managers: Amundi, Ashmore, BlackRock, DWS, Jupiter, Man Group, Schroders, Standard Life Aberdeen. Alternative Asset Managers: Blackstone, EQT, Intermediate Capital, KKR, Partners Group, Tikehau, 3i Group. Exchanges and other market infrastructure: Deutsche Borse, Euronext, LSE, Flow Traders, MSCI.
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For a second consecutive quarter - a strong earnings season Q4 earnings season was fuel for the bulls - with earnings, capital and proactive dividend guidance all surprising positively. This report explores Q4''s lasting themes with a focus on credit quality, dividends and NII. Credit quality - more to come We compare provisioning practices across the sector in our usual asset quality ''dashboard'' and find a more rational spread of impairments than previous quarters. Our updated proprietary provision model argues that consensus earnings may still be 20%+ too low on this theme in 2021/22. We check in on the latest trends in moratoria, a focus topic for many investors, which look reassuring. Capital and dividends Management teams went further than we expected in pre-promising Q4 surplus capital returns. We look at yields, payouts, promises and capital positions across the sector. Reflation and NII History suggests that this reflation rally has further to go. But history also reminds us that we shouldn''t get carried away about top-line prospects just because the yield curve has twitched. We remind on the cyclical and structural NII challenges and use recent data to show why US lending rates may move, and European rates may not. We continue to prefer NII-lite businesses. Changes to Top Picks We add Barclays to our Top Pick list at the expense of Lloyds, joining BBVA, Credit Suisse, Intesa and Credit Agricole. In the last 12 months our Top Pick list is up +72% relative to the SX7P''s +39%. We stay bullish with a quality bias, recognising that bond yields hold the key to near-term performance.
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Are we there yet? European banks are up +80% from their lows. This report addresses the dominant question from recent investor discussions - ''How far can this go?' - by considering lessons from prior crises, the signals from the bond market, valuations and the earnings outlook. In sum: we''re probably not there yet. Picking battles Recovery rallies are all about valuation and yield curves, fundamentals come a distant third. Valuation lessons from the past and overseas argue for 20-35% further re-rating. For the first time in a decade, the sector may not suffer from an earnings downgrade cycle, which helps. When does it end? History suggests the right time to buy banks is when it feels most uncomfortable to do so, and the time to underweight them is during periods of post-crisis euphoria. We lay out the sign-posts to look for in 2021 that the rally has over-stretched. Supersized wallets Household deposit growth hit an all-time high in January, according to data released yesterday: we focus on the implications. We estimate European ''lockdown savings'' sitting idle in current accounts equivalent to 1.5pp of GDP: particularly high in France, the Netherlands and Portugal. We find scant survey evidence indicating an imminent consumption binge, though house-purchase intentions have reached an 18-year high: good for mortgage lenders and asset quality. Investment conclusions Valuation dispersion in the sector is relatively tight, allowing investors to gain exposure to the rally via good quality banks, with intact revenue and profitability, at still-discounted valuations. Our Top Picks: BBVA, Credit Agricole, Intesa, Credit Suisse and Lloyds.
Getting testy European bank stress-tests will occur mid-year and will matter more than in the past. Banks which fare well will have a strong bargaining chip for extra capital return. Last time, banks which fared poorly announced scrip dividends, asset sales and MandA, and underperformed the sector by -8% in the next six months. Recently, we received the macro scenario for the 2021 test. This report looks at what''s different this time, who is better or worse positioned, and indicates bank-by-bank outcomes, with the help of our proprietary provision model. Post-code matters This test is harsher than its predecessor in most regards, so should not be underestimated. Banks exposed to the financial markets, the US, Emerging Markets and Commercial Real Estate will be harder hit. Banks with large Credit Guarantee Schemes - France, Italy and Spain - will enjoy a helpful shield. Bank-by-bank outcomes Quite honestly, accurately predicting bank-specific outcomes from the outside-in is impossible. Instead, we use a common framework to indicate the probable range of CET1 outcomes, and divide the sector into four buckets based on their relative vulnerability. Investment conclusions The Nordic, Benelux and Italian banks should fare well, boosting their dividend prospects - of most relevance to our Outperform ratings for Intesa and KBC. Deutsche, Sabadell (both Underperform rated) and SocGen may be most vulnerable, and a handful of other banks are worth watching.
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Bold actions from the new management team Commerzbank''s new executives are taking big steps to reshape the bank for the future, reducing total staff numbers by 20%, and domestic branches by 55%, together with a range of technology investments, efficiency improvements and growth investments in selected areas. Near-term headwinds create uncertainty for the year ahead The bank is facing some adverse impacts in the coming quarters, from further margin pressure, RWA inflation, and the burden of additional restructuring costs. These are expected to cause another year of losses, and a drawdown of the capital ratio. Medium-term potential is very positive, if it works If the new restructuring plan works, it has potential to transform the bank''s outlook and valuation, with much better profitability (7-8% RoTE) and capital (14-15% CET1) as well as a much more modern and competitive operating model. We reduce 2021-22 estimates, but start to incorporate 2023-24 aspirations Updating our financial forecasts here reduces 2021-22 numbers, reflecting the near-term negatives. We start to model 2023-24 in the direction that the company is aiming for, but it will take some time for investors to see traction and gain confidence in that potential. We remain Neutral on the shares at this stage in the process The shares on 0.27x tangible book value are low relative to their range of the past few years (0.2-0.7x), and the potential implied by the RoTE target. However it will take time to work through the near-term challenges and assess future prospects. We remain Neutral here.
• Net profit after minorities attributable to shareholders decreased from €644m for 2019 to a loss of €2.9bn for 2020. • The resumption of dividend payments is planned for FY2023. • Up to €3bn of payouts to shareholders in the years 2023 and 2024.
Political wheels are turning Basel 4 has been out-of-sight, out-of-mind for the last year. But the political machinery in Europe is turning, and further loosening may be on the cards in the coming months. This report summarises what may change, how much it matters, and who it impacts. Members of the EBNPP banks team examine the stock implications. What''s at stake A year ago, Basel 4 was estimated to be a -270bp capital problem for the industry. Our base-case is that this falls to -160bp, and a bull-case under consideration is -100bp. Basel 4 is often dismissed as a hazy, long-dated issue. But these changes are impactful: the difference between consuming seven years'' of organic capital generation, four, or two. Jargon-nought We attempt to be jargon-free. But certain jargon is worth familiarising yourself with ahead of the Commission''s legislative proposal expected in Q2. A ''parallel stack'' for example could alleviate the harshest element of Basel 4 and, with the stroke of a pen, free up capital equivalent to 6% of market cap on average, and significantly more for the most exposed banks. Investment conclusions We do not recommend positioning based on ''Basel 4 risk'' alone - other investment debates matter more near-term. But this is a topic to understand and to monitor through 2021: in a low-rates, low-growth world, yield matters. 2020''s dividend restrictions undermined confidence that banks can deploy capital as they see fit. If regulatory loosening is a by-product of the pandemic, it will be a step forward in repairing this trust.
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An unprecedented 2020 and what to watch for 2021 The last two banking crises were about credit. Today it matters less what you''ve borrowed, more what you''ve saved. Households will exit this crisis wealthier and more cash-rich than they went in. Corporates borrowed a record amount, and yet reduced their net debt. EUR1trn has been accumulated (helicoptered?) into deposit accounts. How this cash is used in 2021 has meaningful implications for bank top-lines and the strength of the economic recovery. Fresh data from the ECB on Friday allows an up-to-date look at what''s going on. Corporates have started to deleverage Corporates are using un-needed cash to deleverage across most of Europe. Demand lead indicators suggest this trend will intensify. We show why, for now, it should not be feared (by markets, economists or central banks), but why it augurs a shrinking industry top-line this year. TLTRO may need a re-think Banks are currently ''pushing on a string'' in the corporate sector. As such, the current design of TLTRO needs a re-think. If not, EUR1.5trn of bank funding may quietly re-price higher overnight in June: not good for banks, borrowers or policy-makers. We explore the different ''accrual'' practices across the sector - dividing banks into 3 groups based on their NII risks from TLTRO pricing. Excess liquidity rising Our excess liquidity indicator hits record growth in December. It''s an additional NII headwind to monitor. What can be done? More generous tiering from the ECB, more aggressive deposit pricing or less wholesale funding issuance from the banks are themes to monitor. Investment implications Eurozone NII looks the most challenging PandL dynamic in the industry. We stick to a preference for banks which would enjoy reflation, but don''t need it, are underweight Eurozone NII and would enjoy falling credit risk concerns: BBVA, Credit Agricole, Intesa, Credit Suisse and Lloyds.
Commerzbank will reduce c.10,000 full-time equivalents in gross terms. Costs will be reduced by €1.4bn, or around 20%, by 2024. Restructuring expenses totalling €1.8bn, which will be fully financed with existing funds. Commerzbank targets a Return on Tangible Equity (RoTE) of 6.5-7% for FY2024.
The bank has already guided to four major one-off items, causing large losses Commerzbank has over the past few weeks announced that it will book a number of specific items in its 4Q PandL, including additional restructuring charges (EUR 610m), loan loss provisions (at least EUR 600m), goodwill impairment (at least EUR 1.5bn), and deferred tax asset write-downs (not quantified but we estimate around EUR 0.5bn). We include these in our numbers here. Operating trends include NII pressure but robust fees and commissions and trading In the underlying numbers, we expect some further net interest income pressure in the quarter, offset by strong fee and commission income and trading income. There will be a negative in other income from mBank''s additional mortgage-related charges. Costs are targeted slightly below last year''s levels, and we expect this to be achieved. We update numbers to reflect these points. Capital ratio should remain above 13%, notwithstanding the PandL losses The company has indicated that it expects to remain above 13% CET1 ratio (from 3Q 13.5%) despite the one-off charges. This is partly because the biggest item (goodwill impairment) has no impact on regulatory capital, since already deducted, but also because we expect the bank to manage down assets and RWAs into year-end as it did last year, boosting its ratios. New CEO unveiling a strategy update Commerzbank has been working on additional cost reductions over the past year (more digital, less branches), and is expected to provide more details of this and other business plan updates now that the new CEO is fully on board (since 1 January). The company has scheduled a 3-hour Capital Markets Day presentation in the afternoon of its results day (11 February). We update estimates and raise our target price, but remain Neutral We make slight increases to forward estimates to reflect a slight pull-forward of loan loss provisions with these 4Q charges. We do not yet make any...
3 themes to monitor Three sector themes will dominate the year, we suspect. The good news - fast-falling impairments should drive substantial EPS and DPS upgrades. The bad - we count 4 cyclical NII headwinds to add to the industry''s structural top-line challenge. Like it or not, but Theme 3 - the whiff of reflation - may matter most, near-term. This report weighs these colliding forces. Provisions - very different to the consensus Increasingly, we are asked whether renewed lockdowns will create provision disappointment. We use proprietary work to show why the topic remains an opportunity, not threat, and why consensus looks substantially too conservative this year and next. We lay out when provision beats ''do'' and ''don''t'' matter, and explore some important macro trends which are quietly improving. NII pressures mounting We explore four growing NII challenges: rising surplus liquidity, unusual EURIBOR pricing, corporate deleveraging and the poor design of TLTRO. We then test the risks to industry earnings from this interplay of falling NII and provisions. The lessons from 2016-17 We are not Rates strategists, so do not speculate on the next stop for Bund yields. But if 2021 is characterised by ''NII down, provisions down, bond yields up, valuations up'', it would be highly reminiscent of H2''16. We look at the lessons from this period which may help investors to navigate an unpredictable year. So how to position within these colliding forces? A bold sector bet would now rely on factors outside the industry''s control. Instead, we seek exposure to stocks which would enjoy, but do not require, reflation, have gearing to declining credit concerns and are underweight Eurozone NII: Credit Agricole, Intesa, Credit Suisse, BBVA and Lloyds fit the bill.
Commerzbank expects to impair fully the existing goodwill of around €1.5bn in FY2020. The loan loss provision guidance of €1.3-1.5bn for FY2020 was increased to at least €1.7bn too. The bank is planning further restructuring measures as part of a new strategy to be announced in the first quarter of 2021.
Dividend D-Day - a survival guide Ahead of a crucial few weeks for the sector''s dividend prospects, this report addresses the key questions: the dates for your calendar, the actors to watch and the permutations if the ban is lifted. We gauge market expectations, based on ~100 responses to a buy-side survey, and explore the potential for technical buying if income funds return. At a stock level, we run screens for potential yields, and each member of the EBNPP banks team outlines what matters for their stocks. Dividend survey Our buy-side survey suggests there is no ''in-line'' outcome. A ban extension would disappoint plenty of investors (40%), a lifted ban would pleasantly surprise slightly more. We look at how investors expect the sector and individual stocks to react to the news. Holding of income funds We review the changing holdings of the largest Income Funds to scale the damage of the ban. Financials remain their principal holding - with an average 20% weighting - but ownership of bank shares has dwindled to a mere 3%. This for a sector which is 7% of the market, and the second-highest yielder. This ban matters to the sector''s equity story, and to the size of its audience. Our base case The politics of this decision means that visibility is poor. Our central case is that the ban will be lifted - since it is legally questionable - most likely on 15th December, but pay-outs will be constrained. This is an important step on the ''Wall of Worry'' - improving the sector''s equity story, bringing back Income investors, and placing value on provision-led EPS beats - the story of Q3 which we expect to persist in 2021. Intesa, Credit Agricole, Swedbank, KBC and BBVA are our preferred ways to play this theme.
Animal spirits or liquidity trap? Consider these two possible paths for 2021: (i) ''Animal spirits'': the credit drawn by companies for ''insurance'' in 2020 becomes the investment of 2021. Households channel ''lockdown savings'' into the housing market and consumption and put the change into AuM, or (ii) ''Liquidity trap'': corporates delever, the ECB pushes harder on a string, excess deposits swill around on bank balance-sheets driving competition. This note explores the arguments for and implications of each. Household risk appetite holding up The household bull-case looks the best founded - current accounts are invitingly full, V-shaped markets have lured in household participation and, unusually for a crisis, net wealth is rising. This bodes well for retail and bancassurance revenues. Corporate deleveraging ahead? European companies have borrowed a record amount this year, yet not increased their net debt. We use recent pandemic surveys in France to show why corporate borrowing may slow markedly in the recovery. Market participants and the ECB should not panic at this trend. It''s a top-line headwind to be alert to though, since it is counter-cyclical. And also... We include our usual ''dashboard'' of credit, deposit and Central Bank interaction in each European banking market. The data and charts are available to download in Excel here. Also, we can think of a use for a Central Bank Digital Currency for the first time. Investment implications These scenarios become relevant when households and corporates emerge bleary-eyed from lock-down with a fresh EUR1trn of deposits to deploy. Between now and then we continue to expect the sector to fare well as still-cheap relative valuations meet with credit-quality-led EPS upgrades. Of our Top Picks Credit Agricole and Intesa are most positively geared to the trends in this report.
Debt repayment holidays in focus A pervasive fear - on the part of both markets and regulators - is that borrowers are being propped up by stimulus: and only once this is withdrawn will the skeletons emerge. A high usage of moratoria is an obvious place to look for such skeletons. Of the industry data we track, this is the topic most frequently requested by investors. This report looks at what we learned in Q3, and the right context for using this data. The headlines are encouraging The use of moratoria halved during Q3, from 8% to 4% of the industry''s loan-book. To date, ~95% of borrowers returning from payment holidays are servicing their debt. It''s early days, but these are encouraging signs. Dispersion is wide We review moratoria trends at a national and bank-by-bank level. Dispersion is wide. We outline the dates to monitor and quantify the reinforcements in place. Moratoria should fade from the investment debate for most banks in Germany, the Netherlands and Ireland, but may persist a while longer in Portugal, CEE and Italy. Top picks We remain upbeat on the sector, and view credit quality as a continuing source of positive earnings revisions. Nor is this a ''P/E of 1x'' event: credit risk was at the heart of the sector''s halving in the pandemic and is driving the regulators'' determination in forbidding dividends. Our Top Picks are: Credit Agricole, Intesa, BBVA, Lloyds and Credit Suisse.
It''s not all about a vaccine Is the sector''s recent outperformance sustainable? We think so. This is not just a question of vaccines and valuation; the sector just enjoyed its best quarter for positive earnings surprise in more than a decade. This report explores the changing fundamentals in Q3, and addresses the most common questions we receive: Are low provisions sustainable? Do they matter? Which are the banks to own? Refreshing our proprietary provision models We update our proprietary provision models to reflect second lockdowns and latest market rates. The case for listening to these models is strengthened by the pervasive provision surprise in Q3. They continue to shout at us that consensus is substantially too cautious on provisions in 2021, and still too high in 2022, with meaningful EPS implications. Looking for proactivity We update our asset quality ''dashboard'', comparing provision proactivity across the industry. The average bank now has 2 years'' of ''normal'' impairments at the ready for upcoming NPLs. Liquidity piling up A theme of growing importance in Q3 is the rapid pace of deposit inflow and the ''liquification'' of balance sheets. We explore various implications of the trend and the case for an ECB response. Stay Positive, Changing Top Picks We adjust our Top Pick list, tilting towards credit risk underperformers, whilst prioritising above-average profitability - we add BBVA, Lloyds and Credit Suisse and remove Swedbank, Julius Baer and CaixaBank. Buying banks because they are cheap alone tends not to work. Buying cheap banks at the turning point of a crisis, in the foothills of an earnings upgrade cycle is much more of an appealing set-up. We remain positive.
A reminder In each previous banking crisis, there was a day when the wind definitively changed direction. Only time will tell whether today''s vaccine news is the ''Whatever it takes'' of this crisis. At the very least, the sector''s lurch +12% reminds that fear works in both directions for banks: a powerful catalyst when it rises, so too when it falls. This short note addresses the questions triggered by vaccine optimism: What to watch next? How cheap is the sector? How to position within it? Interconnected The sector has been battling a trio of problems this year: credit quality uncertainty, flattening yield curves and trapped dividends. Each is sensitive to macro tail-risk. If vaccine optimism sustains, history suggests the switch from vicious cycle to virtuous circle should not be underestimated. Dividends first and foremost The ECB is waiting and watching before deciding on dividends. Sustained vaccine optimism must improve the sector''s chance of distributions. An earnings bull case is already visible The sector is in the midst of its best quarter for earnings surprise in more than a decade. Provisions are back near ''normal'' levels already in Q3. The market - both sell- and buy-side - has collectively shrugged its shoulders at the trend. Both will care more if macro tail-risks recede: particularly if 15-30% EPS upgrades meet a sector at a record relative P/E discount. Valuation dispersions We look at valuation dispersions in the sector: investors are not being asked to pay an unusual premium for ''expensive'' or ''highly profitable'' banks. For those returning to the sector, the good news is that you don''t necessarily need to ''Buy Beta''.
Net interest income has fallen, but consensus estimates still look intact Commerzbank''s NII has been reduced by negative interest rates and deposit margins, but appears to be stabilising. There should be an uplift from TLTRO in 2021, and consensus estimates are already consistent with the current run-rate plus that increment. There should also be some further benefit from deposit repricing and from loan growth. Loan losses in 2021 remain hard to predict with any confidence Management continue to expect EUR 1.3-1.5bn loan loss provisions in FY20 (after 1.1bn so far), although this is subject to the further development of the crisis over the coming weeks and through January as well. And they offer no view on 2021 at this stage, there is too much uncertainty. Most customers have come off moratoria and resumed regular payments, but the planned full reinstatement of the currently suspended insolvency law in Germany on 1 January is seen as a potential risk for some small business borrowers. Capital levels are above target, represent a sizeable buffer The bank has further improved its CET1 ratio to 13.5%, above its 12-13% target range, and representing a buffer of EUR 7bn above the 9.8% regulatory minimum (MDA). The CFO expects slight increases, from RWAs in 4Q and in 2021 from TRIM and from rating migration. Cost cutting continues, details to come with strategy update in February The management team (and external consultants) have been working on further cost reduction and digitisation plans during the year, which they expect the incoming CEO (1 January) to review, leading to a strategy update in 1Q, perhaps with full-year results in early February. We update estimates, keep Neutral rating Our forecasts move by large percentage amounts but small absolute numbers. We forecast losses in 2020 and 2021, 2.3% RoTE in 2022, and 4.2% in 2023. The shares are on 0.20x P/TB.
Why are we publishing this report? On Friday evening, Bloomberg News reported that the ECB Supervisory board is considering whether to lift the ban on dividends or renew it in the context of the second wave of the virus. The article suggests that the ECB may allow stronger banks to pay dividends, but only up to a certain payout ratio. In this short report, we discuss what each scenario would mean and what to expect for our banks'' dividend yield if a payout cap is implemented. A full dividend ban would be detrimental for the sector Dividends have been at the heart of the debate since the introduction of the dividend ban a few months ago. While we are still expecting the official decision to be announced in December, we believe that removing the dividend ban is key for the sector to become investable again. While the fundamental impact of an extension of the ban would be manageable, as we show in our analysis, we think that it would send a strong negative signal to investors. By trying to preserve the capital in the sector, supervisors could make it impossible for banks to find fresh capital should they need it. If the regulators opt for a payout cap, whose dividend is at risk? We look at our expectations for earnings and consensus for 2020 dividends and assess whose payouts would be impacted at caps of 100%, 75% and 50%. In the Euro area, only SocGen, Unicredit, Natixis and Intesa would be affected by a 100% payout cap on adjusted earnings, with a small impact on the dividend yield. Compared to an extension of the dividend ban, we think that a payout cap would be much less negative for the sector. Of our three top picks, we do not see Credit Agricole and Caixabank''s dividends as being at risk, while our current expectations for Intesa''s dividend might need to be revised down if a cap were to be introduced.
Weaker NII but stronger commissions Net interest income is likely to have slipped slightly from 2Q, with rate cuts in Poland and margin pressure in Germany. However commission income should have remained strong, with active retail investors and resilient payments volumes. Trading and other income are likely to be subdued. Stable/lower costs, and earlier restructuring charges Operating costs are likely to be stable or slightly lower in 3Q. We expect the EUR 200m restructuring charges earmarked for 4Q to be brought forward to 3Q, as the company has extended its early retirement scheme to a wider catchment, impacting this quarter. Lower loan loss provisions We expect lower loan loss provisions in 3Q, perhaps a third below the 1H run-rate, in the absence of adverse developments in the quarter, and waiting for greater clarity over the coming months. Stable capital ratios We expect the ratio to remain similar to 2Q''s 13.4%. It could even improve slightly, if management have been active in reducing balance sheet exposures. Awaiting new CEO (in January) and strategy update (in February) The new CEO is due to start on 1 January. We expect him to review / adjust / approve the new cost reduction plans as a matter of urgency, and maybe other topics too, with a view to giving a strategy update with full-year results in mid-February. Updating estimates, no change in price target or Neutral rating We update our estimates here, with large-ish percentage moves in FY20-21 but small absolute numbers, and limited impact on 2022-23. We make no change to target price or recommendation.
