Commerzbank AG jumped the most in almost three years after fourth-quarter profit beat analyst estimates, as the lender said it plans to wind down its unit for soured loans at a faster pace than forecast.
Net income was 187 million euros ($211 million) after a loss of 280 million in the year earlier period, when the bank took a charge to settle U.S. investigations into sanctions violations, the company said in a statement from Frankfurt on Friday. That beat the 156.1 million-euro average estimate of seven analysts in a Bloomberg survey. The company confirmed that it plans to pay a dividend of 20 cents per share, its first payout since 2007.
Commerzbank Chief Executive Officer Martin Blessing, 52, is set to step down in October when his contract expires after helping restructure the lender following its 18.2 billion-euro rescue by German taxpayers during the global financial crisis. The lender has boosted profit by cutting jobs and tapping investor demand for higher-yielding assets to shrink its pile of delinquent shipping and commercial real-estate loans.
“The real news is the non-core assets where they are winding down shipping loans ahead of schedule,” said Neil Smith, an analyst at Bankhaus Lampe, who recommends investors buy the shares. “There was a fear that the bank would need a capital increase to get out of shipping.”
The shares surged as much as 17 percent, the biggest intraday gain since May 2013, and traded at 7.46 euros at 12:38 p.m. in Frankfurt. They have declined about 22 percent this year as a rout among European lenders deepened. Deutsche Bank AG, Germany’s biggest lender, lost about 34 percent of its value in that period.
Stock markets are exaggerating risks “to an amazing extent” and the company is sticking to its medium-term target on dividend payouts, Chief Financial Officer Stephan Engels said on a call with analysts. Blessing told Bloomberg TV in an interview that he doesn’t see a “specific problem” with the bank’s balance sheet, when commenting on sliding share prices.
“Today’s stock reaction feels much better than what we’ve seen over the past few weeks,” Blessing said. “We sent a strong message with today’s results.”
Commerzbank’s non-core assets unit saw its pretax loss shrink to 61 million euros in the fourth quarter from 189 million euros a year earlier as loan-loss provisions dropped 74 percent to 53 million euros, according to the statement.
The company said it will dissolve the unit after shrinking its assets to 63 billion euros at the end of the year from 160 billion euros when it was set up in 2012. About 71 percent of assets, which also include government bonds, will be transferred to other units while the remainder will be held at a newly formed division for winding down assets. That unit will generate as much as 850 million euros of operating losses through 2019, it said.
While the shortfall could widen to 1 billion euros if global trade slumps, “no one expected them to be able to get out of shipping without losses and now they have put a number on it there’s some visibility,” said Smith.
“While we continue to see the bank’s earnings profile as weak, its risk profile substantially decreases with these results,” Heiner Luz, an analyst at Goldman Sachs Group Inc., said in a note on Friday. He raised his recommendation on the shares to neutral from sell.
Commerzbank’s previous goal was to wind down its shipping and commercial real estate assets to about 20 billion euros by the end of 2016. They stood at 18 billion euros at the end of December.
This year will be “challenging” given the economic environment and the bank will see a “moderate” increase in provisions for risky loans, the lender said. Commerzbank anticipates a “slight” increase in profit this year while costs will be kept stable with the exception of “additional external non-influenceable burdens,” according to the statement.
“The developments on capital and non-core assets are positive,” said Philipp Haessler, an analyst at Equinet AG who recommends buying the shares. “Their outlook is a little cautious but it’s not surprising that they don’t want to lean out of the window in this environment.”
Profit at the company’s consumer-banking unit surged to 160 million euros in the fourth quarter from 81 million euros a year earlier. An 18 percent jump in new mortgage loans in 2015 from the previous year “largely offset” the effect of the low interest rate environment, Commerzbank said.
Commerzbank will probably fail to reach goals for return on equity, a measure of profitability, and costs as a share of revenue at the units it deems as central to its business in 2016, Engels said. The bank didn’t anticipate economic developments and low interest rates when setting the targets, he said.
The core bank’s net ROE was 8.1 percent last year, while the cost-income ratio, a measure of efficiency, stood at 72 percent. That compares with targets of more than 10 percent and about 60 percent that the bank had set for this year.
The non-core unit helped Commerzbank build its common equity Tier 1 ratio, a key measure of financial strength, to 12 percent at the end of the year from 9.3 percent a year earlier, according to its filings. That’s above the 11.75 percent ratio the European Central Bank will hold the company to in 2019 when factoring in estimates for additional surcharges, the bank said.
In the full year, net profit jumped to 1.1 billion euros from 266 million euros, while loan-loss provisions dropped 39 percent to 696 million euros. The lender will cut its bonus pool “very slightly” from 2014, according to Blessing.
“2015 has shown that our strategy is right and that the implementation has been successful,” Blessing said in the statement. “For the first time in five years, we have attained a net profit of more than 1 billion euros and have seen further significant strengthening of our capital base.”
Commerzbank has drafted a shortlist of candidates to replace Blessing when he retires after conducting interviews with internal and external people, according to a note to staff obtained by Bloomberg. The bank wants to conclude the process by its annual shareholder meeting in April, Supervisory Board Chairman Klaus-Peter Mueller said in the note.
“My successor will still have a lot to do and it will remain difficult and challenging,” Blessing told reporters on Friday, when asked about his departure. He declined to comment about his future plans. “I’m wishing my successor the best of luck, will keep fingers crossed and will do my best for an orderly handover.”
Commerzbank’s accounts for the fourth quarter of 2014 included charges related to its agreement with U.S. authorities in March last year to pay $1.45 billion to settle sanctions and anti-money laundering violations.