What happens to Deutsche Bank and Commerzbank?
The point about Deutsche Bank and Commerzbank. The results of the two banks, the latest news, analyst comments and future scenarios.
While Deutsche Bank begins to reap some benefits from the restructuring plan launched in July 2019 after the merger with Commerzbank failed, the latter lags behind. The largest German bank closed the third quarter of 2020 with a net profit of 309 million euros, exceeding analysts' expectations. The accounts, among other things, confirmed the importance of the leveraged loan business for the bank. Commerzbank, on the other hand, ended the third quarter of 2020 with a loss of 69 million euros, a figure that was affected by restructuring costs and provisions for future credit losses. In this context, the bank is awaiting the new CEO and a new turnaround plan that could arrive in the first quarter of 2021.
THE RESULTS OF DEUTSCHE BANK
The radical restructuring plan that Deutsche Bank outlined in July 2019 and which will last until 2022 seems to be paying off. The German bank closed the third quarter of 2020 with a net profit of 309 million euros (loss of 832 million euros in the third quarter of 2019), which brings the net profit for the nine months to 435 million euros (- 3.8 billion euros in the nine months of 2019).
Revenues for the third quarter amounted to € 5.9 billion (+ 13% year on year) and € 18.6 billion in the nine months (+ 4% year on year). A strong boost to turnover came from the Investment Bank division which achieved revenues of € 2.4 billion in the three months (+ 43% year on year) and of € 7.396 billion in the nine months (+ 35% year on year) . The turnover of the Investment Bank was supported by the item 'Debt Origination' for 387 million euros in the three months (+ 20% year on year) and for 1.225 billion euros in the nine months (+ 43% year on year). The Common Equity Tier 1 capital ratio remained stable at 13.3%, 285 basis points above the regulatory requirements.
The continuing and substantial cost reduction contributed to offsetting headwinds, including Covid-related credit losses and recurring restructuring charges. Overall, Deutsche Bank, as stated in the statement of accounts, remains on track to achieve all the financial and strategic objectives of the transformation plan. Analysts appreciated Deutsche Bank's results. UBS, for example, highlighted that net profit exceeded its expectations and those of consensus.
MOODY'S APPRECIATES THE PROGRESS OF THE TRANSFORMATION PLAN
Moody's confirmed Deutsche Bank's long-term rating at A3 and improved its outlook from negative to stable. The rating agency's move is based precisely on the fact that, more than twelve months after the start of the profound transformation, the bank has achieved a more balanced and sustainable business model.
THE BUSINESS OF LEVERAGE LOANS
Against this backdrop of improvement, the Financial Times wrote in a recent article that Deutsche Bank refused a request from the European Central Bank to suspend some of its core leveraged loan business, which was mainly granted for the purchase of private equity debt company. The ECB, tells the FT, in the summer sent the bank a letter explaining that the credit institution's internal risk management for highly leveraged transactions was "incomplete", giving Deutsche Bank the deadline of the end of September to fill gaps in risk management. The Supervisory Authority also "encouraged" the credit institution to freeze some transactions. The German bank replied to the ECB that the suspension was "impractical" even though it has strengthened its internal approval process and is currently aligned with the practices required by the European Central Bank.
Deutsche Bank, writes the Financial Times , stated in fact that “leveraged loans are an important business for the economy and for many banks, including Deutsche Bank. We have a solid experience in the business and we follow a prudent risk management approach, in line with the regulations ”. Leveraged loans are a high risk and return business and are included in the Debt Origination division which in the first nine months of 2020, as highlighted above, generated revenues of € 1.225 billion for Deutsche Bank. For leveraged loans, according to data from Dealogic, the Frankfurt-based credit institution controlled 8.6% of the market in Europe and 3.7% of the American one in the first nine months of this year. much bigger.
In general, the ECB has become increasingly concerned about the risks associated with leveraged financing operations in recent years as fierce competition between banks has led to a weakening of underwriting standards and an increase in financial leverage. The Coronavirus pandemic has increased the concerns of the regulator who raised the latest alarm in May 2020 , highlighting that the global markets for leveraged loans "are facing contraction winds not seen since the financial crisis of 2008-2009".
COMMERZBANK RESULTS
While Deutsche Bank begins to reap the benefits of the transformation plan, Commerzbank, with a much higher retail weight, lags further behind. Commerzbank closed the third quarter of 2020 with a net loss of 69 million euros (profit of 297 million euros in the same period of 2019) and a loss of 162 million euros in the nine months of 2020 (profit of 681 million euros of the nine months of 2019), while the internal reorganization continues and faces the impact of the Coronavirus epidemic. Revenues for the quarter amounted to € 2.033 billion (€ 2.182 billion in the same period of 2019) while the turnover for the nine months was equal to € 6.158 billion (€ 6.467 billion in the same period of the previous year) . The Common Equity Tier 1 ratio instead increased slightly to 13.5% (13.4% at the end of June 2020). Commerzbank, as the bank itself highlighted in the release, continues to work strategically on costs and has set the stage for further reductions through branch closures and headcount reductions.
LOSS AFFECTED BY RENOVATION COSTS AND PROVISIONS
The bank's net loss was affected by restructuring costs of € 201 million and by € 272 million of provisions for future credit losses made in the third quarter (€ 1.067 billion in the nine months of 2020), of which 181 millions of euros linked to the Covid pandemic. Commerzbank expects a further increase in the figure in the fourth quarter and expects to close 2020 with provisions for future credit losses between 1.3 and 1.5 billion euros. Considering this factor and the restructuring costs, the Bank expects to end the whole of 2020 at a loss. The Common Equity Tier 1 ratio will be at least 13% at the end of the year. For Commerzbank CFO Bettina Orlopp, it must be assumed that some small businesses will not be able to overcome the crisis, even if the bank does not expect a tsunami of insolvencies.
The Financial Times pointed out that Commerzbank's rise in loan loss provisions runs counter to the picture emerging from Deutsche Bank, where the headwinds linked to the pandemic in the third quarter eased faster than expected. Asked about the differences, the FT continues, the CFO said that Commerzbank has a "conservative approach" to provisions and then highlighted the enormous uncertainty caused by the pandemic. Commerzbank looks forward to the arrival of the new CEO Manfred Knof scheduled for January 2021. The bank's CFO has expressed confidence that the bank will be able to unveil a new turnaround plan in the first quarter of 2021.
THE COMMENT OF THE ANALYSTS
For Citigroup analysts, Commerzbank's results were disappointing but not disastrous. Experts also think that the Cet1 level will allow the bank to carry out another major restructuring. As for inorganic growth, UBS analysts think M&A is unlikely for Commerzbank, at least in the short term.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-vanno-deutsche-bank-e-commerzbank/ on Mon, 23 Nov 2020 08:23:30 +0000.