Stephan Engels - CFO

Nicholas Herman - Citigroup Britta Schmidt - Autonomous Hugo Cruz - KBW Kiri Vijayarajah - Barclays

Good morning, ladies and gentlemen, welcome to our conference call. Five weeks after our strategic announcement in London, I will today present our figures for the third quarter 2016. Before doing so, let me quickly look back at the Capital Markets Day. Key to our program, Commerzbank 4.0 is a stringent customer-oriented business model with two balanced segments, private and small business customers, as well as corporate clients. The continuous growth in retail banking and mBank, as well as our strong market position in corporate banking already contribute to the implementation of our strategy, and form a very good basis for further growth and increased profitability. Furthermore, our prudent track record in cost management is a strong starting point to further increase our efficiency by means of digitization. Since the strategic update, we have talked to a lot of investors and received encouraging feedback, in line with the rating agencies that back our strategic initiatives with stable ratings. Before turning to our Q3 result, which shouldn't be too surprising, given the guidance provided, let me say that today's call has to be limited to 45 minutes including a slightly shorter presentation from myself. Let me start with our summary on page 1. In Q3, we achieved an operating result of EUR429 million based on total Group revenues of EUR2.4 billion. Further growth in private customers and CEE underpins our successful growth strategy in these divisions. Expenses stay almost flat at EUR1.7 billion. Continued active cost management compensates for our digitization and regulatory efforts, as well as the additional external burdens from the Polish banking tax. Overall, for the first nine months, the operating return on tangible equity stands at 5.3%. Q3 confirmed our healthy risk profile, proven by a low NPL ratio of 1.7%. The increase compared to the previous quarter stems from single cases in MSB, and corporates and markets, as well as deteriorating shipping markets. In line with our conservative risk policy, shipping LLPs are recognized timely. Our cost of risk for the first nine months of 2016 stands at low 19 basis points including ACR, and 10 basis points excluding ACR. With regards to capital we improved our Core Tier 1 ratio to 11.8%, and are therefore well on track to achieve around 12% by the end of the year. The 30 basis points increase, quarter on quarter, primarily results from a EUR4 billion decrease in RWAs due to effective risk management. As of Q3 our fully phased-in leverage ratio strengthened to a comfortable 4.5%, which compares very well in peer benchmarking. Let me directly move to slide 3 to have a look at the first nine months' figures of our new client-facing segments, which have been set up according to our new strategy. Both segments, corporate clients and private small business customers contribute almost equally to the Group result. As highlighted our, at our Capital Markets Day, private and small business customers require significantly less RWAs than corporate clients, and are therefore more capital efficient. This is why we will focus further growth initiatives on private and small business customers, while improving RWA efficiency is one of the key approaches for corporate clients. Please expect a comprehensive disclosure of the new segmental structure with the full year results on February 9 next year, and the respective restatement ahead of Q4 numbers. As we look into the business segments in the former structure later in my presentation, let me just spend a few words on our segment others and consolidation on Page 4. Driven by a better treasury contribution, others and consolidation showed an improved operating result of minus €62 million in Q3 2016, well above our quarterly guidance of minus €100 million to €150 million. From today's perspective, also Q4 will likely be at the better end of this range. Please turn to Slide 5 where we have summarized the development of the Group P&L. Our Group operating result of €429 million in Q3 benefitted from an overall stable revenue development during the summer, and from positive valuation effect of 181 million compared to Q2. This number includes both OCS and XVA effects, as well as other valuation effects in ACR, mainly due to mark to market valuations of derivatives. The €88 million increase on loan-loss provision is driven by shipping, as well as the almost flat costs, are in line with our provided outlook. In Q3, we have booked €57 million restructuring charges, to reflect the further realignment of our corporates and market setup in New York, and internal process optimizations in our Germany-based, back-office operations. Taking into account the non-tax deductible goodwill impairment of €627 million, as well as tax and minority, the Q3 net result is negative, as guided, and amounts to minus €288 million. Let me briefly touch on the final goodwill impairment of €627 million compared to our Capital Markets Day guidance of around €700 million. On the basis of finalized numbers with the auditor, the difference basically results from the higher returned goodwill of small business customers in the new segment private and small business customers. Let's carry on with Page 6 that gives you an overview of the cost development. Thanks to our strict cost management Group expenses turned out to be stable quarter on quarter, and total €1.7 billion in Q3. Overall, expenses, for the first nine months of the year, even decreased by €85 million compared to 2015. Through our active cost management, we managed to reduce costs by €260 million. This more than compensates for investments and digitization, regulatory and compliance, as well as external burdens including the Polish banking tax, together summing up to €175 million. Our cost management achievements include, amongst others, FTE reductions and successful sourcing initiatives. On a net basis, Group FTEs decreased for, like for like, by roughly 900. On top of that we successfully sourced more than 500 people into service units within the Group. These sourcing initiatives lead to significant cost savings per headcount. This demonstrates that we deliver on our cost ambition and we will also do so in the execution of our strategic agenda. Loan-loss provisions and the development of our NPL ratio are shown on Pages 7 and 8. Overall, LLPs remain at low levels with €275 million in Q3, and reflect the good quality of our loan book and the healthy German economy. This is also underpinned by our low NPL ratio of 1.7% at the end of Q3. By contrast, shipping markets still suffer from chronic over-capacity. In particular, the market for container vessels up to a certain size remains difficult as contracts are short term. Tankers continue to be dependent on oil market development. For bulkers, we have seen some signs of recovery over the last months; for example, the scrapping volumes of oil bulkers went up with positive impact on charter rates. Our management team reduced the ACR shipping exposure from more than 20 billion EaD end of 2010 to 5 billion as of Q3, will further use their experienced successfully manage the portfolio in this market environment. The cost of risks stay at a low level of 19 basis points for the first nine months of the year, with ACR contributing 226 basis points; without ACR costs are only 10 basis point. This proves the overall sound asset quality resulting from our German-centric business model. Page 9 shows the development of our risk-weighted assets in Q3 2016. Fully phased-in Group RWAs came out at €195 billion. The decrease versus Q2 is primarily driven by lower credit risk RWAs, that reduced by €4.4 billion. Let me give you a bit more background. Firstly, we actively manage our portfolio with a clear target to optimize capital efficiency without affecting our core franchise. As part of the toolkit, we took advantage of the current low yield environment through bond sales in the investment book. Secondly, the decision to optimize our corresponding banks network also led to reduction of attached credit RWAs. Let me point out that the RWA development in Q3 serves as a good proof point for our ability to effectively manage risk and capital well in line with our guidance at the Capital Markets Day, to focus on RWA efficient businesses. This leads to slide 10 where we provide you with the quarterly development of our fully phased-in core Tier 1 ratio. The ratio increased by 30 basis points in Q3 to 11.8%. Thus, we stand above the 2019fully loaded SREP requirement of 11.75% including a G-SIB buffer of 1.5%. As you are certainly interested in an update here, let me give you a brief outlook on this year's SREP process. Conversations are still ongoing and we have not received the final letter yet. However, our expectations towards the 2017 SREP requirement remain unchanged. In other words, we are confident to meet all SREP requirements including Pillar 2 guidance both in 2017 and '18. Although the main part of the ratio development can be attributed to the RWA decrease, as pointed out before, we have also seen a net positive contribution from capital over the quarter. On the positive side, firstly, the revaluation reserve recovered by €97 million compared to Q2, mainly driven by tightened Italian credit spread. Secondly, and consistent with our Capital Markets Day guidance, there will be no dividend payment in 2016; hence, the H1 accrual amount of €125 million is released. And thirdly, Q3 net profit contributes positively excluding the capital-neutral impairment of goodwill. By contrast, actuarial gains and losses affected capital by minus EUR150 million in Q3 mainly driven by lower discount rates for pension liabilities, but decreased from 1.7% to 1.4%. For comparison, at the end of Q4 2013 the discount rate stood at 3.9%. Since then, we had to compensate for a net decrease in actuarial gains and losses of roughly EUR900 million, primarily due to the change in discount rates. Let me now focus on the segments of the former structure and start with private customers, on slide 11. In Q3 PC achieved its highest operating result in 2016 with EUR209 million, despite ongoing challenging market environment. Let me highlight the successful growth track. Year-on-year loan volumes increased by 8% at overall stable margins. We further strengthened our market position in new mortgages benefiting from healthy demand, and our proper offering for this product. Since 2012, we have nearly doubled our market share in new mortgages, which now exceeds 10%. Due to slightly better securities performance and various pricing initiatives, net commission income increased by 3% compared to Q2. Also, our customer base grows further. Over the summer months we have acquired 54,000 net new customers due to our attractive product offering. With a total of 994,000 net new customers from 2013 up to Q3, we are very close to our strategic target of 1 million net new customers. In Q3, Commerzbank successfully completed the sale of its Luxembourg-based international wealth management activities. The sale supports Q3 revenues in PC by EUR25 million. While the Visa Europe transaction backed the Q2 result by EUR58 million. Let's carry on with Mittelstandsbank as shown on page 12. Overall, MSB maintained its strong market position in a competitive market environment. Excluding valuation adjustment, this leads to a stable operating result 2016 with the Q3 operating result amounting to EUR208 million. Fewer transactions and overall lower deal sizes in our corporate finance business have an impact on net commission income. Whereas revenues of financial institutions developed stable quarter on quarter, they decreased compared to Q3 2015. This mainly results from our decision to refocus the business model, in order to cope with our strict compliance and risk framework, and corresponds with lower credit RWAs as mentioned earlier. Let me now come to the impact of negative interest rates on net interest income also in MSB. Therefore, we updated slide 13, you'll remember from the previous two quarters. As illustrated, the gross burden on deposit margins for PC and MSB adds up to EUR226 million, comparing the first nine months 2015 and 2016, and is therefore EUR65 million higher than over the same period a year earlier. Active mitigation measures in private clients focus on growing loan volumes, in particular in mortgages. In MSB, the negative impact softened in Q3 as we significantly reduced the deposit base. Since the beginning of the year, deposits in MSB decreased by EUR21 billion. Thus, our loan-to-deposit ratio in Mittelstandsbank has improved to a more healthy 88% in the negative interest rate environment. Besides lowering deposit volumes, we continue our pricing effort and agreed upon deposit fees with our clients on a volume of around €10 billion to date. Talking about deposits, let me take this as an opportunity to give you an update on our capital market funding activities. Our funding profile remains diversified and sound. On top of our broad deposit base, we use senior unsecured instruments and Pfandbriefe for our funding purposes. In 2016, we have successfully issues €2.4 billion unsecured bonds, and €2.9 billion Pfandbriefe including benchmarks, especially Pfandbriefe backed by retail mortgages represent a cost-efficient funding instrument. Together with our €1.4 billion issuance of Tier 2, we have already covered, more or less, all of our funding needs for 2016. Going forward, we expect issuance volumes at similar levels. For more details, please take a look at page 25 of the presentation. Let's continue with the segments and turn to Central and Eastern Europe. As illustrated on Page 14, we achieved an operating result of €57 million. Excluding the one-off gain from Visa Europe transaction in Q2, we managed to increase operating revenues by 10% quarter on quarter. The sources of growth show their well-diversified nature. Net interest income came out 7% stronger due to higher volumes and margin improvements, and commission income increased by 15%. Since the beginning of the year, mBank grew consumer loans by 15% and attracted 12% higher deposit volumes. This highlights that mBank's organic growth path is well on track and allows a slightly higher headcount compared to Q3 2015. Let's carry on with corporates and markets on page 15. Corporates and markets delivered a solid quarter with stable revenues, excluding OCS and XVA across business lines, compared to Q3 2015 and, in particular, Q2 2016, despite traditionally slower client activity over the summer months. The operating result stands at €104 million in Q3, including effects from OCA and XVA of €82 million. Given our client-centric business model and regional focus, we did not profit from stronger U.S. securities markets the way some competitors did. With regards to our strategic agenda, we initiated the integration of the new corporate clients' segment. As pointed out during the Capital Markets Day, this encompasses the discontinuation of the complex and exotic rates derivatives business and ring-fencing of the EMC financial product and market-maker business in the subsidiary. The clear intention is to bring this attractive to the market. However, and I'd like to emphasize this, we continue to offer corporates the full range of capital markets products and advisory. This includes debt or equity financing on the capital markets, structured financing and hedging solutions. In addition, our equity capital markets business, for example, covering rights issues and M&A transactions for our clients, and our cash equities and research business, of course, continue to be core businesses for us. Finally, let's turn to page 16 and have a look at the development of our segment asset and capital recovery that ended the quarter with an operating result of a minus of €108 million. On the one hand, positive valuation effects of 130 million due to movements in CVA/DVA and mark-to-market of hedging derivatives had a significant impact on the revenue increase quarter on quarter. On the other hand, higher loan-loss provisions, as mentioned before, are partly offsetting higher revenues. As guided at our Capital Markets Day, we are confident to continue our successful asset rundown with a target to almost completely de-risk shipping and commercial real estate by 2020. To conclude, I would like to provide you with our outlook as shown on page 17, as well as some further explanation. First, we expect to keep our cost base stable compared to 2015. In comparison to our previous guidance, this means that we will fully compensate additional external burdens including the Polish banking tax, as well as investments into digitalization and regulatory. Second, on loan-loss provisions, we can now provide you with a more precise outlook. Despite continuously challenging shipping markets, we expect loan-loss provisions below €R1 billion for 2016. Third, we expect a positive net result for the full year 2016. As we all know, the goodwill is not tax deductible and does, therefore, not lower the tax rate. So, from the basis of profit before tax, including the goodwill impairment, the IFRS tax rate for the full year will be somewhat higher than the normalized rate of 25% to 30%. Fourth, we expect the Core Tier 1 ratio to be around 12% at yearend. Ladies and gentlemen, let me finally wrap up the quarter. We have seen further growth in retail banking and mBank, and maintained our strong market position in corporate banking. We successfully continued our active cost management and increased the core Tier 1 capital ratio to 11.8%. Including our sound risk profile, these are good prerequisites for our Commerzbank 4.0 strategy, which we will forcefully implement now. Thank you for your attention, and I'm now looking forward to your questions.

And the first question comes from Nicholas Herman from Citigroup.

I have three questions please. The first is on your outlook. Clearly, there are a lot of moving parts and provisions of 1 billion for the full year would be a big increase, even versus this quarter. However, is it fair to say that your full year guidance implies an increase in underlying revenues in the fourth quarter? And if so, what would drive this? My second quarter questions is on MSB. Last quarter you said that you had reduced deposits by 22 billion, now you're saying that the nine-month rate is 21 billion, which implies an increase in deposits of 1 billion in this quarter. Are you done with your deposit reductions now, or is there more to come? And then finally, in corporates and markets, just a quick clarification on what revenue line item the CVA/DVA effect, is it all thick? Thank you.

Yes, indeed, the outlook for LLPs is below 1 billion. It's not the full 1 billion; we expect it to be below 1 billion. That will mainly be driven by the shipping book, as already in Q3. Please keep in mind that on the revenue line, for the Q4, we'll probably see the HETA resolution being booked, which will obviously help with around €140 million. On the MSB, indeed deposits got up a little bit, by EUR1 billion. But since beginning of the year, we have on top of the reduction of deposits, agreed for deposit of fees for an additional volume of EUR10 billion. So, in total we have addressed now in excess of EUR30 billion deposits, either by driving them off or pricing them. I wouldn't expect more deposits to move out currently. I'd rather think that we would go on with our initiatives on the pricing side. The third one…

Revenue new line items.

CVA/DVA, I think that's mainly across all of the business lines. The OCS effect, which you see also positively, is driven by the issuance of a benchmark funding in Q3, which pushed the reference rate a little bit down.

Right thank you. I just, just a follow-up on the last point. There isn't one particular item that it affected more than others?

No.

And the next question comes from Britta Schmidt from Autonomous.

I've got three questions please. The first one is could you give us a little bit more insight into the single cases that have driven the NPL increase in Mittelstand, and corporates and markets? Are there any specific sectors that you're seeing that are coming under more pressure? And what's the outlook here? The second one would be on the seasonality in corporates and markets. Should we expect that in the future, some of that is going to reduce, due to some of the exiting of trading businesses, or is it going to be something that we still have to incorporate? And the third question is on the net new customer acquisitions. It's still running at a run rate that's in line with your old business plan, but your new business plan is significantly more aggressive. How do you see that progressing in terms of step up to twice the run rate that we currently have? Is that something that you expect to come across from Q4? Is it something that's more back end loaded? Can you give us any more insight there, please?

Yes, on the single cases, as we all know, we're not going to disclose names. But I would expect, for both of them, a, let's say, reasonably quick resolution, which means that the NPL volumes on these two cases should go back to normal, in inverted commas, over the next two quarters. So, in that sense, that is not a specific sector issue, nor is it a portfolio issue, or something that is of concern. Indeed, seasonality should be a little bit less pronounced in our business model, going forward. But still I think there are and there will be also in future, certain events and markets where even in our customer-oriented business model, people then tend to, or customers then tend to take more cover, be it FX or interest rates, or something like else, and something like that. I think there's a number of events coming up, like the U.S. election, and so on, over the next quarters, that may or may not trigger these things. Net new customers, I would expect a gradual step up over the quarter, so it's not back-end loaded. And I guess you will see a good part of that coming in terms of initiatives, actions, products, already during 2017.

And we have a further question coming from Hugo Cruz from KBW.

Now, that you have a bit more visibility on capital and so, can you update us on your thoughts on AT1 issuance and when you might be able to pay dividends? Thank you.

On dividend, I would stick to what has been said on the Capital Markets Day, which means that our current working assumption is that we will, for 2017 and 2018, not pay a dividend, because we want to cover the restructuring expenses there, and still want to be around 12% capital ratio. With respect to AT1, that also is unchanged. We watch the market, we look at the instruments, but we currently don't see a real requirement for us to issue AT1.

And the next question comes from Kiri Vijayarajah from Barclays.

Just a quick question on the reduction in the financial institutions, RWAs you've done in the quarter. Is the revenue impact from exiting those relationships, largely in the P&L already? And then when you think about the 20 bps in capital you're hoping to add in the fourth quarter, is it fair to say a big chunk of that's also going to come from further RWA reductions, rather than retained earnings? Thank you.

The FI business has seen roughly a €70 million reduction in revenues, year over year. Part of that, obviously, is also driven by the reshaping of our correspondent banking business and, thereby, also the RWA stuff. But as I've mentioned it's also, in general, lower deal volumes and a little bit less of activity. On the 20 bps, I would normally -- I would expect the normal mix on the first quarter, so it's both retained earnings and RWAs.

At the moment, it's seems to be no further questions. [Operator Instruction] There are no further questions.

Okay, thank you very much. I'm looking forward to see or hear you on our full-year release in February. Thank you and have a good day.