Commerzbank AG (CRZBY)

[Enterprising Investor]

Commerzbank Swings to Profit (5/07/14)

Absence of Restructuring Costs Boosts German Bank's First-Quarter Results

Commerzbank AG swung to a first-quarter net profit of €200 million ($278 million) after recording a loss in the same period a year ago, helped by the absence of hefty restructuring costs which hurt its first-quarter results last year.

Shares of Germany's second-largest lender were down 3.75% in midday trading, making it the biggest decliner among European banking stocks after net profit missed analysts' estimates of €227 million and the bank failed to boost its capital buffers in the quarter.

Commerzbank's capital ratio, a key measure of its ability to weather a crisis, remained flat at 9%.

"The flat…ratio was disappointing and begs the question why the bank didn't make more progress," analyst Neil Smith from Bankhaus Lampe said.

Chief Financial Officer Stephan Engels moved to reassure investors in a conference call Wednesday, saying the bank is strongly capitalized and feels well prepared for the this year's stress test of Europe's largest banks.

Commerzbank posted a €94 million net loss in the first quarter of 2013, which included €500 million in expenses for sweeping job cuts.

Operating profit, a better yardstick for the bank's performance, fell 30% to €324 million from €464 million a year earlier as sluggish client activity weighed on investment banking operations. The unit's revenues from fixed income and currency sales and trading fell by almost a third to €135 million.

Commerzbank's rivals have also posted fixed-income trading declines with Deutsche Bank AG's fixed-income sales and trading business falling 10% and Barclays PLC's by 41%. The investment banking unit's overall profit fell to €215 million, down from €272 million.

In Commerzbank's case, the faster run down of its internal bad bank which contains its nonperforming loans also dented overall profit. The operation that houses shipping and commercial real-estate loans as well as sovereign bonds doubled its loss to €172 million in the first quarter.

The bank reduced unwanted assets to €102 billion, down 12% from the end of last year and down 29% from the end of March 2013. A large part of the reduction was achieved by transferring some securities and bonds that help improve liquidity back into the core bank. "This might change the valuation of the core bank at some point," Mr. Smith said.

On the flip side, Commerzbank activities with midsize business clients as well as its operations in Central and Eastern European and the private customers segment posted higher profits on the back of lower loan loss provisions or higher revenues.

Commerzbank repeated its outlook for the full year, saying pretax and net profit would be "considerably higher in 2014." In 2013, the bank recorded net profit of €78 million.

Write to Eyk Henning at [e-mail]

http://online.wsj.com/news/articles/SB10001424052702304431104579546990686279908