Fitch: Commerzbank Capital Targets Now Achieved
The bank's internal capital generation is modest because low interest rates mean operating profits are constrained by fine margins hovering around 1%, and because of a large stock of low-yielding non-core assets and significant provisions to cover loan impairments on legacy assets and conduct and litigation fines, the latest of which was a large USD1.45bn in March for violating US sanctions.
Commerzbank is one of many large commercial banks in Europe and the US still working through large non-core and legacy portfolios and adapting business profiles to a future (and still evolving) regulatory environment where capital, liquidity and operational demands are more stringent. Its Frankfurt neighbour Deutsche Bank announced a new five-year strategy last Friday, including the sale of its domestic retail bank subsidiary and a substantial reduction of assets to achieve a leverage ratio of 5%.
In contrast to southern European banks, which are essentially still dealing with high volumes of domestic problem loans, those in the more stable European economies face prolonged pressure on revenue generation opportunities. Many large European banks have raised capital, cut back assets and exited businesses in recent years. Low interest rates, low levels of corporate investment and multiple setbacks from conduct fines have prevented banks achieving targets set as they emerged from the crisis.
Commerzbank's 2016 strategic plan is still looking ambitious at this stage. It will be challenged to achieve its 10% post-tax ROE performance target for its core bank on an on-going basis, due to the higher denominator, despite a strong 1Q15 result in line with performance at peers.
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