Deutsche Bank, Commerzbank set for strong profits though cost pressures mount

Germany's two largest listed lenders, Deutsche Bank AG and Commerzbank AG, are expected to achieve multiyear high profits for full year 2022 as eurozone interest rate hikes push revenues up and restructuring efforts lower expenses.

Commerzbank has guided for net income of more than €1 billion for the full year, a result the bank has not achieved since 2015, S&P Global Market Intelligence data shows. While not setting a profit target for itself, sell-side analyst estimates put Deutsche Bank's net income at some €3.7 billion in 2022. That would be the bank's best full-year profit since 2011.

Revenue and net income forecasts for both banks have increased over the course of the year, reflecting progress in ongoing strategic overhauls and tailwinds from central bank policies.

'No small feat'

Given the challenging macroeconomic and market backdrop, Deutsche Bank's return on tangible equity, or ROTE, of 8% the first nine months of 2022 was "no small feat," according to Morgan Stanley analyst Magdalena Stoklosa. The result matched Deutsche Bank's ROTE target for full year 2022.

Berenberg analysts said Deutsche Bank's transformation so far has been "impressive." CFRA Research analyst Firdaus Ibrahim said that both banks have made good restructuring progress thanks to cost-reduction efforts.

Sell-side analyst forecasts call for continued growth in revenue and net income through 2023 at both institutions.

Income outpacing costs

Both Deutsche Bank and Commerzbank have been able to keep their operating incomes above operating expenses during the past five quarters. The former has been more successful in cost reduction than the latter, however, keeping a wider gap between costs and income in the period.

Higher costs may hurt profitability in coming years

Cost-to-income ratios also have fallen over the past five years. Those ratios could come under pressure in 2023 and 2024 due to rising costs, which could also weigh on profitability, Berenberg analysts said.

Deutsche Bank has increased its cost-to-income ratio guidance to the low to mid-70% range in 2022 from the initially expected 70%, CFO James von Moltke said at a Nov. 9 conference presentation. Rising inflation means the group needs to work even harder on expenses, von Moltke added.

At more than €27 billion, Deutsche Bank's revenues are expected to "meaningfully exceed" the group's original target of €24.5 billion, Berenberg analysts said. Rising costs have prevented the translation of the additional revenues into higher returns, leaving Deutsche Bank's ROTE target unchanged at 8%, they added.

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Commerzbank has kept its 2022 cost target at €6.4 billion but also warned of growing inflationary pressures. The bank has raised its revenue and operating profit targets for 2024, when its restructuring will be completed, but also increased its cost target for the period.

With higher costs offsetting some of the revenue growth, Commerzbank's 2024 cost-to-income ratio and ROTE targets remain unchanged at 60% and 7.3%, respectively, CEO Manfred Knof said on a Nov. 9 earnings call.

Berenberg, however, argued that the targeted additional revenues of €900 million, accompanied by €600 million increase in costs in 2024, equates to a marginal cost-to-income ratio of 67%, suggesting that Commerzbank could struggle to cut the ratio to the targeted 60%.