Commerzbank AG's new plan to cut 10,000 jobs and close 340 branches by 2024 will lower its cost base but may not lead to sustainable profits if the bank cannot preserve revenues in the current challenging economic environment, analysts said.
In its latest attempt to restructure, the German lender launched the new Strategy 2024 on Jan. 28, which targets a return on tangible equity of between 6.5% and 7% — mainly through a cost reduction of €1.4 billion — by 2024. The bank revised its previous Commerzbank 5.0 strategy and reshuffled senior management after coming under pressure from investors and regulators to make deeper cuts and aim for higher profitability in the medium term.
Although deeper, the newly announced cost reduction may not be enough to bring Commerzbank back to sustainable profitability if the group loses too much of its revenue base in the next few years, analysts said. Revenue outlook will likely be the key theme at Commerzbank's capital markets day on Feb. 11 as the market questions the group's ability to preserve revenues while cutting costs by roughly 20% and every third job in its core German market, UBS analysts said in a note Jan. 28.
Revenue woes
"We currently lack, in particular, information on the bank's planned measures to defend its revenue base in an environment with ultralow rates and intense competition," S&P Global Ratings analysts said in a bulletin Jan. 29. Achieving sustainable profitability remains a challenge under the revised strategy as Commerzbank has to take on more restructuring costs and COVID-19-related provisions in the coming years, they said.
The group's restructuring is already protracted and its past efforts to improve profitability have had "limited success" so far, the Ratings analysts said.
Commerzbank said earlier in February that it expects to post a net loss of about €2.9 billion for 2020, mainly due to restructuring charges of €800 million and the write-off of existing goodwill of €1.5 billion. The bank has also raised its risk result guidance for 2020, which includes pandemic-related provisions, to €1.7 billion from the previously expected range of €1.3 billion to €1.5 billion. The group will release its full-year earnings ahead of its capital markets day on Feb. 11.
The low interest rate environment is expected to lead to a single-digit percentage decline in Commerzbank's revenue for the full year 2020 with loan growth also slowing down due to the economic deterioration in Germany, driven by negative COVID-19 effects, CFRA Research equity analyst Firdaus Ibrahim said in a note Jan. 30.
The mean analyst consensus for Commerzbank's revenues in 2020 stands at €8.34 billion, compared to €8.62 billion reported by the bank for full year 2019. For 2021, analysts are expecting revenues of €8.52 billion, and €8.53 billion for each of 2022 and 2023.
Downside risks
With the bank's weakened performance in 2020, the risks to profitability over the the next few years remain "skewed to the downside" and the planned "significant" branch network reduction could negatively impact revenue generation as the bank becomes "more dependent on successful client and asset acquisition through digital channels," Fitch said in a report Feb. 5.
Prolonged lockdown periods due to COVID-19 in the first half of 2020 or setbacks in the efficacy or distribution of coronavirus vaccines may affect Commerzbank's earnings in 2021. Group capitalization may also come under pressure as the loan book starts to sour after COVID-19 aid schemes expire, Fitch said in an earlier report.
Commerzbank's asset quality has been "fairly stable" so far through the pandemic, its funding and liquidity are strong and its capitalization adequate, Fitch said. However, the bank's transformation is still considered challenging particularly as a new senior team will have to manage it following the departure of key management board members, including the CEO, the rating agency said. The execution risks to any new restructuring measures could increase if they are met by resistance from staff, Fitch said.
Shortly after Commerzbank launched the Strategy 2024, labor representative Stefan Wittmann, who sits on Commerzbank's supervisory board, said the 10,000 job cuts included in the new plan are "simply crazy," Reuters has reported.
Given Commerzbank's current cheap valuation, the downsides for the stock are limited even though the bank's strategy is not likely to be executed seamlessly in the current challenging environment, according to CFRA's Ibrahim. Despite the ups and downs related to COVID-19, Commerzbank's stock price at the time of the Strategy 2024 launch had hardly changed from the price at the time of the Commerzbank 5.0 strategy launch on Sept. 26, 2019.
