Commerzbank AG's upgraded 2024 targets are achievable, yet the German bank could still face significant risks from the Russia-Ukraine conflict, the impact of which had not been envisaged when the goals were outlined, analysts said.

Counting on expected positive developments in its customer business and rate hikes in Poland, Commerzbank unveiled more bullish targets, of which a key item is a €400 million bump in its revenue target to €9.1 billion. The bank also said a return to dividends could happen earlier than initially anticipated.

Commerzbank's 2021 revenues hit €8.46 billion, mainly driven by the private and small business customers segment, or PSBC, including Warsaw-based mBank SA. As of March 14, the consensus estimate of 12 analysts compiled by the bank projected annual increases reaching €8.88 billion come 2024.

The new revenue target factored in a potential €200 million increase in revenues at mBank based on the Polish central bank's benchmark interest rate of 2.25% at the time the targets were determined. The central bank has since further raised rates, now at 3.50%, and more hikes could happen this year.

Analysts at UBS view the target as broadly achievable considering that it did not factor in potential rate increases outside Poland, but they remain cautious given the uncertainty over the length and severity of the Russia-Ukraine war. Analysts at S&P Global Ratings and Berenberg Research also struck a similar tone.

The ECB is widely expected to increase its key rate this year amid burgeoning inflation in the eurozone. However, any monetary policy tightening appears unlikely any time soon as the ECB has said it would only raise rates after the end of its net bond-buying program, set in the third quarter.

If the forward curve from early February materializes, net interest income from deposits in PSBC and the corporate clients segments could be up to €850 million above target, CFO Bettina Orlopp said during the targets' presentation.

War impact

Commerzbank could be impacted by shocks, unintended side effects and one-offs relating to GDP slowdown and inflation, UBS analysts said in a March 10 note. Operational issues could also arise due to sanctions against Russia.

The bank could also face roadblocks in its domestic business, according to Benjamin Heinrich, a director at the financial institutions team at Ratings.

"[It] is uncertain whether Commerzbank will be able to preserve its structural revenue capacity despite extensive restructuring," Heinrich said, noting that the bank has had "little success in defending its revenue pool" in previous restructuring efforts.

The group's Strategy 2024 is a revision of its previous five-year plan through 2023, dubbed "Commerzbank 5.0," which was deemed insufficient by regulators and investors to boost profitability.

Orlopp has said the bank is on track to meet its goals. It had a "very nice start" to 2022 across all revenue streams, providing "a little bit of comfort" for the first quarter, the CFO said March 16 at the Morgan Stanley European Financials Conference in London.

A spokesperson for Commerzbank did not comment further on the strategy. Key investor BlackRock declined to comment, while Cerberus did not respond to a request for comment.

Orlopp also said the bank's exposure to Russia has been trimmed further to €1.3 billion and the reduction efforts were ongoing. The bank is winding down transactions in the country.

The worst-case scenario would be a €1.3 billion loss that "would not be great, but easy to absorb," Orlopp said.

Capital returns

The war's impact will be manageable as Commerzbank still holds substantial management overlays in loan loss provision, Ratings' Heinrich said. At the very least, second-round effects worsening the operating environment could impact capital return efforts, Heinrich added.

Proceeding with capital returns depends primarily on delivering solid profitability and holding enough of a buffer to its minimum distributable amount, Orlopp said at the conference. A "healthy buffer" would be between 200 basis points and 250 basis points.

At the end of 2021, Commerzbank's common equity Tier 1 ratio was 13.6%, well above its 9.53% minimum requirement.