Commerzbank CFO sticks to guidance on shipping loans despite market pick-up

Abstract

Commerzbank AG will keep its full-year guidance for loan-loss provisions in its shipping portfolio unchanged despite the surge in charter rates in the first quarter, CFO Stephan Engels told analysts during a call after the release of the lender's first-quarter results. Shipping finance drove Commerzbank's total nonperforming loan volume slightly up in the first quarter to [euro]6.9 billion from [euro]6.8 billion in the year-ago period, though quarter over quarter the level remained unchanged. "In general,...

Commerzbank AG will keep its full-year guidance for loan-loss provisions in its shipping portfolio unchanged despite the surge in charter rates in the first quarter, CFO Stephan Engels told analysts during a call after the release of the lender's first-quarter results.

"We have definitely seen some very positive movements in the market if you compare the last 10 to 12 weeks with ... [the third and fourth quarter] of last year," he said.

"There is a clear pick-up of charter rates and other stuff. Our guidance remains unchanged since the structural issues of the industry are still not solved. I'd like to see another quarter of real sustainable improvement before I'd discuss guidance on this topic."

Charter rates for bulk carriers and containers surged recently, and full-year net fleet growth in those segments is expected at 2%, with 5% growth in the tanker segment, according to Commerzbank. The bank considers a sustainable recovery of charter rates unlikely before 2018 and for the container and tanker segments not before 2019. However, if new orders remain at the current low levels and scrapping activity remains high, then markets could recover earlier, the lender noted.

Commerzbank booked shipping loan-loss provisions of [euro]116 million in the first quarter, up from [euro]70 million in the year-ago period. As advised in its full-year 2016 earnings release, the lender expects full-year 2017 shipping loan-loss provisions to be in the range of [euro]450 million to [euro]600 million.

Shipping finance drove Commerzbank's total nonperforming loan volume slightly up in the first quarter to [euro]6.9 billion from [euro]6.8 billion in the year-ago period, though quarter over quarter the level remained unchanged.

Engels reiterated that the lender wants to clear almost all of the remaining shipping and commercial property loans from its books by 2020, as highlighted by CEO Martin Zielke at the May 3 annual general meeting. Commerzbank has run down its shipping portfolio by almost two thirds, or around [euro]19 billion, since 2008.

Total provisions for loan losses across the group amounted to [euro]195 million in the first quarter, up from [euro]148 million a year earlier. The nonperforming loan ratio stood at 1.5% at the end of the first quarter, down from 1.6% at the end of 2016.

Capital buffer

Even though Commerzbank's common equity Tier 1 ratio rose to 12.5% from 12.3% at the end of last year and 12.0% at the end of March 2016, Engels said he did not see any reason to raise the current guidance for the full year. The bank has stated that it wants to keep its CET1 ratio stable at, or slightly above, 12%.

"Keep in mind that if we book restructuring charges, that will also burden the capital ratio, and at the end of the year [for] IFRS9, we'd also like to keep a certain buffer available," the CFO told analysts.

He indicated that he does not consider the IFRS9 accounting rules, due to come into force next January, a major risk, but declined to give a projection of the impact on Commerzbank, promising more specific guidance in the second quarter. The expected average IFRS9 impact on European banks' CET1 ratios is around 50 basis points.

The improvement in Commerzbank's CET1 ratio was mainly down to the reduction in risk-weighted assets during the first quarter. Thanks to a decline in operational risks, the lender's RWAs fell to [euro]186 billion from [euro]190 billion three months earlier and [euro]195 billion a year ago.

Engels projected continued pressure on net interest income throughout the year as rates remain low. "In general, [net interest income] is still burdened by the low-interest-rate environment, so for the full year, we expect [euro]200 million gross impact, which will be offset by growth in loans and other positions, so it nets out to around [euro]100 million," he told analysts.

Quarterly net interest income fell on a yearly basis to [euro]1.08 billion from [euro]1.33 billion, while net commission income rose to [euro]887 million from [euro]823 million. Net trading income and net income from hedge accounting increased to [euro]364 million from [euro]12 million.