(Updates with outlook for provisions in seventh paragraph, comment on capital in 13th, losses from asset cuts in 18th.)
Feb. 13 (Bloomberg) -- Commerzbank AG, Germany’s second- largest bank, pledged to shrink at a faster pace as it reported fourth-quarter profit that exceeded analysts’ estimates. The shares climbed.
Net income of 64 million euros ($87 million) was boosted by lower provisions for risky loans and compared with a 726 million-euro loss a year earlier, the Frankfurt-based company said today. The average of nine analyst estimates compiled by Bloomberg was for a 23.3 million-euro profit.
“Capital and non-core asset reduction rather than profit are what’s in focus for Commerzbank,” said Neil Smith, an analyst at Bankhaus Lampe in Dusseldorf, Germany, who recommends investors sell the stock. “Everybody is going to be looking at their non-core asset reduction. That’s what’s going to be considered the good news today.”
Commerzbank said it will reduce the assets to about 75 billion euros by the end of 2016 compared with a previous goal of less than 90 billion euros and 116 billion euros at the end of 2013. The capital ratio under Basel III rules, a measure of financial strength, will exceed 10 percent by 2016 compared with 9 percent in 2013, it said. It had previously targeted a ratio of more than 9 percent.
The bank is selling and winding down the assets, which includes shipping and commercial real estate loans and sovereign and municipal debt, to meet conditions of an 18.2 billion-euro government bailout in 2009. It faces added scrutiny this year as the European Central Bank conducts an asset quality review of the euro area’s biggest banks and takes over as their supervisor.
Commerzbank’s shares rose as much as 4.1 percent to 13.95 euros in Frankfurt, the highest level since April 2012. They more than doubled in value since touching a record low on July 3 as the bank increased capital levels and reported profit that beat analysts’ estimates. The gains exceeded the 24 percent increase for the 43-member Bloomberg Europe Banks and Financial Services Index over the same period.
Loan-loss provisions, or capital set aside to cover potential losses from defaults, declined to 451 million euros in the fourth quarter from 614 million euros a year earlier, below an average estimate of 516.7 million euros. Provisions will probably fall this year from 1.75 billion euros last year, the company said.
“Thanks to the ongoing risk reduction and the continued consolidation of our capital base we were, on the whole, able to further increase the stability of the bank in 2013,” Chief Financial Officer Stephan Engels said in the statement.
Commerzbank is among European lenders that will attract most market attention during the ECB’s asset review and it is a clear laggard when it comes to legacy asset-quality problems, Paul Smillie, a credit analyst at Threadneedle Asset Management in Singapore, said in an interview today. Threadneedle is cautious on all Commerzbank subordinated debt, he said.
The bank is well-prepared for the ECB examination, Engels said. Loan-loss provisions in shipping will be 600 million euros this year, similar to those recorded in 2012 and 2013, he said.
Six of 36 analysts recommend buying Commerzbank shares, the lowest proportion since May last year, data compiled by Bloomberg show. Thirteen say sell the stock.
The ECB is conducting the asset review and a stress test in conjunction with the European Banking Authority. Lenders that fail will be required to raise capital. Commerzbank, in which the government holds a 17 percent stake after the bailout, completed its fifth capital increase in four years last May.
When asked at a press conference in Frankfurt if he could rule out a capital increase this year, Chief Executive Officer Martin Blessing said he would be well-advised to say that one can never rule something out no matter how unlikely one considers it.
Commerzbank pared shipping loans by 24 percent last year to 14 billion euros, meeting a target it had originally sent for 2016, the bank said today.
Commerzbank sold 710 million euros of non-performing commercial real estate loans in Spain as part of its asset reduction plan, the company said last week, without identifying the buyers.
The bank is sounding out investors for a sale of the remainder of its loans linked to Spanish commercial real estate in a deal named “Project Octopus,” according to three people with knowledge of the matter, Bloomberg News reported this week.
While the asset reduction “has been very successful in recent quarters and should continue,” it may generate higher pretax losses than investors had anticipated, Andreas Plaesier, an analyst with M.M. Warburg, wrote in an e-mailed report from Hamburg yesterday. Plaesier cut his recommendation on Commerzbank shares to sell from hold.
Commerzbank expects to take 2.9 billion euros of losses from winding down non-core assets through 2016, more than an earlier estimate of 2.3 billion euros, the company said today.
Blessing is also seeking to boost income from lending to consumers and businesses and lowering costs as he tackles losses from soured shipping and real estate loans.
The company said fourth-quarter operating profit fell 11 percent to 89 million euros from the third quarter.
Operating profit at the consumer bank more than doubled to 60 million euros in the fourth quarter from a year earlier. The corporate banking unit saw operating profit slide 42 percent to 220 million euros. Investment banking operating profit jumped 40 percent to 98 million euros in the period.
Commerzbank posted a loss in the fourth quarter of 2012 after taking a charge of 185 million euros related to the sale of a Ukrainian unit and writing down 560 million euros on deferred tax accruals.
--Editors: Mark Bentley, Frank Connelly