YWR: Not so Boring Commerzbank
Disclosure: These are personal views, not investment recommendations to buy or sell a security. For investment advice seek professional help.
Our Commerzbank trade is working surprisingly well. In September I pitched this as a boring but good investment (CBK’s Cashflow Pile Up), but it’s moving faster than expected.
We’ll do a quick review of the Q1 #’s because it doesn’t seem like a stretch for CBK to hit EUR 27/share. It’s also good for your macro view to see what’s happening in Euro bank land.
EUR 747 million of net profit in Q1 is a big number and annualises out to about EUR 2.5/share in EPS.
Net interest income has been stable at EUR 2.1bn/quarter despite the CFO guiding at the year end that it would drop in 2024 (‘ECB going to cut rates, deposit pricing pressure….’).
Commerzbank is benefitting from the continuation of the ECB’s 4% policy rate, the interest rate hedge portfolio rolling off, and deposit pricing pressure which isn’t as bad as they expected. Barclays is benefitting from this same hedge dynamic.
Higher for longer on interest rates is exactly why we are in the European banks. Money is getting more expensive, and will stay expensive, so we want to be in the business of selling it.
Commissions are picking up. We expected this would happen as the economy improves and corporate customers get more active. I’m still being conservative on this line item.
Commerzbank points out in their commentary that to their surprise the German economy is improving.
Another interesting sign is the balance sheet is growing. I was surprised to see total assets at 552bn. That’s a big jump from the 2023YE. CBK seems to be mostly growing its fixed income securities holdings, rather than the loan book. but to some extent the difference is irrelevant in modern banking.
I have had this view that the first stage of the European banks trade is that banks would make lots of money from higher net interest margins, but would remain mentally negative about the economy, growth and regulation (just super cautious after the last 14 years of getting burned on this). So the bank would just give the extra profits back to us, which is what’s happening with the dividends and buybacks.
The second stage, which I am looking/waiting for now, is for the banks to realise the sky isn’t falling, they are making record profits and maybe….they could start to grow again. And then it would be interesting to see the knock-on effect across Europe as the banking system flips from deleveraging mode to growth mode. This is the topic of last year’s post What do you do with EUR 250bn?
How do we make money?
Money making method #1.
We stay with CBK. It doesn’t seem like a stretch for it to get to 27 (another 70%) by 2026.
The EPS gets to roughly EUR 3.00/share by 2026. This is the combination of a little bit of growth, Polish mortgage provisions dropping off (the mess from lending to Polish customers in CHF) and share buybacks. CBK just finished a EUR 600mn buyback and will announce another buyback after the 1H results. I estimate they will be buying back at least EUR 800/mn year for a long time (4% of current market cap). The DPS for 2024 should be EUR 0.8- 1/share (5-6% yield).
I also like that consensus estimates are still conservative and getting revised up. The 2024 consensus estimate is 2.06 and 2.34 for 2025. The street might have to move their numbers up 20%.
The Book Value per Share is 24 currently and grows to 28/share in 2025.
If we put Commerzbank on a P/E of 9x we get to EUR 27.
If we put it on 1x price/book we get to 28/share.
Below is the historical price/book ratio. You see we are still at depressed levels despite the turnaround.
Here is the link to my updated Commerzbank model if you want to look at the forecasts. You have all the other earnings models too.
Money making method #2
As I said above I think Commerzbank and other European banks are close to the point where they switch into growth mode. Andrea Orcel at Unicredit is already ahead of the game, but the Germans are more conservative and take longer to join the party.
So where does the money flow when CBK wants to grow the loan book?
I think it’s renewable energy projects.
You might not realise it in the US but the reporting and regulations around ESG in Europe are intense. It’s partly why companies want to delist and move to the NYSE.
It means Commerzbank has to be really careful about its Scope 3 emissions (the carbon emitted by your customers) as it grows the loan book. So you can’t lend to chemical companies, can’t lend to shipping companies. Energy out too. Maybe real estate is OK.
But the no brainer is renewable energy infrastructure. And so Commerzbank now sees itself as a global leader in green energy financing. For banks this is the new bubble in the making.
Commerzbank has 3 global green energy financing hubs (Hamburg, New York and Singapore) and is building up its green energy portfolio. Now at EUR 9.5bn.
Commerzbank is also selling these green energy products to its customers. Green bonds, green investment funds.
So what’s the money making method #2?
I really don’t like these stocks, but I see a tidal wave of money going into renewable infrastructure everywhere I look. I see the private equity funds pushing it, I see the MegaFunds all blabbing about it in their annual reports (MegaFund positioning review) with pictures of wind farms, and I see the banks with nowhere else to lend all the money they are making. It’s a train smash of money going into building wind farms and solar parks.
So I can’t help but think Siemens Energy, Orsted, Vestas, Scatec Solar could all have a second life.
I stress I am not buying any of these stocks. I’m just pointing out the logic of why they might do well.
I do have some exposure through Vinci which has a renewable energy construction business. But I like Vinci for other reasons (YWR Infra Opportunties Fund). One of which is the next time I pay a EUR 40 toll driving around France I like to think 4cts of it will come back to me as a dividend.
Have a good weekend!
Erik