Commerzbank reports record profits, boosted by higher interest rates

Higher interest rates helped German lender Commerzbank achieve record profits last year, with net income rising to more than €2.2 billion ($2.4 billion) in 2023 from €1.4 billion in the previous year.

"We will not rest on our laurels from 2023," Commerzbank chief executive Manfred Knof said on Thursday.

He added that the bank would "increase the result again in the current year" and prove that it can "grow profitably even in a less favourable interest rate environment."

The profits topped the bank's previous record from 2007 of €1.9 billion, which came before financial crisis threw the bank into deep losses that required a major public bailout from the German government.

Commerzbank's net interest income increased by almost 30% to around €8.4 billion in 2023, driven by repeated interest rate hikes from the European Central Bank (ECB) intended to fight high inflation in the eurozone.

Commerzbank's total income increased by just under 11% to around €10.5 billion within the space of a year.

The amount of money set aside for loan defaults also dropped to €618 million, well below the previous year's figure of €876 million. Commerzbank executives expect loan defaults in 2024 as a whole to also remain below €800 million.

Knof, the chief executive, had pushed through a series of cost-cutting and savings measures since taking over at Commerzbank at the beginning of 2021. The bank has slashed thousands of jobs and significantly reduced its branch network in Germany from 1,000 locations to 400.

Commerzbank's 2022 results were dragged down by more than €1 billion in losses at Polish subsidiary mBank, including from major problems with home loans to Polish residents that were denominated in Swiss francs.

Last year, special charges and write-offs in Poland totalling around €1.1 billion also depressed earnings.

The bank is attempting to mitigate the legal risks in this area through out-of-court settlements, chief financial officer Bettina Orlopp told analysts on Thursday.

"We are not at the end of the tunnel, but we clearly see light at the end of the tunnel," Orlopp said.

In the coming years, Commerzbank hopes that growing business with wealthy private clients and additional digital offerings for corporate clients will bring in even higher profits.

The bank's management board aims to increase net profit to around €3.4 billion by 2027.

Shareholders are also set to benefit, with around €1 billion earmarked for share buybacks and dividends in the 2023 financial year. The bank plans to pay dividends of €0.35 per share, up from €0.20 in the previous year.

Overall, the bank has set aside around €3 billion for buybacks and dividends between the 2022 and 2024 financial years.

"We now have so much water under our keel and enough leeway that we can both invest and serve our shareholders, who admittedly have not had very much fun holding shares in recent years," said Knof.

Commerzbank's largest shareholder is the German state, which took a large stake in the firm in exchange for billions of euros in public bailouts during the height of the financial crisis in 2008-09.

The German government has no plans to sell shares in Commerzbank, meaning that its stake will likely increase due to the buybacks. The government ownership stake will reportedly rise from the current 15.75% to around 16.5%.