Germany's Commerzbank delivered a better-than-expected third-quarter net profit as strong lending to smaller firms made up for a hefty one-off charge at its real estate unit and said it may be heading for its best ever full-year result.
"In nine months we have already earned more than in the whole of 2005," Chief Financial Officer Eric Strutz told analysts in a conference call on Friday. "2006 will be one of the best years in the history of Commerzbank and maybe even the best."
Analysts cautiously welcomed the 217 million euro ($277.2 million) profit which was seen as an improvement on a disappointing second quarter and the bank's shares jumped 5.1 percent to 29.23 euros by 1119 GMT. Strutz said buoyancy in financial markets made Commerzbank look to the rest of the year with confidence.
Its net return on equity of 14.5 percent in the first nine months was still short of its long-term goal of 15 percent, which it wants to reach by 2010, but up from 12.1 percent a year ago.
A Reuters poll of analysts had given an average net profit forecast of 210 million euros for the third quarter, down from 262 million euros a year earlier. "At first glance I am not overly enthusiastic but at least the quality of the results is better. For the first time this year, it is not about trading - interest income and commission income is strong," said Sigrid Baas, an analyst with ING.
Commerzbank has a wide range of interests including retail banking, corporate lending to small and medium sized firms known as Mittelstand, asset management, mortgage lending and a treasury and public finance business.
"They have met expectations fully. Mittelstand was a bit better. Corporates and markets was a positive plus while public finance and treasury was a disappointment," said Andreas Weese, an analyst at HVB. The key Mittelstand business saw operating profit jump to 225 million euros from 165 million a year earlier.
"German industry has recovered tremendously in the last 18 months," CFO Strutz said, adding that he expected loan loss provisions in the division to total 170 million euro for the full year but to fall by about 10 million euro in 2007.
The bank made overall risk provisions of 415 million euros, up from 151 million euros in the third quarter of 2005, boosted by a one-off 293 million charge from the absorption of the Eurohypo real estate and mortgage business it bought last year. Strutz said Eurohypo, which has fallen short of investor expectations since Commerzbank bought it for 4.5 billion euros last year, was unlikely to achieve its planned 15 percent pretax profit increase this year.
Commerzbank has said it sees group risk provisions falling steadily to less than 900 million euro in 2007 and 700 million in 2008. Risk provisions in the first nine months were nearly 800 million euros.
The bank also reported trading profit weakened to 183 million euros from 212 million a year ago while commission income jumped to 703 million from 599 million a year earlier.
Trading results at Commerzbank's public finance divisions were hit by adverse market conditions. "We had an impact on the trading result from public finance and treasury which was hit by a flattening of the yield curve," said Strutz.
Commerzbank's shares plunged in August when investors were upset by second quarter results showing a higher-than-expected tax bill and a weak performance in the bank's key business of lending to small and medium-sized firms.
"The fact that the interest income is what's pushing the performance and not trading will be seen positively," said Andrew Webborn, an analyst with Societe Generale. "I think there is a sustainable improvement."
The bank's shares have been sluggish this year, falling behind their rivals as investors grew increasingly nervous about the earnings power of Eurohypom, and have underperformed European rivals by more than half. Commerzbank's stock is valued at more than 11.48 times estimated 2006 earnings, compared to Deutsche Bank's 10.08 times, according to Reuters data.
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