Commerzbank profit up, but Greece losses continue

AP News
Posted: Feb 23, 2012 7:24 AM
Commerzbank profit up, but Greece losses continue

Cost cuts and fewer bad loans helped Germany's Commerzbank AG improve fourth-quarter profits by 23 percent to euro316 million ($418 million), at the end of a year that saw its finances battered by the eurozone debt crisis and heavy losses on Greek bonds.

The net result announced Thursday improves on profit of euro257 million in the same quarter a year ago _ and the euro687 million loss recorded in the third quarter when the bank wrote down large amounts of Greek debt.

Fourth-quarter earnings included a further writedown of roughly euro700 million in Greek bonds, a loss that was offset by a gain from repurchasing some of the bank's own debt securities.

Shares in Commerzbank dropped 5 percent in morning trading in Germany.

The bank also said it would carry out a capital increase by swapping new shares for hybrid securities and debt that it had issued earlier. The capital increase, which could amount to more than euro1 billion, would help the bank's efforts to strengthen its capital cushion against losses.

Commerzbank said last month that it was well on its way to meeting new European Union capital requirements by the June 30 deadline.

The Frankfurt-based bank, which is 25 percent owned by the Germany government, improved earnings from its basic businesses through a reduction in operating costs of about 18 percent, to euro1.77 billion from euro2.16 billion a year earlier, crediting the integration of its acquisition of Dresdner Bank for creating savings through shared costs. The company's work force shrank by about 1,000 people to 58,160.

Bad loans fell to euro381 million from euro595 million thanks to the relatively robust economy in Germany, where the bank's mainstay business is lending to small and medium-sized industrial companies. Germany saw its economy shrink 0.2 percent in the fourth quarter but growth for the year was a strong 3.0 percent, exports remain strong and unemployment is low.

For all of 2011, Commerzbank's net profit fell to euro638 million from euro1.43 billion in 2010 as the bank took losses on the eurozone debt crisis. All told, it wrote down its large portfolio of Greek government bonds by 73.6 percent.

It said that it had now adequately accounted for losses that would come from an expected debt swap that will reduce the financially prostrate Greek government's debt burden. The swap is aimed at helping get the country back on its feet and off bailout support by other eurozone countries and the International Monetary Fund by 2015.

The deal will cut the face value of bondholders' investments by 53.5 percent. Total losses from the swap including interest have been estimated by international finance officials at around 70 percent.

Commerzbank said that since the value of the new bonds could not yet be finally determined, it would use standard market discount rates that are used to value comparable bonds. The resulting calculation leaves its holdings at 26.4 percent of their value, or a 73.6 percent loss.

Commerzbank said it had "made adequate provision for current discernible default risks associated with the European debt crisis" but added that continuing uncertainty makes further losses possible.

Chief executive Martin Blessing focussed on the bank's core business in its key markets, Germany and Poland.

"Our customer-centric business model, which is firmly anchored in the real economy, has proved itself and is also successful in a challenging environment," Blessing said in a statement.