Europe's debt crisis weighs on Commerzbank's Q1

AP News
Posted: May 09, 2012 6:51 AM
Europe's debt crisis weighs on Commerzbank's Q1

Reduced income from trading and commissions due to Europe's debt crisis weighed on earnings at Germany's Commerzbank, which saw net profit fall sharply to (EURO)369 million ((EURO)480 million) in the first quarter.

The profit figure was down from (EURO)985 million in the same quarter a year ago and short of average expectations among market analysts of (EURO)460 million.

The bank said Wednesday that customer trading and investment activity was muted in the quarter, which was marked by continued market turbulence from the European debt crisis that has discouraged investor activity. Income fell both from trading securities and from the commissions that are generated when customers engage in transactions.

Germany's No. 2 bank, which is still 25 percent owned by the German government after a 2009 bailout, said operating profits remained stable from its basic banking business, which focuses on lending to companies in Germany and Eastern Europe.

It said the earnings comparison was skewed by a one-time gain a year ago of (EURO)358 million that came from the company's move to strengthen its capital structure through a hybrid capital buyback. It bought back some of its own outstanding debt which had fallen in value, booking a gain.

Commerzbank said it had now exceeded by (EURO)1.1 billion the (EURO)5.3 billion in new capital that it was asked to raise as part of a European Union effort to strengthen the banking system.

The bank is still selling riskier investments and lowering its borrowings in an effort to strengthen its finances, which suffered from its extensive holdings of shaky government bonds that had to be written down. It has also sold noncore businesses and is winding down its Eurohypo mortgage lender as a condition of its bailout aid.

That all contributed to a fall in revenues to (EURO)2.6 billion from (EURO)3.6 billion.

Commerzbank said it was compensating for the lower revenues with cost cuts and by having to set aside less money to cover bad loans. The amount of business loans that don't get paid pack has fallen due to Germany's relatively strong economy.

"Despite challenging markets we have made a solid start to 2012," CEO Martin Blessing said in a statement. "We have again made good progress with our strategic goal of consistently de-leveraging the balance sheet and further strengthening the capital base."

The bank said it was still incurring expenses related to its Greek bond portfolio, most of which had already been written down. Greek bondholders agreed to a negotiated writedown of more than 70 percent on their holdings during the quarter.

The bank said its efforts had reduced its exposure to government bonds issued by so-called GIIPS countries _ Greece, Ireland, Italy, Portugal and Spain _ to (EURO)4.7 billion from (EURO)12.1 billion. Falls in the value of government bonds have been a key driver of Europe's debt crisis by causing losses to bank finances.

Commerzbank shares traded up 2.5 percent at (EURO)1.57 in morning trading in Germany.

Separately, a British court said Wednesday that Commerzbank must pay bonuses to former employees of Dresdner Kleinwort Ltd. The case was brought by 104 London investment bankers who sought payment of (EURO)50 million awarded for 2008.

Commerzbank, which took over Dresdner Kleinwort in January 2009, had argued that the awards were not legally binding.

Justice Robert Owen ruled Wednesday that the bonuses should be paid. Commerzbank says it will appeal.