Commerzbank earns rise in Q2, outlook grim

AP News
Posted: Aug 09, 2012 7:24 AM
Commerzbank earns rise in Q2, outlook grim

FRANKFURT, Germany (AP) — Germany's Commerzbank warned profits would decline in the second half of the year because of a rough economy and the European debt crisis in spite of reporting a boost to its second-quarter net profits.

The bank said Thursday that earnings for the period bounced back to €300 million ($370 million) from €53 million a year ago when the bank took deep losses on Greek bonds.

However, other aspects of the bank's business were still hit by Europe's troubles: income from trading and commissions declined, while bad loans rose.

The company said the difficult economy meant profit for the second half would come up short of the first half's. Germany, Europe's biggest economy and the main focus of Commerzbank's business lending to companies, is slowing and some economists are even predicting that it may fall into recession.

Commerzbank said it expected lower income from commissions due to subdued investment and customer activity, along with weaker loan demand and continuing low interest returns due to rock bottom rates. The result would be "profit that clearly lags behind the performance in the first six months of the year."

It said its goal of holding bad loans to €1.7 billion this year, up from €1.39 billion in 2011, was "achievable" but appeared "increasingly ambitious" considering current market conditions. An increase in bad loans is a downbeat sign for the economy as it means companies are not earning enough money to meet their credit obligations or going out of business.

Investors were disappointed by the downbeat outlook, and the bank's share price was trading 3.3 percent lower at €1.24 in midday trading in Europe.

Despite its warning, the bank said it was in good shape to meet the challenging market conditions, as it continues to shed risky investments and boost its financial reserves to meet new regulatory requirements.

Commerzbank said it cut its investments and loans, adjusted for risk, by €13 billion to €210 billion and that it had exceeded requirements from European Union regulators by €2.8 billion. Overall, the bank said it is well-positioned to meet new capital buffer requirements under the international Basel III agreement.

European banks have seen earnings sag due to the wider economic slowdown, the European government debt crisis and new regulatory requirements. The EU and Basel III requirements have meant shedding potentially profitable but risky investments, loans and lines of businesses.

Meanwhile, the debt crisis and the related market turmoil have meant fewer companies taking out new loans or using banks to help them issue new shares and bonds.

Commerzbank said bad loans rose 45 percent to €404 million during the second quarter, while income from trading securities was off 13 percent at €574 billion. Net interest income sagged 25 percent to €1.33 billion.

Net profit improved in part because the bank took €760 million in losses on Greek government bonds a year ago. Greek bonds fell because of that country's debt crisis.