Investments In Aquila Capital And Payments Will Strengthen Future Operations

Key Takeaways

• Strategic investments and efficient operations are set to drive revenue growth and profitability, with a focus on enhancing shareholder value through capital returns.
  
• Effective margin management and reduction of risk-related expenses aim to stabilize earnings and improve net interest income despite market conditions.
  
• Restructuring charges, legal risks, and economic challenges may pressure margins, earnings, and profitability amid interest rate volatility and rising operating costs.

Catalysts

Provides banking and capital market products and services to private and small business customers, corporate, financial service providers, and institutional clients in Germany, rest of Europe, the Americas, Asia, and internationally.

• Commerzbank's ongoing growth initiatives and strategic plans suggest potential future revenue increases. With investments in the securities business, asset management (e.g., Aquila Capital), and payments, the bank aims for a 7% growth in net commission income, impacting overall revenue positively.
  
• Effective margin management and a strong deposit base are highlighted as crucial for maintaining stable net interest income, even amid rate changes, which could positively impact net margins and future earnings.
  
• Commerzbank's capital return plans, including share buybacks and dividends, are expected to enhance earnings per share (EPS) significantly, reflecting a focused strategy on shareholder value.
  
• The planned reduction of the cost/income ratio from 59% to 57% in 2025 suggests operational efficiency improvements, likely increasing net margins and overall profitability.
  
• The strategic management of FX mortgage-related legal provisions in Poland and their anticipated decline in 2025 should reduce risk-related expenses, positively impacting net income and shareholder value.

Commerzbank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Commerzbank's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.8% today to 25.6% in 3 years time.
• Analysts expect earnings to reach €3.5 billion (and earnings per share of €3.59) by about March 2028, up from €2.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €3.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, down from 10.0x today. This future PE is lower than the current PE for the GB Banks industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.78%, as per the Simply Wall St company report.

Commerzbank Future Earnings Per Share Growth

Risks

• The ongoing restructuring efforts and associated charges of €700 million pretax for headcount reduction may pose a short-term risk to net margins and earnings in 2025.
  
• Elevated legal risks from FX mortgages in Poland continue to pressure the bank, despite a reduction in lawsuits, potentially impacting net margins and earnings due to unforeseen provisions.
  
• A muted outlook for the German economy heightens risk results expectations to around €850 million, potentially affecting net margins and future earnings.
  
• Interest rate volatility and potential impact on net interest income (NII) and fair value adjustments introduce uncertainties that could affect revenue stability and net interest margins.
  
• Expected rise in operating expenses by 5% in 2025, primarily due to wage inflation and acquisition costs, might pressure cost/income ratios and reduce future profitability.

Valuation

• The analysts have a consensus price target of €22.662 for Commerzbank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €30.0, and the most bearish reporting a price target of just €16.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €13.5 billion, earnings will come to €3.5 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of €22.58, the analyst price target of €22.66 is 0.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.