Strategy 2027 Aims To Propel Revenue Growth And Enhance Shareholder Value

Key Takeaways

• Strategic execution aims to boost revenue and efficiency, enhancing margins and return on tangible equity.
  
• Expanded offerings and capital distribution enhance revenue growth and earnings per share through optimized capital use.
  
• Economic and strategic uncertainties, including ECB rates and execution risks, may challenge Commerzbank's revenue growth, earnings, and shareholder returns amidst Germany's muted GDP growth.

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.

• The execution of Strategy 2027 aims to boost the bank's revenue and improve its cost/income ratio, potentially increasing net margins through more efficient operations.
  
• An upgraded strategy to be unveiled in February 2025 could unlock additional value, potentially impacting earnings positively through capital deployment and optimization of risk-weighted assets (RWA).
  
• The expansion of offerings for ultra-high-net-worth individuals and family offices aims to increase net commission income, supporting revenue growth.
  
• Continued improvements in revenue and the cost/income ratio bring the 2027 target into focus, potentially enhancing return on tangible equity and earnings.
  
• Increased capital distribution plans, including share buybacks and potentially higher dividends, could drive earnings per share (EPS) growth by reducing outstanding shares and returning value to shareholders.

Commerzbank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Commerzbank's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.6% today to 23.2% in 3 years time.
• Analysts expect earnings to reach €2.9 billion (and earnings per share of €2.96) by about November 2027, up from €2.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.1x on those 2027 earnings, down from 8.9x today. This future PE is lower than the current PE for the GB Banks industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 6.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.89%, as per the Simply Wall St company report.

Commerzbank Future Earnings Per Share Growth

Risks

• The uncertainty surrounding the trajectory of ECB rates presents a risk to Commerzbank's net interest income (NII), potentially impacting earnings if rates are lower than anticipated.
  
• Increased provisioning for climate and environmental risks could pressure earnings if further provisions are needed in future quarters.
  
• Economic challenges in Germany, including muted GDP growth and difficulties in the corporate sector, may impact loan demand and credit quality, potentially affecting net margins and revenue growth.
  
• Potential tariffs on European exports create uncertainty for corporate clients, which could lead to decreased loan demand and increased credit costs, affecting revenue and profitability.
  
• Execution risks associated with the new strategy and capital efficiency measures could impact Commerzbank’s ability to meet financial targets, thus affecting future earnings and shareholder returns.

Valuation

• The analysts have a consensus price target of €18.28 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 €22.0, and the most bearish reporting a price target of just €15.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €12.4 billion, earnings will come to €2.9 billion, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 4.9%.
  
• Given the current share price of €16.04, the analyst's price target of €18.28 is 12.3% higher.
  
• 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.