Commerzbank AG
XETRA:CBK
Earnings Call Analysis
Q4-2023 Analysis
Commerzbank AG
Commerzbank AG delivered an outstanding performance in 2023 with far-reaching strides in both strategic initiatives and profitability. Notably, the bank exceeded expectations, achieving its Strategy 2024 targets a year early. A vital indicator of this success is the more than 50% growth in net results, yielding a substantial EUR 2.2 billion. This progress was propelled by an 11% increase in revenue, amounting to EUR 1 billion, while also managing costs effectively, translating to a 7-percentage point reduction in the cost-income ratio, which now stands at 61%, nearly hitting the 2024 target of 60%.
Furthermore, Commerzbank displayed strong capital management, announcing a significant capital return to its shareholders. The plan includes a lucrative EUR 600 million share buyback and a dividend proposal of EUR 0.35 per share, culminating in a total capital distribution of EUR 1 billion for 2023. The bank maintains a robust common equity tier 1 (CET1) ratio of 14.7%, embodying both financial strength and a commitment to shareholder value.
Under its strategic plan for 2027, Commerzbank has identified net commission income as the focal point for revenue expansion. This strategic emphasis is set to be further bolstered by key partnerships and acquisitions, including a majority stake in Aquila Capital Investment for sustainable projects, a joint venture with Global Payments for digital payment solutions, and an expanded partnership with ODDO BHF in equity capital markets. These initiatives are targeted to amplify fee income growth by 4% annually and contribute to meeting Commerzbank's ambitious growth targets.
In the pursuit of growth, Commerzbank anticipates a net interest income of EUR 7.9 billion in 2024, expecting stability in these earnings even if ECB rates dip in 2025. From 2026 onwards, they project a rising net interest income backed by portfolio replication and volume growth. This confident outlook aligns with planned profitability targets from 2024 to 2027, portraying a positive outlook for Commerzbank's future financial trajectory.
Prerequisites for achieving these strategic and financial goals include customer loyalty and employee satisfaction, both of which are a top priority for management. Commerzbank is determined to nourish its corporate culture and augment client satisfaction, recognizing these elements as imperative for sustainable business and employee morale. The management is fully committed to a minimally 70% payout ratio for 2024, attesting to their confidence in the bank's operational success and dedication to returning value to shareholders.
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Hello, and welcome to the Commerzbank AG conference call regarding the fourth quarter results 2023. [Operator Instructions].The floor will be open for questions following Bettina Orlopp's and Manfred Knof's presentation.Let me now turn the floor over to our CEO, Manfred Knof.
Good morning, everybody. 2023 was a great business year for Commerzbank. We have made significant strategic progress and reached a very good financial result. We delivered on strategy 2024, 1 year early. The restructuring of the bank is accomplished. And we have materially improved profitability. Our new business model is in place and geared towards revenue growth. This is most important when looking at the next phase of our strategy.Costs have been managed strictly in line with our cost-income ratio target. The teams have proven their ability to manage their resources while they have delivered on their strategic priorities. For 2023, we aim to distribute EUR 1 billion capital to our shareholders. That is exactly what we promised when we set up our capital return policy. On ESG, we committed ourselves to an ambitious path towards net-zero and firmly anchored the green transformation in our strategy.Let me underline the strong performance in 2023 with some key financial figures for the group. Our net result increased by more than 50% and came in at EUR 2.2 billion. The main driver for this growth was an 11% increase of revenues which equals EUR 1 billion. At the same time, costs were successfully managed despite inflation pressures. Combined with our increased revenues, this led to a significant reduction of the cost-income ratio of 7 percentage points. The 61% in 2023, we have nearly met our target of 60% for 2024.The low level in cost of risk with only 23 basis points have again proven the high quality of our loan book. This low level comes with virtually no support from any releases of our top-level adjustment. Hence, we have started the year 2024 with a remaining TLA of EUR 453 million, providing us with lots of comfort for potential future challenges. Bottom line, we achieved a return on tangible equity of 7.7%.This good return has been achieved at a high CET1 level of 14.7%, which already fully reflects the 50% payout ratio for 2023. We plan to distribute the payout to shareholders by means of a EUR 600 million share buyback, that is currently being executed and a dividend proposal to the AGM of EUR 0.35 per share, totaling EUR 1 billion of capital return for the year 2023.Back in November, we presented to you our strategic plan for 2027 with the ultimate goal to earn our cost of capital. The major driver for our planned revenue growth is net commission income. With the restructuring behind us, this is where we focused highest amount of management attention. Acquisitions and partnerships will help on this journey and contribute to the ambitious growth targets we have set.Let me highlight 3 initiatives we have recently signed. In the field of asset management, we have acquired the majority stake in Aquila Capital Investment to take a leading role in offering sustainable projects to our customers. Together with Commerz Real, the real asset portfolio in the group grows to more than EUR 40 billion, and we will significantly drive forward the energy transition in Germany and Europe.In payments, we are entering into a joint venture with Global Payments to offer digital payment solutions to small and medium-sized business customers across Germany. Merchants will be able to use smartphone-based payment applications to accept mobile payments without a separate card reader and benefit from an integrated, seamless, omnichannel experience.In equity capital markets, we have enlarged our successful partnership with ODDO BHF. For the Swiss market, we signed an exclusivity agreement to underwrite and execute ECM transactions across the full ECM product range. The agreement includes an increase of the research coverage universe from 27 to roughly 50 names in Switzerland. Hence, we complement our overall growth ambition and set up in and for Switzerland, adding to our German-speaking ECM franchise. Again, I am convinced that these initiatives will help us to push us in the direction of growth in fee income, and will contribute to achieving our ambitious targets.And this leads me to the top priorities of the management board for 2024. First and foremost, we want to ensure the delivery of our targeted capital return. Back in September, we published our updated capital return policy until 2027. On the route towards a CET1 ratio of 13.5%, we aim for a payout ratio of at least 70% for the year 2024, but no more than the net result after AT1 coupon payments. And we are fully committed to this target, which is, however, subject to further financial delivery and approval of the ECB.On P&L, our key management focus is on fee income. With NNI at the current peak, strong asset quality and costs under control, the main driver for growth is net commission income. As presented in our strategy update last November, we target an annual NCI growth of 4% and this will require maximum effort from the whole management team. Hence, strict performance management and strategy execution are on top of our daily, weekly and monthly agenda. We will not rest on the success of 2023, but rather we will have all hands-on deck to reach our strategic and financial targets.And there are 2 important prerequisites to achieve our goals. Customer loyalty and employee satisfaction. The necessary restructuring of the bank has left its marks. Our customers had and still have to adapt to our new business model. Though we are on a very good track, we have made an increase of customer satisfaction a concrete target for all managers in the group. Only satisfied clients will provide us with the sustainable business we need to succeed.The same holds true for our employees. In Commerzbank we have a great team with an outstanding corporate culture. We need to build on this and improve employee satisfaction that was affected by the significant number of job cuts in the last years. And I am very confident that success with our new business model will also drive team spirit and ultimately employee satisfaction.Let me conclude with my key takeaways for today. 2023 was an excellent year for Commerzbank. We have made first tangible achievements in our strategy moving forward underpinning our ambitions to grow. We have a positive outlook on 2024 with a clear target of a payout ratio of at least 70% according to our capital return policy.And now, Bettina will walk you through the financials. Over to you Bettina.
Thank you, Manfred, and good morning. Before I start with the 2023 financials, I want to give you my key messages on net interest income. This is obviously the topic of greatest interest and I assume you all have already read today's disclosure.First, for 2024 we expect EUR 7.9 billion net interest income based on current forward rates which imply an average deposit rate of 3.5% in 2024.Second, though, forward rates imply lower ECB rates of 2.4% for 2025, we expect NII only slightly below 2024.And third, from 2026 onward we expect rising net interest income supported by the replication portfolio and volume growth. Overall, we firmly believe that we can grow revenues with an ECB rate in the range of 2% to 3%. And we are confident to reach our 2024 to 2027 profitability targets as laid out in November.Let's now move to the financials of 2023. As Manfred already said, we had a very successful year. The results of the quarter and the financial year speak for themselves. We achieved a very strong operating and financial performance and we delivered the target capital return for 2023.We reached a net result of EUR 2.2 billion for the year and improved the RoTE to 7.7%. The fourth quarter contributed EUR 395 million to the net result, despite being burdened by some one-offs and in particular by EUR 340 million provisions for Swiss franc loans in mBank.Excluding the one-offs, quarterly revenues from the customer business have again been strong. Net interest income is up 9% year-on-year and fee income broadly stable. By managing our cost to EUR 6.4 billion, we hit our cost income ratio target of 61%.The risk result of EUR 618 million is also fully in line with our expectations. We have slightly increased our Top Level Adjustment to EUR 453 million. This gives us a good starting position for 2024.Thanks to the good result, we further improved our CET1 ratio to 14.7% while returning the promised EUR 1 billion capital for the financial year. To summarize, we have delivered.Looking at the full year results on Slide 9, we improved on every metric, driven by revenues that have grown by EUR 1 billion year-on-year. This has led to the overall strong performance in 2023.With minus EUR 25 million in the fourth quarter and plus EUR 23 million for the year, exceptional revenue items had only a minor impact on the results. Provisions for the Swiss franc loans in Poland are not reported as exceptional items. However, they totaled EUR 1.1 billion in 2023 after EUR 650 million in 2022. Hence, real underlying revenue growth in 2023 has been even better than reported.This leads to the underlying revenues starting with the commission income on Page 11. As usual, net commission income has been seasonally lower in the fourth quarter. This has been more pronounced than usual in Corporate Clients. In Q4 2022, we had a strong FX business that compensated for the seasonally weakest syndication business. In 2023, this slowdown has not been offset by other businesses. As expected, in the beginning of 2024, the syndication business has again picked up.In contrast, PSBC Germany's next net commission income has held up well in Q4, reaching the level of Q3 and increasing by EUR 20 million year-on-year. This is mainly due to improved revenues from the securities business. Both higher transaction volumes and increased market values of assets in accounts contributed. This is a promising start for -- starting point for 2024 where we clearly focus on growing fee income.Now to NII and Slide 12. We maintained net interest income nearly on the record level reached last quarter. The main driver for the slight reduction is the minimum reserves we need to keep at the ECB for which we no longer receive interest. Corporate Clients managed to increase loan margins and reached a new high in net interest income.At first glance, PSBC Germany seems to have experienced a sharp drop in interest income. However, this is predominantly due to adjustments in the replication portfolio that are one-to-one compensated in Others & Consolidation. When eliminating this effect, the interest income is lower by only EUR 30 million due to an increased deposit beta that could not be fully compensated by volume growth in the deposit business.The NII of Others & Consolidation has been largely stable when eliminating the mentioned effect from the adjustments of the replication portfolio and the minimum reserves. Even though the Polish Central Bank lowered rates in Q4, mBank managed to grow NII with continued margin management.On the next slide, I will cover the outlook for net interest income in 2024. 2023 was better than expected. The deposit beta was around 30% in the fourth quarter and around 32% in December. The driver of the somewhat higher beta in December is a larger than anticipated inflow of call money in PSBC Germany, increasing our stock of deposits well above plan. These additional deposits came at an above average beta, skewing the average. For the whole year, the average deposit beta was 25%.Given our experience in 2023, we have slightly adjusted our expectations for the deposit beta in 2024. Our base case now assumes an increase of the average beta to 35%. Next to the beta, the most important driver of the net interest income is the trajectory of the ECB deposit rates.Market participants' expectations are quite diverging. The forward rates from February 8 imply an average ECB rate of around 3.5% in 2024, with rate cuts starting in spring. Many economists expect a somewhat later start of rate cuts and less cuts than the forwards. We have, however, based our outlook on the forward rates.As a third big driver, NII driver, we have our replication portfolio, which should add more than EUR 400 million in 2024. For the loan business, we assume a contribution at or slightly below the level of 2023.For mBank, we have improved our outlook. We now assume an NII slightly lower than in 2023 on the back of mBank's success in maintaining NII after last rate cuts in Poland. Based on these assumptions, we expect a net interest income of around EUR 7.9 billion in 2024.On the next slides, we have given sensitivities to the main drivers of the NII. The most important drivers are the ECB rate and the deposit beta. These are not fully independent of each other. When the ECB initiates rate cuts, we expect banks to react accordingly and reduce customers' deposit rates to maintain margins. This is already visible today as we, and many other banks, have started to reduce the interest offered on call accounts in anticipation of upcoming rate cuts. Therefore, we expect a certain offset.The next key driver is the replication portfolio. Coming out of the very low rates environment, it will continue to contribute to NII over a long period of time. While the additional contribution in 2024 will be sizable, in 2025 we expect only a small triple digital increase. This is due to 2 factors.In line with changes in the deposit mix, we have reduced the size of the replication portfolio to currently EUR 123 billion. We also increased the share of shorter models in line with a higher share of call accounts. This has reduced the average duration to around 3.6 years.Further, due to lower expected rates, the pick up from reinvesting maturing model tranches is also lower. Based on the current mix and forward curve, contributions from the replication portfolio should increase meaningfully every year after 2025.Moving from deposits to the loan business. It should benefit when rates decrease. Lower rates generally lead to higher loan demand, and banks can potentially use rate cuts to improve loan margins. Taking these factors together, we believe that the effect of lower rates is manageable, and NII in 2025 should be only slightly lower than in 2024.Furthermore, as rates move lower, there are also effects outside the interest income. Clearly, the brokerage business should benefit from lower rates, as this makes securities relatively more attractive than deposits. But also in the fair value result, a partial offset is to be expected.To again summarize, we expect 2024 NII ahead of our original assumption in the Strategy 2027. The 2025 NII will be influenced by many factors and several offsetting drivers are at work. On a net basis, we expect the 2025 NII to come out slightly below the level of 2024. And in addition to the NII, there is a potential of additional revenues in other line items that would compensate lower NII. And last, but clearly not least, I want to stress that we are committed to our cost-income ratio target. We will take additional measures if necessary.With that in mind, let's move to costs on Slide 15. We have continued with our strict cost discipline in 2023. High inflationary pressure, expenses for inflation compensation payments, and higher provisions for variable compensation, due to the good result, led to higher operating expenses. These were partially offset by active cost management.Compulsory contributions are lower, thanks to decreases in European bank levies and the Polish Deposit Guarantee Scheme. Overall, we have reached our cost-income ratio target of 61%, with total cost of EUR 6.4 billion. In 2024, we will continue our active cost management in order to reach our target cost income ratio of 60% for 2024.The next 2 slides detail the risk result. The 2023 risk result came in at EUR 618 million, well within our guidance. The Q4 risk result is up from the previous quarters, mainly due to model adjustments and recalibrations, as well as the implementation of a new backstop indicator. The actual loss experience from the loan book has continued to be benign. This is also true for our EUR 9 billion asset-based commercial real estate portfolio. We only have exposures in Germany. The average LTV is 51% and only 4% of the exposure is in Stage 3. For nearly half of the portfolio, we have recourse to the sponsor.The high quality of our exposures is also visible in the NPE ratio, which edged even lower to only 0.8%. The Q4 risk result includes a slight increase of our top-level adjustment to EUR 453 million. This is the result of the quarterly review based on the current macroeconomic assumptions. It also covers uncertainties from inflation and the impact of a restrictive monetary policy.Let's now look at group results and the tax rate. With EUR 542 million, the operating result is up slightly year-on-year. However, it is only half of the extraordinarily high Q3 result. The customer business continued to be strong in the quarter, but there were several one-offs that dampened the result. mBank significantly increased provisions for Swiss franc mortgages, an equity participation of PSBC has been revalued, and there were negative valuation effects related to hedge accounting. For the whole year, however, effects from hedge accounting roughly even out. By its nature, the fair value result is for the most part hard to predict.One item that is fairly certain is the line item offset between NII and the fair value result. Due to this offset, a negative fair value result similar to the level of 2023 is our initial baseline for 2024. Other income is also expected to be negative and largely depends on provisions for Swiss franc loans.The tax rate remains at an elevated level of 35%, mainly due to the provisions for Swiss franc mortgages that are largely not tax deductible. I currently assume that the 2024 tax rate will be in the range of 25% to 30%. Of course, this is dependent on the amount of potential Swiss franc provisions we might need to book in 2024.The next slides cover the operating segments, starting with private and small business customers. Customers of PSBC Germany continue to adjust the composition of their financial investments. Following a very good market performance in 2023, customers took profits on their security holdings in the fourth quarter, leading to a net outflow of EUR 1 billion from brokerage accounts. This was more than compensated by an increase of around EUR 11 billion due to market moves.Loan volumes have declined slightly, as new production could not fully replace maturities. The biggest movement has been in deposits, where PSBC acquired additional call deposits with attractive offerings, increasing the volume by EUR 11 billion in the quarter. Part of the increase is new money, but part is also shifts from side deposits, which decreased by EUR 2 billion.This leads to the performance of PSBC on Page 19 and Page 20. Excluding the already mentioned EUR 130 million adjustment from the replication portfolio, the customer business of PSBC Germany has been stable quarter-on-quarter. Those interest income and commission income have held up well.Commission income was on the level of Q3 and the interest income around EUR 30 million lower. A higher deposit beta could partially be compensated by the significant increase of deposit volumes. The operating result is additionally burdened by the revaluation of the participation.Let's now move to mBank. On an operating level, excluding the effects from the Swiss franc mortgages, mBank again had a very successful quarter on the level of Q4 last year. Customer revenues have grown further and could more than offset higher expenses and a higher risk result. The good customer business and the good revenues are mainly thanks to active deposit management that led to higher NII from deposits despite lower central bank rates. The elevated risk result is mainly driven by changes in the provisioning methodology.Provisions for Swiss franc mortgages now reach the coverage ratio of nearly 100% of the outstanding mortgage volumes. mBank continues to offer settlement agreements very proactively to customers, and the volume has increased further in the quarter. So far, more than 14,000 settlements have been agreed. While making good progress on the resolution of the Swiss franc mortgages, further burdens cannot be excluded in 2024, but should be lower than in 2023.The next 2 slides cover Corporate Clients. In Corporate Clients, the overall loan volume decreased slightly from the previous quarter. This is mainly due to international corporates that temporarily had increased volumes in Q3. Mittelstand has been rather stable.For 2024, we are seeing first signs of an increased willingness of German corporates to invest. It remains to be seen how quickly this will really materialize.In deposits, there has been an ongoing shift to term and call deposits. Correspondingly, the deposit beta increased slightly in the quarter. With margins on term and call deposits [ slightly ] remaining at current level in 2024, the size of further transfers out of current accounts will be the main driver of the deposit beta.Corporate Clients have again delivered a solid operating result in the quarter. This is based on revenues close to the record achieved in Q3, well-managed costs, and a very low risk result.The main revenue contributor was interest income. With the syndication market quiet towards the end of the year, the commission income was seasonally lower in Q4. Corporate Clients managed to reduce credit risk RWA slightly year-on-year with a new securitization in Q4. Overall, RWA increased due to higher operational risk RWA in line with higher operating revenues.And finally, a quick look at Others & Consolidation. Others & Consolidation reports an operating profit of EUR 72 million in Q4. This is driven by the higher net interest income from the adjustment of the replication portfolio offsetting the corresponding decrease in PSBC. Excluding this effect, the operating result would have been negative, driven by the fair value result. This mainly reflects residual market valuations after hedge accounting, which should even out over time.RWA have increased slightly in Q4. The main driver has been the operational risk RWA in the standardized approach. These are linked to the operating revenues and have increased accordingly. Market and credit risk RWA have been slightly lower with the credit risk RWA benefiting from the securitization transaction of Corporate Clients.With higher capital due to retained earnings, the CET1 ratio further increased to 14.7%. This translates to a 435 basis points buffer to the MDA based on the new SREP requirements that have become effective as of January 2024.The announced acquisitions have partially been included already in the CET1 ratio. After closing of the transactions, the CET1 ratio will be reduced by another 10 basis points. This gives us a very solid starting point for further capital return and a significant buffer to absorb the Basel effects in 2025.Now to our outlook for 2024 on Slide 26. With a very good start in January, we target a further improvement in 2024. This is based on the assumption of a mild recession in Germany and subject to further developments of burdens for Swiss franc loans and mBank.On revenues, we plan to grow commission income by 4% in line with our strategy 2027. Net interest income should come in around EUR 7.9 billion based on current forward rates. We will manage costs to our target cost income ratio of 60%. We anticipate a risk result less than EUR 800 million, assuming usage of our top-level adjustment. We expect a decreasing CET1 ratio due to capital distribution and RWA growth, but still above 14%. And we aim for an increased net result and a further improved return on tangible equity.In accordance with our capital return policy, we target a payout ratio of at least 70%, but obviously not more than the net result, consisting of the dividend payment and share buybacks. And as always, the buybacks are subject to approval by the ECB and the German Finance Agency.As part of the payout and based on the anticipated further progress in the implementation of our strategy in the first half of the year, we want to apply for a next buyback after the H1 results. With the targeted payout, we want to further increase the total capital return yield well above the 9% we delivered for 2023. This proves our commitment to return the lion's share of earnings to our shareholders and should be seen as a key element of an investment case for Commerzbank.Thank you very much for your attention and we are now very happy to take your questions.
[Operator Instructions] And the first question comes from Kian Abouhossein JPMorgan.
Yes. Just on NII, can you talk a little bit about back book, front book, asset spreads? You talk a little bit about it on Page 12. And in that context, could you just explain the EUR 130 million effect on the replication portfolio? And how that will impact your overall replication portfolio, what changes you have done?And then, if I may, the second question is just on betas, I mean we're not far off from your 30 sorry, we're not far off from your 35% clearly for 2024 average beta. Wanted to see at what confidence level, you are there. And in that context of very briefly how we should think about '25, since you give some guidance of NII declining, previously you used to talk about NII growing at '25 relative to '24.
Okay. Thank you for the questions. So I mean, front book, back book, rather unchanged, I would say. I mean, there will be, and we have seen that in Q4, that there was a slight increase in margins in Corporate Clients in Q4, and it all depends clearly also on the development of the interest rates. On the replication portfolio, the EUR 130 million, I mean, that is something which is really technical adjustments which we have done in Q4, and it was really one-to-one effect which you then have seen in Others & Consolidation and it was very much due to the changed deposit mix which we have seen specifically in the private client portfolio.On deposit beta, our confidence level is high for '24 otherwise we wouldn't have done that. And it's also clear that if we see changes there will be also other changes like, volume increases and things like that. So yes, confidence level is very high on it. And for '25 onwards, I mean what we basically have done is that we have increased guidance on '24, and there is now a slight decrease between '25 and '24 but that has all to do with interest rate development because we now assume a drop in interest rates on average of 110 basis points, and that clearly has an effect, and you will see counter effects again. And we also believe that when you are at this level, deposit beta will stay rather stable and not further increase. So there are a lot of effects ongoing, but I think it's prudent to assume for the moment if we really see an average of 2.4% to expect a slightly lower NII still. I mean, with respect to historic levels, still a very high level, and prepare for that.
The next question comes from Borja Ramirez, Citi.
I have 2 questions. Firstly, on deposits in Germany, it's great to see the improved deposit beta guidance for the year. Peers have provided also encouraging indications on deposit beta in Germany. I would like to ask how you see the cost of deposits when the ECB cuts interest rates later in the year? And also what is the exit rate deposit beta in November 2020 -- in December 2024?And then my second question would be if you could give a bit more details on NII 2025, so what is the assumption for model deposits and the deposit beta?
Okay. Thank you. So yes, on deposit beta, as I said, we are very confident on the number. You can assume that this will be rather flattish development, so we expect that overall, we have a 35%. And then that links directly to your second question, and we also assume that in 2025 deposit beta will be not so different to 2024. That's one of the key assumptions clearly. The other key assumption for 2025 is that, as I said before, the forward rates suggest that there will be only an average interest rate level of 2.4% after 3.5%, which we assumed for 2024.
The next question comes from Stuart Graham, Autonomous Research.
I had a couple of questions on targets and then just a clarification question on NII. On the targets, you used to talk about flat costs, '24 and '23. Is that still the case? And at the Capital Markets Day, you talked about an 8% return on tangible for '24 and a 9.5% return on tangible for '25, are those still valid?And then the second question is on NII. At the Capital Markets Day, you talked about down EUR 0.5 billion, '24 on '23, which you're still talking about. But back then, there was a EUR 200 million negative from Poland, which is not there now. So I guess my question is, why is NII down EUR 500 million in '24? When it should be down EUR 300 million, all other things being equal, given Poland is now better?
Okay. Thank you, Stuart. So on cost, we are really very much targeting now on the cost income ratio, which is the 60%, but that implies also that you shouldn't see too much movement on the cost side. And there will be a lot of work to be done given that the inflationary effects will continue to be shown in '24. And we also plan for a lot of investments. But the 60% is really our target. And yes, we confirm the 4% that commission income grows year-on-year. And with respect to the, how to come from the EUR 8.4 billion to the EUR 7.9 billion, I think it's a question because you said it should be less. So we still assume a slight decrease from mBank, which will be a little bit less than EUR 100 million. Then we have the minimum reserve, which is again something less than EUR 100 million. That brings you down to EUR 8.2 billion. If you then have the positive effects of rate moves coming from 3.3% average and '23 and up to 3.5% and a little bit of volume growth which we have seen, you can add again something around EUR 200 million so you're back to the EUR 8.4 billion where we started. You then take the benefits from the replication portfolio plus EUR 400 million that brings you up to EUR 8.8 billion. And then you need to deduct the beta move, the 10 percentage points multiplied with approximately EUR 90 million, so EUR 900 million. And EUR 8.8 billion minus EUR 900 million are the EUR 7.9 billion. That's basically the math between the 2024 number.And you asked for the RoTE. Yes, we confirm all our RoTE targets.
Okay. So just back on the costs, it should be broadly flat year-on-year because some people are saying there's a cost creep here because your NII is up EUR 300 million, but the cost income ratio is still 60%. So therefore, the costs are higher than the hidden cost profit warning here. But is that the case or no?
No, it's not. I mean, we will also -- we're very much dependent also investments and things like that, dependent on how revenues are developing and we are very much committed also to invest, but stick to a very solid cost income ratio of 60%. So there is no cost warning at all in that rather the contrary. It's a confidence that regardless what's happening, we stick to our cost income ratio target.
The next question comes from Benjamin Goy, Deutsche Bank.
And 2 questions, please. One on deposit beta and the other on fee. Deposit beta, just given it was such a driver of the '23 upgrades, given you mentioned the trade-off between higher deposit volumes and also higher beta in Q4, and now you say your call rates came down, actually the whole market is less competitive, feels like it, in '24 so far. Could deposit beta come down versus your December exit rates in the first quarter?And then secondly, 4% fee income growth. I mean, it's in line with your long-term target, but how much will Aquila add this year and how much on a full-year run rate? And yes, could it actually be better given '23 wasn't, after all, a strong year and rather easy comes?
Thank you, Benjamin. I mean, on deposit beta, a decline -- I wouldn't go so far, so we're feeling real comfortable with the 35% now. I mean, it might that there are up and downs over the year, but on average, I think the 35% is a fair assumption, and it's clearly that we have the deposit beta management is probably one of the most discussed topics in the bank, I can assure you. And on -- I would rather say if I see upside, which I think is your question linked to, you could say that the 3.5% on average for 2024 might be something you could suggest that might be higher if you just take the movements, which we just have seen in 1 week in the forward rate, which came up again also with respect to the expectation for 2024. I would rather see upside there.On the NCI side, I think it's important to state that we want to grow on the 4% mainly organically. It will be complemented by selected acquisitions, and Aquila is a great example for that. We have signed the deal. Closing is still out, so it will clearly create benefits for '24, but it depends really also when the closing happens. And we will keep you updated and give you more information whenever we are further down in the process.
Okay. The deposit question -- deposit beta question was only for Q1. I know the year is long, so I don't want to speculate too much. But given you've seen 6 weeks so already, that was the question [indiscernible], but understood.
Yes, I mean, we see -- we currently see a still increase, so we also have seen an increase in deposit beta in January, and it will end to a certain point in time, but in the moment, there are still very attractive call money offerings out there. For Comdirect, we still have a 3.75% out there, and for Commerzbank, a 3.25%.
The next question comes from Mate Nemes, UBS.
Yes. I have 2 questions, please. The first one is on NII still, and I wanted to come back to the technical adjustment that you mentioned in Q4. I'm not sure still if I understand what happened there. Is that simply a technical accounting adjustment? Or have you changed the parameters, the key parameters, including average duration of the replication portfolio? If you could provide any further details on that, that would be very helpful.And secondly, on the risk cost guidance, the less than EUR 800 million risk result in '24, how much TLA usage is built-in in that guidance?
Yes, thank you. So on the replication portfolio changes, I mean, as I said, It's very much due to the adjustments we have done in the PSBC application portfolio because of the changes which we have observed in the customer deposit mix. And as said, these adjustments were carried out in Q4 2023. And while we adjusted the model, some of the existing model trenches were closed out and set up again. And as internal transaction of the segment are conducted at arm's length. The required closing of all tranches was done present value neutrally and required prepayments from segment PSBC to group treasury as part of O&C. So it's very much, yes, also accounting logics here. And the consequence is a side shift of periodically net interest income, which from PSBC's perspective is a burden in Q4 2023 and a corresponding benefit in 2024. I hope that is answering the question.And then on risk cost, that's a good question. I mean, we always leave it open with less than EUR 800 million and then we have this EUR 453 million. So positively thinking, you could think about we don't use the top-level adjustment at all and we basically release it, then you would have a much lower risk result if corporates proved to be very resilient. And we don't see the necessity to have anything for '25. And it can go up to -- it gives us the flexibility to go up to basically EUR 1.2 billion because we book an EUR 800 million plus EUR 453 million top-level adjustments. So yes, there is a high [ variance ]. I would just say with this guidance, we are well-prepared whatever might happened. Also, we have a very good feeling because our Corporate Clients have proven to be very resilient and same holds true for the private clients.
The next question comes from Jeremy Sigee, BNP Paribas Exane.
Questions just around the buyback, please. The first is on Slide 26. Your footnote there says no accrual of net results to CET1 within the year. Is that a kind of technical comment? Or is that a signal that you're accruing at the top end of your 70% to 100% payout range, or at least to be in a position to do a very full payout should you want to? So is it a signal of that?And then the second related question is if you are doing the considerably bigger share buybacks, I just wanted to see what your thoughts are around timing, because if you're still going to wait until the half year results to apply to the ECB. It's going to be tough to do if you're doing EUR 1 billion to a EUR 1.5 billion buybacks, it's going to be tough to get that done before the AGM if you're only starting in January again next year. So I just wondered what scope you see to bring the start date forward for your buybacks.
Yes. Thank you, Jeremy, for the questions. So yes, the comment is partly a technical comment because nobody should wonder if we don't do the consideration in the Q1 result. Part of it, however, also our confidence that we want to have a large payout and therefore we just show the CET1 ratio without any accrual and the leftover of what we do not pay-out will be then basically considered at year end. So on the timing, you're totally rightfully, and that's why we want to apply right after H1. We think it's prudent to wait for H1 just to see how the year goes. If it continues like the January, I'm very confident to say it like that. And then clearly, we hope given that this is then not the first time we do a share buyback request to a regulator authority that probably we all can be a little bit faster and -- but it all depends on what numbers we present and how the situation is. But we have that clearly in mind that we want to use every window we have to that they are fully used.
The next question comes from Tobias Lukesch, Kepler Cheuvreux.
I would like to address the Swiss franc provisioning and the capital distributions. On the Swiss franc provisioning, what is the amount of mBank's provisions you're expecting in '24? And would you expect further burdens even in '25? And further, is there a chance of tax deductibility of these provisions going forward or potentially even retrospectively?And secondly, on the capital distribution, is it fair to assume that you will target a kind of EUR 1.6 billion, EUR 1.7 billion total payout for '24 in order to reach the kind of minimum EUR 3 billion cumulative payout over '22 to '24. I understand you have the 70% to 100% payout ratio range that you're targeting, but I just wanted to see that you target basically a minimum of EUR 3 billion.
Thank you, Tobias. On the Swiss franc provisioning, I mean, if we would know what we had to book, we would have to book it already for '23. So it's pretty clear that we expect more to come. And it's also very clear that we want to really end this story as the sooner the better. So this is also why we make a lot of pressure on the settlements so that we make progress there and the 14,000 as a promising signal, I think. And yes, we will try to book really the large chunk in 2024, and hopefully we will not have a lot of leftovers to say like that for 2025. It should be less clearly than in '23, but we simply don't know what I would say. We don't see -- we are not at the end of the tunnel, but we see clearly light at the end of the tunnel. And let me reiterate that the strong performance of mBank gives us a lot of flexibility because they earn a lot, and therefore they can also take the burden.On the capital distribution, I would say it's a fair assumption of the numbers you have just mentioned.
The next question comes from Vishal Shah, Morgan Stanley.
Firstly, congratulations on the good results and also delivery on your fee side of things. It's a good job there. And then I have questions on the 2025 NII guidance. I think most of it you have answered in terms of drivers, but if I compare what you had in your Capital Markets Day presentation, I obviously agree that the rates assumptions are very different now. But if I back it out, back out the path of 2025 NII versus the previous 2024 NII guidance, you were landing somewhere close to $7.9 billion, which is not very different versus the guidance you have given today. So is that fair to assume? So that's one.The second thing is on funding costs. I see in your slides that, obviously S&P has revised their outlook of credit ratings to positive recently. And then so it's possible to expect some ratings upgrades going forward as well. So have you factored any potential benefits on funding costs in your NII planning?And then thirdly, on the provisions and in risk results. If you can talk a bit about your commercial real estate exposure. I know in terms of U.S., you don't have any exposure, but on your European exposure, what sort of trends are you seeing in terms of refinancing and vacancy rates? And what gives you confidence that nothing material would happen there?
Yes, thank you for your question. So on 2025 NII guidance, I think we need to take as a starting point 2024, which is the $7.9 billion. And then you basically have to deduct something around $500 million for the rate moves, because as I said, the assumption now is we go down from 3.5% to 2.4%, and that brings the NII down by $500 million. And then you have counter-effects of the replication portfolio of deposit growth and loan and margin growth, and that adds up again. But our prudent assumption at the moment is that we will end below, slightly below the $7.9 billion. So there's not a big difference, but there is one.On funding costs, yes, I mean, we work very intensively on further improving our ratings, specifically with S&P, but it's not in our hands, so we haven't included any benefits out of it. So that would be a nice add-on if we should get a rating increase by, for example, S&P.And on the risk result with respect to real estate, commercial real estate exposure, I mean, it's not even Europe-based, it's Germany-based. That's important to note. And if you look and there is a chart in the appendix of the analyst presentation, if you look at that, it's very well diversified in good locations. It has a LTV of 51%, and only 4% are in stage 3. So we are not really worried about this portfolio. I can only reiterate, we really learned our lessons from the financial crisis.
The next question comes from Chris Hallam, Goldman Sachs International.
Yes. So Bettina, I think in your prepared remarks, you said you'd expect a low 3-digit million year-over-year tailwind from the replicating portfolio in 2025 and then an acceleration thereafter, which I guess is a little bit different to the path laid out on Slide 20 of the strategic plan back in November. So perhaps if you could just help us understand what those numbers that we got back in November would look like today. At the time, you had EUR 0.5 billion in '24, '25, '26, and then EUR 300 million in '27 to get to a total of EUR 1.8 billion. So just sort of what's the latest on that?And then second, another one on NII, sorry. In one of your earlier answers, you mentioned that one of the upside risks to the 2024 NII guide could be higher average ECB deposit rate. And I just wanted to check how you think about deposit beta assumptions in that scenario. So whether or not those would also move higher. I mean, obviously, there's a lot of moving parts around competition, et cetera. But it sort of sounds like you think you're getting towards a ceiling on betas. I just wondered if that's fair.
Yes, let me take first the deposit beta question. I mean, if it's -- I mean, we're talking here about, is it a 3.5% average or 3.6% average, I would not see any real impact on the deposit beta if markets and customer behavior, competitor behavior stay the same. So no change there. And on the replication portfolio contributions, and please also keep in mind, it's just the increase always what we talk about. And I mean, what we have done is really that we adjust our models to the changed customer behaviors. That is what we have done, and the resulting deposit mix. And we want to safeguard the long-term benefit of the replication portfolio. And this has been achieved with the technical side effects of lower positive contributions in 2025, because the current replication portfolio is now smaller in size, and we have shown that. It's -- and it has a shorter average duration. But you also must keep in mind that by reducing the size of the replication portfolio, we have more deposits invested outside. Thus, the interest income outside of the replication portfolio increases offsetting these effects.
So the next question comes from Jochen Schmitt, Metzler.
I have one question on your NII outlook 2024. Which number have you included here for Q4? Would it be reasonable to assume about EUR 1.9 billion? That's my question.
For Q4 2024?
Yes, exactly. Just to get some flavor for the quarterly path of your NII assumptions.
I would say it's flattening down, right? I mean, whenever you will see the decreases, then you will see also the impact of the lower interest rates kicking in. Yes.
The next question comes from Rohith Chandra-Rajan, Bank of America.
I've got a couple of follow-ups, please. The first, sorry, is on deposit beta again. You mentioned 35% sorry, 32% in December. You said it had gone higher in January. I was just wondering what the January number was, [ it ] would be helpful. And then just in terms of your confidence in the 35% for this year, what is it really that's driving that confidence given that beta has recently been increasing and you're seeing more flow into call accounts? So that would be the first one.And then the second one is just the clarification on the cost guidance that you gave earlier. I think you were very clear in reiterating the cost income guidance is 60%. I wasn't quite clear whether you're still talking about flattish costs or not, please.
So on the deposit beta, the January number is a slight increase, but -- and why do we believe that we are ending up with a 35%? It's just because of the competition. There is an increased talk, as we all know, about decreasing interest rate levels. That takes a lot of pressure away. We are out with attractive offerings, which we, however, also adjust now in the light of the expectations on the decrease of the interest rates. And on cost guidance, we have a very clear cost budget in place and we will manage against that. We will also get some benefits as everybody else because of the compulsory contributions because there has been just a public announcement that there will be no compulsory contributions from the European side for 2024. And we all take that together, and I think we will see a very solid cost development.
The next question comes from Anke Reingen, RBC.
Yes. Just one follow-up or one question, please. On the fair value result in '24, you guided to an unchanged level versus '23. And I just wonder, for 2025, given the strong correlation with NII, should the fair value result be similarly negative in '25 as in '24?
Yes. I mean, on '25, there will be a positive effect as we start out of lower interest rates because there is this communicating channels with lower NII, specifically another consolidation, you will have a positive on the fair value result. So it's fair to assume that '25 February will be better than '24.
That's still a negative number, right? So less negative.
Less negative, yes. But probably still negative, yes.
The next question comes from Timo Dums, DZ Bank.
Yes. So I have one follow-up in terms of the Swiss franc loans. So in mBank almost is now close to basically 100% provisioning, so I was wondering, how this -- how much of that -- I mean, this should clearly be beneficial for your overall tax rate. So how much of that is already embedded in your RoTE guidance for 2024? This would be my first question.And then my second is on the growth initiatives and on the joint venture with Global Payments. Could you talk here a little bit about the strategic rationale. I mean, some German peers that are also following the same route and some European banks in contrast, they try to pull the plug out of that business. So just wanted to check your thinking about that.
Yes, thank you. That gives me an opportunity to kick in before it goes back to Bettina. Global Payments is really a very interesting strategic partnership, because it's on the one hand, we believe it's an untapped business area. And the fact that we have a total mobile connection for them is really a strategic improvement, so they don't need a card reader, they don't need any other complicated tools. And in the way of ease of doing business exactly for this group of small business customers, it's an improvement and therefore, we have taken that and building on that, that makes the way of banking much easier for them. And that's why we are focused and believe that it's a growth story here.
And now back to Swiss franc's. And I realize that I didn't answer one of the side questions also of Tobias with respect to the tax deductibility of Swiss franc provisioning. And there has been some discussions in the [ Polish ] market to change that, but unfortunately it has been now confirmed that Swiss franc provisioning is not tax deductible. And that also leads back to your question, there will be not a positive impact on RoTE because of this tax thing. We shouldn't expect that.And with respect to the coverage ratio of 100% or nearly 100%, I mean, that's the number which is also used in Poland to compare the provisioning of different players. It is -- unfortunately, it's not a good indicator to say how much is still due because it's just taking the provisions still there in comparison to the volume of active users. The thing is we have already provisioned more than the EUR 1.9 billion, which you still have. We provisioned in total EUR 2.7 billion. And the other thing is that we always face the risk and we also have some clients in [ court ] that people who are passive, so who have already repaid, could turn around and still go to [ court ]. And that is something which we also assume in our modeling.But overall, it stays, as I say, we are progressing, specifically the settlement program is very important to put this story to an end. And we are very confident that we will close the whole thing in the next quarters. And mBank has a strong operational performance and can absorb all burden.
The next question comes from Riccardo Rovere, Mediobanca.
The first one, actually the first 2 is on NII again. Now, if you take Q4, that includes the 32% beta in Germany, and you brutally multiply by 4, you would end up at EUR 8.5 billion. Now you say EUR 7.9 billion, so there is a EUR 600 million fall in 2024, which is a bit difficult for me to understand given that rates are supposed to be the same in average terms. Now, you also have in Germany, EUR 260 billion of deposits from your slides in PSBC plus corporate customers of which EUR 120 billion is modeled. So you are left with EUR 140 billion of deposits not modeled. Now, you say the deposit beta is going to go to 35%. So it's 3 percentage points out of 400 basis point increase, roughly, in rates in Europe. So it's 12 basis points, say 15 basis points, times EUR 140 billion is at best EUR 200 million lower NII. Is the residual EUR 400 million from the replicating portfolio? And if this is the case what's the point of having it? If it smashes down NII by 5% what's the point of having it? Or the other way around to put it, can you reduce it further to reduce this -- the drag from this in '24 and also in '25, because what is going to happen in '26 and '27, I mean, it's really far away.And the other question I have is -- or just the question here is, is there anything wrong in what I'm saying? And the other question is, in November, you stated NII '23 was supposed to be just above EUR 8.1 billion, let's say EUR 8.15 billion. And you ended up at almost EUR 8.4 billion. How should we read the -- what went "wrong" in only 1.5 month give or take?And the third question I had is, your risk cost guidance is based on slight mild recession, what would happen if the mild recession would turn to be a mild growth? Would you be in the position to indicate a sort of sensitivity range in provisions to, let's say, 0.5 percentage point GDP growth or anything like that?
So, Riccardo, thank you very much for your question. I start with the last one. So if it would turn into a slight growth, I mean, it's a little bit what I said earlier. We have quite some flexibility. So you can imagine that if you don't need the TLA and everything is lightening up also for '25, then you don't need the top-level adjustment anymore. You release it, you will also then have a counter effect on a normalized risk result and the normalized risk result is rather around EUR 600 million. So you can imagine that there will be a much lower number for the risk result. But as said, we are also prepared for the other side. So there's a high flexibility dependent on the situation. And there is clearly, if there is growth, there's clearly upside for our plan.On your NII question, I take first one on the 2023, what happened that we sat, and we sat actually larger than EUR 8.1 billion, but it's still a way to go to the EUR 8.4 billion, agreed. One is clearly that and that's the most important part that we had really some positive inflow with respect to private clients and actually we also thought that Corporate Clients would come in a little bit lower than it did. So this one is very much driven by the volumes and that's also the basis then for our 2024 guidance.And now, on your first question, which was a lengthy one, and I think it's worth to probably go deeper in that tomorrow in our call. But let me say it like that. I mean, first of all, we should always keep in mind that when we talk about the replication portfolio end the add-on, it's an increase. So we talk about more benefits coming out of it. And it's very much something which helps us to, to level out and smoothing the NII over time. That's the whole benefit of such a portfolio. And the rest, I would say, we save for tomorrow.
So there are no further questions at this point. Back to you, Dr. Orlopp and Mr. Knof for some closing remarks.
Yes. Thank you very much for all the questions. And as always, the team is ready to answer your follow-up questions tomorrow, or when we see each other next time. Looking forward and have a good day. And thank you very much for your interest and your questions. Thank you. Bye-bye.