Commerzbank’s Latest Asset Sale Reduces the Group’s Risk
Last Thursday, Commerzbank AG (Baa1 stable, D+/ba1 stable6
)
announced that it had sold €710 million of
nonperforming loans from its Spanish commercial real estate (CRE) portfolio to international investors.
The sale is credit positive for Commerzbank.
Commerzbank reported that the transaction reduced risk-weighted assets by €600 million, had a positive
net effect on capital and marked a 50% reduction of the volume of nonperforming loans in the group’s
Spanish CRE portfolio since January 2013. The €20 million positive capital relief effect is small in the
context of the group’s €25 billion common equity Tier 1 capital as of 30 September 2013, and will not
visibly improve its regulatory capital ratios. However, the €710 million sale marks a 12% reduction in the
group’s €6.1 billion impaired portfolio relating to its CRE exposure.
Commerzbank’s asset sale is the latest of a string of higher-risk portfolio sales during recent quarters that
improve the group’s asset quality. The transaction fully fits Commerzbank’s strategy to quickly unwind its
disproportionately large non-core asset segment, which will support the gradual recovery of its franchise.
Commerzbank successfully cut non-core assets by more than 20% to €138 billion in the nine months to
September 2013, without compromising its capital ratios. Non-core assets accounted for more than 25% of
total group assets as of December 2012, and recent reductions have exceeded its targets for unwinding
them. The group achieved much of the reduction in higher-risk areas of the non-core asset unit, particularly
in CRE, where assets were 30% lower as of September versus December 2012.
In the third quarter of last year, Commerzbank sold its entire UK CRE portfolio, which comprised €5
billion in loan assets. Similar to its Spanish CRE book, this portfolio also had a high percentage of
nonperforming loans. Commerzbank followed the UK sale with the December sale of €280 million of
nonperforming ship finance assets. As Exhibit 2 shows, all of these transactions had a positive effect on
Commerzbank’s asset quality metrics.
The non-core assets burden Commerzbank’s franchise, as illustrated by the €1.5 billion operating loss it
contributed to group results in 2012. We expect another sizable loss for 2013 from non-core assets,
considering the €745 million operating loss reported for the nine months to September, and the ongoing
(and sometimes costly) efforts to shed the assets. However, the latest transactions demonstrate
Commerzbank’s strong commitment to unwinding the non-core asset unit at a good pace, with positive
implications for its franchise.
In addition, the accelerated balance sheet cleanup is an effective preparation for the asset quality review and
stress test that the European Central Bank, in cooperation with the European Banking Authority, is
presently conducting to assess the robustness of Europe’s largest banks. Every reduction in underperforming
assets reduces the potential for any parameter adjustments to the group’s nonperforming loans, given that
the harmonisation of problem-loan reporting and provisioning across Europe are focal points of the asset
quality review. Commerzbank’s comments that the latest two portfolio sales were possible at only minor
losses indicate that its collateral and provisioning levels are close to market values. Importantly,
Commerzbank’s 11.0% core equity Tier 1 ratio under the Basel III phase-in rules implies that the bank is
well positioned for the asset quality review, which will benchmark banks against a common equity Tier 1
threshold rate of 8%.
Last Thursday, Commerzbank AG (Baa1 stable, D+/ba1 stable6
)
announced that it had sold €710 million of
nonperforming loans from its Spanish commercial real estate (CRE) portfolio to international investors.
The sale is credit positive for Commerzbank.
Commerzbank reported that the transaction reduced risk-weighted assets by €600 million, had a positive
net effect on capital and marked a 50% reduction of the volume of nonperforming loans in the group’s
Spanish CRE portfolio since January 2013. The €20 million positive capital relief effect is small in the
context of the group’s €25 billion common equity Tier 1 capital as of 30 September 2013, and will not
visibly improve its regulatory capital ratios. However, the €710 million sale marks a 12% reduction in the
group’s €6.1 billion impaired portfolio relating to its CRE exposure.
Commerzbank’s asset sale is the latest of a string of higher-risk portfolio sales during recent quarters that
improve the group’s asset quality. The transaction fully fits Commerzbank’s strategy to quickly unwind its
disproportionately large non-core asset segment, which will support the gradual recovery of its franchise.
Commerzbank successfully cut non-core assets by more than 20% to €138 billion in the nine months to
September 2013, without compromising its capital ratios. Non-core assets accounted for more than 25% of
total group assets as of December 2012, and recent reductions have exceeded its targets for unwinding
them. The group achieved much of the reduction in higher-risk areas of the non-core asset unit, particularly
in CRE, where assets were 30% lower as of September versus December 2012.
In the third quarter of last year, Commerzbank sold its entire UK CRE portfolio, which comprised €5
billion in loan assets. Similar to its Spanish CRE book, this portfolio also had a high percentage of
nonperforming loans. Commerzbank followed the UK sale with the December sale of €280 million of
nonperforming ship finance assets. As Exhibit 2 shows, all of these transactions had a positive effect on
Commerzbank’s asset quality metrics.
The non-core assets burden Commerzbank’s franchise, as illustrated by the €1.5 billion operating loss it
contributed to group results in 2012. We expect another sizable loss for 2013 from non-core assets,
considering the €745 million operating loss reported for the nine months to September, and the ongoing
(and sometimes costly) efforts to shed the assets. However, the latest transactions demonstrate
Commerzbank’s strong commitment to unwinding the non-core asset unit at a good pace, with positive
implications for its franchise.
In addition, the accelerated balance sheet cleanup is an effective preparation for the asset quality review and
stress test that the European Central Bank, in cooperation with the European Banking Authority, is
presently conducting to assess the robustness of Europe’s largest banks. Every reduction in underperforming
assets reduces the potential for any parameter adjustments to the group’s nonperforming loans, given that
the harmonisation of problem-loan reporting and provisioning across Europe are focal points of the asset
quality review. Commerzbank’s comments that the latest two portfolio sales were possible at only minor
losses indicate that its collateral and provisioning levels are close to market values. Importantly,
Commerzbank’s 11.0% core equity Tier 1 ratio under the Basel III phase-in rules implies that the bank is
well positioned for the asset quality review, which will benchmark banks against a common equity Tier 1
threshold rate of 8%.
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