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Edited Transcript of CBK.DE earnings conference call or presentation 13-Feb-20 8:00am GMT

Q4 2019 Commerzbank AG Earnings Call

Frankfurt am Main Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Commerzbank AG earnings conference call or presentation Thursday, February 13, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bettina Orlopp

Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs

* Stephan Engels

Commerzbank AG - CFO & Member of the Board of MDs

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Conference Call Participants

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* Hugo Moniz Marques Da Cruz

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Izabel G. Dobreva

Morgan Stanley, Research Division - Equity Analyst

* Johannes Thormann

HSBC, Research Division - Global Head of Exchanges and Analyst

* Nicholas Herman

Citigroup Inc, Research Division - Assistant VP and Analyst

* Riccardo Rovere

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Stuart Oliver Graham

Autonomous Research LLP - Head of Banks Strategy

* Tobias Lukesch

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Commerzbank AG conference call. Please note that this call is being transmitted and recorded by audio webcast and will be subsequently made available for replay in the Internet. (Operator Instructions)

Let me now turn the floor over to Stephan Engels.

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Stephan Engels, Commerzbank AG - CFO & Member of the Board of MDs [2]

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Good morning, ladies and gentlemen. Welcome to our conference call on the results of the fourth quarter and the full year 2019. The CFO handover from me to Bettina Orlopp is valid one. We have spent a good amount of time in jointly preparing the year-end closing of 2019, therefore, Bettina will guide you through our presentation in the call. I would like to thank and to take this opportunity to thank you all for the good and constructive discussions we had over the last 8 years. Though this included on or the other challenging topic, it was always a very professional attitude that has to set the tone for all the meetings we had. So thanks, again, and I'm looking forward to any future context.

And now over to you, Bettina.

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [3]

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Thank you, Stephan. Also a warm welcome from my side. I'm looking forward to keeping the dialogue with you starting today.

2019 has been a busy year in banking and, of course, for Commerzbank. We have advanced our agenda Commerzbank 4.0 and made significant progress.

This includes the implementation of our new IT delivery organization Campus 2.0, with strong customer and asset growth and our successful cost measures. We conducted a very thorough review of our business and decided on our next strategic step, Commerzbank 5.0. And we ended the year with better financials than expected and have achieved first results in the strategy implementation. With this introduction, let me update you on the preliminary 2019 results and the execution of our strategy Commerzbank 5.0.

The financials of 2019 finally came in better than expected. Also at a small margin, our operating results have been higher than in 2018, thanks to better revenues for the fourth quarter. And besides P&L, capital is much stronger than anticipated, increasing our flexibility. And we have already and ahead of plan achieved 2 important milestones of Commerzbank 5.0.

On comdirect integration, we have surpassed the threshold of 90% of outstanding comdirect shares in early January. This is a major milestone in our plan to leverage the capabilities of comdirect for the whole group and realized cost synergies in an amount of EUR 150 million. While we had to pay a premium as it is usual in these situations, we could significantly accelerate the process and reduce risk and complexity. We now fulfill all requirements to move perhaps the squeezeout and statutory merger, and this will be decided at the comdirect AGM on May 5. The working groups preparing the integration are making good progress. Following the legal merger, we will be able to start the integration in the fourth quarter.

On our efficiency program, we have already decided to offer a part-time retirement program similar to previous offers. Employees at the age of at least 56 years receive an offer to early retire after another 2 to 3 years of service for the bank. This allows for a smooth transition. We expect the number of FTEs signing up for the program to be above 1,000. For this cost-efficient program, we have booked a EUR 101 million restructuring charge already in Q4 2019, ahead of plan.

Let's now look at the highlights of the financial year 2019 on Page 2. In 2019, we have substantially grown our customer and asset base to counter the negative rate environment and generated additional revenue. We have added nearly 0.5 million net new customers in, PSBC Germany. This customer growth has contributed significantly to an increase in loans and securities volume of EUR 35 billion, a strong increase of 16%. We are also growing in Corporate Clients. We have maintained our market-leading position in Mittelstand and have improved our position in International Corporates.

Just looking at loans, we have managed to increase our corporate loan book by EUR 6 billion or 7% last year. Based on customer and volume growth, revenues have overall kept up at the level of 2018. PSBC has improved underlying revenues by 1%. Corporate Clients have also managed to improve revenues from the customer business. However, this could not fully compensate the lack of contribution from legacy businesses that we have closed on both. In total, we have grown underlying NII at 7%. And our underlying revenues have been stable overall, all this, as we all know, in a quite challenging environment. This proves the resilience of our customer-focused business model.

Operating expenses have come in below EUR 6.8 billion, fully in line with our guidance and around EUR 100 million below last year. Together with the EUR 620 million risk result, this has led to a stable full year operating result of EUR 1.26 billion. As mentioned, the net result incorporates the booking of the EUR 101 million restructuring charge and a higher tax rate.

Based on this solid EUR 644 million net result and previous year's payout ratio, we will propose a dividend of $0.15. This represents a dividend yield of around 2.5%. We have maintained our healthy risk profile with a further improved NPE ratio of only 0.9%. And again, we have reached a strong CET1 ratio of 13.4% at year-end. This provides a solid basis for 2020.

Let's briefly touch on exceptional revenue items on Slide 4, and then move straight to Slide 5 for the overview of our segments. On a net basis, exceptional revenue items in Q4 as well as for the full year 2019 have largely leveled out. We had net EUR 11 million in Q4 and EUR 24 million for 2019.

Revenues from PSBC increased by EUR 107 million from our growth initiatives and the sale of ebase. The EUR 111 million higher operating result directly reflects these improved revenue. Corporate Clients has lower revenues driven by lower contributions from legacy portfolios, which could not be completely offset by higher revenues from client businesses. This and the higher risk results are the main drivers for the reduction in the operating side. Taking others and consolidation and ACR together, they have contributed EUR 84 million to our operating results. This is a noticeable improvement of EUR 174 million compared to last year. It reflects a better treasury performance in 2019, valuation effects as a cleanup over the last years. Considering these improvements, we adjust our others and consolidation guidance to around minus EUR 150 million for the financial year 2020.

Let's take a closer look at our revenue development at group level on the next page. Overall, stable underlying revenues in 2019 benefited from growth, compensating the negative rate environment but also reflects diminishing contribution from legacy portfolio. NII has been the key driver of revenues over the last 2 years. Higher loan volume has translated into additional revenue. In 2020, I expect a positive impact from pricing measures regarding deposits as well as further support from continued loan growth. These should at least offset the negative rate environment and respective margin pressure.

NCI has developed flattish in 2019. This is an area where I see additional potential in 2020, especially in the securities business of PSBC and for pricing initiatives in PSBC and Corporate Clients. With fair value and other revenues most likely to show a stable development in 2020, I expect total underlying revenues at least the level of 2019.

On Slide 7, I would like to focus on the development of the fourth quarter, which came in with better revenues offsetting higher risk provisioning. Underlying revenues in the fourth quarter have been better than expected. In particular, when considering that they carried the burden of EUR 57 million legal provision for the FX mortgage portfolio and EUR 18 million from an ECG verdict on early loan repayments on mBank. On a full year basis, mBank growth has more than compensated these burdens with underlying revenues up by EUR 81 million. The risk result in Q4 of EUR 250 million is driven by individual cases, and they reflect the somewhat longer booking period in line with the year-end closing procedures. This costs in line with guidance, the Q4 operating result came in at a solid EUR 250 million.

The EMC business that we sold to SocGen has in total, reported a small operating loss of EUR 17 million in 2019, showing up in discontinued operation. The transfer of the business has progressed well throughout 2019. We expect the last position to be transferred at Q1 this year. After completion, we will receive a final payment from SocGen for the business, which would roughly offset the remaining costs, resulting in a small positive effect in 2020.

The group's net loss of EUR 54 million in Q4 is due to the early booking of the EUR 101 million reduction charge and a high tax rate incorporating a DTA adjustment. This has resulted in a full year tax rate of 33%. For next year, we expect the tax rate to begin at the normalized level of 25% to 30%.

Let us move over to Slide 8, which provides a view on our cost development. We have reached our 2019 target to manage the cost base below EUR 6.8 billion. The total cost reduction of EUR 160 million or 1.7% in 2019 has been driven by lower operating expenses. A big contributor for lower cost for IT projects as we have decreased the number of external staff employed within our new IT delivery organization Campus 2.0. This has more than compensated higher compliance and regulatory costs as well as an increase in personnel expenses. The latter increased especially due to the regular 2% salary adjustment and slightly increased variable compensation.

In 2019, we have reduced our headcount below 40,400 FTE, a reduction of net more than 1,100. Based on this and with the booking of the restructuring charge for the part-time retirement theme, we are well on track to meet our FTE targets of Commerzbank 5.0.

For 2020, our base case from the strategy update targets EUR 6.7 billion run-in cost plus up to EUR 0.2 billion cost-to-achieve from IT investments. These IT investments form a key private (inaudible) to ultimately take out gross EUR 1 billion of costs production 5.0.

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Furthermore, in September, we have kicked off a cost project at level to come up with additional savings potential. We will provide an update of the results with the release of our Q2 figures at the latest.

Moving on to Slide 9 and our risk result. Commerzbank had a clean balance sheet and a very healthy risk profile. Our NPE ratio has further improved to 0.9%, below the German and well below the European average. Our cost of risk covers (inaudible) at 14 basis points. Overall, the underlying risk indicators remain with the ranges seen over last year.

While we have benefited from significant write-back in 2018, we have seen a somewhat higher number of individual cases in 2019 and in particular, in Q4, where we have larger international cases. Throughout the year, this individual cases have been widely dispersed, very idiosyncratic, have not clustered in a specific country or industry. The risk result of the German private customer segment has been completely stable. Also the higher risk provisioning in Q4 and 2019 is based on single cases, we are well aware of the high interest and rather slowing of the economy shows up in our book. Therefore, we have this Slide 10 to shed some light on this.

Our Corporate Clients portfolio is well diversified across all relevant sectors. Our risk management is based on a strong sector competence. We expect our specialists in place who know the sector extremely well and manage the portfolios in a proactively -- in a proactive and timely manner. Based on this robust setup, we are well placed to manage slowdowns in individual sectors. Given our lackluster GDP outlook for Germany with 0.8% and the eurozone with 0.9%, as well as noise around sector, we continue to closely monitor our portfolio and are somewhat cautious regarding outlook. This is why we guide for a risk result in 2020 above EUR 650 million. And this is before any major impact that might potentially result from the coronavirus.

Now let's carry on with the operating segments and start in Private and Small Business Customers on the next 3 slides. In 2019, the segment has added 473,000 net new customers; and since 2016, more than 1.5 million in Germany. We are on a good trajectory to reach our target of at least 1 million net new customers in 2023. As always, the (inaudible) customer acquisition is volume and revenue growth. Loan and securities volumes in Germany have increased by EUR 35 billion to EUR 261 billion. This double-digit growth has materially contributed to revenues and largely compensated the drag from the rate environment.

With higher revenues and lower cost, we had a successful year 2019 at PSBC. The full year operating result increased by 15%. And I would like to point out that I'm pleased with the revenue quality of the fourth quarter. Full year revenues in Germany has evolved, thanks to growth and the better securities business, which has been the strongest of the last 7 quarters. The mortgage business has continued its expansion in the fourth quarter and ended the year at EUR 80.9 billion and overall, 7.7 million increase in volume. Margins in the new business have improved this year, and lower rates have not been fully passed on to customer base.

The consumer finance book stopped at EUR 3.7 billion at the end of the year. This is lagging behind our expectations. We continue to see significant potential in this business, and we are expanding the offerings through additional channels like online, contact center and broker.

Let me conclude on PSBC with the current status of deposit pricing. It clearly has potential, and we take careful and deliberate steps, taking into the consideration the whole customer relationship and its potential (inaudible) the second part. In Q4, we have piloted our approach to tackle deposits in excess of EUR 250,000. The result has been encouraging. A good portion of our customers has accepted negative rates or moved deposits into securities. Others have reduced the deposits below the threshold, and this has been less than expected. Based on these encouraging results, we have started the rollout of the full organization. Since January, relationship managers across Germany approached their customer with deposits of more than EUR 250,000, starting with the largest account.

Regarding numbers, we are talking about a total of roughly EUR 20 billion of deposits above the threshold of EUR 250,000. We see first revenue potential ready in 2020. This goes into the low double-digit million area with more potential in the medium term.

In Corporate Clients, I would like to remind you, we have been frontrunners in deposit charging. In 2019, this has led to revenues of EUR 100 million in Germany because we have successfully passed on part of the burden of negative clients.

This brings me to Slide 13 and 14 about Corporate Clients. In 2019, we have seen strong growth in our customer franchise. Mittelstand and International Corporates have grown their loan book by EUR 6 billion to EUR 88 billion. The 7% loan growth in 2019 clearly contributed to revenues, which are up 4% at Mittelstand and International Corporates. This has been achieved despite the unfavorable development of the rate environment. Financial institutions also managed to increase revenues by 3% in 2019. Focus is on our core clients and our optimized correspondent banking network that we have expanded slightly in strategic areas. In Q4, revenues are somewhat lower as we have put some RWA measures in place towards (inaudible). While the customer base business has performed well, the closing of legacy business is visible in the significantly reduced revenues in others. Underlying revenues are therefore lower by EUR 129 billion compared to last year. And as already mentioned, single cases has further led to a higher risk result, which has brought down Q4 and full year results.

Let me now turn to the positive development of our CET1 ratio on Page 17 (sic) [Page 15]. With 13.4% at the end of 2019, we have reached a strong level. In operational risk, we could reduce the RWA by around EUR 2 billion through improvements in our risk model, which were approved by the regulator in Q4. A dropout of external loss events and the industry-wide database further contributed to the reduction. The moderate driven reduction should be maintained going forward.

In market risk, we have reduced the RWA by EUR 1 billion to adjustment at risk position. Also, the transfer of significant part of the EMC business to SocGen has contributed in Q4.

The credit risk RWA reflects our active RWA management. In Q4, we have closed the securitization transaction that has lowered RWA by EUR 1 billion. We have also seen reduced volumes, in particular, in the financial institution portfolio in line with year-end management.

All in all, this provides us with a very good basis for 2020. Looking further out into 2020 with a starting point of 13.4%, I'm very confident that we have enough capacity for continued focused growth and the implementation of our strategic initiatives. We continue to target a CET1 ratio of at least 12.75% at year-end. This is well above the MDA and before any upside from the sale of mBank. Looking into 2021, we have confirmation from the ECB that we can fill 40 -- up to 44% of our 2% Pillar 2 requirement with AT1 and Tier 2 capital. Now let's take a look at our agenda for 2020. With Commerzbank 5.0, we have a clear strategy to future-proof Commerzbank increased profitability by focused growth and cost savings. In PSBC, we will pursue our successful growth path. We tracked more than 200,000 net new customers and more than EUR 10 billion additional volumes in loans and security. With growth in PSBC and the introduction of charges for deposits in excess of EUR 250,000 in Germany, we will compensate for the burdens from the negative rate environment. And as already mentioned, we will start the integration of comdirect and started the sales with consignment.

In Corporate Clients, we target to acquire 300 new client groups in Mittelstand and (inaudible). Based on capital-efficient growth and client volumes, we aim to increase underlying revenues of the segment.

In IT and operations, we have a clear direction of travel and technology as well as efficiency. We plan to nearly double the number of applications that are cloud-ready to 40% by the end of the year. Based on our good experience, we will expand our existing near-shore hubs and set up new ones to foster internalization. Here, we also aim to nearly double our capacity to 40% of relevant staff. And of course, we will start negotiations with the workers council regarding our planned FTE reduction, on top of the agreed part time retirement scheme. Subject to the progress of the negotiations, I expect further bookings of restructuring charges in the course of 2020.

Last but not least, I would like to highlight our focus on responsibility. On Page 21 of the presentation, we have summarized our sustainability ratings, which are well above the sector efforts and dedicated renewable energy financing for your reference. We have already achieved a lot and will continue to advance. In 2020, we will further increase our efforts and management actions. A special focus will be on the development of green products, green mortgages as well as on incorporating climate into our credit risk portfolio management.

Ladies and gentlemen, let me wrap up and summarize our objectives and expectations for 2020. We have met our customer acquisition targets and continue to grow our customer business in PSBC and Corporate Clients. This has enabled us to achieve stable revenues in a challenging environment. We have also reached our cost targets. This has led to a stable operating result for the year. We have reached a CET1 ratio of 13.4%, which is a very solid basis for targeted growth and gives us additional strategic flexibility. We have launched our new strategy Commerzbank 5.0 and have already achieved important milestones. In 2020, we will make big strides towards objective of Commerzbank 5.0, laying the foundation for further cost reduction, improved revenues and, ultimately, a higher return. And we had a good start in January. PSBC has maintained its momentum in the securities business, corporate Clients and had a similar strong start as in January 2019. And these first data points are encouraging and make me feel positive about the potential of 2020.

With that in mind, let me outline our financial objectives for 2020. We will continue with our growth strategy and target underlying revenues at least at the level of 2019. We confirm our target for cost base of EUR 6.7 billion. In addition, we will invest up to EUR 0.2 billion cost to achieve in IT as part of the Commerzbank 5.0 agenda. We expect our risk result above EUR 650 million. We plan to maintain a dividend with a payout ratio comparable to 2019. We confirm our target of the CET1 ratio of at least 12.75% by year-end.

And now thank you very much for your attention, and I'm happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Nicholas Herman of Citigroup.

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [2]

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A couple of questions, please. One on capital -- one on revenues and one on capital and strategy. So the first one, on the revenue outlook, you've guided to at least -- revenues at least -- the revenues in 2020 at least as high as 2019 levels. That looks like to be a similar run rate to 4Q '19. So are we -- should we just assume a flat run rate through 2020? Or does it get worse before it gets better? That's the first question.

On capital and strategy, now you said before that the sale of mBank was to fund cost saves but also to avoid the 50 basis points higher decent buffer. But at the same time, the regulatory environment has improved. So a couple of parts to this question, please. Firstly, is it fair to assume that your new strategy, 5.0, was formed last year without assuming you get credit to fill the Pillar 2 our buffer with AT1 and Tier 2 capital? And I'm talking here about the recent clause and you've been commissioned for 104-1a?

Secondly then, with that in mind, as Pillar 2A is 2%, I mean, you can save 80 to 90 basis points and potentially of CET1. So it's 12% to 13% the right hurdle rate for Commerzbank?

And finally, given that you can save the CET1 capital, is it not worth keeping mBank and benefit -- keeping the high returns because after this changing capital rules, you would still net-net be in a better position even after the 50 basis points higher?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [3]

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Yes, thank you, Nicholas. As lot of question, I'm trying to get through it. First of all, the question on revenues, no, it's not getting worse. We just thought that we would have minimum the revenues of 2019. As I said, start in 2020 has been good but -- and we expect definitely higher underlying revenues in our 2 core segments.

On capital, yes, indeed, when we did our strategy launch last year in September, we didn't take into account any free-up with respect to the Pillar 2 guidance we just got from the ECB. So that is definitely a change. There's also clearly a change because we didn't forecast a 13.4% capital ratio at year-end. So that is clearly providing us much more flexibility than we thought in September, which is good. Regarding the mBank sale, we stick to the mBank sale because there were 2 reasons for the mBank there. One was that, clearly, we wanted to have the RWA free-up on the one side, but we also wanted to lock in the value -- the high valuation of mBank. And so we pursue our sales process. But I have to say that we will clearly only sell mBank if the conditions are the right ones and specifically if we get the right price for mBank because, otherwise, it would be stupid to not do it.

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Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [4]

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And just on the last part, I mean does -- also does that -- does it also gets occur to you to revise that 12% to 13% hurdle rates over time?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [5]

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We said that we target a hurdle rate of 12% to 13%. I think that is still a valid assumption because we need to see what time brings with respect to regulatory requirements, et cetera. So I think it's good to be on the safe side. And I think we will stick to that guidance for the moment. And if you see any major changes, we would definitely also adjust that.

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Operator [6]

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The next question is from Stuart Graham of Autonomous Research.

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Stuart Oliver Graham, Autonomous Research LLP - Head of Banks Strategy [7]

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I had a couple of questions. Firstly, can you talk about the CET1 headwinds, please, for this year? I guess I'm thinking about the comdirect minority buyouts, the final stage of TRIM and I guess, the EBA guidelines on PDs and LGDS, which kick in on 1/1/21. So could you talk to any CET1 headwinds, please?

And then the second question was on the cost measures. You said there's more cost-cutting to come out Q2 at the latest. I guess what has changed that you're coming up with more cost cuts so soon after outline 5.0? And could you give us a bit of sense of what to expect there in terms of scale and restructuring charges that might go with that?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [8]

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Okay. On the CET1 ratio, yes, there are some headwinds to expect. TRIM is clearly one of it. To be very honest, it's too early to tell how much it is. It might be in a similar level what we have seen last year. We -- from the comdirect sale -- or not sale, integration is the better saying. We do not expect a lot because the impact on the capital will be a very low number, either even 1-digit number or a low double-digit number impact.

On the cost measures, what has changed, not a lot. Actually, we announced in September that we would launch a cost reduction initiative. By the time we already said that we wanted to do that and use the time and really review with the external help our cost base again, and first results look promising. But it's early -- too early to tell what level -- levers we will have and what restructuring costs we need for that. But I'm pretty sure I will update you on that latest Q2.

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Stuart Oliver Graham, Autonomous Research LLP - Head of Banks Strategy [9]

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Just to be clear, this is additional to what you laid out with 5.0, yes?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [10]

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Yes, that comes as addition.

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Stuart Oliver Graham, Autonomous Research LLP - Head of Banks Strategy [11]

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And then just finally back on the capital. The PDs and LGDs from EBA guidelines, does any hit there to come 1/1/21?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [12]

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Not much from our current understanding.

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Operator [13]

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The next question is from Riccardo Rovere of Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [14]

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I have just a couple, if I may. The first one on risk result, you stated that in 2020, you expect risk costs to be above EUR 650 million, if I remember correctly. But you also stated that in 2019, the relatively higher amount of provisions you charge at the end of the year was due to, let's say, kind of isolated cases or specific cases. Is that EUR 650 million taking into account possible specific cases that clearly can arise anytime during the year? Or is it due to, let's say, more broader deterioration of the asset quality that you see on the back of a weakening global outlook, coronavirus or whatever it is? This is my first question.

The second question I have is on this -- is on the restructuring charges. Is it still the case you expected to, let's say, conclude the disposal of mBank in 2020, at some point in '20, and so the residual restructuring charges that should be booked in conjunction with that in 2020? And with regard to the cost-to-achieve IT investments and so on, would you be in a position to give us an idea of how the phasing of these investments should be over the course of the next, let's say, couple of years?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [15]

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Well, on the risk results, of the EUR 650 million it takes into account 2 points. First of all, I mean, as we always see over the year individual cases, we are also very cautious. And also second to account that there might be individual cases in 2020. That's the first thing. The second thing is given that -- I mean there is some nervousness around the development of economy. We are just very cautious and just -- yes, have forecasted a little bit higher risk results than we have seen this year.

On the restructuring charges, infact mBank proceeds this year to say all the guidance I have provided you earlier on was right with respect to revenues, also with respect to capital ratio, et cetera. And with restructuring charges, the booking depends very much on the progress we make in the negotiations with Workers' Council. And it might be booked completely in '22 but -- in mid-2020, but it might be also part still to be booked in '21. The IT investments of EUR 750 million, you referred to will be spread over the next few quite (inaudible) fully.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [16]

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Sorry, Mrs. Orlopp, I didn't get the very final answer with regard to the IT investments. You expect them to be booked largely this year or next year? Sorry, I didn't -- just didn't get it.

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [17]

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The IT investments, we will see up to EUR 0.2 billion this year, for EUR 200 million. And the rest, the EUR 550 million, which we have announced, you will see spread over the next 2 to 3 years until 2025.

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Operator [18]

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(Operator Instructions) The next question is from Tobias Lukesch of Kepler Cheuvreux.

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Tobias Lukesch, Kepler Cheuvreux, Research Division - Equity Research Analyst [19]

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I would like to come back to revenues first. So you gave the guidance of at least as high revenues as we've seen in 2019. I was wondering, if you strip out mBank already in 2020 and do a like-for-like comparison with 2019, would that still imply stronger revenue, stronger underlying revenues for Commerzbank?

Secondly, on the capital, I mean you decreased your balance sheet by 10% by the end of the year, surely also saving some regulatory charges on that front. However, I was wondering like how much of an asset increase can we expect over Q1. What is the target size basically of the balance sheet? What is the target size of the portfolios with regards maybe for the loan growth, maybe some international corporate loans like we have seen in the last quarters? Is there something that might be a kind of exceptional being in the pipeline?

And lastly, again, on the costs, so you're just guiding EUR 200 million now for 2020. Is that a reflection of potential availability of IT resources, i.e., you couldn't even spend the EUR 300 million if you wanted to do so because it's just hard to apply as many resources at the same time?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [20]

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So on revenues, I mean the revenues, in the moment, it's still assumed (inaudible) included clearly in our P&L for 2020 because even if we close the sale until year-end, you will still see it in our P&L this year. Would we see the same revenues as last year if we exclude mBank, it would be tougher, but we are optimistic.

On the cost, I think the next question was on the balance sheet, balance sheet management. I have to say our core ratio is the capital ratio, and that's what we manage. The balance sheet management is just at -- an end product of basically the growth in the business, and we are clearly focused on growth. So that's what we manage.

And third point the IT investments, could we also invest EUR 300 million this year. Probably not because, as you rightfully said, we need to have the right resources, et cetera, and it must be in a manageable amount because it is better to invest less but really get the things out for the money. And we also have seen that it's so important to do the IT projects with a large share of internal capacities and not only rely on external support.

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Operator [21]

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The next question is from Hugo Cruz of KBW.

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Hugo Moniz Marques Da Cruz, Keefe, Bruyette & Woods Limited, Research Division - Analyst [22]

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Two questions. So should I just assume that the extra IT investment in 2020 will all be going through the P&L? Or some of that could be treated in some other way? And then can you give me more clarity on your payout targets -- do you -- because it's not clear to me what the actual payout policy is? Do you have a reported earnings payout target at logistic level? Or is it kind of stable but growing EPS? If you could explain, it would be great.

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [23]

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The extra IT investments are largely on P&L. And on the payout ratio or the dividend, it's the payout ratio. As we have had it in 2018 and 2019, we just target the same payout ratio as we have targeted in previous year.

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Operator [24]

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The next question is from Johannes Thormann of HSBC.

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Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [25]

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Johannes from HSBC. 2 questions from my side. First of all, looking at your NII, was this strength partly driven by less margin pressure in the German market? Or would you only be charged this to your deposit pricing strategy?

Secondly, on your risk cost, you said the single cases came from different regions. Can you shed a bit more light on this and give details on which industries were affected and, considering your cautious outlook for 2020, which industries are the main concern? Is your watch list for single case bigger than at the same time in 2019? Or could you provide more details on this, please?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [26]

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So NII is basically -- I mean if -- we don't see -- at least on the private client side, we do not see any effect of the deposit pricing yet. As I said, we see it in the corporate side with the EUR 100 million. We, however, also see an increase in margins, for example, on mortgages, PSBC margins came back by 10 basis points. And also on the loan side, we have seen an increase in margins. And that's combined with the growth in volumes, you see the result in the higher NII last year.

On risk cost, the single cases were really spread to -- have been in Asia, one in Europe and very different sector. With respect to the outlook, I mean, there are sectors who are basically weaker than others. Automotive is clearly one. We only see there really some shadows appearing. And especially for Tier 2 and Tier 3 players, we do not see any impact at the moment for OEMs and Tier 1 player.

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Johannes Thormann, HSBC, Research Division - Global Head of Exchanges and Analyst [27]

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And any other industries in Germany, or is this just automotive? Retail also?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [28]

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Yes, the general sectors, everybody is talking about retail, clearly, is also something.

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Operator [29]

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The next question is from Riccardo Rovere of Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [30]

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I just wanted to ask if you could shed a little bit more light on the collapsing total assets that you had in Q4 are about EUR 50 billion, from EUR 513 billion to EUR 463 billion. So I would imagine this should not be loans. Maybe it's an interbank exposure, cash portfolios. Can you shed a little bit of light on what has driven the shrinking of the balance sheet by roughly 10% in 1 quarter?

And then the second question, more of curiosity actually. On the -- again, on the dividend, the dividend came a little bit, let's say, lighter than what the Street's expectation was. But the capital was 30 basis points better than what the Street was going for. So I'm just wondering, it's not clear to me how is your thinking about that. Maybe it's not the most important thing in Commerzbank, the dividend, but still, I can't just help a little bit why better capital and a little lighter DPS is brutally just because the net profit in the year was affected by a negative one-off restructuring charges and so on. Is that the rule?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [31]

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So the reduction in total assets has been just the usual year-end management, I have to say. On dividend, to be very honest, I mean, yes, I think the forecast was EUR 0.16, and we now have EUR 0.15. I think it's not a real big difference. And the factors that just wanted to basically expect to the payout ratio to the same one, and I think that gives us some upside for the coming years, right?

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [32]

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All right, all right. On the asset side, they should just take the -- let's say, the decline that you had if you had it in -- at the end of last year, just -- this is more or less mirrors, more or less the same dynamics? Is that what I should think about? It is clearly -- this is the bond portfolio or whatever, might have an impact on NII. But given that we don't have a balance sheet, just to have an idea where this EUR 50 billion lower asset base is coming from is not totally relevant, I would say.

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [33]

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Yes, it's a different thing. What you always see that is that the cash deposit goes down at the end of the year. And you see also fair value reduction. And it's a mixture of a lot of factors, I have to say.

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Operator [34]

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And the last question comes from Izabel Dobreva, Morgan Stanley.

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Izabel G. Dobreva, Morgan Stanley, Research Division - Equity Analyst [35]

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I have 3 questions. The first one is just a follow-up on the costs. I know you can't give us exact numbers at this stage. But could you maybe give us a little bit of color of which areas you're focusing on? So would this be through further branch optimization? Or should we think about it more as IT efficiencies, and therefore, what would be the timing? Would it be fair to assume that this is more a 2 to 3-year out type of savings?

And then the second question is on the NII. The NII in the corporate center was up quite a lot this quarter. Could you give us some guidance on how much of that is recurring because maybe the funding cost improved at the group level? And how much of it was a one-off?

And then finally, the last question is on capital. You mentioned that the ECB have actually confirmed your ability of relief. I was wondering, do you have any sense on the timing? So is it possible that we might already see that reflected in your SREP letter as of December this year? Or would that be too early?

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Bettina Orlopp, Commerzbank AG - Head of Legal & Group Compliance & Member of the Board of MDs [36]

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So yes, on the cost initiative, I understand the interest. Which area do we focus on? I have to say every area. We do not exclude one single one, so we really go into every area, whether people like it or not. But I think it's worth to look everywhere on nonpersonnel costs but also personnel costs. That is number one. And we see that we clearly also target for short-term cost reduction but also some needs preparation, so there will be also some cost reduction coming into play.

On the second, the NII from corporate center, that's clearly also treasury result, which has come in better than expected.

And thirdly, on the capital relief with respect to the ECB guidance, we expect that for -- already for 2021.

Very good. Ladies and gentlemen, many thanks for your questions and the discussion with you. I'm really looking forward to continuing the dialogue at the analyst meetings we will have next week. And at this point, I really would like to thank Stephan for the great handover we have. It was really, really supportive and helpful. And I wish him all the best in his new role. And again, thanks for participating in the role, and have a nice day.