Commerzbank: rate rises offer small cushion against Vlad the Inveigler

Chief executive Manfred Knof forecasts “bright spots with clouds” for Commerzbank. The relative intensity of each weather pattern will matter. The retail and business bank run by Knof has warned that if Russia cuts off most gas supplies to Germany it could trigger “a chain reaction with unforeseeable consequences”.

Well, maybe not that unforeseeable. Finance director Bettina Orlopp reckons Commerzbank would need to roughly double loan loss provisions to €1.3bn in the event of “gas stop”. German gross domestic product would take hits of 2.7 per cent in 2022 and 1.1 per cent in 2023.

This all sounds almost as scary as Russian president Vladimir Putin himself. However, Commerzbank, a former Sick Bank of Europe, has been doing better thanks to higher interest rates.

Lending margins are skinny in Germany. But when rates are rising, Commerzbank has the advantage of hefty and relatively price-insensitive funding from retail deposits. It also has a subsidiary in Poland, where returns are better.

Net interest income in the first half rose 19 per cent to €2.9bn. Commerzbank made a half-year pre-tax profit of €1.25bn compared with a €406mn loss last time. The bank reckons higher European rates could deliver an extra €650mn of income next year and €800mn in 2024. Cost cutting means plenty would drop through to the bottom line.

Core equity tier one capital stands at 13.7 per cent. That compares with a comfortable minimum of just under 12 per cent. The bank therefore has a capital cushion of about €3.5bn against the machinations of Vlad the Inveigler. If his gas pipes go on pumping, surpluses may be paid out to shareholders instead.

Commerzbank’s additional problem is that the Polish government has placed a moratorium on mortgage payments. This will put a crimp on interest income.

Though Commerzbank’s numbers have improved, its shares only trade at 0.3 times tangible book value, the same as Deutsche Bank according to Refinitiv. Russian gas, Polish populism and the vagaries of the European Central Bank look more like a flagon of hemlock than an invigorating cocktail of risk to most investors.