Commerzbank AG (CRZBF) Management on Q4 2019 Results – Earnings Call Transcript No ratings yet.

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Commerzbank AG (OTCPK:CRZBF) Q4 2019 Results Earnings Conference Call February 13, 2020 3:00 AM ET

Company Participants

Stephan Engels – Chief Financial Officer

Bettina Orlopp – Member of the Board of Managing Directors

Conference Call Participants

Nicholas Herman – Citigroup

Stuart Graham – Autonomous Research

Riccardo Rovere – Mediobanca

Tobias Lukesch – Kepler Cheuvreux

Hugo Cruz – KBW

Johannes Thormann – HSBC

Riccardo Rovere – Mediobanca

Izabel Dobreva – Morgan Stanley

Operator

The conference is now being recorded. 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. At this time all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation.

Let me now turn the floor over to Stephan Engels.

Stephan Engels

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 well advanced. We have spent a good amount of time in jointly preparing the year – yearend 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 eight years. Though they concluded one 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.

Bettina Orlopp

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, the strong customer asset growth and our successful cost measures.

We conducted a very thorough overview 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 has been higher than in 2018. Thanks to better revenue for the fourth quarter. And besides P&L capital is much stronger than anticipated, increasing our flexibility and we have already ahead of plan achieved two 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 €150 million.

While we had to pay a premium as it is usual in these situation, we could significantly accelerate the process and reduce risk and complexity. We now fulfill all requirements to move ahead with squeeze-out and statutory merger and this will be decided at the comdirect AGM on May 5th. The working group 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 two to three 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 1000. For this cost efficient program we have booked a 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 rates environment and generated additional revenue. We have added nearly 0.5 a million net new customers in PSBC Germany. This customer growth has contributed significantly to an increase in loans and securities volume of €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 with international profit. Just looking at loans, we have managed to increase our corporate loan book by 6 billion or 7% percent 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 would not fully compensate the lack of contribution from legacy businesses that were closed or sold.

In total we have grown underlying NII at 7% and our underlying revenues has 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 6.8 billion, fully in line with our guidance and around 100 million below last year. Together with a 620 million risk result this has led to a stable full year operating result of 1.26 billion.

As mentioned, the net result incorporates the booking of the 101 million with restructuring charge and a high tax rate. Based on the solid 644 million net result and previous year’s payout ratio, we will propose a dividend of $0.15. This would present 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 the 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 segment. On a net basis exceptional revenue items in Q4, as well as for the full year 2019 have largely leveled out. We had net 11 million in Q4 and 24 million for 2019.

Revenues from PSBC increased by 107 million from our growth initiatives and the sale of ebase. The 111 million higher operating result directly reflect these improved revenue.

Corporate clients has lower revenues driven by lower contribution from legacy portfolio which could not be completely offset by higher revenues from client businesses. This and the higher gross result are the main drivers for the reduction in the operating side.

Taking others and consolidation and ACR together, they have contributed 84 million to our operating result. This is a noticeable improvement of 174 million compared to last year. It reflects a better Treasury performance in 2019, valuation effects as a cleanup over the last year. Considering these improvements, we adjust our others and consolidation guidance to around minus 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 revenue in 2019 benefited from growth, compensating the negative rates environment, but also reflect diminishing contributions from legacy portfolio.

NII has been the key driver of revenues over the last two 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 in respect of 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 from pricing initiatives in PSBC and corporate client. The fair value and other revenues most likely to show a stable development in 2020, I expect total underlying revenues at least at 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 has been better than expected. In particular when considering that they carry the burden of €57 million legal provision for the FX mortgage portfolio, and €18 million from an ECG verdict on early loan repayments at mBbank.

On a full year basis mBanks growth has more than compensated these burdens with underlying revenues up by 81 million. The risk result in Q4 of 250 million is driven by individual cases and they reflect a somewhat longer booking period in line with the year end closing procedures. With cost in line with guidance, the Q4 operating results came in at a solid €250 million.

The EMC business that we sold to SocGen, as in total reported a small operating loss of 17 million in 2019, showing up in discontinued operation. The transfer of the business has progressed throughout 2019. We expect the last positions to be transferred at Q1 this year. Upon completion we will receive a final payment from SocGen for the business. This should not offset the remaining cost resulting into small positive effect in 2020.

The group’s net loss of 54 million in Q4 is due to early booking of the 101 million restructuring 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 €6.8 billion. The total cost reduction of 160 million or 1.7% in 2019 has been driven by lower operating expenses. A big contributor for lower costs 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 personal 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 scheme, we are well on track to meet our FTE target of Commerzbank 5.0.

For 2020, our base case from the strategy update targets 6.7 billion run-in cost, plus up to 0.2 billion cost to achieve from IT investments. These IT investments form a key private [indiscernible] to ultimately take out gross 1 billion of costs with Commerzbank 5.0.

Furthermore, in September, we have kicked off a cost project at board 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 analysis [ph] Commerzbank has 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 [indiscernible] funding lease at 14 basis points. Overall the underlying risk indicators remain with the ranges seen over the last year.

While we have benefited from significant write backs 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 in 2019 is based on a single cases. We are well aware of the high interest in weather [ph] slowing of the economy shows up in our book. Therefore we have added slide 10 to shed some light on this.

Our corporate client’s portfolio is well diversified across all relevant sectors. Our risk management is based on a strong sector competence. We expect our specialists in place to know the sectors extremely well and manage the portfolios that are proactively – proactive in timely manner. Based on this robust setup, we are well placed to manage the slowdowns in individual sector.

Given our lackluster GDP outlook for Germany was the 0.8% and the eurozone was 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 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 private and small business customers, the next three slides. In 2019 the segment has added 473,000 net new customers and since 2016 more than 1.5 million Germany. We are on a good trajectory to reach our target of at least 1 million net new customers in 2023.

As always, the aim of customer acquisition is volume and revenue growth. Loan and securities volumes in Germany have increased by 35 billion to 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 at 2019 in PSBC. The full year operating result increased by 50%. And I would like to point out that I’m pleased with the revenue quality of the fourth quarter. Clean revenues in Germany have improved, thanks to growth and a better securities business which has been the strongest over the last seven quarters.

The mortgage business has continued its expansion at the fourth quarter and ended the year at 80.9 billion, an overall 7.7 increase in volume. Margins in the new business have improved this year and lower rates have not been fully passed on customer rates.

The consumer finance book stood at 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 to additional channels, like online contact center and broker [ph]

Let me conclude on PSBC with the current status of deposit pricing. It clearly is potential and we take careful and deliberate steps, taking into consideration the whole customer relationship and its potential not just typical product.

In Q4 we have piloted our approach to tackle deposits in excess of €250,000. The result has been encouraging. A good portion of our customers has accepted negative rate or moved deposits into securities. Others have reduced their deposits below the threshold. But this has been less than expected.

Based on these encouraging results, we have started to roll out the full organization. Since January, relationship managers across Germany approached their customer with deposits of more than €250,000 starting with the largest account.

Regarding numbers, we are talking about a total of roughly €20 billion of deposits above the threshold of €250,000. We see first revenue potential already 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 100 million in Germany, because we have successfully passed on part of the burden on negative client.

This links 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 6 billion to 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 operating environment.

Financial institutions also managed to increase revenues by 3 percentage in 2019. Focus is on our core clients and our optimized correspondent banking network, that we have expanded slightly in strategic area. In Q4 revenues are somewhat lower as we have put some RWA measures in place towards [indiscernible]

While the customer base business has performed well, the closing of legacy businesses is visible in the significantly reduced revenue and other. Underlying revenues are therefore lower by 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 result.

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

In market risk we have reduced the RWA by 1 billion to adjustment at risk position, Also the transfer of significant part of the EMC business to SocGen has contributed and crucial [ph]

The credit risk RWA reflects our active RWA management. In Q4 we have closed the securitization transaction that has lowered RWA by 1 billion. We have also seen reduced volumes, in particular in the financial institutions 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 focus growth and the implementation of our strategic initiatives. We continue to target a CET1 ratio of at least 12.75% at year end. This was 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 up to 44% of our 2% Pillar 2 requirements 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 10 billion additional volumes in loans and security.

This growth in PSBC and the introduction of charges for deposits in excess of €250,000 in Germany, we will compensate for the burden on the negative rates environment.

And as already mentioned, we will start the integration of comdirect and started the sales with consignment [ph] In Corporate Clients, we target to acquire 300 new client groups in Mittelstand and [indiscernible] based on capital efficient growth and client volume, 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 effort and management action. A special focus will be on the development of green product, e.g. green mortgage, as well as on incorporating climate into our credit risk portfolio management.

Ladies and gentlemen, let me wrap up and summarize our objective and expectations for 2020. We have met our customer acquisition target and continue to grow our customer presence in PBSC and corporate client, which has enabled us to achieve stable revenues in a challenging environment.

We have also reached our cost target. This has led to a stable operating result for the year. We have reached the 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 milestone. In 2020 we will make big strides to achieve objective of Commerzbank 5.0, laying the foundation for further cost reduction, improved revenues and ultimately higher return.

And we had a good start in January. PSBC has maintained its momentum in the securities business, Corporate Clients had a very similar strong start as in January 2019. These first data points are encouraging and make me feel positive about the potential of 2020.

With that in mind, let me outline all 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 6.7 billion. In addition, we will invest up to the ultimate 2 billion cost to achieve in IT as part of the Commerzbank 5.0 agenda.

We expect our risk result above 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.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Nicholas Herman of Citigroup.

Nicholas Herman

Good morning. Thank you for taking my questions. A couple of questions please. 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 should we just assume a flat run rate through 2020 or does it get worse before it gets better? That’s the first question.

And on capital strategy. Now you said before that the sale of mBank was to fund cost base, but also to avoid a 50 basis points high [ph] 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 – these recent clause and you’ve been commissioned for 104 (1A) [ph]

And secondly then with that in mind, as Pillar 2 A is 2% that means you could save 80 to 90 basis points and potentially of CET1. So is 12% to 13% the right hurdle rate for Commerz?

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 [indiscernible]? Thank you.

Bettina Orlopp

Yeah. Thank you, Nicholas. Lots 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 starts in 2020 has been – has been good. But – and we expect definitely higher underlying revenues in our two core segments.

On capital. Yes indeed, when we did our strategy last year in September, we didn’t take into account any free up with respect to the Pillar 2 to 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 those 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 two reasons for the mBank sale. One was that clearly we wanted to have the RWA free ups on the one side, but we also wanted to lock in the value with the high valuation of mBank.

And so we pursue 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 keep it.

Nicholas Herman

And just a little on the last part. Thank you for that. And just the last part. It just – does that – does it also gets occur to you to revise that 12% to 13% hurdle rates over time?

Bettina Orlopp

We said that 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 will definitely also adjust that.

Nicholas Herman

Great. Thank you very much. Very helpful.

Operator

The next question is from Stuart Graham of Autonomous Research. The floor is yours, sir.

Stuart Graham

Morning. Thank you for taking my questions. 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, Q2 at the latest. I guess what has changed that you’re coming up with more cost cuts. So soon after outlying 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? Thank you.

Bettina Orlopp

Okay. On that CET1 ratio, yeah, 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 of what we have seen last year. From the comdirect sale or sale integration is a better saying, we do not expect a lot of it because the impact on the capital will be a very low number, either even one digit number or low double digit number impact.

On the cost measures what has changed, not a lot actually we announced in September that we would launch cost reduction initiatives, 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 really too early to tell what concrete level – levers we will have and what restructuring cost we need for that. But I’m pretty sure I will update to you on that latest Q2.

Stuart Graham

But just to be clear, this is additional to what you laid out with 5.0, yeah?

Bettina Orlopp

Yes, this comes in addition.

Stuart Graham

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

Bettina Orlopp

Not much from our current understanding.

Stuart Graham

Okay. Thank you.

Operator

The next question is from Riccardo Rovere of Mediobanca. The floor is yours, sir.

Riccardo Rovere

Thanks. Thanks for taking my question. I have just a couple if I may. The first one on risk result, you stated that in 2020 your expect risk cost to be above 650, 650 million. If I remember correctly, but you also stated the fact in 2019 the relatively higher amount of provisions you charge at the end of the year was – it was due to let’s say kind of isolated cases or specific cases.

Is that 650 taking into account possible specific cases that clearly can arise any time during the year or is it GE [ph] to, let’s say more broader deterioration of the asset quality that you see on the back of our weakening global outlook, or coronavirus or whatever it is? This is my first question.

The second question I have is on that – 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 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 the position to give us an idea of how would the phasing of these investments should be over the course next, let’s say couple of years? Thank you.

Bettina Orlopp

Well, on the risk results, the €650, it takes into account two 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 – yeah, have forecasted a little bit higher risk results than we have seen this year.

On the restructuring charges – we expect mBank proceeds this year [Technical Difficulty] all the guidance I have provided you earlier on was [Technical Difficulty] with respect to revenues, also with respect to capital ratio et cetera.

And restructuring charges booking depends very much on the progress we make in the negotiations with workers. And it might be booked completely in ’22 – in 2020, but it might be also part still to be booked in ’21.

The IP investments of €750 million, you referred to will be spread over the next years…

Riccardo Rovere

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

Bettina Orlopp

The IT investments we will see up to 0.2 billion this year for 200 million and the rest of the 550 million which we have announced, you will see back over the next two to three years, until ‘2023…

Riccardo Rovere

Right. Okay. Now its clear. Thanks.

Operator

[Operator Instructions] The next question is from Tobias Lukesch of Kepler Cheuvreux. The floor is yours, sir.

Tobias Lukesch

Yes. Hi, good morning. Thanks for taking my questions as well. I would like to come back to revenues. 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?

And secondly on the capital and 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 you know, like how much of a 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 to further loan growth, maybe some international corporate loans like we have seen in 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 20 million now for 2020. Is that a reflection of potential availability of IT resources, i.e., you couldn’t even spend the 300 million if you wanted to do so because it’s just hard to apply as many resources at the same time? Thank you.

Bettina Orlopp

And so on revenues, I mean, the revenues in the moment, its still assumes [Technical Difficulty] revenues are included clearly in our P&L for 2020, because even if we closed 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 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 an – at 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 300 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, one, 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.

Tobias Lukesch

Thank you.

Operator

The next question is from Hugo Cruz of KBW.

Hugo Cruz

Hi. Thank you. 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 and you know – because its not clear to me what the actual payout policy is. Do you have a reported earnings payout target to adjusted level or is it kind of stable but growing EPS? If you could explain it would be great. Thank you.

Bettina Orlopp

The extra IP investments are largely on P&L and on the payout ratio or the dividends its the payout ratio, as we have headed in 2018 and 2019 we just target the same payout ratio as we have targeted in previous years.

Hugo Cruz

Okay. Thanks.

Operator

The next question is from Johannes Thormann of HSBC. The floor is yours, sir.

Johannes Thormann

Good morning. Johannes Thormann, HSBC. Two 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? Is your watchlist for a single case bigger than at the same time in 2019 or

could you provide more details on this please.

Bettina Orlopp

So NII is basically – I mean, it’s – we don’t see at least on the private client side, we did not see any effects of the deposit pricing yet. As I said we see it in the – in the corporate side with 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 combined with the growth in volumes, you see the result in the higher NII last year.

On the risk cost, the single cases were really spread to – have been in Asia, one in Europe and very different – 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.

Johannes Thormann

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

Bettina Orlopp

Yeah the general sectors everybody is talking about retail. Clearly is liked [ph] something.

Johannes Thormann

Okay. Thank you.

Operator

The next question is from Riccardo Rovere of Mediobanca.

Riccardo Rovere

Thanks a lot for taking my question. I just wanted to ask if you could shed a little bit more light on the collapsing total assets that you had in Q4 around – about €50 billion from €513 billion to €4 6 3 billion. So I would imagine this should not be loans. Maybe it’s interbank exposure, cash, bond portfolios. Can you shed a little bit of light on what has driven the thinking of the balance sheet by roughly 10% in only a quarter?

And then the second question, more curiosity actually on the – again on the dividend, the dividend came a little bit lets say lighter than what the street’s expectation was. But if capital was a 30 basis point better than what the street was going for.

So was just wondering, it’s not clear to me how is your thinking about that. Maybe it’s not the most important thinking Commerzbank the dividend, but still it can 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-offs restructuring charges and so on. Is that is that the rule?

Bettina Orlopp

So the reduction in total assets has been just a usual year end management I have to say. On dividends to be very honest, I mean, yes, I think the forecast was at $0.60, we now have $0.15. I think it’s not a huge big difference.

And the fact that that we just wanted to basically expect to the payout ratio to the same one and I think that gives just some upsides for the coming year side.

Riccardo Rovere

All right. So on the asset side, they should just take the – lets say the decline that you had, if you had it in 2000 and – at the end of last year, just to – this is more or less mirrors, more or less the same dynamics? Is that what I should think about? It is clearly – this the bond portfolio or whatever, might have an impact on NII. But given that we don’t have a balance sheet you know, just to have an idea, you know, where the 50 billion lower assets base is coming from, it’s not totally relevant I would say.

Bettina Orlopp

Yeah, 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 some value reduction. And it’s a mixture of lots of factors I have to say.

Riccardo Rovere

All right. Okay. Okay, thanks.

Operator

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

Izabel Dobreva

Good morning. Thank you for the presentation. I have three 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 in more as IT efficiencies and therefore what would be the timing? Would it be fair to assume that this is more a two to three 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 recovering because maybe the funding costs improved at the group level and how much of it was on 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? Thank you.

Bettina Orlopp

So yeah, on the cost initiatives – I understand the interest, which areas 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 non-personal costs, but also personal cost. That’s 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 certainly on the capital relief with respect to the ECB guidance, we expect that four already for 2021.

Izabel Dobreva

Okay. Thank you.

Bettina Orlopp

Very good, ladies and gentlemen. Many thanks for your questions and the discussion with you. I’m really looking forward to continuing the dialogue in the analyst meetings we will have next week. And at this point, I really would like to thank Stephan for the great handover we had, 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.

Operator

The conference is no longer being recorded.

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