Fundamentals of Banking

Assignment- 2

PROFESSOR : AURORE BURIETZ-BARAKAT

GROUP-7

LISA KREBS
LEROUX ANTOINE
TREHAN SUSHOWNIKA
BOUHSAIN HOUDA
Balance sheet and Income Statement Analysis
We will start our study by a short analysis of Commerzbank on the financial crisis’ period (from 2007 to 2009).
At a first sight, Commerzbank seems to not have suffered much from the 2008 financial crisis. Indeed, the sum
of its assets increased by 35%, while the respective increases of the previous two years counted 1.3% and 1.4%.
From €616 bn in 2007 to €844 bn in 2009, there was a 37% increase. There are several factors to explain the
raise. First, we observe an increase of Commerzbank’s reserves between 2008 and 2009 by 57,3%. This increase
in reserves is linked to the €18 billion recapitalization of the bank by the German government to rescue the bank.
Thanks to this State aid, the bank was able to go back to lending activities, especially to banks. Indeed, lending
activities to the banks went up from 10% to 12,6% of total assets (TA) between 2008 and 2009. On the other
hand, the customer claims declined from 45,9% of TA in 2007 to 41% of TA in 2009, meaning that the
Commerzbank has preferred to focus more on corporate activities than customers between 2007 and 2009 who
were losing trust in the bank after the crisis. The second largest German banking group therefore increased bank
lending to banks between 2008 and 2009 by 69,4%.
However, Commerzbank’s share price did not recover to
former levels as the chart illustrates. In the context of the
financial crisis, Commerzbank was subject to the same default
risk as other banks if withdrawals exceeded its cash reserves
Commerzbank’s share price (Commerzbank AG 2008, p. 325; Commerzbank AG 2009, p.
330, Commerzbank AG 2010, p. 390).
To analyze the bank’s performance using the CAMELS
approach, it is important to take a look at its components:
Capital Adequacy, Asset quality, Management quality,
Earnings, Liquidity assets and Sensitivity. It evaluates the risk
Source: onvista.de situation of a bank by ranking the components from 1 (best) to
5 (worst). Before we start to assess Commerzbank’s
performance it is relevant to give a short overview about the bank’s clients, the associated risk
situation as well as the capital structure.

I. Development of Commerzbank’s clients and risk analysis

1. Clients of Commerzbank in terms of loans
The loans dedicated to customers have increased by 8,807€bn between 2017 and 2018. And
that’s mainly due to the increasing loans attributed to customers and that are secured by
mortgages on real estate. This way the bank risks less. If the loan is not repaid by the customer,
the bank seizes the mortgage on real estate. Moreover, the rise in the claims on customers can
be explained by the growth of customers number that has taken place in 2018 thanks to many
strategies led by the Commerzbank such as digitalizing services and expanding the distribution
channels.
Despite the fact that the loans to customers are secured by mortgages on real estate or on ships,
the Risk Management of the Commerzbank have evaluated the risk weighted asset and have
concluded that the RWA has increased from €171bn to €180bn. (Commerzbank AG 2018, p.
49).
2. Clients of Commerzbank in terms of deposits
The liabilities allocated to customers have increased by 3.4€bn between 2018 and 2017. The
Commerzbank have more deposits with a period of more than three months. As a consequence,
could invest more money in loans, which explains the rise in clients. The risk concerning
liabilities is limited and depends mainly on the Commerzbank resources.
3. The Commerzbank’s off-sheet activities:
Commerzbank’s off-balance sheet activities have contributed also to the growth of its
customers. Thanks to the contingent liabilities and the irrevocable lending commitments that
it’s offering and that have been increasing in the last 6 years, Commerzbank was able to collect
 many information about customers and has developed its expertise. This way, Commerzbank
has improved its competitiveness and has also
Irrevocable lending reduced the market incompleteness.
To Illustrate the impact on the off-sheet activities
commitments on the competitivity of Commerzbank, we will
100 focus more on the development of the loans
73.466 commitments due to their important weight.
50 52.326 (€73,466 M of loans commitment in 2018 against
€52,326 M of contingent loans in 2014)
0 (Commerzbank AG 2018, p. 76).
2013 2014 2015 2016 2017 2018
Source: Own illustration based on Commerzbank AG 2013-2018.

II. Capital Structure

At the end of 2018 the financial assets held for trading fell to €42.5 bn, about 30% less than in
2017 whereas the non-current assets held for sale and disposal groups increased. A main reason
for this rise was the sale of the EMC business to Société Générale. By that, Commerzbank
increased its liquidity capacity for the case of a liquidity emergency. The leverage ratio based on
the CRR regulation, which compares Tier 1 capital with leverage exposure, was 5,0% (“phase-in”)
compared with 5,5% the year before (Commerzbank AG 2018, pp. 72f.). This decrease is a
consequence of the bank’s expansion of loans as a response to the intense competition and pressure
on margins. As a result, the Trier 1 capital was slightly fluctuating (Commerzbank AG 2018a, p.
3).
The previously mentioned removal of Commerzbank from the DAX in September 2018 has not
strongly affected the bank’s balance sheet. The removal in had been widely anticipated. Therefore,
the event itself did not result in any notable changes in the share price (Commerzbank AG 2018,
p. 18). However, it is worth comparing the development
Wirecard’s share price of Commerzbank’s share prices over the last decade with
those of the new DAX member Wirecard to illustrate
another significant trigger for Commerzbank’s removal
from the index (Mauerer 2019, p. 1). Recently, the
innovation of fintechs strongly affects the banking
industry as fintechs note an annual growth of 33%
according to Deutsche Bank Research (Mai and Kaya
2018). Looking at the chart of Wirecard’s share over the
last ten years the share price of Wirecard has slightly
Source: onvista.de been rising since 2011. From 2017 on there has been an
enormous increase finally leading to the fintech’s
inclusion in the German top league index replacing Commerzbank.

III. CAMELS approach

1. Capital Adequacy
According to the Basel 3 norms, a bank has to maintain a capital adequacy ratio of 8%, and
Commerzbank has constantly maintained a CAR of above 8%, though there has been a
decrease beginning in 2018 after a peak in 2017. Commerzbank also takes into account the
market liquidity risk when calculated the capital adequacy ratios. In FY18, Commerzbank was
able to keep aside €0.8 bn capital to hedge the market’s liquidity risks.
 Capital Adequacy
20
15
10
5
0
2014 2015 2016 2017 2018 2019
Common equity tier 1 ratio
(%, fully loaded) 9.3% 12.0% 9.3 12 12.3 14.1 13.2 12.9
12.3% 14.1% 13.2%
Total capital ratio (%,
transitional) 14.6% 16.5% 14.6 16.5 16.9 18.3 16.8 16.3
16.9% 18.3% 16.8%

Source: Own illustration based on Commerzbank AG 2014-2018; Deutsche Bank AG 2014-2018.

2. Asset quality
The asset growth during the five last year is significant and goes in line with the
increasing net profit of Commerzbank. For instance, if we focus on both parameters
between 2017 and 2018. We can conclude that The Commerzbank increased profit in
2018 is due to the asset growth that the bank has knew. Actually, the profit has
increased by 174 M euro
Growth Asset Net profit between 2017 and 2018. In line
600 with this profit gain, the asset
Growth
growth has moved significantly
400
20.00% from -5.8% in 2017 to +12% in
2018 (Commerzbank AG 2018, p. 76). This
0.00% 200
remark is still valid for the last
2014
2015
2016
2017
2018

0 five years and can be illustrated

-20.00%
20142015201620172018 in the graphics on the left.
Source: Own illustrations based on Commerzbank AG 2014-2018.

3. Management quality
With over 1,000 domestic branches Commerzbank has one of the densest branch networks of
any private-sector bank in Germany. The bank counts 49,410 employees in 2018. The
revolution of fintechs has shown that human interaction gets less relevant for clients and jobs
will be sharply reduced or less paid. To calculate the management efficiency, we therefore
decided to compare Commerzbank’s salaries to revenues over the last five years to see if the
technological change in the financial market has already affected this ratio.
By additionally comparing this ratio with Deutsche
Salaries/Revenue Bank’s ratio the diagram illustrates that
40.00% Commerzbank’s efficiency did not just rise in 2018 but
35.00% the bank performed better than Deutsche Bank with
30.00% a Sal/Rev ratio of 35,77% compared to 38,82%. This
25.00%
2014 2015 2016 2017 2018
evolution can be an indication for a new management
strategy which is based on the use of technological
Salaries/Revenue Commerzbank AG
Salaries/Revenue Deutsche Bank AG

Source: Own illustration based on Commerzbank AG 2014-2018; Deutsche Bank AG 2014-2018.

 equipment and is rated with a 2 (Commerzbank AG 2018; Deutsche Bank AG 2018).1
4. Earnings

5 Earnings Ratios

0
2014 2015 2016 2017 2018

-5

-10

ROE CMRZBK ROA CMRZBK NIM CMRZBK

-15
ROE D.B. ROA D.B. NIM D.B.

Source: Own illustration based on Gurufocus 2019; Macrotrends 2019; YCHARTS 2019.

Regarding to the earnings part, we observe a quite steady Commerzbank’s ROE.

Comparing to the Deutsche Bank’s ROE, Commerzbank seemed to be more effective
in terms of current assets’ management to create profits. However, ROAs are quite
the same and very closed to zero, meaning that Commerzbank’s assets’ management
is as very few effective as the Deutsche Bank’s one. Finally, concerning the NIM, we
can conclude that Commerzbank has been less effective in terms of investments’
management regarding to the Deutsche Bank between 2014 and 2017, but always the
NIM is always positive, meaning that in average the Commerzbank has earned 1% on
interest from its credit products, loans, compared to the interest it pays out on
savings, deposits etc. Commerzbank has a 2 regarding the earnings.
5. Liquidity assets
Liquidity ratios are an integral indicator when assessing the ability of the bank to
handle any asset liability mis-match situation. Bank’s liquidity improved to a great
extent in 2018 due to Eurosystem’s expanded asset purchase program. Commerzbank
has maintained a stable loan to deposits ratio (persistently less than 100%) as
indicated in the following graph, implying the improving liquidity of the bank.

Net Loans/Deposits Liquidity Coverage Ratio

100.00% 160%
90.00% 140%
120%
80.00% 2017 2018
70.00%
2014 2015 2016 2017 2018 Deutsche Bank Commerz Bank

Source: Own illustration based on Commerzbank AG 2014-2018.

Though Commerzbank has maintained the liquidity coverage ratio above the 100%
prescribed limit, still it is behind its main competitor in 2018 indicating deteriorating
liquidity position. Towards the optimistic side, Commerzbank has established various
systems to ensure that minimum LCR is achieved. The liquidity is rated with a 3,5.

1
The non interest income is composed of the net commission income, the net income from financial assets and liabilities at fair
value through profit or loss and the net income from hedge accounting.
 6. Sensitivity
The sensitivity of Commerzbank’s share to the market (reference: DAX 30) increased
over the last three years from 1,71 to 2,21. Compared with the recent Beta factor of
Deutsche Bank of 1,72 and the sensitivities of its international peers Commerzbank’s
shares fluctuate stronger and are highly volatile. Therefore, Commerzbank achieves a
4 regarding its volatility risk (Infront Analytics 2019).

IV. Conclusion
Finally, Commerzbank can be rated with an overall mark of 3. They are considered to be a slightly
risky bank. The consequences of the financial crisis as well as the threat through fintech startups
challenge Commerzbank to recover. We therefore recommend to intensify activities relating to
a technological change to finally gain back private customers and thus to reduce volatility.

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