Ahead of the Curve | Friday, 19th November 2021

Commerzbank in the sweet spot with rising inflation and cost execution
Commerzbank has underperformed the European bank index by 10% since last October – since then, we’ve seen the announcement and rollout of vaccines, economic activity approach pre-COVID levels (and in some cases exceed it), and inflation surge across the globe.  The market is even pricing in the potential for a rate hike by the ECB next year.  It is thus puzzling that one of the banks most geared to higher rates in Europe would underperform.  We believe this reflects the market’s skepticism about Commerzbank’s profitability, which has long suffered despite several cost restructuring efforts.  However, we believe the new Strategy 2024 plan announced earlier this year is both ambitious and achievable, and recent signs point to it potentially even being surpassed.  The cornerstone of the plan is to reduce the cost base by 20% from 2020 levels – this stands in contrast to the last two plans announced in 2016 and 2019, which targeted cost reductions of 8% and 7%, respectively.  Third quarter results showed execution ahead of plan across several KPIs.  Further, clean revenues are expected to remain flat from 2020 to 2024 – this already looks likely to be surpassed given the pace of rate hikes in Poland, which will boost Commerzbank’s Polish subsidiary’s revenues much faster than anticipated.  Consensus expectations reflect the pessimism – 4% lower revenues and 4% higher costs, resulting in net income 20% lower than plan.  Remarkably, even on these low expectations the stock trades on 5.3x its earnings power, which falls even further to 4.4x if management continues to execute.  Combine that with highly convex sensitivity to higher rates – profits could easily increase by 50%, but this is not baked into expectations – and we believe Commerzbank is in the sweet spot right now.  While the 2024 plan may seem a long way away, with the bank’s profitability already recovering ahead of plan, the market’s skepticism could be further eroded next year as it reinstates its dividend and contemplates buybacks for the following year.

BNP Paribas hires advisors to sell Bank of the West
About a month ago, we wrote about the potential value creation that could emerge from BNP Paribas’ selling its US Subsidiary, Bank of the West.  Contributing just 4% of earnings but potentially worth 15-20% of BNP’s market cap the transaction would create significant excess capital that could be returned to shareholders via buybacks.  As it turns out, BNP agrees with us, as reports emerged this week that the bank had hired advisors to sell Bank of the West, targeting a $15bn valuation.  Such a deal could be 15% accretive to BNP’s earnings, effectively de-rating the shares from an currently low 8.1x to 7.0x.  The stock was already too cheap, and it may soon become even cheaper – this transaction could be the catalyst to bring the shares closer to fair value which we see as being at least 40% higher from here.