Germany's second-largest lender Commerzbank will refuse loans which don't help Germany or Poland, as the euro zone crisis makes European banks more protectionist in choosing between writing new business and meeting stringent capital requirements.
We are not doing business which is not to the benefit of Germany or Poland, Chief Financial Officer Eric Strutz told analysts on a conference call discussing third-quarter earnings Friday. We have to focus on supporting the German economy as other banks pull out.
Commerzbank's retrenchment to its home turf shows that even Europe's largest economy, which has been relatively sheltered from the euro zone crisis, is feeling the heat. Survey data on Friday showed that private sector activity in the euro zone shrank at the fastest pace in 28 months.
Commerzbank, which is 25 percent owned by the State, is accelerating the pullback from euro zone nations and cutting risky assets to avoid another state bailout after a 798 million euros (689.5 million pounds) impairment on Greek assets pushed it to a third-quarter operating loss.
Having cut exposure to indebted euro zone countries by more than 20 percent to 13 billion euros, including a 52 percent haircut on Greek debt, the Frankfurt-based lender said it would continue reducing its public sector debt in Portugal, Italy, Spain, Ireland and Greece, mirroring a similar move made by French rival BNP Paribas.
When resources are tight you shrink back to your strongest footprint. Other banks face similar choices, said Keefe Bruyette & Woods analyst Matthew Clark.
Friday it emerged that Royal Bank of Scotland reduced the number of non-core real estate loans by 2.3 billion pounds during the third quarter.
Euro zone banks have shed risky assets to avoid underpinning their loan books with more capital as demanded by the European Banking Authority.
European banks must raise 243 billion euros to achieve a core tier one capital ratio of 9 percent using a more stringent definition of capital, J.P. Morgan analysts said in an October 19 note.
Commerzbank said it had a core tier one ratio of 9.4 percent at the end of September and needs to raise 2.9 billion euros to meet tougher capital requirements set out by the European bank regulators.
We can meet the required capital ratio by, for example, reducing risk assets in non-core areas, selling non-strategic assets or by means of retained earnings and we do not intend to tap new state funds, Commerzbank said.
Commerzbank will keep its Eastern European BRE Bank unit and its online arm comdirect but may sell other units as it seeks to cut risky assets by a further 30 billion euros. Its property financing unit Eurohypo will also stop taking new business, the bank said.
EURO ZONE STILL A WORRY
The outlook for the current year and 2012 is subdued, the company said in its report, citing the risk of escalation of the European sovereign debt crisis and stricter capital requirement for the industry.
In a conference call with analysts, finance chief Strutz was more forthright, saying efforts to resolve the euro zone crisis need to be intensified, We have now had 18 summits. The last ones were more encouraging that the first 15. But I feel we will have more summits.
The whole stability of Europe depends on whether Italy gets its act together, he said, citing a key economy seen vulnerable to contagion.
The lender's exposure to the country was 14.3 billion euros at the end of September, 7.9 billion of which in sovereign debt.
The lender was also forced to drop its 2012 profit target.
We continue to be committed to our original operating profit target of 4 billion euros for the group but, on account of the market environment, we will be unable to reach this target next year, Chief Executive Martin Blessing said.
Its shares fell 6.05 percent to 1.64 euros at 1353 GMT, as the STOXX Europe 600 Bank index fell 1.9 percent.
The third-quarter operating loss of 855 million euros compared with a year-earlier profit of 116 million was worse than the 683 million euros loss estimated in a Reuters poll as investment banking income wilted.
Even the lender's core business of lending to German mid-sized companies failed to impress. Q3 results were weaker than expected, particularly performance in the core bank was disappointing, Equinet analyst Philipp Haessler said.
(Additional reporting by Christoph Steitz and Sarah Marsh; Editing by Hans-Juergen Peters and Helen Massy-Beresford)