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Investors’ Day 2007
Michael Reuther
Member of the Board of Managing DirectorsFrankfurt, September 20th, 2007
Public Finance
& Treasury: Transforming
public
finance
and managing the
challenges
of the
current
market
environment
2 / 26
Agenda
1. Figures H1 2007 Public Finance & Treasury
2. Public Finance
4. Outlook
3. Group Treasury
3 / 26
Key figures Public Finance and Treasury H1 2007Figures segment1)
1) Q1 2006 results
including
Pro-forma
integration
of Eurohypo
Operating
profitin € m
2006 2007Q1 Q2 Q3 Q4 Q1 Q2 H1 H1
Operating
RoEin %
Q1 Q2 Q3 Q4 Q1 Q2 H1 H12006 2007
Revenues
incl. LLPsin € m
2006 2007 2006 2007Q1 Q2 Q3 Q4 Q1 Q2 H1 H1
CIRin %
112134
67 82103
246
14891
44 47
11277
203
95
Q1 Q2 Q3 Q4 Q1 Q2 H1 H12006 2007
16.433.1
2006 2007
2006 2007 2006 2007
4518
37.6
16.2
Public Finance and Treasury 1. 2. 3. 4.
6.1
26.317.416.7
42.033.3
51.9
24.1
40.231.1
15.517.5
4 / 26
Agenda
1. Figures H1 2007 Public Finance & Treasury
2. Public Finance
4. Outlook
3. Group Treasury
5 / 26
Current
initiatives and next
steps
to optimize
public
finance business
within
Commerzbank Group
•
Capital Market Issuance Committee established•
Public Finance Management board established•
Active management of country limits across legal entities•
Cross fertilization of public finance entities
•
Coordination of risk profile for public finance entities•
Revision of Essen Hyp’s
business model
Current
initiatives
Next Steps
Public Finance 1. 2. 3. 4.
6 / 26
Public finance
market
worldwide
Global market
potential virtually
unlimited
547
USA
1,107
8,370
7,835
142
Russia
82
1,256 thereof
Germany
bn
USD
Public debt
including
social
insurance; Source: IMF, own
calculation
Public Finance 1. 2. 3. 4.
7,029
South Africa
Australia, New Zealand
Asia/Pacific
127
Japan
EU-15/EFTA
1,883
MEE, Turkey
Latin America, South America
7 / 26
Different business
model
positionings
in public
finance
Product specialist Local financier
•
Specific product know-
how
•
Deal-related acquisitions
•
Loan as introductory product, cross-selling
•
Main bank status based on local presence
Business approach
Portfolio manager
•
Focus on loan and securities business with high secondary market proportion
•
Centrally managed contacts with customers
•
Commission income
•
Low operating risks
•
Net interest income and commission income
•
High operating risks; market and credit risks
Earnings
/ risks
•
Primary net interest income and trading results
•
Market-
and credit-risks
Portfolio manager with focus on risk-return optimization
Product specialist incl. non-credit business
Main bank for public
authorities
Public Finance 1. 2. 3. 4.
8 / 26
Risk management
approach
Traditional mortgage bank approach Target risk management approach
No separation
of market, liquidity
and credit
risks
•
Public finance
business
as basis
for
expansion
of treasury
activities
•
Performance is
dominated
of interest
rate development
Separation of different risk
classes
Credit risk
management
Market-/liquidity
risk
management
Origination of dedicated
earnings
contribution
from
credit
risk
management
as main
objective
Additional clearly
separable
and identifiable
management
of market
risks
Public Finance 1. 2. 3. 4.
9 / 26
Commerzbank business
model
–
key
aspects
for
public
finance strategy
•
Centralised
portfolio management of public sector assets•
Changes in credit spread and creditworthiness: active portfolio management
on a macro basis (“buy & manage” approach instead of “buy & hold”)
•
Default risk: low probabilty
of default as credit exposures restricted largely to investment
grade sovereign counterparties
•
Liquidity risk: optimization of refinancing structure within given limits•
General market risk / interest rate risk: selective exposure to interest rate market within reduced risk limits, clear separation from other risk classes (banking book vs. trading book activities)
•
Strengthen acquisition of higher margin assets in Europe by use of local acquisition units•
Setup of dedicated team and a platform in the US to incorporate US market specificsOrigination
Business model portfolio manager
International diversification
•
Extension of existing business and entrance mainly in EU, USA and Asia •
Selective and closely monitored exposures in emerging markets
•
Diversify products, particularly into credit derivatives and structured products •
Specific product-line designed for US market•
Strengthening of PPP business with focus on „real“ PPP-business (life cycle approach)
Diversification of assets and liabilities
•
Use of different market conditions (Germany vs. Luxembourg, tax optimization, broader range of cover pool eligible assets)
•
Funding Mix using Pfandbriefe, Lettres
de Gage and repo
market•
expansion into structured funding
Funding
Public Finance 1. 2. 3. 4.
10 / 26
Path
to transform
public
finance
in Commerzbank Group
•
The current portfolio structure
is still dominated by traditional public finance business. Exposure is concentrated in OECD countries containing classical products such as securities and certificated of indebtedness / loans (SSD). Sovereigns account for a percentage of nearly 25%. Germany exposure reduced to 53% (2004: 70%) of total assets due to strengthened international diversification.
•
Setup of the market entities
Public finance strategy not set to offer operation or product range of a full service bank to its customers. However, it will generate direct acquisitions by maintaining decentralised
origination acitivities.
•
Active portfolio management Buy & manage strategy.
•
Extension of US business activities
Establishment of an acquisition team and dedicated platform in New York in order to generate assets and to implement new product-lines (i.e. tender option bond etc.) .
•
Credit derivatives
Setup of a CDS portfolio in high potential countries and increase of synthetic credit-
exposure to US Munis
(total return swaps).
•
Structured transactions / PPP
Increasing cooperation with Commerzbank (joint bidding), diversification of portfolio product base into structured transactions to increase risk return ratio. Selective acquisitions partially using own origination activities (multichannel
strategy).
•
High yielding public finance business within Commerzbank Group
Benefit from group affiliation, e.g. client relationships of the “Mittelstandsbank” and competence of Commerzbank’s
Corporates
& Markets unit to realise
cross-selling results and synergies within origination and transaction services.
•
Financial objectives
Stable and growing results (dominated by net interest income).
•
Market objectives Public finance unit to reach top three position in Europe and become major market participant worldwide.
•
International activities
Regional market analysis in relevant markets supported by local specialists (New York, Singapore, Tokyo).
≥
20082007≤
2006
Present
situationCurrent
activities
Objectives
Public Finance 1. 2. 3. 4.
11 / 26
Sophistication
and optimization
of public
finance
portfolio
structure
Present structure Target structure
complexity
/ risk complexity
/ risk
attr
activ
enes
s
attr
activ
enes
s
Germany –
plain
vanilla
EU15 –
sovereignsJapan
EU15 –
subsovereigns
US –
tax munis
& student
loans
EU15 –
structured
Germany –
plain
vanilla
Japan EU15 –
sovereigns
EU15 –
subsovereigns
US –
tax munis
& student
loansEU15 –
structured
US –
new
product
lines
Eastern Europe
–
Subsovereigns
High potential CDS
Germany –
PPP /infrastructure
Eastern Europe sovereigns
Eastern Europe
–
Subsovereigns
High potential CDS
Germany –
PPP /infrastructure
Eastern Europe sovereigns
growingstableshrinking
Public Finance 1. 2. 3. 4.
12 / 26
0
Creditspread-Risko
in %
Mar
ge p
.a. i
n B
ps.
Strong
Public Finance Business significantly
improves
risk
/ return profile
within
Commerzbank Group
Efficient
frontier Government bonds
vs. corporate
bonds
Data: Month
end dates
since
January
1998Corporates: 100% ML EMU Corporate Index APublic Finance: 95% ML EU-Gov
Index 5% JP-Morgen
EMBI Index
Creditspread-Risk
in %
Public Finance 1. 2. 3. 4.
•
Empirical
negative correlation
between
public
finance
risks
and corporate
bond
market
(reasons: e.g. safe-haven
demand, flight-to-quality)
•
Exposure
to both
risk
classes
has risk
reducing
effect•
Compared
to a 100% investment
in corporate
assets, a portfolio
with
significant
exposure
to public
finance
assets
achieves
higher
returns
with
equal
risk
profile
(i.e. equivalent
returns
at lower
risk)
Mar
gin
p.a.
in b
ps.
100%PF
100%Corp
13 / 26
Commerzbank Group on track
to build
leading
public
finance
business
Build European top tier public finance business within characterized by market orientation and value creation potential for Commerzbank
•
Diversification
–
both
in products
and regionally
–
well on track Reduction
of plain-vanilla
business
and shift
towards
innovative and more
valuable
products
initiated, portfolio
structure
shifted
from
local
to global focus
•
Development of origination
activities
started Local
activities
in New York have
been
started, Tokyo and Singapore
to follow
•
Group affiliation
provides
unparalleled
backing
for
public
finance
business Local
group entities
serve
as acquisition
and distribution
channel
for
public
finance
products. Cross-selling
potential can
be
lifted
for
other
group entities. Synergies
from
Group‘s
funding expertise
and Group‘s
global market
potential provide
support.
Public Finance 1. 2. 3. 4.
14 / 26
Agenda
1. Figures H1 2007 Public Finance & Treasury
2. Public Finance
4. Outlook
3. Group Treasury
15 / 26
Safeguard the Group‘s solvency in normal and stress situations; fulfill regulatory requirements
Fund the Group at lowest possible cost and highest possible funding source diversification
Optimise
balance sheet structure and structural interest income via implementation of investment and refinancing models; interest income distributed to business lines
Profit-oriented management of interest rate and currency risks from the
commercial banking book; fixed amount of interest income is distributed to business segments
Asset Liability Management of Pension Funds via Pension Committee;
economic results reflected in IAS notes
Frequent communication with central banks, regulators, investors
and
market participants
Group Treasury 1. 2. 3. 4.
Core functions of Group Treasury
16 / 25
•
Ensure Group liquidity after Eurohypo acquisition (balance sheet volume doubled)
•
Reduce wholesale funding dependency•
Separation of Public Finance and Treasury activities within Eurohypo
Challenges
Achieve- ments
Fully integrated Group Treasury of Commerzbank and Eurohypo
BaFin waiver allows flexible cross-financing between entities; net reduction of approx. € 15bn of wholesale funding“One funding curve” concept for all unsecured funding; money market funding centralised in CB, secured funding in EurohypoFunding synergies fully on track (€ 14m in 2008)
Next Steps Projects
Finalisation of “Refi-Register” for cheaper funding
Seek official approval of our Group-internal liquidity model from regulators; replacing current Grundsatz II regulation
Align Group-wide hedge accounting
Key hirings
in 2007
!
Eurohypo integration: Efforts
on track, stress test successfully
mastered
!!
Group Treasury 1. 2. 3. 4.
17 / 26
•
Clear coordination procedures implemented and process defined•
Group issuance and roadshow
calendars adopted•
Investor survey conducted –
very positive feedback received•
Leveraging #1 position of Group in Pfandbrief
market
Milestones in the first year
Capital Markets CommitteeCapital Markets Committee
-
Systematic issuance by Group members gives clear guidance -
Tier 1, Tier 2, Tier 3Öffentliche Pfandbriefe Lettres de Gage Hypothekenpfandbriefe Senior Unsecured
6.5
bn
0.8 bn
79.4 bn
152.4 bn
31.9 bn
* total outstanding issuances in € bn
as of June
2007 (Treasury Database)
Group Treasury 1. 2. 3. 4.
Capital Market Committee manages
€ 270bn* of Group capital
market
issuance
70%
30%
26%
22%38%
3%
11% 91%
2% 1%6%
93%
2% 5%
50%50%
18 / 26
Implementation of Funding plan for distressed market environment
• No Jumbo Pfandbriefe
for the remaining year
• Only limited requirements for unsecured debt
• Direct placements with institutional clients of Commerzbank
Group Treasury 1. 2. 3. 4.
Group funding plan adjustment to current market environment
Residual Funding needs(Sept. until year end)
Funding generated as of June 30: €
22.5bn
Funding Plan 2007 approx. €
40bn
Commerzbank Group funding plan 2007
65 –
75 %
€ 14.2bn
25 –
35 %
€ 8.3bn Approx€ 4bn
Funding planreduction
Funding done in Q3 y-t-d
20% 40% 60% 80% 100%
Reduced capital markets funding regards due to
• Increase in customer deposits
• Sufficient liquidity portfolios
• Increase in money market secured financing
Covered
Bonds Unsecured
debt
19 / 26
•
Funding cost of commercial loan business (approx. € 210bn) only to be affected by up to 4-5 bp (increase extended over several years)
•
Positive impact of widening credit margins on Group’s lending business likely to match increased funding cost
•
No evidence for customer deposits to become more expensive•
Issuance cost of Pfandbriefe
higher than recent lows but impact limited as more expensive Pfandbrief
issues will expire•
Spreads of Group’s senior unsecured capital markets funding to increase in line with markets movements. First expectations of impact: 20-25 bp
•
Total outstanding unsecured debt € 60bn, to be reduced by roughly € 12 bn
due to use of “refinancing register”•
Funding cost to increase over several years. Effects in 2008 € 10-15m (€ 30-35m in 2010)
What will happen?
Overall funding cost to increase moderately
Funding spreads and credit margins in general may remain at higher levels even after stressed liquidity situation of banking sector will have calmed down
Impact on assets
Group Treasury 1. 2. 3. 4.
Outlook: Impact of increased credit spreads on Group’s P&L expected to be positive
20 / 26
Group balance sheet shows sound funding structure ...Total Assets € 638bn Total Liabilities € 638bn
•
Core business & assets not liquid within 1 year funded long term (average term to maturity of bonds over 3.5 yrs)
•
Remaining unsecured and capital funding calendar until year end: € 1.5bn
•
Customer deposits on the rise
Dedicated liquidity portfolio and liquid assets larger than short term liabilities
Balance sheet prudently funded
Cover pool
eligible
Not eligible
for
cover
pool
Liquid trading
assets/ reverse
repos
& fair values
of derivative
hedging
instruments
Covered
bonds
Capital/ senior unsecured
funding & core
customer
deposits
Trading liabilities/ repos
& fair values
of derivative
hedging
instruments
Money market
instrum.& liabilities
to banks
Other
commercial
banking
assets
& other
assets
Non core
customer
deposits
& other
liab.
12%
28%
31%33%
22%
Cor
ebu
sine
ssor
notl
iqui
d w
ithin
1yr
24%
Cash/ interbk. lending
& dedicated
liquidity
portfolio41%
Group Treasury 1. 2. 3. 4.
21 / 26
Unsecured funding matrix
0-1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y 7-8Y 8-9Y 9-10Y > 10Y
0-1Y
1-2Y
2-3Y
3-4Y
4-5Y
5-6Y
6-7Y
7-8Y
8-9Y
9-10Y
> 10Y
Breakdown Group position “Liabilities to banks”
Liab
ilitie
s to
ban
ks
Rep
os&
col
late
ral
Ope
n m
arke
top
erat
ion
with
cen
tral
bank
Reg
iste
red
cove
red
bond
s
Pass
thro
ugh
loan
sfr
om K
fW, E
IB, e
tc.
Schu
ldsc
hein
darle
hen
plac
ed w
ith b
anks
Dep
osits
of c
entr
alba
nk c
usto
mer
s
Dep
osits
from
com
mer
cial
ban
ks
Maturing
assets
> liabilities
Maturing
liabilities
> assets
Assets
Liab
ilitie
s
Data Source: interim report
& Treasury data
as per 06/30/07
Group Treasury 1. 2. 3. 4.
... in all maturity buckets
Maturing assets > liabilities
Maturing liabilities > assets
0
40
80
120
bnEU
R
22 / 26
141%147
928
110
Liabilities to customers thereof repos & cash collateral thereof registered covered bondsUnsecured liabilities to customers
29915
10615.6
7155
Claims on customers thereof reverse repos & cash collateral thereof cover pool eligible claims thereof pass through loans from KfW, EIB, etc. thereof loan loss provisionsunsecured funded loans to customers
Group Treasury 1. 2. 3. 4.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50D
euts
che
CS
Gro
up
UB
S
Post
bank
Uni
Cre
dit
HSB
C
Inte
saSP
I
SocG
en
Dre
ba
Erst
eB
ank
Bar
clay
s PL
C DZ
RB
S
AB
N A
mro
Cre
dit A
gric
ole
LBB
W
BN
P Pa
ribas
BB
VA
Lloy
ds T
SBC
omm
erzb
ank
adju
sted
Wes
tLB
Alli
ed Ir
ish
SEB
Sant
ande
r
Nor
dLB
Hel
aba
Bay
LaB
a
Nor
dea
HB
OS
HVB
Com
mer
zban
kLB
B
HSH
Sach
senL
B
Aar
ealB
ank
Dep
fa
Group’s adjusted loan/deposit ratio in mid range of European banks
Adjustment Commerzbank Group (€ bn)
Data Source: Based
on annual
report
information
23 / 26
Conclusion: Group liquidity
situation
Group Treasury 1. 2. 3. 4.
Commerzbank well positioned
•
Commerzbank well prepared
due
to regular
updates
of stress scenarios•
Integrated
Treasury (Commerzbank/Eurohypo) allows
active
management•
Refinancing
structure
of the
Group restructured
since
Eurohypo acquisition
Commerzbank as liquidity
provider
•
Commerzbank acted as liquidity provider of the German banking system•
Supply of € 4.5bn term money (1-3 months) to German banks in late August/September
Liquidity
of conduits
assured
•
Exposure to Commerzbank conduits € 8.5bn, thereof € 5.5bn funded•
Liquidity assured at all times
No deterioration
expected
•
Interbank
deposits without significant changes •
Increase in client deposits by € 6bn since August•
But:
Risk of market turbulences remains
Further contingency
measures initiated
•
Market Risk Controlling and Group Treasury identified potential to generate additional liquidity from business lines
24 / 26
…but a volatile element will always be part of the risk management business
Objective: Stable revenue stream for the Group…
Similar to other Service and Support depart-
ments
in the Group
Allocation of Treasury results reflects dual function
•
Fund the Group •
Optimise
balance sheet structure •
Optimise structural interest income (investment models)
•
Advise and support business units
•
…
Active management of the commercial banking interest rate risk
Allocation of P&L
Allocation of cost to business segments
Service and Support Function
Risk Management Function
Fixed amount of operating profit (representing an ave-
rage treasury interest
income over the cycle) is distributed to business segments
Remaining result (positive or negative) is shown in Public Finance and Treasury
H1 07
€
86.5m
€ 58m
€
-28.5m
Operating Profit Group Treasury
Group Treasury 1. 2. 3. 4.
1.
2.
25 / 26
Agenda
1. Figures H1 2007 Public Finance & Treasury
2. Public Finance
4. Outlook
3. Group Treasury
26 / 26
Outlook
Public Finance and Group Treasury 1. 2. 3. 4.
Revenuesincl. LLPs
Costs
Operating
profit
Average
equity
Op. RoE 16.2%
148
53
95
1,173
27.4%
395
101
294
1,074
Value drivers: current figures and outlook
2006 H1 2007 2007p (vs. 2006)
2010p Outlook
•
Growing and stable revenues based on diversification and risk management
•
Moderate shift in cost basis due to investment measures
•
New public finance business model anticipates growing profits
•
Small increase
due
to Basel II and focus
on structured
business
in Public Finance
•
Effective use of capital basis based on value driven investments
Value drivers (€ m)
27 / 26
DisclaimerAll presentations shown at Investors’ Day based on new group reporting as published per H1
2007.
This presentation has been prepared and issued by Commerzbank
AG. This publication is intended for professional and institutional investors only
.
Any information in this presentation is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Commerzbank
AG and/or its subsidiaries and/or affiliates (herein described as Commerzbank
Group)
with regard to the accuracy of the data. This
presentation
also contains forward-looking statements that reflect our current views and expectations about future events. The words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” and similar expressions are used to identify forward-looking statements. These statements are based on plans, estimates and projections as they are currently available to the management of
Commerzbank
AG. Forward-looking statements therefore speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.
By their very nature, forward-
looking statements involve risks and uncertainties. A number of important factors could therefore cause actual results to differ materially from those contained in any forward-looking statement. This presentation is for information purposes; it is not intended to be and should not be construed as an offer or solicitation to acquire, or dispose of any of the securities or issues mentioned in this presentation.
Commerzbank
Group accepts no responsibility or liability whatsoever for any
expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this presentation.
Copies of this document are available upon request or can be downloaded from www.ir.commerzbank.com
28 / 26
Jürgen
Ackermann
(Head of IR)P: +49 69 136 22338M: [email protected]
Sandra Büschken
(Deputy Head of IR)P: +49 69 136 23617M: [email protected]
Wennemar
von BodelschwinghP: +49 69 136 43611M: [email protected]
Ute Heiserer-JäckelP: +49 69 136 41874M: [email protected]
Simone NuxollP: +49 69 136 45660M: [email protected]
Stefan PhilippiP: +49 69 136 45231M: [email protected]
For more information, please contact Commerzbank´s
IR-team:
Karsten
SwobodaP: +49 69 136 22339M: [email protected]
Andrea Flügel
(Assistant)P: +49 69 136 22255M: [email protected]
www.ir.commerzbank.com