A Takeover Play in European Banking

Erik@YWR on Commerzbank AG (CBK-ETR | commerzbanka)

4/19/2025

Summary

Commerzbank AG (CBK-ETR) is a classic value investment, trading at just 0.8x book value and 6x 2027E earnings, despite an expected 18% EPS CAGR through 2027. The bank is emerging from a multi-year drag from Polish legal provisions. As the provisions fall out of the income statment it will reveal the normalised profitability with ROE expanding to 11% by 2027. With €1.1BN/ year in annual buybacks plus dividends (3.4% dividend yield in 2025), a potential takeover bid from UniCredit (27.6% owner), and a leaner cost structure, Commerzbank offers 36% upside to €31/share by 2027 (or sooner via M&A). Key Strengths: • Attractive future if you look through depressed 2025 and 2026 earnings: P/B of 0.8x and a P/E of 6x 2027E EPS. • Earnings inflection: Polish legal provisions (€1BN/year in 2023-24) fading to €400MM by 2026, boosting net profit. • Capital return catalyst: €600MM buyback (2025) + 70% payout ratio, yielding 3.4% in 2025. • Takeover optionality: UniCredit (ECB-approved) could bid at 1.1x book (€31/share) to merge Commberzbank with Unicredit’s German bank, HypoVereinsbank.

Thesis

1. Earnings Growth: 18% CAGR (2024-2027) Driven by Cost Cuts, Loan Growth and Normalisation of Extraordinary provisions. • Revenue: 5% loan growth + fee income from corporate clients. • Costs: 1% CAGR after 2025 restructuring; cost-income ratio to drop to 55% by 2027 (from 61% in 2024). • Polish drag fading: Provisions drop from €1BN/year to €400MM by 2026, adding €0.50/share to EPS • Increasing Economic Confidence: Economic confidence and government spending in Germany are improving. Since COVID in 2020 Commerzbank has been cautious about growing the loan book, but if confidence improves the bank has lots of capital to grow. 2.. Capital Return: Shareholder-Friendly Payouts • Dividend: €0.77/share in 2025 (3.6% yield), growing to €1.23 by 2027 (5.3% yield). • Buybacks: €600MM program (3% of shares) through Feb 2025 with potential for more. • Payout ratio: 70-100% of net profit ensures capital discipline 5. 3. Takeover Optionality: UniCredit’s Strategic Move • UniCredit owns 27.6% of Commerzbank and has ECB approval to acquire it. • Synergies: Merging HypoVereinsbank + Commerzbank could cut costs and boost ROE. • Poland play: mBank (5.8M customers) fills UniCredit’s gap in Poland and complements their strong Eastern European operations.

Risks

1. Economic Slowdown in Germany • Risk: Weak GDP growth could pressure loan demand and credit quality. The German auto industry is under pressure. So far this has been a big news item, but not resulted in NPL's. • Mitigation: Commerzbank’s CET1 ratio (16%) and low NPLs (0.8%) provide buffers. 2. Polish Legal Liabilities Linger • Risk: Provisions exceed €400MM forecast, delaying EPS growth. This is a possibility as Polish provisions have exceeded expectations in both 2023 and 2024. Polish court rulings were surprisingly supportive of retail borrowers. • Mitigation: 2023-24 already absorbed worst costs; settlements accelerating. 3. Failed M&A or Integration • Risk: UniCredit walks away and sells its stake in the market. • Mitigation: Standalone upside (€31) doesn’t rely on M&A. 4. Interest Rate Cuts • Risk: ECB rate cuts compress net interest margins (NIM). • Mitigation: Commerzbank has an ongoing strategy of hedging against interest rate changes, so the effect of lower interest rates will be gradual. The bank also benefits in the very short term as they lower deposit rates faster than lending rates.

📈 Price Targets

Tags