Investors Day Public Finance & Treasury: Transforming public finance and managing the challenges of the current market environment

Transcription

1 Investors Day 2007 Public Finance & Treasury: Transforming public finance and managing the challenges of the current market environment Michael Reuther Member of the Board of Managing Directors Frankfurt, September 20th, 2007

2 Agenda 1. Figures H Public Finance & Treasury 2. Public Finance 3. Group Treasury 4. Outlook 2/ 26

3 Public Finance and Treasury Key figures Public Finance and Treasury H Figures segment 1) Revenues incl. LLPs in m 246 Operating profit in m Q1 Q2 Q3 Q4 Q1 Q2 H1 H Q1 Q2 Q3 Q4 Q1 Q2 H1 H Operating RoE in % CIR in % Q1 Q2 Q3 Q4 Q1 Q2 H1 H1 Q1 Q2 Q3 Q4 Q1 Q2 H1 H ) Q results including Pro-forma integration of Eurohypo 3/ 26

4 Agenda 1. Figures H Public Finance & Treasury 2. Public Finance 3. Group Treasury 4. Outlook 4/ 26

5 Public Finance Current initiatives and next steps to optimize public finance business within Commerzbank Group Current initiatives Capital Market Issuance Committee established Public Finance Management board established Active management of country limits across legal entities Cross fertilization of public finance entities Next Steps Coordination of risk profile for public finance entities Revision of Essen Hyp s business model 5/ 26

6 Public Finance Public finance market worldwide Global market potential virtually unlimited 8,370 7, ,835 thereof Germany 1,883 EU-15/EFTA 547 Russia 1,256 USA MEE, Turkey Asia/Pacific Japan 1,107 Latin America, South America 82 South Africa 142 bn USD Australia, New Zealand Public debt including social insurance; Source: IMF, own calculation 6/ 26

7 Public Finance Different business model positionings in public finance Product specialist Local financier Portfolio manager Business approach Product specialist incl. non-credit business Main bank for public authorities Portfolio manager with focus on risk-return optimization Specific product knowhow Deal-related acquisitions Loan as introductory product, cross-selling Main bank status based on local presence Focus on loan and securities business with high secondary market proportion Centrally managed contacts with customers Earnings / risks Commission income Low operating risks Net interest income and commission income High operating risks; market and credit risks Primary net interest income and trading results Market- and credit-risks 7/ 26

8 Public Finance Risk management approach Traditional mortgage bank approach Target risk management approach No separation of market, liquidity and credit risks Separation of different risk classes Public finance business as basis for expansion of treasury activities Performance is dominated of interest rate development Credit risk management Origination of dedicated earnings contribution from credit risk management as main objective Market-/liquidity risk management Additional clearly separable and identifiable management of market risks 8/ 26

9 Public Finance Commerzbank business model key aspects for public finance strategy Business model portfolio manager 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) International diversification Diversification of assets and liabilities Origination Funding 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) 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 specifics 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 9/ 26

10 Public Finance Path to transform public finance in Commerzbank Group Present situation 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. Current activities 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 creditexposure 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). Objectives 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) / 26

11 Public Finance Sophistication and optimization of public finance portfolio structure Present structure Target structure US new product lines Eastern Europe Subsovereigns EU15 structured Eastern Europe Subsovereigns US tax munis & student loans US tax munis & student loans EU15 structured attractiveness EU15 subsovereigns High potential CDS Germany PPP /infrastructure Eastern Europe sovereigns attractiveness EU15 subsovereigns High potential CDS Germany PPP /infrastructure Eastern Europe sovereigns Japan EU15 sovereigns Japan EU15 sovereigns Germany plain vanilla Germany plain vanilla complexity / risk complexity / risk shrinking stable growing 11 / 26

12 Public Finance Strong Public Finance Business significantly improves risk / return profile within Commerzbank Group Efficient frontier Government bonds vs. corporate bonds Margin Marge p.a. in in Bps. bps %PF Creditspread-Risko in in % % 100%Corp 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) Data: Month end dates since January 1998 Corporates: 100% ML EMU Corporate Index A Public Finance: 95% ML EU-Gov Index 5% JP-Morgen EMBI Index 12 / 26

13 Public Finance Commerzbank Group on track to build leading public finance business 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. Build European top tier public finance business within characterized by market orientation and value creation potential for Commerzbank 13 / 26

14 Agenda 1. Figures H Public Finance & Treasury 2. Public Finance 3. Group Treasury 4. Outlook 14 / 26

15 Group Treasury Core functions of Group Treasury 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 15 / 26

16 Group Treasury Eurohypo integration: Efforts on track, stress test successfully mastered Challenges Ensure Group liquidity after Eurohypo acquisition (balance sheet volume doubled) Reduce wholesale funding dependency Separation of Public Finance and Treasury activities within Eurohypo Fully integrated Group Treasury of Commerzbank and Eurohypo Achievements 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 Eurohypo Funding synergies fully on track ( 14m in 2008) Key hirings in 2007 Next Steps Projects Finalisation of Refi-Register for cheaper funding Align Group-wide hedge accounting Seek official approval of our Group-internal liquidity model from regulators; replacing current Grundsatz II regulation!!! 16 / 25

17 Group Treasury Capital Market Committee manages 270bn* of Group capital market issuance Capital Markets Committee Capital Markets Committee - Systematic issuance by Group members gives clear guidance - Milestones in the first year 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 3% 6% 2% 1% 2% 5% 30% 31.9 bn 22% bn 38% 79.4 bn 6.5 bn 50% 0.8 bn 50% 70% 26% 11% 91% 93% Öffentliche Pfandbriefe Lettres de Gage Hypothekenpfandbriefe Senior Unsecured * total outstanding issuances in bn as of June 2007 (Treasury Database) Tier 1, Tier 2, Tier 3 17 / 26

18 Group Treasury Group funding plan adjustment to current market environment Commerzbank Group funding plan 2007 Funding Plan 2007 approx. 40bn % Covered Bonds % Unsecured debt Funding generated as of June 30: 22.5bn 14.2bn 8.3bn Funding plan reduction Approx 4bn Funding done in Q3 y-t-d Residual Funding needs (Sept. until year end) 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 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 18 / 26

19 Group Treasury Outlook: Impact of increased credit spreads on Group s P&L expected to be positive What will happen? Overall funding cost to increase moderately Impact on assets Funding spreads and credit margins in general may remain at higher levels even after stressed liquidity situation of banking sector will have calmed down 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: 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 m ( 30-35m in 2010) 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 19 / 26

20 Group Treasury Group balance sheet shows sound funding structure... Total Assets 638bn Cash/ interbk. lending & dedicated liquidity portfolio 41% Liquid trading assets/ reverse repos & fair values of derivative hedging instruments Other commercial banking assets & other assets Total Liabilities 638bn Money market instrum. & liabilities to banks Trading liabilities/ repos & fair values of derivative hedging instruments Non core customer deposits & other liab. 12% 24% 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 Core business or not liquid within 1yr Not eligible for cover pool Cover pool eligible 22% 33% Capital/ senior unsecured funding & core customer deposits Covered bonds 28% 31% Dedicated liquidity portfolio and liquid assets larger than short term liabilities Balance sheet prudently funded 20 / 26

21 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 21 / 26 Liabilities to banks Repos & collateral Open market operation with central bank Registered covered bonds Pass through loans from KfW, EIB, etc. Schuldscheindarlehen placed with banks Deposits of central bank customers Deposits from commercial banks Group Treasury in all maturity buckets Assets Liabilities Maturing assets > liabilities Maturing liabilities > assets bn EUR 40 0 Data Source: interim report & Treasury data as per 06/30/07 Maturing liabilities > assets Maturing assets > liabilities

22 Group Treasury Group s adjusted loan/deposit ratio in mid range of European banks Deutsche CS Group UBS Postbank UniCredit HSBC Intesa SPI SocGen Data Source: Based on annual report information Dreba Erste Bank Barclays PLC DZ RBS ABN Amro Credit Agricole LBBW BNP Paribas BBVA Lloyds TSB Commerzbank adjusted WestLB Allied Irish SEB Santander NordLB Helaba BayLaBa Nordea HBOS HVB Commerzbank LBB HSH SachsenLB Aareal Bank Depfa Adjustment Commerzbank Group ( bn) Claims on customers thereof reverse repos & cash collateral thereof cover pool eligible claims thereof pass through loans from KfW, EIB, etc. thereof loan loss provisions unsecured funded loans to customers Liabilities to customers thereof repos & cash collateral thereof registered covered bonds Unsecured liabilities to customers % 22 / 26

23 Group Treasury Conclusion: Group liquidity situation Commerzbank well positioned Commerzbank as liquidity provider Liquidity of conduits assured No deterioration expected Further contingency measures initiated 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 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 Exposure to Commerzbank conduits 8.5bn, thereof 5.5bn funded Liquidity assured at all times Interbank deposits without significant changes Increase in client deposits by 6bn since August But: Risk of market turbulences remains Market Risk Controlling and Group Treasury identified potential to generate additional liquidity from business lines 23 / 26

24 Group Treasury Allocation of Treasury results reflects dual function 1. Service and Support Function Allocation of P&L Fund the Group Optimise balance sheet structure Optimise structural interest income (investment models) Advise and support business units 2. Active management of the commercial banking interest rate risk Risk Management Function Similar to other Service and Support departments in the Group Objective: Stable revenue stream for the Group but a volatile element will always be part of the risk management business Allocation of cost to business segments Operating Profit Group Treasury Fixed amount of operating profit (representing an average treasury interest income over the cycle) is distributed to business segments Remaining result (positive or negative) is shown in Public Finance and Treasury H m 86.5m -28.5m 24 / 26

25 Agenda 1. Figures H Public Finance & Treasury 2. Public Finance 3. Group Treasury 4. Outlook 25 / 26

26 Public Finance and Group Treasury Outlook Value drivers ( m) 2006 H p (vs. 2006) Value drivers: current figures and outlook 2010p Outlook Revenues incl. LLPs Growing and stable revenues based on diversification and risk management Costs Moderate shift in cost basis due to investment measures Operating profit New public finance business model anticipates growing profits Average equity 1,074 1,173 Small increase due to Basel II and focus on structured business in Public Finance Op. RoE 27.4% 16.2% Effective use of capital basis based on value driven investments 26 / 26

27 Disclaimer All presentations shown at Investors Day based on new group reporting as published per H 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, forwardlooking 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 27 / 26

28 For more information, please contact Commerzbank s IR-team: Jürgen Ackermann (Head of IR) P: M: juergen.ackermann@commerzbank.com Sandra Büschken (Deputy Head of IR) P: M: sandra.bueschken@commerzbank.com Wennemar von Bodelschwingh P: M: wennemar.vonbodelschwingh@commerzbank.com Ute Heiserer-Jäckel P: M: ute.heiserer-jaeckel@commerzbank.com Simone Nuxoll P: M: simone.nuxoll@commerzbank.com Stefan Philippi P: M: stefan.philippi@commerzbank.com Karsten Swoboda P: M: karsten.swoboda@commerzbank.com Andrea Flügel (Assistant) P: M: andrea.fluegel@commerzbank.com 28 / 26