COMMERZBANK AKTIENGESELLSCHAFT

30
Commerzbank AG
The German economy delivered another very robust performance in 2011, growing by
3%. This was much stronger than the rest of the eurozone, which is expected to post growth
of 1%. The Germany economy was again buoyed primarily by foreign demand and corporate
investment, but private consumption made a tangible positive contribution for the first time
in a number of years. Nevertheless, the German economy was not immune to the weaker
global economy or the negative effects arising from the uncertainty over the sovereign debt
crisis. Order intakes for industry fell noticeably from the summer onwards, and the German
economy actually contracted slightly in the fourth quarter.
The capital markets came under pressure last year from numerous crises: while the natural
and nuclear disaster in Japan and the subsequent discussion on a potential US default
had only a temporary impact, the renewed intensification of the sovereign debt crisis in the
summer made investors less willing to take risks. As a result, share prices fell markedly, the
yield on German Bunds reached a new record low, and the risk premiums of peripheral
countries’ sovereign debt rose sharply against equivalent Bunds. The euro also suffered from
the increasing uncertainty about the future of currency union. It fell sharply against the US
dollar, particularly in the autumn when it became increasingly clear that the US economy
was not falling into recession (as many had feared), but was actually picking up instead. Investors
only rediscovered a bit more risk appetite towards the end of the year when the ECB
calmed fears of an impending escalation of the sovereign debt crisis by carrying out further
substantial monetary easing – this included providing eurozone banks with almost €500bn in
liquidity through its first ever three-year tender.
Sector environment
In the first half of 2011, many banks were still able to use the favourable overall economic
environment to improve their profitability, strengthen their capital base and thereby reduce
their borrowings. At the same time, many improved the quality of their core capital. According
to the Bundesbank’s estimates, German banks noticeably strengthened their resilience
by autumn 2011, thus preparing the ground for earnings growth and improved credit quality.
Since then, however, mounting pressures have been posing an increasing challenge for
German and international credit business. Despite banks’ increased earnings power and improved
resilience, the European sovereign debt crisis, the global economic slowdown and
increasing doubts about financial services companies in general have led to a loss of confidence
in banks.
Although the environment was favourable at the beginning of 2011, in general banks’
earnings have declined and uncertainty has increased. Margins were slightly wider, but lending
volumes grew only minimally and actually fell again at year-end. As competition for deposits
intensified further, earnings potential on interest rate business remained limited. Supported
by favourable economic trends that prevailed until the autumn, the Corporate Clients
segment benefited from lower risk provisions in domestic lending. However, this was offset
by increased expenses from business with foreign individuals and from public finance of
European peripheral nations. Although commission business benefited initially from the
buoyant domestic economy, the emerging uncertainties on the financial markets limited its
earnings potential sharply as 2011 progressed. The increasing competition for customer deposits
also resulted in limited income potential in Private Customer business.