(Bloomberg) -- Commerzbank AG raised earnings goals for the year as it continues to benefit from higher interest rates and announced a €600 million ($641 million) share buyback.

The bank said it now expects both profit and net interest income — or the difference between what it earns on loans and pays for deposits — to be ahead of its previous forecast. Both measures were higher in the third quarter than analysts surveyed by Bloomberg had expected. 

The German lender has been a key beneficiary of the European Central Bank’s rate increases as it relies heavily on lending to consumers and companies and has a big base of deposits on which it pays comparatively little interest. After a series of overhauls, Commerzbank has started returning cash again after a long period in which shareholders received little or no payouts.

“It was a great third quarter,” Commerzbank Chief Financial Officer Bettina Orlopp told Bloomberg TV on Wednesday. That justified higher ambitions for the year as net interest income is “clearly driving the revenues,” the bank showed a “very solid” position in provisioning needs and “good cost discipline,” she said. 

The shares rose 4.1% as of 09:06 a.m. in Frankfurt, their highest intraday level in more than a month.

Commerzbank intends to conduct the buyback before its shareholder meeting next year and is seeking approval from regulators and the agency that runs the German government’s stake in the lender, according to the statement. 

The third-quarter results are also a “decent start for our strategy moving forward,” Orlopp said

As part of a strategy update announced on Wednesday, the bank said it will seek to it strengthen its revenue base via the “selective expansion of its customer business” with a focus on digital banking, asset management and sustainable finance. Commerzbank said it aims to reduce its costs as a ratio of income to 55% by 2027 and is targeting profit of about €3.4 billion by then.

What Bloomberg Intelligence Says:

Commerzbank’s delivery of a high-quality 3Q result — beating profit estimates by 12% on a 34% rise in net interest income (4% ahead of MODL consensus) — shows the recovery remains on track. New full-year guidance (NII up 1-2%, lower impairments) imply modest upgrades to analyst estimates. Return on equity of 8.3% and a 14.6% CET1 ratio underpin a new €600 million share buyback, with the focus now shifting to new 2024-27 targets at the Capital Markets Day later today.

— Philip Richards, BI banking analyst

Commerzbank €600 Million Buyback, 3Q Beat Signals Revival: React

Yet the bank will probably face headwinds along the way. While ECB interest rates will probably be “stable” next year, Commerzbank is likely to have to pay more for deposits, Orlopp said. “It might be that we see a dip in NII for 2024 but then an increase for the years to come,” she said.

Commerzbank in September committed to returning a higher share of its profits in an effort to meet a pledge to pay €3 billion to shareholders for net income earned from 2022 through 2024. It raised the expected payout ratio to more than 50% for the years 2025 through 2027, and to at least 70% for 2024. The respective ratios will “depend on the economic development and business opportunities,” Commerzbank said on Wednesday.

Despite challenges facing the German economy, the lender said it expects to stash less money this year for losses on credit than previously estimated.  

“Clients are very resilient and we see it in our loan book with our risk result,” Orlopp said. “We however also stay cautious” given “the weaker assumptions for 2024.” The bank expects to set aside more money next year and will maintain an extra layer of provisions, which currently stands at €135 million, she said.

--With assistance from Anna Edwards, Tom Mackenzie and Mark Cudmore.

(Updates with CFO comments starting in fourth paragraph, shares in fifth)

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