(Bloomberg) -- Commerzbank AG shares rose after it committed to returning a higher share of its profits in an effort to meet a pledge to return €3 billion ($3.2 billion) to shareholders for net income earned from 2022 through 2024.
The German lender on Thursday raised the expected payout ratio to more than 50% for the years 2025 through 2027, and to at least 70% for 2024. It had previously promised to return between 30% and 50% of its profits to shareholders.
RBC analyst Anke Reingen said in a note that the updated returns policy would suggest materially more capital distributions than are currently factored into consensus. Shares were up as much as 11.5% in Frankfurt, the most since February.
Commerzbank has been a key beneficiary of the European Central Bank’s interest rate increases as it relies heavily on lending to consumers and companies for income. It has started returning cash again after a long period in which it paid little to no dividends, and has previously promised more of its earnings to shareholders going forward.
“The planned increase in the pay-out ratio is an expression of our confidence in the bank’s continued development,” Chief Executive Officer Manfred Knof said in the statement.
Still, the pledge to return €3 billion to shareholders is at the lower end of a range Commerzbank had previously given for the sum of potential payouts. It has to keep its CET1 ratio at a minimum level of 13.5% to be allowed to buy back shares, it said in the statement on Thursday.
Knof said early last year that the lender would aim to return at least €3 billion and as much as €5 billion to shareholders over the coming years. At the time, he said that he would be able to pay out the top of the range if the lender were to let its CET1 ratio — a regulatory metric of capital strength — fall to 12.8%.
The lender also said on Thursday that it expects return on tangible equity to exceed 11% by 2027. It had previously guided that it would raise its profitability target to above 10% in an effort to earn its cost of capital.
Commerzbank’s new profitability and payout targets come ahead of an investor day scheduled for Nov. 8.
Read More: Commerzbank CFO Signals $960 Million in Payouts for 2023
Thus far, Commerzbank has returned about €370 million in total payouts on its 2022 profits. It has also signaled about €900 million in payouts from the profits it expects to earn in the current year, leaving roughly €1.73 billion to be paid out on 2024 profits.
What Bloomberg Intelligence Says
Commerzbank’s revamped capital return policy, targeting shareholder payouts of over 50% vs. 2025 consensus of 35% plus buybacks, is credible, supported by its strengthened capital position (14.4% CET1) and improving profitability. But the pledge for 11% return on tangible equity (ROTE) is a stretch vs. estimates of 9.3% for 2025, with interest rates peaking, greater pass-through of hikes to savers and weak economic conditions in Germany all threatening that profitability promise.
— BI analyst Philip Richards
--With assistance from Sam Nagarajan.
(Updates with share price movement in third paragraph. An earlier version corrected the spelling of the bank’s name.)
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