Annual General Meeting Business situation, strategy and perspectives. may 30, 2003

Transcription

1 Annual General Meeting Business situation, strategy and perspectives may 30, 2003

2 Commerzbank Annual General Meeting 2003 Klaus-Peter Müller, Chairman of the Board of Managing Directors: Business situation, strategy and perspectives Contents A. Financial statements for B. Development in 1 st quarter C. Comments on strategy 6 D. Agenda of the AGM 9 Commerzbank AG Head office Kaiserplatz, Frankfurt am Main Postal address: Frankfurt Telephone (+49 69) Fax (+49 69) info@commerzbank.com Internet: Investor Relations Telephone (+49 69) , Fax (+49 69) ir@commerzbank.com

3 ANNUAL GENERAL MEETING klaus-peter müller: Business situation, strategy and perspectives Dear shareholders, shareholder representatives, ladies and gentlemen, I want to extend a cordial welcome to our Annual General Meeting, also on behalf of my colleagues on the Board of Managing Directors. For the first time in eleven years, our AGM is being held in the Festhalle Frankfurt. We are very pleased that you have come in such large numbers, thereby showing the interest you take in your company, in Commerzbank. There is no denying it: we have an extremely difficult year behind us if we look at economic performance and the financial markets. While economists forecasts for the development of the world economy were quite positive at the start of last year, the outlook became increasingly gloomy as the year progressed. In Germany, this was reflected in a marked deterioration in companies business expectations and a lack of confidence on the part of consumers. We look back upon a year without economic growth. The entire banking industry is struggling under the rising number of insolvencies, which reached a new record peak of roughly 37,600. Unfortunately, the signs for this year are no better. Stagnation is forecast once again for the economy; the first quarter even brought a decline in GDP of 0.2%. It is becoming ever more important, therefore, for us to steer our business activities such that we are able to stay in the black even in these times of economic weakness and nervous sentiment. A. Financial statements for 2002 I intend to keep my report on 2002 brief today. Then there will be more time to report about what is new in the current year and also about the prospects for the Bank. You have all been provided with information on the 2002 financial statements. Our 220-page annual report is the longest in our history. In it, we describe at length the development of the individual business lines and comment in detail on the Bank s risk position. I should also like to draw your attention to the illustrations devoted this year to the social commitment of the Commerzbank Foundation. In addition, we have included a new chapter on the topic of sustainability, reporting on our activities in connection with environmental protection, support for our staff in the areas of training and knowledge and on equal opportunities within the Bank. But back to the figures: last year, we were very successful in the area of cost-cutting. Our measures have had their full impact, enabling us to more than achieve our target of reducing operating expenses by around 7400m to below 75.5bn. All told, we brought them down by 12% from 75.86bn to 75.16bn.

4 4 ANNUAL GENERAL MEETING 2003 What was missing were earnings. They collapsed, primarily due to the overall conditions which I have mentioned. Our net interest and net commission income was down by 12.5% and 6.5%, respectively, while our trading profit was more than halved. On the other hand, weak economic performance caused us to raise our provisioning substantially, whereby in both absolute and relative terms we fared better than our closest domestic competitors. At the same time, our annual results were influenced by variety of extraordinary factors. In particular, a negative impact was exerted by the writedowns on our T-Online shareholding and Montgomery Asset Management in the U.S. In addition, we had to shoulder restructuring expenses of 7209m, which were earmarked for various structural and personnel measures. We registered extraordinary income mainly through the integration of Rheinhyp into the new Eurohypo and from the disposal of our interest in Crédit Lyonnais. After the profit attributable to minority interests was deducted, we were left with a consolidated loss of 7298m for Despite this unsatisfactory result, we are proposing that shareholders be paid a dividend of 10 cents per share compared with 40 cents last year. We look upon this dividend payment as a demonstration of our confidence that we can achieve a turnaround in 2003 and many signs point in that direction. We also want to offer you at least a small current return on your investment in recognition of your loyalty towards us, often over many years and including during the present difficult phase. B. Development in 1 st quarter 2003 On May 7, we published our interim report as of March 31, 2003, which received a positive response from both analysts and the press. Our cost management, which was again successful, and the upward trend for earnings made Commerzbank profitable again in the first quarter of the year. By March 31, our balance-sheet total had contracted by 724bn to 7398bn. Our risk-weighted assets declined by 75.5bn to 7155bn, causing our core capital and own funds ratios to rise to 7.4% and 12.5%, respectively. They are thus well above our medium-term targets of 7% and 11%, respectively, and give us scope for earnings-oriented growth. For the most part, I want to compare the income statement for the first three months with that for the final quarter of last year, as the Rheinhyp Group is still included in the figures for the first quarter of This distorts the picture considerably. We were able to improve our net interest income by 4.0% to 7705m, which is positive given the marked reduction in risk-weighted assets. Here our efforts to achieve wider margins in our lending business are bearing fruit. We set aside 7252m for provisioning purposes. After adjustment for Rheinhyp s share of the total amount in the same period of last year, this was 712m more than in the first quarter of For this item of the income statement, it is more useful to compare the situation at the start of the year in question, for we are also dealing with forecasts of the provisioning needs for the year as a whole here. In the first three months, the amount which we set

5 aside far exceeded the actual need for provisioning. That is why it was not necessary to allocate an even larger amount. At all events, we will examine at mid-year whether the amount budgeted for provisioning purposes is appropriate. Net commission income was 6.1% higher than in the final quarter of 2002, at 7520m. In other words, we managed to reverse the marked downward trend of the previous quarters. Above all, there were higher earnings from securities and syndicated business. We are satisfied with the development of our trading profit. It was 7140m higher than in the final quarter of 2002, reaching 7231m. We were particularly successful in our fixed-income and derivatives business. The encouraging trend for operating expenses was maintained; they were 3.4% lower than in the previous quarter, at 71.18bn. In March, we resolved the measures which make up our second cost-cutting offensive. Applying them, we intend to reduce operating expenses to below 75bn this year and to reach the threshold of 74.5bn in In order to implement this offensive, we have increased our restructuring provisions by 7104m. We have therefore already covered all the expenses to be incurred in the 2003 business year as well as the foreseeable parts of the non-recurring expenses expected in Our operating profit for the first three months of the year was 7172m, as against 7181m in the first quarter, and 732m in the final quarter, of last year. After the regular amortization of goodwill and the already described restructuring expenses have been deducted, a pre-tax profit of 738m remains. With tax expenses of 72m and the profit and losses attributable to minority interests of 733m taken into consideration, we are left with a consolidated profit of 73m. Of course, that is too small, but it represents a substantial improvement on the previous quarter which produced a loss of 7243m. We are fully aware that we have not achieved a result that can satisfy you, our shareholders. However, we are confident that we are able to put Commerzbank back on a successful course. Apart from our cost-cutting offensives, the many strategic measures and structural changes which we have either resolved or begun to implement will prove instrumental in this respect. ANNUAL GENERAL MEETING

6 6 ANNUAL GENERAL MEETING 2003 C. Comments on strategy Before I say something about the strategy of our individual business lines, I want to turn to the cost-cutting offensive. Having easily exceeded the targets of the first offensive, we are now realizing the second. The measures resolved in March had been worked out in various sub-projects since last autumn. Primarily, we have examined the head-office units, our foreign outlets and our subsidiaries. The Bank s branches in Germany, on which our efforts to save expenses had initially focused, were excluded from this second cost-cutting offensive. The planned savings add up to 7688m. Of this total, 7307m relates to nonpersonnel expenses and 7381m to personnel expenses. The resolved measures entail the shedding of 2,000 jobs in Germany and 1,100 elsewhere. We are continuing to make every effort to reach acceptable solutions with the staff affected and to avoid dismissals as far as possible. However, cost-cutting alone is not sufficient to put our Bank back on course; we have to tap new sources of revenue and adapt our strategy to the changed overall conditions. I should like to outline for you what we plan in the individual business lines. Our strategic positioning is unchanged: we are the efficient bank for demanding private customers in Germany. In corporate banking, we are the most important nationwide bank for successful German Mittelstand firms and also the creative relationship bank for major corporates and institutions as well as for multinationals from all over the world. All in all, we place the emphasis in our activities on distribution rather than production. Taking this positioning as the basis for the Group, all our business lines have re-defined their strategic orientation and developed the corresponding measures. In the retail banking segment, our projects to achieve a sustained improvement in results are already having their first effects. Having suffered an operating loss of 7243m in 2001, we achieved a plus of 753m last year. Primarily, we brought about this change of trend by cutting costs. Since the start of 2000, we have reduced our branch network by just over 200 offices to the target figure of 727; the number of branch personnel fell by 12%. Over the medium term, we are aiming for a pre-tax return on equity of over 15% in this business line. In order to achieve this goal, we have launched two projects. The first, Play to win, comprises a series of measures designed to cut costs and boost earnings and will make our Bank the best choice for demanding customers in Germany. We intend to realize this ambition, among other things by raising the level of qualifications of our staff and by offering a range of innovative products. The second project was launched by comdirect bank under the name com one. In this connection, comdirect s subsidiaries in France and Italy were disposed of and various measures were adopted to reduce costs and hold earnings stable, including the closure of the service centre in Kiel. In addition, we have combined Commerzbank AG s call centre with that of comdirect in terms of both location and technology in order to make use of synergy effects.

7 However, I want to stress that the two remain independent units. Contrary to repeatedly voiced assumptions, we are neither planning nor even considering the integration of comdirect into Commerzbank. Not least, we want to step up our activities in private banking. For us, this interesting target group consists of customers with assets of 71.25m to invest or a gross household income of over 7250,000 per year. In asset management, we continued the process of restructuring and concentration last year. This led to high extraordinary charges. For one thing, we sold our subsidiary Montgomery Asset Management to Wells Fargo, involving an amortization of goodwill of 7170m. In the second quarter of the current year, we will also dispose of our asset-management unit in Italy. For another, we had amortization amounting to 777m on further equity participations in this area. In Germany, we have combined ADIG, Commerzinvest and the Commerz Asset Managers research unit to form Cominvest, where since last September roughly half of the assets under management of the Commerzbank Group are held. At the same time, we want to distribute the attractive products of Jupiter International Group to a greater extent in Germany. Last year, we managed to reduce costs in this area by 18%; however, the poor market environment caused earnings to fall by 22%. Over the medium term, we expect the positive impact of the disposal of our US subsidiary and the calculated synergy effects generated by Cominvest to produce satisfactory results in this business line as well. The new strategic orientation in corporate banking is guided by the motto: concentration of business activity on segments with strong earnings. Four areas have been singled out for this purpose. By means of our Mittelstand offensive, we want to gain new attractive clients or build upon existing customer relationships. This March, for instance, we launched a credit offensive. Our core capital ratio of a current 7.5% gives us easily enough scope to take on profitable new business. That is why we have made extra funds available to smaller German companies with a good credit standing. In this way, we are continuing our expansionary policy in the Mittelstand area. Over the past five years, we have increased our lending to this core target group by a substantial 37%. Practically 40% of such firms have an account with us. The second area is known as the major corporates value offensive. We will concentrate on high-value relationships with customers in other words, on a sound credit standing and a solid cross-selling profile. Otherwise, we are going to selectively reduce the equity tied up in this customer bracket. Thirdly, we are pressing ahead with the meshing of corporate and investment banking. We want to use special investment-banking products to satisfy the demands of our corporate customers and realize additional earnings potential. In addition, we have set up four financial engineering centres throughout Germany each placed under the responsibility of a regional board member. Fourthly and finally, there is our European strategy in corporate banking. By standardizing products, conditions and procedures, we will operate more efficiently, focusing our business activities on core segments. ANNUAL GENERAL MEETING

8 8 ANNUAL GENERAL MEETING 2003 In corporate business, we are committed more than ever to the so-called Hausbank principle, the relationship between a company and its principal bank that has frequently developed over the decades. This approach will forfeit none of its importance. Quite the contrary, it will even be reinforced by new regulations, as Basel II and the central significance of internal ratings call for a regular and even more intensive dialogue between customer and bank. In our segment reporting, the Corporate Banking department has been bundled with Financial Institutions, Multinational Corporates and Real Estate to form Corporate Customers and Institutions. Last year, we achieved an operative return on equity of 8.5% in this area, where practically half of our equity is tied up. We are not dissatisfied with this figure, for in view of weak economic performance we had to shoulder a 72% increase in provisioning. It is encouraging that we were able to widen our average lending margin in We reduced our risk-weighted assets by 13%, while net interest income receded by only 9%. In the current year as well, we must try to widen our margins which are still too narrow in Germany. Let me report at this point on the new securitization institution which has been established by the four major private-sector German banks together with DZ Bank and KfW. With it, we intend to promote a new segment of the securitization market so-called true sales which will point the way forward as far as the future significance of Germany as a financial centre is concerned. The aim is to bundle loan portfolios through a new company and place them in the capital market. This will create interesting investment alternatives for institutional investors. We can lower our capital charges, at the same time tapping a new source of funds. Borrowers will benefit indirectly from these transactions as banks thus gain more scope for granting new loans. In the meantime, several public-sector banks have confirmed their interest in joining this initiative a development which I greatly welcome. To round off my remarks on strategy, a glance at our investment banking. After quite encouraging operating profits in 2000 and 2001, the Securities department saw its earnings drop 41% last year, due to persistently difficult market conditions. As operating expenses declined by no more than 2%, the operating result was decidedly negative in The restructuring resolved last autumn will produce notable savings only in the course of the current year. Investment-banking activities are being scaled back in New York, Singapore, Tokyo and Prague or are being integrated into the local branches. Through the shedding of more than 400 front-office and roughly 150 backoffice jobs, we will realize savings altogether in excess of 7100m. In investment banking, the focus is clearly on the needs of our German and European corporate customers.

9 ANNUAL GENERAL MEETING D. Agenda of the AGM I now want to make a few comments on today s agenda which, as usual, we sent to you with the invitation to this AGM. As you saw, it is especially lengthy this year, comprising 20 pages. There are various reasons for this. For one thing, the regular elections to the Supervisory Board are taking place this year. In addition to the election proposals, we have to list the seats held by the individual candidates on other boards. With the exception of Mr. Strenger, all the shareholder representatives are standing for re-election. A newly proposed candidate is Dr. Hasford, member of the management board of Münchener Rückversicherungs AG, which holds a 10.4% interest in Commerzbank. On the other hand, with one exception, we will be welcoming an entirely new set of employee representatives to our new Supervisory Board. Mr. Foullong alone has been represented on this board since 1994 and has been re-elected for the next five years. Under points 7 and 8 of the agenda, we request your approval for profitand-loss transfer agreements with CORECD Commerz Real Estate Consulting and Development GmbH and Hibernia Delta Beteiligungsgesellschaft mbh. Under these agreements, both companies are obliged to transfer their entire profits to Commerzbank AG throughout the duration of the agreement. Commerzbank, on the other hand, is obliged to balance any annual losses incurred during the contractual period. In this way, neither company will post an annual result in future. As CORECD has a further shareholder in the form of CommerzLeasing und Immobilien AG, it displays a special feature not found in the contractual agreement with Hibernia. In order to provide adequate protection for the interests of the minority shareholder, the latter is to receive an annual compensatory payment equal to 15% of the nominal amount of its share in the capital of CORECD. This compensatory payment will be taken into consideration in working out the net profit to be transferred to Commerzbank AG and also in working out any possible balancing of losses. The profit-and-loss transfer agreement with CORECD has been examined by PwC Deutsche Revision Wirtschaftsprüfungsgesellschaft pursuant to Art. 293b, German Stock Corporation Act AktG. No grounds were found for objection. The agreement with Hibernia required no such examination, as all the shares in this company are held by Commerzbank. Provided that today s AGM gives its approval, the profit-and-loss transfer agreement with CORECD will become effective with the entry into the commercial register retroactively to January 1, It can be terminated at the earliest per December 31, The agreement with Hibernia will become effective retroactively to January 1, 2003; it may be terminated at the earliest per December 31, The agreements will create an integrated inter-company relationship for tax purposes so that the start-up losses resulting from the business activity of the companies can be used in full for tax purposes by Commerzbank AG. Point 9 of our agenda, in which we request your approval for various amendments to our articles of association, takes up a large amount of space. Primarily, we are adapting our articles of association here to innovations produced last year by the corporate governance code of Commerzbank AG.

10 10 ANNUAL GENERAL MEETING 2003 For your convenience, we have drawn together the current version of the articles of association and the proposed amendments and included them as an annex to this year s agenda. I should like to take a closer look at one amendment, namely the remuneration of our Supervisory Board members. In times when dividend payments are high, a low fixed remuneration is unproblematic. The variable portion then ensures that the overall remuneration is appropriate. If the distribution is minimal or no dividend is paid, however, this is no longer the case. For this reason, we have decided to raise the fixed part from the present 73,000 to 720,000. The basis for the new regulation was mainly provided by a study in 2002 produced by Deutsches Aktieninstitut, according to which the fixed remuneration of members of supervisory boards ranges between 73,000 and 760,000. Both the Board of Managing Directors and our shareholders should be keen to have and to attract well-qualified people to the Supervisory Board. But the remuneration has to be appropriate. It is surely correct that the main components of managers salaries are performance-linked. However, in the case of the Supervisory Board, which can exert no direct influence over current earnings performance, the share of fixed remuneration should be larger. Point 10 of the agenda has appeared regularly for a number of years now. Here we request authorization to purchase and sell our own shares for the purpose of securities trading. At the end of each day, the aggregate amount of shares acquired for this purpose may not exceed 5% of our share capital. Last year, the aggregate amount reached a maximum of 2.62% and thus fell well short of the upper limit. Point 11 as well is practically a regular point on the agenda. It relates to authorization to repurchase our own shares in a volume of up to 10%, but for other purposes than securities trading. We can, for example, redeem and cancel the repurchased shares in order to reduce the number of issued shares. However, we can also use them as an acquisition currency in order to take up interests in other enterprises. If the Bank s own shares are sold in other ways than via the stock exchange or by means of a public offer to all shareholders, and consequently with shareholders subscription rights excluded for instance, because they are offered to selected individual investors they may only be sold at a price which is not substantially lower than the market price of the Commerzbank share. Last year, we made no use of this authorization. But it provides us with flexibility. The final point of the agenda relates to authorization for the Board of Managing Directors to issue convertible bonds or bonds with warrants, or to issue profit-sharing certificates. We have no concrete plans to increase our equity or supplementary capital. However, the existing authorization for a conditional capital increase expires on April 30, We want to preserve our scope for seizing growth opportunities beyond this date as well. With the exception of fractional amounts and for the purpose of protecting bearers of already existing conversion or option rights, we seek authorization to exclude shareholders subscription rights insofar as the issue price of the financing instruments is not substantially lower than their market value.

11 ANNUAL GENERAL MEETING This will largely rule out any dilution. Last but not least, we are to be authorized to use bonds as an acquisition currency, which presupposes the possibility of excluding shareholders subscription rights. Insofar as the authorization relates to straight profit-sharing certificates without conversion or option rights, no exclusion of subscription rights is envisaged from the outset. By way of conclusion, let me repeat quite categorically and distinctly that we, too, are not satisfied with the development of our earnings and our share price; we can very well understand your annoyance. We at Commerzbank are as unhappy as you are with the performance of the stock market. Virtually all our employees have Commerzbank shares and over the years they have paid far higher prices for their shares than the current price on the stock market. In addition, our staff and especially our executives and board members have had to accept considerable cuts in pay over the past two years. Given the cost situation and the shortfalls in earnings, this was only logical. It is thanks not least to these contributions by all Commerzbankers that we have been able to get costs so well and so durably under control. At this point, I should like to thank our staff for preserving their motivation, despite the many negative measures and the shedding of jobs, and for working together with the management to get the Bank back on a successful course. We are confident that the stock market will reward our efforts. What is more, we do not consider the present market price of our share to be justified in fundamental terms. This is underlined simply by comparison with the book value, which was on March 31. Let me just add here that we have registered with great gratitude the tokens of loyalty and friendship on the part of our customers. They have made it clear to us that they do not want to do without Commerzbank. We wish to thank you, our shareholders, for your trust and for your loyalty towards our Bank even in such stormy and turbulent times. Please rest assured that we will do all in our power to ensure that you can enjoy sunnier times.

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