COMMERZBANK AKTIENGESELLSCHAFT

Group Management Report
130
74 Commerzbank Annual Report 2011
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 the composition 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. 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, despite banks’ increased
earnings power and improved resilience.
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.
Since summer 2011, the environment for banks has been dominated by the markets’
sharp loss of confidence in public finances; this forced banks to revalue key assets in their
capital position and seriously compromised the interbank market. The European Central
Bank became the most important source of funding for many banks. At the same time, the
banking sector was affected by sovereign risk, both directly through sovereign debt in banks’
portfolios and indirectly through cross-border interbank relationships. In other words, “debt
issued by industrialised countries” has ceased to be the low-risk asset class it once was.
Sovereign debt is suddenly subject to much greater risk, as it is no longer unthinkable that
a country could leave the European currency union. Banks, insurance companies and
other investors and financial companies will have to make further adjustments to these
new circumstances.