Commerzbank prepares for more German bankruptcies amid Ukraine fallout

Lender expects loan losses to increase this year amid higher inflation, 'Handelsblatt' cites chief executive Manfred Knof as saying

A Commerzbank branch in Frankfurt, Germany. The lender is bracing for higher loan losses this year. Photo: Bloomberg

Germany’s Commerzbank is preparing for more businesses to fail in Europe’s biggest economy amid high inflation and economic perils exacerbated by Russia’s war in Ukraine.

The lender expects provisions for loan losses to rise as it works closely with its clients to minimise the impact of commodities’ super cycle on their businesses, Handelsblatt, a German businesses newspaper cited Commerzbank chief executive Manfred Knof as saying.

"The energy supply in Germany is at risk, supply chains are breaking down, we have high inflation," Handelsblatt said in a report that cited Mr Knof’s speech, scheduled for the lender’s Wednesday shareholders meeting.

"That's why we work closely with our corporate customers on the currently difficult issues — such as how to deal with the rising commodity prices and the bottlenecks in the supply chains," Mr Knof said.

"But we mustn't delude ourselves either: the number of insolvencies in our markets will probably increase and with it the risk provisions of the banks."

Although Commerzbank, the second-largest private bank in Germany, more than doubled its first-quarter net income, beating analysts’ expectations, it more than tripled its provisions for bad debts.

The lender increased its provisions and writedowns to €464 million ($490m) in the three months to the end of March, up from €149m a year earlier, citing the continuing conflict in Ukraine.

“The economic consequences of the Russian war against Ukraine have impacted on our risk result. We are sticking by our targets for the year as a whole,” Mr Knof said in the April earnings statement.

Banks in Europe are bracing for the economic impact of the Russia’s war in Ukraine, a conflict that is showing no signs of abating as Moscow continues its assault on the east of the country. The war, which is expected to drag on into the later quarters of this year and beyond, is threating the supply of global energy and other commodities.

Brent, the benchmark for more than two thirds of the world’s oil, which rose 67 per cent last year, already climbed to just under $140 per barrel this year before retreating. Japan’s largest lender, MUFG Bank, expects oil prices to average $135 per barrel this year.

Europe as a whole and Germany in particular is heavily reliant on Russian oil and gas. Higher oil and gas prices are stoking already-high inflation. The 27-member bloc is trying to phase out Russian energy imports, but businesses are already buckling under the economic pressure.

The direct impact on banks in Europe, however, depends on their own exposure and that of their clients to Russia and Russian entities.

Standard Chartered does not see a systemic weakness, Jose Vinals, chairman of the British lender told The National in March. An impact on earnings or an increase in loan losses in Europe's financial sector as a whole would be limited because banks have smaller exposure to Russia, he said.

Jane Fraser, chief executive of Citigroup, said the magnitude of the impact on the banking system would be limited and far less than what banks have endured during the pandemic.

“For now, it’s a different order of magnitude. I think anyone at this juncture is foolhardy to guess where things go next,” she told The National in March.

Citigroup’s own exposure to Russia is about 0.3 per cent of the bank’s total risk-weighted assets, she said at the time.

Commerzbank operates in Russia through its subsidiary. It reduced its business in the country in mid-March, but did not withdraw completely.

"We have stopped our new business in Russia," Mr Knof said. "We continue to carry out existing business with German and international customers."

The future of Commerzbank’s business in Russia will depend, among other things, on Russia's behaviour and further sanctions, according to Handelsblatt report.

"We continue to monitor developments in Russia and Ukraine closely," Mr Knof said. “We are continuously adapting our business strategy and risk assessment to the current situation."