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Commerzbank: eastern ambitions should shore up recovery

17th February 2006

Commerzbank has reported encouraging 2005 results, marking an end to a number of poor years for the bank. However, the lender cannot rest on its laurels and faces a number of challenges ahead. First and foremost will be the mammoth task of integrating recent acquisition Eurohypo into its business. Then the bank will look to continue its expansion through M&A.

Commerzbank, Germany's third largest bank, reported a strong rise in operating profits in 2005, which jumped by 70% to E1.71 billion, as a number of the group's businesses put in solid performances. The bank also confirmed a 9.6% return on equity for the year, surpassing the 8% target it had set for itself. These positive results mark an end to a run of poor years for the bank and will come as a relief to shareholders.

Indeed, the German banking market has underperformed for a number of years and is currently going through a period of consolidation, while some of Germany's leading commercial banks have even been targeted by efficient foreign players - Unicredit's acquisition of HVB last year being a prime example. So Commerzbank is in a relatively healthy position.

However the bank cannot rest on its laurels as it faces a number of challenges in the years ahead. First and foremost, it needs to integrate Eurohypo - the large German commercial mortgage lender - into its business. The deal saw Commerzbank purchase Deutsche Bank and Dresdner Bank's stakes in the company for E4.5 billion, with the strategic aim of realizing synergies of E100 million to E130 million by 2008.

Commerzbank has also set its sights of further acquisitions abroad and has previously voiced its interest in central and eastern Europe. The bank already has a number of subsidiaries in the region, including BRE Bank in Poland, Commerzbank Budapest in Hungary and Commerzbank Pobocka Praha in the Czech Republic. Now Ukraine has been tipped as a likely destination because its banking sector remains relatively fragmented.

It should come as no surprise that Commerzbank is looking to further consolidate its presence in the region. With little organic growth opportunities in its domestic market and exceptionally tough competition in most western European markets, banks have been climbing over each other for new opportunities in the rapidly growing central and eastern European region. However, Commerzbank must still be prepared to move quickly in countries such as Ukraine to achieve its goal to underpin future fiscal health.

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