Commerzbank's third-quarter earnings missed expectations as the German lender warned about weaker profits in the fourth quarter and its ability to pay dividends during a multi-year restructuring effort to restore its earnings power.
Commerzbank, which received an 18 billion euro bailout in the wake of the collapse of Lehman Brothers, has spent years restructuring as a slowing euro zone economy crimp its efforts to get back on its feet and build capital to meet new European Union rules.
The bank's third-quarter net profit of 78 million euros ($99 million), missed analyst expectations of 131 million euros but remained ahead of the 687 million euros net loss in the year-earlier.
In the third quarter, the bank's operating return on equity was 12.9 percent at the operating business which the bank plans to keep going forward.
Analyst Dirk Becker from Kepler Capital Markets said that the return on equity target looked easily reachable the bank already exceeded it now. "The main question is what will happen with the 160 billion in the non-core-assets unit. Those have to be shed elegantly without again causing a lot of costs," he said.
The continued revamp and higher loan loss provisions are likely to hit earnings going forward, Commerzbank said.
"The payment of dividends for 2012 and 2013 is unlikely from the current stance", it said adding that the uncertain euro zone markets will further dampen earnings.
"The market environment will remain volatile in the coming months", chief executive Martin Blessing said. In its third-quarter report the bank elaborated that it no longer expects any marked upswing in customer and investor activity in the investment and lending business before the end of the year.
Germany's second-largest lender said it would spend more than 2 billion euros on overhauling its core business, with about half the investment earmarked for its retail arm, adding the core bank was targeting a return on equity after taxes of more than 10 percent by 2016.
Sources close to Commerzbank said on Wednesday it was planning to cut jobs in an overhaul of its retail business.
The lender said it aims to lower costs over the next four years to help reduce its cost-income-ratio in its core bank to about 60 percent by 2016, after reaching 69 percent in the third quarter.
Banks across Europe are slashing costs and selling assets to cope with tougher regulations aimed at preventing a repeat of the 2008 financial crisis, as well as the impact of countries' austerity drives to cut their deficits.
Retail banking, once viewed as a stable counterweight to riskier investment banking, is seeing margins pressured by the low interest rate environment.
Third-quarter operating profit in Commerzbank's cash cow Mittelstandsbank unit stagnated at 395 million euros and revenues decreased following low interest rates.
Prospects of the unit have been dampened however by recent signs of ebbing strength in Europe's economic powerhouse, where output and industrial orders have fallen while joblessness has risen, highlighting the vulnerability of Germany's economy to the euro zone crisis.
Commerzbank said that it plans to pay back long-term refinancing loans to the European Central Bank in the first quarter of 2013, two years ahead of schedule.
($1 = 0.7840 euro)
(Reporting by Arno Schuetze and Edward Taylor; Editing by Dan Lalor)