How Commerzbank Turned Around and Could Go Higher

It's no secret that eurozone banks have been hit hard by the financial collapse in 2008-2009 and continue to be depressed by a slow-growth economy. But one German bank just showed the market that progress is being made.

Better than last year
Commerzbank AG has had a rough few years, but the 2013 results show a major turnaround is at work. The results showed a net profit of 78 million euros, marking a major improvement over the 47 million euro loss in 2012.

The bank also further improved its tier 1 capital ratio to 9% from 7.6% at the end of 2012. With European stress tests coming up, having a strong capital ratio is particularly important in avoiding future recapitalizations.

Toxic assets
Toxic assets have damaged financial institutions worldwide and Commerzbank AG did not escape. However, results for 2013 are positive on this front, showing that the bank reduced its toxic assets by 35 billion euros, exceeding forecasts.

Commerzbank has also chosen to house its toxic assets in an internal bad bank. Other banks have taken this approach as well. Royal Bank of Scotland Group made headlines last year when it agreed to move 38 billion pounds of toxic assets into an internal bad bank. Shares took an initial hit on the news, as it would result in having RBS take an impairment charge of between 4.0 billion and 4.5 billion pounds. However, shares have recovered much of their lost ground since the bad bank announcement.

But Commerzbank has already moved its toxic assets to its own bad bank and is working on winding them down over the next several years. Last year saw the sale of toxic assets largely in real estate and shipping -- two sectors that have been particularly troublesome for the bank because of foreign exposure and poor shipping industry performance.

Future goals
Commerzbank laid out some important goals ahead in the 2013 results. Near the top of the list is a target of a 10% tier 1 capital ratio for 2016, which would put the bank on more solid footing. Also being targeted for the future is further shrinkage of the bad bank from the current 116 billion euros to 75 billion euros by 2016.

A dividend could also be in the works, but it looks highly unlikely to happen in 2014. Commerzbank CEO Martin Blessing played down the possibility, saying, "We first want to have the capital situation at the bank as comfortable as possible before we pay out a dividend." With upcoming stress tests, retaining capital looks to be the best move for Commerzbank at this time.

Dividend investors may want to consider Deutsche Bank AG if they are bullish on German banks but want to collect a dividend at the same time. Although Deutsche Bank's dividend does face some risk of being cut if further capital is needed, this would be a last resort measure as dividend cuts often spook the markets and companies generally do anything possible to avoid them.

Turnaround
Commerzbank AG was hit hard by the financial crisis, and a quick look at the five-year chart will show that effect. But with an improving tier 1 capital ratio, stronger earnings, and significant reductions in toxic assets, Commerzbank is showing a major turnaround from the bank that nearly wiped out its old shareholders.

For investors bullish on a eurozone recovery, Commerzbank is definitely worth a look.