UPDATE 2-Commerzbank profit misses forecast as battles to turn round

Wed May 7, 2014 5:31am EDT

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By Arno Schuetze

FRANKFURT, May 7 (Reuters) - Commerzbank, Germany's No.2 lender, swung to a smaller-than-expected profit in the first quarter, held back by low interest rates, fierce competition for its core mid-sized business customers and its drive to clear out weaker assets.

Shares in the bank fell 5 percent in early Wednesday trading, the biggest decline among European peers, to the lowest level since the middle of March as investors worried about its slow pace of recovery.

Commerzbank was one of the highest-profile casualties of the global financial crisis, with the German government spending around 18 billion euros ($25 billion) to bail it out.

It has since cut costs and sold assets, and returned to profit in 2013. But like rivals it is struggling with low interest rates and weak fixed-income markets, and also faces growing competition for its core mid-sized company customers - the backbone of Europe's largest economy.

"The quality of the result is poor," said Ruland Research analyst Heino Ruland of the first-quarter performance.

Interest income and fees for providing financial services were both weaker than expected, he said, adding: "The conventional business suffered badly."

Commerzbank made a first-quarter net profit of 200 million euros, up from a loss of 98 million in the same period last year but below analysts' mean forecast of 231 million

Falling income from lending and fees led to an 8 percent drop in revenue to 2.26 billion euros, while operating expenses held stable.

SHRINKING

Trading revenue declined, dragged down by a fall in income from buying and selling bonds and currencies. Similar declines have already hit investment banking results at Deutsche Bank Barclays, JPMorgan and Citi.

"Compared to the year-earlier period we could not uncouple from the weak market environment in fixed income," said Chief Financial Officer Stephan Engels on a call with analysts.

Commerzbank's Mittelstandsbank unit, which caters to Germany's raft of medium-sized companies, saw operating earnings rise 4 percent as lower loan loss provisions compensated for weak demand.

Its internal non-core asset unit shrank by almost a third to 102 billion euros compared with a year earlier as the bank sold off underperforming investments in property and shipping stemming from an expansion drive that backfired.

"Overall, a mixed set of numbers, but disappointing in quality, given the revenue miss," said analysts at Citibank in a note to clients.

At 0910 GMT, Commerzbank shares were down 4.1 percent at 12.08 euros.

Commerzbank said earlier this year it expected profit to rise considerably in 2014 and that it was well prepared for a "health check" of banks' finances by the European Central Bank, designed to make sure they have enough capital to withstand future economic shocks.

Since the financial crisis Commerzbank has been cutting costs and selling assets in a bid to return to health and Chief Executive Martin Blessing said the restructuring was paying off, with the bank turning a corner in 2013.

It reiterated on Wednesday its turnaround plan was on track, allowing it set more ambitious targets for improving its capital position and shedding weaker assets, and easing investor fears it might need to raise more cash after selling shares worth more than 10 billion euros since its bailout in 2008.

($1 = 0.7177 Euros) (Editing by Thomas Atkins and Mark Potter)

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