Commerzbank in a vulnerable spot

At the beginning of the week, the European banking sector experienced further decline, making it the largest loser in the Stoxx 600 sector overview with a decrease of 1.2 percent. Although it has partially recovered from the crisis at regional banks in the USA that occurred in March, it is still far from reaching its previous highs.

Concerns about a weakening economy in Europe have intensified, raising worries about potential loan defaults and increased provisions at banks. Despite the positive impact of rising interest rates on financial institutions, the focus has shifted to the current economic slowdown, according to trade sources.

Fears were not alleviated on Monday following the release of the Ifo business climate index, Germany’s most crucial leading indicator. The June data revealed a more significant deterioration in the German economy than anticipated by analysts.

Jens-Oliver Niklasch, an economist at Landesbank Baden-Württemberg (LBBW), commented on the situation, stating, “A decline was already evident, but the extent of the decrease is shocking.” He soberly concluded that “we are in the midst of a recession,” predicting a noticeable decline in economic output in the second quarter. A substantial economic recovery appears to be a distant prospect at present.

In addition to the broader economic concerns impacting the banking sector, Commerzbank is facing its own challenges, resulting in weaker performance for its shares on Monday, with a decline of 2.7 percent. The Frankfurt-based institution is burdened with further financial provisions worth millions for its Polish subsidiary mBank. This follows the European Court of Justice’s ruling on controversial loans in Swiss francs, which prompted mBank to allocate an additional €342 million, as reported by Commerzbank. This brings the total provisions to €1.7 billion.

Despite Commerzbank’s aspirations for a significantly higher consolidated profit in 2023 compared to the previous year, the share price failed to rally. The forecast hinges on the developments surrounding mBank’s Swiss franc loans and assumes a mild recession in Germany.

Trading at €9.194, Commerzbank shares approached their interim low from May at €9.106 on Monday morning, potentially marking the lowest level since the end of March. Deutsche Bank shares also faced a downward trend, declining by 1.4 percent and falling below the nine euro mark for the first time since March’s end.

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