OREANDA-NEWS. The modest performance targets set out in Commerzbank's strategic business plan, outlined yesterday, highlight the challenges faced by German banks to become more competitive and boost earnings, says Fitch Ratings.

The plan focuses on cost reductions and restructuring will take place primarily in the corporate and investment banking business. The group's goal is to achieve a 66% cost-to-income ratio and minimum 6% return on tangible equity by 2020. By Commerzbank's standards, these targets are ambitious. According to our calculations, its current cost-to-income ratio and return on equity are, respectively, 83% and 3%. Results for 1H16 saw both operating and net profit falling by around 40% on comparable results for 2015.

Commerzbank's ratings are constrained by its earnings capacity. An upgrade is unlikely and contingent on a number of factors, including the bank achieving further significant improvements in profitability. We believe the short-term impact of the restructuring will weigh on earnings

Cost cutting is key to Commerzbank's strategic plan and in our view there is less emphasis on revenue growth. This highlights the difficulties faced by Germany's banking sector, where some business may need adjustments and profitability for most banks is low. Banks face fierce competition in the corporate segment and the high costs associated with maintaining retail branch networks leave little room to boost earnings in the current low interest-rate environment.

We believe Commerzbank is adapting to this new reality and addresses the bank's medium-term challenges. But we see substantial execution risk, primarily in defending its corporate market position. Commerzbank plans a net 7,300 reduction in staff at a cost of EUR1.1bn but, in our opinion, negotiations on contract terminations can be lengthy in Germany.

The bank says it expects to report a small net profit in 2016, but results will be affected by a EUR700m write-off of goodwill from the reorganisation of the corporate and middle market divisions. Management says loan loss provisions relating to the non-core shipping portfolios will still be high.