EQS-News: Aareal Bank doubles consolidated operating profit in the first quarter of 2023

Aareal Bank doubles consolidated operating profit in the first quarter of 2023

• Consolidated operating profit of 62 million (Q1 2022: 30 million), despite previously announced additional expenses of 34 million at Aareon
• Strong income growth: net interest income up 40 per cent; net commission income up 13 per cent
• Loss allowance at a moderate level, including additional management overlay for the US office property finance portfolio; further slight decline in the NPL inventory
• CET1 ratio at 19.4 per cent
• CEO Jochen Klösges: We have further increased our operating profitability and remain on course. We are taking a forward-looking, vigilant stance in the current challenging environment.

Wiesbaden, 11 May 2023 Aareal Bank Group doubled its consolidated operating profit in the first quarter, to 62 million (Q1 2022: 30 million). This strong result also includes 34 million of investments and expenses to enhance Aareons efficiency, as announced at the annual press conference. Net interest income and net commission income both soared, whilst loss allowance remained moderate. Even though a 21 million management overlay was recognised, loss allowance totalled 32 million. In view of current volatility, Aareal Bank has selectively originated new commercial property finance business in the first quarter. At the same time, Aareons sales revenues continued to develop very favourably, whilst the strong deposit base remained above the full-year target.

Chief Executive Officer Jochen Klösges said: We have further increased our operating profitability and remain on course. We are taking a forward-looking, vigilant stance in the current challenging environment. With our robust business model, broadly diversified property financing portfolio, and strong capital and liquidity position, we are well positioned even for a difficult market environment.

Net interest income rose by 40 per cent, to 222 million (Q1 2022: 159 million). The marked increase was driven on the one hand by solid margins and higher portfolio volume compared to the same quarter of the previous year. On the other hand, the deposit-taking business continued to benefit from rising interest rates.

Net commission income also continued to increase, rising 13 per cent compared to the same quarter of the previous year, to reach 72 million (Q1 2022: 64 million). Software subsidiary Aareons growth was a major contributor to this.

Loss allowance in the first quarter amounted to 32 million (Q1 2022: 49 million), this includes a management overlay in the amount of 21 million for US office property financings, to cover potential impairments. Around 60 million was budgeted for the targeted swift NPL reduction, as communicated for the financial year and included in loss allowance for the full year. Whilst the budgeted figure was not yet drawn upon in the first quarter, preparatory measures have already commenced. At 1.055 billion, the volume of non-performing loans (NPLs) declined slightly; the NPL ratio amounts to 3.4 per cent.

Consolidated administrative expenses rose to 199 million (Q1 2022: 153 million) reflecting, as expected, strong growth and the announced additional expenses for efficiency-enhancement measures at Aareon, which accounted for 34 million. Administrative expenses also include charges for the bank levy and the deposit guarantee scheme in the amount of 25 million, which are generally posted during the first quarter of the year. Costs in the banking business remained stable: the cost/income ratio of 35 per cent was at a very good level during the quarter under review, even in an international comparison. This metric does not include the bank levy and the deposit guarantee scheme, as is customary in the banking sector.

Considering tax deductions of 20 million, consolidated net income was 42 million (Q1 2022: 19 million). Earnings per share came to 0.78 (Q1 2022: 0.25)

Aareal Bank continues to enjoy a very solid capital base. As at 31 March 2023, the Banks Common Equity Tier 1 (CET1) ratio (Basel IV phase-in ratio) was 19.4 per cent, which is very comfortable even on an international level. The total capital ratio stood at 23.8 per cent.

Aareal Banks funding activities also proved successful: the Bank placed two benchmark Pfandbrief issues with an aggregate volume of 1.5 billion already at the beginning of the year. The volume of fixed-interest retail deposits sourced through platforms rose from 0.6 billion at year-end to more than 1.4 billion in the first quarter.

Chief Financial Officer Marc Hess said: We were very successful in diversifying our funding sources already last year, which has clearly made us less dependent on funding via the capital markets and has proven especially helpful in volatile markets, as we have recently seen.

Development by business segments

In its Structured Property Financing segment, Aareal Bank adopted a selective approach towards newly acquired business, taking the low level of transaction volumes into consideration, achieving excellent average gross margins of approximately 300 basis points (Q1 2022: approximately 220 basis points) and very conservative loan-to-value ratios averaging 53 per cent (Q1 2022: 57 per cent). New business volume which includes both renewals and newly acquired business amounted to 1.1 billion as at the end of March (Q1 2022: 3.3 billion).

Portfolio volume reached 30.7 billion as at the end of the first quarter, thereby remaining largely stable, despite being burdened by exchange rate fluctuations (31 Dec 2022: 30.9 billion). Average loan-to-value ratios in the existing portfolio of only 55 per cent reflect the high quality of Aareal Banks credit portfolio.

Turning to the Banking & Digital Solutions segment, at 13.7 billion the average volume of customer deposits from the housing industry remained above the targeted level of around 13 billion and above the previous years average of 13.4 billion in the first quarter. Aareal Bank is a leading payment services provider on the German housing market, serving more than 3,700 clients from the housing industry with around 8 million managed residential units. In 2022, Aareal Bank handled the majority of payment transactions for these clients.
Net interest income in the segment soared by 333 per cent to 52 million (Q1 2022: 12 million), driven by increased interest rate levels. The segments net commission income increased to 8 million (Q1 2022: 7 million),

Software subsidiary Aareon increased its sales revenues by 15 per cent to 83 million, up from 72 million in the first quarter of 2022, marking progress in the transition from a licence-based approach to a Software-as-a-Service (SaaS) model. As such, the share of recurring revenue increased to 75 per cent. Adjusted EBITDA increased to 18 million (Q1 2022: 16 million). Aareon invested in the announced early retirement programme and in product and process efficiency, thus launching its strategic efficiency-enhancement measures in the first quarter. These are set to deliver gradual cost relief effects already in 2023.

Aareon continued its M&A activities as planned, acquiring amongst others Embrace, the Dutch market leader for SaaS solutions in the areas of digital workspace and customer engagement during the reporting period, thereby not only improving its positioning in the Dutch market, but also further expanding its product portfolio for European clients. Aareon also launched its new partner programme Aareon Connect in Germany, which will allow clients to integrate third-party software solutions and services with Aareons ERP systems quickly and easily. More than ten partners have joined the programme from the start.

Outlook  

Aareal Bank continues to expect consolidated operating profit for 2023 of between 240 million and 280 million. As communicated at the annual press conference in March, this figure includes additional expenses for a swift NPL reduction and the implementation of efficiency measures at Aareon. The market environment, however, remains challenging, given the ongoing geopolitical risks.

Additional features:

• Aareal Bank logo, central (Credits: Aareal Bank / Pavel Becker)
• Aareal Bank logo, lateral  (Credits: Aareal Bank / Pavel Becker)

Contacts for the media:

Margarita Thiel
Phone: +49 611 348 2306
Mobile: +49 171 2069740
margarita.thiel@aareal-bank.com

Christian Feldbrügge
Phone: +49 611 348 2280
Mobile: +49 171 8667919
christian.feldbruegge@aareal-bank.com

Contact for investors:

Aareal Bank AG Investor Relations
Phone: +49 611 348 3009
ir@aareal-bank.com

About Aareal Bank Group 100 years of Aareal Bank. 100 years of writing success stories.

Aareal Bank Group, headquartered in Wiesbaden, was founded 100 years ago and has since become a leading international property specialist. The Bank uses its expertise to identify trends, challenges and opportunities at an early stage, and to exploit them for the benefit of its stakeholders. Today, it provides financings, software products, and digital solutions for the property sector and related industries, and is present across three continents, Europe, North America and the Asia/Pacific region. Aareal Bank Groups business strategy focuses on sustainable business success, with environmental, social and governance aspects as an integral part of this strategy.

Aareal Bank AG comprises the business segments Structured Property Financing, Banking & Digital Solutions, and Aareon. The Structured Property Financing segment encompasses all of Aareal Bank Groups property financing and funding activities. Here, the Bank supports its clients in making large-volume commercial property investments. The investment properties mostly comprise office buildings, hotels, shopping centres, logistics and residential property, as well as student housing. In the Banking & Digital Solutions segment, Aareal Bank Group supports businesses from the housing, property management and energy industries as a digitalisation partner combining extensive advisory services and product solutions with traditional corporate banking services and deposit-taking. Its subsidiary Aareon, the leading supplier of SaaS solutions for the European property sector, represents the third business segment. It is digitalising property management by offering user-oriented software solutions that simplify and automate processes, support sustainable and energy-efficient operations, and interconnect all process participants.

Aareal Bank Group Key Indicators

¹⁾ The allocation of earnings is based on the assumption that net interest payable on the AT1 bond is recognised on an accrual basis.

²⁾ Structured Property Financing and Banking & Digital Solutions segments: in line with common practice in the banking sector, bank levy and contributions to the deposit guarantee scheme are not included.

³⁾ On an annualised basis

⁴⁾ 31 December 2022: including originally proposed dividend of 1.60 per share in 2022 and pro rata temporis accrual of the net interest on the AT1 bond, excluding profits for 2022 under commercial law. There are no plans to distribute any dividends, in line with the strategy for 2023. The appropriation of profits is subject to approval by the Annual General Meeting. The CET1 ratio, determined as the higher of the amounts under Basel III and Basel IV (phase-in), as shown in Aareal Banks regulatory report as at 31 March 2023, was 18.7%, reflecting the fact that the Bank had not submitted an application for inclusion of profits on that reporting date to the ECB. The SREP recommendations concerning the NPL inventory and the ECB's NPL guidelines for the regulatory capital of new NPLs and an additional voluntary and preventive capital deduction for regulatory uncertainties from ECB tests were taken into account. Adjusted total risk exposure amount (as defined in Article 92 (3) CRR RWAs), in accordance with applicable law as at 31 December 2022 (CRR II) and applying the partial regulation for the output floor in connection with commercial property lending and equity exposures, based on the European Commissions proposal dated 27 October 2021 for implementation of Basel IV (CRR III). The adjusted risk-weighted exposure amount for commercial property lending and equity exposures is determined using the higher of (i) total RWAs calculated in accordance with CRR II currently in force, and (ii) the figure calculated in accordance with the revised CRSA (pursuant to CRR III), applying the transitional provisions for 2025 (50% output floor).

Consolidated income statement for the first quarter of 2023 (in accordance with IFRSs)

¹⁾ The allocation of earnings is based on the assumption that net interest payable on the AT1 bond is recognised on an accrual basis.

2) Earnings per ordinary share are determined by dividing the earnings allocated to ordinary shareholders of Aareal Bank AG by the weighted average of ordinary shares outstanding during the financial year (59,857,221 shares). Basic earnings per ordinary share correspond to diluted earnings per ordinary share.

³⁾ Earnings per AT1 unit (based on 100,000,000 AT1 units with a notional amount of 3 each) are determined by dividing the earnings attributable to AT1 investors by the weighted average of AT1 units outstanding during the financial year. Earnings per AT1 unit (basic) correspond to (diluted) earnings per AT1 unit.

Segment results for the first quarter of 2023 (in accordance with IFRSs)

¹⁾ During the course of a regular review, intra-Group cost allocation between the SPF and BDS segments was adjusted in 2023, aligning it to the size of the respective segment.