EQS-News: Aareal Banks strong operating performance in the third quarter largely offsets additional loss allowance for Russia

Aareal Banks strong operating performance in the third quarter largely offsets additional loss allowance for Russia

• Consolidated operating profit up by 32 per cent to 66 million in the third quarter, including additional loss allowance of 43 million for the remaining exposure to Russia
• Third-quarter loss allowance excluding burdens for Russia amounts to 20 million
• Earnings momentum continues unabated, net interest income rises by 19 per cent to 184 million, net commission income increases by 20 per cent to 67 million
• Cost/income ratio in the banking business of 39 per cent demonstrates the Banks high cost efficiency
• Full-year capital markets funding plan fully implemented already in the third quarter CET1 ratio of 19.4 per cent remains on a very comfortable level
• Chief Executive Officer Jochen Klösges: We have further increased our earnings, and our strategy is clearly bearing fruit. Amid high political and economic uncertainty, our operating strength is a solid foundation in an increasingly difficult environment.

Wiesbaden, 10 November 2022 Aareal Bank Group generated strong operating performance in the third quarter of 2022, improving quarterly results over the previous quarter and the third quarter of 2021, even though the Banks remaining Russian exposure is a burdening factor.

Consolidated operating profit rose by 32 per cent in the third quarter to 66 million (Q3 2021: 50 million). That includes loss allowance totalling 63 million (Q3 2021: 39 million), of which 43 million is attributable to Russia. Loss allowance excluding Russia thus remained on a low level. At the same time, the credit portfolio was further extended to just under 32 billion, benefiting from good margins and better loan-to-value ratios. Aareon and the Banking & Digital Solutions segment also continued along their growth path, which is reflected in higher net commission income and the higher deposit volume of 13.5 billion.

Jochen Klösges, Chief Executive Officer, commented: We are very pleased with Aareal Bank Groups performance so far this year. We have further increased our earnings, and our strategy is clearly bearing fruit. Amid the high political and economic uncertainties, our operating strength is a solid foundation in an increasingly difficult environment.

Net interest income continued to rise by 19 per cent year-on-year, reaching 184 million (Q3 2021: 155 million) and thus surpassing the already very good previous quarter by 13 million to reach the highest level in seven years. A larger credit portfolio and good new business margins are the main reasons for this result. In addition, the first positive effects from higher market interest rates already made themselves felt in Aareal Banks deposit-taking business. In the first nine months, net interest income amounted to 514 million, significantly exceeding the previous years figure of 435 million (+18 per cent).

Net commission income was up by 20 per cent compared to the previous years quarter, to 67 million (Q3 2021: 56 million), reflecting the continued solid sales revenue development at the Banks software subsidiary Aareon. Its transformation towards becoming a company with a business model based on software as a service (SaaS) and on subscriptions is making progress. In the first nine months of the financial year, net commission income increased by 14 per cent, to a total of 199 million (9m 2021: 174 million). Quarter-on-quarter, net commission income remained stable.

The larger part of loss allowance was attributable to the increase for the exposure to Russia (an office complex in Moscow) which is being run down. There were hardly any defaults in the remaining portfolio, and hence no direct implications from the deteriorating macro-economic situation so far.

The additional impairment charge for Russia in turn was due to the significant worsening of the crisis surrounding the war in Ukraine, which has deteriorated the prospects for any rapid de-escalation. Even though the borrower is willing and able to pay, the exposure still cannot be serviced due to the sanctions imposed in Russia. In the first nine months of the year, loss allowance amounted to 170 million (9m 2021: 79 million), approximately three-quarters of which was attributable to Russia.

Administrative expenses amounted to 128 million, markedly dropping quarter-on-quarter (Q2 2022: 142 million), whilst remaining largely stable year-on-year (Q3 2021: 125 million). In the first nine months of the year, administrative expenses totalled 423 million (9m 2021: 393 million), including the non-recurring effect incurred by the transaction costs from the takeover offer by Atlantic BidCo GmbH of approximately 12 million booked in the second quarter. The year-on-year increase in a nine-month comparison was mainly down to Aareons growth- and acquisition-related expenses, whereas expenses at the Bank remained unchanged despite the non-recurring transaction costs due to strict cost discipline. Aareal Bank thus successfully implemented its growth strategy at low marginal costs. The cost/income ratio (CIR) in the banking business improved to 39 per cent in the third quarter, providing proof of Aareal Banks high cost efficiency, even in a European comparison.

Taking taxes of 24 million into account, consolidated net income was 42 million (Q3 2021: 23 million). After net interest payable on the AT1 bond and non-controlling interest income, consolidated net income allocated to ordinary shareholders amounted to 39 million (Q3 2021: 20 million). Earnings per share came to 0.65 (Q3 2021: 0.33)

Despite its continued portfolio growth, Aareal Banks capital position remains comfortable. As at 30 September 2022, 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 24.2 per cent.

The Bank has fully implemented its capital markets funding plan for 2022 as early as at the end of the third quarter despite lending volume growing more strongly than scheduled. Diversifying its funding mix and broadening its investor base remained at the core of the Banks funding activities. Funding instruments totalling 4.5 billion were placed on the capital markets in the first nine months of 2022. This included six benchmark transactions: two 750 million Pfandbrief issues, one 625 million Pfandbrief issue and one Pfandbrief issue in the amount of 500 million. Aareal Bank Group also raised a total of 1.3 billion in senior unsecured funding, including two green senior preferred issues of 500 million each. The cooperation with Raisin and Deutsche Bank ZinsMarkt launched in June also progressed at a very pleasing pace and the offering was extended; Aareal Banks fixed-income products are now also available on the WeltSparen investment platform. The deposit volume generated on both platforms since market launch already amounted to a total of approximately 267 million as at the end of October. 

Growth across all three business segments

Controlled growth of the property financing portfolio continued in the Structured Property Financing segment. The lending volume amounted to 31.9 billion as at the end of September (30 June 2022: 31.3 billion). New business originated in the first nine months was 6.9 billion (9m 2021: 6.1 billion), supported by a third-quarter figure of 1.7 billion, following already very strong new business generation during the first half of the year. In the third quarter the focus lay on logistics and hotel properties, which accounted for 35 and 22 per cent of new business.

Key portfolio indicators, such as the average loan-to-value ratio (LTV) or yield-on-debt (YoD), continued to improve and have largely returned to pre-pandemic levels. The Bank was able to lower the NPL ratio from 5.2 per cent as at year-end 2021 to 4.6 per cent at the end of the third quarter of 2022.

In the Banking & Digital Solutions segment, the average volume of deposits was comfortably above the initially targeted level of 12 billion for the year, rising to 13.5 billion in the third quarter (Q3 2021: 11.9 billion). However, in light of rising energy prices and associated higher liquidity needs for housing companies, amongst other things, a temporary decrease cannot be ruled out. Nevertheless, Aareal Bank maintains its target of not falling below the level of 12 billion.

The segments net interest income of 26 million (Q3 2021: 11 million) showed the first positive effects from the change in interest rate policies. The segments net commission income increased to 8 million (Q3 2021: 7 million), and operating profit rose to 17 million in the third quarter (Q3 2021: 1 million).

Our software subsidiary Aareon remained on its growth trajectory, increasing sales revenue to 75 million in the quarter under review (Q3 2021: 62 million) and thus to 221 million in the first nine months (up 14 per cent; 9m 2021: 195 million). In terms of promising Software as a Service (SaaS) products, Aareon generated sales revenue growth of 24 per cent in the first nine months. The share of recurring revenue compared to total sales rose to more than 70 per cent. Adjusted EBITDA rose to 15 million in the third quarter (Q3 2021: 13 million). Aareons new management team around CEO Harry Thomsen is focusing on implementing the growth plan and product portfolio efficiency. The integration of Swedish Momentum Software Group AB, acquired in the second quarter, is proceeding on schedule.

Outlook: Full-year forecast confirmed  

Despite increased loss allowance for the remaining exposure to Russia, non-recurring cost effects as a result of the takeover by Atlantic BidCo, and burdens from the ECBs TLTRO decision, Aareal Bank continues to expect consolidated operating profit at the lower end of the 210 million to 250 million range for the 2022 financial year. The potential impact of the war in Ukraine both in terms of the Banks remaining exposure to Russia and the economic consequences of mutual sanctions imposed and the escalated geopolitical tensions remains very difficult to estimate.

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

Aareal Bank Group, headquartered in Wiesbaden, is a leading international property specialist. It provides smart financings, software products, and digital solutions for the property sector and related industries, and is present across three continents: Europe, North America and Asia/Pacific. 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 is the Groups parent entity. It manages the various entities organised in the Groups 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 apartments. 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 ERP software and digital solutions for the European property sector and their partners, represents the third business segment. Aareon is digitalising the property industry 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 segment: 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 2021: excluding originally proposed dividend of  1.60 per share in 2022 for the financial year 2021, including the dividend of  1.10 per share not distributed in 2021 as well as the pro rata temporis accrual of net interest on the AT1 bond. 30 September 2022: including originally proposed dividend of 1.60 per share in 2022, including interim profits for 2022 and pro rata accrual of the net interest on the AT1 bond. In accordance with the Investment Agreement entered into with Atlantic BidCo GmbH, there are no plans to distribute any dividends. The CET1 ratio as shown in the regulatory report as at 30 September 2022 was 18.4%, reflecting the fact that as at that date Aareal Bank had not submitted an application for inclusion of profits to the ECB. The SREP recommendations concerning the NPL inventory and the ECBs 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.

⁵⁾ 30 September 2022: underlying RWA estimate based on the revised CRSA (phase-in) output floor, resulting from a higher of comparison with the RWA estimate based on the CRR in its current version plus revised AIRBA requirements for commercial property finance in line with the draft version dated 27 October 2021 for the European implementation of Basel IV by the European Commission which will officially enter into force as of 1 January 2025.

Consolidated income statement for the first nine months of 2022(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 allocated 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.

Consolidated income statement for the third quarter of 2022 (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 allocated 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 nine months of 2022(in accordance with IFRSs)

¹⁾ Allocated equity is calculated for all segments on the basis of standardised capital requirements pursuant to Basel IV (phase-in) of 15%. Reported equity on the statement of financial position differs from this. Aareons equity as disclosed in the statement of financial position amounts to 138 million (31 December 2021: 143 million).

²⁾ On an annualised basis

³⁾ The allocation of earnings is based on the assumption that net interest payable on the AT1 bond is recognised on an accrual basis.

Segment results for the third quarter of 2022 (in accordance with IFRSs)