Aareal Bank : affirms full-year guidance, after good third quarter

Aareal Bank Group affirms full-year guidance, after good third quarter

- Consolidated operating profit of EUR 82 million for the third quarter (Q3 2016: EUR 74 million)

- Full-year outlook for 2017 affirmed: Aareal Bank anticipates consolidated operating profit of between EUR 310 million and EUR 350 million

- Structured Property Financing segment originated EUR 1.9 billion in new business during the third quarter (Q3 2016: EUR 1.6 billion)

- Net commission income rises to EUR 48 million (Q3 2016: EUR 44 million), thanks to Aareon's sustained positive development

Wiesbaden, 14 November 2017 - Aareal Bank Group maintained its positive business development, in a market environment that continued to be shaped by numerous uncertainty factors and strong competition. After the first nine months of the year, the Bank is thus well on track for achieving its targets for the full year 2017. In the third quarter of 2017, the Bank generated consolidated operating profit of EUR 82 million, up 11 per cent year-on-year (Q3 2016: EUR 74 million). Consolidated operating profit of EUR 262 million for the first nine months of the year was only slightly lower than the very strong figure for the same period of the previous year (9m 2016: EUR 281 million). Nine-month consolidated net income allocated to ordinary shareholders amounted to EUR 147 million (9m 2016: EUR 166 million), of which EUR 47 million was generated during the third quarter (Q3 2016: EUR 42 million). Earnings per ordinary share rose to EUR 0.78 (Q3 2016: EUR 0.70).

Net interest income for the third quarter was down to EUR 164 million, as expected (Q3 2016: EUR 175 million). Positive non-recurring effects from high early loan repayments were offset by charges - also as expected - from the continued scheduled reduction of the credit portfolio, and by currency translation effects. At EUR 26 million, allowance for credit losses was lower year-on-year (Q3 2016: EUR 33 million), and also within the expected range. Thanks to the good development at IT subsidiary Aareon, whose importance for the success of the Group is growing in line with Group strategy, net commission income rose to EUR 48 million in the third quarter (Q3 2016: EUR 44 million).

At EUR 1.9 billion, the volume of new business in the Structured Property Financing segment during the third quarter exceeded the previous year's figure (Q3 2016: EUR 1.6 billion). Aareal Bank thus originated new business totalling EUR 5.7 billion for the first nine months of the year, almost matching the previous year's volume of EUR 6.0 billion. Thanks to its flexible allocation of new business, with a clear focus on attractive markets such as the US, Aareal Bank was able to keep gross margins on new business stable - despite tough competition and in contrast to original expectations. Margins on newly-originated loans exceeded 230 basis points (after FX costs), with loan-to-value ratios remaining moderate.

The Company consistently pursued its "Aareal 2020" programme for the future throughout the third quarter. The programme comprises numerous initiatives for further developing business in its two segments, especially with respect to ongoing digitalisation and the expansion of business into new markets and neighbouring industries, as well as the expansion of syndication activities. A further key element of the programme is the optimisation of internal structures and processes, which also involves personnel measures. As already announced, this programme will be continued next year.

"Aareal Bank Group will consistently pursue its path, in a challenging environment", said Hermann J. Merkens, Chairman of the Management Board. "Thanks to our perfectly healthy operative business and financial strength, we are in a position to take the right strategic decisions to ensure the sustainably successful future for our Company - making the requisite investments as well as bearing the burdens associated with the changes from a position of strength", Merkens added.

Structured Property Financing segment: flexible business policy and new business allocation

In its Structured Property Financing segment, Aareal Bank Group generated operating profit of EUR 89 million (Q3 2016: EUR 85 million) during the third quarter. In a business environment that continued to be characterised by intense competition, Aareal Bank originated new business volume of EUR 1.9 billion, virtually in line with the previous quarter (Q2 2017: EUR 2.0 billion). Newly-originated loans accounted for around 58 per cent of new business in the third quarter. At 43 per cent, the share of North American business in newly-originated loans remained at a high level; the share of North American exposures in the Bank's overall property financing portfolio rose to 25 per cent. Aareal Bank continues to adhere to its forward-looking, flexible business policy and new business allocation in the Structured Property Financing segment.

Consulting/Services segment: Aareon's sales revenue and results on schedule

Operating profit in the Consulting/Services segment totalled EUR -7 million for the quarter under review (Q3 2016: EUR -11 million). Subsidiary Aareon AG developed on schedule, posting operating profit of EUR 6 million (Q3 2016: EUR 6 million), whilst sales revenue rose to EUR 51 million (Q3 2016: EUR 49 million).

The volume of deposits in the segment's banking business averaged EUR 9.7 billion during the quarter under review (Q3 2016: EUR 9.5 billion), thus remaining at a high level. The persistently low interest rate environment burdened income generated from the deposit-taking business, and therefore the segment result. Nonetheless, the importance of this business goes way beyond the interest margin generated from deposits - which is under pressure in the current market environment. Deposits from the housing industry are a strategically important additional source of funding for Aareal Bank.

Sound funding situation, continued strong capitalisation

Aareal Bank remained very solidly funded during the third quarter of 2017, maintaining its long-term funding inventory at a high level. Total long-term funding as at 30 September 2017 amounted to approximately EUR 23.5 billion (30 June 2017: EUR 24.2 billion).

Aareal Bank raised EUR 2.1 billion on the capital markets during the first nine months of the year, of which EUR 1.7 billion was placed via Pfandbriefe - including two very successful non-euro Pfandbrief issues, placed in US dollars and pound sterling.

Aareal Bank continues to have a very solid capital base. As at 30 September 2017, the Bank's Tier 1 ratio was 19.9 per cent, which is comfortable also on an international level. Assuming full implementation of Basel III, the Bank's fully phased-in Common Equity Tier 1 (CET1) ratio would be 17.3 per cent.

Notes to Group financial performance

Net interest income amounted to EUR 164 million in the quarter under review, up EUR 6 million from the previous quarter (Q2 2017: EUR 158 million). The slight increase compared to the previous quarter was largely due to higher positive non-recurring income from early loan repayments - as expected, this was offset by charges from the continued scheduled reduction of the credit portfolio, and by currency translation effects. Net interest income totalled EUR 486 million for the first nine months of the financial year (9m 2016: EUR 532 million).

Allowance for credit losses of EUR 26 million was lower than the previous year's figure (Q3 2016: EUR 33 million); bringing the figure for the first nine months of the year to EUR 53 million (9m 2016: EUR 64 million).

Net commission income of EUR 48 million improved on the previous year's figure (Q3 2016: EUR 44 million), bringing net commission income for the first nine months of the year to EUR 145 million (9m 2016: EUR 137 million). The increase was due, in particular, to higher sales revenue posted by Aareon.

The aggregate of net trading income/expenses, the net result on hedge accounting, and the result from non-trading assets, was EUR 11 million in the third quarter (Q3 2016: EUR 12 million); the relevant aggregate figure for the first nine months of 2017 was EUR 8 million (9m 2016: EUR 91 million).

Consolidated administrative expenses amounted to EUR 120 million during the third quarter (Q3 2016: EUR 127 million). Administrative expenses for the first nine months of the year totalled EUR 388 million (9m 2016: EUR 417 million). The expected decline in administrative expenses was primarily due to lower running costs and integration costs for the former WestImmo.

Net other operating income/expenses amounted to EUR 5 million (Q3 2016: EUR 3 million).

On balance, consolidated operating profit for the third quarter amounted to EUR 82 million. Taking tax deductions of EUR 31 million into account, consolidated net income was EUR 51 million. After deduction of non-controlling interest income, and assuming pro-rata temporis accrual of net interest payments on the AT1 bond, consolidated net income allocated to ordinary shareholders of Aareal Bank AG amounted to EUR 47 million (Q3 2016: EUR 42 million).

Aareal Bank Group's consolidated operating profit for the first nine months of the financial year totalled EUR 262 million (9m 2016: EUR 281 million). After deduction of EUR 97 million in taxes and EUR 6 million in non-controlling interest income, and assuming pro-rata net interest payable on the AT1 bond, consolidated net income allocated to ordinary shareholders of Aareal Bank AG amounted to EUR 147 million (9m 2016: EUR 166 million).

Outlook: Aareal Bank affirms full-year guidance

Aareal Bank Group does not anticipate any fundamental changes to the demanding market and competitive environment for the remainder of the year. Against a background of successful business development during the first nine months of the financial year, the Bank affirms its full-year guidance for 2017, according to which net interest income is expected in a range between EUR 620 million and EUR 660 million. Aareal Bank forecasts allowance for credit losses to be in a range between EUR 75 million and EUR 100 million. As in the previous years, the Bank cannot rule out additional allowance for unexpected credit losses that may be incurred during the current year.

Net commission income is projected to increase to between EUR 195 million and EUR 210 million, mainly driven by the expected positive developments at Aareon. Administrative expenses are expected in a range between EUR 470 million and EUR 510 million.

Aareal Bank continues to anticipate being able to generate consolidated operating profit of between EUR 310 million and EUR 350 million for the current year. The Bank expects RoE before taxes in a range between 11 per cent and 12.5 per cent for the current financial year, with earnings per share between EUR 2.85 and EUR 3.30, based on an expected tax rate of around 37 per cent. Aareal Bank's medium-term target RoE of 12 per cent before taxes remains unchanged.

The Bank continues to target new business of between EUR 7 billion and EUR 8 billion for the Structured Property Financing segment during 2017.

In the Consulting/Services segment, Aareal Bank expects its IT subsidiary Aareon to contribute between EUR 34 million and EUR 35 million to results before taxes.

Note to editors: The full interim report as at 30 September 2017 is available at http://www.aareal-bank.com/en/financialreports.

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. Aareal Bank AG, whose shares are included in Deutsche Börse's MDAX index, is the Group's parent entity. It manages the various entities organised in the Group's two business segments: Structured Property Financing and Consulting /Services. The Structured Property Financing segment encompasses all of Aareal Bank Group's property financing and funding activities. In this segment, the Bank facilitates property investment projects for its domestic and international clients, within the framework of a three-continent strategy covering Europe, North America and Asia. In its Consulting/Services segment Aareal Bank Group offers its European clients from the property and energy sectors a unique combination of specialised banking services as well as innovative digital products and services, designed to help clients optimise and enhance the efficiency of their business processes.