Aareal Bank : posts a strong start to the 2014 financial year

07.05.2014

• Consolidated operating profit of €215 million, including negative goodwill from the acquisition of Corealcredit 
• Business development on schedule: consolidated operating profit excluding negative goodwill up year-on-year, to €65 million; forecast for full-year 2014  affirmed
• Capitalisation and liquidity situation remain very solid - Aareal Bank continues to comply with CRD IV requirements, even following the Corealcredit transaction

Wiesbaden, 7 May 2014 - Aareal Bank Group started the 2014 financial year with a markedly higher result, even without the non-recurring effect from the acquisition of COREALCREDIT BANK AG ("Corealcredit"). As already announced, first-quarter consolidated operating profit of €215 million was materially influenced by €150 million in negative goodwill from the acquisition of Corealcredit, which was closed with effect from 31 March 2014. But even without this non-recurring effect, Aareal Bank Group succeeded in increasing consolidated operating profit: at €65 million, it was up when compared both year-on-year (Q1 2013: €47 million) and the strong final quarter of the previous year (Q4 2013: €58 million). Consolidated profit was €185 million. Even adjusted for negative goodwill, at €35 million, it clearly exceeded the comparative figures of €22 million (Q1 2013) and €27 million (Q4 2013), respectively.

Given that the closing of the Corealcredit transaction took place on 31 March 2014, Corealcredit's operative results will be included in Aareal Bank Group's consolidated income statement for the first time in the second quarter of this year. Accordingly, the results adjusted for negative goodwill, as well as all other income statement items for the first quarter, exclusively reflect the performance of Aareal Bank Group in its structure to date.

The Bank's good net interest income was the main contributor to another very positive performance. Net interest income of €144 million for the first three months of the 2014 financial year was up 19 per cent on the same period of the previous year (Q1 2013: €121 million). In particular, the higher volume of the credit portfolio had a positive effect on net interest income; the figure also included €4 million in non-recurring effects from early repayments.

Aareal Bank recognised €37 million in allowance for credit losses for the first quarter of 2014. The figure was lower compared to the previous quarter (Q4 2013: €39 million), yet higher than in the first quarter of 2013 (€17 million); it comprised a very low level of specific allowance for credit losses - at €6 million, this reflects the high quality of Aareal Bank's credit portfolio, plus €31 million in portfolio-based allowance for credit losses. The latter is due to a change in measurement parameters for determining the portfolio-based valuation allowance, and thus essentially non-recurring. This does not affect the forecast for the year as a whole (€100 million to €150 million).

However, due to a positive non-recurring effect from the reversal of provisions recognised at the peak phase of the financial markets crisis, net other operating income/expenses improved to €16 million (Q1 2013: -€5 million).

In spite of further intensified competition for attractive transactions, new business originated in the Structured Property Financing segment remained at a high level, totalling €1.6 billion during the first quarter. Given a lower volume of loans for renewal, the figure was slightly below the previous year's level (Q1/2013: €2.0 billion); the share of newly-originated loans increased to the high level of 67.4 per cent (Q1/2013: 59.5 per cent).

"As expected, we had a very successful start into the new financial year. Once again, we were able to fully leverage our strengths in a highly competitive environment, thus further improving results. Overall, looking at the positive performance in the first quarter, we are very confident of being able to maintain the steady upward trend that we have shown over recent financial years throughout the current year, as announced", said CEO Dr Wolf Schumacher.

Structured Property Financing segment: net interest income at a high level

Consolidated operating profit in the Structured Property Financing segment amounted to €221 million in the first quarter of 2014. Excluding €150 million in negative goodwill from the acquisition of Corealcredit, it amounted to €71 million, clearly exceeding the previous year's figure of €51 million. The increase was mainly attributable to markedly higher net interest income, which rose to €143 million in the quarter under review (Q1 2013: €118 million). The higher volume of the credit portfolio had a particularly positive effect in this context.

Allowance for credit losses amounted to €37 million (Q1 2013: €17 million) in the first quarter, comprising €6 million in specific allowance for credit losses and €31 million in portfolio-based allowance for credit losses. The latter is largely due to a change in measurement parameters for determining the portfolio-based valuation allowance, and thus essentially non-recurring.

Consulting/Services segment: Aareon developed on schedule

Operating profit in the Consulting/Services segment totalled -€6 million for the quarter under review (Q1 2013: -€4 million).

The business activities of the Aareon AG subsidiary developed on schedule; it contributed €5 million (Q1 2013: €5 million). Following a fourth quarter characterised by high licence fees (which is a usual feature in this type of business), the first quarter was shaped - as in the previous years - by contributions from consultancy, maintenance, and software rental fees. Aareon's international business also remained positive during the first quarter. In contrast to the first quarter of 2013, the subsidiary Incit AB was fully consolidated in the quarter under review.

As in the previous year, the banking business in the Consulting/Services segment continued to be shaped by two developments. On the one hand, deposit volumes continued to increase, averaging €8.1 billion during the quarter under review, up from €7.7 billion in the fourth quarter of 2013. On the other hand, the persistently low interest rate environment continued to burden the results generated from deposit-taking business during the first three months of the year. Yet the importance of this business therefore goes way beyond the interest margin generated from the deposits, which is under pressure in the current market environment. Deposits from the housing industry represent a strategically important additional source of funding for Aareal Bank.

Successful funding activities and strong capitalisation

Aareal Bank raised a total of €1.7 billion in long-term funds on the capital market during the first quarter. This sum comprised Mortgage Pfandbriefe in the amount of €0.7 billion, unsecured funding of €0.6 billion, as well as subordinated liabilities of €0.4 billion. Aareal Bank has therefore maintained its long-term funding at a high level.

Aareal Bank therefore continues to be very solidly financed. The Tier 1 ratio as at 31 March 2014 stood at 15.9 per cent, which is comfortable on an international level, whilst the Common equity tier 1 ratio without the silent participation of SoFFin was 12.1 per cent on the reporting date. Both ratios already include the impact of the Corealcredit transaction. Aareal Bank already complies today with the capital and liquidity requirements under the CRD IV, which will be gradually implemented between now and the end of 2018.

Notes to Group financial performance

Net interest income of €144 million for the first three months of the 2014 financial year was up significantly on the same period of the previous year (€121 million). Net commission income was up slightly on the previous year, to €40 million. The aggregate of net trading income/expenses, the net result on hedge accounting, and net result from non-trading assets, of €4 million resulted largely from the measurement of derivatives used to hedge interest rate and currency risk.

Administrative expenses totalled €102 million (Q1 2013: €92 million). The increase was largely attributable to higher project-related costs (including costs incurred in relation to the acquisition of Corealcredit) as well as to regulatory measures such as the Asset Quality Review by the ECB.

Net other operating income/expenses amounted to €16 million (Q1 2013: -€5 million).

Taking into consideration income taxes of €20 million and non-controlling interest income of €5 million, consolidated operating profit of €215 million (€65 million excluding the negative goodwill from the acquisition of Corealcredit) translates into net income attributable to shareholders of Aareal Bank of €190 million. After deduction of €5 million in net interest payable on the SoFFin silent participation, consolidated profit stood at €185 million for the first quarter (Q1 2013: €22 million).

Outlook: forecast for the full year 2014 affirmed

Aareal Bank continues to expect a slight global recovery during the 2014 financial year, as well as more intense competition. In this environment, Aareal Bank envisages a continuation of its positive business development during the remainder of the year. One main focus of the activities will be the integration of Corealcredit. Discussions concerning the future business policy of the new subsidiary will take place over the coming months.

The Bank has already incorporated the acquisition of Corealcredit into its forecasts for the full 2014 financial year. Given the positive performance during the first quarter, Aareal Bank has affirmed its forecast for net interest income to rise to between €610 million and €640 million. Despite a larger loan portfolio, Aareal Bank continues to forecast allowance for credit losses in a range of €100 million to €150 million. As in the previous years, the Bank cannot rule out additional allowance for unexpected credit losses that may be incurred during 2014.

Net commission income is projected to increase slightly, to between €170 million and €180 million. Administrative expenses are expected in the region of €430 million to €450 million. A material reason for the projected increase over the previous year is the acquisition of Corealcredit.

All in all, Aareal Bank sees good opportunities, including the negative goodwill from the acquisition of Corealcredit, to achieve consolidated operating profit of between €370 million and €390 million for the current year. Adjusted for this non-recurring effect, the Bank anticipates consolidated operating profit of between €220 million and €240 million. On this basis, RoE before taxes is likely to be in the region of 9 per cent; Aareal Bank's medium-term target RoE of approximately 12 per cent before taxes remains unchanged.

New business of between €8 billion and €9 billion is expected for the Structured Property Financing segment in 2014.

In the Consulting/Services segment, Aareal Bank anticipates a slightly higher profit before taxes over the previous year for its Aareon subsidiary, at around €28 million.