Aareal Next Level: profitable growth in all segments
Aareal Bank Group’s strategy focuses on sustainable business success: we want to continue our long track record of success in the German banking sector in the future whilst generating value for all of our stakeholders.
By successfully implementing our “Aareal 2020” programme for the future, we managed to not only achieve our financial targets for the year, but also to reposition ourselves substantively, organisationally and culturally. Our Group is now higher performing, more robust, efficient and agile.
Under the guiding principle of “Aareal Next Level”, we continue to evolve the strategic positioning we had been implementing for the Bank since spring 2020, to confront the immense challenges facing the entire financial services sector.
Activate! Elevate! Accelerate!
Our goal with “Aareal Next Level” is to advance Aareal Bank Group to the next stage of its development. This remains unchanged, despite the coronavirus pandemic. The essential results of the 360-degree review that was concluded in early 2021 have confirmed that our strategy and our business model remain viable in a normalised environment, once the pandemic has been overcome. Our focus in future, however, will be even more firmly directed than previously at exploring new potential for growth and greater strategic opportunities, whilst maintaining our proven business model. Excluding any potential acquisitions, this should allow us to generate consolidated operating profit in the range of €300 million in 2023, provided the pandemic has been fully overcome by then and the risk situation has returned to normal again.
We see opportunities for profitable growth in all our three business segments. Given that these have different operating frameworks and growth potentials, however, we have also defined different strategic focal points in “Aareal Next Level”. The Structured Property Financing segment is guided by the motto “Activate!”, the Banking & Digital Solutions segment by “Elevate!” and Aareon by “Accelerate!”. The respective focal points are described in detail below:
In the Structured Property Financing segment, the backbone of the Group, the motto “Activate!” is primarily about shoring up the success achieved over the last several years and its best-in-class position in a challenging environment. In part, that means systematically using the flexibility developed in recent years in terms of regions, asset classes, structures and exit channels. It also involves expanding our activities along the value creation chain, for example in servicing property financing. We also want to enhance the efficiency of our processes.
Overall, we seek to maintain our significance – which is quite high – as a property financing provider in the most important markets whilst more closely aligning our business with the changing needs of our clients and markets, in line with business cycles and in a flexible manner. Regionally, we want to grow our portfolio in North America and Asia and, in terms of asset classes, expand our student housing activities in particular. In addition, our goal is to realise the potential of digital business models in the Structured Property Financing segment even further.
We are targeting a portfolio volume of around €29 billion by the end of 2021 and of approximately €30 billion by the end of 2022 – with positive effects for net interest income, which is expected to rise noticeably already in the current year. For the post-Covid period, we anticipate enhanced opportunities for high-margin business whilst maintaining our conservative risk standards.
Under the “Elevate!” model, we want to significantly expand the Banking and Digital Solutions segment in the years ahead, which combines our activities for the institutional housing industry and related sectors. We are planning to grow our product portfolio and expand into new markets where there is demand for specific expertise in payment transactions. In the process, we intend in particular to take advantage of our deep understanding of our clients’ infrastructures and processes. In addition to the deposit-taking business, we also aim to increase our focus on generating commission income, and to further harness the opportunities that arise there to develop business models together with our clients and other market participants.
A marked increase in net commission income is envisaged between now and 2025. We want to achieve this mainly by expanding the product range, in particular in the digital arena and through further strategic partnerships. We want to continue with our deposit-taking business as an attractive additional source of funding for the Group, with volumes projected to remain above €11 billion over the medium term.
Along the way, we will increase the recognition of the different products and lines of business. In specific terms, this means that Aareal Bank, as the leading provider of payment transaction services for the housing industry, will be expanding. Doing so will mean greater transparency and a clearer perspective on the possibilities for individual segments. We want to continue to use existing synergies and analyse potential synergies.
The Aareon business segment is the key growth driver for Aareal Bank Group. Aareon AG is recognised as a pioneer in the digitalisation of the European housing industry. Under the “Accelerate!” motto, we intend to once again significantly intensify the pace of growth in this segment in the years ahead whilst developing the software-as-a-service business and rolling out the cloud strategy beyond Germany. Our goal is to develop a strong value proposition for Aareon as an independent software company with a standalone market position that is separate from the Group.
In addition, we want to organically grow Aareon’s business and double results over the medium term. Targeted M&A activities are expected to generate additional growth. Throughout this process, we intend to not only secure the loyalty of our existing client base with an expanded range of products, but also to reach adjacent client groups and target them with our established product portfolio. In addition, we are planning to develop new products for adjacent client groups.
In order to further bolster Aareon’s growth prospects and implement its growth programme more quickly, we entered into a long-term partnership in August 2020 with the financial investor Advent. Within the scope of this agreement, we have sold a 30 per cent minority stake in Aareon to Advent International. Advent is set to help further strengthen Aareon’s market position as a leading consultancy and IT systems house for the European property industry and its partners in the digital age, and to accelerate Aareon’s value appreciation. The common goal is for Aareon to achieve “Rule of 40” performance by 2025 (meaning that the sum of Aareon's EBITDA margin and revenue growth rate should exceed 40 per cent). Based on the value-creation programme jointly developed with Advent – excluding any potential acquisitions – an increase in adjusted EBITDA to around €135 million by 2025 is targeted.
Additional levers to sustainably raise profitability
Besides the growth initiatives for the three segments, Aareal Bank Group will use additional levers to sustainably raise its profitability, including an optimisation of the funding mix and the capital structure. In addition, numerous measures are being implemented to enhance the efficiency of the organisational structure, processes and infrastructure. As an example, the “IT Next Level” initiative will reduce complexity in the IT infrastructure, expanding cloud-based applications. In addition, the Group plans to streamline management structures across divisions.
All of the measures combined are projected to lead to a cost/income ratio below 40 per cent in the Bank’s core segment, which is in line with the upper boundary of the benchmark range on an international level as well. Aareal Bank has budgeted total expenses of around €10 million Group-wide for implementing the strategic adjustments in the years 2021 to 2023; these are however offset by one-off income in a similar magnitude.