- Consolidated operating profit of € 11 million in the third quarter of 2020 improved compared to the previous quarter – pandemic-driven burdens remain at a manageable level
- Loss allowance of € 61 million in the third quarter, coping with € 138 million in aggregate Covid-19-related burdens (including forward-looking measurement effects within the scope of management overlays)
- Net interest income has risen to the highest quarterly level in the current year
- Solid level of new business, despite the pandemic – with continued good margins and low loan-to-value ratios
- Net commission income continues its positive development; IT subsidiary Aareon continues to show a robust performance during the third quarter
- Guidance for consolidated results specified: clearly positive consolidated operating profit expected, in a middle double-digit euro million range
- Chief Financial Officer Marc Hess: “The burdens from the Covid-19 pandemic are manageable, and we are definitely in a position to cope with them. At the same time, we are exploiting new business opportunities.”
Wiesbaden, 12 November 2020 – Aareal Bank Group has once again generated positive consolidated operating profit, despite the continued, clearly visible impact of the Covid-19 pandemic. Profit before taxes recovered to € 11 million in the third quarter of 2020, showing increases in net interest income and net commission income, following € 2 million for the previous quarter, which had been hardest hit to date by the global pandemic. In the third quarter of the previous year – in a perfectly normal environment that cannot be compared to the current situation – Aareal Bank had generated profit of € 64 million. With a consolidated operating profit totalling € 24 million after the first nine months of the year, the Company is well on track to achieving its forecast of substantially positive consolidated operating profit for the year as a whole. In the absence of any signs of a normalisation in the global economic environment, which remains challenging and persistently volatile, the guidance is for consolidated operating profit in a middle double-digit euro million range (the previous guidance was for a mid to upper double-digit million range).
Consolidated net income (after taxes and non-controlling interest income) attributable to shareholders of Aareal Bank AG totalled € 15 million for the first nine months of the year (Q3: € 0 million). The € 180 million capital gain from the sale of a minority stake in the IT subsidiary Aareon to private equity investor Advent International, which was agreed upon in August and closed at the end of October, will be recognised directly in equity in the consolidated financial statements in accordance with IFRSs (in contrast to the single-entity financial statements in accordance to the German Commercial Code, where it will be recognised in income). The capital gain will thus increase both equity as carried on Aareal Bank Group's statement of financial position, as well as the Group’s regulatory capital – thus enhancing the Group's flexibility in terms of capital management, and its scope for investment in value-enhancing opportunities.
With the successful sale of a partial stake in Aareon, and the long-term partnership established with Advent in order to join forces to accelerate Aareon’s growth momentum, Aareal Bank Group has reached a major milestone in implementing the Group's corporate strategy. The IT subsidiary once again proved its strong market position and resilience during the quarter under review: third-quarter sales revenues were up by 5 per cent, and by 4 per cent for the first three quarters, in spite of Covid-19 – driven by especially strong momentum in the digital business, where growth rates of 20 per cent and 25 per cent, respectively, were posted. This means that Aareon remains the key driver for higher consolidated net commission income. Aareon’s results (in terms of adjusted EBITDA) remained stable at the previous year's level, despite the burdens from Covid-19 and stepped-up planned investments for the future.
Besides the Aareon transaction, for Aareal Bank Group the third quarter was all about coping with the challenges arising from the Covid-19 pandemic. In this context, Aareal Bank continues to act in a forward-looking manner, striving to recognise provisions for pandemic-driven risks determined on a model basis at an early stage, within the framework of so-called management overlays. In the third quarter, this approach led to a year-on-year increase in loss allowance, to € 61 million (Q3/2019: € 27 million), bringing the aggregate Covid-19-related burdens to € 138 million for the first nine months of the year, of which slightly more than half was attributable to management overlays. The total volume of non-performing loans was reduced as at 30 September, compared to the mid-year point (30 Jun 2020: € 1.11 billion), to € 1.03 billion; the NPL ratio declined to 3.9 per cent (30 Jun 2020: 4.3 per cent).
The robust state of the financing business is also expressed in new business which, at € 4.2 billion for the first nine months of the year, remains below the previous year's figure (9m 2019: € 6.1 billion) but at a very solid level in view of the pandemic. Persistently high margins continue to exceed projections, averaging around 220 basis points – with low average LtV ratios. Thanks to good new business, portfolio volume at the end of the quarter rose to € 26.7 billion, meaning that the figure has been rising continuously during the course of the 2020 financial year. This trend is expected to prevail in the fourth quarter, with a further increase to the upper end of the target range between € 26 billion and € 28 billion. Also due to the positive development of the portfolio volume, net interest income continued to rise during the third quarter, to € 128 million – the highest quarterly figure in the current financial year. Net interest income is thus gradually approaching the levels seen prior to the Bank’s extensive de-risking measures since the final quarter of the previous year. Besides the ongoing maintenance and profit-oriented growth of the credit portfolio, its orientation towards sustainability criteria – in the context of Aareal Bank Group's ESG strategy – keeps growing in importance.
CFO Marc Hess commented on the Bank's year-to-date performance during 2020: “Without doubt, we have also been affected by the economic impact of the Covid-19 pandemic. But the burdens we have seen to date are manageable for us; thanks to our financial strength, we are definitely in a position to cope with them. Regardless of the challenging environment, we are exploiting new business opportunities. With the sale of a minority stake in Aareon, we have achieved a key strategic milestone. But even so, we are reviewing to what extent we need to adjust our strategy against the background of Covid-19.”
Notes to Group financial performance
Net interest income for the third quarter of 2020 was € 128 million (Q3 2019: € 134 million; Q2 2020: € 122 million). It totalled € 373 million (9m 2019: € 403 million) for the first nine months of the financial year. The year-on-year decline reflected reduced credit and securities portfolios, thanks to the accelerated de-risking measures successfully carried out in 2019, as well as the lower new business volume during the first half of the year, on account of the Covid-19 pandemic. Furthermore, net interest income includes pro-rata interest benefits from the TLTRO programme of the European Central Bank.
Loss allowance amounted to € 61 million in the third quarter (Q3 2019: € 27 million), largely due to adverse economic effects related to Covid-19; the figure for the first nine months of the year totalled € 167 million (9m 2019: € 55 million).
Net commission income amounted to € 57 million (Q3 2019: € 54 million). The figure for the first nine months showed net commission income of € 168 million – a slight increase over the previous year's level (9m 2019: € 164 million), in spite of the Covid-19 pandemic.
The net derecognition gain for the third quarter was € 3 million (Q3 2019: € 15 million); the figure for the first nine months was € 19 million (9m 2019: € 42 million). It was largely attributable to market-driven effects from early loan repayments, and a positive effect from the repurchase of liabilities within the scope of market support.
The net gain or loss from financial assets (fvpl) and from hedge accounting totalled € -2 million (Q3 2019: € 2 million). The net figure for the first nine months of the year was € -7 million (9m 2019: € 1 million); This mainly resulted from adjustments to the measurement of defaulted property loans carried at fair value, which are thus reported in net gain or loss from financial instruments (fvpl).
At € 114 million, consolidated administrative expenses for the third quarter were unchanged from the corresponding period of the previous year (Q3 2019: € 114 million). They totalled € 352 million for the first nine months, declining year-on-year thanks to cost savings in connection with the Covid-19 crisis, and despite higher expenses due to Aareon’s growth (9m 2019: € 370 million, including expenses for the integration of DHB). Aareon accounted for € 46 million during the third quarter (Q3 2019: € 43 million), and € 138 million in the first nine months (9m 2019: € 127 million) – these being minor year-on-year increases given Aareon’s growth path.
Consolidated operating profit totalled € 11 million for the quarter under review (Q3 2019: € 64 million). Taking into consideration taxes of € 10 million (the tax rate for the full year will be negatively influenced by non-deductible expenses) and non-controlling interest income, consolidated net income attributable to shareholders of Aareal Bank AG amounted to € 0 million (Q3 2019: € 39 million)
Aareal Bank Group's consolidated operating profit for the first nine months of the financial year totalled € 24 million (9m 2019: € 186 million). After taking taxes in the amount of € 7 million and non-controlling interest income into consideration, consolidated net income attributable to shareholders of Aareal Bank amounted to € 15 million (9m 2019: € 119 million).
Strong liquidity position, diversified sources of funding, and strong capitalisation
Aareal Bank remained very solidly funded throughout the third quarter of 2020, maintaining both a strong liquidity position and well diversified sources of funding. The Bank placed bonds with an aggregate nominal amount of € 1.2 billion on the capital market during the first nine months of the year, comprising € 1.0 billion of senior preferred and € 0.2 billion of senior non-preferred issues. Capitalising on the very attractive funding terms, Aareal Bank additionally participated in the ECB’s Targeted Longer-Term Refinancing Operations (TLTRO 3) programme, raising € 4.3 billion under the programme.
Aareal Bank continues to have a very solid capital base. As at 30 September 2020, the Bank's Common Equity Tier 1 (CET1) ratio was 20.4 %, which is very comfortable even on an international level; the Total Capital Ratio was 30.3 %. The CET1 ratio determined on the basis of the Basel Committee's final framework – the estimated so-called 'Basel IV' ratio, which is relevant for capital planning – was 13.9 %.
Outlook: Substantially positive results achievable, despite persistent high uncertainty
Besides the strategic measures and initiatives within the framework of “Aareal Next Level”, Aareal Bank Group's focus for the further course of the 2020 financial year will remain on coping with the impact of the Covid-19 pandemic in the best way possible – together with its clients. In this context, it will be crucial whether the recovery of the real economy will materialise, and how quickly such a recovery will gain momentum. Aareal Bank Group continues to forecast a “swoosh”-shaped course of the crisis and recovery. The normalisation of global economic activity during the current year shows a variety of development patterns, in particular due to different infection incidence in the various regions. The market forecast as at the reporting date has deteriorated overall, compared to 30 June 2020: Hence, for 2020 Aareal Bank now expects a slightly more pronounced decline in economic activity in most of the regions where it is active, and a recovery that will be delayed by about six months. The Bank continues to anticipate a marked recovery in 2021 and 2022.
Aareal Bank Group maintains its forecast of a substantially positive consolidated operating profit for the full year 2020. The forecast had hitherto anticipated consolidated operating profit in the mid to upper double-digit million euro range. In view of the deteriorating macroeconomic forecasts and market outlook, as of today the Bank expects consolidated operating profit in the mid double-digit euro million range. Aareal Bank is continuously assessing the pandemic development, the actions taken, and the resulting economic impact. Should the current trend continue, the Bank’s forecast might require further adjustment. Naturally, in the current environment, this forecast is subject to significant uncertainty, especially with regard to the assumed duration and intensity of the crisis, the pace of recovery and the associated effects on the Bank’s clients, as well as prevailing unclear regulatory and accounting provisions, and the possibility that individual loan defaults cannot be reliably predicted. Further effects from potential de-risking measures are also not included.