- Consolidated operating profit of €25 million in the second quarter (Q2 2022: €61 million), despite announced non-recurring burdens and increased loss allowance
- Loss allowance, including net gain or loss from financial instruments (fvpl), totalled around €160 million in the second quarter: Approx. €100 million related to the US office property portfolio and approx. €60 million to the announced swift NPL reduction of which around €35 million for the exit from the Russian exposure
- Operating performance remains strong: net interest income rose by 40 per cent to €240 million, net commission income by 13 per cent to €77 million.
- CET1 ratio unchanged at 19.4 per cent, despite portfolio growth
- CEO Jochen Klösges: “Thanks to our strong profitability, we succeeded in maintaining our half-year results almost stable, despite higher investments, impairments on our US office property finance portfolio, and the full exit from our Russian exposure. This demonstrates our operational resilience, even in difficult markets.”
Wiesbaden, 10 August 2023 – Despite non-recurring burdens, additional investments at software subsidiary Aareon, and increased loss allowance for US office property financings, Aareal Bank Group reported consolidated operating profit of €25 million in the second quarter of 2023 (Q2 2022: €61 million). This corresponds to consolidated operating profit in the first six months of 2023 of €87 million (H1 2022: €91 million).
Aareal Bank Group had announced investments of around €100 million for a swift reduction of Aareal Group’s NPL inventory and efficiency-enhancement measures at Aareon at the annual press conference in March 2023. These non-recurring burdens have risen to around €120 million in total, reflecting higher investment requirements at Aareon; however, this amount was almost fully absorbed in the first half of the year. Moreover, a part of the investment budget was used for the early termination of the Bank's remaining Russian exposure.
Loss allowance thus totalled €128 million in the second quarter. Additional loss allowance of €33 million was recognised for write-downs of defaulted US property loans; since these are carried at fair value, this is shown in net gain or loss from financial instruments (fvpl). This means that loss allowance for US office property financings totalled approximately €100 million.
Yet thanks to its strong profitability, especially due to a significant increase in net interest income, the Group was able to offset the aggregate burdens in the first half of the year. Aareal Bank Group has thus confirmed its full-year profit guidance for 2023. However, consolidated operating profit is expected to reach the lower end of the communicated range of between €240 million and €280 million, due to the additional investments at Aareon.
Jochen Klösges, Chief Executive Officer, explained: “Thanks to our strong profitability, we succeeded in maintaining our half-year results almost stable, despite higher investments, impairments on our US office property finance portfolio, and the full exit from our Russian exposure. This demonstrates our operational resilience, even in difficult markets.”
Net interest income rose by 40 per cent in the second quarter, to €240 million (Q2 2022: €171 million), driven by a portfolio growth of around €1 billion compared to the same quarter of the previous year and solid margins. What is more, deposits reached an average volume of €13.5 billion in the first six months of 2023, benefiting from higher interest rates. Net interest income for the first half-year amounted to €462 million (H1 2022: €330 million).
Net commission income was up by 13 per cent compared to the previous year’s quarter, and reached €77 million (Q2 2022: €68 million), with Aareon's persistent revenue growth contributing significantly. Net commission income for the first half of the year increased to €149 million (H1 2022: €132 million).
Loss allowance for the second quarter amounted to €128 million (Q2 2022: €58 million), which was – on the one hand – due to loan defaults of US office properties. On the other hand, around €60 million designated in the full-year’s budget for the swift reduction of the NPL inventory was fully drawn upon in the second quarter, of which around €35 million was used to exit the remaining Russian exposure. Loss allowance for the first six months totalled €160 million (H1 2022: €107 million).
Another €33 million of loss allowance was recognised in net gain or loss from financial instruments (fvpl) due to fair value measurement adjustments in the US.
At €143 million, consolidated administrative expenses roughly matched the previous year's level (Q2 2022: €142 million). Costs in the banking business declined year-on-year, to €66 million (Q2 2022: €80 million). In the same quarter of the previous year, transaction costs of €12 million from the takeover by Atlantic BidCo additionally burdened the Bank's administrative expenses. At 30 per cent, the Bank's cost/income ratio was at a very good level during the quarter under review, even in an international comparison.
In contrast, Aareon's costs increased to €79 million (Q2 2022: €65 million), reflecting growth as well as additional expenditure in the second quarter. Due to the combination of UK entities and the optimisation of the product portfolio, Aareon's investments rose to just under €60 million in total for the first half of the year. Consolidated administrative expenses for the first six months totalled €342 million (H1 2022: €295 million), with €175 million (H1 2022: €118 million) attributable to Aareon.
Considering taxes of €9 million, second-quarter consolidated net income was €16 million (Q2 2022: €39 million).
At the end of the second quarter, Aareal Bank’s Common Equity Tier 1 (CET1) ratio (Basel IV phase-in ratio) was unchanged at 19.4 per cent, despite portfolio growth (31 March 2023: 19.4 per cent; 31 December 2022: 19.3 per cent). The total capital ratio stood at 23.4 per cent. This means that Aareal Bank continues to enjoy a very solid capital base.
Turning to Aareal Bank's funding activities, the Bank was able to place €2.3 billion on the capital markets during the first half of 2023, including two benchmark Pfandbrief issues of €750 million each. Aareal Bank also successfully issued another €500 million Pfandbrief in July. The volume of fixed-interest retail deposits sourced through platforms rose from €1.4 billion as at 31 March 2023 to €1.7 billion in the second quarter.
Chief Financial Officer Marc Hess said: "We remain solidly funded and well-capitalised. Our CET1 ratio remained at 19.4 per cent, despite our growth. The Bank also performed very well in this year's stress test: in a scenario which provided for price losses on global commercial property markets of close to 30 per cent, Aareal Bank's stressed CET1 ratio was soundly above-average and ahead of applicable requirements."
Developments by business segment
In the Structured Property Financing segment, Aareal Bank's portfolio volume increased to €32.1 billion at the end of the second quarter (31 December 2022: €30.9 billion). New business amounted to €4.1 billion for the first six months (H1 2022: €5.2 billion), and was increasingly dynamic after a muted first quarter (€1.1 billion). Newly-originated loans totalled €2.4 billion in the first half of the year (H1 2022: €3.4 billion), of which €1.8 billion was originated in the second quarter. The Bank achieved very good average gross margins of approximately 290 basis points (H1 2022: approximately 230 basis points), with low loan-to-value ratios averaging 53 per cent (H1 2022: 57 per cent). Aareal Bank has thus maintained its conservative risk policy during the current financial year, also demonstrated by the average loan-to-value ratio of 55 per cent in the existing portfolio.
Aareal Bank’s financing activities in the second quarter included Hyatt’s 5-star Sofia hotel in Barcelona and the mixed-use Legendre complex in Paris that combines high-quality hotel, office and fitness spaces under one roof. The Bank also financed its very first "co-living" project in Helsinki: the concept refers to temporary shared housing in urban areas.
In the Banking & Digital Solutions segment, net interest income rose to €59 million in the second quarter (Q2 2022: €11 million); the six-month figure was €111 million (H1 2022: €23 million). The segment’s net commission income of €8 million in the second quarter remained on the previous year's level (Q2 2022: €8 million), whilst on a six-months basis, it grew slightly to €16 million (H1 2022: €15 million). Aareal Bank concluded new partnerships in the housing and energy sectors, and has become innovation partner of the German association of service providers in the energy sector (Bundesverband der Energiemarktdienstleister) in May. The Bank also concluded a payments partnership with housing software development partner Comline SE at the beginning of the second quarter.
Aareal Bank’s software subsidiary Aareon increased its sales revenues to €85 million in the second quarter (Q2 2022: €75 million) and to €168 million in the first six months (up 15 per cent; H1 2022: €147 million). The share of recurring revenue compared to total sales revenues increased to 76 per cent (H1 2022: 73 per cent). Adjusted EBITDA rose to €21 million in the second quarter (Q2 2022: €16 million).
Aareon continued its strategic efficiency-enhancing measures in the second quarter. It invested just under €25 million in the combination of UK entities under one roof and the optimisation of its product portfolio. These investments, alongside measures already realised geared towards organisational transformation, are expected to yield cost savings starting as early as from the third quarter onwards. Aareon's new partner programme Aareon Connect was launched in the first quarter: it allows clients to integrate third-party software solutions and services with Aareon’s systems. Aareon was able to expand its circle of partners, and to attract first clients.
Furthermore, Aareon keeps pursuing its inorganic growth path. On 9 August 2023, Aareon announced the acquisition of IESA, the leading provider of property management software solutions in Spain. With this acquisition, Aareon will expand its geographical footprint towards Southern Europe.
Thanks to its strong earnings base and despite increased burdens from loss allowance for the US office property finance portfolio in the first half of the year, Aareal Bank Group remains confident to achieve consolidated operating profit between €240 million and €280 million in the 2023 financial year. However, due to additional investments at Aareon, it expects to reach the lower end of that range. At the same time, the environment remains challenging and geopolitical and macro-economic uncertainties remain difficult to estimate.
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