- Second-quarter consolidated operating profit of € 62 million within expectations; previous year's figure (Q2 2017: € 109 million) strongly influenced by non-recurring effects – previous quarter: € 67 million
- Full-year consolidated operating profit still expected in a range between € 260 million and € 300 million
- Stabilisation of net interest income, at a solid level, continues as announced – slight quarter-on-quarter increase to € 136 million; derecognition gain remains at a low level
- Administrative expenses of € 109 million below the previous quarter and Q2 2017
- Strong new business of € 2.7 billion for the first half of the year in the Structured Property Financing segment clearly exceeded the previous year's figure
Wiesbaden, 14 August 2018 – Aareal Bank Group maintained its positive business development during the second quarter of 2018, and thus remains on course to achieve full-year earnings target. In a market and competitive environment that continued to be challenging, the Group once again generated solid consolidated operating profit which, at € 62 million, was fully in line with expectations. Consolidated operating profit for the same quarter of the previous year (€ 109 million) had included a positive one-off effect of € 50 million arising from the reversal of provisions at a subsidiary. The corresponding figure for the first quarter of 2018 was € 67 million. Aareal Bank Group's consolidated operating profit for the first six months of the current financial year thus totalled € 129 million (H1 2017: € 180 million, including said one-off effect). Consolidated net income allocated to ordinary shareholders of Aareal Bank amounted to € 37 million for the second quarter (Q2 2017: € 62 million), and € 76 million for the first half of the year (H1 2017: € 100 million). Earnings per share amounted to € 0.62 for the second quarter and € 1.27 for the first half of 2018 (Q2 2017: € 1.05; H1 2017: € 1.68).
Strong evidence of Aareal Bank Group's continued robust operating performance was to be found in the development of net interest income, which increased during the second quarter for the first time since an extended phase of planned decreases, reflecting the scheduled reduction of non-strategic portfolios from the acquisitions of Corealcredit and WestImmo. Net interest income totalled € 136 million in the second quarter, compared to € 133 million in the first quarter of 2018 and € 151 million in the second quarter of 2017. Net interest income including gains on derecognition[1] (which must be reported separately in accordance with IFRS 9) amounted to € 141 million: at € 5 million, the derecognition gain remained at a low level, as in the first quarter.
As with the slight increase in the credit portfolio, this is in line with Aareal Bank’s announcement that it will stabilise its aggregate credit portfolio – and hence, net interest income – at a solid level during the current year.
Loss allowance for the second quarter amounted to € 19 million (Q2 2017: € 25 million). Aareal Bank continues to forecast loss allowance for the full year in a range of € 50 million to € 80 million, which is markedly lower than in the previous year.
Net commission income improved to € 51 million (Q2 2017: € 49 million), which was mainly due to higher sales revenue at Aareon. This means that net commission income continues to gain importance for Aareal Bank Group – as set out in its "Aareal 2020" programme for the future.
Consolidated administrative expenses amounted to € 109 million during the second quarter (Q2 2017: € 129 million). For the first half of 2018, the figure thus markedly decreased year-on-year: from € 268 million to € 237 million. Amongst others, this reflects the efficiency-enhancing measures adopted within the scope of "Aareal 2020".
"We are satisfied with our overall performance during the second quarter. Our operating performance continues to be robust, and we are making good progress with the transformation we have initiated with 'Aareal 2020'. At the mid-year point, we therefore remain on track not only to meet our earnings target for the current year, but also our medium- to long-term strategic goals", said CEO Hermann J. Merkens.
Structured Property Financing segment: strong new business, higher credit portfolio
In the Structured Property Financing segment, Aareal Bank – whilst maintaining its conservative lending policy – posted a significant increase in new business, to € 2.7 billion (Q2 2017: € 2.0 billion). New business volume for the first six months of the year totalled € 4.2 billion, compared to € 3.8 billion in the same period of the previous year. Thanks to the strong performance in new business, aggregate portfolio volume as at 30 June 2018 rose to € 26.5 billion (Q1 2018: € 25.9 billion), despite the continued reduction of non-strategic credit portfolios. The volume is thus in the middle of the target corridor of between € 25 billion and € 28 billion for the current year. The average gross margin for newly-originated loans (after currency hedging costs) of 171 basis points for the second quarter was lower than in the previous quarter (approximately 220 basis points); this was as expected, and reflected a lower portion of business generated in North America. Looking at projections for the year as a whole, however, gross margins achieved remain in line with the plan, and on a good level.
Consulting/Services segment: Aareon's sales revenue keeps growing – deposit volumes in the banking business remain at a high level
Operating profit in the Consulting/Services segment of € –8 million during the quarter under review was in line with the previous quarter (Q1 2018: € –8 million; Q2 2017: € –6 million). Subsidiary Aareon AG generated operating profit of € 8 million during the quarter under review, which was in line with the same quarter of the previous year. Aareon's profit contribution for the first half of the year was € 14 million (H1 2017: € 15 million); the figure was burdened by non-recurring cost increases as well as delays affecting two major projects. Aareon's sales revenue increased to € 57 million in the second quarter of 2018 (Q2 2017: € 55 million).
The volume of deposits in the segment's banking business averaged € 10.5 billion during the quarter under review (Q1 2018: € 10.2 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 Group has remained very solidly funded throughout the first half of the 2018 financial year. Total long-term funding as at 30 June 2018 amounted to € 21.0 billion (31 December 2017: € 22.8 billion), comprising Pfandbrief issues as well as senior unsecured and subordinated issues.
Aareal Bank Group very successfully raised € 0.7 billion on the capital markets during the first half of 2018, including a € 0.5 billion benchmark Mortgage Pfandbrief issue with a term of 6.3 years. The remaining € 0.2 billion was accounted for by senior unsecured issues.
Aareal Bank continues to have a very solid capital base. As at 30 June 2018, the Bank’s Common Equity Tier 1 (CET1) ratio was 19.9 %, which is comfortable on an international level. Its Total Capital Ratio was 31.3 %. 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 13.5 %.
Notes to Group financial performance
Net interest income for the second quarter of 2018 was € 136 million (Q2 2017: € 151 million). The year-on-year decline was attributable to the portfolio reduction in the previous year, particularly due to the planned reduction of WestImmo and Corealcredit portfolios. Gains from derecognition declined to € 5 million (Q2 2017: € 7 million), due to lower effects from early loan repayments. Net interest income including derecognition gains or losses totalled € 280 million for the first six months of the financial year (H1 2017: € 322 million).
Loss allowance of € 19 million was lower than the previous year's figure (Q2 2017: € 25 million); the total figure for the first half-year was thus also € 19 million (H1 2017:€ 27 million).
Net commission income of € 51 million exceeded the previous year's figure (Q2 2017: € 49 million), bringing net commission income for the first half of the year to € 101 million (H1 2017: € 97 million). The increase was due, in particular, to higher sales revenue posted by Aareon.
The net loss from financial instruments (fvpl[2]) and on hedge accounting in the aggregate amount of € -5 million (Q2 2017: € 1 million) mainly resulted from exchange rate fluctuations. The total figure for the first half-year was € -4 million (H1 2017:€ -3 million).
Consolidated administrative expenses declined to € 109 million for the second quarter (Q2 2017: € 129 million) and to € 237 million for the first half of the year (H1 2017: € 268 million). Factors contributing to this expected decrease in administrative expenses included lower running costs due to the efficiency-enhancing measures adopted within the scope of "Aareal 2020".
Net other operating income/expenses amounted to € 3 million; the figure for the same quarter of the previous year (Q2 2017: € 55 million) included a positive one-off effect of € 50 million arising from the reversal of provisions through profit or loss at a subsidiary. The total figure for the first half-year was € 8 million (H1 2017:€ 59 million).
On balance, consolidated operating profit for the second quarter amounted to € 62 million. Taking tax deductions of € 21 million into account, consolidated net income was € 41 million. Assuming the pro rata temporis accrual of net interest payments on the AT1 bond (€ 4 million), consolidated net income allocated to ordinary shareholders stood at € 37 million (Q2 2017: € 62 million).
Aareal Bank Group's consolidated operating profit for the first six months of the financial year totalled € 129 million (H1 2017: € 180 million). After deduction of € 44 million in taxes and € 1 million in non-controlling interest income, and assuming pro-rata net interest payable on the AT1 bond (€ 8 million), consolidated net income allocated to ordinary shareholders of Aareal Bank AG amounted to € 76 million (H1 2017: € 100 million).
Outlook for 2018: full-year earnings forecast affirmed
Following a solid performance during the first half of 2018, Aareal Bank Group affirms its full-year forecasts for key indicators: consolidated net interest income (including derecognition gains or losses reported separately, in accordance with IFRS 9) is projected between € 570 million and € 610 million. Loss allowance is expected in a range between € 50 million and € 80 million, which is significantly lower than in the previous year. A further increase in net commission income is projected, in a range between € 215 million and € 235 million. Administrative expenses are expected to decline to between € 470 million and € 500 million.
Against this background, Aareal Bank expects consolidated operating profit for the current year to be in a range between € 260 million and € 300 million. The Bank expects RoE before taxes of between 9.5 per cent and 11.0 per cent for the current financial year, with earnings per share between € 2.60 and € 3.00. Aareal Bank affirms its medium-term target RoE of around 12 per cent before taxes.
Aareal Bank will continue the reduction of non-strategic portfolios in the Structured Property Financing segment during 2018. At the same time, its core credit portfolio is planned to grow: overall, subject to exchange rate fluctuations, the aggregate credit portfolio is expected to range between € 25 billion and € 28 billion. The Bank targets new business between € 7 billion and € 8 billion for the current year, with a continued focus on the high-margin US market. In the Consulting/Services segment, Aareal Bank expects its IT subsidiary Aareon to contribute a markedly higher amount, of approximately € 37 million to € 38 million, to consolidated operating profit – slightly below its original expectation of approximately € 40 million, on account of non-recurring burdens from two projects. Aareal Bank Group affirms its positive medium-term outlook for Aareon's results.
[1] In accordance with IFRS 9, the result from the derecognition of financial assets and financial liabilities which are not measured at fair value through profit or loss is reported separately. (In particular, this includes the effects from early loan repayments.)
[2] Net gain or loss from financial assets measured at fair value through profit or loss.
