- Q2 pre-tax profit of € 25 million (Q1: € 17 million), despite the global economic slump and the prevailing financial markets crisis
- Allowance for credit losses remains at a manageable level, projection for the full year confirmed
- Structured Property Financing enjoys solid new business and stable net interest income – satisfactory overall performance of Consulting/Services
Wiesbaden, 11 August 2009 – Aareal Bank Group’s robust business development continued into the second quarter of the current year. Against the background of a difficult market environment, the Group once again achieved a satisfactory result, therefore remaining successfully on track. Group profit before taxes improved to € 25 million in the second quarter of 2009, after € 17 million in the first quarter (Q2 2008: € 48 million). Both segments – Structured Property Financing and Consulting/Services – once again posted positive quarterly results, in spite of the dramatic slump affecting the global economy and the continuing challenges on the financial markets. Aareal Bank Group is therefore one of the few banks, in Germany and abroad, to have achieved a positive result in all quarters since the outbreak of the financial markets crisis two years ago.
"Aareal Bank Group remained on track in a difficult environment", said Dr Wolf Schumacher, Chairman of the Management Board. "Thanks to its conservative business policy and its robust client business, the bank continues to generate solid results. We are still in a good position to manage the manifold burdens and difficulties posed by the crisis affecting financial markets and the sharp recession. Once again, we have proven that our business model based on two columns is sustainable, consistent, and viable. We continue to control our risk exposure and costs. Our business is profitable enough to also absorb the costs for the silent participation and the guarantee facilities extended by SoFFin."
Structured Property Financing: sustainable business policy bears fruit
Aareal Bank's Structured Property Financing segment once again posted a positive result, in spite of a significant deterioration in its market environment. At € 18 million, (Q2 2008: € 37 million), the segment's operating profit was slightly higher than in the first quarter of 2009 (€ 16 million).
Aareal Bank continued to adhere to its strict and selective new business policy that focuses on quality and return. New business amounted to € 1.7 billion in the first six months of 2009. The bank continued to concentrate predominantly on its existing client base, and on active financing projects.
Net interest income in the Structured Property Financing segment amounted to € 101 million in the quarter under review, compared to € 102 million in the first quarter of 2009, and € 95 million in the second quarter of 2008. The year-on-year increase is largely due to the higher margins achieved in the lending business. Aareal Bank consistently exploited the favourable capital market environment during the first half of the year to place issues over and above its bond guaranteed by the German Financial Markets Stabilisation Fund (SoFFin): placements focused on Pfandbriefe, but also included medium-term senior unsecured bonds. The liquidity generated through these issues provides the bank with ample funding for its new business budgeted for the second half of the year. Given the extremely low interest rates prevailing during the first half of 2009, the excess liquidity had a slightly negative effect on net interest income.
Thus far, Aareal Bank has coped well with the consequences of the worst recession in recent decades. Even though at € 42 million (Q2 2008: € 20 million), allowance for credit losses in the second quarter of 2009 was higher than in the same period of the previous year, it remained at a manageable level. The increase over the previous quarter (Q1 2009: € 37 million) was in line with the normal fluctuation range. Aareal Bank affirmed its forecast regarding allowance for credit losses for the full year, and expects a figure at the upper end of the projected target corridor of € 90 million to € 150 million for 2009. Given the prevailing market environment, it is however impossible to fully exclude unexpected losses. "Even though Aareal Bank has not been spared from the effects of the recession, we consider the moderate increase in allowance for credit losses as renewed evidence of the high quality of our financing portfolio. Moreover, the solid results generated in Structured Property Financing show that there is a future for the segment's business model: provided that it is being sustainably managed – as Aareal Bank does – it also provides stable and reliable results in a cyclical downturn", Schumacher commented.
Consulting/Services: satisfactory development
At € 7 million, operating profit in the Consulting/Services segment for the second quarter was considerably higher than the € 1 million reported in the previous quarter, which was burdened by non-recurring charges. However, it was down on the second quarter of the previous year (€ 11 million). Against the background of low margins in the deposit-taking business due to market developments, and the prevailing economic environment, the segment’s performance was satisfactory overall.
Net commission income amounted to € 46 million in the second quarter, up € 2 million on the previous quarter. This represented a decline of € 2 million on the same quarter of the previous year, largely due to the unfavourable interest rate environment for the deposit-taking business with the institutional housing industry. The volume of deposits placed by this client group remained stable, at an average € 4.2 billion during the second quarter.
The Aareon AG subsidiary increased its profit contribution in the second quarter of 2009 over the first quarter, in line with expectations. Capacity adjustments to the Blue Eagle product line – which resulted in expenditure recognised in first-quarter results – were completed at the end of the second quarter.
While Aareon’s revenue from products implemented with its existing client base remained stable in the second quarter, revenue from new client business was slightly lower than in the same period of the previous year. This was primarily attributable to perceptible client reticence regarding large SAP-based projects.
"Despite the burdens placed upon it by the unfavourable interest rate environment and the impact of recession, the Consulting/Services segment did well overall, thus affirming its position as a reliable source of income for Aareal Bank Group, even during a challenging period", Schumacher explained.
Solid refinancing situation and good capitalisation
Aareal Bank Group successfully continued its funding activities during the second quarter, thus further expanding its good liquidity situation. The bank raised € 1.9 billion in long-term funds between April and June, with mortgage bonds accounting for € 1.6 billion and uncovered issues for € 0.3 billion. Aareal Bank invests available liquidity in a conservative manner and ensures quick access, in order to provide continued financing support to its existing clients as well as being well-equipped to deal with a potential deterioration of the financial and economic crisis.
As at 30 June 2009, Aareal Bank’s Tier 1 ratio – measured in accordance with the Credit Risk Standardised Approach (CRSA) – was 10.4%, which is high by international standards.
Notes to consolidated results
Net interest income for the second quarter of 2009 was € 114 million (Q2 2008: €114 million), and therefore € 228 million in the first half of the year (H1 2008: € 221 million). Net interest income after allowance for credit losses for the first half of the year totalled € 149 million (H1 2008: € 181 million).
Net commission income totalled € 30 million for the second quarter (Q2 2008: € 35 million), and thus € 66 million for the first half of the year (H1 2008: € 68 million). Net commission income for the second quarter includes expenses of € 6 million for the guarantee facilities extended by SoFFin.
Net trading income totalled € 9 million in the second quarter (Q2 2008: net expense of € 3 million). As in the first quarter of 2009, the net figure no longer showed any burden due to the financial markets crisis. Net trading income of € 25 million for the first half of 2009 was attributable mainly to the measurement of stand-alone derivatives. In addition to offsetting effects – in part from the measurement of interest rate and currency derivatives employed as economic hedges – the positive result was due to a recovery in the value of credit derivatives (+€ 18 million), especially in the second quarter.
Despite the difficult market environment, Aareal Bank managed to post a slightly positive result from non-trading assets (€ 1 million) in the second quarter of 2009. This reflects the conservative risk policy the bank has pursued in the past, and the quality of its existing securities portfolio. The result of –€ 16 million for the first half of 2009 is mainly attributable to the restructuring of the securities portfolio that was undertaken in the first quarter.
Administrative expenses in the Group amounted to € 88 million in the second quarter, and € 178 million in the first half-year. The net figure for the first half was thus almost unchanged from the same period of the previous year, despite special charges of € 6 million incurred by Aareon AG and additional expenditure sustained in conjunction with the consolidation of Sylogis.com. This continues to reflect pursuance of the Group’s strict cost discipline.
Net other operating income/expenses posted a positive balance of € 1 million for the second quarter (Q2 2008: € 16 million). First-half net other operating income and expenses of –€ 5 million includes project expenditure (including legal and advisory costs) of € 6 million that were incurred in the first quarter in conjunction with the support measures agreed upon between SoFFin and the Aareal Bank. Last year’s figure included, amongst other things, non-recurring income of € 7 million from the Interhotel exposure.
Consolidated operating profit for the second quarter of 2009 totalled € 25 million (Q2 2008: € 48 million). Taking into consideration € 1 million in income taxes and € 5 million in income attributable to non-controlling interests, consolidated net income after non-controlling interests stood at € 19 million. After deduction of the return on the SoFFin silent participation (which was recognised in the second quarter for the first time), consolidated net income stood at € 7 million.
Aareal Bank's consolidated operating profit for the first half of 2009 totalled € 42 million (H1 2008: € 75 million). Taking into consideration taxes of € 7 million and income attributable to non-controlling interests of € 9 million, net income attributable to shareholders of Aareal Bank AG amounted to € 26 million. After deduction of the return on the SoFFin deposit, consolidated net income stood at € 14 million.
Outlook: the environment remains challenging
Because of the current challenging market environment, characterised by continued uncertainty, it remains impossible to make any substantiated earnings forecast for the full year 2009. However, Aareal Bank continues to adhere to its key projections for important indicators communicated to date.
The Management Board continues to expect consolidated net interest income to range between € 420 million and € 440 million for the year as a whole.
Given the general economic developments, allowance for (expected) credit losses will clearly exceed the previous year's figures, but will remain manageable, within the communicated range of € 90 million to € 150 million. As already indicated towards the end of the first quarter, the full-year figure is expected to reach the upper end of the range. It is, however, impossible to exclude additional impairments from unexpected losses for 2009.
Administrative expenses are expected in the region of € 360 million. Adjusted for non-recurring effects and the impact of the first-time consolidation of Sylogis.com, this would represent only a minor increase over the previous year.
From today's perspective, new business generated in the Structured Property Financing segment is expected to range between € 2 billion and € 3 billion. Aareal Bank's particular focus is on extensions of existing exposures, and on financing requirements of existing clients.
Aareal Bank expects net commission income in the Consulting/Services segment to rise again in the second half of the year, and especially during the fourth quarter – due to rising revenues generated by Aareon through the new Wodis Sigma product line. However, due to intensified margin pressure in the deposit-taking business, the Management Board has further adjusted projections for pre-tax profits in this segment. From today’s perspective, this will lead to lower returns of roughly € 10 to € 15 million compared with first-quarter projections. The forecast for the operative segment result before taxes and non-recurring effects has therefore been reduced from around € 40 million to between € 25 and € 30 million, depending on interest rate developments.
