- Consolidated operating profit up by 32 per cent to € 66 million in the third quarter, including additional loss allowance of € 43 million for the remaining exposure to Russia
- Third-quarter loss allowance excluding burdens for Russia amounts to € 20 million
- Earnings momentum continues unabated, net interest income rises by 19 per cent to € 184 million, net commission income increases by 20 per cent to € 67 million
- Cost/income ratio in the banking business of 39 per cent demonstrates the Bank’s high cost efficiency
- Full-year capital markets funding plan fully implemented already in the third quarter – CET1 ratio of 19.4 per cent remains on a very comfortable level
- Chief Executive Officer Jochen Klösges: “We have further increased our earnings, and our strategy is clearly bearing fruit. Amid high political and economic uncertainty, our operating strength is a solid foundation in an increasingly difficult environment.”
Wiesbaden, 10 November 2022 – Aareal Bank Group generated strong operating performance in the third quarter of 2022, improving quarterly results over the previous quarter and the third quarter of 2021, even though the Bank’s remaining Russian exposure is a burdening factor.
Consolidated operating profit rose by 32 per cent in the third quarter to € 66 million (Q3 2021: € 50 million). That includes loss allowance totalling € 63 million (Q3 2021: € 39 million), of which € 43 million is attributable to Russia. Loss allowance excluding Russia thus remained on a low level. At the same time, the credit portfolio was further extended to just under € 32 billion, benefiting from good margins and better loan-to-value ratios. Aareon and the Banking & Digital Solutions segment also continued along their growth path, which is reflected in higher net commission income and the higher deposit volume of € 13.5 billion.
Jochen Klösges, Chief Executive Officer, commented: “We are very pleased with Aareal Bank Group’s performance so far this year. We have further increased our earnings, and our strategy is clearly bearing fruit. Amid the high political and economic uncertainties, our operating strength is a solid foundation in an increasingly difficult environment.”
Net interest income continued to rise by 19 per cent year-on-year, reaching € 184 million (Q3 2021: € 155 million) and thus surpassing the already very good previous quarter by € 13 million – to reach the highest level in seven years. A larger credit portfolio and good new business margins are the main reasons for this result. In addition, the first positive effects from higher market interest rates already made themselves felt in Aareal Bank’s deposit-taking business. In the first nine months, net interest income amounted to € 514 million, significantly exceeding the previous year’s figure of € 435 million (+18 per cent).
Net commission income was up by 20 per cent compared to the previous year’s quarter, to € 67 million (Q3 2021: € 56 million), reflecting the continued solid sales revenue development at the Bank’s software subsidiary Aareon. Its transformation towards becoming a company with a business model based on software as a service (SaaS) and on subscriptions is making progress. In the first nine months of the financial year, net commission income increased by 14 per cent, to a total of € 199 million (9m 2021: € 174 million). Quarter-on-quarter, net commission income remained stable.
The larger part of loss allowance was attributable to the increase for the exposure to Russia (an office complex in Moscow) which is being run down. There were hardly any defaults in the remaining portfolio, and hence no direct implications from the deteriorating macro-economic situation so far.
The additional impairment charge for Russia in turn was due to the significant worsening of the crisis surrounding the war in Ukraine, which has deteriorated the prospects for any rapid de-escalation. Even though the borrower is willing and able to pay, the exposure still cannot be serviced due to the sanctions imposed in Russia. In the first nine months of the year, loss allowance amounted to € 170 million (9m 2021: € 79 million), approximately three-quarters of which was attributable to Russia.
Administrative expenses amounted to € 128 million, markedly dropping quarter-on-quarter (Q2 2022: € 142 million), whilst remaining largely stable year-on-year (Q3 2021: € 125 million). In the first nine months of the year, administrative expenses totalled € 423 million (9m 2021: € 393 million), including the non-recurring effect incurred by the transaction costs from the takeover offer by Atlantic BidCo GmbH of approximately € 12 million booked in the second quarter. The year-on-year increase in a nine-month comparison was mainly down to Aareon’s growth- and acquisition-related expenses, whereas expenses at the Bank remained unchanged – despite the non-recurring transaction costs – due to strict cost discipline. Aareal Bank thus successfully implemented its growth strategy at low marginal costs. The cost/income ratio (CIR) in the banking business improved to 39 per cent in the third quarter, providing proof of Aareal Bank’s high cost efficiency, even in a European comparison.
Taking taxes of € 24 million into account, consolidated net income was € 42 million (Q3 2021: € 23 million). After net interest payable on the AT1 bond and non-controlling interest income, consolidated net income allocated to ordinary shareholders amounted to € 39 million (Q3 2021: € 20 million). Earnings per share came to € 0.65 (Q3 2021: € 0.33)
Despite its continued portfolio growth, Aareal Bank’s capital position remains comfortable. As at 30 September 2022, the Bank’s Common Equity Tier 1 (CET1) ratio (Basel IV phase-in ratio) was 19.4 per cent, which is very comfortable even on an international level. The total capital ratio stood at 24.2 per cent.
The Bank has fully implemented its capital markets funding plan for 2022 as early as at the end of the third quarter – despite lending volume growing more strongly than scheduled. Diversifying its funding mix and broadening its investor base remained at the core of the Bank’s funding activities. Funding instruments totalling € 4.5 billion were placed on the capital markets in the first nine months of 2022. This included six benchmark transactions: two € 750 million Pfandbrief issues, one € 625 million Pfandbrief issue and one Pfandbrief issue in the amount of € 500 million. Aareal Bank Group also raised a total of € 1.3 billion in senior unsecured funding, including two ‘green’ senior preferred issues of € 500 million each. The cooperation with Raisin and Deutsche Bank ZinsMarkt launched in June also progressed at a very pleasing pace and the offering was extended; Aareal Bank’s fixed-income products are now also available on the “WeltSparen” investment platform. The deposit volume generated on both platforms since market launch already amounted to a total of approximately € 267 million as at the end of October.
Growth across all three business segments
Controlled growth of the property financing portfolio continued in the Structured Property Financing segment. The lending volume amounted to € 31.9 billion as at the end of September (30 June 2022: € 31.3 billion). New business originated in the first nine months was € 6.9 billion (9m 2021: € 6.1 billion), supported by a third-quarter figure of € 1.7 billion, following already very strong new business generation during the first half of the year. In the third quarter the focus lay on logistics and hotel properties, which accounted for 35 and 22 per cent of new business.
Key portfolio indicators, such as the average loan-to-value ratio (LTV) or yield-on-debt (YoD), continued to improve and have largely returned to pre-pandemic levels. The Bank was able to lower the NPL ratio from 5.2 per cent as at year-end 2021 to 4.6 per cent at the end of the third quarter of 2022.
In the Banking & Digital Solutions segment, the average volume of deposits was comfortably above the initially targeted level of € 12 billion for the year, rising to € 13.5 billion in the third quarter (Q3 2021: € 11.9 billion). However, in light of rising energy prices and associated higher liquidity needs for housing companies, amongst other things, a temporary decrease cannot be ruled out. Nevertheless, Aareal Bank maintains its target of not falling below the level of € 12 billion.
The segment’s net interest income of € 26 million (Q3 2021: € 11 million) showed the first positive effects from the change in interest rate policies. The segment’s net commission income increased to € 8 million (Q3 2021: € 7 million), and operating profit rose to € 17 million in the third quarter (Q3 2021: € 1 million).
Our software subsidiary Aareon remained on its growth trajectory, increasing sales revenue to € 75 million in the quarter under review (Q3 2021: € 62 million) and thus to € 221 million in the first nine months (up 14 per cent; 9m 2021: € 195 million). In terms of promising Software as a Service (SaaS) products, Aareon generated sales revenue growth of 24 per cent in the first nine months. The share of recurring revenue compared to total sales rose to more than 70 per cent. Adjusted EBITDA rose to € 15 million in the third quarter (Q3 2021: € 13 million). Aareon’s new management team around CEO Harry Thomsen is focusing on implementing the growth plan and product portfolio efficiency. The integration of Swedish Momentum Software Group AB, acquired in the second quarter, is proceeding on schedule.
Outlook: Full-year forecast confirmed
Despite increased loss allowance for the remaining exposure to Russia, non-recurring cost effects as a result of the takeover by Atlantic BidCo, and burdens from the ECB’s TLTRO decision, Aareal Bank continues to expect consolidated operating profit at the lower end of the € 210 million to € 250 million range for the 2022 financial year. The potential impact of the war in Ukraine – both in terms of the Bank’s remaining exposure to Russia and the economic consequences of mutual sanctions imposed and the escalated geopolitical tensions – remains very difficult to estimate.
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