- Stable consolidated operating profit in the third quarter and the first nine months despite increased loss allowance (Q3 2023: €68 million; Q3 2022: €66 million; 9m 2023: €155 million; 9m 2022: €157 million).
- Net interest income up 35 per cent to €248 million; net commission income increased by 13 per cent to €76 million
- Loss allowance of €120 million in the third quarter, including net gain or loss from financial instruments (fvpl)
- CET1 ratio remains stable at 19.4 per cent, despite portfolio growth
- CEO Jochen Klösges: “In light of ongoing political and economic uncertainties, we are focussing on actively managing our loan portfolio whilst maintaining our conservative risk standards. Our strong earnings power enables us to actively control activities across all business segments and underscores the Bank’s resilience.”
Wiesbaden, 9 November 2023 – Despite increased loss allowance for US office properties, Aareal Bank Group generated consolidated operating profit of €68 million in the third quarter, thus slightly above the result for the same period of the previous year (Q3 2022: €66 million). At €155 million, the figure for the first nine months was also stable year-on-year (9m 2022: €157 million). Net interest income and net commission income were both up strongly in the third quarter too; dynamic income growth offset the burdens on loss allowance from the US office property finance portfolio as well as investments at Aareon.
Chief Executive Officer Jochen Klösges said: “In light of ongoing political and economic uncertainties, we are focussing on actively managing our loan portfolio whilst maintaining our conservative risk standards. Our strong earnings power enables us to actively control activities across all business segments and underscores the Bank’s resilience.”
Aareal Bank Group’s consolidated net interest income rose by 35 per cent in the third quarter, to €248 million (Q3 2022: €184 million). The surge reflected a marked year-on-year increase in the portfolio volume and strong margins, whilst higher interest rate levels had a positive effect upon the deposit-taking business. Net interest income for the first nine months amounted to €710 million (9m 2022: €514 million), up 38 per cent.
Net commission income was up by 13 per cent compared to the previous year’s quarter, to €76 million (Q3 2022: €67 million), mainly due to ongoing revenue growth at Aareon. In the first nine months, net commission income increased to a total of €225 million (9m 2022: €199 million).
Loss allowance for the third quarter amounted to €102 million (Q3 2022: €63 million), and continued to reflect loan defaults affecting the US office property market. In the first nine months, loss allowance thus totalled €262 million (9m 2022: €170 million). In addition, loss allowance of €18 million for the third quarter was reported in net gain or loss from financial instruments (fvpl), due to measurement adjustments especially for office properties in the US. The nine-month figure amounts to €54 million.
Consolidated administrative expenses amounted to €144 million in the third quarter (Q3 2022: €128 million) and €486 million in the first nine months (9m 2022: €423 million). The increase largely reflected growth as well as efficiency-enhancement measures at Aareon. In contrast, costs for the banking business remained stable at €248 million, compared with €254 million in the same period of the previous year. The Bank enjoyed a very good cost/income ratio of 31 per cent for the first nine months of the year.
Taking taxes of €22 million into account, third-quarter consolidated net income was €46 million, outperforming the previous year’s figure (Q3 2022: €42 million).
Aareal Bank continues to enjoy a very solid capital base. The Bank’s Common Equity Tier 1 ratio (Basel IV phase-in ratio) stood – despite portfolio growth – at 19.4 per cent at the end of the third quarter (30 Jun 2023: 19.4 per cent; 31 Dec 2022: 19.3 per cent). The total capital ratio was 23.6 per cent.
Aareal Bank’s funding activities also proved successful: the volume of fixed-interest retail deposits sourced through platforms rose, exceeding the two-billion-euro threshold for the first time in the third quarter (30 Jun 2023: €1.7 billion). On top of this, Aareal Bank placed a total of €2.4 billion on the capital markets during the first nine months of the year, including three benchmark Pfandbriefe with an aggregate size of €2 billion.
Chief Financial Officer Marc Hess said: “We have been working very carefully on diversifying our funding sources for quite some time. Retail deposits generated via online platforms have now exceeded the two-billion-euro threshold. At the same time, our Common Equity Tier 1 ratio persisted at a high level. Looking at our growth, this is yet another proof of how solid the Bank is.”
Developments by business segment
Portfolio volume in the Structured Property Financing segment rose to €32.8 billion as at 30 September 2023 (31 Dec 2022: €30.9 billion). New business originated during the first nine months totalled €6.5 billion (9m 2022: €6.9 billion), with €2.4 billion generated during the third quarter (Q3 2022: €1.7 billion). This shows that Aareal Bank is on track to achieve its full-year targets both for portfolio volume (€32 billion to €33 billion) and for new business (€9 billion to €10 billion).
Newly-originated loans totalled €4.0 billion in the first nine months of the year (9m 2022: €4.8 billion), of which €1.6 billion was originated in the third quarter. Margins remained at a good level, averaging around 290 basis points, and the same applies to average loan-to-value ratios, which stood at a very healthy 53 per cent (9m 2022: 56 per cent).
Aareal Bank’s conservative risk policy is also evident in average loan-to-value ratios in the existing portfolio, which also remained low, at 56 per cent. At 4.1 per cent, the NPL ratio stayed on the level of the previous quarter, despite challenging markets.
NPL and NPE ratios in accordance with EBA definitions stood at 3.3 per cent and 2.9 per cent, respectively.
Aareal Bank intensified its exposure to financing alternative living properties in the third quarter: a dedicated, newly-established team is set to further expand financing business in this market segment, which comprises student housing (purpose-built student accommodation, PBSA) and co-living. The Bank is already a leading provider in this growth segment.
In the Banking & Digital Solutions segment, the volume of client deposits from the housing and energy industries remained stable at a high level, averaging €13.5 billion (9m 2022: €13.5 billion) and above the expected target level of around €13 billion for the full year. Segment net interest income doubled to €59 million in the third quarter (Q3 2022: €26 million); the figure for the first nine months was €170 million (9m 2022: €49 million). At €8 million, segment net commission income for the third quarter was on a par with the previous year (Q3 2022: €8 million) and rose slightly year-on-year to €24 million in the first nine months (9m 2022: €23 million).
Software subsidiary Aareon increased third-quarter sales revenues to €83 million, up from €75 million in the third quarter of 2022, bringing the figure for the first nine months of the financial year to €251 million (up 13 per cent; 9m 2022: €221 million). The share of recurring revenue compared to total sales increased to 78 per cent (Q3 2022: 74 per cent). Adjusted EBITDA increased by 67 per cent to €25 million in the third quarter (Q3 2022: €15 million) and by 37 per cent to €64 million in the first nine months (9m 2022: €47 million).
Aareon refinanced the facility provided by Aareal Bank (“Hunting Line”) in the third quarter through external long-term debt. Moreover, Aareon continued its M&A activities with the signing of an agreement to acquire IESA, a leading and fast-growing Spanish provider of property management software solutions. The company also succeeded in winning initial partners for the new Aareon Connect programme in the UK.
Aareal Bank Group continues to anticipate being able to achieve consolidated operating profit at the lower end of the range between €240 million and €280 million in the 2023 financial year. However, the environment remains challenging, and the impact of geopolitical and macro-economic uncertainty remains difficult to estimate.
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