- Q1 2020 consolidated operating profit of € 11 million, after € 61 million in the same quarter of the previous year
- Loss allowance of € 58 million (Q1 2019: € 5 million), including direct and indirect impacts of the Covid-19 pandemic
- As expected, net interest income reflects the lower level of interest-bearing assets, following the successful de-risking exercise conducted during the fourth quarter of the previous year
- Dynamic new property finance business prior to the outbreak of the Covid-19 crisis: increase to € 1.3 billion in the first quarter (Q1 2019: € 0.8 bn), at sustained good margins
- Net commission income up 8 per cent year-on-year, mainly driven by IT subsidiary Aareon, which remains on a growth trajectory in the current year
- Substantially positive consolidated operating profit achievable for the full year 2020, from today's point of view – forecast is subject to significant uncertainty, given that duration and intensity of the crisis are hard to assess
- CEO Hermann J. Merkens: “We went into the Covid-19 crisis from a position of strength – and we are in a good position to master it effectively.”
Wiesbaden, 12 May 2020 – Aareal Bank Group achieved a positive result in the first quarter of the 2020 financial year, despite the increase in loss allowance associated with the Covid-19 pandemic and the usual full recognition of expenses for the bank levy and deposit protection schemes in the first quarter. Consolidated operating profit amounted to € 11 million, after € 61 million in the same period of the previous year; consolidated net income allocated to ordinary shareholders stood at € 2 million (Q1 2019: € 35 million).
This development of results was driven in particular by the adverse effects of the Covid-19 pandemic, and by the resultant increase in loss allowance for the first quarter, to € 58 million (Q1 2019: € 5 million). This increase reflects elevated uncertainty surrounding the deterioration in economic forecasts (as a consequence of Covid-19) and extended realisation periods for defaulted borrowers in this context. It is also related to one newly-defaulted borrower in the US, where restructuring measures had been fully negotiated but could not be implemented in the wake of the Covid-19 crisis. Another reason for the lower first-quarter earnings was, as expected, net interest income, which declined to € 123 million (Q1 2019: € 135 million) – mainly due to the reduction in interest-bearing assets as part of the very successful de-risking programme conducted in the previous year.
CEO Hermann J. Merkens explained: “Aareal Bank Group went into the Covid-19 crisis from a position of strength – firstly, because the risk profile of our loan book is very conservative indeed, with average loan-to-value (LTV) ratios at a historically low level of 57 per cent. Secondly, we have a very strong capital base, which provides us with substantial scope for absorbing potential negative developments which might materialise over the next quarters. Thirdly, our funding and liquidity position is very solid because we raised funds early, at attractive terms, and our deposits provide us with a stable additional source of funding. As a fourth point, our business model, where the diversification and stabilisation of income streams through our IT subsidiary Aareon is a competitive advantage, especially during times like these. Overall, therefore, Aareal Bank Group is in a good position to weather the current crisis well, as well as the resulting impact affecting all sectors – together with its clients.”
Despite the economic turbulence caused by Covid-19, Aareal Bank Group further specified the strategic thrusts presented at the beginning of the year under the motto of “Aareal Next Level” during the first quarter, launching numerous measures and initiatives in this regard. As announced, the focus in this context was on further strengthening the independent profiles of the individual business activities. Segment reporting was adjusted in this connection during the first quarter of 2020, to comprise three segments (instead of two previously): Structured Property Financing, the Bank’s business with the housing sector and related industries, and Aareon.
New business of € 1.3 billion for the Structured Property Financing Segment during the first quarter of 2020 was higher than in the previous year (Q1 2019: € 0.8 billion). At € 26.1 billion, the portfolio volume declined slightly compared to the end of 2019, particularly due to strong syndication activities, but remains within the unchanged range of € 26 billion to € 28 billion projected for the full year. At more than 200 basis points (excluding currency effects), average gross margins on new business originated during the first quarter clearly exceeded projections.
The new Consulting/Services Bank segment, which comprises the Bank’s business with the housing sector and related industries, generated net commission income of € 5 million during the first quarter of 2020 (Q1 2019: € 4 million). The marked increase in net interest income, to € 10 million (Q1 2019: € –3 million) was due to the new deposit modelling approach and adjustments to intra-segment charges already communicated. Accordingly, the segment result improved to € -3 million (Q1 2019: € -17 million). Averaging € 10.5 billion, the volume of deposits from the housing industry remained at a high level during the first quarter of 2020 (2019 average: € 10.7 billion). 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 stable source of funding for Aareal Bank.
Aareon, which is now reported as an independent segment, remains on a growth trajectory in the current year: Q1 sales revenue improved to € 64 million (Q1 2019: € 59 million). Aareon's adjusted EBITDA of € 15 million was slightly higher year-on-year (Q1 2019: € 14 million). Aareon made good progress with the implementation of strategic initiatives: the Aareon Smart Platform was rolled out further, with the market launch of the Virtual Assistant being prepared. Aareon's acquisition of the CalCon Group was concluded on 1 January 2020, as planned.
Notes to Group financial performance
Net interest income of € 123 million in the first quarter of 2020 was down on the previous year (Q1 2019: € 135 million), mainly due to a year-on-year decline in the loan and securities portfolios, also as a result of the successful de-risking exercise carried out in the previous year.
Loss allowance of € 58 million (Q1 2019: € 5 million) was recognised, largely due to the adverse economic effects related to the Covid-19 crisis. This increase reflects elevated uncertainty surrounding the deterioration in economic forecasts (as a consequence of Covid-19) and extended realisation periods for defaulted borrowers in this context. It is also related to one newly-defaulted borrower in the US, as mentioned above.
Net commission income increased to € 57 million (Q1 2019: € 53 million), which was mainly due to Aareon's higher sales revenue (€ 64 million, Q1 2019: € 59 million).
Net derecognition gain of € 7 million (Q1 2019: € 16 million) was largely attributable to market-driven effects from early loan repayments. The higher figure for the previous year reflected structural adjustments to our securities portfolio following the acquisition of former Düsseldorfer Hypothekenbank AG (Düsselhyp).
Net income from financial instruments (fvpl) and from hedge accounting, totalling € 11 million (Q1 2019: € 6 million) largely resulted from syndicated loan receivables (and derivatives under related economic hedges), as well as from changes in the measurement of other derivatives (fvpl) used for economic hedges of interest rate and currency risks.
Administrative expenses declined significantly, to € 129 million (Q1 2019: € 144 million) due to cost savings incurred in connection with the Covid-19 crisis, and in spite of rising expenses in connection with Aareon's growth. The previous year's figure included € 9 million in running costs and expenses incurred in conjunction with the integration of Düsselhyp. As in the previous year, it also included the net annual contribution for the bank levy and deposit guarantee funds.
Overall, consolidated operating profit for the quarter under review was € 11 million (Q1 2019: € 61 million). Taking into consideration tax expenses of € 4 million and non-controlling interest income of € 1 million, consolidated net income attributable to shareholders of Aareal Bank AG amounted to € 6 million (Q1 2019: € 39 million). Assuming the pro rata temporis accrual of net interest payments on the AT1 bond, consolidated net income allocated to ordinary shareholders stood at € 2 million (Q1 2019: € 35 million).
Strong liquidity position, diversified sources of funding, and strong capitalisation
Aareal Bank has remained very solidly funded throughout the first quarter of 2020. It benefits from a strong liquidity position and diversified sources of funding. Therefore, the Bank did not need to execute any larger capital market transactions during the quarter. It placed a total of € 0.2 billion on the capital markets, with the majority of funds raised through senior unsecured issues.
Furthermore, Aareal Bank continues to enjoy a very solid capital base. Including the dividends which are not being paid out for the time being, the Bank’s Common Equity Tier 1 (CET1) ratio was 20.2%, which is very comfortable on an international level, and the Total Capital Ratio was 30.3%. 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 14.2%. When calculating own funds as at 31 March 2020, interim profits for 2020 were taken into account, deducting the pro-rata dividend in line with the dividend policy, and incorporating the pro-rata accrual of net interest payable on the AT1 bond.
Outlook: Substantially positive consolidated operating profit achievable for the full year 2020, from today's point of view – forecast is subject to significant uncertainty, given that duration and intensity of the crisis are hard to assess
Aareal Bank had qualified its annual forecast published in the 2019 Annual Report, noting that the impact of the Covid-19 pandemic cannot be reliably estimated and that it is thus impossible to anticipate the consequences for business and earnings development.
Besides the strategic measures and initiatives within the framework of “Aareal Next Level”, Aareal Bank Group's focus for the further course of the 2020 financial year will remain on coping with the impact of the Covid-19 pandemic in the best way possible – together with its clients. In this context, it will be crucial when the expected recovery of the real economy will commence, and how quickly it will gain momentum. Aareal Bank assumes a continuous normalisation of global economic activity commencing from mid-2020, with a marked acceleration of the recovery during 2021.
Based on this assumption, from today’s point of view, the Company considers a substantially positive consolidated operating profit to be achievable for the 2020 financial year as a whole. Naturally, in the current environment, this forecast is subject to significant uncertainty, especially with regard to the assumed duration and intensity of the crisis, the pace of recovery and the associated effects on our clients, as well as prevailing unclear regulatory and accounting provisions, and the possibility that individual loan defaults cannot be reliably predicted.