Interim / Quarterly Report • Aug 21, 2018
Interim / Quarterly Report
Open in ViewerOpens in native device viewer
Aareal Bank Group – Interim Report 1 January to 30 June 2018
| Results | ||
|---|---|---|
| Operating profit (€ mn) | 129 | 180 |
| Consolidated net income (€ mn) | 85 | 114 |
| Consolidated net income allocated to ordinary shareholders (€ mn)1) |
76 | 100 |
| Cost/income ratio (%)2) | 44.2 | 43.0 |
| Earnings per ordinary share (€)1) | 1.27 | 1.68 |
| RoE before taxes (%)1) 3) | 9.4 | 13.0 |
| RoE after taxes (%)1) 3) | 6.1 | 8.0 |
| 30 Jun 2018 | 31 Dec 2017 | |
|---|---|---|
| Statement of Financial Position | ||
| Property finance (€ mn) 4) | 25,307 | 25,088 |
| Equity (€ mn) | 2,798 | 2,924 |
| Total assets (€ mn) | 40,162 | 41,908 |
| Regulatory indicators | ||
| Risk-weighted assets (€ mn) | 10,615 | 11,785 |
| Common Equity Tier 1 ratio | ||
| (CET1 ratio) (%) | 19.9 | 19.6 |
| Tier 1 ratio (T1 ratio) (%) | 22.7 | 22.1 |
| Total capital ratio (TC ratio) (%) | 31.3 | 30.0 |
| Common Equity Tier 1 ratio | ||
| (CET1 ratio) – Basel IV (estimated) (%)5) | 13.5 | 13.4 |
| Employees | 2,769 | 2,800 |
| A- | A- |
|---|---|
| (outlook: stable) | |
| BBB+ | BBB+ |
| (outlook: stable) | (outlook: stable) |
| F2 | F2 |
| A3 | A3 |
| (outlook: stable) | (outlook: stable) |
| Baa1 | Baa1 |
| P-2 | P-2 |
| Aaa | Aaa |
| AA | AA |
| prime (C) | prime (C) |
| 70 | 70 |
| (outlook: stable) |
30 Jun 2018 31 Dec 2017
1) The allocation of earnings is based on the assumption that net interest payable on the AT1 bond is recognised on an accrual basis.
2) Structured Property Financing segment only
3) On an annualised basis
4) Excluding € 0.7 billion in private client business (31 December 2017: € 0.8 billion) and € 0.5 billion in local authority lending business by former Westdeutsche ImmobilienBank AG (former WestImmo) (31 December 2017: € 0.5 billion)
5) Underlying RWA estimate, given a 72.5% output floor based on the final Basel Committee framework dated 7 December 2017;
Calculation of material impact for Aareal Bank, subject to outstanding EU implementation as well as the implementation of further regulatory requirements (CRR II, EBA requirements, TRIM, etc.)
6) Please refer to our website (www.aareal-bank.com/en/responsibility/reporting-on-our-progress/) for more details.
This report contains rounded numbers, which may result in slight differences when aggregating figures and calculating percentages.
| Key Indicators | 2 |
|---|---|
| Interim Group Management Report | 4 |
| Report on the Economic Position | 4 |
| Risk Report | 17 |
| Report on Expected Developments and Opportunities | 27 |
| Consolidated Interim Financial Statements | 34 |
| Statement of Comprehensive Income | 34 |
| Statement of Financial Position | 38 |
| Statement of Changes in Equity | 39 |
| Statement of Cash Flows (condensed) | 40 |
| Notes (condensed) | 41 |
| Basis of Accounting | 41 |
| Notes to the Statement of Comprehensive Income | 62 |
| Notes to the Statement of Financial Position | 66 |
| Notes to Financial Instruments | 74 |
| Segment Reporting | 77 |
| Other Notes | 82 |
| Executive Bodies of Aareal Bank AG | 83 |
| Responsibility Statement | 84 |
| Review Report | 85 |
| Offices | 86 |
| Financial Calendar | 88 |
| Locations/Imprint | 89 |
The first half of 2018 was marked by geopolitical uncertainty. Following a moderate first quarter in terms of economic performance, growth picked up again slightly in the second quarter. Still, economic momentum slowed down in the face of uncertainty – particularly in some European countries such as Germany and France, but also in China. Capacity utilisation is currently considered to be very high in the advanced economies.
The economy in the euro zone grew at a moderate pace in the first half-year, with growth down by nearly half of the rate reported in the same period of the previous year. Private consumption and investments were robust. On the other hand, foreign trade and industrial production had a dampening effect, not least owing to the uncertainty brought about by a protectionist economic policy and slower global demand. Growth within the euro zone was highest in Finland, the Netherlands, and in Spain. Germany was on par with the euro zone as a whole, while France recorded slightly weaker growth. Uncertainty arose as a result of the Italian parliamentary elections in February, which ultimately led to the creation of a Eurosceptic government. The Italian economy grew slightly less than the euro zone average.
Overall economic growth in the European Union (EU) was marginally higher than in the euro zone during the first half of 2018. Substantially stronger growth was observed in Poland relative to the euro zone, as was already the case last year. Growth in Sweden also clearly exceeded the euro zone level.
Economic development in the UK during the first half of the year showed two distinctly different quarters: after growth stagnated in the first quarter – partly due to particularly bad weather – it strengthened again somewhat in the second quarter. Whilst negotiations surrounding the planned exit of the
UK from the EU at the end of March 2019 have yielded initial agreements, such as a 21-month transition period, during which the UK will continue to have access to the EU internal market, numerous other issues – such as the border between Ireland and Northern Ireland – remain unresolved at this stage.
Real economic output in the US in the first halfyear rose sharply on the basis of higher investments, strong exports and solid consumption. The growth rate in the second quarter climbed to its highest level in four years. However, the import taxes levied against important trading partners and the backlashes from the countries in question have escalated political uncertainty and the risk of an open trade war.
China's economic momentum lost steam in the first half of the year, due to slightly weaker exports and negative effects from the high level of private debt. In response to US import duties, China also imposed import duties on a number of US products.
The labour markets benefited from the fundamentally good economy and the sustained economic cycle. In the euro zone, unemployment rates continued to fall slightly during the first half of 2018, whilst they remained stable, at a low level, in the UK and the US.
The first half of the year on the financial markets was defined by volatility triggered by geopolitical events and the change in monetary policy. Particular noteworthy in this context was the political situation in Italy, which drove up Italian government bond yields.
The ECB set the course in the first half of 2018 for a turnaround in its monetary policy. In June, it announced it would end its net asset purchases at the end of 2018. It also communicated a reduction in the monthly purchase volume from € 30 billion at present to € 15 billion for the fourth quarter. Furthermore, the ECB plans to keep key interest
rates low through summer 2019. On the other hand, the US Federal Reserve (Fed) increased its Fed Funds corridor twice during the first half year – by 25 basis points on each occasion – to between 1.75 % and 2.00 %.
Following an initial marked devaluation, the US dollar appreciated noticeably against the euro during the first half of the year. In contrast, pound sterling remained virtually constant against the euro. The Canadian dollar and the Swedish krona weakened significantly vis-a-vis the euro in the first half of the year.
Short-term interest rates exhibited significant divergence between different currency areas throughout the first half-year, not least due to differences in monetary policy. In the euro zone and in Swedish krona, they remained slightly negative, unchanged from the end of the previous year. In British pounds and Canadian dollars, rates rose slightly over the same period. However, in US dollars they increased strongly compared to the end of the previous year, but stabilised towards the middle of the year.
Long-term interest rates in the currency areas that are relevant to Aareal Bank rose consistently at the start of 2018 compared with the end of the previous year. Towards the mid-year point, euro zone and Swedish krona rates fell back to the levels seen at the end of 2017 – whereas US dollar, Canadian dollar and British pound rates were markedly higher at the end of the first half, compared to the 2017 year-end.
The performance of ten-year government bond yields diverged in the first half-year owing to geopolitical uncertainties and adjustments in monetary policy. Whilst rising initially in Germany at the start of the year, yields then fell back below yearend 2017's levels by the end of the first half of 2018. On the other hand, yields in Italy increased strongly during the first half-year. The Italian government had previously announced a far-reaching, expansive fiscal policy that is expected to replace the reform policy of the previous years. Although yields retreated from their highs in May, the level nonetheless remained significantly higher.
The continuous, albeit moderate upward trend continued in the US, only to stagnate again towards the middle of the year. Yields on US government bonds were thus somewhat higher than at the start of the year.
Inflation tended to pick up slightly in the first half of 2018 – rising in the euro zone and the US, to some extent due to rising energy prices. It was just below 3 % in the US, whilst remaining below 2 % in the euro zone. The relatively high rate of inflation in the UK fell slightly, but remained quite high at 2.6 %.
The environment in which banks are operating continues to be defined by highly dynamic regulatory requirements, as well as by changes in banking supervision. This includes, in particular, the implementation of the final draft of the Basel III framework into EU law (known as "Basel IV"), which was endorsed by the Basel Committee's Group of Governors and Heads of Supervision (GHOS). Furthermore, the amendments to BaFin's Minimum Requirements for Risk Management (MaRisk) – including the new German Banking Supervisory Requirements for IT (BAIT), the EU Commission's proposals to revise supervisory regimes (CRR, CRD IV, BRRD and SRMR) as well as the EBA documents (Guidelines on PD and LGD estimation, treatment of defaulted exposures, and determination of downturn LGD) will all bring about further regulatory changes. In addition, the amendments proposed by the ECB, EBA and the EU Commission on the treatment of non-performing loans must also be taken into account.
The ECB's Supervisory Review and Evaluation Process (SREP) ensures a common approach on the supervisory review of banks, within the framework of Pillar 2. The SREP is built around a business model analysis, an assessment of governance, as well as of the capital and liquidity risks. The results of the individual areas are aggregated in a score value, from which the ECB derives supervisory measures on holding additional capital and/or additional liquidity requirements. Aareal Bank's
Total SREP Capital Requirement (TSCR) has been at 9.75 % thus far in 2018, comprising the total capital ratio of 8 % for Pillar 1 as well as a (Pillar 2) capital requirement of 1.75 % from the ECB's Supervisory Review and Evaluation Process (SREP). In addition, Aareal Bank is required to hold a (phasedin) capital conservation buffer of 1.875 %, plus a countercyclical capital buffer of 0.093 % forecast for the end of the year. Aareal Bank's pure SREPdriven CET1 requirement has been at 8.22 % thus far in 2018, comprising 4.5 % for Pillar 1, the abovementioned Pillar 2 requirement of 1.75 %, as well as the capital conservation buffer (1.875 %) and countercyclical capital buffer forecast for the end of the year (0.093 %) (also mentioned above). No further liquidity requirements were imposed upon Aareal Bank.
Development of the volume of commercial property transactions was inconsistent across the different regions in the first half of 2018 compared with the same period of the previous year. Volumes rose slightly in Asia, whereas in North America they
* Including Germany
1) New business, excluding former WestImmo's private client business and local authority lending business
remained virtually constant; in Europe they contracted markedly.
Very low prime yields continue to be observed on numerous commercial property markets around the world. The markets for prime rents are – in some cases – in different phases of their business cycles. In North America, average rental growth is flattening out. By contrast, average rental growth was higher in Europe, where strong rental volumes in the office property market particularly supported this development.
Fierce competition for the financing of existing commercial properties persisted in many markets. Margins were under pressure in the European markets in the first half-year, as well as in the US: however, they remained higher in the US than in Europe. Pricing levels on the US market are also influenced by the market for commercial mortgagebacked securities (CMBS). The volume in this segment increased slightly year-on-year during the first half-year, but remained generally low.
In a highly competitive and uncertain business environment, Aareal Bank generated new business of € 2.7 billion in the second quarter of 2018 (Q2 2017: € 2.0 billion). New business in the first half-year thus totalled € 4.2 billion (H1 2017: € 3.8 billion). Newly-originated loans amounted to € 3.4 billion (H1 2017: € 2.7 billion) during the first six months, accounting for a share of 87.6% during the second quarter of 2018 (Q2 2017: 75.2 %).
At 53.4 % (H1 2017: 44.8 %), the highest share of new business was originated in North America, followed by Europe with 46.2 % (H1 2017: 54.6 %). We originated 0.4% of new business in Asia (H1 2017: 0.6 %). The high share of new business in North America is an element of the "Aareal 2020" programme for the future.
Transaction volumes in the first half-year fell sharply in both the first and second quarter, compared to the respective periods of the previous year. There were differences within the respective countries. During the first half of the year, transaction volumes declined moderately in France, the Netherlands and the UK, whereas decreases were more pronounced in Germany, Italy, Spain and Sweden. The reserved stance adopted by foreign investors impacted on transaction volumes in Italy. Poland, in contrast, showed a marked increase.
Cross-border and institutional investors – as well as REIT structures – were on the buy side for the most part, whereas private investors tended to be sellers.
Rents for first-class commercial properties in the European economic centres showed a largely stable to slightly rising trend in the first half of 2018 compared with the end of the previous year. In the office property segment, slight increases were visible in some markets such as Berlin and Milan. Average rents were stable in numerous markets, as were top rents for logistics and retail property.
Top yields for commercial property showed a mixed picture in the European economic centres.1) For office properties, yields – which were already at very low levels in some markets – once again declined slightly compared with the end of the previous year, for example, at the top German locations and in the Netherlands. Yields for retail properties continued to decline in Germany and the Netherlands, whilst increasing in the UK. Yields for first-class commercial logistics properties slightly declined in the first half of 2018 compared to the previous year-end in most European markets, except for the UK and Spain. Political uncertainty in Italy had no direct impact on property market yields during the first half of the year – in fact, they even exhibited slight declines. For office properties outside the top-class range, yields tended to be stable to slightly lower. Yields for retail properties outside the prime locations were stable to slightly rising, with the latter applicable to the UK, Italy and the Netherlands in particular.
The hotel markets in the European economic centres painted a diverging picture during the first half of 2018. Occupancy rates rose compared with the first half of 2017 in some markets such as
Brussels, Paris and Rome. The indicator of average revenues per available room (which is important for hotel markets) also recorded an increase in most markets. However, occupancy figures as well as average revenues per available hotel room were down slightly year-on-year in London and Munich during the first half; the decline was somewhat more pronounced in Barcelona.
Aareal Bank originated new business of € 1.5 billion (Q2 2017: € 1.1 billion) in Europe in the second quarter of 2018. New business in Europe in the first half-year thus totalled € 2.0 billion (H1 2017: € 2.1 billion). The largest share by far was transacted in Western Europe, followed by Southern and Northern Europe; Eastern Europe's share was comparatively minor.
Transaction volumes in the North American commercial property markets remained almost unchanged year-on-year during the first half of 2018. Investor interest thus remained high, despite rising interest rates.
REIT structures were clearly on the sell side, whilst institutional and private investors were (to a modest extent) buyers. Cross-border investors were active market participants, showing balanced investment activity overall.
Rents for office and retail properties were virtually stable on a national average in the US, compared to the final quarter of 2017. There were marginal differences in the regional centres. Rents for office properties rose slightly in Atlanta and Chicago. By contrast, they stagnated in Boston, New York and Washington DC. Retail property rents rose in Miami and San Francisco, but showed a slightly declining trend in New York.
The first half of 2018 was characterised by a largely constant yield development. On a national average,
1) Falling yields are associated with rising property market values, whilst rising yields correspondingly produce falling values, all other things remaining equal.
investment yields in the US hardly moved – compared to the year-end 2017 – for office and retail properties. A slight increase was observed for office properties in Washington DC, both in and outside prime locations.
In the US, average occupancy rates for hotel properties remained stable year-on-year. Average revenue per available hotel room on the other hand climbed slightly, when measured against the comparable value from 2017. In Canada, occupancy rates rose slightly, whilst average revenue per available hotel room increased significantly.
Aareal Bank originated new business of € 1.2 billion in North America during the second quarter of 2018 (Q2 2017: € 0.9 billion), bringing aggregate new business in North America to € 2.2 billion for the first half of the year (H1 2017: € 1.7 billion). This business was originated in the US and in Canada.
Transaction volumes in the Asia/Pacific region were up slightly year-on-year during the first half of 2018. However, volumes in China were down noticeably.
Institutional and cross-border investors were net buyers, while private investors and REIT structures were net sellers.
Rents for first-class office and retail properties in the metropolitan areas of Beijing and Shanghai were virtually unchanged from year-end 2017.
Investment yields for newly-acquired, high-quality office property were stable in Beijing, whilst a slight decrease was evident in Shanghai. The opposite development occurred for retail properties.
The hotel markets in these two cities performed very differently in the first half of 2018 compared with the corresponding prior-year period. Whilst the average revenue per available hotel room rose markedly and occupancy rates increased slightly in Beijing, occupancy figures in Shanghai fell slightly on stable income per available hotel room.
Aareal Bank concluded a minor amount of new business in Asia in the first half of 2018, as in the same period of the previous year.
The housing and commercial property industries continue to be stable market segments. Steady rental income generated from a highly-diversified tenant group thus guarantees a secure foundation. The stable economic situation has also helped housing companies, in that rental arrears have now fallen by around 50 % since 2003.
Initiatives in the housing industry are focusing increasingly on creating the framework for constructing and providing affordable housing, or on campaigning for the legal basis to be established for investments in this area. Serial and modular construction, for example, should be made easier, thereby generating a boost in realising new housing construction projects.
The German residential rental market continued to see a good development. Rents offered increased across Germany.
The opening months of 2018 saw the Bank's Housing Industry division strengthening its market position via the acquisition of new customers. We also continuously expanded our client base in the energy and waste disposal industries, especially through interface products (such as BK 01 eConnect and BK 01 immoconnect) facilitating cross-sector collaboration amongst our client groups. Examples include accounting documentation and invoicing of energy supplies. This brought in more business partners from the housing industry during the first half of 2018 – managing just under 48,000 residential units between them – for the payments and deposit-taking businesses.
At present, more than 3,700 clients throughout Germany are using our process-optimising products and banking services. In line with the "Aareal 2020" programme for the future, the volume of deposits from housing industry clients averaged around
€ 10.5 billion at the end of the second quarter of 2018 (Q1 2018: € 10.2 billion): during the period under review, they averaged € 10.3 billion (H1 2017: € 9.9 billion). All in all, this reflects the strong trust our clients continue to place in Aareal Bank.
Aareon's contribution to consolidated operating profit amounted to € 14 million during the first half of 2018 (H1 2017: € 15 million). Results were slightly below projections, due to non-recurring cost increases incurred with a major project as well as delays with another project.
The business volume of the ERP solutions was in line with the previous year. Further customers opted for Wodis Sigma in Germany in the second quarter of 2018. Among these new customers, there are still previous GES customers who opted to change to Wodis Sigma within the framework of Aareon's migration campaign. As expected, the favoured version is the one that uses Wodis Sigma as a service from the exclusive Aareon Cloud. Aareon continues to implement a large number of migration projects. The GES system is approaching the end of its lifecycle. Most customers have opted in favour of one of the Wodis Sigma modern ERP systems or for SAP® solutions and Blue Eagle, or their systems were already migrated.
Business volumes of SAP® solutions and Blue Eagle were in line with projections.
In the Netherlands, the Tobias AX solution was rolled out into production for several clients. Demand for consulting services increased in France, as legal requirements had to be implemented in the software. Further clients also opted for a Platinum contract. Despite intense competition in the UK, Aareon UK succeeded in winning two important tenders for Aareon QL. In Northern Europe, Aareon Sverige has proved successful in the Finnish market. A second key customer was acquired, namely Finland's largest financial and technical service company for the housing industry.
In the course of the digital transformation process, the digital solutions of Aareon Smart World will
be extended throughout the Group. This will be achieved on the one hand by the in-house research and development team and the associated transfer of knowledge within the Group. On the other hand, Aareon is entering into cooperation with proptech companies that have developed solutions providing added value to the Aareon Smart World stakeholders.
The Aareon Congress, which is the largest industry event in Germany, was held in June 2018, under the motto "Next Level Networking". The focus was on a new era of networked cooperation, together with the associated potential this brings and possible uses it offers. Integrated digital solutions support the networking of companies with their customers, partners and buildings.
The digital solutions involved boosting the crossborder development of Aareon CRM in particular. The CRM app has been intensely marketed in Germany since the fourth quarter of 2017. It has already been rolled out in a major pilot project, and further customers were acquired. The CRM app simplifies customer relationship management between housing companies and tenants.
Business volumes with digital solutions continued to increase year-on-year. We saw demand in Germany for the following digital solutions in particular: Aareon Archiv kompakt (document management), Mareon service portal (connectivity to craftsmen/maintenance), Aareon CRM (tenant portal) and mobile solutions. These offers benefit from migration activities involving ERP products. Numerous customers, among them key accounts, opted for digital solutions in the Netherlands. In France, agreements were concluded for the digital Aareon solutions, such as the digital customer relationship management system Aareon CRM. Additional UK customers have opted for digital solutions. The tenant portal has been successfully distributed in Scandinavia. We also recently started to market a webshop for housing and property management companies, and prepared the rollout with a pilot customer. Services for tenants and owners can be offered via the webshop. Housing and property management companies can leverage
this new potential for business. In Norway, the first customer was rolled out for the Facilitor facility management solution. This solution was further developed for the Scandinavian market on the basis of the Dutch solution.
Aareon also cooperates with proptech companies in order to expand the integrated offer of Aareon Smart World for its clients. Aareon Sverige entered into a cooperation with Metry in Scandinavia. Users can optimise their energy consumption by choosing smart energy services via a digital marketplace. Aareon Group founded AV Management GmbH in the second quarter, with a view to enhancing the Group's ability to invest in attractive and innovative businesses.
The volume of business generated with add-on products is up slightly on the previous year. The positive development of the outsourcing business in Germany continued. BauSecura's insurance business has been running at the previous year's level. Outsourcing activities in the Netherlands were a key contributor to higher sales revenues for add-on products in the international business.
Aareon is now targeting new markets, such as utilities. A cross-industry solution – Aareon Wechselmanagement – has been developed for the energy supply companies, together with other utilities, housing enterprises and metering service providers. It is designed to digitalise the processes involved in a change of tenant. Initial sales of the solution have already been concluded.
Aareon implemented changes required pursuant to the European General Data Protection Regulation (EU GDPR) in good time, both in its solutions and in its data centre.
Consolidated operating profit for the first six months of 2018 amounted to € 129 million (H1 2017: € 180 million). The comparative figure for the previous year's period included € 50 million in net reversals of provisions in connection with the final agreement on contractual issues with a third party, which were still pending when Aareal Bank Group acquired former Corealcredit, and the release of tax assessment notes. This was offset by corresponding income tax expense of € 26 million.
Net interest income totalled € 269 million, an expected reduction from the previous year (H1 2017: € 305 million). which was largely due to the portfolio decline seen in the previous year, reflecting – amongst other factors – the scheduled reduction of the former WestImmo and Corealcredit portfolios. Loss allowance amounted to € 19 million (H1 2017: € 27 million) and was thus in line with our expectations.
Net commission income increased to € 101 million (H1 2017: € 97 million), which was mainly due to higher sales revenue at Aareon.
The net € 11 million gain on derecognition of loan receivables (H1 2017: € 17 million) declined due to lower effects from early repayments.
The net loss from financial instruments (fvpl) and on hedge accounting in the aggregate amount of € -4 million (H1 2017: € -3 million) mainly resulted from exchange rate fluctuations and changes in the measurement of hedging derivatives (fvpl).
At € 237 million (H1 2017: € 268 million), administrative expenses were reduced as expected, thanks to lower running costs.
Overall, this resulted in consolidated operating profit of € 129 million for the first half of the year (H1 2017: € 180 million). Taking into consideration tax expenses of € 44 million and non-controlling
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Net interest income | 269 | 305 |
| Loss allowance | 19 | 27 |
| Net commission income | 101 | 97 |
| Net derecognition gain or loss | 11 | 17 |
| Gains/losses from financial instruments (fvpl) | -1 | 3 |
| Net result on hedge accounting | -3 | -6 |
| Results from investments accounted for using the equity method | – | – |
| Administrative expenses | 237 | 268 |
| Net other operating income/expenses | 8 | 59 |
| Operating profit | 129 | 180 |
| Income taxes | 44 | 66 |
| Consolidated net income | 85 | 114 |
| Consolidated net income attributable to non-controlling interests | 1 | 6 |
| Consolidated net income attributable to shareholders of Aareal Bank AG | 84 | 108 |
1) Comparative amounts reclassified according to the new classification format
interest income of € 1 million, consolidated net income attributable to shareholders of Aareal Bank AG amounted to € 84 million (H1 2017: € 108 million). Assuming the pro rata temporis accrual of net interest payments on the AT1 bond, consolidated net income allocated to ordinary shareholders stood at € 76 million (H1 2017: € 100 million). Earnings per ordinary share amounted to € 1.27 (H1 2017: € 1.68) and annualised return on equity (RoE) before taxes to 9.4 % (H1 2017: 13.0 %).
Operating profit in the Structured Property Financing segment amounted to € 145 million in the first half of 2018 (H1 2017: € 192 million). The comparative figure for the previous year's period included € 50 million in net reversals of provisions in connection with the final agreement on contractual issues with a third party, which were still pending when Aareal Bank Group acquired former Corealcredit, and the release of tax assessment notes. This was offset by corresponding income tax expense of € 26 million.
Segment net interest income of € 275 million showed an expected decline from the previous year (H1 2017: € 310 million), which was largely due to the portfolio decline seen in the previous year, reflecting – amongst other factors – the scheduled reduction of the former WestImmo and Corealcredit portfolios.
Loss allowance amounted to € 19 million (H1 2017: € 27 million) and was thus in line with our expectations.
The net € 11 million gain on derecognition of loan receivables (H1 2017: € 17 million) declined due to lower effects from early repayments.
The net loss from financial assets (fvpl) and on hedge accounting in the aggregate amount of € -4 million (H1 2017: € -3 million) mainly resulted from exchange rate fluctuations and changes in the measurement of hedging derivatives (fvpl).
At € 129 million (H1 2017: € 166 million), administrative expenses were reduced as expected, thanks to lower running costs.
Overall, operating profit for the Structured Property Financing segment was € 145 million (H1 2017: € 192 million). Taking income tax expenses of € 50 million into consideration (H1 2017: € 70 million), the segment result was € 95 million (H1 2017: € 122 million).
Sales revenue generated in the Consulting/Services segment developed positively during the first half of 2018, totalling € 113 million (H1 2017: € 109 million), driven particularly by Aareon's higher sales revenues. The persistent low interest rate environment continued to burden margins from the deposittaking business that are reported in sales revenues.
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Net interest income | 275 | 310 |
| Loss allowance | 19 | 27 |
| Net commission income | 4 | 3 |
| Net derecognition gain or loss | 11 | 17 |
| Gains/losses from financial instruments (fvpl) | -1 | 3 |
| Net result on hedge accounting | -3 | -6 |
| Results from investments accounted for using the equity method | – | – |
| Administrative expenses | 129 | 166 |
| Net other operating income/expenses | 7 | 58 |
| Operating profit | 145 | 192 |
| Income taxes | 50 | 70 |
| Segment result | 95 | 122 |
1) Comparative amounts reclassified according to the new classification format
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 2017 | |
|---|---|---|
| € mn | ||
| Sales revenue | 113 | 109 |
| Own work capitalised | 3 | 2 |
| Changes in inventory | – | 0 |
| Other operating income | 2 | 2 |
| Cost of materials purchased | 20 | 18 |
| Staff expenses | 76 | 71 |
| Depreciation, amortisation and impairment losses | 7 | 6 |
| Results from investments accounted for using the equity method | – | – |
| Other operating expenses | 31 | 30 |
| Interest and similar income/expenses | 0 | 0 |
| Operating profit | -16 | -12 |
| Income taxes | -6 | -4 |
| Segment result | -10 | -8 |
Staff expenses rose to € 76 million (H1 2017: € 71 million).
Other items were roughly unchanged from the previous year's levels.
Overall, segment operating profit for 2018 was € -16 million (H1 2017: € -12 million). Aareon's contribution was € 14 million (H1 2017: € 15 million).
Taking income taxes into consideration, the segment result for the first half of the year amounted to € -10 million (H1 2017: € -8 million).
Consolidated total assets as at 30 June 2018 amounted to € 40.2 billion, after € 41.9 billion as at 31 December 2017.
1) Comparative amounts reclassified according to the new classification format
2) Excluding € 0.7 billion in private client business (31 December 2017: € 0.8 billion) and € 0.5 billion in local authority lending business by former Westdeutsche ImmobilienBank AG (former WestImmo) (31 December 2017: € 0.5 billion)
The volume of Aareal Bank Group's property financing portfolio stood at € 25.3 billion as at 30 June 2018 (31 December 2017: € 25.1 billion). The international share of the portfolio increased to 87.6 % (31 December 2017: 84.8 %) – due, in particular, to the planned reduction of the former WestImmo and Corealcredit portfolios.
At the reporting date (30 June 2018), Aareal Bank Group's property financing portfolio was composed as shown in the graphs beside and on the following page, compared with year-end 2017.
Portfolio allocation by region and continent changed only selectively compared with the end of the previous year. Whilst the portfolio shares of
1) Excluding former WestImmo's private client business and local authority lending business
Average LTV of property financing1)
Note that the loan-to-value ratios are calculated on the basis of drawdowns and market values, including supplementary collateral with sustainable value, excluding defaulted property financings.
Note that the loan-to-value ratios are calculated on the basis of drawdowns and market values, including supplementary collateral with sustainable value, excluding defaulted property financings.
1) Excluding former WestImmo's private client business and local authority lending business
Germany and Eastern Europe declined by 2.7 and 2.2 percentage points, respectively, the North American portfolio share rose by about 3.2 percentage points; Western Europe was up by 2.0 percentage points. Portfolio shares for all other regions remained relatively stable.
Also, the breakdown of the portfolio by property type changed only marginally during the reporting period. The share of hotel and residential property increased by 1.1 percentage points each compared to year-end 2017, whilst the share of office property was reduced by 0.9 percentage points and of retail property by 1.3 percentage points. The share of other property types in the overall portfolio remained almost unchanged compared to the year-end 2017.
All in all, the high degree of diversification by region and property type within the property financing portfolio was maintained during the period under review.
As at 30 June 2018, the nominal volume of the securities portfolio2) was € 7.8 billion (31 December 2017: € 8.3 billion). The securities portfolio comprises three asset classes: public-sector borrowers, covered bonds and Pfandbriefe, as well as bank bonds. 99 % of the overall portfolio is denominated in euro. 99 % of the portfolio has an investment grade rating.3) More than 75 % of the portfolio fulfils the requirements for "High Quality Liquid Assets" (as defined in the Liquidity Coverage Ratio (LCR)).
Aareal Bank Group has remained very solidly funded throughout the first half of the 2018 financial year. Total long-term refinancing as at 30 June 2018 amounted to € 21.0 billion
2) As at 30 June 2018, the securities portfolio was carried at
3) The rating details are based on the composite ratings.
€ 9.4 billion (31 December 2017: € 9.9 billion).
(31 December 2017: € 22.8 billion), comprising Pfandbrief issues as well as senior unsecured and subordinated issues. As at the reporting date, Aareal Bank also had € 9.6 billion at its disposal in deposits generated from the business with the housing industry (31 December 2017: € 9.2 billion). Money-market liabilities amounted to € 4.7 billion (31 December 2017: € 4.8 billion).
The Liquidity Coverage Ratio (LCR) exceeded 150 % on the reporting days during the period under review.
Aareal Bank Group very successfully raised € 0.7 billion on the capital market during the first half of 2018, including a benchmark mortgage Pfandbrief transaction of € 0.5 billion with a term of 6.3 years. The remaining € 0.2 billion were covered by senior unsecured issues.
Since we conduct our business activities in a range of foreign currencies, we have secured our foreign currency liquidity over the longer term by means of appropriate measures.
Aareal Bank Group's total equity as disclosed in the statement of financial position amounted to € 2,798 million as at 30 June 2018 (31 December
2017: € 2,924 million), comprising € 300 million for the Additional Tier 1 (AT 1) bond. Equity declined due to the distribution of dividends, and a distribution on the AT 1 bond. Please also refer to the statement of changes in shareholders' equity, and to our explanations in the Notes (20 and 22).
For further information on the transitional effects resulting from the introduction of IFRS 9, please refer to the sub-section "First-time application of
| 30 Jun 2018 | 31 Dec 2017 | |
|---|---|---|
| € mn | ||
| Common Equity Tier 1 (CET 1) | 2,115 | 2,305 |
| Tier 1 (T1) | 2,415 | 2,600 |
| Total capital (TC) | 3,318 | 3,536 |
| % | ||
| Common Equity Tier 1 ratio (CET 1 ratio) | 19.9 | 19.6 |
| Tier 1 ratio (T1 ratio) | 22.7 | 22.1 |
| Total capital ratio (TC ratio) | 31.3 | 30.0 |
| CET1 ratio – Basel IV (estimated) – 1) | 13.5 | 13.4 |
1) Underlying RWA estimate, given a 72.5% output floor based on the final Basel Committee framework dated 7 December 2017; Calculation of material impact for Aareal Bank, subject to outstanding EU implementation as well as the implementation of further regulatory requirements (CRR II, EBA requirements, TRIM, etc.)
IFRS 9 Financial Instruments" in the "Basis of Accounting" section of the Notes.
The regulatory measurement of risk-weighted assets (RWAs) in the area of credit risks is based on both the Advanced Internal Ratings-Based
Approach (AIRBA), and on the standardised approach (CRSA). This is subject to various realignments, ("Basel IV", EBA requirements), or a review of underlying approved internal models (TRIM). We cannot rule out that considerable increases might occur in this context.
| EAD | Risk-weighted assets (RWA) | ||||
|---|---|---|---|---|---|
| AIRBA | CRSA | Total | requirements | ||
| € mn | |||||
| Credit risks | 42,145 | 7,664 | 1,221 | 8,885 | 711 |
| Companies | 27,285 | 5,635 | 601 | 6,236 | 499 |
| Institutions | 2,765 | 337 | 14 | 351 | 28 |
| Public-sector entities | 10,392 | 0 | 27 | 27 | 2 |
| Other | 1,703 | 1,692 | 579 | 2,271 | 182 |
| Market price risks | 124 | 10 | |||
| Credit Valuation Adjustment | 195 | 15 | |||
| Operational risks | 1,411 | 113 | |||
| Total | 42,145 | 7,664 | 1,221 | 10,615 | 849 |
| EAD | Risk-weighted assets (RWA) | Regulatory capital | |||
|---|---|---|---|---|---|
| AIRBA | CRSA | Total | requirements | ||
| € mn | |||||
| Credit risks | 44,141 | 8,577 | 1,432 | 10,009 | 801 |
| Companies | 27,539 | 6,400 | 778 | 7,178 | 574 |
| Institutions | 3,065 | 376 | 14 | 390 | 31 |
| Public-sector entities | 11,664 | 0 | 21 | 21 | 2 |
| Other | 1,873 | 1,801 | 619 | 2,420 | 194 |
| Market price risks | 134 | 11 | |||
| Credit Valuation Adjustment | 209 | 17 | |||
| Operational risks | 1,433 | 114 | |||
| Total | 44,141 | 8,577 | 1,432 | 11,785 | 943 |
The Annual Report 2017 contains a comprehensive description of Aareal Bank Group's risk management approach, including the corresponding organisational structure and workflows in the lending and trading businesses, as well as the methods and procedures used for measuring and monitoring risk exposure. Within the scope of this interim report, we will once again briefly outline the key components of our risk management structure, together with the key developments during the period under review. The business policy set by the Management Board, and duly acknowledged by the Supervisory Board, provides the conceptual framework for Aareal Bank Group's risk management. Taking this as a basis, and strictly considering the Bank's risk-bearing capacity, we have formulated detailed strategies for managing the various types of risk. These risk strategies, as well as the Bank's business strategy, are adapted to the changed environment at least once a year, adopted by the Management Board, and duly acknowledged by the Supervisory Board. Suitable risk management and risk control processes are deployed to implement the risk strategies, and to ascertain the Bank's ability to bear risk. A monthly internal risk report is prepared for all material types of risk, and submitted to the Bank's Management Board and Supervisory Board.
The Bank's ability to carry and sustain risk is a core determining factor governing the structure of its risk management system. To ascertain its uninterrupted risk-bearing capacity, Aareal Bank Group has adopted a dual management approach whereby its risk management is primarily based on the assumption of a going concern. This approach ensures that risk positions are only established to an extent that the institution's continued existence will not be threatened should the risks materialise. A secondary management process ensures that risk positions are only established to an extent that even in the event of liquidation there will still be sufficient potential risk cover in order to service all liabilities (the "gone concern" approach). The statements below relate to the going-concern approach which the Bank has implemented as a primary management process.
In accordance with this approach, potential risk cover is determined using data derived from the income statement and from the statement of financial position; this derivation also forms the basis for determining regulatory capital. The riskbearing capacity concept is based on the conservative planning of Tier 1 capital until the next year-end date, and the subsequent year-end, respectively. This involves setting aside the maximum amount of own funds required as potential risk cover to offset risks without causing a breach of minimum requirements pursuant to the Capital Requirements Regulation (CRR). Aareal Bank has set Tier 1 (T1) capital (as defined by the CRR) at a level of 7.75 % of forecast risk-weighted assets (RWA) as a deductible, in accordance with regulatory requirements. Only free own funds exceeding this level are applied as potential risk cover.
The reduction of regulatory capital, in the course of the changeover to IFRS 9, had an identical impact on aggregate risk cover. Given the use of planned Tier 1 capital, this effect was already accounted for as at 31 December 2017. The regular rolling forward of aggregate risk cover to the planning date of 31 December 2019 took place during the second quarter.
We are also currently working intensively on the implementation of the ECB's guideline on the Internal Capital Adequacy Assessment Process (ICAAP), published for consultation. In this context, and within the scope of regular adjustments to the cover assets pools, we adjusted the risk taxonomy in line with regulatory expectations. Specifically, the previous category of market price risk has been broken up with the introduction of risk categories IRRBB (interest rate risk in the banking book) and CSRBB (credit spread risk in the banking book), in line with regulatory requirements; individual limits have been set for these
new categories. Foreign exchange risk is the only type of risk remaining within market price risk. The risk-reducing inclusion of inter-risk correlations is no longer permitted for the purposes of determining risk-bearing capacity utilisation – a key cause for the increase of this indicator. Property risk has been excluded from credit risk, now forming a separate risk type with specific limits. Likewise, "Other risks" has been split, with specific counterparty credit risk (CVA exposure) having been reclassified to CSRBB; business and strategic risks remain within "Other risks".
As a result, we now distinguish eight risk categories (instead of five to date), each with separate limits.
– Going-concern approach –
| 30 Jun 2018 | |
|---|---|
| € mn | |
| Own funds for risk cover potential | 2,531 |
| less 7.75% of RWA (Tier 1 capital (T1)) | 1,019 |
| Freely available funds | 1,512 |
| Utilisation of freely available funds | |
| Loan loss risks | 205 |
| Interest rate risk in the banking book (IRRBB) | 55 |
| Credit spread and migration risks in the banking book (CSRBB) | 265 |
| Other market risks | 91 |
| Operational risks | 85 |
| Investment risks | 21 |
| Property risks | 50 |
| Business and strategic risks | 151 |
| Total utilisation | 923 |
| Utilisation as a percentage of freely available funds | 61% |
| 31 Dec 2017 | |
|---|---|
| € mn | |
| Own funds for risk cover potential | 2,623 |
| less 7.75% of RWAs (Tier 1 capital (T1)) | 870 |
| Freely available funds | 1,753 |
| Utilisation of freely available funds | |
| Credit risks | 265 |
| Market risks | 145 |
| Operational risks | 86 |
| Investment risks | 21 |
| Other risks | 173 |
| Total utilisation | 690 |
| Utilisation as a percentage of freely available funds | 39% |
We adopt a conservative stance with respect to setting risk limits. The aggregation of individual limits is based on the assumption that no risk-mitigating correlation effects exist amongst different types of risk. Taking into account the prior deduction of a minimum Tier 1 ratio of 7.75 % of RWA, the value-at-risk (VaR) models used to quantify risks are based on a confidence interval of 95 % and a one-year holding period (250 trading days). Limits are defined at Group level, as well as for the individual Group entities. A detailed monthly report provides information regarding the utilisation of individual limits for the material types of risk, as well as on the overall limit utilisation. These are being monitored as part of daily reporting. No limit breaches were detected during the period under review.
Given the change in the risk taxonomy, comparison with end-of-year values is not possible. The expected increase in utilisation was largely due to the regular adjustment of aggregate risk cover, an increase in RWAs used to calculate prior deductions, and to the aggregation of utilisation levels for new types of risk (which are now added up).
The chart above shows the development of risk limit utilisation during the course of the year, including the effects of the changes made during the second quarter of 2018.
Since aggregate risk cover is an inadequate measure to assess the risk-bearing capacity for liquidity risk, we have defined special tools for managing this type of risk. These tools are described in detail in the section "Liquidity risks".
Aareal Bank defines credit risk – or counterparty credit risk – as the risk of losses being incurred due to (i) a business partner defaulting on contractual obligations; (ii) collateral being impaired; or (iii) a risk arising upon realisation of collateral.
be subject to counterparty credit risk. Counterparty credit risk exposure from trading activities may refer to risk exposure vis-à-vis counterparties or issuers. Country risk is also defined as a form of counterparty credit risk.
Aareal Bank's structural organisation and business processes are consistently geared towards effective and efficient risk management. Regulatory requirements are fully taken into account for the organisation of operations and workflows in the credit and trading businesses.
Processes in the credit and trading businesses are designed to consistently respect the clear functional division of Sales units ("Markt") and Credit Management ("Marktfolge"), up to and including senior management level. The independent Risk Controlling division is responsible for identifying, quantifying and monitoring all material risks at portfolio level, and for maintaining a targeted risk reporting system.
Aareal Bank employs different risk classification procedures tailored to the requirements of the respective type of business for the initial, regular, or event-driven assessment of counterparty credit
589 39%
1) Excluding hedge adjustment; 2) Including the private client business of former WestImmo
risk. Forward-looking as well as macro-economic information is taken into consideration for risk classification procedures, and in the valuation of collateral. The respective procedures and parameters are subject to permanent review and adjustment. Responsibility for development, quality assurance, and monitoring implementation of procedures, is outside the Sales units.
Methods used to measure, control and monitor concentration and diversification effects on a portfolio level include two different credit risk models. Based on these models, the Bank's decisionmakers are regularly informed of the performance and risk content of property financing exposures, and of business with financial institutions. The models in question allow the Bank to include in particular, rating changes and correlation effects in the assessment of the risk concentrations.
Within the process-oriented monitoring of individual exposures, the Bank uses various tools to monitor exposures on an ongoing basis: besides the tools already described, this includes rating reviews, the monitoring of payment arrears, and the regular, individual analysis of the largest exposures.
The intensity of loan coverage is oriented upon the credit risk exposure. Intensified handling triggers recognition of loss allowance, in the amount of lifetime expected credit loss for the financial instrument concerned (Stage 2).
The following tables provide a breakdown of gross carrying amounts excluding hedge adjustment of on-balance sheet as well as off-balance sheet credit business, money-market business, and capital markets business, by rating class and loss allowance stages. Figures are based on Aareal Bank Group's internal default risk rating classes. The default definition follows Article 178 of the CRR. To facilitate comparison, figures as at 1 January 2018 including adjustments pursuant to IFRS 9 were shown as previous year's values.
| Stage 1 | Stage 2 | Stage 3 | fvpl | Total | 1 Jan 2018 | |
|---|---|---|---|---|---|---|
| € mn | ||||||
| Class 1 | ||||||
| Class 2 | 68 | 68 | 88 | |||
| Class 3 | 285 | 285 | 399 | |||
| Class 4 | 1,535 | 1,535 | 1,345 | |||
| Class 5 | 2,662 | 57 | 2,719 | 3,025 | ||
| Class 6 | 3,974 | 14 | 54 | 4,042 | 3,717 | |
| Class 7 | 3,192 | 3 | 50 | 3,245 | 3,242 | |
| Class 8 | 5,452 | 75 | 242 | 5,769 | 5,620 | |
| Class 9 | 2,775 | 44 | 62 | 2,881 | 3,335 | |
| Class 10 | 1,830 | 1,830 | 1,368 | |||
| Class 11 | 396 | 107 | 56 | 559 | 480 | |
| Class 12 | 495 | 25 | 520 | 518 | ||
| Class 13 | 67 | 58 | 125 | 261 | ||
| Class 14 | 174 | 174 | 3 | |||
| Class 15 | 4 | 4 | ||||
| Defaulted | 1,430 | 23 | 1,453 | 1,614 | ||
| Total | 22,664 | 509 | 1,430 | 606 | 25,209 | 25,015 |
| Stage 1 | Stage 2 | Stage 3 | fvpl | Total | 1 Jan 2018 | |
|---|---|---|---|---|---|---|
| € mn | ||||||
| Class 1 | 1,325 | 20 | 1,345 | |||
| Class 2 | 32 | 32 | 1,398 | |||
| Class 3 | 25 | 25 | 25 | |||
| Class 4 | 60 | 60 | 55 | |||
| Class 5 | 5 | |||||
| Class 6 | 39 | 39 | 43 | |||
| Class 7 | 245 | 245 | 466 | |||
| Class 8 | 431 | 145 | 576 | 516 | ||
| Class 9 | 3 | 3 | 30 | |||
| Class 10 | 31 | 31 | 51 | |||
| Classes 11-18 | ||||||
| Defaulted | ||||||
| Total | 2,191 | 145 | 20 | 2,356 | 2,589 |
| Stage 1 | Stage 2 | Stage 3 | fvpl | Total | 1 Jan 2018 | |
|---|---|---|---|---|---|---|
| € mn | ||||||
| Class 1 | 2,202 | 2,202 | 1,601 | |||
| Class 2 | 1,839 | 77 | 1,916 | 1,579 | ||
| Class 3 | 818 | 33 | 851 | 1,784 | ||
| Class 4 | 128 | 32 | 160 | 348 | ||
| Class 5 | 188 | 188 | 57 | |||
| Class 6 | 23 | 23 | 207 | |||
| Class 7 | 117 | 117 | 118 | |||
| Class 8 | 4 | 73 | 77 | 103 | ||
| Class 9 | 160 | 936 | 88 | 1,184 | 1,186 | |
| Classes 10-20 | ||||||
| Defaulted | ||||||
| Total | 5,479 | 1,009 | 230 | 6,718 | 6,985 |
| Stage 1 | Stage 2 | Stage 3 | fvpl | Total | 1 Jan 2018 | |
|---|---|---|---|---|---|---|
| € mn | ||||||
| Classes 1-2 | ||||||
| Class 3 | 57 | |||||
| Class 4 | 34 | 34 | 25 | |||
| Class 5 | 135 | 135 | 33 | |||
| Class 6 | 116 | 116 | 365 | |||
| Class 7 | 138 | 138 | 242 | |||
| Class 8 | 278 | 4 | 282 | 254 | ||
| Class 9 | 123 | 123 | 223 | |||
| Class 10 | 137 | 137 | 106 | |||
| Class 11 | 17 | 17 | 17 | |||
| Class 12 | 2 | 7 | 9 | 12 | ||
| Class 13-15 | 2 | 2 | ||||
| Defaulted | 93 | 93 | 108 | |||
| Total | 982 | 11 | 93 | 1,086 | 1,442 |
Monthly reporting covers the material aspects of credit risk; it is supplemented by detailed information – which also fully covers specific credit portfolio developments (broken down by country, property and product type, risk classes, and collateral categories, for example), in line with regulatory requirements – at least on a quarterly basis. Risk concentrations are being taken into account in particular.
Trading activities are restricted to counterparties for whom the requisite limits are in place. All trades are immediately taken into account for the purposes of borrower-related limits. Compliance with limits is monitored in real time by Risk Controlling. Persons holding position responsibility are informed about relevant limits and their current usage, regularly and without delay.
In principle, Aareal Bank pursues a "buy and manage" strategy in managing its credit portfolio – with the primary objective of holding the majority of loans extended on its balance sheet until maturity; at the same time, targeted exit measures are deployed for actively managing the portfolio and the risks involved.
In summary, during the period under review, the existing set of tools and methods continued to enable the Bank to adopt suitable risk management or risk mitigation measures, where required, at an early stage.
Our comprehensive approach to risk management also includes measuring and monitoring country risk exposure. When defining country risk, in addition to the risk of sovereign default or default of state entities, Aareal Bank also considers the risk that a counterparty could become unable to meet its payment obligations as a result of government action, despite being willing and able to pay, due to restrictions being imposed on making payments to creditors (transfer risk). Country risk exposure is managed using a cross-divisional process. The respective country limits are determined on the
basis of a country risk assessment by the Bank's senior management. The Risk Controlling division is responsible for the continuous monitoring of country limits and limit utilisation, and for periodical reporting.
Interest rate risk in the banking book (IRRBB) is defined as the risk exposure of instruments held in the banking book which are sensitive to changes in interest rates, caused by yield curve shifts.
Specifically, for Aareal Bank this includes:
Risk Controlling informs the members of the Management Board responsible for Treasury and risk monitoring about the risk position and the exposure to interest rate risk in the banking book on a daily basis.
The VaR concept has been broadly accepted as the predominant method for measuring economic interest rate risk in the banking book. VaR quantifies risk as the maximum loss that will occur within a certain period of time, and given a defined probability.
A variance-covariance approach (delta-normal method) is used throughout the Group to determine the VaR indicator. Determined on a daily basis for the Group and all its operating units, the VaR figure takes into account the correlation between individual risk types. Statistical parameters used in the VaR model are calculated directly from a 250 day historical data pool maintained within the Bank. The loss potential is determined applying a 95 % confidence interval and a 250-day holding period.
By their very nature, VaR calculations are based on numerous assumptions regarding the future development of the business, and the related cash flows. Key assumptions used include current account balances which are factored into calculations for a period of up to five years, using the average residual amount of deposits observed in the past. Loans are taken into account using their fixedinterest period (for fixed-rate exposures), or using their expected maturity (variable-rate exposures). Aareal Bank Group's consolidated equity is not taken into account as a risk-mitigating item. This tends to overstate VaR, demonstrating the conservative approach adopted in our risk measurement processes.
We define credit spread and migration risks in the banking book (CSRBB) as any type of spread risk exposure of instruments held in the banking book which are sensitive to changes in interest rates, where the risk cannot be assigned to IRRBB nor to counterparty credit risk.
Specifically, for Aareal Bank this includes:
Risk Controlling informs the members of the Management Board responsible for Treasury and risk monitoring about the risk position and the exposure to credit spread risk in the banking book on a daily basis.
Risk measurement differentiates between underlying exposures and sub-risks. Accordingly, credit spread risks from securities and sovereign risk are calculated using VaR concepts, in line with the methods described in connection with interest rate risk in the banking book. In this context, VaR quantifies risk as the loss that will not be exceeded within a certain period of time, and given a defined probability.
A variance-covariance approach (delta-normal method) is used throughout the Group to determine the VaR indicator. Determined on a daily basis for the Group and all its operating units, the VaR figure takes into account the correlation between individual risk types for this risk category. Statistical parameters used in the VaR model are calculated directly from a 250-day historical data pool maintained within the Bank. The loss potential is determined applying a 95 % confidence interval and a 250-day holding period.
Loan migration risks are determined by reference to stressed migration matrices: risk is defined as the change in expected loss over the lifetime of the loan, based on a 95 % confidence interval. The CVA buffer amount is taken from the amount determined in accordance with CRR requirements.
Other market risks are broadly defined as the threat of losses due to changes in market parameters.
Residual market risks which are not assigned to IRRBB or CSRBB are summarised under "market risk". Specifically, for Aareal Bank this includes:
Being authorised to maintain a trading book, Aareal Bank AG is the Group entity that is in a position to assign transactions to the trading portfolio as defined by the CRR. Given that no such trades have been concluded during the current year, trading book risks were not relevant during the period under review.
Commodities are irrelevant for the Bank's business. Hence, the market price risk exposures are currently related to the relevant risk parameters
of spot and forward foreign exchange rates only. These exchange rate risks are largely eliminated through hedges.
Risk Controlling informs the members of the Management Board responsible for Treasury and risk monitoring about the risk position and exposure to other market risks on a daily basis.
The VaR concept has been broadly accepted as the predominant method for measuring economic market risk. VaR quantifies risk as the maximum loss that will occur within a certain period of time, and given a defined probability.
A variance-covariance approach (delta-normal method) is used throughout the Group to determine the VaR indicator. Determined on a daily basis for the Group and all its operating units, the VaR figure takes into account the correlation between individual risk types. Statistical parameters used in the VaR model are calculated directly from a 250-day historical data pool maintained within the Bank. The loss potential is determined applying a 95 % confidence interval and a 250-day holding period.
Furthermore, in addition to the risk category limit, a separate trading limit has been determined for Aareal Bank AG, as an institution authorised to maintain a trading book.
The quality of forecasts made using statistical models is checked through a monthly backtesting process. The quality of the statistical procedure used to measure risk is checked using a binomial test, whereby daily profits and losses from market fluctuations are compared with the upper projected loss limit (VaR) forecast on the previous day (known as "clean backtesting"). In line with the selected confidence level of 95 %, only a small number of events are expected to break out of the VaR projection (≤17 for a 250 day period).
The backtesting exercise shown above comprises all risk positions subject to daily changes from the "other market risks" category.
Eight negative outliers at Group level occurred during the last 250 trading days, affirming the high forecasting quality of the VaR model we use.
The Bank defines operational risk as the threat of losses caused by inappropriate internal procedures, human resources and systems (or their failure), or through external events. This definition also includes legal risks. To the extent that they are caused by operational risks, model, strategic and reputational risks are also taken into consideration within this type of risk. Systemic risks (or their impact on operational risks) are not affected by this.
Aareal Bank's legal department compiles all information concerning any legal disputes involving Aareal Bank Group, whether in or out of court. The involvement of the legal department is based on corresponding Group-wide guidelines. The Bank's decentralised operating legal entities, as well as the legal departments of subsidiaries submit quarterly as well as event-driven reports on legal risks identified to Aareal Bank's legal department, which reports to the Management Board, also (at least) on a quarterly basis. Moreover, information about legal risks is included in operational risk reporting. Aareal Bank's policy for managing and monitoring operational risks is geared to achieving a risk-minimising or loss-limiting effect at an early stage, by employing a pro-active approach. The Risk Report in the 2017 Annual Report contains a detailed description of controlling tools employed by the Bank to manage operational risk, plus the relevant responsibilities.
The current analysis conducted using these control instruments has shown that the Bank is not exposed to disproportionate operational risks; nor did it indicate any material risk concentration.
Operational risk management also includes the reporting to the Bank's Management Board about outsourced activities and processes.
We define investment risk as the threat of unexpected losses incurred due to an impairment of the investment's carrying amount, or a default of loans extended to investees. The concept of investment risk also encompasses additional risks arising from contingencies vis-à-vis the relevant Group entities.
All relevant Group entities are subject to regular audits, including a review and assessment of their risk situation. There were no significant changes in investment risk during the period under review.
We define property risk as the threat of unexpected losses incurred due to changes in the value of properties held by the Bank, or by fully-consolidated subsidiaries.
Due to the special character of property-related risks (e. g. marketing risks), the Bank has developed special methods and procedures to deal with such risks. Regular risk reviews and assessments are carried out for all relevant properties held. There were no significant changes in property risk during the period under review.
Strategic risk is defined as the threat of unexpected losses usually incurred through lower profits – caused by income being lower than expected, whereby such lower income cannot be offset through cost reductions. Strategic risk may result from changes in the competitive environment, or in regulatory requirements; it may also be caused by an unsuitable strategic position in the macro-economic environment.
In this context, we distinguish between investment risk and allocation risk; large parts of these risks are covered by various planning scenarios and are thus incorporated in the calculation of aggregate risk cover. These risks are being closely monitored as part of the regular planning review process. Any potential unexpected risks over and above this assessment are currently incorporated using a lump sum; there are plans to refine this methodology during the course of the year.
Liquidity risk in the narrower sense is defined as the risk that current or future payment obligations cannot be met in full or on time. Aareal Bank Group's liquidity risk management system is designed to ensure that the Bank has sufficient cash and cash equivalents to honour its payment obligations at any future point in time. The risk management and monitoring processes have been designed to cover refinancing and market liquidity risks in addition to liquidity risk in the narrower sense.
Treasury is responsible for managing liquidity risks. Risk Controlling prepares a daily liquidity report submitted to responsible members of the Management Board.
The appropriateness of the Bank's liquidity is assessed in a liquidity report prepared using an internal liquidity risk model: the aggregate of all potential cash inflows and outflows over a three-month period is compared to the liquidity stock. There were no liquidity shortages throughout the period under review. Further details are provided in the comments on the Bank's liquidity in the section on "Refinancing and Equity".
Developments for the economy, as well as for financial and capital markets, are exposed to diverse risks and threats – which also have an impact on the commercial property markets. The economic forecast at the end of June 2018 was characterised by a number of major uncertainties. The key factors in this regard relate to geopolitical risks, protectionist economic policy, changing monetary policy and the impact of a weakening economy.
The low interest rate environment continues to be a risk factor for many markets as it harbours risks for financial stability of a systemic dimension, should it persist for a longer period. Low interest rates can lead to a misallocation of investment capital, possibly resulting in asset-price bubbles. Moreover, market participants are encouraged to take on higher levels of risk. Sudden or excessive changes in interest rates may trigger a revaluation and changes in investor behaviour, potentially leading to a collapse in asset prices. Emerging economies in particular will have to face capital outflows, and may have to raise their own interest rates. Although financial market players expect a further rise in interest rates in the US and an end to quantitative easing measures in the euro zone,
markets remain vulnerable. A longer-lasting period of low interest rates complicates an exit from such an environment, heightening the risks for the financial and capital markets. In this context, traditional central bank policy may lose its impact. Low interest rates may also entice a scaling back of reform and consolidation efforts in various sectors.
The increased trade barriers from the US pose a threat to both macroeconomic performance and the financial markets. An open trade war cannot currently be ruled out, which, in addition to the reduction in trade in goods and services, could also cause turbulence on the financial markets.
A major risk factor in Europe is the impact of the UK's exit from the EU – in spite of the transitory period agreed upon. We continue to see significant economic risks from this – both for the UK and for the EU. Differences about the EU's future orientation might cause further uncertainty; The tension within European countries as a result of increased migration should be mentioned here also. Political uncertainty in Spain is also in the spotlight. A separation of the Autonomous Community of Catalonia from the Kingdom of Spain might have negative economic consequences, which are as yet difficult to assess.
The sovereign debt crisis might still raise its head again in Europe: the problem of high levels of indebtedness continues to exist. A widening of monetary policy between the US and the euro zone, political realignments and significant changes in fiscal policy may all heighten the risks.
In China, there is continued danger that the sharp increase in levels of private debt could lead to a pronounced market correction. Despite a slight easing of price pressure on the residential property market, the danger of a far-reaching market correction still exists.
Despite the many uncertainties and adverse factors mentioned above, the economic momentum associated with strong consumption and robust
investments is likely to continue in 2018. Real global economic output is expected to grow at a slightly higher rate. In this context, global trade is expected to provide support, in spite of protectionist measures – which will especially benefit emerging market economies. Inflation is expected to rise sharply, particularly in the euro zone and the US. However, trends vary from region to region. Moreover, risks and uncertainty factors, were they to materialise to a substantial extent, could mute the economic development, or even cause recessive tendencies in various regions.
We expect slightly lower growth in the euro zone in 2018 than in 2017, albeit remaining high in historical comparison. In line with our projections for the region as a whole, most of the euro zone countries relevant to Aareal Bank should show moderate to good economic development. In this connection, we must assume that the Netherlands and Spain will achieve high growth rates, albeit short of the previous year's levels. We anticipate stable but robust growth in Germany and France, although growth is expected to be significantly lower than in the previous year. The Italian economy is expected to grow at a slightly lower level than in the previous year. Stimulus from the new government programme is not initially expected this year.
In 2018, the economic development of the EU as a whole is anticipated to be similar to that of the euro zone countries. In the UK, we anticipate growth to be slightly lower than in the previous year. Brexit will continue to be a burden. The Polish economy is expected to continue growing strongly, albeit at a slightly weaker rate than in the previous year. Economic growth in Denmark is forecast to be markedly weaker than in 2017, but still at a good level. In Sweden, we expect last year's strong growth to continue. As far as Russia's economy is concerned, we expect a slightly higher growth rate in 2018 than in the previous year.
In the US, the economy should grow at a slightly more dynamic pace in the current year on the basis of strong exports and high levels of investments as well as robust consumption. Whilst uncertainty remains concerning the direction of economic policy, the tax reform adopted in December 2017 is nonetheless likely to provide clearly positive impulses. Protectionist policies might have a dampening effect, on the other hand. In Canada, we anticipate a significantly lower rate of real economic output, compared to the previous year. The main factor here is that growth of consumer spending is getting less stronger.
Following a year influenced, amongst others, by government intervention in China, we expect the trend of slowing real GDP growth rates to continue. Factors influencing economic development in China are the targeted reduction of over-capacity in heavy industry and the transition to an overall lower investment ratio. We are still witnessing uncertainty with regard to the increase of macroeconomic debt. Moreover, protectionist measures could also have a negative impact on trade.
Against a backdrop of positive economic development, we expect most labour markets across the euro zone as well as in other European countries to register slowly decreasing to virtually stagnating unemployment rates for 2018. The US unemployment rate is also likely to continue to fall moderately.
The risks and uncertainties we have listed so far are also impacting on the financial markets in the current year. Were they to materialise to a significant extent, they might cause turbulence on capital markets as well. Under current conditions, volatility should remain moderate overall. We continue to believe that the financial markets will remain receptive towards refinancing and new securities issues.
Monetary policy in the euro zone will continue to be extremely expansionary this year, as confirmed by the decisions taken by the ECB in June 2018. The ECB intends to initially scale back its asset purchase programme in the autumn and to end its net purchases by the end of the year. The ECB
has no plans to raise interest rates this year. In contrast, further interest rate hikes are expected in the US, whilst the Fed will likely continue the reduction of its balance sheet. In view of the prospect of interest rate adjustments, as indicated by the Bank of England, the likelihood of an increase in UK key interest rates during 2018 has risen. Given the UK's exit from the EU and forecast economic developments, any change is expected to be moderate.
In addition to the changes in monetary policy, the positive development of the US economy is underpinning the gradual rise in interest rates this year. A further moderate rise in short-term and long-term interest rates is expected in the US as a result of the hike in base rates; in the Euro zone, there could also be a degree of upward pressure, particularly on longer-term interest rates, in light of the phasing-out of the asset purchase programme. Nevertheless, levels in the euro zone should remain low.
Inflation is expected to rise on the basis of higher energy prices and higher import prices in the majority of currency areas. Inflation in the euro zone is expected to be slightly higher than in the previous year, although the ECB's target of just below 2 % should be almost reached. A further increase to well over 2 % is expected in the US. In China, too, a significant increase to markedly over 2 % is expected.
The trend towards a tighter regulatory framework in the banking business is set to persist during the coming years. For instance, the finalisation of the Basel III framework, adopted by the Basel Committee's Group of Governors and Heads of Supervision (GHOS), will bring about extensive changes to the approaches used for determining risk-weighted capital requirements (a concept known as "Basel IV").
EBA has also finalised its Guidelines related to the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy
Assessment Process (ILAAP). In addition, the Single European Supervisory Mechanism (SSM) has drawn up expectations regarding the structure of ICAAP and ILAAP based on a multi-year plan. These are expected to be specified further in 2018.
Furthermore, the Target Review of Internal Models within Pillar 1 has not yet been completed.
Regulators have yet to come up with final details for some of these additional regulatory requirements; hence, various technical standards, guidelines and regulations still have to be finalised. In addition, EBA has published guidelines on PD and LGD estimates, the treatment of defaulted exposures, and the determination of downturn LGDs which will need to be implemented.
To facilitate the timely implementation, we have already continued to pursue the individual issues in numerous projects – devoting considerable resources to this task.
The volatility of requirements presents an additional challenge for institutions: besides the new requirements mentioned by way of example, this volatility is particularly a function of the concrete specifications for instruments implemented by the ECB and/or the national supervisory authorities. For instance, the capital buffers to be set on a national level (the anticyclical buffer and the buffer for systemic risks), or the annual results of the Supervisory Review and Evaluation Process (SREP) for individual banks, can only be planned to a certain extent. Moreover, these instruments may lead to changes in a bank's individual capital requirements, at short notice.
During the year 2018, commercial property will continue to be a sought-after asset class in many markets. Global transaction volumes are therefore expected to remain high. Given the shortage of available first-class properties on offer, and rising
total revenue requirements, investor interest in properties outside the top segment will likely increase compared to previous years. Investor demand is thus expected to continue to support performance this year. Nonetheless, commercial property markets are also exposed to major risks and threats. An excessively sharp interest rate hike – originating from the US – may have a negative effect on performance. Moreover, other uncertainty factors and risks in the macro-economic environment are also relevant for commercial property markets.
Several factors will influence the market value of commercial property over the course of the year. Whilst the stable economy and the prevailing low interest rate environment will support property values, political uncertainty and a potentially significant interest rate increase can reduce values. Expansive monetary policy in numerous currency areas supports the upward trend in market values, which has now been intact for a very long time. Still, market cycles have not been invalidated. This means that cyclical downturns are possible as well.
We anticipate a largely stable development in the market values of commercial property in many markets this year.
We expect a stable development of market values in most European countries in 2018, including the Netherlands, Poland and Sweden. For Germany, France and Spain on the other hand, we consider slightly positive growth to be possible. The situation in the UK is subject to uncertainty because of the Brexit vote. In Italy, political uncertainties could have a negative impact on values, even if the economic situation suggests stability. Market values could fall in some sub-markets, although we anticipate a stable development overall. We anticipate that property values in Russia will stabilise in the current year due to the slight economic recovery.
In the US, backed by the relatively positive economic outlook, values are expected to show a slightly positive trend. Rising interest rates pose certain risks for this development. In Canada, we see a probability for a stable performance.
In China, market values for commercial property are expected to remain stable.
The trends described above are expected to apply to office, retail and logistics properties.
For 2018, we continue to expect a slight upward trend in the hotel markets of Europe's most significant economic centres. Looking at occupancy ratios, we see potential for further slight increases in numerous markets, including in Berlin and Paris. Likewise, we expect average revenues per available hotel room to further improve in most markets – in Madrid and Paris, for example. We expect occupancy ratios in London to show a slight decline, to still elevated levels – whereas we consider a possibility of average revenues per available hotel room to slightly rise year-on-year.
We believe a slight improvement on average in revenues per available room is likely in the US, with stable or slightly lower occupancy ratios. In Canada, we anticipate slight increases for both indicators – albeit short of the momentum seen in the previous year, which was driven by the 150th anniversary celebrations of the foundation of the Canadian Confederation.
In Asia, we anticipate occupancy ratios and average revenues per available room to remain stable throughout 2018 in the hotel markets of many metropolitan areas.
The intense competition in commercial property financing is also likely to persist in many markets during the current year, and in this context we assume that lenders will be willing to lower their margins. We anticipate a virtually stable development in loan-to-value ratios across the various regions. Banks are expected to continue adhering to their preference for financing first-class properties in top locations. Investors' readiness to finance properties outside top locations will increase.
We have incorporated various market aspects and our "Aareal 2020" programme for the future, amongst other factors, in our assessment of anticipated new business volumes for the current year. For the Structured Property Financing segment, we are targeting new business of between € 7 billion and € 8 billion for the 2018 financial year, whereby the focus is set to remain on the high-margin US market. Aareal Bank Group's property financing portfolio – including the private client business and local authority lending business of former WestImmo – should amount to between € 25 billion and € 28 billion at the end of 2018, subject to currency fluctuations. To manage our portfolio and risk exposure, we also use syndications which facilitate larger-sized financing solutions.
The forecasts are based on the assumption that the macro-economic risks and uncertainty factors described above will not materialise to a significant extent, or only in a manageable manner: otherwise, business development, in terms of new business for example, could be affected.
We expect the development for the German housing and commercial property industries to be characterised by a high degree of stability in the current year, thanks mainly to largely constant rental returns and long-term financing structures.
The demand for new housing and the completion of respective properties remains higher in urban areas than in rural areas, which can be seen from the corresponding price increases. However, rents and purchase prices are also continuing to rise in rural areas. Moreover, the prevailing urbanisation trend is likely to further boost demand for housing in the major cities and their surrounding areas. Hence, it is fair to expect further rent increases – with a stagnation of rent levels only feasible in rural areas. In addition, there is a large surplus of approved apartments that have yet to be built, as the minimum limit of 380,000 new apartments targeted by the federal government and housing associations again fell short of last year by around 100,000. In general, this low figure should keep the pressure up in the housing market.
We see good opportunities during 2018 to acquire new clients and to intensify the business relationships with our existing client base. This also applies to utilities and the waste disposal industry. In addition, in line with our "Aareal 2020" programme for the future, we are investing into the expansion of the "Housing Industry Ecosystem", the cross-sector development of interface products, and the expansion to adjacent ecosystems. We will also examine cooperations with fintech and proptech companies.
We continue to expect the high level of deposit volumes to prevail. The persistent low interest rate environment, which is relevant for the results from our deposit-taking business, will continue to burden segment results. However, the importance of this business goes way beyond the interest margin generated from the deposits, which is under pressure in the current market environment. This is because the deposits from the housing industry represent a strategically important additional source of funding for Aareal Bank.
Aareon will continue in 2018 to pursue the growth strategy based on its strategy programme integrated in the "Aareal 2020" programme for the future. Both sales revenues and Aareon's contribution to consolidated operating profit are expected to rise significantly. Key success factors are the expansion of digital solutions within the Aareon Smart World portfolio, strengthening the ERP business, and growing activities targeting the commercial property markets in the Netherlands and in Germany. Furthermore, the structural organisation in both the UK and Sweden is set to be optimised, and the potential in the existing customer base in these countries is to be exploited more intensively.
Aareon expects an increase in revenues in the ERP business – in Germany in particular through its acquisition of the mse companies – and in the consulting business, due to the ongoing migration of GES customers to Wodis Sigma. ERP revenues are expected to remain unchanged year-on-year in France and the Netherlands. Growth drivers in the global ERP business are the Scandinavian solution
Incit Xpand and the British product Aareon QL. The aforementioned optimisation measures in Great Britain and Sweden are already proving successful.
Digital solutions are expected to show strong growth. This growth will be driven in particular by the CRM solutions (portal and app) in France, Germany, the Netherlands and the UK. We also anticipate increased demand for mobile services in Germany and the UK. In the Netherlands, growth is expected in the area of digital solutions with Trace & Treasury (for managing assets) and ShareWorX (for case management). In France, the Building Relationship Management (BRM) and Supplier Relationship Management (SRM) solutions, newly developed in 2017, are expected to generate growth.
In addition, we anticipate that we can maintain and improve the positive trend seen in our German outsourcing business during the previous year and in our Dutch cloud services business.
Aareon anticipates a marked overall increase in sales revenue and profits for 2018. Aareon's contribution to consolidated operating profit is anticipated between € 37 million and € 38 million (previously: around € 40 million), due to nonrecurring cost increases incurred with a major project as well as delays with another project, which are unlikely to be recovered during the course of this year, on account of the high workload.
Aareal Bank Group's strategy focuses on sustainable business success. With its Group-wide "Aareal 2020" programme for the future, the Bank is addressing the challenges of the future. In an environment characterised by technological change, altered client needs and fiercer competition, this programme allows us to secure our strong foundation while also leveraging new revenue potential. Aareal Bank developed an extensive strategic roadmap for the implementation of "Aareal 2020", including various initiatives and projects for the further development of the Group. One of the top priorities is unlocking new revenue potential in
both segments; another is to adapt structures and processes to its stakeholders' requirements in a digital world.
We anticipate the challenging business environment to prevail during the current financial year – with continued low interest rates in Europe, and strong competitive and margin pressure on key target markets. Against this background, we will continue to adhere to our business policy with a strict focus on risks and returns. We will further accelerate our strategic development, within the framework of the "Aareal 2020" programme for the future, in order to safeguard the Group's longterm success – in a business environment that is set to remain highly challenging in the future.
We anticipate consolidated net interest income for the full year 2018 between € 570 million and € 610 million, including the net result from the derecognition of financial assets and liabilities not measured at fair value through profit or loss – which will be reported separately, in accordance with IFRS 9, as of 2018. Loss allowance is expected to remain in a range between € 50 million and € 80 million. Net commission income, whose importance for the Group is continuously rising due to the expansion of business activities in the Consulting/Services segment, is anticipated to rise further, to between € 215 million and € 235 million. Administrative expenses are expected to decline to between € 470 million and € 500 million.
Against this background, we expect consolidated operating profit for the current year to be in a range between € 260 million and € 300 million; this is in line with the previous year's figure, adjusted for the positive non-recurring effect related to Corealcredit. We envisage RoE before taxes of between 9.5 % and 11.0 % for the current financial year, with earnings per share between € 2.60 and € 3.00. We affirm our medium-term target RoE of around 12 % before taxes.
We will continue the reduction of non-strategic portfolios in the Structured Property Financing
segment during 2018. At the same time, our core credit portfolio is planned to grow in line with respective market conditions. Overall, Aareal Bank Group's property financing portfolio – including the private client business and local authority lending business of former WestImmo – is expected to remain stable, amounting to between € 25 billion and € 28 billion at the end of 2018, subject to currency fluctuations. We are targeting 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, we expect our IT subsidiary Aareon to provide a markedly higher contribution of between € 37 million and € 38 million to consolidated operating profit.
Subject to further regulatory changes, Aareal Bank considers a target CET1 ratio (post-finalisation of Basel III – so-called "Basel IV") of around 12.5 % to be appropriate. The Liquidity Coverage Ratio (LCR) is expected to be at least 150 %.
Income Statement
| Notes | 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) |
|---|---|---|
| € mn | ||
| Interest income from financial instruments (ac and fvoci) | 412 | 426 |
| Interest income from financial instruments (fvpl) | 17 | 3 |
| Market-driven modification gains | 2 | n.a. |
| Interest expenses for financial instruments (ac) | 58 | 55 |
| Interest expenses for financial instruments (fvpl) | 102 | 69 |
| Market-driven modification losses | 2 | n.a. |
| Net interest income 1 |
269 | 305 |
| Loss allowance excluding credit-driven net modification gain or loss | 19 | 27 |
| Credit-driven net modification gain or loss | – | n/a |
| Loss allowance 2 |
19 | 27 |
| Commission income | 122 | 115 |
| Commission expenses | 21 | 18 |
| Net commission income 3 |
101 | 97 |
| Net gain or loss on the derecognition of financial assets (ac) | 11 | 17 |
| Net gain or loss on the derecognition of financial liabilities (ac) | 0 | – |
| Net gain or loss on the derecognition of financial assets (fvoci) | – | 0 |
| Net derecognition gain or loss 4 |
11 | 17 |
| Gains /losses from financial instruments (fvpl) 5 |
-1 | 3 |
| Net result on hedge accounting 6 |
-3 | -6 |
| Results from investments accounted for using the equity method | – | – |
| Administrative expenses 7 |
237 | 268 |
| Net other operating income/expenses 8 |
8 | 59 |
| Operating profit | 129 | 180 |
| Income taxes | 44 | 66 |
| Consolidated net income | 85 | 114 |
| Consolidated net income attributable to non-controlling interests | 1 | 6 |
| Consolidated net income attributable to shareholders of Aareal Bank AG | 84 | 108 |
| Earnings per share (EpS) | ||
| Consolidated net income attributable to shareholders of Aareal Bank AG2) | 84 | 108 |
| of which: allocated to ordinary shareholders | 76 | 100 |
| of which: allocated to AT1 investors | 8 | 8 |
| Earnings per ordinary share (in €)3) | 1.27 | 1.68 |
| Earnings per AT1 unit (in €)4) | 0.08 | 0.08 |
1) Comparative amounts reclassified according to the new classification format
2) The allocation of earnings is based on the assumption that net interest payable on the AT1 bond is recognised on an accrual basis.
3) Earnings per ordinary share are determined by dividing the earnings allocated to ordinary shareholders of Aareal Bank AG by the weighted average of ordinary shares
outstanding during the financial year (59,857,221 shares). Basic earnings per ordinary share correspond to diluted earnings per ordinary share.
4) Earnings per AT1 unit (based on 100,000,000 AT1 units with a notional amount of € 3 each) are determined by dividing the earnings attributable to AT1 investors by the weighted average of AT1 units outstanding during the financial year. Earnings per AT1 unit (basic) correspond to (diluted) earnings per AT1 unit.
Reconciliation from Consolidated Net Income to Total Comprehensive Income
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Consolidated net income | 85 | 114 |
| Items that will not be reclassified subsequently to profit or loss | ||
| Changes in the reserve from remeasurements of defined benefit plans | -2 | 11 |
| Remeasurements | -3 | 16 |
| Taxes | 1 | -5 |
| Items that are reclassified subsequently to profit or loss | ||
| Changes in the reserve from the measurement of debt instruments (fvoci) | -4 | -4 |
| Gains and losses from debt instruments (fvoci) | -6 | -6 |
| Reclassifications to the income statement | – | – |
| Taxes | 2 | 2 |
| Changes in hedging reserves | – | -19 |
| Profit/loss from derivatives used to hedge future cash flows | – | -28 |
| Reclassifications to the income statement | – | 0 |
| Taxes | – | 9 |
| Changes in the reserve from foreign currency basis spreads | -14 | n/a |
| Gains and losses from foreign currency basis spreads | -21 | n/a |
| Reclassifications to the income statement | – | n/a |
| Taxes | 7 | n/a |
| Changes in currency translation reserves | 3 | -8 |
| Profit/loss from translating foreign operations' financial statements | 1 | -8 |
| Reclassifications to the income statement | – | – |
| Taxes | 2 | – |
| Other comprehensive income | -17 | -20 |
| Total comprehensive income | 68 | 94 |
| Total comprehensive income attributable to non-controlling interests | 1 | 6 |
| Total comprehensive income attributable to shareholders of Aareal Bank AG | 67 | 88 |
Income Statement (Quarterly Development)
| Quarter 2 2018 | Quarter 2 20171) | |
|---|---|---|
| € mn | ||
| Interest income from financial instruments (ac and fvoci) | 213 | 216 |
| Interest income from financial instruments (fvpl) | 9 | 2 |
| Market-driven modification gains | 1 | n.a. |
| Interest expenses for financial instruments (ac) | 29 | 31 |
| Interest expenses for financial instruments (fvpl) | 57 | 36 |
| Market-driven modification losses | 1 | n/a |
| Net interest income | 136 | 151 |
| Loss allowance excluding credit-driven net modification gain or loss | 19 | 25 |
| Credit-driven net modification gain or loss | – | n/a |
| Loss allowance | 19 | 25 |
| Commission income | 62 | 58 |
| Commission expenses | 11 | 9 |
| Net commission income | 51 | 49 |
| Net gain or loss on the derecognition of financial assets (ac) | 5 | 7 |
| Net gain or loss on the derecognition of financial liabilities (ac) | – | – |
| Net gain or loss on the derecognition of financial assets (fvoci) | – | 0 |
| Net derecognition gain or loss | 5 | 7 |
| Gains /losses from financial instruments (fvpl) | -4 | 4 |
| Net result on hedge accounting | -1 | -3 |
| Results from investments accounted for using the equity method | – | – |
| Administrative expenses | 109 | 129 |
| Net other operating income/expenses | 3 | 55 |
| Operating profit | 62 | 109 |
| Income taxes | 21 | 42 |
| Consolidated net income | 41 | 67 |
| Consolidated net income attributable to non-controlling interests | 0 | 1 |
| Consolidated net income attributable to shareholders of Aareal Bank AG | 41 | 66 |
| Quarter 2 2018 | Quarter 2 20171) | |
|---|---|---|
| € mn | ||
| Consolidated net income | 41 | 67 |
| Items that will not be reclassified subsequently to profit or loss | ||
| Changes in the reserve from remeasurements of defined benefit plans | -2 | 8 |
| Remeasurements | -3 | 12 |
| Taxes | 1 | -4 |
| Items that are reclassified subsequently to profit or loss | ||
| Changes in the reserve from the measurement of debt instruments (fvoci) | 1 | -2 |
| Gains and losses from debt instruments (fvoci) | 1 | -4 |
| Reclassifications to the income statement | – | – |
| Taxes | 0 | 2 |
| Changes in hedging reserves | – | -3 |
| Profit/loss from derivatives used to hedge future cash flows | – | -4 |
| Reclassifications to the income statement | – | 0 |
| Taxes | – | 1 |
| Changes in the reserve from foreign currency basis spreads | -14 | n/a |
| Gains and losses from foreign currency basis spreads | -21 | n/a |
| Reclassifications to the income statement | – | n/a |
| Taxes | 7 | n/a |
| Changes in currency translation reserves | 6 | -7 |
| Profit/loss from translating foreign operations' financial statements | 3 | -7 |
| Reclassifications to the income statement | – | – |
| Taxes | 3 | – |
| Other comprehensive income | -9 | -4 |
| Total comprehensive income | 32 | 63 |
| Total comprehensive income attributable to non-controlling interests | 0 | 1 |
| Total comprehensive income attributable to shareholders of Aareal Bank AG | 32 | 62 |
| € mn Assets Financial assets (ac) 9 32,727 33,715 38,438 Cash funds (ac) 1,139 2,081 1,786 Loan receivables (ac) 25,814 26,316 29,767 Money market and capital market receivables (ac) 5,697 5,225 6,800 Receivables from other transactions (ac) 77 93 85 Loss allowance (ac) 10 -543 -540 -554 Financial assets (fvoci) 11 4,238 5,424 5,949 Money market and capital market receivables (fvoci) 4,234 5,422 5,947 Equity instruments (fvoci) 4 2 2 Financial assets (fvpl) 12 2,866 2,449 2,983 Loan receivables (fvpl) 606 196 – Money market and capital market receivables (fvpl) 250 – – Positive market value of designated hedging derivatives (fvpl) 1,279 1,926 2,481 Positive market value of other derivatives (fvpl) 731 327 502 Investments accounted for using the equity method 7 7 0 Intangible assets 13 153 153 126 Property and equipment 14 260 253 252 Income tax assets 44 52 68 Deferred tax assets 87 99 134 Other assets 15 323 296 312 Total 40,162 41,908 47,708 Equity and liabilities Financial liabilities (ac) 16 35,092 36,630 40,587 Money market and capital market liabilities (ac) 24,322 26,109 29,935 Deposits from the housing industry (ac) 9,586 9,164 9,191 Liabilities from other transactions (ac) 136 92 95 Subordinated capital (ac) 1,048 1,265 1,366 Financial liabilities (fvpl) 17 1,659 1,703 3,181 Negative market value of designated hedging derivatives (fvpl) 1,260 1,479 2,529 Negative market value of other derivatives (fvpl) 399 224 652 Provisions 18 536 570 680 Income tax liabilities 28 29 71 Deferred tax liabilities 16 19 28 Other liabilities 19 33 33 32 Equity 20, 21, 22 2,798 2,924 3,129 Subscribed capital 180 180 180 Capital reserves 721 721 721 Retained earnings 1,657 1,798 1,734 AT1 bond 300 300 300 Other reserves -61 -77 -48 Non-controlling interests 1 2 242 Total 40,162 41,908 47,708 |
Notes | 30 Jun 2018 | 31 Dec 20171) | 31 Dec 20161) |
|---|---|---|---|---|
1) Comparative amounts reclassified according to the new classification format; recognised amounts of the previous period as at 1 January 2017 correspond to the recognised amounts as at 31 December 2016
| Equity as at 1 Jan 20181) |
Adjustment due to first-time application of IFRS 9 |
Adjusted equity as at 1 Jan 2018 |
Total compre hensive income for the period |
Payments to non controlling interests |
Dividends | AT1 coupon |
Other changes |
Equity as at 30 Jun 2018 |
|
|---|---|---|---|---|---|---|---|---|---|
| € mn | |||||||||
| Subscribed capital | 180 | 180 | 180 | ||||||
| Capital reserves | 721 | 721 | 721 | ||||||
| Retained earnings | 1,798 | -60 | 1,738 | 84 | -150 | -16 | 1 | 1,657 | |
| AT1 bond | 300 | 300 | 300 | ||||||
| Other reserves | -77 | 33 | -44 | -17 | -61 | ||||
| Reserve from remeasurements of defined benefit plans |
-91 | -91 | -2 | -93 | |||||
| Reserve from the measurement of equity instruments (fvoci) |
0 | 0 | 0 | ||||||
| Reserve from the measurement of debt instruments (fvoci) |
24 | 29 | 53 | -4 | 49 | ||||
| Hedging reserves | -1 | 1 | |||||||
| Reserve from changes in the value of foreign currency basis spreads |
3 | 3 | -14 | -11 | |||||
| Currency translation reserves | -9 | -9 | 3 | -6 | |||||
| Total | 2,922 | -27 | 2,895 | 67 | -150 | -16 | 1 | 2,797 | |
| Non-controlling interests | 2 | 2 | 1 | -2 | 1 | ||||
| Equity | 2,924 | -27 | 2,897 | 68 | -2 | -150 | -16 | 1 | 2,798 |
| € mn | Equity as at 1 Jan 20181) |
Total compre hensive income for the period |
Payments to non controlling interests |
Dividends | AT1 coupon |
Other changes |
Equity as at 30 Jun 20171) |
|---|---|---|---|---|---|---|---|
| Subscribed capital | 180 | 180 | |||||
| Capital reserves | 721 | 721 | |||||
| Retained earnings | 1,734 | 108 | -120 | -16 | -7 | 1,699 | |
| AT1 bond | 300 | 300 | |||||
| Other reserves | -48 | -20 | -68 | ||||
| Reserve from remeasurements of defined benefit plans | -100 | 11 | -89 | ||||
| Reserve from the measurement of equity instruments (fvoci) | 0 | 0 | |||||
| Reserve from the measurement of debt instruments (fvoci) | 29 | -4 | 25 | ||||
| Hedging reserves | 17 | -19 | -2 | ||||
| Reserve from changes in the value of foreign currency basis spreads | |||||||
| Currency translation reserves | 6 | -8 | -2 | ||||
| Total | 2,887 | 88 | -120 | -16 | -7 | 2,832 | |
| Non-controlling interests | 242 | 6 | -6 | -241 | 1 | ||
| Equity | 3,129 | 94 | -6 | -120 | -16 | -248 | 2,833 |
| 2018 | 20171) | |
|---|---|---|
| € mn | ||
| Cash and cash equivalents as at 1 January | 2,081 | 1,786 |
| Cash flow from operating activities | -560 | -668 |
| Cash flow from investing activities | 2 | -13 |
| Cash flow from financing activities | -384 | -235 |
| Total cash flow | -942 | -916 |
| Effect of changes in exchange rates | 0 | 0 |
| Cash and cash equivalents as at 30 June | 1,139 | 870 |
1) Within the scope of the changeover to IFRS 9 and the business model allocation, cash flows from securities were re-allocated from investment activities to operating activities.
Aareal Bank AG is a listed public limited company incorporated under German law, with its registered office in Wiesbaden, Germany. It is the parent company of an international property finance and services group.
This half-yearly financial report for the period ended 30 June 2018 was prepared pursuant to the provisions of section 115 of the German Securities Trading Act (Wertpapierhandelsgesetz – "WpHG") in conjunction with section 117 no. 2 of the WpHG, and was approved for publication by the Management Board on 31 July 2018. It comprises the present interim condensed consolidated financial statements, as well as an interim group management report.
Aareal Bank AG prepares its condensed interim consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) applicable within the European Union (EU) as at the reporting date, in connection with the provisions pursuant to section 315e (1) of the German Commercial Code (Handelsgesetzbuch – "HGB"). In particular, the interim consolidated financial statements comply with the requirements for interim financial reporting set out in IAS 34. The reporting currency is the euro (€).
Subsidiaries of Aareal Bank AG are included in the consolidated financial statements by way of full consolidation. Companies over which Aareal Bank AG may exercise a significant influence ("associates") are included in the consolidated financial statements, using the equity method. The present interim report is based on the same consolidation methods as were applied in the consolidated financial statements as at 31 December 2017.
There were no material changes to the basis of consolidation during the period under review.
Recognition and measurement within Aareal Bank Group are based on accounting policies applied consistently throughout the Group. The consolidated financial statements are prepared on a going concern basis.
We generally apply accounting policies – and the presentation of financial statements – consistently, in order to ensure the comparability of financial statements over time. The classification format was adjusted within the framework of the first-time application of IFRS 9.
Information is presented in accordance with the principle of materiality. Minor differences may occur regarding the figures stated, due to rounding.
The Bank observes the general prohibition of setting off assets against liabilities. To the extent that the criteria of IAS 12.74 are met, deferred tax assets and deferred tax liabilities are offset. If the requirements set out in IAS 32.42 are met, financial assets and liabilities are reported on a net basis.
Income and expenses are recognised on an accrual basis and recorded in the income statement in the period to which they relate.
Interest income and expenses are recognised using the effective interest method. In the case of impaired receivables, interest income and expenses are recognised only up to the amount of the net carrying amount. Interest from derivatives designated for hedge accounting and economic hedging relationships is included in net interest income. Interest from derivative hedging instruments is shown under interest from financial instruments (ac and fvoci). Based on the IFRIC decision "Presentation of interest revenue for particular financial instruments", we have stated interest from economic hedging relationships under interest from financial instruments (fvpl), starting this quarter. The previous year's figures were adjusted accordingly. We provide specific information on negative interest from financial assets or positive interest from financial liabilities in the Notes, under net interest income. These assets and liabilities are deposits as well as money market and securities repurchase transactions.
Dividend income is recognised when there is a corresponding legal title.
Commission income and expenses include revenue from the provision of goods or services in the ordinary course of business. This mainly refers to IT consulting projects, trainings, licence and maintenance agreement and hosting or outsourcing services. Revenue recognition is assessed on the basis of the five-step model in accordance with IFRS 15. If the performance obligation is not satisfied over time, it is satisfied at a certain point in time.
The presentation of the financial position and the financial performance in the consolidated financial statements depends on the recognition and measurement methods underlying the preparation of the financial statements, as well as on estimates and assumptions made by the management in relation to uncertain future events. Any assessments required for recognition and measurement are prepared in line with the relevant accounting standards. Estimates and assumptions are based on historical experience and other factors, such as planning and current expectations and forecasts with respect to the occurrence of future events. The estimates and assessments themselves as well as the underlying assessment factors and estimation techniques are reviewed regularly and compared with actual outcome. In our view, the parameters used are relevant and reasonable.
The most significant estimates and assumptions of the management primarily refer to the calculation of provisions, loss allowances and provisions in the lending business, the measurement of goodwill, property and tax assets and liabilities. We refer to the item-specific disclosures in this section for information related to the estimates and assumptions actually made within the context of recognition and measurement.
An asset is recognised in the statement of financial position when it is probable that an associated future economic benefit will flow to the Company and the asset can be measured reliably.
A liability is recognised if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and when the settlement amount of the liability can be measured with sufficient reliability.
Unless specifically indicated otherwise, the accounting policies applied in the preparation of the consolidated financial statements 2017 were also applied in the preparation of these condensed interim consolidated financial statements, including the calculation of comparative figures. Given the extensive changes due to the new classification scheme and IFRS 9, we have provided a full overview of accounting policies for ease of reference.
The following financial reporting standards (IASs/IFRSs) were required to be applied for the first time in the reporting period:
IFRS 9 Financial Instruments introduces new rules for the accounting of financial instruments, and generally replaced IAS 39 Financial Instruments: Recognition and Measurement as at 1 January 2018. We present the changes in the chapter "First-time application of IFRS 9 Financial Instruments" in this section.
The objective of this interpretation is to clarify the accounting treatment of transactions that include the receipt or payment of consideration in a foreign currency.
IFRS 15 governs the recognition of revenue from contracts with customers based on a uniform model. The standard supersedes the current revenue recognition provisions set out in IAS 11 and IAS 18 as well as the related interpretations. IFRS 15 has to be applied by all companies that enter into contracts with customers for the delivery of goods or the provision of services unless these contracts are within the scope of other standards. Accordingly, amongst other things, financial instruments and other contractual rights or obligations within the scope of IFRS 9 are excluded from the scope of IFRS 15. The core principle of IFRS 15 for revenue recognition is that an entity has to recognise revenue when the performance obligations assumed are satisfied, i. e. when control over the goods and services has been transferred. Revenue has to be recognised in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. IFRS 15 introduces a 5-step model based on which the amount and the timing of revenue recognition are determined. In addition, the standard requires additional disclosures, including, amongst other things, a disaggregation of total revenue, performance obligations, a reconciliation of opening and closing balances of contractual net assets and liabilities as well as significant judgements and estimates. Aareal Bank Group has reviewed the effects of the new standard on the consolidated financial statements by analysing the relevant standard contracts on the basis of the fivestep model. Within the Group, these changes mainly affect Aareon. Aareon has adjusted its processes. Within the scope of this adjustment, we have changed the breakdown of net commission income. Commission income from advisory and other services is broken down into ERP products, digital solutions, and add-on products. Commission expenses from advisory and other services have been renamed as purchased services. Net commission income from trustee and administered loans, securities business, and other lending and money market transactions has been summarised as net commission income from lending and other banking business. Other net commission income has been renamed net commission income from other activities. Moreover, commission income is also shown in segment reporting. The modified retrospective approach did not have any material consequences for Aareal Bank Group.
Within the scope of the Annual Improvements Cycle, the IASB publishes clarifications and minor changes to the existing standards IFRS 1, IFRS 12 and IAS 28.
The amendments clarify the provisions regarding transfers to or from investment property. The amendments mainly refer to the question whether property under construction or in development that was previously classified as inventory can be reclassified to the investment property category when there is evidence of a change in use.
In April 2016, the IASB issued the final version of the amendment standard IFRS 15. The amendment includes clarifications regarding various rules set out in IFRS 15, and also simplifications concerning the transition to the new standard. The clarifications refer to the identification of the service obligations from a contract, the assessment as to whether a company acts as principal or agent of a transaction, and the assessment as to whether revenue from a licence granted has to be recognised either as at a particular reporting date or during a specific period. The simplifications refer to options regarding the presentation of contracts that are either completed at the beginning of the earliest period presented, or which were modified prior to the beginning of the earliest period presented. This is to reduce the complexity and costs of the transition to the new standard.
In June 2016, the IASB issued amendments to IFRS 2 that clarify classification and measurement of sharebased payment transactions. The amendments relate to the following areas: (i) accounting for cashsettled share-based payment transactions that include a performance condition, (ii) the classification of share-based payment transactions with a settlement feature for withholding tax obligations and (iii) accounting for modifications of share-based payment transactions that change the classification from "cash-settled" to "equity-settled".
Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts In September 2016, the IASB issued amendments to IFRS 4. The amendments refer to the first-time application of IFRS 9 by insurers. Due to different effective dates for IFRS 9 and the new standard for insurance contracts, without these amendments, results will be more volatile for a transitional period; in addition, conversion efforts will be doubled.
Except for IFRS 9, the revised standards did not have any material consequences for the consolidated interim financial statements of Aareal Bank Group.
IFRS 9 Financial Instruments introduces new rules for the accounting of financial instruments, and generally replaced IAS 39 Financial Instruments: Recognition and Measurement from 1 January 2018. The first-time application had an effect of € -27 million (after taxes) on equity carried on the statement of financial position, and of € -17 million on regulatory equity (full Basel III implementation pursuant to Directive 2013/36/EU and Regulation (EU) No 575/2013 of the European Parliament and the Council). The effect of first-time application comprises various individual effects.
Under the new model for classification and measurement of financial assets, the subsequent measurement of financial assets is based on three categories with different measurement methods and different recognition methods related to changes in value:
The classification to the measurement categories is based on the criteria of business model and contractual characteristics of the financial assets (the so-called "SPPI criterion" = solely payments of principal and interest). The allocation of financial instruments to the business models was made as at 1 January 2018. The major portion of the financial instruments was allocated to the "amortised cost" measurement category. We recorded a positive overall effect of € 28 million (after taxes) from the transition on the revaluation surplus, due to the reversal of the revaluation surplus from securities reclassified in accordance with IAS 39, and from changes in the measurement category of individual securities (to fvpl, because the SPPI criterion is not met, or due to an assignment to the residual business model). In addition, adjustments during the contract term that lead to a change in the contractual cash flows, but that are not of an extent that the previous financial asset is derecognised and a new financial asset is recognised, will result in non-substantial modifications. In this case, the carrying amount of a financial asset is adjusted and a modification gain or loss is determined. The transition effect from market-driven modifications amounted to € -6 million (after taxes). Credit-driven modification effects are included in the effects resulting from the allocation of items into the Stage 3 category of loss allowances.
There are special rules for equity instruments as there is an option to measure these either through other comprehensive income or through profit or loss. This did not have any transition effect.
The accounting rules for financial liabilities do not result in any material changes. An exception to this is the inclusion of changes from own credit risk in case of financial liabilities measured at fair value through profit or loss. These changes may not be recognised through profit or loss, but through other comprehensive income. The Group currently does not have any financial liabilities measured at fair value.
The new rules for impairment (expected credit loss model) replaced the previous incurred credit loss model. The objective of this is an earlier measurement and recognition of loss allowances. IFRS 9 prescribes three stages which are used to determine the amount of the loss allowances to be recognised and the recognition of interest. Financial assets are allocated to Stage 1. Twelve-month expected credit losses are recognised for these assets. If the credit risk increases significantly, the loss allowance is increased to the total amount of lifetime expected credit losses (Stage 2). If there is objective evidence of impairment in relation to a financial asset, a loss allowance at an amount equal to the expected credit losses over the entire remaining term also has to be recognised and, in addition, interest revenue has to be recognised based on the net carrying amount (Stage 3). The impairment model set out in IFRS 9 has to be applied to financial assets of the categories "Measured at amortised cost" and "Measured at fair value through other comprehensive income" as well as to loan commitments and financial guarantees. In addition, lease receivables and trade receivables are covered by the new impairment rules. To the extent that financial instruments are measured at fair value through profit or loss, no loss allowance is recognised for such financial instruments; instead, they are reported at their net carrying amount.
Portfolio-based allowances for credit losses were already recognised within the Group under IAS 39. Calculation under Stage 1 in accordance with IFRS 9 continues to be on the basis of a twelve-month loss. In Stage 2, additions to loss allowances were recognised due to the recognition of a loss allowance at an amount equal to the expected credit losses over the entire remaining term. The transition effect for Stage 1 and Stage 2 amounted to approximately € -27 million (after taxes).
Specific allowances for credit losses pursuant to IAS 39 were recognised where estimated future cash flows fall below the carrying amount of a loan receivable. This methodology was developed further into a probability-weighted multi-scenario analysis. The transition effect amounted to € -22 million (after taxes) for Stage 3.
Hedge accounting rules were changed by establishing a closer relationship between the entity's risk management strategy, the reasons for entering into hedging instruments and the recognition of hedging relationships in the entity's financial statements. Non-derivative items may also be included in hedge accounting; net positions are now also eligible for designation as hedges. A voluntary discontinuation of hedge accounting – so-called de-designation – is no longer permitted under the new regulations. Hedging relationships may only be discontinued when the objective of risk management has been changed. In contrast, the new IFRS 9 allows for an adjustment of hedging relationships if this is necessary (rebalancing). The requirements regarding effectiveness have also been simplified: only qualitative assessments of effectiveness and prospective effectiveness tests have to be performed. In addition, foreign currency basis spreads may be recognised as part of the costs of the hedge. Changes in the fair value due to this component are recognised directly in equity in the reserve from foreign currency basis spreads. Due to the separation of the macro hedge accounting project from IFRS 9 and its postponement, the application of the new hedge accounting rules in IFRS 9, for the time being, allows for the continued application of special rules for – fair value hedge accounting for portfolio hedges of interest rate risks in IAS 39. The Group does not currently use this option. The Group uses the simplifications under micro-hedge accounting and for foreign currency basis spreads. This did not have any transition effect on equity.
IFRS 9 comprises comprehensive disclosure requirements, above all in the area of impairments, leading to numerous new requirements. The disclosures on financial instruments continue to be based on IFRS 7, which was amended and significantly extended in the context of the publication of IFRS 9.
Due to the introduction of IFRS 9 and in order to increase the transparency of the financial statements, the classification format was adjusted. The following table shows a reconciliation of the financial instruments by measurement categories under IAS 39 to IFRS 9 (before taxes).
| IAS 39 | Revaluation | |||||
|---|---|---|---|---|---|---|
| IAS 39 31 Dec 2017 |
reclassified 31 Dec 2017 |
Reclassi fication |
OCI | Retained earnings |
IFRS 9 1 Jan 2018 |
|
| € mn | ||||||
| Financial assets (ac) | ||||||
| Cash funds (ac) | 2,081 | 2,081 | ||||
| from cash funds (lar) | 2,081 | |||||
| Loan receivables (ac) | 26,316 | 25,885 | ||||
| from loans and advances to banks (lar) | 5 | |||||
| from loans and advances to customers (lar) | 26,311 | 27 | ||||
| less loan receivables (fvpl) | -458 | |||||
| Money market and capital market receivables (ac) | 5,225 | 6,087 | ||||
| from loans and advances to banks (lar) | 774 | |||||
| from loans and advances to customers (lar) | 1,338 | |||||
| from non-trading assets (lar, htm) | 3,113 | 63 | ||||
| plus money market and capital market receivables (fvoci) | 1,594 | -41 | ||||
| less money market and capital market receivables (fvoci) | -505 | |||||
| less money market and capital market receivables (fvpl) | -249 | |||||
| Receivables from other transactions (ac) | 93 | 2 | 95 | |||
| from other (financial) assets (lar) | 93 | |||||
| Financial assets (fvoci) | ||||||
| Money market and capital market receivables (fvoci) | 5,422 | 4,343 | ||||
| from non-trading assets (afs) | 5,422 | |||||
| plus money market and capital market receivables (ac) | 505 | 10 | ||||
| less money market and capital market receivables (ac) | -1,594 | |||||
| Equity instruments (fvoci) | 2 | 2 | ||||
| from non-trading assets (afs) | 2 | |||||
| Financial assets (fvpl) | ||||||
| Loan receivables (fvpl) | 196 | 604 | ||||
| from loans and advances to customers (hft) | 196 | |||||
| plus (net) loan receivables (ac) | 408 | |||||
| Money market and capital market receivables (fvpl) | – | 2 | 251 | |||
| plus money market and capital market receivables (ac) | 249 | |||||
| Positive market value of designated hedging derivatives (fvpl) | 1,926 | 1,387 | ||||
| from positive market value of derivative hedging instruments (hft) | 1,926 | |||||
| less positive market value of other derivatives (fvpl) | -539 | |||||
| Positive market value of other derivatives (fvpl) | 327 | 866 | ||||
| from trading assets (hft) | 327 | |||||
| plus positive market value of designated hedging derivatives (fvpl) | 539 | -1 | 1 | |||
| Total | 41,588 | -48 | 31 | 30 | 41,601 |
| IAS 39 | Revaluation | |||||
|---|---|---|---|---|---|---|
| IAS 39 | reclassified | Reclassi | Retained | IFRS 9 | ||
| 31 Dec 2017 | 31 Dec 2017 | fication | OCI | earnings | 1 Jan 2018 | |
| € mn | ||||||
| Financial liabilities (ac) | ||||||
| Money market and capital market liabilities (ac) | 26,109 | 26,109 | ||||
| from liabilities to banks (lac) | 1,914 | |||||
| from liabilities to customers (lac) | 16,601 | |||||
| from certificated liabilities (lac) | 7,594 | |||||
| Deposits from the housing industry (ac) | 9,164 | 9,164 | ||||
| from liabilities to customers (lac) | 9,164 | |||||
| Liabilities from other transactions (ac) | 92 | 92 | ||||
| from other (financial) liabilities (lac) | 92 | |||||
| Subordinated capital (ac) | 1,265 | 1,265 | ||||
| Subordinated capital (lac) | 1,265 | |||||
| Financial liabilities (fvpl) | ||||||
| Negative market value of designated hedging derivatives (fvpl) | 1,479 | 1,318 | ||||
| from negative market value of derivative hedging instruments (hft) | 1,479 | |||||
| less negative market value of other derivatives (fvpl) | -161 | 1 | -1 | |||
| Negative market value of other derivatives (fvpl) | 224 | 385 | ||||
| from trading liabilities (hft) | 224 | 6 | -6 | |||
| plus negative market value of other derivatives (fvpl) | 161 | |||||
| Total | 38,333 | – | 7 | -7 | 38,333 |
| IAS 39 | Revaluation | |||||
|---|---|---|---|---|---|---|
| IAS 39 31 Dec 2017 |
reclassified 31 Dec 2017 |
Reclassi fication |
OCI | Retained earnings |
IFRS 9 1 Jan 2018 |
|
| € mn | ||||||
| Loss allowance on financial assets (ac) | ||||||
| Loan receivables (ac) | -540 | -571 | ||||
| from loans and advances to customers (lar) | -540 | -81 | ||||
| less loan receivables (fvpl) | 50 | |||||
| Money market and capital market receivables (ac) | – | -20 | ||||
| from non-trading assets (lar, htm) | – | -15 | ||||
| plus money market and capital market receivables (fvoci) | -5 | |||||
| Receivables from other transactions (ac) | – | -2 | ||||
| from other (financial) assets (lar) | – | -2 | ||||
| Provisions for unrecognised lending business | -4 | -6 | ||||
| from provisions in the lending business for unrecognised items | -4 | -2 | ||||
| Loss allowance in reserves from debt instruments (fvoci) | ||||||
| Money market and capital market receivables (fvoci) | – | 0 | ||||
| from non-trading assets (afs) | – | 0 | ||||
| Total | -544 | -544 | 48 | – | -103 | -599 |
The total transition effect of € -27 million (after taxes) recognised under equity comprises the revaluation effects disclosed in other comprehensive income and retained earnings of € -42 million, less tax effects of € 15 million.
Within the scope of the first-time application, non-trading assets (afs) were allocated to the "hold" business model and since then have been measured at amortised cost. Debt securities held on the reporting date were carried at € 1,522 million; their fair value amounted to € 1,529 million. The difference of € 7 million would have been recognised in the revaluation surplus under IAS 39.
Individual line items in the financial statements of each Group entity are measured on the basis of the currency of the primary economic environment the respective entity operates in ("functional currency"). The consolidated financial statements are prepared in euro, being both the functional and the reporting currency.
Monetary assets and liabilities denominated in a foreign currency, unsettled cash market/spot transactions and non-monetary items measured at fair value are all translated to the functional currency on the basis of the ECB reference rate prevailing on the balance sheet date. Non-monetary items measured at amortised cost are translated using historical rates. Foreign exchange forward transactions are measured at the forward exchange rate prevailing on the balance sheet date.
Currency translation adjustments on monetary assets and liabilities must be recognised in income. Depending on the relevant measurement category, currency translation adjustments on non-monetary items are either recognised directly in equity (in the currency translation reserves), or recognised in the income statement (in net trading income).
Financial statements of consolidated subsidiaries, which are presented in a currency other than the euro, are translated at the ECB reference rate prevailing at the reporting date. Translation differences are recognised in equity, in the currency translation reserves.
The determination of fair value is governed by IFRS 13 and applies to financial instruments and nonfinancial assets or liabilities. In accordance with IFRS 13.9, the fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The determination of the fair value is based on the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Another factor to be taken into account is whether Aareal Bank can enter into a transaction for the relevant asset or liability at the price in that market at the measurement date. The principal market is the market with the greatest volume and the highest level of activity for the asset or liability to which Aareal Bank has access. In the absence of a principal market for the financial instrument, the most advantageous market is used to determine the fair value. The most advantageous market is the market that maximises the amount that would be received to sell the asset, or minimises the amount that would be paid to transfer the liability.
In accordance with IFRS 13.72 et seqq., the fair value determination is based on the fair value hierarchy pursuant to which the inputs used are classified into various hierarchy levels on the basis of their respective market proximity and objectivity. The fair value of assets and liabilities is allocated to Level 1 of the fair value hierarchy if it is determined on the basis of unadjusted qualifying prices in active markets for identical assets or liabilities. Fair values determined using inputs other than qualifying prices included within Level 1 that are observable for the financial instrument, either directly or indirectly, are included in Level 2 of the fair value hierarchy. Fair values determined using valuation techniques where one or more material inputs are not based on observable market data are assigned to Level 3 of the fair value hierarchy. The estimation uncertainties as regards fair value measurement increase the higher the level is.
The property and public-sector loans included in loan receivables are measured using the discounted cash flow method for the purpose of the determination of fair value. Discounting of future cash flows of a transaction is based on transaction-specific risk-adjusted interest rates. These are derived on the basis of a virtually risk-free market interest rate for each currency depending on the relevant term, taking into account add-ons for risks specific to the counterparty as well as credit costs. In the case of loans subject to fixed interest rates, the contractually agreed payments are used as future cash flows. The future cash flows for floating-rate loans are derived using the future forward interest rates, taking into account the relevant spread for customer-specific terms and conditions.
Debt securities and promissory note loans for which no current market price is available are measured through an analysis of future payments using the fully-capitalised earnings value approach, where the inputs are based on observable market data. These approaches include the discounted cash flow (DCF) method which is used to determine the present value of contractual cash flows until the expected end of the term. The present value is determined based on the benchmark curve applicable for the relevant market, taking into account mark-ups based on credit quality and liquidity. The valuation model used for options included in the transaction is the commonly used Black-Scholes model or appropriate numerical procedures.
The fair value of OTC derivatives as well as of OTC hedging derivatives is determined on the basis of sector-specific standardised measurement models, such as the present value method or option pricing models. These techniques are based on inputs of active markets, such as interest rates, yield curves and credit spreads. The fair value of foreign exchange forwards is generally based on current forward exchange rates quoted on active markets. Adjustments for specific counterparty risks (CVA and DVA) are not taken into account for the determination of the present value of derivatives at Aareal Bank, as they are deemed immaterial. Since the derivatives are part of highly effective collateral agreements (Credit Support Annex to the ISDA Master Agreement and Collateral Annex to the German Master Agreement on Financial Derivatives Transactions) which are each subject to a master collateralisation agreement, measurement adjustments to reflect any potential counterparty credit risk or own credit risk are not required. The Bank uses the overnight interest rate swap curve (OIS curve) for the measurement of derivatives secured by cash collateral.
Amortised cost is an adequate estimate of fair value for cash funds, other loan receivables as well as short-term money market receivables and liabilities.
As a rule, the transaction price equals the fair value at initial recognition. In contrast, there can be differences between the initial fair value determined using a valuation technique and the transaction price. These so-called day-one gains or losses may only be recognised immediately when all the inputs on which the valuation parameters are based are observable in the market. Otherwise, the difference has to be amortised through profit or loss over the term of the transaction.
Pursuant to IAS 32, a financial instrument is any contract that gives rise to a financial asset at one contracting party and a financial liability or equity instrument at another contracting party.
Financial instruments (including derivative financial instruments) must be recognised if the reporting entity has become a party to the contractual provisions of such financial instruments. Trade date and settlement date are not the same for regular way purchases and sales of financial assets. Such regular way purchases and sales may be accounted for either at trade date or at settlement date. At Aareal Bank Group, financial instruments (fvpl) are recognised at the trade date, while all other financial instruments are recognised at the settlement date.
Financial instruments have to be derecognised when the contractual rights to the cash flows from the financial asset expire or an entity transfers the financial asset, including substantially all its risks and rewards. The modification of the contractual terms may also result in the derecognition of a financial instrument and the recognition of a new financial instrument.
If only a portion of risks and rewards is transferred and a portion of control is retained, the financial asset is recognised only to the extent of its continuing involvement. The extent of the continuing involvement corresponds to the extent to which the Company is exposed to changes in the value of the financial asset. A financial liability is derecognised when it is extinguished, i. e. when the obligation specified in the contract is discharged.
As a matter of principle, a modification is defined as any change made to existing terms of a loan agreement or a contractual adjustment during the loan or contract term. This applies regardless of the reasons for the modification (credit-driven or market-driven). Contractual adjustments may either lead to the derecognition of the "old" and the recognition of a "new" asset when such adjustments are substantial to the extent that they, in essence, constitute a new asset (hereinafter referred to as "substantial modification") or to the recalculation of the carrying amount and the recognition of a net modification gain or loss, when such adjustments constitute an adjustment of an existing asset (hereinafter referred to as "non-substantial modification").
The contractual adjustments subject to modifications may generally be caused by the borrower's credit quality and solvency (credit-driven modifications) or the granting of more favourable terms and conditions in an existing contract or the adjustment of the framework for financings as a result of changes in the customer's financing needs (market-driven modifications).
Both substantial and non-substantial modifications have an impact on profit or loss.
The amount of net modification gains or losses arising from non-substantial modifications is determined by the difference of the gross carrying amounts before and after the modification. Net modification gains or losses arising from market-driven modifications are recognised in net interest income, while creditdriven modifications are reported in the loss allowance. Subsequently, the changes in the carrying amount of the receivable is amortised over the remaining term of the receivable and recorded in net interest income.
In the case of a substantial modification, the old asset has to be derecognised, and a new asset has to be recognised. The difference of the gross carrying amounts before and after the modification is reported as net derecognition gains or losses in the case of market-driven modifications. In the case of creditdriven modifications, a loss allowance is recorded prior to derecognition in an amount that covers the entire difference between the old carrying amount and the fair value determined at the time of initial recognition.
Upon initial recognition, financial instruments are measured at fair value plus any transaction costs.
Subsequent measurement of financial assets is based on the classification of the financial instrument. Depending on the classification, financial assets are measured at amortised cost, at fair value through other comprehensive income or at fair value through profit or loss. Investments in equity instruments are measured at fair value through profit or loss, unless an irrevocable election is made at initial recognition to present subsequent changes in fair value in other comprehensive income. Within Aareal Bank Group, this election is exercised as a rule due to the investment characteristics of the equity instruments.
Financial liabilities are measured at amortised cost.
In addition, financial assets and liabilities may be designated as at fair value through profit or loss if certain prerequisites are met. Aareal Bank Group does not make use of this option.
The classification, i. e. the determination of the measurement category of a financial asset is to be assessed on the basis of two criteria. The objective criterion refers to the contractual design as to whether the payments solely represent payments of interest and principal on the principal amount outstanding (SPPI = solely payments of principal and interest). Relevant criteria were defined that are reviewed at initial recognition. For example, this may be financings with a primary investment risk or contractually agreed payments that depend on the borrower's economic performance. The subjective classification criterion refers to the business model, i. e. the aim that a company pursues for a group of assets.
Subsequent measurement has to be based on amortised cost (ac) when the financial instrument is held in order to collect contractual cash flows (business model "Hold") and additionally the contractual cash flows represent solely payments of principal and interest, i. e. are SPPI compliant. This classification category is used for a large portion of the lending and securities business.
Subsequent measurement at fair value, with changes in fair value being recognised initially directly in equity and subsequently reclassified to profit or loss (so-called recycling) (fair value through other comprehensive income (fvoci) with recycling) has to be made when financial instruments are SPPI compliant and are held either to collect contractual cash flows or to be sold (business model "Hold & Sell").
Subsequent measurement at fair value, with changes in fair value being recognised through profit or loss (fvpl), has to be made if the financial instrument is not SPPI compliant or cannot be allocated to one of the two business models. The latter is the case for example when there is the purpose of selling such financial instruments in the near term due to syndication covenants.
Loss allowances are based on the internal staging and expected credit loss (ECL/EL) model of Aareal Bank. For this purpose financial instruments measured at amortised cost and at fair value through other comprehensive income as well as loan commitments and financial guarantees are allocated to various stages at both initial recognition and subsequent measurement. The related loss allowances are recognised in the amount of the twelve-month or the lifetime expected credit loss.
The expected credit loss is generally determined by Aareal Bank using a model-based procedure where, depending on the stage, one- or multi-year parameters are used. The calculation of the expected loss in Stage 1 and of lifetime expected credit loss in Stage 2 is based on the one-year or lifetime probability of default (PD), respectively, the loss given default (LGD), the expected exposure at default (EAD), a discount factor (DF), the expected contractual term and the current and expected economic environment such as the GDP, long-term interest and unemployment rate. A period of not more than twelve months
is assessed for Stage 1, while the expected contractual term of the financial instrument has to be taken into account for Stages 2 and 3 (and, in addition, the expected term for loan repayment in Stage 3).
The expected loss in Stage 3 is usually determined on the basis of individually estimated cash flows (ECF procedure) in several probability-weighted scenarios. The amount of the loss allowance is determined as being the difference between the carrying amount of the asset and the present value of the expected future cash flows, discounted using the original effective interest rate applicable at initial recognition (taking into account the marketability of collateral provided). Collateral is largely provided in the form of land charges or mortgages; these are measured at fair value which is generally based on either the income capitalisation approach or the discounted cash flow method. Impairment triggers are strong indications for a decline of the borrower's credit quality, arrears as well as further indications that not all interest and principal payments can be made as contractually agreed.
The loss allowance for debt instruments measured at amortised cost are reported in the item "Loss allowance (ac)", for debt instruments measured at fair value through other comprehensive income in the item "Reserve from the measurement of debt instruments (fvoci)" and for loan commitments and financial guarantees under provisions. Debt instruments reported under POCI are accounted for on a net basis, i. e. without any loss allowance. Changes in loss allowance are reflected by increasing or decreasing the carrying amount through other loss allowance. If the receivables are not recoverable, the corresponding loss allowance is utilised and the receivable is derecognised.
The loss allowance for receivables from other transactions is determined using a simplified procedure in the amount of the lifetime expected credit losses.
The risk management strategy set out in the Risk Report is the basis for the recognition of hedging relationships. In Aareal Bank Group, risks from value fluctuations or from changed cash flows are hedged at transactions not measured through profit or loss. In this context, the risks from hedged items are intended to be offset by entering into hedging derivatives where the fair value changes or the changes in the cash flows have the opposite direction as those of the hedged item. Average prices of the hedges are not relevant for risk management. Hedging relationships are not recorded for transactions that are measured at fair value through profit or loss. The results from economic hedging relationships are offset in the result from transactions measured at fair value.
Hedge accounting in accordance with IFRS 9 distinguishes various forms of hedging relationships.
Fair value hedges are used to hedge hedged items against fair value changes from changes in interest rates or from changes in interest and exchange rates that are determined accordingly as hedged risk. In Aareal Bank Group, property loans, securities and promissory note loans are typically hedged using interest rate swaps and cross-currency swaps. The derivatives used for hedging are accounted for at fair value through profit or loss. The offsetting fair value changes of the hedged item resulting from the hedged risk are also recognised through profit or loss. The proportion of the fair value changes of the hedged item not attributable to the hedged risk is accounted for in line with the classification of the hedged item. A fully effective hedging relationship results in offsetting measurement results. The hedging relationship may result in adjustments in the carrying amount of the underlying transaction. Such adjustments will only be recognised in income at the end of the transaction term.
Derivatives used as hedging instruments for the purposes of a cash flow hedge serve to hedge future cash flows against changes in interest rates or interest and exchange rates resulting from variable-rate financial assets and liabilities. The effective portion of measurement gains or losses from the derivative is recorded in equity, in the hedging reserve. The ineffective portion of these measurement gains or losses is recorded directly in income. When the hedging relationship ceases to exist, the amounts recorded in the other reserves are transferred to the income statement at the same time as profits or losses on the former underlying transaction are recognised in income. The underlying transaction is recognised in line with the rules for the measurement category to which the underlying transaction has been allocated.
Hedges of a net investment in a foreign operation are used to hedge currency risks arising on the translation of the net assets of foreign Group companies. The effective portion of measurement gains or losses from derivative hedging instruments is recognised directly in equity in the reserve from hedges of net investments. The ineffective portion of the hedging derivative's fair value changes have to be recognised in the income statement. The gain or loss on the hedging derivative relating to the effective portion of the hedge that has been recognised directly in equity shall be recognised in profit or loss on disposal of the foreign operation. Any translation differences resulting from the translation of an entity with a different functional currency into the Group currency also have to be recognised directly in equity in the currency translation reserve; they will be reclassified to the income statement upon disposal of the foreign operation.
Cash funds include cash on hand and balances with central banks. Cash funds are exclusively allocated to the measurement category "ac".
The item "Loan receivables" comprises property loans, loans to local authorities and other loan receivables, including deferred interest. Loan receivables can be allocated to all measurement categories. The portion of loan commitments not disbursed is reported as contingent liabilities.
Money and capital market receivables consist of money market receivables, promissory note loans and debt securities, including deferred interest. This item also includes unconsolidated equity instruments. Money and capital market receivables may generally be allocated to all measurement categories. Equity instruments are allocated to the measurement category "fvoci".
The item "Receivables from other transactions" comprises trade receivables and other financial receivables. Receivables from other transactions are exclusively allocated to the measurement category "ac".
The items "Positive market value of designated hedging derivatives" and "Negative market value of designated hedging derivatives" include derivatives with positive or negative market values from fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation, including deferred interest. Derivatives are exclusively allocated to the measurement category "fvpl". The basis for the recognition of hedging relationships is described in the chapter "Recognition and measurement of financial instruments" in this section. Effects from the measurement of these derivatives are reported in the item "Net result on hedge accounting", together with the effects from the measurement of the transactions.
Derivative financial instruments that are not part of recognised hedging relationships are reported in Aareal Bank Group under positive or negative market values of other derivatives. They are mainly used to hedge economic market price risks. Derivatives are exclusively allocated to the measurement category "fvpl". Results from the measurement and the termination of the derivatives are reported in the item "Net gain or loss from financial assets (fvpl)". Interest received or paid in connection with these derivatives is also recorded generally in the item "Net gain or loss from financial assets (fvpl)". Interest received or paid for derivatives entered into for hedging purposes which, however, do not meet the hedge accounting criteria, is reported in net interest income. Effects from the measurement of these derivatives are reported in the item "Net gain or loss from financial assets (fvpl)", together with the effects from the measurement of the transactions.
Investments accounted for using the equity method include shares in companies where Aareal Bank Group can exercise significant influence (associates) as well as shares in joint ventures.
Investments in associates included in this item are recognised at cost when the significant influence arises, and subsequently carried at amortised cost whereby, in particular, the share of results of operations of any financial year is recognised in income.
The equity method applied to the major associates was based on the most recent available financial statements prepared under local GAAP.
The item "Intangible assets" consists of proprietary software, goodwill and other intangible assets such as purchased software and licenses.
Intangible assets (except goodwill) are carried at cost, less accumulated amortisation and any impairment losses.
Research costs incurred in connection with software development are expensed as they are incurred. Development costs are capitalised from the time when the software development can be regarded as completed from a technical perspective, and several other conditions are fulfilled. Borrowing costs directly attributable to software development are part of the cost. They are amortised on a straight-line basis, using an estimated economic life of ten years. Purchased software is also deemed to have a limited useful life. The procedure followed for the determination of amortisation of purchased software is the same as the procedure used for proprietary software. Amortisation is recognised in administrative expenses. Goodwill is defined as the excess of the cost of acquisition over the fair value of the Group's interest in the net assets of an acquired entity, at the time of acquisition (positive difference). Goodwill is carried
at historical cost less accumulated impairments. Any negative goodwill (badwill) arising upon acquisition is immediately charged against income.
In case the annual impairment test shows that there are indications of impairment of intangible assets (as set out in IAS 36) and that the recoverable amount is lower than the carrying amount of the asset concerned, the asset is written down through profit or loss, to the estimated recoverable amount.
If it is impossible to estimate the recoverable amount for a specific asset, the recoverable amount of the cash-generating unit that the asset belongs to must be determined. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Aareal Bank Group defines cash-generating units either on the basis of a single subsidiary or on product level. The recoverable amount of an asset or a cash-generating unit is the higher of fair value less costs to sell and value in use. (Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset or cash-generating unit.) Future cash flows are determined based on medium-term projections. The present value of the future cash flows is determined using discount factors which are in line with the risks involved. Accordingly, the recognition of intangible assets and the impairment test is also subject to estimation uncertainties.
Property and equipment includes owner-occupied land and buildings, office furniture and equipment as well as a hotel which is operated by Aareal Bank. Property and equipment is measured at cost, less accumulated depreciation and impairment losses. Depreciation and impairment losses are reported under administrative expenses, while those of the owner-operated hotel are shown in net other operating income/expenses.
Owner-occupied buildings reported under property and equipment are depreciated on a straight-line basis, over a period of 25 to 50 years. Owner-occupied land is not depreciated. Please refer to the explanations in the Notes on other assets for the accounting method to be applied for land and buildings which are not owner-occupied. Office furniture and equipment items are depreciated using the straightline method, applying the following periods:
| Depreciation period | |
|---|---|
| Other property and equipment | |
| IT equipment | 3-7 years |
| Other office furniture and equipment | 5-13 years |
Tenant improvements are depreciated based on the principles applicable for the relevant building.
For details on recognising impairments as defined in IAS 36, please refer to the explanations in the Note on intangible assets in this section.
Gains and losses upon disposal of property and equipment are recognised in income (in net other operating income/expenses).
The costs to purchase property and equipment in the amount of up to € 250.00 (low-value assets) are expensed as they are incurred.
Deferred taxes are reported in the items "Deferred tax assets" and "Deferred tax liabilities".
Deferred tax assets are recognised when they are deemed recoverable. The recoverability is assessed using tax planning (internal assessment) on the basis of medium-term Group planning. Accordingly, deferred tax assets are only recognised to the extent that we deem it probable that future taxable profits will be available against which the temporary differences and tax loss carryforwards can be utilised. Deferred taxes are calculated on the basis of country- and company-specific tax rates expected to apply at the time of the realisation of temporary differences and set-off against loss carryforwards.
Deferred tax assets and deferred tax liabilities are offset in accordance with IAS 12.74 when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or tax group.
The item "Other assets" includes properties and miscellaneous assets. Properties reported under other assets are intended for short-term disposal, though the IFRS 5 criteria are not met. They are measured at the lower of cost or net realisable value, in accordance with IAS 2, and therefore are subject to estimation uncertainties.
The item "Money and capital market liabilities" comprises money market liabilities, mortgage Pfandbriefe, registered public sector Pfandbriefe, promissory note loans and other debt securities, including deferred interest. Money and capital market activities are allocated to the measurement category "ac".
The item "Deposits from the housing industry" includes deposits payable on demand and term deposits, including deferred interest. Deposits from the housing industry are allocated to the measurement category "ac".
The item "Liabilities from other transactions" comprises trade payables and other financial liabilities. Liabilities from other transactions are exclusively allocated to the measurement category "ac".
The item "Subordinated capital" consists of subordinated liabilities, profit-participation certificates and silent participations. Subordinated funds raised do not provide for any early repayment obligation. In the event of liquidation or insolvency, claims on interest and principal from these liabilities are subordinated
to the claims of all other creditors, which are not subordinated themselves. Pursuant to the terms and conditions of issue, holders of profit-participation certificates have a claim on interest payments which takes precedence over the profit entitlements of shareholders. To the extent that a distribution would cause a net loss, said interest claim would be reduced, possibly down to zero, creating a claim for backpayment during the term of the certificates at the same time. Repayment takes place at the nominal amount (subject to any loss sharing), on the day after the Annual General Meeting passing resolutions regarding the relevant financial year. The profit-participation certificates evidence creditors' rights; they do not grant any share in the liquidation proceeds.
Subordinated capital is allocated to the measurement category "ac".
Other liabilities include, among other items, deferred income and liabilities from other taxes.
The item "Provisions" comprises provisions for pensions and similar obligations, provisions for staff expenses and non-staff operating costs, provisions for risks related to unrecognised items in the lending business, provisions for legal or tax risks, as well as other provisions. Provisions are recognised when there is a present legal or constructive obligation towards third parties arising from a past event, the outflow of resources to meet this obligation is probable and the amount of the obligation can be reliably estimated. Provisions, including uncertain tax positions, are measured on the basis of the best estimate of expenditure required to settle the obligation (most likely value) required as at the reporting date. In the context of acquisitions in accordance with IFRS 3, contingent liabilities, including uncertain tax obligations, were also recognised at their expected value. These are released when the reasons for their recognition cease to exist.
Measurement is subject to several uncertainties and often requires significant estimates made by the management in relation to various factors that may not apply subsequently. The final amount of the liabilities may deviate significantly from the measurement previously made in accounting. For example, the outcome of individual legal proceedings may not be predicted with certainty.
If utilisation in the short term, i.e. within twelve months, from the obligation is not expected, the provision will be recognised at present value.
Aareal Bank Group maintains various pension plans as defined in IAS 19. For the purpose of reporting pension obligations, IAS 19 makes a distinction between defined contribution plans and defined benefit plans.
Under defined contribution plans, an enterprise pays fixed contributions into a separate entity or a fund and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Contributions paid to the statutory pension insurance scheme are also classified as defined contribution plans. The contributions paid to a defined contribution plan are recorded as staff expenses.
Defined benefit obligations are all pension obligations that do not meet the criteria of a defined contribution obligation. The amount of obligations usually depends on one or several factors, including age, length of service, and salary.
The Group's obligations under defined benefit plans are recognised as a provision in the consolidated statement of financial position. These are based on general works agreements on an employee pension scheme, individual agreements with executive staff as well as individual agreements concluded with the members of the Company's senior management. Projected economic and demographic developments as well as salary trends must be applied to the calculation of the provisions. Calculating the amount of provisions in the Group is based on actuarial opinions which are prepared by external actuaries on the basis of Aareal Bank-specific and Group-wide standardised parameters.
Provisions for pensions and similar obligations under defined benefit plans are determined in accordance with IAS 19 on the basis of the projected unit credit method; the various defined benefit plans are measured separately. The fair value of the plan assets is deducted from the present value of the pension obligation, taking into account, if applicable, the rules for the asset ceiling in relation to a surplus of plan assets over the benefit obligation. The resulting amount represents the net defined benefit liability (provision) or the net defined benefit asset. The net interest expense in the financial year is determined by applying the discount factor calculated at the beginning of the financial year to the net liability calculated as at that date. The discount rate used to determine the present value of the obligation is based on the capital market rate of high quality corporate bonds with comparable maturities at the reporting date. Determination is based on the GlobalRate:Link method by Willis Towers Watson. The data basis consists of corporate bonds recorded by Bloomberg which have a rating of at least "AA" and are denominated in the same currency as the underlying pension obligation. Actuarial gains and losses (remeasurements), which – in connection of the amount of obligations – arise on changes in expectations regarding life expectancy, pension increases, salary development, discount rate compared to the estimation made at the beginning of the period or compared to the actual trend during the period, are recorded in other comprehensive income in the item "Changes in the reserve from remeasurements of defined benefit plans". Actuarial gains and losses (remeasurements) recorded in other comprehensive income may not be reclassified subsequently to profit or loss (recycling). Differences between the expected return on plan assets, determined at the beginning of the period using the then applicable discount rate, and the actual return on plan assets (remeasurement) at the end of the period are also recognised in other comprehensive income. Actuarial gains and losses as well as the difference between expected and actual return on plan assets are included in other reserves. They are reported separately in the statement of changes in equity. Accordingly, the recognition of pension obligations is also subject to estimation uncertainties.
Aareal Bank Group maintains share-based payment plans subject to cash settlement in accordance with IFRS 2. We refer to the Remuneration Report as part of the Notes to the consolidated financial statements as at 31 December 2017, which includes a detailed description of the plans and their scope as well as information on the valuation model applied and the effects of share-based payments on the Group's financial position and performance.
Provisions for obligations arising from share-based remuneration plans have been recognised under administrative expenses, in the amount of the fair value of the relevant obligation at the reporting date.
Equity comprises subscribed capital, capital reserves, retained earnings and other reserves. Other reserves include the reserve from remeasurements of defined benefit plans, the reserve from the measurement of equity and debt instrument at fair value through other comprehensive income, the hedging reserves, the Reserve from changes in the value of foreign currency basis spreads and currency translation reserve. In addition, the item "Equity" includes non-controlling interests as well as the so-called Additional Tier 1 bond (AT1 bond). The AT1 bond is classified as equity since there is neither an obligation to repay the bond nor is there an obligation for ongoing debt service (payment of a dividend). The transaction costs directly attributable to the issue of the AT1 bond as well as dividends paid are deducted directly from equity, net of taxes.
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when due. A guarantor recognises a financial guarantee contract as a liability at the date of addition, using the fair value of the guarantee obligation. The obligation is subsequently measured at the greater of a provision recorded in accordance with IAS 37 and the original amount, less any accumulated amortisation. Within Aareal Bank Group, financial guarantee contracts are presented based on the present value of the claim resulting from the future premium payments of the holder, and offset with the obligation for the guarantee (net basis).
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Interest income from financial assets (ac) | 408 | 423 |
| Loan receivables (ac) | 399 | 414 |
| Money market and capital market receivables (ac) | 9 | 9 |
| Interest income from financial liabilities (ac) | 4 | 3 |
| Money market and capital market liabilities (ac) | 3 | 2 |
| Deposits from the housing industry (ac) | 1 | 1 |
| Interest income from financial assets (fvoci) | 0 | 0 |
| Money market and capital market receivables (fvoci) | 0 | 0 |
| Current dividend income | 0 | 0 |
| Interest income from financial assets (fvpl) | 17 | 3 |
| Loan receivables (fvpl) | 10 | – |
| Money market and capital market receivables (fvpl) | 3 | – |
| Other derivatives (fvpl) | 4 | 3 |
| Market-driven modification gains | 2 | n/a |
| Total interest and similar income | 431 | 429 |
| Interest expenses from financial liabilities (ac) | 52 | 47 |
| Money market and capital market liabilities (ac) | 38 | 33 |
| Deposits from the housing industry (ac) | 1 | 0 |
| Liabilities from other transactions (ac) | 0 | 0 |
| Subordinated capital (ac) | 13 | 14 |
| Interest expenses from financial assets (ac) | 6 | 8 |
| Cash funds (ac) | 6 | 7 |
| Money market and capital market receivables (ac) | 0 | 1 |
| Interest expenses for financial liabilities (fvpl) | 102 | 69 |
| Other derivatives (fvpl) | 102 | 69 |
| Market-driven modification losses | 2 | n/a |
| Total interest and similar expenses | 162 | 124 |
| Total | 269 | 305 |
1) Comparative amounts reclassified according to the new classification format
Net interest income totalled € 269 million, an expected reduction from the previous year (H1 2017: € 305 million), which was largely due to the portfolio decline seen in the previous year, reflecting – amongst other factors – the scheduled reduction of the former WestImmo and Corealcredit portfolios.
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Additions | 59 | 59 |
| Reversals | 38 | 25 |
| Direct write-offs | – | 10 |
| Recoveries on loans and advances previously written off | 2 | 17 |
| Loss allowance – other items | 0 | n/a |
| Credit-driven net modification gain or loss | – | n/a |
| Total | 19 | 27 |
1) Comparative amounts reclassified according to the new classification format
Loss allowance amounted to € 19 million (H1 2017: € 27 million) and was thus in line with our expectations.
Please also refer to our explanations in the Notes (10, 18, and 20).
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Commission income from | ||
| ERP products | 78 | 76 |
| Digital solutions | 19 | 17 |
| Additional products | 7 | 7 |
| Lending and other banking business | 13 | 11 |
| Other activities | 5 | 4 |
| Total commission income | 122 | 115 |
| Commission expenses for | ||
| Purchased services | 18 | 16 |
| Lending and other banking business | 1 | 1 |
| Other activities | 2 | 1 |
| Total commission expenses | 21 | 18 |
| Total | 101 | 97 |
1) Comparative amounts reclassified according to the new classification format
Net commission income increased to € 101 million (H1 2017: € 97 million), which was mainly due to higher sales revenue at Aareon.
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Net gain or loss on the derecognition of financial assets (ac) | ||
| Loan receivables (ac) | 11 | 17 |
| Money market and capital market receivables (ac) | – | – |
| Net gain or loss on the derecognition of financial liabilities (ac) | ||
| Money market and capital market liabilities (ac) | 0 | – |
| Net gain or loss on the derecognition of financial assets (fvoci) | ||
| Money market and capital market receivables (fvoci) | – | 0 |
| Total | 11 | 17 |
1) Comparative amounts reclassified according to the new classification format
The € 11 million net gain on derecognition of loan receivables (H1 2017: € 17 million) declined due to lower effects from early repayments.
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 20171) | |
|---|---|---|
| € mn | ||
| Net gain or loss from loan receivables (fvpl) | -1 | – |
| Net gain or loss from money market and capital market receivables (fvpl) | 1 | 0 |
| Net gain or loss from other derivatives (fvpl) | 1 | 0 |
| Currency translation | -2 | 3 |
| Total | -1 | 3 |
1) Comparative amounts reclassified according to the new classification format
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 2017 | |
|---|---|---|
| € mn | ||
| Ineffective portion of fair value hedges | -3 | -1 |
| Ineffective portion of cash flow hedges | – | -5 |
| Ineffective portion of net investment hedges | 0 | 0 |
| Total | -3 | -6 |
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 2017 | |
|---|---|---|
| € mn | ||
| Staff expenses | 130 | 163 |
| Wages and salaries | 101 | 131 |
| Social security contributions | 18 | 17 |
| Pensions | 11 | 15 |
| Other administrative expenses | 95 | 95 |
| Depreciation, amortisation and impairment of property and equipment and intangible assets |
12 | 10 |
| Total | 237 | 268 |
At € 237 million (H1 2017: € 268 million), administrative expenses were reduced as expected, thanks to lower running costs.
| 1 Jan-30 Jun 2018 | 1 Jan-30 Jun 2017 | |
|---|---|---|
| € mn | ||
| Income from properties | 32 | 32 |
| Income from the reversal of provisions | 1 | 70 |
| Income from goods and services | 0 | 0 |
| Miscellaneous other operating income | 15 | 6 |
| Total other operating income | 48 | 108 |
| Expenses for properties | 35 | 26 |
| Expenses for other taxes | 1 | 3 |
| Other operating expenses | 4 | 20 |
| Total other operating expenses | 40 | 49 |
| Total | 8 | 59 |
The comparative figure for the previous year's period included € 50 million in net reversals of provisions in connection with the final agreement on contractual issues with a third party, which were still pending when Aareal Bank Group acquired former Corealcredit, and the release of tax assessment notes. This was offset by corresponding income tax expense of € 26 million.
| 30 Jun 2018 | 31 Dec 2017 | |
|---|---|---|
| € mn | ||
| Cash on hand | 0 | 0 |
| Balances with the central bank | 1,139 | 2,081 |
| Total | 1,139 | 2,081 |
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Property loans | 25,295 | 25,701 |
| Public sector loans | 492 | 537 |
| Other loan receivables | 27 | 78 |
| Total | 25,814 | 26,316 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Money market receivables | 762 | 713 |
| Promissory note loans | 1,223 | 1,399 |
| Bonds | 3,712 | 3,113 |
| Total | 5,697 | 5,225 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Trade receivables | 55 | 56 |
| Other financial receivables | 22 | 37 |
| Total | 77 | 93 |
| Receivables | Total loss | ||||
|---|---|---|---|---|---|
| Stage 1 | Stage 2 | Stage 3 | from other trans actions (ac) |
allowance (ac) |
|
| € mn | |||||
| Balance as at 1 January | 32 | 42 | 517 | 2 | 593 |
| Additions | 13 | 10 | 32 | 0 | 55 |
| Utilisation | – | – | 73 | 0 | 73 |
| Reversals | 12 | 6 | 17 | – | 35 |
| Transfer to Stage 1 | 0 | 0 | – | – | 0 |
| Transfer to Stage 2 | 0 | 0 | 0 | – | 0 |
| Transfer to Stage 3 | 0 | 0 | 0 | – | 0 |
| Interest rate effect | – | – | 3 | – | 3 |
| Currency adjustments | 0 | 0 | -1 | 0 | -1 |
| Transfers | – | – | – | 1 | 1 |
| Balance as at 30 June | 33 | 46 | 461 | 3 | 543 |
The loss allowances for financial assets measured at amortised cost refers to loan receivables, money and capital market receivables as well as receivables from other transactions (largely trade receivables) that are measured at amortised cost.
| € mn | Specific valuation allowance |
Portfolio impair ment allowance |
Total loss allowance for recognised items |
Provisions in the lending business for unrecognised items |
Total loss allowance and provisions in the lending business |
|---|---|---|---|---|---|
| Loss allowance as at 1 January | 435 | 119 | 554 | 5 | 559 |
| Additions | 59 | – | 59 | 0 | 59 |
| Write-downs | 5 | – | 5 | 0 | 5 |
| Reversals | 3 | 20 | 23 | 2 | 25 |
| Unwinding | 15 | – | 15 | – | 15 |
| Changes in the basis of consolidation | – | – | – | – | – |
| Currency adjustments | -3 | -1 | -4 | 0 | -4 |
| Loss allowance as at 30 June | 468 | 98 | 566 | 3 | 569 |
1) Comparative values determined in accordance with IAS 39
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Promissory note loans | – | – |
| Bonds | 4,234 | 5,422 |
| Total | 4,234 | 5,422 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Equities and other non-fixed income securities | 1 | – |
| Other investments | 3 | 2 |
| Total | 4 | 2 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Property loans | 606 | 196 |
| Public sector loans | – | – |
| Other loans and advances | – | – |
| Total | 606 | 196 |
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Promissory note loans | 91 | – |
| Bonds | 159 | – |
| Fund units | 0 | 0 |
| Total | 250 | 0 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Positive market value of fair value hedges | 1,279 | 1,915 |
| Positive market value of cash flow hedges | – | 8 |
| Positive market value of net investment hedges | – | 3 |
| Total | 1,279 | 1,926 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Positive market value of economic hedging derivatives | 527 | 80 |
| Positive market value of other derivatives | 204 | 247 |
| Total | 731 | 327 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 2017 | |
|---|---|---|
| € mn | ||
| Goodwill | 85 | 85 |
| Proprietary software | 26 | 24 |
| Other intangible assets | 42 | 44 |
| Total | 153 | 153 |
| 30 Jun 2018 | 31 Dec 2017 | |
|---|---|---|
| € mn | ||
| Land and buildings and construction in progress | 229 | 221 |
| Office furniture and equipment | 31 | 32 |
| Total | 260 | 253 |
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Properties | 187 | 203 |
| Miscellaneous | 136 | 93 |
| Total | 323 | 296 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Money market liabilities | 4,664 | 4,821 |
| Promissory note loans | 5,218 | 5,421 |
| Mortgage Pfandbriefe | 9,717 | 11,036 |
| Public-sector Pfandbriefe | 2,432 | 2,578 |
| Other debt securities | 2,289 | 2,230 |
| Other financial liabilities | 2 | 23 |
| Total | 24,322 | 26,109 |
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Payable on demand | 7,698 | 7,314 |
| Term deposits | 1,888 | 1,850 |
| Total | 9,586 | 9,164 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Trade accounts payable | 9 | 18 |
| Other liabilities | 127 | 74 |
| Total | 136 | 92 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 2017 |
|---|---|
| 1,036 | 1,060 |
| 12 | 12 |
| – | 193 |
| 1,048 | 1,265 |
| 30 Jun 2018 | 31 Dec 20171) |
|---|---|
| 1,251 | 1,464 |
| – | 15 |
| 9 | – |
| 1,260 | 1,479 |
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Negative market value of economic hedging derivatives | 247 | 34 |
| Negative market value of miscellaneous other derivatives | 152 | 190 |
| Total | 399 | 224 |
1) Comparative amounts reclassified according to the new classification format
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Provisions for pensions and similar obligations | 368 | 351 |
| Provisions for unrecognised lending business | 7 | 4 |
| Other provisions and contingent liabilities | 161 | 215 |
| Total | 536 | 570 |
1) Comparative amounts reclassified according to the new classification format
Changes in the discount rate require a revaluation of the amount of obligations. This is recognised directly in other comprehensive income, under changes in the reserve from defined benefit plans.
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Deferred income | 19 | 16 |
| Liabilities from other taxes | 13 | 17 |
| Miscellaneous | 1 | 0 |
| Total | 33 | 33 |
| 30 Jun 2018 | 31 Dec 20171) | |
|---|---|---|
| € mn | ||
| Subscribed capital | 180 | 180 |
| Capital reserves | 721 | 721 |
| Retained earnings | 1,657 | 1,798 |
| AT1 bond | 300 | 300 |
| Other reserves | ||
| Reserve from remeasurements of defined benefit plans | -93 | -91 |
| Reserve from the measurement of equity instruments (fvoci) | 0 | 0 |
| Reserve from the measurement of debt instruments (fvoci) | 49 | 24 |
| Hedging reserves | – | -1 |
| Reserve from foreign currency basis spreads | -11 | n/a |
| Currency translation reserve | -6 | -9 |
| Non-controlling interests | 1 | 2 |
| Total | 2,798 | 2,924 |
1) Comparative amounts reclassified according to the new classification format
The item "Reserve from the measurement of debt instruments (fvoci)" includes loss allowance of € 0 million (2017: n/a).
No treasury shares were held during the period under review.
The Annual General Meeting of Aareal Bank AG held on 23 May 2018 resolved that Aareal Bank AG's net retained profit of € 149,643,052.50 for the financial year 2017, as reported under the German Commercial Code (HGB), be used to distribute a dividend of € 2.50 per notional no-par value share.
In addition, on 30 April 2018, the Management Board resolved on a distribution in relation to the AT1 instruments, pursuant to the terms and conditions of the notes.
Within Aareal Bank Group's consolidated statement of financial position, a dividend payment and a distribution on the AT1 bond reduce the retained earnings item within consolidated equity.
The carrying amounts of financial instruments held by Aareal Bank Group which are reported at fair value in the statement of financial position are presented in the following table according to the three-tier fair value hierarchy pursuant to IFRS 13.72 et seqq. The presentation is made for each class of financial instrument:
| Fair value total |
Fair value level 1 |
Fair value level 2 |
Fair value level 3 |
|
|---|---|---|---|---|
| € mn | ||||
| Financial assets (fvoci) | 4,238 | 4,234 | – | 4 |
| Money market and capital market receivables (fvoci) | 4,234 | 4,234 | – | – |
| Equity instruments (fvoci) | 4 | – | – | 4 |
| Financial assets (fvpl) | 2,866 | – | 2,260 | 606 |
| Loan receivables (fvpl) | 606 | – | – | 606 |
| Money market and capital market receivables (fvpl) | 250 | – | 250 | – |
| Positive market value of designated hedging derivatives (fvpl) | 1,279 | – | 1,279 | – |
| Positive market value of other derivatives (fvpl) | 731 | – | 731 | – |
| Financial liabilities (fvpl) | 1,659 | – | 1,659 | – |
| Negative market value of designated hedging derivatives (fvpl) | 1,260 | – | 1,260 | – |
| Negative market value of other derivatives (fvpl) | 399 | – | 399 | – |
| Fair value total |
Fair value level 1 |
Fair value level 2 |
Fair value level 3 |
|
|---|---|---|---|---|
| € mn | ||||
| Financial assets (fvoci) | 5,424 | 5,422 | – | 2 |
| Money market and capital market receivables (fvoci) | 5,422 | 5,422 | – | – |
| Equity instruments (fvoci) | 2 | – | – | 2 |
| Financial assets (fvpl) | 2,449 | – | 2,253 | 196 |
| Loan receivables (fvpl) | 196 | – | – | 196 |
| Money market and capital market receivables (fvpl) | – | – | – | – |
| Positive market value of designated hedging derivatives (fvpl) | 1,926 | – | 1,926 | – |
| Positive market value of other derivatives (fvpl) | 327 | – | 327 | – |
| Financial liabilities (fvpl) | 1,703 | – | 1,703 | – |
| Negative market value of designated hedging derivatives (fvpl) | 1,479 | – | 1,479 | – |
| Negative market value of other derivatives (fvpl) | 224 | – | 224 | – |
In the first six months of 2018, there were no material transfers between the hierarchy levels for the various financial instruments.
The fair values of financial instruments recognised at fair value in the statement of financial position that are assigned to Level 3 of the fair value hierarchy developed as follows during the period under review:
| Loan receivables (fvpl) | |
|---|---|
| € mn | |
| Fair value as at 1 January 20181) | 604 |
| Change in measurement | -2 |
| Position changes | |
| Additions | 466 |
| Derecognitions | 463 |
| Deferred interest | 1 |
| Fair value as at 30 June 2018 | 606 |
1) Fair value in accordance with IAS 39, as at 31 December 2017: € 196 million
Financial instruments held in the Bank's portfolio contributed € -1 million to the gains/losses from financial instruments (fvpl).
Regarding loan receivables (ac), the add-ons for risks specific to the counterparty represent the material input parameter not observable in the market. Regarding the non-defaulted loans, an increase/decrease by 1 % would lead to a decrease/increase of the fair value by approximately € 18 million.
The fair values of financial instruments are compared with their carrying amounts in the following table. The presentation is made for each class of financial instrument:
| Carrying amount 30 Jun 2018 |
Fair value 30 Jun 2018 |
Carrying amount 31 Dec 20171) |
Fair value 31 Dec 20171) |
|
|---|---|---|---|---|
| € mn | ||||
| Financial assets (ac) | 32,184 | 32,623 | 33,175 | 33,698 |
| Cash funds (ac) | 1,139 | 1,139 | 2,081 | 2,081 |
| Loan receivables (ac) | 25,292 | 25,846 | 25,776 | 26,308 |
| Money market and capital market receivables (ac) | 5,679 | 5,564 | 5,225 | 5,218 |
| Receivables from other transactions (ac) | 74 | 74 | 93 | 91 |
| Financial assets (fvoci) | 4,238 | 4,238 | 5,424 | 5,424 |
| Money market and capital market receivables (fvoci) | 4,234 | 4,234 | 5,422 | 5,422 |
| Equity instruments (fvoci) | 4 | 4 | 2 | 2 |
| Carrying amount |
Fair value | Carrying amount |
Fair value | |
|---|---|---|---|---|
| 30 Jun 2018 | 30 Jun 2018 | 31 Dec 20171) | 31 Dec 20171) | |
| € mn | ||||
| Financial assets (fvpl) | 2,866 | 2,866 | 2,449 | 2,449 |
| Loan receivables (fvpl) | 606 | 606 | 196 | 196 |
| Money market and capital market receivables (fvpl) | 250 | 250 | – | – |
| Positive market value of designated hedging derivatives (fvpl) | 1,279 | 1,279 | 1,926 | 1,926 |
| Positive market value of other derivatives (fvpl) | 731 | 731 | 327 | 327 |
| Financial liabilities (ac) | 35,092 | 35,312 | 36,630 | 36,961 |
| Money market and capital market liabilities (ac) | 24,322 | 24,482 | 26,109 | 26,349 |
| Deposits from the housing industry (ac) | 9,586 | 9,586 | 9,164 | 9,164 |
| Liabilities from other transactions (ac) | 136 | 136 | 92 | 90 |
| Subordinated capital (ac) | 1,048 | 1,108 | 1,265 | 1,358 |
| Financial liabilities (fvpl) | 1,659 | 1,659 | 1,703 | 1,703 |
| Negative market value of designated hedging derivatives (fvpl) | 1,260 | 1,260 | 1,479 | 1,479 |
| Negative market value of other derivatives (fvpl) | 399 | 399 | 224 | 224 |
1) Comparative amounts reclassified according to the new classification format
Aareal Bank Group has entered into transactions that were not effected on the principal market or the most advantageous market for the asset or liability concerned. In these cases the transaction price does not correspond to the fair value of the asset or liability, because the determination of the fair value using a valuation technique which assumes a transaction on a principal market results in a fair value that deviates from the transaction price. The financial instruments are carried at the transaction price upon initial recognition. The difference between the transaction price and the fair value measured based on the valuation model (the so-called day-one profit or loss) is amortised over the term of the transaction in the income statement, since the fair value of these derivatives is determined using valuation models whose inputs are not fully based on observable market factors.
The table below shows the development of the day-one profit or loss during the year under review. The day-one profit or loss is recognised as an item to be deducted from the carrying amount of the respective underlying derivative position:
| 2018 | 2017 | |
|---|---|---|
| € mn | ||
| Balance as at 1 January | 6 | 12 |
| Additions from new transactions | -1 | 1 |
| Reversals through profit or loss in the period | 2 | 3 |
| Balance as at 30 June | 3 | 10 |
| Structured Property Financing |
Consulting/ Services |
Consolidation/ Reconciliation |
Aareal Bank Group |
|||||
|---|---|---|---|---|---|---|---|---|
| 1 Jan 30 Jun 2018 |
1 Jan 30 Jun 20171) |
1 Jan 30 Jun 2018 |
1 Jan 30 Jun 2017 |
1 Jan 30 Jun 2018 |
1 Jan 30 Jun 2017 |
1 Jan 30 Jun 2018 |
1 Jan 30 Jun 20171) |
|
| € mn | ||||||||
| Net interest income | 275 | 310 | 0 | 0 | -6 | -5 | 269 | 305 |
| Loss allowance | 19 | 27 | 0 | 19 | 27 | |||
| Net commission income | 4 | 3 | 93 | 91 | 4 | 3 | 101 | 97 |
| Net derecognition gain or loss | 11 | 17 | 11 | 17 | ||||
| Gains /losses from financial instruments (fvpl) |
-1 | 3 | -1 | 3 | ||||
| Net result on hedge accounting | -3 | -6 | -3 | -6 | ||||
| Results from investments accounted for using the equity method |
||||||||
| Administrative expenses | 129 | 166 | 110 | 104 | -2 | -2 | 237 | 268 |
| Net other operating income/expenses |
7 | 58 | 1 | 1 | 0 | 0 | 8 | 59 |
| Operating profit | 145 | 192 | -16 | -12 | 0 | 0 | 129 | 180 |
| Income taxes | 50 | 70 | -6 | -4 | 44 | 66 | ||
| Consolidated net income | 95 | 122 | -10 | -8 | 0 | 0 | 85 | 114 |
| Consolidated net income attributable to non-controlling interests |
0 | 4 | 1 | 2 | 1 | 6 | ||
| Consolidated net income attributable to shareholders of Aareal Bank AG |
95 | 118 | -11 | -10 | 0 | 0 | 84 | 108 |
| Allocated equity | 1,788 | 1,813 | 172 | 152 | 520 | 548 | 2,480 | 2,513 |
| Cost/ income ratio (%) | 44.2 | 43.0 | 116.4 | 112.8 | 61.6 | 56.3 | ||
| RoE before taxes (%) 2) 3) | 14.9 | 19.5 | -19.9 | -17.7 | 9.4 | 13.0 | ||
| Employees (average) | 812 | 908 | 1,956 | 1,825 | 2,768 | 2,733 | ||
| Segment assets | 29,530 | 33,955 | 10,632 | 10,158 | 40,162 | 44,113 |
1) Comparative amounts reclassified according to the new classification format
2) On an annualised basis
3) The allocation of earnings is based on the assumption that net interest payable on the AT1 bond is recognised on an accrual basis.
| Structured Property Financing |
Consulting/ Services |
Consolidation/ Reconciliation |
Aareal Bank Group |
|||||
|---|---|---|---|---|---|---|---|---|
| 1 Jan 30 Jun 2018 |
1 Jan 30 Jun 20171) |
1 Jan 30 Jun 2018 |
1 Jan 30 Jun 20171) |
1 Jan 30 Jun 2018 |
1 Jan 30 Jun 20171) |
1 Jan 30 Jun 2018 |
1 Jan 30 Jun 20171) |
|
| € mn | ||||||||
| ERP Products | 79 | 76 | -1 | 78 | 76 | |||
| Digital solutions | 19 | 17 | 19 | 17 | ||||
| Add-on products | 14 | 14 | -7 | -7 | 7 | 7 | ||
| Lending and other banking | ||||||||
| business | 4 | 4 | 9 | 7 | 13 | 11 | ||
| Other activities | 5 | 4 | 5 | 4 | ||||
| Total | 4 | 4 | 126 | 118 | -8 | -7 | 122 | 115 |
| Structured Property Financing |
Consulting/ Services |
Consolidation/ Reconciliation |
Aareal Bank Group |
|||||
|---|---|---|---|---|---|---|---|---|
| Q2 2018 | Q2 20171) | Q2 2018 | Q2 2017 | Q2 2018 | Q2 2017 | Q2 2018 | Q2 20171) | |
| € mn | ||||||||
| Net interest income | 139 | 153 | 0 | 0 | -3 | -2 | 136 | 151 |
| Loss allowance | 19 | 25 | 0 | 19 | 25 | |||
| Net commission income | 3 | 2 | 46 | 46 | 2 | 1 | 51 | 49 |
| Net derecognition gain or loss | 5 | 7 | 5 | 7 | ||||
| Gains /losses from financial instruments (fvpl) | -4 | 4 | -4 | 4 | ||||
| Net result on hedge accounting | -1 | -3 | -1 | -3 | ||||
| Results from investments accounted for using the equity method |
||||||||
| Administrative expenses | 55 | 77 | 55 | 53 | -1 | -1 | 109 | 129 |
| Net other operating income/expenses | 2 | 54 | 1 | 1 | 0 | 0 | 3 | 55 |
| Operating profit | 70 | 115 | -8 | -6 | 0 | 0 | 62 | 109 |
| Income taxes | 24 | 44 | -3 | -2 | 21 | 42 | ||
| Consolidated net income | 46 | 71 | -5 | -4 | 0 | 0 | 41 | 67 |
| Consolidated net income attributable to non-controlling interests |
0 | 0 | 0 | 1 | 0 | 1 | ||
| Consolidated net income attributable to shareholders of Aareal Bank AG |
46 | 71 | -5 | -5 | 0 | 0 | 41 | 66 |
| Allocated equity | 1,788 | 1,813 | 172 | 152 | 520 | 548 | 2,480 | 2,513 |
| Cost/ income ratio (%) | 38.8 | 35.2 | 114.9 | 112.2 | 57.5 | 48.7 | ||
| RoE before taxes (%) 2) 3) | 14.3 | 24.2 | -18.4 | -16.9 | 9.0 | 16.4 |
Commission income from contracts with customers is allocated to the segments as follows:
| Structured Property Financing |
Consulting/ Services |
Consolidation/ Reconciliation |
Aareal Bank Group |
|||||
|---|---|---|---|---|---|---|---|---|
| Q2 2018 | Q2 20171) | Q2 2018 | Q2 20171) | Q2 2018 | Q2 20171) | Q2 2018 | Q2 20171) | |
| € mn | ||||||||
| ERP Products | 40 | 39 | 40 | 39 | ||||
| Digital solutions | 10 | 9 | 10 | 9 | ||||
| Add-on products | 7 | 7 | -4 | -4 | 3 | 3 | ||
| Lending and other banking business | 2 | 2 | 4 | 3 | 6 | 5 | ||
| Other activities | 3 | 2 | 3 | 2 | ||||
| Total | 2 | 2 | 64 | 60 | -4 | -4 | 62 | 58 |
1) Comparative amounts reclassified according to the new classification format
2) On an annualised basis
3) The allocation of earnings is based on the assumption that net interest payable on the AT1 bond is recognised on an accrual basis.
Reconciliation of the segment result from the income statement classification aligned to an industrial enterprise to a bank income statement classification (which is used for the purposes of segment reporting)
| Income statement classification – bank | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net interest income |
Loss allowance |
Net com mission income |
Results from investments accounted for using the equity method |
Admin istrative expenses |
Net other operating income/ expenses |
Operating profit |
Income taxes |
Segment result |
|||
| € mn | |||||||||||
| H1 2018 | 0 | 0 | 93 | 110 | 1 | -16 | -6 | -10 | |||
| H1 2017 | 0 | 91 | 104 | 1 | -12 | -4 | -8 | ||||
| Income statement classification – industrial enterprise |
|||||||||||
| H1 2018 | 113 | 113 | |||||||||
| Sales revenue | H1 2017 | 109 | 109 | ||||||||
| H1 2018 | 3 | 3 | |||||||||
| Own work capitalised | H1 2017 | 2 | 2 | ||||||||
| Changes in inventory | H1 2018 | ||||||||||
| H1 2017 | 0 | 0 | |||||||||
| H1 2018 | 2 | 2 | |||||||||
| Other operating income | H1 2017 | 2 | 2 | ||||||||
| Cost of materials | H1 2018 | 20 | 20 | ||||||||
| purchased | H1 2017 | 18 | 18 | ||||||||
| H1 2018 | 76 | 76 | |||||||||
| Staff expenses | H1 2017 | 71 | 71 | ||||||||
| Depreciation, amortisation | H1 2018 | 7 | 7 | ||||||||
| and impairment losses | H1 2017 | 6 | 6 | ||||||||
| Results from investments accounted for using the |
H1 2018 | ||||||||||
| equity method | H1 2017 | ||||||||||
| Other operating | H1 2018 | 31 | 0 | 30 | 1 | ||||||
| expenses | H1 2017 | 30 | 29 | 1 | |||||||
| Interest and similar income /expenses |
H1 2018 | 0 | 0 | ||||||||
| H1 2017 | 0 | 0 | |||||||||
| Operating profit | H1 2018 | -16 | 0 | 0 | 93 | 110 | 1 | ||||
| H1 2017 | -12 | 0 | 91 | 104 | 1 | ||||||
| Income taxes | H1 2018 | -6 | -6 | ||||||||
| H1 2017 | -4 | -4 | |||||||||
| Segment result | H1 2018 | -10 | |||||||||
| H1 2017 | -8 |
Reconciliation of the segment result from the income statement classification aligned to an industrial enterprise to a bank income statement classification (which is used for the purposes of segment reporting)
| Income statement classification – bank | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net interest income |
Loss allowance |
Net com mission income |
Results from investments accounted for using the equity method |
Admin istrative expenses |
Net other operating income/ expenses |
Operating profit |
Income taxes |
Segment result |
|||
| € mn | |||||||||||
| Q2 2018 | 0 | 0 | 46 | 55 | 1 | -8 | -3 | -5 | |||
| Q2 2017 | 0 | 46 | 53 | 1 | -6 | -2 | -4 | ||||
| Income statement classification – industrial enterprise |
|||||||||||
| Q2 2018 | 57 | 57 | |||||||||
| Sales revenue | Q2 2017 | 55 | 55 | ||||||||
| Q2 2018 | 2 | 2 | |||||||||
| Own work capitalised | Q2 2017 | 1 | 1 | ||||||||
| Q2 2018 | |||||||||||
| Changes in inventory | Q2 2017 | 0 | 0 | ||||||||
| Q2 2018 | 1 | 1 | |||||||||
| Other operating income | Q2 2017 | 1 | 1 | ||||||||
| Cost of materials | Q2 2018 | 11 | 11 | ||||||||
| purchased | Q2 2017 | 9 | 9 | ||||||||
| Q2 2018 | 39 | 39 | |||||||||
| Staff expenses | Q2 2017 | 36 | 36 | ||||||||
| Depreciation, amortisation | Q2 2018 | 3 | 3 | ||||||||
| and impairment losses | Q2 2017 | 3 | 3 | ||||||||
| Results from investments accounted for using the equity method |
Q2 2018 | ||||||||||
| Q2 2017 | |||||||||||
| Other operating | Q2 2018 | 15 | 0 | 15 | 0 | ||||||
| expenses | Q2 2017 | 15 | 15 | 0 | |||||||
| Interest and similar | Q2 2018 | 0 | 0 | ||||||||
| income /expenses | Q2 2017 | 0 | 0 | ||||||||
| Operating profit | Q2 2018 | -8 | 0 | 0 | 46 | 55 | 1 | ||||
| Q2 2017 | -6 | 0 | 46 | 53 | 1 | ||||||
| Income taxes | Q2 2018 | -3 | -3 | ||||||||
| Q2 2017 | -2 | -2 | |||||||||
| Segment result | Q2 2018 | -5 | |||||||||
| Q2 2017 | -4 |
| 30 Jun 2018 | 31 Dec 2017 | ||
|---|---|---|---|
| € mn | |||
| Contingent liabilities | 172 | 124 | |
| Loan commitments | 1,435 | 1,749 | |
| of which: irrevocable | 1,008 | 1,355 |
The number of Aareal Bank Group employees1) at 30 June 2018 is shown below:
| 30 Jun 2018 | 31 Dec 2017 | |
|---|---|---|
| Salaried employees | 2,623 | 2,644 |
| Executives | 146 | 156 |
| Total | 2,769 | 2,800 |
| of which: Part-time employees | 535 | 544 |
The average number of Aareal Bank Group employees in 20182) is shown below:
| 1 Jan-30 Jun 2018 | 1 Jan- 31 Dec 2017 |
|---|---|
| 2,617 | 2,600 |
| 151 | 158 |
| 2,768 | 2,758 |
| 539 | 531 |
In the first six months of the 2018 financial year, there were no material transactions with related parties that would have to be reported here.
There have been no events subsequent to the end of the interim reporting period under review that need to be disclosed at this point.
1) This number does not include 195 employees of the hotel business (31 December 2017: 57 employees).
2) This number does not include 316 (1 January to 31 December 2017: 198) employees of the hotel business.
Marija Korsch 1) 2) 3) 4) 5) 6) Chairman of the Supervisory Board Former partner of Bankhaus Metzler seel. Sohn & Co. Holding AG
Prof. Dr Stephan Schüller 1) 2) 3) Deputy Chairman of the Supervisory Board Former spokesman of the General Partners of Bankhaus Lampe KG
Dieter Kirsch 1) 2) 7) Deputy Chairman of the Supervisory Board Aareal Bank AG
York-Detlef Bülow 7) (until 31 March 2018) Aareal Bank AG
Thomas Hawel 6) 7) Aareon Deutschland GmbH
Petra Heinemann-Specht 4) 5) 7) (since 1 April 2018) Aareal Bank AG
Richard Peters 1) 3) 6) President and Chairman of the Management Board of Versorgungsanstalt des Bundes und der Länder
Dr Hans-Werner Rhein1) 4) 5) German Lawyer (Rechtsanwalt)
Sylvia Seignette4) 5) Former CEO for Germany and Austria, Crédit Agricole CIB (formerly Calyon)
Elisabeth Stheeman4) 5) 6) External Member of the Bank of England's Financial Policy Committee (FPC)
Hans-Dietrich Voigtländer 2) 3) 6) Senior Partner at BDG Innovation + Transformation GmbH & Co. KG
Prof. Dr Hermann Wagner 3) 4) 5) Chairman of the Audit Committee German Chartered Accountant, Tax Consultant
Beate Wollmann3) 7) Aareon Deutschland GmbH
Hermann Josef Merkens Chairman of the Management Board
Dagmar Knopek Member of the Management Board
Christiane Kunisch-Wolff Member of the Management Board
Thomas Ortmanns Member of the Management Board
Christof Winkelmann Member of the Management Board
1) Member of the Executive and Nomination Committee; 2) Member of the Remuneration Control Committee; 3) Member of the Audit Committee;
4) Member of the Risk Committee; 5) Member of the Committee for Urgent Decisions; 6) Member of the Technology and Innovation Committee; 7) Employee representative
To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the financial year.
Wiesbaden, 31 July 2018
The Management Board
Hermann J. Merkens Dagmar Knopek Christiane Kunisch-Wolff
Thomas Ortmanns Christof Winkelmann
We have reviewed the condensed consolidated interim financial statements – comprising the statement of financial position, statement of comprehensive income, condensed statement of cash flows, statement of changes in equity and selected explanatory notes – and the interim group management report of Aareal Bank, Wiesbaden for the period from 1 January 2018 to 30 June 2018 which are part of the halfyear financial report pursuant to § (Article) 115 WpHG ("Wertpapierhandelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Managing Directors. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review.
We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW) and additionally observed the International Standard on Review Engagements "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion.
Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports.
Frankfurt/Main, 1 August 2018
PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft
Ralf Schmitz Lukas Sierleja Wirtschaftsprüfer Wirtschaftsprüfer (German Public Auditor) (German Public Auditor)
Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3480 Fax: +49 611 3482549
40 rue Joseph II-straat 1000 Brussels, Belgium Phone: +32 2 5144090 Fax: +32 2 5144092
Ebulula Mardin Caddesi Maya Meridyen I¸s Merkezi D:2 Blok · Kat. 11 34335 Akatlar-Istanbul, Turkey Phone: +90 212 3490200 Fax: +90 212 3490299
6th Floor, 6,7, 8 Tokenhouse Yard London EC2R 7AS, United Kingdom Phone: +44 20 74569200 Fax: +44 20 79295055
Calle María de Molina 40, 4 28006 Madrid, Spain Phone: +34 915 902420 Fax: +34 915 902436
Business Centre "Mokhovaya" 4/7 Vozdvizhenka Street Building 2 125009 Moscow, Russia Phone: +7 499 2729002 Fax: +7 499 2729016
Aareal Capital Corporation 250 Park Avenue Suite 820 New York NY 10177, USA Phone: +1 212 5084080 Fax: +1 917 3220285
29 bis, rue d'Astorg 75008 Paris, France Phone: +33 1 44516630 Fax: +33 1 42662498
Via Mercadante, 12/14 00198 Rome, Italy Phone: +39 06 83004200 Fax: +39 06 83004250
Suite 2311 Plaza 66 Phase I 1266 Nanjing West Road Shanghai 200040, China Phone: +86 21 62889908 Fax: +86 21 62889903
Aareal Bank Asia Limited 3 Church Street #17-03 Samsung Hub Singapore 049483, Singapore Phone: +65 6372 9750 Fax: +65 6536 8162
Norrmalmstorg 14 11146 Stockholm, Sweden Phone: +46 8 54642000 Fax: +46 8 54642001
RONDO 1 · Rondo ONZ 1 00-124 Warsaw, Poland Phone: +48 22 5380060 Fax: +48 22 5380069
Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3482950 Fax: +49 611 3482020
Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3482446 Fax: +49 611 3483587
Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 9714010 Fax: +49 611 971401510
Grosse Bleiche 46 55116 Mainz, Germany Phone: +49 6131 92800 Fax: +49 6131 92807200
Aareal Bank AG Housing Industry Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3482967 Fax: +49 611 3482499
SpreePalais Anna-Louisa-Karsch-Strasse 2 10178 Berlin, Germany Phone: +49 30 88099444 Fax: +49 30 88099470
Alfredstrasse 220 45131 Essen, Germany Phone: +49 201 81008100 Fax: +49 201 81008200
Leipzig Branch Neumarkt 2-4 04109 Leipzig, Germany Phone: +49 341 2272150 Fax: +49 341 2272101
Paulinenstrasse 15 65189 Wiesbaden, Germany Hotline: +49 611 3482000 Fax: +49 611 3483002
Büchsenstrasse 26 70174 Stuttgart, Germany Phone: +49 711 2236116 Fax: +49 711 2236160
Isaac-Fulda-Allee 6 55124 Mainz, Germany Phone: +49 6131 3010 Fax: +49 6131 301419
Isaac-Fulda-Allee 6 55124 Mainz, Germany Phone: +49 6131 4864500 Fax: +49 6131 486471500
Grundstücks-Aktiengesellschaft Lievelingsweg 125 53119 Bonn, Germany Phone: +49 228 5180 Fax: +49 228 518298
Dublin
Torquay Road Foxrock Village Dublin D18 A2N7, Ireland Phone: +353 1 6369220 Fax: +353 1 6702785
| 13 November 2018 | Publication of results as at 30 September 2018 |
|---|---|
| 22 May 2019 | Annual General Meeting – Kurhaus, Wiesbaden |
as at 30 June 2018
Aareal Bank AG Investor Relations Paulinenstrasse 15 65189 Wiesbaden, Germany
Phone: +49 611 348 3009 Fax: +49 611 348 2637
www.aareal-bank.com
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.