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Aareal Bank AG

Investor Presentation • May 12, 2014

11_ip_2014-05-12_d0e5a6b9-f450-4ac9-8a7c-ab99570a18f8.pdf

Investor Presentation

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May 07, 2014Dr. Wolf Schumacher, CEO – Hermann J. Merkens, CFO

Agenda

  • Environment Q1 2014
  • Acquisition of COREALCREDIT BANK AG("Corealcredit")
  • Q1 2014 results at a glance
  • Segment performance
  • B/S structure, capital & funding position
  • Group figures Q1 2014
  • Asset quality
  • Outlook 2014
  • Appendix
  • Definitions and Contacts

Environment Q1 2014

General environment

  • Capital markets continued to ease - backed by central bank measures in Europe and the US, but still uncertainty about reaction to normalisation of money supply (e.g. tapering)
  • Due to little inflation pressure, we expect ECB to keep key interest rates low and to start alternative measures - therefore short-term Euro interest rates will likely stay low as well. Possible challenge of negative interest rates
  • Generally a slight world economic recovery expected in 2014, but different speed of economical recovery in Europe, North American will recover faster, Asian economies will continue to grow with smaller growth rates
  • Regulatory environment more predictable (but still possible challenges, e.g. additional capital requirements), AQR may cause some uncertainty

Main takeaways

  • Increasing competition in our lending buckets as a consequence margin compression earlier than originally expected and early repayments of high margin loans will continue.
  • The above will be partially offset by lower than expected funding costs

We see largely stable property values and rents for most European countries but further NPL inflow mainly from our southern European portfolio

While Aareon is expected to be on track deposit business will suffer on segment reporting level – deposit volume supports funding and cheapens funding costs on group level

Acquisition of Corealcredit

Acquisition of Corealcredit

Impact on P&L, B/S, Capital ratios, EpS, and RoE

P&L and balance sheet:

  • Initial consolidation at 31.03.2014: all balance sheet items are inclusive of Corealcredit
  • The negative goodwill (gain from initial consolidation) reflected in Q1 P&L
  • Operating results of Corealcredit will be included in Q2 P&L and onwards

Capital ratios:

  • All cash transaction: RWA increase on group level compensated via negative goodwill and allocation of excess capital
  • Target range of Tier 1 (11.5-12%)1) before mgmt. buffer and total capital (19%-20%)1) unaffected
  • Bail in capital ratio expected above target (> 8%)

EpS:

  • Transaction is EpS accretive from day one
  • Present value of cumulative EPS for the next three years > € 32)
  • Capital currently absorbed by acquired RWA to free up until 2016 for alternative utilisation (allocation or alignment)

RoE:

Transaction in line with mid-term RoE target: midterm pre-tax RoE target confirmed at ~12%

1) Fully loaded incl. IFRS and CRD IV

2) Negative goodwill and additional net income until 2016 including ppa amortisation

Corealcredit purchase price determinationClosing date 31.03.2014

Q1 2014 results at a glance

Q1 2014 results at a glance Strong operating profit

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Structured property financing

New business in line

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Consulting / Services

Solid in IT & volumes – weak in deposit margins

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Performance of Aareon within guidance

  • Unchanged low interest rate environment continues to burden segment results
  • Deposit volume of the housing industry has increased to
  • -€ 8.1 bn Ø in Q1 2014
  • -€ 7.7 bn Ø in Q4 2013
  • -€ 6.7 bn Ø in Q1 2013
  • The strategic importance of the housing industry deposits as an additional source of funding exceeds the importance of the margins shown in the segment

Consulting / Services

Deposit taking business burdens segment performance

B/S structure, capital & funding position

Strong capital ratios & stable capital structure(IFRS, CRD IV as at 31.03.2014)

  • Bail-in capital ratio (acc. to our definition): above 8%
  • Strong capital ratios enable us to take new business on board
  • Strong capital ratios in line with business model, company size and capital market expectations
  • Full repayment of remaining SoFFinsilent participation possible without capital increase
  • AT 1 to be raised depending on market conditions and requirements
  • Leverage ratio as at 31.03.2014
  • -3.8% (CET 1 excl. SoFFin)
  • -4.4% (CET 1 incl. SoFFin)

Expected development of capital ratios1) (IFRS & CRD IV as at 31.03.2014)

1) Actual figures may vary significantly from estimates

2) TCR: total capital ratio

Asset- / Liability structure according to IFRSAs at 31.03.2014: € 49.7 bn (31.12.2013: € 43.0 bn)

  • Conservative balance sheet with structural over borrowed position
  • Average maturity of long term funding > average maturity of RSF loans

2) Liquidity position clearly exceeds 15% of the total balance sheet. This includes unencumbered

ECB-eligible assets, available excess cash at other banks as well as highly liquid government securities

3) Interbank incl. € 1.5 bn (€ 1.5 bn) invested in ECB's fine-tuning operations ("absorbing tender")16

Asset- / Liability structure according to IFRSAs at 31.03.2014: € 49.7 bn (31.03.2013: € 45.1 bn)

€ bn

2) Liquidity position clearly exceeds 15% of the total balance sheet. This includes unencumbered

ECB-eligible assets, available excess cash at other banks as well as highly liquid government securities

3) Interbank incl. € 1.5 bn (€ 0.0 bn) invested in ECB's fine-tuning operations ("absorbing tender") 17

Net stable funding- / Liquidity coverage ratio Fulfilling IFRS and CRD IV requirements

  • Aareal Bank already fulfils future requirements
  • -NSFR > 1.0
  • LCR >> 1.0
  • Basel III and CRD IV require specific liquidity ratios starting end 2018
  • High NSFR surplus used to purchase Corealcredit Bank's balance sheet
  • Positive effect in 2014 due to changed weighting factors

Refinancing situation Q1 2014Successful funding activities

Total funding of € 1.7 bn in Q1 2014

  • Pfandbriefe: € 0.7 bn
  • Senior unsecured: € 0.6 bn
  • Subordinated debt (Tier 2): € 0.4 bn
  • Backbone of capital market funding is a loyal, granular, domestic private placement investor base
  • -Hold-to-maturity investors: over 600
  • -Average ticket size: € 10 mn

Refinancing situation

Diversified funding sources and distribution channels

  • Aareal Bank has clearly reduced its dependency on wholesale funding
  • 2002 long term wholesale funding accounted for 47% of overall funding volumes –by 31.03.2014, this share has fallen to ~32% (or even below 10% without Pfandbriefe)

As at 31.03.2014

Net interest income

NII reflects portfolio growth, sound margins, low funding costs

  • NII Structured Property Financing

  • NII Consulting / Services

  • NII include

    • ~€ 4 mn in Q1 2014 effects from premature repayments
    • ~€ 10 mn in Q4 2013 effects due to higher than expected repayments
  • Portfolio growth, sound margins from the CRE business and low funding costs pushing the NII
  • Due to very limited investment opportunities a considerable part of liquidity stock is still parked with central banks
  • -Ø Q1 2014: € 4.0 bn
  • -Ø Q4 2013: € 3.9 bn
  • -Ø Q1 2013: € 4.4 bn
  • NII Consulting / Services further burdened by interest rate environment
  • Aareal Bank already fulfils future NSFR / LCR

Loan loss provisions

Q1 2014 driven by conservative adjustment to LIP factor 1

  • Q1-LLP of € 37 mn includes
  • -€ 6 mn specific allowances
    • € 31 mn portfolio allowances, one-off due to adjustment to LIP factor 1, more conservative approach
  • 2013 full year LLP of €113 mn translates to 47 bp risk costs
  • Confirmed guidance of € 100 mn to € 150 mnequals to 36 bp to 54 bp risk costs (on planned weighted average portfolio)

FY guidance

Net commission incomeConfirming expectation

  • Aareon on track
  • Showing expected slight positive trend
  • Strong Aareon revenue regularly pushing Q4

Admin expensesConfirming guidance

  • Regulatory projects and initial costs for Corealcredit burden admin expenses in Q1
  • Admin expenses will regularly be on a higher level due to acquisition of Incit and Coreal

Total property finance portfolio

High diversification and sound asset quality

Total property finance portfolio Continuing conservative approach

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1) Incl. property finance portfolio still on DEPFA's balance sheet

2) Portfolio allowances mainly reflect expected losses which are calculated on the bases of specific loans in most cases

3) NPL-Exposure net acc. to IFRS3

284) € 18 mn Portfolio Allowances allocated in the course of purchase price allocation (PPA)

Total property finance portfolio

€ 28.6 bn of high quality real estate assets

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Western Europe (ex Germany) credit portfolio Total volume outstanding as at 31.03.2014: € 7.9 bn

Total German credit portfolio

Total volume outstanding as at 31.03.2014: € 7.4 bn

Aareal German credit portfolio

Total volume outstanding as at 31.03.2014: € 4.0 bn

Corealcredit German credit portfolio Total volume outstanding as at 31.03.2014: € 3.4 bn

Southern Europe credit portfolio

Total volume outstanding as at 31.03.2014: € 4.1 bn

Eastern Europe credit portfolio

Total volume outstanding as at 31.03.2014: € 2.6 bn

Northern Europe credit portfolio

Total volume outstanding as at 31.03.2014: € 2.4 bn

North America credit portfolio

Total volume outstanding as at 31.03.2014: € 3.9 bn

Asia credit portfolio

Total volume outstanding as at 31.03.2014: € 0.4 bn

Total treasury portfolio

€ 11.9 bn of high quality and highly liquid assets

Total treasury portfolio

€ 11.9 bn of high quality and highly liquid assets

Outlook 2014 confirmed

Driven by operating performance and Corealcredit take-over

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1) Recognition of interest payments for AT1 in H2 2014

2) As in 2013, the bank cannot rule out additional allowances for credit losses

3) Incl. negative goodwill of € 150 mn

Aareal Bank's action planKey RoE drivers

Measures in Aareal's action planOptimisation funding structure / liquidity portfolio Slight loan portfolio growth – but margin compression

  • Stable RWA & LTVsLower risk costs (but development in Southern Europe uncertain)
  • Increase in Aareon EBIT
  • Keep cost base under control, lower project and one-off costs – as well as other items
  • Optimisation of regulatory capital structureAlignment or allocation of underlying capital (e.g. Coreal)

Aareal Bank's action planMeasures

1.Funding strategy:

Improve deposit ratio and covered bond (CB) ratio further avoiding capital market dependency

2.CRE new business:

Focus on markets with LTV ratios of 60-70%, resulting in stable RWA and LtVs, higher CB-funding share, lower risk costs(but development in Southern Europe uncertain)Strengthen client relationships by leveraging new business through stronger cooperation via club deals and syndication

3.Aareon:

Enhance profit contribution

4.Cost base:

Continue cost discipline, but temporarily effected by project costs etc.

5.Capital structure:

Optimise capital structure once regulatory guidelines are in place and markets are pricing instruments adequately

Aareal Bank'saction plan

Aareal Bank's action plan

Measures in detail (1/2)

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Outlook 2014 & Midterm OutlookSummary and Prerequisites

2014 2015 / 2016Tier 1 ratio IFRS & CRD IV fully loadedbefore mgmtbuffer12.0 –12.25%11.5 –12.0%CIR ~40% (SPF) ~40% (SPF) EBIT margin ~16% (Aareon) >17.5% (Aareon) Pre-tax ROE ~9% ~12%Cost of equity (net)9 - 10 %

Prerequisites

  • No Eurozone break up
  • Normalised asset valuations
  • Healthy world GDP growth beside some European peripherals
  • Regulation will be introduced according to today's timeline and framework
  • Regulatory environment more predictable, but still possible challenges, e.g. additional capital requirements
  • No additional burdens
  • Due to little inflation pressure, we expect ECB to keep key interest rates low and to start alternative measures therefore short-term Euro interest rates will likely stay low as well, possible challenge of negative interest rates

Aareal Bank GroupKey figures Q1 2014

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Aareal Bank GroupKey figures Q1 2014 by operating units

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tr
ta
to
om
e
s
a
s
re
rs
o
rea
n		 1
9
5		 3
1		 5
-		 4
-		 0 0 1
9
0		 2
7

Aareal Bank GroupKey figures – quarter by quarter

St
ed
P
tur
ert
ruc
rop
y
Fin
cin
an
g		 Co
ult
ing
/
Se
rvi
ns
ce
s		 Co
oli
da
tio
n /
ns
ilia
tio
Re
co
nc
n		 Aa
l B
k G
rea
an
rou
p
Q
1		 Q
4		 Q
3		 Q
2		 Q
1		 Q
1		 Q
4		 Q
3		 Q
2		 Q
1		 Q
1		 Q
4		 Q
3		 Q
2		 Q
1		 Q
1		 Q
4		 Q
3		 Q
2		 Q
1
20
14		 20
13		 20
13		 20
13		 20
13		 20
14		 20
13		 20
13		 20
13		 20
13		 20
14		 20
13		 20
13		 20
13		 20
13		 20
14		 20
13		 20
13		 20
13		 20
13
Eu
ro
mn
Ne
t in
t in
ter
es
co
me		 143 146 13
1		 124 118 0 0 0 0 0 1 1 2 2 3 144 147 133 126 12
1
All
fo
red
it l
ow
an
ce
r c
os
se
s		 37 39 29 28 17 37 39 29 28 17
t in
t in
af
Ne
ter
ter
es
co
me		 10
6		 10
7		 10
2		 96 10
1		 0 0 0 0 0 1 1 2 2 3 10
7		 10
8		 10
4		 98 10
all
fo
red
it l
ow
an
ce
r c
os
se
s		 4
Ne
mi
ion
in
t c
om
ss
co
me		 1 3 2 3 2 40 47 40 39 39 1
-		 2
-		 2
-		 3
-		 3
-		 40 48 40 39 38
Ne
t re
lt o
n h
ed
nti
su
g
e a
cc
ou
ng		 2 3
-		 0 0 3
-		 2 3
-		 0 0 3
-
Ne
ad
ing
in
/ e
t tr
co
me
xp
en
se
s		 2 4 3 5 6 2 4 3 5 6
Re
lts
fro
rad
ing
n-t
ts
su
m
no
as
se		 0 0 -2 -5 -1 0 0 -2 -5 -1
Re
lts
fro
ies
su
m
co
mp
an
ted
fo
ity
t e
ac
co
un
r a
qu		 0 0
Re
lts
fro
inv
tm
t
su
m
es
en		 0 0 0 0 0 0 0 0
rtie
pro
pe
s		 0 0
Ad
mi
nis
tive
tra
ex
pe
ns
es		 56 54 50 47 50 46 47 44 44 42 0 2
-		 0 1
-		 0 102 99 94 90 92
/
Ne
t o
the
rat
ing
in
r o
pe
co
me
ex
pe
ns
es		 16 1
-		 3
-		 2
-		 4
-		 0 2 0 0 1
-		 0 1
-		 0 0 0 16 0 3
-		 2
-		 5
-
Ne
ati
dw
ill
g
ve
g
oo		 150 0 0 0 0 150 0 0 0 0
Op
tin
rof
it
era
g
p		 22
1		 56 52 50 51 6
-		 2 4
-		 5
-		 4
-		 0 0 0 0 0 5
21		 58 48 45 47
Inc
e t
om
ax
es		 22 18 16 15 16 2
-		 0 1
-		 1
-		 1
-		 20 18 15 14 15
Ne
t in
/ l
co
me
os
s		 19
9		 38 36 35 35 4
-		 2 3
-		 4
-		 3
-		 0 0 0 0 0 19
5		 40 33 31 32
Al
loc
ati
of
lts
on
re
su
/ l
Ne
t in
ttri
bu
tab
le
to
co
me
os
s a
llin
int
tro
sts
no
n-c
on
g
ere		 4 3 4 5 4 1 1 1 0 1 5 4 5 5 5
Ne
t in
/ l
ttri
bu
tab
le
to
co
me
os
s a
of
G
sh
ho
lde
Aa
l B
k A
are
rs
rea
an		 195 35 32 30 31 5
-		 1 4
-		 4
-		 4
-		 0 0 0 0 0 190 36 28 26 27

Strategic rationale for acquisition of CorealcreditValue enhancing transaction in line with current strategy

The transaction represents an attractive opportunity for Aareal Bank Group to pursue inorganic growth as it is creating shareholder value and EpS accretive from day one

Aareal Bank Group acquires Coreal, which has been successfully realigned and refocused on its core business by its previous owner, in a favourable market environment at a conservative price

Coreal is a well digestible addition to Aareal Bank Group. Legacy risks have been conservatively evaluated and comprehensively ring-fenced

Our mid-term targets and our goal to resume an active dividend policy remain unchanged

With the acquisition of Coreal, Aareal Bank Group further strengthens its position as a leading commercial real estate lender

The acquisition of Coreal from existing excess capital demonstrates the strength and strategic capacity of Aareal Bank Group

Development property finance portfolioDiversification continuously strengthened (in € mn)

Property finance under management

Revaluation surplus

Change mainly driven by asset spreads

From asset to risk weighted asset (RWA) Essential factors affecting volume of RWA

1) Excl. market risk

  • 2) Exposure to Retail amounts to € 23 mn
  • 3) Exposure to Sovereigns amounts to € 16 mn

564) Exposure to investment shares amounts to € 16 mn

Definitions andcontacts

Definitions

  • Structured Property Financing Portfolio
  • -Paid-out financings on balance sheet
  • Incl. remaining property loans on DEPFA books
  • New Business
  • -Newly acquired business incl. renewals
  • Contract is signed by customer
  • Fixed loan value and margin
  • Core Tier I Ratio = Tier 1 capital ./. hybrids ./. SoFFin silent participation
  • Risk weighted assets
  • Pre tax RoE = Operating profit ./. Net income/loss attributable to non-controlling interestsAllocated (average) equity
  • Allocated Equity

Average of:

  • Equity (excluding minorities and revaluation surplus but including silent participation by SoFFin) start of period less dividends and
    • Equity (excluding minorities and revaluation surplus but including silent participation by SoFFin) end of period less expected dividends
  • CIR =Admin expenses

Net income

  • Net income
  • net interest income + net commission income + net result on hedge accounting + net trading income + results from non-trading assets + results from investments accounted for at equity + results from investment properties + net other operating income
  • Net stable funding ratio = ≥ 100%Available stable fundingRequired stable funding
  • Liquidity coverage ratio = ≥ 100%Total stock of high quality liquid assetsNet cash outflows under stress

Contacts

Jürgen Junginger Managing Director Investor Relations Phone: +49 611 348 [email protected]

Alexandra Beust

Director Investor RelationsPhone: +49 611 348 [email protected]

Sebastian Götzken

Senior Manager Investor RelationsPhone: +49 611 348 [email protected]

Karin Desczka

Investor RelationsPhone: +49 611 348 [email protected]

Disclaimer

© 2014 Aareal Bank AG. All rights reserved.

  • This document has been prepared by Aareal Bank AG, exclusively for the purposes of a corporate presentation by Aareal Bank AG. The presentation is intended for professional and institutional customers only.
  • It must not be modified or disclosed to third parties without the explicit permission of Aareal Bank AG. Any persons who may come into possession of this information and these documents must inform themselves of the relevant legal provisions applicable to the receipt and disclosure of such information, and must comply with such provisions. This presentation may not be distributed in or into any jurisdiction where such distribution would be restricted by law.
  • This presentation is provided for general information purposes only. It does not constitute an offer to enter into a contract on the provision of advisory services or an offer to purchase securities. Aareal Bank AG has merely compiledthe information on which this document is based from sources considered to be reliable – without, however, havingverified it. Therefore, Aareal Bank AG does not give any warranty, and makes no representation as to the completeness or correctness of any information or opinion contained herein. Aareal Bank AG accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this presentation.
  • This presentation may contain forward-looking statements of future expectations and other forward-looking statements or trend information that are based on current plans, views and/or assumptions and subject to known and unknown risks and uncertainties, most of them being difficult to predict and generally beyond Aareal Bank AG´s control. This could lead to material differences between the actual future results, performance and /or events and those expressed or implied by such statements.
  • Aareal Bank AG assumes no obligation to update any forward-looking statement or any other information contained herein.

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