Interim / Quarterly Report • Aug 17, 2011
Interim / Quarterly Report
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| 1 Jan-30 Jun 2011 | 1 Jan-30 Jun 2010 | Change | |
|---|---|---|---|
| € mn | € mn | € mn | |
| Income Statement | |||
| Operating profit | 91 | 61 | 30 |
| Net income after non-controlling interests | 56 | 34 | 22 |
| Indicators | |||
| Cost/income ratio (%) 1) | 45.5 | 48.2 | |
| Earnings per share (€) | 1.16 | 0.78 | |
| RoE before taxes (%) 2) | 8.3 | 5.4 | |
| RoE after taxes (%) 2) | 5.7 | 3.4 |
| 30 Jun 2011 | 31 Dec 2010 | Change | |
|---|---|---|---|
| € mn | € mn | € mn | |
| Portfolio data | |||
| Property financing | 22,252 | 22,884 | -632 |
| of which: international | 18,891 | 19,195 | -304 |
| Property financing under management 3) | 22,527 | 23,251 | -724 |
| of which: international | 18,891 | 19,195 | -304 |
| Equity | 2,195 | 1,985 | 210 |
| Total assets | 40,867 | 41,217 | -350 |
| % | % | ||
| Regulatory indicators | |||
| Tier 1 ratio pursuant to AIRBA4) | 15.8 | 12.9 | |
| Total capital ratio pursuant to AIRBA4) | 19.9 | 16.5 |
| 30 Jun 2011 | 31 Dec 2010 | ||
|---|---|---|---|
| Rating | |||
| Fitch Ratings | |||
| Long-term | A- | A | |
| Short-term | F1 | F1 |
1) Only Structured Property Financing
2) On an annualised basis
3) Property financings under management include the € 0.3 billion property financing portfolio managed on behalf of Deutsche Pfandbriefbank AG
4) Advanced Internal Ratings-Based Approach (AIRBA)
| Key Group Figures | 2 |
|---|---|
| Letter to Shareholders | 4 |
| Group Management Report | 9 |
| Business Environment | 9 |
| Financial Performance | 12 |
| Segments | 14 |
| Financial Position | 19 |
| Report on Material Events after the Reporting Date | 21 |
| Risk Report | 21 |
| Future Opportunities and Outlook | 27 |
| Consolidated Financial Statements | 34 |
| Statement of Comprehensive Income | 34 |
| Income Statement | 34 |
| Reconciliation from Net Income/Loss to Total Comprehensive Income | 35 |
| Income Statement (Quarterly Development) | 36 |
| Reconciliation from Net Income/Loss to Total Comprehensive Income (Quarterly Development) | 37 |
| Segment Reporting | 38 |
| Segment Results | 38 |
| Segment Results (Quarterly Development) | 39 |
| Consulting/Services Segment – Reconciliation of Income Statement | 40 |
| Statement of Financial Position | 41 |
| Statement of Changes in Equity | 42 |
| Statement of Cash Flows (condensed) | 43 |
| Notes to the Consolidated Financial Statements (condensed) | 44 |
| Basis of Accounting | 44 |
| Notes to the Statement of Comprehensive Income | 45 |
| Notes to the Statement of Financial Position | 49 |
| Other Notes | 56 |
| Responsibility Statement | 57 |
| Review Report | 58 |
| Executive Bodies | 59 |
| Offices | 60 |
| Shareholder Structure | 62 |
| Financial Calendar | 62 |
| Locations / Imprint | 63 |
Dear shareholders, business associates and Aareal Bank staff,
Aareal Bank Group's successful business development continued into the second quarter of the current year – thanks to our performance during the first six months, we remain well on track for achieving our goals for 2011 as a whole.
At € 44 million, consolidated operating profit exceeded the previous year's figure by around 42 %, almost matching the extraordinary level seen during the first quarter of 2011. Aareal Bank Group thus once again proved its operative strength during the second quarter: a very solid performance, once again demonstrating that the bank's prudent and sustainable business policy pursued over recent years has paid off.
The economic environment during the second quarter was essentially shaped by the exacerbation of the sovereign debt crisis affecting the euro periphery, and by the resulting uncertainty and volatility on the financial and capital markets. Discussions in this context focused predominantly on increasing doubts regarding Greece's ability to service its debt, as well as on budget consolidation measures initiated (and related requirements). Notwithstanding the general agreement reached at the Brussels Summit on 21 July, significant uncertainty is set to prevail regarding the European sovereign debt crisis. Moreover, finding a sustainable solution to the US debt issue is a very important factor.
Meanwhile, the "real" global economy continued its growth path during the second quarter, albeit with slowing momentum. In the banking and insurance sectors, discussions have been ongoing regarding regulation, supervision and levies: unresolved issues include, in particular, the aggregate impact of the various planned measures on the financial sector and the real economy, and the international harmonisation of measures to be implemented in order to avoid competitive disadvantages.
Despite the prevailing uncertainty on financial and capital markets, Aareal Bank Group has stood its ground during the course of the year, further expanding its good position and sound reputation on the capital markets. In a capital markets environment that continued to be challenging, we not only completed our funding activities as scheduled, but also successfully executed a rights issue during the second quarter, raising gross issue proceeds of € 269.6 million. We will use the net proceeds from the capital increase to support the future growth of the Structured Property Financing segment, consistent with our credit risk strategy. We want to increasingly exploit the opportunities
available for high-margin new business, strictly observing our stringent risk/return requirements. In this way, the capital increase will significantly contribute to further enhancing our market position, and our profitability. At the same time, the capital increase further strengthened Aareal Bank's regulatory capital base.
Moreover, we used a portion of the issue proceeds for further repayment of the SoFFin silent participation: € 75 million was transferred to SoFFin on 28 April 2011. We are also consistently reducing the guarantee facility provided by SoFFin for senior unsecured issues. During April 2011, we carried out an early redemption of the SoFFin-guaranteed € 2 billion bond maturing in June 2013, which the bank held on its own books, in agreement with SoFFin. This step is particular evidence of Aareal Bank's good refinancing situation. Against this background, we also invited investors holding the remaining SoFFin-guaranteed notes (maturing in March 2012) to redeem their notes early. This offer was taken up with an aggregate volume of just under € 0.8 billion.
During the course of 2011 to date, the property sector continued to improve gradually, reflecting the predominantly positive performance of the economy as a whole. In this economic environment, the business framework for the commercial property markets was stable to slightly positive: this also applied to rents and prices – particularly for first-class commercial properties, which users and investors continued to focus on in many places. Second-class properties, however, often lagged behind this development. These trends were evident for office, retail and logistics properties. In the hotel sector – which had already posted a marked recovery last year following a difficult year 2009 for hotels – key indicators during the second quarter of 2011 showed that the recovery is continuing.
Traded volumes on investment markets showed a further year-on-year increase. Investor yield requirements for purchases of commercial properties remained stable or declined slightly in numerous locations, consistent with a rising price trend. Investors continued to focus on first-class properties; nonetheless, there was some interest – higher than in the previous year, albeit on a selective basis – in properties which are not top of the range in terms of location or quality. However, the prices of such properties often still lacked the momentum seen with first-class properties, or those offering a stabilised cash flow.
For Aareal Bank, as expected this market situation offered attractive opportunities for high-margin new business. We continued to exploit these during the second quarter, maintaining our risk-sensitive lending policy. New business totalled € 1.8 billion from April to June, thus exceeding the figures for both the previous quarter (€ 1.4 billion) and for Q2 2010 (€ 1.6 billion). Aggregate new business originated during the first half of 2011 thus amounted to € 3.2 billion – up approximately 10 % year-on-year. Newly acquired business more than doubled compared to 2010, whilst the share of loan renewals declined signifinantly.
Operating profit in the Structured Property Financing segment of € 41 million for the second quarter of 2011 exceeded the previous year's figure of € 25 million by 64 %, and almost matched the extraordinarily strong results achieved in the first quarter (€ 43 million). The year-on-year increase was largely due to a marked increase in net interest income – reflecting higher margins – and lower allowance for credit losses, which amounted to € 24 million in the second quarter of 2011 (Q2 2010: € 33 million). Aggregate allowance for credit losses was therefore lower than the pro-rata forecast range of € 110 million to € 140 million for the full year, but within the fluctuation range we had expected.
Business in the institutional housing industry continued to develop steadily during the second quarter of 2011. Rental income generated from a highly-diversified tenant portfolio guarantees a solid foundation. The stability of rental cash flows is also bolstered by the fact that management tools for letting and rental claims handling are becoming more professional and more efficient all the time – a trend to which Aareal Bank Group is also making a major contribution, with its range of products and services for the institutional housing industry.
Aareon AG, our IT subsidiary, has performed on schedule during the current financial year to date. In particular, Aareon's enterprise resource planning software Wodis Sigma developed positively during the second quarter. ERP systems facilitate efficient process design in property management, together with a wealth of analyses to support management decisions. By the end of the second quarter, a total of 347 clients had opted for Wodis Sigma since its introduction, with 216 already using the software in a production environment. The majority of users of this successful product line previously worked with Aareon's WohnData solution, or with the legacy Wodis version. To service the strong demand properly, Aareon has invested further in expanding its advisory and support capacities. With the rollout of the new Wodis Sigma Release 3.0 in the fourth quarter of 2011, Aareon will increasingly be offering its clients an alternative software rental option ("SaaS" – software as a service) version, alongside the existing licence model. In this way, Aareon will enable its clients to benefit from the advantages of cloud computing tailored to the needs of the institutional housing industry. Against this background, some of the remaining Wohn-Data clients have decided in favour of converting to the rental model. When using the software under such a rental scheme, Aareon's SaaS clients pay regular usage fees over a long-term period, but do not need to purchase a software licence – thus saving the related one-off cost.
We made further progress towards our strategic objectives in the Institutional Housing Unit during the second quarter: these objectives were to increase the volume of deposits by acquiring new clients, and to increase cross-selling of our broad product range in our existing client base. At an average € 4.7 billion, the volume of deposits was at a high level during the second quarter of 2011 – in fact, it has been rising continuously since the first quarter of 2010. Aareal Bank benefits from its strong market penetration, its extensive range of products and services, and from many years of experience as the lead bank to the German institutional housing industry. Our clients continue to make strong use of the combination of cash investment schemes, specialist services for automated mass electronic payments processing, and the optimisation of downstream processes (together with related advice) which we offer. This enables us to maintain a strong position in the market, despite strong competitive pressure on money market investment terms.
Operating profit in the Consulting/Services segment for the second quarter of 2011 amounted to € 3 million, compared to € 4 million for the first quarter. The decline was attributable to a higher level of investment in our future business, as indicated above, particularly in the Wodis Sigma product line. Due to consolidation effects (related to the acquisition of SG|automatisering bv), among others, the meaningfulness of any comparisons with the same quarter of the previous year (Q2 2010: € 6 billion) is limited.
Aareal Bank Group continued to successfully carry out its funding activities as planned during the second quarter of this year. The bank continues to enjoy a good liquidity status, which has also been evident in the early redemption of the majority of SoFFin-guaranteed bonds. Aareal Bank raised a total of € 1.7 billion in long-term funds on the capital markets during the period under review, with Mortgage Pfandbriefe accounting for € 0.8 billion and unsecured funding for € 0.9 billion. Key funding transactions during the second quarter included in particular, a three-year bearer bond and the placement of a five-year Mortgage Pfandbrief on the capital market. Both transactions were sized at € 500 million each.
The bank raised a total of € 2.8 billion in longterm funds on the capital market through private and public transactions during the first six months of the financial year, comprising € 1.6 billion in Mortgage Pfandbriefe and € 1.2 billion in unsecured funding.
We further strengthened our already solid capital base via the capital increase executed during the second quarter. Aareal Bank's Tier 1 ratio as at 30 June 2011 stood at 15.8 %, which is also good by international standards, compared to 12.9 % at the year-end 2010, and 15.5 % (on a pro-forma basis) as at 31 March 2011. In this context, it is worth noting that we will only apply the portion of the proceeds from the capital increase earmarked for additional growth during the second half of the year, to originate additional new business.
Not surprisingly, the rights issue announced in April triggered particular share price movements. On the first trading day of the subscription rights, the share price was "adjusted" for the theoretical value of the rights, which led to an adjusted end-ofquarter share price of € 20.371 (compared to an unadjusted price of € 22.63).
The successful rights issue not only increased the issued share capital and the total number of Aareal Bank AG shares outstanding. The free float also increased significantly – particularly due to the fact that the stake held by Aareal Holding Verwaltungsgesellschaft mbH, Aareal Bank AG's largest shareholder, declined from 37.23 % to 28.9 % in the course of the transaction. Moreover, Aareal Bank's market capitalisation increased to € 1.415 billion at the end of the second quarter, on account of the capital increase – compared to around € 975 million at the end of 2010.
Overall, the Aareal Bank share price developed positively during the second quarter, against the background of the continued positive operating performance, the successfully executed rights issue, and the sound medium- and long-term outlook for our business: the share price was up by 16 % (on an adjusted basis) compared to 31 March 2011.
The positive outlook communicated at the press conference to present the financial statements triggered a rally at the beginning of April, driving the share price by more than 14 % to € 23.292, before the euro zone debt crisis deteriorated once again with financial aid provided to Portugal – which burdened financial sector issues in particular. Thanks to the positive first-quarter results, the Aareal Bank share price was able to de-couple from this trend, reaching a high of € 24.465 by early June (having posted another 20 % rise), whilst the DAX and MDAX indices stagnated, and the CXPB bank index lost further ground. Having dropped again in June, reflecting discussions regarding another support package for Greece, the share price recovered towards the end of the quarter.
Aareal Bank considers the very successful rights issue, which was subscribed to at close to 100 %, and the robust performance following the capital increase, as dual vote of confidence by the market – and as an incentive to continue creating sustainable value for its shareholders.
Despite the Brussels Summit resolutions on 21 July 2011, the European sovereign debt crisis as well as the US debt issue are to remain at the top of the agenda of financial and capital markets.
It is thus fair to expect volatility on financial and capital markets to remain high for the time being. Overall, the risks in the financial system have increased.
Provided that the sovereign debt crises will not deteriorate further, Aareal Bank Group continues to see good potential for maintaining its positive business development during the remainder of the year, in this challenging environment. The bank is making good progress in achieving its targets for 2011, which were last raised in April.
Accordingly, on the back of a moderately higher interest rate environment and expected revenues from additional new business, we expect net interest income for 2011 to be higher than in the previous year. The volume of new business generated in the Structured Property Financing segment is expected to increase to between € 7 billion and € 8 billion. We project allowance for credit losses in a range of € 110 million to € 140 million during the 2011 financial year. As in the previous years, the bank cannot rule out additional allowances for unexpected credit losses that may be incurred during 2011. We believe that net commission income for the year 2011 will significantly exceed the previous year's figure. The net figure will benefit from relief due to lower guarantee fees, as a result of the partial redemption of SoFFin-guaranteed bonds. Overall, we continue to believe that during 2011 we will be able to once again markedly increase operating results over and above those for the 2010 financial year – results which were already good, in the context of the challenging market environment.
Dr Wolf Schumacher Dirk Große Wördemann Hermann J. Merkens Thomas Ortmanns
In the second quarter, the economic climate was defined most notably by the deterioration of the debt crisis at the euro zone's periphery, and the resulting uncertainty and volatility on the financial and capital markets. The focal point of the discussion was above all the growing doubts regarding Greece's ability to service its debts, and about the measures initiated and the provisions required to balance the country's budget. Another uncertainty was the debate surrounding the involvement of the financial services industry and other private creditors in providing additional aid to Greece and the assessment of these measures by the rating agencies. The financial and capital markets reacted with uncertainty, which in turn led to sharp increases in foreign exchange and interest rate volatility.
Meanwhile, the global real economy continued to grow in the second quarter, although growth momentum eased.
Global economic development remained on an upward trend – as it did at the start of the year. However, various indicators suggest that the pace of economic growth is slowing down somewhat. Although the ifo business climate index for Western Europe for the second quarter improved slightly over the first quarter, it was down significantly for North America. This index also fell in Asia, following the marked deterioration in sentiment, especially in Japan as a consequence of March's earthquake catastrophe.
The growth momentum of the individual regions continued to vary greatly. Global economic expansion continued to be dominated by the emerging market economies of Asia, even though there was evidence of a slight easing of momentum, for example in China, reflecting the impact of tighter monetary policy. Economic development in Japan was heavily influenced by the earthquake catastrophe. Damages and electricity supply problems
there led to disruptions in supply chains and a slowdown in production. Furthermore, consumer spending was reticent. However, there were already signs of recovery in production and demand in Japan in the course of the second quarter. The pace of real economic recovery in the economies of North America and Europe was moderate. Economic recovery in Europe also varied among the individual countries. Germany and Poland for example, posted relatively high growth rates, while economic development was weak in some countries. In fact, it even declined year-on-year in a few countries such as Portugal and Greece. Similarly, economic development in the USA has been only moderate recently. The announcement by the US Treasury Department that the statutory debt ceiling will be reached at the start of August and current expenditure could therefore no longer be met from additional borrowings, plus the measures taken to implement budgetary consolidation and spending cuts, were at the forefront of the very controversial economic policy discussion in the US.
There was no marked improvement in the situation on the labour markets in the quarter under review, with unemployment persisting at a high level in most countries. Yet some countries – such as Germany, Belgium, Sweden, Finland and the Czech Republic – showed significantly lower unemployment rates compared with the previous
* Arithmetic mean of the assessment of the current situation and expected developments Source: ifo World Economic Survey (WES) II/2011
year. In contrast, unemployment even rose in other countries such as Ireland, Portugal and Spain, where the unemployment rate is now well above the 20 % mark. Having fallen in the two previous quarters, unemployment in the US was up again slightly in the second quarter of 2011. However, it is still down on last year's level.
Many market participants and observers became increasingly doubtful in the second quarter about Greece's consolidation process and the ability to service its debt. The question of the provisions of additional relief measures by the European Union (EU) and the International Monetary Fund (IMF) was discussed on the markets as well as on a political and public level just as intensely as the question of debt restructuring with the participation of private creditors. The rating agency Standard & Poor's (S&P) downgraded Greece's rating to CCC (denoting a speculative investment that is at risk of default). The growing doubts regarding Greece's consolidation course and debt sustainability heightened the uncertainty and nervousness on financial and capital markets, resulting in very strong volatility. The risk premiums for Greek bonds and risk insurers increased further, reaching very high levels.
Risk premiums also rose for other euro zone periphery states. In April, Portugal did no longer see the possibility to refinance its borrowing requirements on the financial and capital markets at justifiable terms with-out the help of third parties, and therefore made a request for support measures. The IMF and the EU agreed upon a three-year, € 78 billion rescue package for Portugal. The funds will be used especially to cover Portugal's refinancing requirements and the current deficits, and – to a lesser extent – to stabilise the Portuguese banking sector.
Despite the increased uncertainty on financial and capital markets, the markets were still able to absorb securities issues from banks and corporates in the second quarter of 2011. However, financial
and capital markets came under further strain during the quarter.
Foreign exchange and interest rate markets were defined by high volatility during the second quarter. The euro appreciated significantly until the middle of May vis-a-vis the US dollar, also against the background of the European Central Bank's (ECB) key rate hike. However, it gave up this appreciation again before it ended the quarter at only a slightly higher level over the US dollar than at the start of the quarter, having fluctuated strongly over the period. The euro was also volatile relative to the pound sterling: it ended the quarter higher compared with the start. The Swedish krona and the Canadian dollar also traded lower against the euro at the end of the quarter compared with the start. On the other hand, the euro depreciated continuously against the Swiss franc almost throughout the entire quarter. This suggests that investors consider the Swiss franc a safer bet than the euro.
While the long-term interest rates of the most important currencies in which we are active rose in the first quarter of the year, these declined considerably in the second quarter thus being on a low level. Short-term interest rate development was less uniform. While short-term euro interest rates were boosted by the key rate hike, short-term US dollar rates fell slightly. The short-term interest rates of the other important currencies in which we are active – such as the pound sterling – were largely unchanged or rose marginally – as with the Swedish krona – relative to the start of the quarter. The different levels achieved between the currencies are significant here. Short-term Swiss franc, Japanese yen and US dollar rates are very low. They are somewhat higher for the pound sterling, followed by the euro, while short-term Swedish krone interest rates are clearly distinguished by their relatively high level, also owing to several key rate hikes.
Annual inflation was above 2 % in the second quarter for most of the important economies. The rate of inflation was particularly pronounced in many emerging market economies. The last annual rate of inflation exceeded more than 6 % in China, and levels just short of 10 % in Russia. Inflation also reached levels above 4 % in some advanced economies, such as Poland and Great Britain; in the case of Great Britain, this was also due to the increase in value-added tax. Average inflation in the euro zone amounted to approximately 2.7 % in the second quarter. Inflation accelerated notably in the US since the end of last year and exceeded 3 % year-on-year in the second quarter. In Japan, prices remained largely unchanged from the previous year. Switzerland, Ireland, Norway and Sweden in particular, had low annual rates of inflation by European standards. Inflation was driven especially by higher commodity prices, especially for crude oil and foodstuffs.
These inflation rates prompted various central banks to tighten their monetary policy somewhat in the second quarter of 2011. China reacted to the high rate of inflation by continuing the policy pursued in the previous quarter of increasing the minimum reserve requirements for commercial banks on the one hand, and by raising the benchmark interest rates for deposits and loans on the other.
Growing concerns about inflation prompted the ECB to raise key rates slightly in April, by 0.25 percentage points to 1.25 %. The central banks of Sweden, Norway, Denmark and Russia also raised key rates. Poland's central bank even raised key rates in several steps by 0.75 percentage points. On the other hand, the US Federal Reserve (Fed), as well as the Bank of England (BoE) and the Bank of Japan (BoJ) kept key rates unchanged at a historically low level.
Furthermore, discussions continued on financial and capital markets concerning planned reforms to the regulatory and supervisory environment, and regarding levies to be charged to the banking sector. The issues of the aggregate impact of these planned measures on banks and on the real economy, and on steps to safeguard a harmonised implementation of such measures on an international scale to prevent competitive distortions, are of major importance.
Besides various property-specific factors, such as the location and modernity of the building, the development of rents and property values also depends on macroeconomic factors. Overall, this affects the development of macroeconomic output – measured in terms of the change in gross domestic product, for example –, the labour markets and long-term interest rates. Most of the countries where we are active continued to post positive economic output in the second quarter, albeit with somewhat slower momentum than in the previous quarters. Unemployment stagnated at a high level in many countries, and long-term interest rates fell in the most important countries in which we are active. In this respect, these factors created a stable to slightly positive environment for commercial property markets in the second quarter.
This was also duly reflected in the markets themselves: rents and values or prices were largely stable or, in some instances, slightly higher. This development was especially true for the first-class commercial property segment, which continued to be in the focus of users and investors in many places. Very few markets reported any drop in the rents and prices for first-class commercial property during the second quarter. Properties outside this segment – in relation to the factors determining rent and value – often continued to lag behind this development.
These trends were evident for office as well as for retail and logistics properties. The hotel sector, where there was already a clear upside trend last year, following the difficult year for the hotel industry in 2009, showed signs of further positive developments in the second quarter of 2011. The important indicator for a hotel's success, namely the average revenues per available hotel room, rose in numerous hotel locations compared with the same period of the previous year. This was attributable in part to an improvement in the occupancy ratio, and also to an improvement in average room prices.
The overall volume of commercial property traded on the investment markets showed a further increase compared with the corresponding period of the previous year. However, it increased only slightly compared with the first three months of this year. Looking at the various regions, the rates of change differed considerably, though. Investors' yield requirements for newly-acquired commercial properties were largely stable on most markets. In fact, they fell on some markets in the premium segments and slight increases were only registered on a small number of markets in this segment. A decline in the yield requirements (assuming all other parameters remain the same) leads to higher prices, while correspondingly, higher yields lead to a price decline. Investors continued to focus on firstclass properties. Nonetheless, there was some interest – higher than in the previous year, albeit on a selective basis – in properties which are not top of the range in terms of location or quality. Often, these properties lagged behind the highquality properties or those with a stable cash flow, in terms of price performance.
The institutional housing industry in Germany proved successful also in the second quarter of 2011.
Rents offered are currently some 2 % higher throughout Germany than in the second quarter of 2010. The rise in advertised rents was almost 3 % higher in the cities than in non-urban districts, where they rose by only approximately 1 %. All in all, the development is very heterogeneous.
The stability of rental cash flows is also bolstered by the fact that management tools for letting and rental claims handling are becoming more pro-fessional (and more efficient) all the time. The members of the GdW, the Federation of German Housing Enterprises, have reported a 34 % decline in unpaid rental claims since 2003, to € 496 million.
Another investment focus of the companies operating in the institutional housing industry is the enhancement of energy efficiency in residential buildings. The volume of loans subsidised by KfW for energy-efficient renovation was increased in June 2011, from € 1 billion to € 1.5 billion p. a. from 2012 to 2014, and legislation on climatefriendly urban development was agreed at the same time.
The positive development on the transaction market remained intact in the course of the year. Until mid-April, residential property with a value of € 1.8 billion was traded. International investors continue to define the transaction markets. Openended residential property funds are becoming increasingly important as buyers. The trend that was already evident since 2010 of rising demand for smaller portfolios in the core segment and a smaller number of larger transactions in the opportunistic sector remains intact.
The 21st Aareon Congress – a trade meeting for the property management sector – was held in Garmisch-Partenkirchen from 30 May to 1 June 2011. The main topics of interest covered were cloud computing, social media and future trends in the institutional housing industry.
Operating profit in the first half of 2011 amounted to € 91 million (H1 2010: € 61 million). The year-on-year increase was largely due to higher net interest income and lower allowance for credit losses.
Net interest income of € 268 million was 12 % higher than the previous year (€ 239 million). The rise was attributable primarily to higher average margins generated in the lending business. Compared with the previous year, the low interest rate environment burdened the profitability of the deposit-taking business with the institutional housing industry.
The allowance for credit losses amounted to € 42 million during the first six months of the financial year (H1 2010: € 65 million). It was there-
| 1 Jan-30 Jun 2011 | 1 Jan-30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Net interest income | 268 | 239 |
| Allowance for credit losses | 42 | 65 |
| Net interest income after allowance for credit losses | 226 | 174 |
| Net commission result | 61 | 62 |
| Net result on hedge accounting | 0 | 4 |
| Net trading income/expenses | -6 | -7 |
| Results from non-trading assets | 4 | 14 |
| Results from investments accounted for using the equity method | 1 | 5 |
| Results from investment properties | 4 | 0 |
| General administrative expenses | 187 | 183 |
| Net other operating income/expenses | -12 | -8 |
| Impairment of goodwill | 0 | 0 |
| Operating profit | 91 | 61 |
| Income taxes | 26 | 18 |
| Net income/loss | 65 | 43 |
| Allocation of results | ||
| Net income/loss attributable to non-controlling interests | 9 | 9 |
| Net income/loss attributable to shareholders of Aareal Bank AG | 56 | 34 |
| Appropriation of profits | ||
| Net income/loss attributable to shareholders of Aareal Bank AG | 56 | 34 |
| Silent participation by SoFFin | 11 | 17 |
| Consolidated profit/loss | 45 | 17 |
fore lower than the pro-rata forecast range of € 110 to € 140 million, but within the fluctuation range we had expected.
Net commission result of € 61 million was slightly lower than the previous year (H1 2010: € 62 million). This figure includes costs of € 15 million (H1 2010: € 11 million) incurred for bonds guaranteed by SoFFin.
Net trading income/expenses of € -6 million were largely attributable to the measurement of trading derivatives used to hedge interest rate and currency risk, and to unrealised changes in value from sold hedging instruments on selected EU sovereign countries.
Net income of € 4 million from investment securities was largely due to the sale of fixed-income securities (H1 2010: € 14 million).
At € 187 million, administrative expenses were roughly unchanged from last year's level (H1 2010: € 183 million).
Net other operating income and expenses amounted to € -12 million (H1 2010: € -8 million), reflecting, in particular, expenses incurred in relation to a specific property.
Overall, consolidated operating profit for the first six months of the current financial year totalled € 91 million (H1 2010: € 61 million). Taking into consideration taxes of € 26 million and non-controlling interest income of € 9 million, net income attributable to shareholders of Aareal Bank AG amounted to € 56 million. After deduction of the net interest payable on the SoFFin silent participation, consolidated income stood at € 45 million.
We continued to pursue our risk-sensitive lending policy in the quarter under review, as well as consistently managing our loan portfolio. New business in the second quarter of 2011 came in at € 1.8 billion and was therefore higher than in the same period of the previous year (Q2 2010: € 1.6 billion). The volume of new business generated in the first half of 2011 stood at € 3.2 billion, compared with € 2.9 billion in the first half of the previous year. The share of loan renewals relative to new business declined considerably compared with the first half of 2010, and the volume of initial loan issues more than doubled.
At 80 %, Europe accounted for the largest share of new business by far in the first two quarters of 2011, followed by North America with 18 %. The volume of new business generated in Asia was low, accounting for only 2 %.1)
The stable trend in relation to the rents and prices of high-quality properties continued on the majority of European commercial property markets in the quarter under review. Against the background of the overall trend of stable rents and prices, some markets for first-class properties posted slight increases, whereas only very few markets in the premium segment were affected by declines. These developments applied to the different types of property – office, retail and logistics. Higher rents
in the premium segment were reported for the second quarter in – for example – the office and logistics markets in Moscow, the office and retail markets in Stockholm, and in the retail markets in Frankfurt, Hamburg and Helsinki. On the other hand, top rents fell in only very few markets, such as the office markets in Madrid, or the office and logistics markets in The Hague, as well as the logistics markets in Milan and Munich. Rental development for properties in peripheral locations, or for those of lesser quality, generally lagged behind that of high-quality property.
The hotel sector shows signs of an improvement on many important markets compared with the same period of the previous year. This is evident on many markets from the rise in the key indicator for average revenues per available hotel room. When comparing the hotel indicators to the previous year, it has to be noted that the hotel sector had been influenced in the second quarter of the previous year by the restrictions imposed on air travel by the volcanic eruption in Iceland. Only few of the major European centres deviated from the positive development in the hotel sector.
Investor interest remained focused predominately on premium properties. Nonetheless, an increasing, albeit still selective interest was determined in properties that are not included in the first-class segment in relation to the factors determining value, or that show development potential. Transaction volumes in Europe in the second quarter of 2011 were moderately higher than the level seen in the corresponding period of the previous year, but slightly below the first quarter of 2011. Investor yield requirements for newly-acquired commercial properties were mostly stable in the second quarter. They declined in a few markets in this premium segment, such as the office, retail and logistics markets in Moscow, the office and retail markets in Stockholm or various logistics markets in Germany's most important economic centres. Together with constant or rising rents, this had a positive effect on market prices. There were very few markets where a slight increase in the yield requirements of first-class properties was recorded. These include for example, office markets in some Dutch centres.
1) New business is allocated to the individual regions on the basis of the location of the properties used as collateral. For exposures not collateralised by property, the allocation is based on the borrower's country of domicile.
151
In Europe, we generated new business in the amount of € 1.3 billion in the second quarter of 2011; this translates into € 2.6 billion for the first half of the year in total. Western Europe accounted for the highest share by far, followed by Northern Europe. The Southern and Eastern European shares lagged behind considerably.
There was evidence of stabilising rents in North America. In the US, the national average for office, retail and logistics rents was virtually constant. However, some markets deviated from this trend, posting a slight increase in rents on average, with others recording a slight average decline. For example, central locations in New York City and Washington D.C. recorded a slight increase in average office rents. This increase was more pronounced in the centre of San Francisco, whereas office rents declined slightly in Los Angeles. Vacancy ratios persisted at a high level, and on average were largely unchanged or marginally lower.
On the American hotel market, national average revenues per available hotel room improved significantly compared with the second quarter of the previous year.
Investors remained focused on first-class properties in North America too, despite the growing, albeit selective interest seen in properties outside of the premium segment. Transaction volumes rose considerably in the second quarter of 2011, compared with the corresponding period of the previous year and the first quarter of this year. On average, investor yield requirements for newlyacquired commercial properties were down slightly.
Our volume of new business in North America during the second quarter of 2011 was € 0.5 billion, and therefore totalled € 0.6 billion for the first half of the year. We conducted this new business almost exclusively in the US, with a very small share generated in Mexico.
Rents for first-class commercial properties in China's most important locations and in Singapore continued to rise in the second quarter. This applied to office and retail, as well as to logistics properties. On average, retail rents in Singapore were the only segment to post a slight decline. Investor yield requirements for newly-acquired properties were stable or fell slightly in China and Singapore – on the whole, prices therefore continued to rise. While the volume of transactions in China in particular remained at a high, virtually unchanged level compared with the previous quarter, no hasty sales of commercial properties were determined on the Japanese investment market after the earthquake catastrophe in mid-March. However, there were some cancellations and postponements. The volume of investments in Japan was therefore low in the second quarter after a strong start to the year. This meant that the total volume invested in Asia was significantly lower than in the previous quarter.
Rental interest also remained reticent in Japan. The effects of the earthquake on the future progress of the Japanese commercial property market cannot be fully estimated at present.
The hotel market varied in the big East Asian cities. While the average revenues per available hotel room rose over the same quarter of the previous year in Beijing and Singapore, revenues per hotel room in Shanghai and Tokyo posted
a marked decline. The decline in Shanghai is likely to be attributable largely to the fact that the city benefited considerably last year from the World Expo that ran from the start of May. The very high declines in Tokyo are attributable to the earthquake catastrophe and its consequences for travel.
The volume of new business conducted in Asia in the second quarter was low, at less than € 0.1 billion. We concluded no new business in Asia in the first quarter of 2011.
At € 41 million, operating profit generated in the Structured Property Financing segment in the second quarter of 2011 was significantly higher than the previous year (Q2 2010: € 25 million) and almost matched the extraordinarily strong figure of the first quarter of 2011 (€ 43 million).
The year-on-year increase was largely due to higher net interest income and lower allowance for credit losses.
Net interest income during the period under review was € 124 million, after € 111 million in the comparable period of the previous year. The rise was attributable predominantly to higher average margins generated in the lending business.
Allowance for credit losses in the second quarter amounted to € 24 million (Q2 2010: € 33 million). It was therefore lower than the pro-rata forecast range of € 110 to 140 million, but within the fluctuation range we had expected.
Net income of € 2 million from investment securities was largely due to the sale of fixed-income securities (Q2 2010: € 14 million).
| Quarter 2 2011 | Quarter 2 2010 | |
|---|---|---|
| € mn | ||
| Net interest income | 124 | 111 |
| Allowance for credit losses | 24 | 33 |
| Net interest income after allowance for credit losses | 100 | 78 |
| Net commission result | -2 | 1 |
| Net result on hedge accounting | 2 | 2 |
| Net trading income/expenses | 2 | -13 |
| Results from non-trading assets | 2 | 14 |
| Results from investments accounted for using the equity method | – | 5 |
| Results from investment properties | 2 | 0 |
| General administrative expenses | 54 | 55 |
| Net other operating income/expenses | -11 | -7 |
| Impairment of goodwill | 0 | – |
| Operating profit | 41 | 25 |
| Income taxes | 13 | 7 |
| Segment result | 28 | 18 |
| Allocation of results | ||
| Segment result attributable to non-controlling interests | 4 | 4 |
| Segment result attributable to shareholders of Aareal Bank AG | 24 | 14 |
At € 54 million, administrative expenses in the second quarter were down slightly on the corresponding level of the previous year (Q2 2010: € 55 million).
Net other operating income and expenses amounted to € -11 million (Q2 2010: € -7 million), reflecting, in particular, expenses incurred in relation to a specific property.
Overall, operating profit for the Structured Property Financing segment was € 41 million (Q2 2010: € 25 million). Taking tax expenses of € 13 million into consideration (Q2 2010: € 7 million), the segment result was € 28 million (Q2 2010: € 18 million). According to the allocation of results, segment results of € 24 million in the second quarter were attributable to shareholders of Aareal Bank AG (Q2 2010: € 14 million).
The positive development of the Wodis Sigma ERP system continued in the second quarter. A further 13 clients signed contracts, including for example, Freiburger Stadtbau GmbH, the largest commercial housing enterprise in southern Badenia. A total of 347 clients have opted for Wodis Sigma since its introduction, with 216 already using the software in production. Most of the existing clients of the successful product line previously used the Aareon ERP products Wodis and WohnData. To adequately service the strong demand, Aareon has invested further in expanding its advisory and support capacities. With the introduction of the new Release 3.0 in the fourth quarter of 2011, Aareon can offer its clients greater opportunities for using a software rental model (known as Software as a Service – "SaaS"), besides the licence model. Aareon can therefore pave the way for its clients to benefit from the advantages of cloud computing individually geared towards the institutional housing industry. Aareon Cloud is available exclusively for
Aareon clients. The data is held in Aareon's Mainz data centre, which guarantees data security and pro-tection at the highest level. Against this background, some of the remaining WohnData clients have decided in favour of converting to the rental model. Wodis Sigma Release 3.0 will also allow the acquisition of additional applications from Aareon Cloud. Aareon Cloud clients pay regular usage fees over a long-term period, but do not need to purchase a software licence – thus saving the related one-off cost.
As expected, the market for SAP® projects remained muted. Larger projects for implementing SAP® were not tendered in the second quarter either. Demand was concentrated on Aareon's SAP® consultancy services. Blue Eagle Release 6.2 is in development at present, with the rollout planned for November 2011.
The business with the established GES system remains stable. Back in 2009, the WohnData Client Advisory Council and Aareon agreed on the Wohn-Data run time: WohnData clients should determine their IT strategies, select their software and agree a conversion project for 2010/2011. A large number of clients already switched to another Aareon ERP product, and further conversion projects are already in operation or in the planning phase.
The Integrated Services product line continued to develop favourably. Demand was particularly high for the Mareon service portal, the document management system Aareon DMS, the insurance solution BauSecura and Aareon's invoicing service for the digitalisation of the invoicing process. One of Aareon's largest clients, Treureal GmbH, Mannheim, decided in favour of Mareon in the second quarter.
One of the particular highlights of the second quarter was the 21st Aareon Congress held in Garmisch-Partenkirchen – the trade meeting for the property management sector with some 1,000 participants. Conducted under the motto "Status. Trends.Visions", the key issues covered included cloud computing, social media and future trends in the institutional housing industry. The new
Aareon online shop was launched at the Congress, which offers a range of products to Wodis Sigma and GES clients.
Development in Aareon's international business has also been positive. In June, Aareon France SAS held its client convention at the Pavillon Royal in the Bois de Boulogne in Paris. This is one of the largest events held by the property management sector in France, with around 200 participants and an extensive exhibition of software partner institutions. The main points of interest included further streamlining of processes through digitalisation, intelligent buildings and customer relationship management in relation to the tenant. Business continues to develop favourably at the French subsidiary, in line with planning. Since the second quarter, Aareon UK is cooperating with Documotive, Sutton Coldfield, to provide document management solutions for the social institutional housing industry. In the Netherlands, SG|automatisering will launch the new Release 2.2 of the ERP solution SG|tobiasAX on the market in the third quarter. In April, the property management company Viverion in Lochem, which manages 5,700 residential units, signed a contract for SG|tobiasAX. The integration process of the Dutch subsidiary – acquired in the fourth quarter of last year – continues on schedule.
In cooperation with our wholly-owned Aareal First Financial Solutions AG subsidiary, our Institutional Housing Unit offers a highly-automated mass payments system – the BK01 product family – to our commercial housing sector clients. Aareal Bank's objective is to increase the volume of deposits through new client acquisition, as well as to intensify the business relationships with existing clients.
At an average € 4.7 billion (Q1 2011: € 4.5 billion), the volume of deposits was at a high level during the second quarter of 2011 – in fact, it has been rising continuously since the first quarter of 2010.
Our clients continue to make strong use of the combination of cash investment schemes, specialist services for automated mass electronic payments processing, and the optimisation of downstream
processes (together with related advice) which we offer. This enables us to maintain a strong position in the market, despite strong competitive pressure on money market investment terms.
This is also reflected in the number of new clients acquired for the deposit-taking and payments business. During the second quarter we again acquired new clients – 16 new institutional housing industry business partners, managing around 80,000 units. We also acquired four additional business partners from the energy supply sector.
Operating profit in the Consulting/Services segment was € 3 million in the second quarter of 2011 (Q2 2010: € 6 million). The decline was attributable to a higher level of investment in our future business, particularly in the Wodis Sigma product line. The lower interest rate environment also burdened the profitability of the deposittaking business in the Institutional Housing Unit compared to the previous year.
At € 48 million, revenues generated in the quarter under review were in line with the corresponding period of the previous year (€ 48 million). Compared with the previous year, the figure includes € 4 million of revenue generated by SG|automatisering bv, Aareon's Dutch subsidiary acquired in the fourth quarter of 2010. On the other hand, the interest margin generated by the deposit-taking business in the Institutional Housing Unit and reported in revenues was down on the corresponding level for the previous year.
The cost of materials, other operating income as well as depreciation and amortisation, were roughly in line with last year's levels.
Staff expenses in the quarter under review amounted to € 28 million. This figure included additional expenses for SG|automatisering bv, which Aareon had acquired in the fourth quarter of 2010.
| Quarter 2 2011 | Quarter 2 2010 | |
|---|---|---|
| € mn | ||
| Sales revenue | 48 | 48 |
| Own work capitalised | 1 | 1 |
| Changes in inventory | 0 | 0 |
| Other operating income | 2 | 2 |
| Cost of materials purchased | 5 | 5 |
| Staff expenses | 28 | 25 |
| Depreciation, amortisation and impairment losses | 3 | 4 |
| Results from investments accounted for using the equity method | 1 | – |
| Other operating expenses | 13 | 11 |
| Interest and similar income/expenses | 0 | 0 |
| Operating profit | 3 | 6 |
| Income taxes | 1 | 2 |
| Segment result | 2 | 4 |
| Allocation of results | ||
| Segment result attributable to non-controlling interests | 0 | 0 |
| Segment result attributable to shareholders of Aareal Bank AG | 2 | 4 |
Similarly, compared with the previous year, other operating expenses include (amongst other things) an additional € 1 million expenses resulting from SG|automatisering bv.
On balance, the Consulting /Services segment yielded a net contribution of € 3 million to consolidated operating profit (Q2 2010: € 6 million).
After deduction of taxes, the segment result for the second quarter of 2011 was € 2 million (Q2 2010: € 4 million).
Aareal Bank Group's total assets as at 30 June 2011 amounted to € 40.9 billion, after € 41.2 billion as at 31 December 2010.
The volume of Aareal Bank Group's property financing portfolio1) stood at € 22.3 billion as at 30 June 2011. This equates to a slight decrease of 2.8 % from the 2010 year-end figure of € 22.9 billion. The international portfolio has also fallen slightly, from € 19.2 billion to € 18.9 billion, and now accounts for 85 % of the total portfolio (31 December 2010: 84 %). The chart below illustrates the very broad regional diversification overall.
1) As at 30 June 2011, the portfolio of property financings under management totalled € 22.5 billion (31 December 2010: € 23.3 billion). Property financings under management include the € 0.3 billion property financing portfolio managed on behalf of Deutsche Pfandbriefbank AG.
The performance of the property financing portfolio was defined during the course of the 2011 financial year by a significant increase in new business activity compared with the same period of the previous year. Additionally, several largevolume repayments were reported in the first six months of this financial year. The repayment ratio exceeds our expectations slightly. Exchange rate performance in the course of the year also contributed to the slight decline in the portfolio value.
Commensurate with the still-volatile market environment, the (very adequate) liquidity reserves are invested in a high-quality securities portfolio. The securities portfolio can be used to procure short-term liquidity, for example through repo transactions conducted on the money market.
As at 30 June 2011, the securities portfolio was measured at € 12.2 billion (with a nominal volume of € 11.6 billion), and comprised the four asset classes of public-sector borrowers, Pfandbriefe and covered bonds, bank bonds and asset-backed securities (ABS). 97 %1) of the overall portfolio is denominated in euros. 99.9 %1) of the portfolio has an investment grade rating2).
Mortgage Pfandbriefe 28 %
Aareal Bank Group continued to successfully carry out refinancing activities in the second quarter of 2011, and also continues to enjoy a good liquidity situation. Long-term funding as at 30 June 2011 amounted to € 25.1 billion and comprised Pfandbriefe (German covered bonds), unsecured and subordinated issues. Aareal Bank also had € 4.7 billion at its disposal from deposits generated from the business with the institutional housing industry, as well as institutional money market investor deposits in the amount of € 5.0 billion.
€ 1.7 million of long-term funds were raised on the capital market in the second quarter. This comprises Mortgage Pfandbriefe in the amount of € 0.8 million as well as unsecured refinancing of € 0.9 million.
Key funding transactions during the second quarter included in particular, a three-year bearer bond and the placement of a five-year Mortgage Pfandbrief. Both transactions were sized at € 500 million each.
The bank raised a total of € 2.8 billion in longterm funds on the capital market through private and public placements during the first six months of the financial year, comprising € 1.6 billion in Mortgage Pfandbriefe and € 1.2 billion in unsecured funding. Aareal Bank has therefore maintained its long-term funding inventory at a high level.
As a result of 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.
As in the previous quarters, no open-market transactions were concluded with the ECB during the first six months of the financial year.
1) Details based on the nominal volume
2) The rating details are based on the composite ratings
On 14 April 2011, the Management Board of Aareal Bank AG resolved, with the approval of the Supervisory Board, to increase the Company's share capital in a rights issue against cash contributions. 17,102,062 new ordinary bearer shares with a proportionate share in the nominal share capital of € 3.00 per share were issued. As a result, the Company's share capital has increased from € 128 million to € 180 million. The gross issue proceeds generated amounted to € 269.6 million.
On 28 April 2011, Aareal Bank AG made a second partial repayment, in the amount of € 75 million, related to the silent participation provided by the German Financial Markets Stabilisation Fund (SoFFin). The repayment reduced the silent participation to a residual amount of € 300 million.
Additionally, Aareal Bank Group carried out an early redemption of the SoFFin-guaranteed € 2 billion bond maturing on 5 June 2013, which the bank held on its own books, in agreement with SoFFin on 19 April 2011. The three-year bond was issued in June 2010 as a precautionary measure to enhance the flexibility in the refinancing business; however, due to the gradual stabilisation of the market environment, the issue was not placed on the market and hence not used for funding purposes.
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Tier 1 capital | 2,494 | 2,284 |
| Liable capital | 3,137 | 2,910 |
| Risk-weighted assets | ||
| (incl. market risk) | 15,738 | 17,663 |
| % | ||
| Tier 1 ratio | 15.8 | 12.9 |
| Total figure | 19.9 | 16.5 |
After the end of the interim report period, Aareal Bank invited investors holding the remaining SoFFin-guaranteed issue to redeem all outstanding notes early. The three-year notes had an issue volume of € 2 billion and a maturity on 26 March 2012. The offer, which expired on 11 July 2011, was taken up with an aggregate volume of just under € 0.8 billion. Aareal Bank accepted all notes tendered for repurchase, and cancelled them in the meantime. The repurchase price was set at 100.816 %.
There have been no further material events subsequent to the end of the interim reporting period under review that need to be disclosed at this point.
The Annual Report 2010 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 approved 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, and then adopted by the Management Board and
the Supervisory Board. Suitable risk management and risk control processes are deployed to implement the risk strategies, and to ascertain the bank's uninterrupted ability to bear risk.
At 66 %, credit risks account for the largest part of the bank's aggregate risk cover; 14 % is retained to cover market price risks, 4 % for operational risks and 3 % for investment risks. In addition, a substantial portion (13 %) of the aggregate risk cover serves as a risk cushion, which is not applied to risk limits, and is thus available for risk types that cannot be quantified (for example, reputational or strategic risks). Overall, aggregate risk cover and risk limits are harmonised to ensure Aareal Bank's ability to bear risk at any time, based on the going concern assumption – even against the background of market distortions as a result of the financial markets and economic crisis. The diagram below shows the allocation of aggregate risk cover to types of risk as at 30 June 2011. There were no changes compared to the allocation as at 31 December 2010.
Since aggregate risk cover is an inadequate measure to assess risk-bearing capacity, we have defined special tools for managing this type of risk. These tools are described in detail in the section "Liquidity risk", and in the 2010 Annual Report.
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. Both credit business and trading activities may 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 professional risk management. The organisation of operations and workflows in the credit and trading business comply with extensive regulatory requirements.
Processes in the credit and trading businesses are designed to consistently respect the clear functional separation of Sales Units and Credit Management, up to and including senior management level. An 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 various risk classification procedures for the initial, regular, or event-driven assessment of counterparty risk; these procedures are adapted specifically to meet the requirements of the relevant business activity and are subject to permanent review and improvement. Responsibility for development, quality assurance, and monitoring implementation of risk classification procedures, is outside the Sales units.
Methods used to measure and monitor concentration and diversification effects on a portfolio level include two diverse credit risk models. Based on these models, the bank's decision-makers are regularly informed of the performance and risk content of property finance exposures, and of business with financial institutions. The model-based analysis and monitoring of risk concentrations is
also carried out on the basis of the credit risk models used in the bank. The models in question allow the bank to include in particular, rating changes and diversification effects in the assessment of the risk concentrations.
The bank uses specific tools to monitor individual exposures on an ongoing basis where this is required: besides the tools already described, this includes rating reviews, monitoring of construction phase loans or residential property developers, the monitoring of payment arrears, and the regular, individual analysis of the largest exposures.
A credit risk report that complies with the Minimum Requirements for Risk Management (MaRisk) is prepared and submitted to the bank's senior management and Supervisory Board on a regular basis, at least quarterly. This report contains extensive information on the development of the credit portfolio (covering countries, types of property and product types, risk classes and types of collateral), with a particular focus on risk concentrations.
Trading activities are generally 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, manage and hold" strategy in managing its credit portfolio: this means that loans are generally held until maturity; sales of loans to third parties during their term are only used on a selective basis, and by selling parts of exposures. Loan syndication is used as an element of portfolio management.
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 carried out by the bank's senior management. The Risk Controlling division is responsible for the continuous monitoring of country limits and for reporting on limit utilisation.
Market price risk is broadly defined as the threat of losses due to changes in market parameters. Aareal Bank's market price risk exposure predominantly comprises interest rate risks, whilst currency risks are largely eliminated through hedges. Commodity and other price risks are irrelevant for the bank's business. Hence, the primary market price risk exposures are related to the risk parameters interest rates, equity prices, exchange rates, and implied volatilities. All relevant parameters are covered by our management and monitoring tools.
Derivative financial instruments are entered into almost exclusively in the trading book, and are primarily used as hedging instruments. Spread risks between the various yield curves (e.g. government, Pfandbrief and swap curves) are taken into account. The risk exposure from bonds that is not related to market price or interest rate risks is managed as part of "specific risk", in particular, credit and liquidity risk exposure of the bond portfolio.
Risk Controlling informs the members of the Management Board responsible for Treasury and risk monitoring about the risk position and the market price risk exposure on a daily basis. In addition, the entire Management Board is informed on a monthly basis, within the scope of an extensive risk report. A quarterly report is submitted to the Supervisory Board.
Value-at-risk (VaR) has been broadly accepted as the predominant method for measuring general market price risk. The VaR for market price risk quantifies the exposure as a negative divergence from the current aggregate value of the bank's financial transactions. This absolute amount, expressed in euros, indicates the potential loss incurred before counter-measures take effect. Since this is a statistical approach, the forecast for the potential loss that may be incurred within a specific period of time is for a given confidence interval only.
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 250-day historical data maintained within the bank. The loss potential is determined applying a 99 % confidence interval and a ten-day holding period.
By its very nature, VaR calculations are based on 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 two years, using the average residual amount of deposits observed in the past. Loans are taken into account using their fixed-interest period (for fixed-rate exposures), or using their expected maturity (variable-rate exposures). Aareal Bank's 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.
The limit set for the VaR figure is derived from the analysis of the bank's risk-bearing capacity, which is carried out at least once a year. Limits are defined at Group level, as well as for the individual Group entities. Being authorised to maintain a trading book, Aareal Bank AG has defined an additional trading book limit, plus a separate value-at-risk limit for fund assets held.
When interpreting the VaR figures stated below, it should be taken into account that these refer to the overall portfolio (thus including all non-trading positions as defined in IFRS). Hence, the analysis provided represents a very extensive disclosure of market price risks by industry standards.
| MAX | MIN | Mean | Limit | |
|---|---|---|---|---|
| Euro mn | ||||
| Q2 2011 (2010 year-end values) 99 %, | ||||
| 10-day holding period | ||||
| Aareal Bank Group – general market price risk | 66.5 (71.5) | 43.3 (36.5) | 55.3 (46.2) | – (–) |
| Group VaR (interest rates) | 61.4 (67.5) | 38.3 (30.6) | 50.1 (40.9) | – (–) |
| Group VaR (FX) | 13.9 (17.9) | 12.5 (13.4) | 13.3 (15.6) | – (–) |
| VaR (funds) | 8.6 (11.9) | 5.7 (6.0) | 7.2 (7.7) | 60.0 (60.0) |
| Aggregate VaR in the trading book | ||||
| (incl. specific VaR) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | 20.0 (20.0) |
| Trading book VaR (interest rates) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | – (–) |
| Trading book VaR (FX) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | – (–) |
| VaR (equities) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | – (–) |
| Group VaR (specific risks) | 111.6 (112.4) | 85.3 (71.4) | 103.4 (96.2) | – (–) |
| Aggregate VaR – Aareal Bank Group | 127.1 (122.2) | 97.7 (85.4) | 118.0 (108.0) | 181.0 (181.0) |
To ensure that Aareal Bank's figures are comparable to those published by other institutions, the risk parameters shown below were determined for a one-day holding period:
| MAX | MIN | Mean | Limit | |
|---|---|---|---|---|
| Euro mn | ||||
| Q2 2011 (2010 year-end values) 99 %, | ||||
| 1-day holding period | ||||
| Aareal Bank Group – general market price risk | 21.0 (22.6) | 13.7 (11.5) | 17.5 (14.6) | – (–) |
| Group VaR (interest rates) | 19.4 (21.3) | 12.1 (9.7) | 15.8 (12.9) | – (–) |
| Group VaR (FX) | 4.4 (5.7) | 4.0 (4.2) | 4.2 (4.9) | – (–) |
| VaR (funds) | 2.7 (3.8) | 1.8 (1.9) | 2.3 (2.4) | 19.0 (19.0) |
| Aggregate VaR in the trading book | ||||
| (incl. specific VaR) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | 6.3 (6.3) |
| Trading book VaR (interest rates) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | – (–) |
| Trading book VaR (FX) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | – (–) |
| VaR (equities) | 0.0 (0.0) | 0.0 (0.0) | 0.0 (0.0) | – (–) |
| Group VaR (specific risks) | 35.3 (35.5) | 27.0 (22.6) | 32.7 (30.4) | – (–) |
| Aggregate VaR – Aareal Bank Group | 40.2 (38.7) | 30.9 (27.0) | 37.3 (34.2) | 57.2 (57.2) |
Limits were unchanged during the quarter under review. No limit breaches were detected.
The quality of forecasts made using this statistical model is checked through a weekly 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 (≤ 5 for a 250-day period). The number of negative outliers at Group level never exceeded 2 during the last 250 trading days, affirming the high forecasting quality of the VaR model we use.
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 German Banking Act. Given that no such trades were concluded during the period under review, trading book risks played a negligible role in the overall risk scenario.
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'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, whilst Risk Controlling ensures the continuous monitoring, including a daily liquidity report submitted to Treasury, and a contribution to the monthly risk report to the entire 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 threemonth period is compared to the liquidity stock. There were no liquidity shortages throughout the period under review. The requirements of the liquidity ratio in accordance with the Liquidity Ordinance, which is relevant to liquidity management, were always complied with, as were the limits set by reference to the liquidity run-off profile. Further details are provided in the comments on the bank's liquidity in the section on "Refinancing and Equity".
Aareal 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 includes legal risks. In contrast, strategic, reputational and systematic risks are not covered by operational risk management. These risks are managed largely through qualitative measures.
Aareal Bank's policy for managing and monitoring operational risks is geared to achieving a riskminimising or loss-limiting effect at an early stage, by employing a pro-active approach. The Risk Report in the 2010 Annual Report contains a detailed description of controlling tools employed by the bank to manage operational risk, plus the relevant responsibilities.
The current analysis using these controlling tools has indicated that the bank is not exposed to any disproportionate operational risks, nor did it indicate any material risk concentration.
Operational risk management also includes the reporting to the bank's senior management 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.
Due to the special character of some exposures (e.g. marketing risks), special methods and procedures are employed to deal with investment risk. All relevant Group entities are subject to regular audits, including a review and assessment of their risk situation. A quarterly investment risk report is submitted to the bank's Management Board. There were no significant changes in investment risk during the period under review.
Various indicators point towards moderate growth in the global economy during the second half of 2011, albeit at a slower pace than in the first half of the year, and below expectations at the beginning of the year. In this context, growth rates are set to diverge considerably across regions and countries.
Significant uncertainty remains regarding the economic outlook. Despite the fundamental agreement on a package of measures to overcome the Greek debt crisis reached at the Brussels Summit in July, the further development of the European sovereign debt crisis is set to remain a substantial factor of uncertainty, as well as the search for a sustainable solution to the US debt issue. It is thus fair to expect volatility on financial and capital markets to remain high for the time being. Overall, the risks in the financial system have increased.
Tax increases and reduced spending, which numerous countries have embarked upon, represent another uncertainty factor for global economic developments going forward. Whilst such measures may slow down overall demand as a consequence of lowering disposable incomes and government spending, at the same time they may strengthen investor confidence, thus boosting lending and investment activities – which would have a positive effect on economic developments. It is too early to determine which of the effects will be dominating. The current expansive monetary policy stance has a positive effect upon economic activity,
even though a slight to moderate tightening can be expected from various central banks. Some economies or economic regions are facing the fundamental question as to how they can achieve sustainable growth.
Significant differences in economic developments across the various regions are expected to prevail. The developing Asian economies – China in particular – continue to lead the economic growth trend. Given the rising inflation in China, which has reached high levels, and the threat of an overheating economy, the Chinese central bank further tightened its monetary policy stance. Even though this is set to slow down economic momentum, China will nevertheless continue to post strong growth rates. In Japan, there are signs that the temporary collapse in production due to the earthquake disaster is easing: catch-up effects and re-building efforts are likely to add some boost to the Japanese economy during the second half of the year. Some problems which might affect production may still persist, however – with respect to power supply, for example. Therefore, only a slight decline in Japanese economic output is expected for the year as a whole – in spite of the earthquake disaster.
In Europe, we anticipate moderate growth on average for the remainder of this year, However, future economic developments will diverge across Europe: we anticipate relatively strong momentum in the German, Polish, Swedish and Turkish economies, whereas other countries will only post low growth rates. We only expect economic output to decline in a few countries such as Greece, Portugal and Ireland. The US economy is burdened by the high level of government debt, persistent high unemployment, consumer reticence, and by a business climate that deteriorated recently. In contrast, monetary policy – with an extremely low key interest rate – is providing a stimulus. We thus also expect the US economy to grow at a moderate pace.
The anticipated economic momentum in most countries will thus fall short of a level that would facilitate any notable improvement to employment this year. Accordingly, we expect unemployment
to remain stagnant, or to fall slightly, until the end of the year: this means that it will persist at relatively high levels in many countries.
Inflation has been on the rise during the first half of the year, predominantly driven by commodity prices (and by crude oil prices in particular), but also by price increases for foodstuffs. Inflation has now reached pronounced levels, especially in emerging market economies. Given the strong influence of crude oil prices, which are driven by political factors and speculation, the outlook for inflation is difficult to judge. Nonetheless, the slower, moderate economic trend expected in developed countries would not indicate any material, extensive acceleration of inflation during the remainder of the year. We continue to expect high inflation rates in some Eastern European countries, and in the emerging economies of Asia.
ECB's medium-term target inflation rate is just under 2 % – a threshold that has been breached over recent months. For this reason, we see a possibility for a further tightening of ECB monetary policy, following the interest rate hike just after the end of the second quarter. However, we believe that any such tightening will remain moderate until the end of this year, which means that monetary policy is set to remain expansive. Other European central banks are expected to adopt a similar stance. In contrast to the ECB, the US Federal Reserve is committed to an employment target besides the goal of monetary stability. Given the prevailing high unemployment levels in the US, with a persistently high proportion of long-term unemployment, the Fed is likely to maintain its very expansive monetary policy for the remainder of this year. Facing considerable inflation, the central banks of some emerging market economies are set to take a different stance, however, with more restrictive monetary policy measures on the cards.
Against the background of an expected moderate tightening of monetary policy in many developed economies, assuming that all other conditions remain unchanged, we anticipate moderate increases in short-term as well as long-term interest rates in the currencies where we are active, for the remainder of the year.
Developments on commercial property markets will strongly depend upon the future overall economic environment. Provided that the existing material risks threatening the economy as a whole do not materialise, on average we anticipate a stable to slightly positive development of rents and prices for commercial property. This outlook is supported by our expectation for moderate economic growth to prevail.
A cautious, conservative assessment of the development on commercial property markets going forward is also supported by persistently high unemployment levels in many countries, which we expect to remain mostly stagnant to slightly falling throughout the remainder of this year.
In principle, rising interest rates – particularly for long-term maturities – can burden commercial property prices. This is because higher interest rates tend to raise investor yield requirements (all other factors unchanged). However, we only anticipate moderate interest rate increases until the end of this year. The resulting burden is thus likely to be minor – yet such increases would also make any extremely dynamic price development unlikely.
The high volume of commercial property financings maturing before the end of this year, and in the years ahead, represents an uncertainty factor for global commercial property markets. This might lead to distressed sales and a burden upon prices if financings cannot be renewed or restructured, with potential buyers hard to find.
The trends described are expected to equally affect the different commercial property types – office, retail and logistics properties. We also expect market values of hotels to be stable to slightly positive. Average revenues per hotel room are set to improve further in many locations during the second half of the year, reflecting economic growth. Looking at the different property classes, highquality properties in prime locations are set to remain the focus of users and investors alike. Accordingly, these properties will develop more favourably – in terms of rents and prices – compared to those in less sought-after locations, or of lesser quality. Nonetheless, if economic development progresses and the number of vacancies are reduced, properties outside the first-class segment could enjoy a catch-up effect, leading to an increase in rents and prices. In any case, this will depend upon the specific situation of the respective sub-markets. Properties offering development potential through improvements are also expected to attract growing investor attention.
We assume stable to slightly rising rents and prices of commercial properties on average, for Europe and North America as well as for Asia. A regional differentiation in Europe is possible to the extent that rents and prices in countries with a relatively dynamic economic momentum will develop above average – whereas they might come under pressure in those countries with weak economic development and high unemployment. Considering that the US economy is expected to post moderate growth until year-end, we also anticipate commercial property prices in North America to be stable to slightly higher on average. The strongly expansive monetary policy might well be supportive for property markets there. Higher growth rates in the developing Asian economies relative to other international regions, especially in China, suggest positive performance from commercial property markets. However, the momentum is set to slow down somewhat; looking at the more restrictive monetary policy and the high volume of new buildings coming onto the market this year, we take a more cautious stance regarding rents and prices in China. As a consequence of the earthquake disaster, transaction volumes in the Japanese market will certainly be lower year-on-year, as some investors are likely to remain on the sidelines. Investors and tenants are expected to increasingly demand newer buildings with a high level of earthquake protection, with rents and prices of older buildings set to remain clearly behind. The situation in the Japanese hotel sector, with lower
returns compared with the same period of the previous year, is expected to prevail during the second half of the year. Beyond this, it is still too early for a final assessment of how the earthquake will ultimately affect the future development of commercial property rents and prices.1)
We expect the German institutional housing industry to continue to perform well during the remainder of this year, especially due to stable rental payments and constancy in values. Looking at the continued (albeit more moderate) economic growth, falling unemployment, and a moderate level of new construction, the German housing market is also expected to develop favourably. Housing prices are expected to increase by 3-4 % during the current year. In Germany's big cities in particular, growing demand combined with slowlyincreasing supply may lead to rising rents and prices – whereas rural regions are more likely to experience falling housing demand.
Driven by the favourable market outlook, the number of new housing construction projects is set to increase, especially in prime locations. Overall, the forecast for new construction volume is a rise from 148,000 units in 2010 to approximately 156,000 units in 2011.
At the same time, housing enterprises will continue to focus on renovations with regard to energy efficiency, and in particular on the modification of their housing stock to suit elderly occupants. GdW, the Federation of German Housing Enterprises expects the aggregate investment volume of its members to increase by 6.7 %, to € 9.6 billion this year, including an increase in new construction activity.
We expect demand for residential property, as a valuable capital investment that offers a stable return, to continue. Assuming that the economic environment continues to develop favourably, the transaction market may gain further momentum during the current year, with metropolitan locations still gaining in attraction for residential property investors.
Cloud computing is one of the key trends in the IT industry, and one that is set to gain importance for property management software as well. Against the background of ever more complex IT solutions, relentless data volume growth, and faster-changing requirements, cloud computing offers new solutions: IT products can be procured as a service as and when needed, independently of any platform, via a network such as the internet.
The trend originally observed in 2010, but also during the first quarter of 2011, prevailed during the second quarter: besides a stabilisation, rents and market values of first-class commercial properties also saw a recovery on numerous markets. Whilst lesser-quality properties remained under pressure during the second quarter, there were initial signs of growing interest compared with the previous year – albeit on a very selective basis.
Despite a rather moderate economic growth in many countries, coupled with stagnating unemployment (expected to continue falling, but only very slowly), we forecast stable to moderately higher rents and prices on average for the remainder of the year. However, the performance in those markets that are especially burdened by weak economic development and high unemployment could be weaker: rents and prices could in fact fall further.
These developments are taken into account in our allowance for credit losses. We will continue to focus on consistently managing our loan portfolio, on active portfolio management, and on the broad diversification of our financing portfolio by region and property type.
1) Assessments on individual sub-markets and properties could deviate from the general assessment of the commercial property markets outlined.
We will continue to consistently pursue our lending policy that is oriented on risk and return in relation to new business, whereby the share of new business should increase further compared with 2010. However, the renewal ratios in 2011 will also exceed the ratios of the property market boom years of 2006 and 2007.
Loan syndication already showed signs of recovery last year. The opportunity to distribute credit risks for large-volume financings among several banks – and therefore achieve better diversification of individual credit risks – has clearly improved. The syndication markets are expected to recover during the remainder of this year.
Subject to the performance of the relevant foreign currencies vis-à-vis the euro, we expect a slightly higher portfolio volume for the 2011 financial year.
Despite the Brussels Summit resolutions on 21 July 2011, the European sovereign debt crisis is set to remain at the top of the agenda of financial and capital markets. It is thus fair to expect financial markets volatility to remain high for the time being. Should tension on financial and capital markets once again mount significantly, renewal ratios are likely to exceed expectations. This would curtail the syndication markets at the same time.
All in all, we expect higher sales and a slight improvement in the overall result in 2011 compared with the previous year.
Modern technology platforms are becoming increasingly important on the market for property management software. Systems are becoming more user-friendly, and new functionalities can be realised quicker. Aareon AG is very well-positioned with its Wodis Sigma ERP product generation. One of the most prominent trends in the IT industry is cloud computing, where IT products can be procured as a service, and independently of any platform, via a network such as the internet. Designed for "SaaS" (software as a service) delivery, the new Wodis Sigma Release 3.0, which will be rolled out during the fourth quarter of this year, takes this trend into account. We anticipate a continued migration of WohnData and Wodis users to Wodis Sigma, and expect our SaaS business to grow. The respective business model is based on long-term fee payments by clients, and will replace a part of the licence-based business. We will continue to invest in the expansion of advisory and support resources for the Wodis Sigma product line.
We continue to expect demand for the SAP® solutions/Blue Eagle product line to be subdued, with a focus on Aareon's SAP® advisory services. With regard to the established GES system, we expect GES clients will increasingly convert to other Aareon ERP solutions, which will produce a revenue shift to other product lines.
We expect higher revenues in the integrated services product line through distribution successes achieved; especially with the Mareon service portal, the document management system Aareon DMS, the insurance service BauSecura, and the Aareon invoicing service. The IT Outsourcing product line will only partially offset the decline in revenue, owing to the end of a contractual relationship with a major client in 2010.
We expect a significant increase in the revenues generated by the International Business product group, with the Dutch subsidiary SG|automatisering bv – acquired on 1 November 2010 – contributing a substantial share thereof. Release 2.2. of the new SG|tobiasAX product generation launched in 2010 will be rolled out during the third quarter of this year.
We believe that the market success of the ERP products Prem'Habitat 2.0 and Portallmmo Habitat 2.0 will continue for our French subsidiary Aareon France SAS. Despite the intensive price competition on the UK market, we expect higher revenues through new client business.
Aareon Group's total expenditure is expected to increase, especially owing to higher staff expenses. This is attributable in particular to the increase
of around 170 in employee numbers through the acquisition of SG|automatisering bv.
The process optimisation procedures for electronic mass payment services (BK 01 products) offered by the bank's Institutional Housing Unit continued to generate stable deposits for the bank's refinancing activities during the second quarter of 2011.
Following a slight increase at the beginning of the year, despite the ongoing predatory competition, the volume of deposits further increased to an average € 4.7 billion. We rate this as a sign of the confidence our clients place in the bank. We expect the positive trend to continue in the course of the year, especially within rental guarantee deposits.
Given the ongoing low interest rate environment, we expect margins will continue to remain under pressure overall in 2011. Good opportunities should also arise in the course of the financial year to acquire new clients and intensify the business relationships with our existing client base. This also applies to our payments services for energy suppliers.
Despite the Brussels Summit resolutions on 21 July 2011, the European sovereign debt crisis and the US debt issue are to remain at the top of the agenda of financial and capital markets. It is thus fair to expect volatility on financial and capital markets to remain high for the time being. Overall, the risks in the financial system have increased.
Provided that the sovereign debt crises will not deteriorate further, Aareal Bank Group continues to see good potential for maintaining its positive business development during the remainder of the year, in this challenging market environment. The bank is making good progress in achieving its targets for 2011, which were last raised in April.
Accordingly, on the back of a moderately higher interest rate environment and expected revenues from additional new business, we expect net interest income for the 2011 financial year to be higher than in the previous year. Higher margins achieved in new business in 2009 and 2010 resulted in an increase in the average margins in the lending business. Burdens could arise, especially from a change to the underlying interest rate environment on which the planning is based.
We project allowance for credit losses in a range of € 110 million to € 140 million during the 2011 financial year. As in previous years, additional allowances for unexpected credit losses cannot be ruled out, especially in the event of negative developments in the business environment.
We believe that net commission income for the year 2011 will significantly exceed the previous year's figure. The net figure will benefit from relief due to lower guarantee fees, due to the partial redemption of SoFFin-guaranteed bonds.
Net trading income/expenses essentially comprises the results of hedge transactions related to the refinancing of our core business (predominantly currency and interest rate hedges). We only engage in traditional own-account trading to a very limited extent. The item also includes changes in value from the sale of hedges pertaining to the debt instruments of selected EU states, so-called credit default swaps (CDS). In our opinion, the measurement of the hedging transactions remains subject to the same high volatility as in the last two years, especially in the current environment. As a result, it is impossible to forecast net trading income/expenses.
Because of the consistent conservative risk policy pursued during recent years, overall we do not anticipate any material burden on the results from non-trading assets in the current financial year.
Administrative expenses continue to be defined by the unchanged cost discipline, and the figure for the current year is expected to be marginally higher than the previous year, including the burden associated with the special bank levy.
With the capital increase, we want to increasingly exploit opportunities for high-margin new business in the Structured Property Financing segment that present themselves in the current market and competitive environment. Our target for new business is in a range between € 7 billion and € 8 billion for the current financial year.
In the Consulting/Services segment, we anticipate the interest rate environment remaining difficult for the segment result in 2011. We therefore forecast operating profit to be slightly higher than for the previous financial year.
From today's perspective, for 2011 as a whole we believe that we will be able to once again markedly increase operating results over and above those for the 2010 financial year – results which were already good in the context of the challenging market environment.
Income Statement
| Note | 1 Jan-30 Jun 2011 | 1 Jan-30 Jun 2010 |
|---|---|---|
| € mn | ||
| Interest income | 525 | 422 |
| Interest expense | 257 | 183 |
| Net interest income 1 |
268 | 239 |
| Allowance for credit losses 2 |
42 | 65 |
| Net interest income after allowance for credit losses | 226 | 174 |
| Commission income | 93 | 89 |
| Commission expenses | 32 | 27 |
| Net commission result 3 |
61 | 62 |
| Net result on hedge accounting | 0 | 4 |
| Net trading income/expenses 4 |
-6 | -7 |
| Results from non-trading assets 5 |
4 | 14 |
| Results from investments accounted for using the equity method | 1 | 5 |
| Results from investment properties | 4 | 0 |
| General administrative expenses 6 |
187 | 183 |
| Net other operating income/expenses 7 |
-12 | -8 |
| Impairment of goodwill | 0 | 0 |
| Operating profit | 91 | 61 |
| Income taxes | 26 | 18 |
| Net income/loss | 65 | 43 |
| Allocation of results | ||
| Net income/loss attributable to non-controlling interests | 9 | 9 |
| Net income/loss attributable to shareholders of Aareal Bank AG | 56 | 34 |
| Appropriation of profits | ||
| Net income/loss attributable to shareholders of Aareal Bank AG | 56 | 34 |
| Silent participation by SoFFin | 11 | 17 |
| Consolidated profit/loss | 45 | 17 |
| € | ||
| Earnings per share | 1.16 | 0.78 |
| Diluted earnings per share | 1.16 | 0.78 |
Earnings per share are determined by dividing the earnings attributable to ordinary shareholders of Aareal Bank AG by the weighted average of shares outstanding during the reporting period.
| Note | 1 Jan-30 Jun 2011 | 1 Jan-30 Jun 2010 | |
|---|---|---|---|
| € mn | |||
| Net income/loss | 65 | 43 | |
| Changes in revaluation surplus | 8 | -22 | -25 |
| Changes in hedging reserves | 8 | – | 0 |
| Changes in currency translation reserves | 8 | 0 | 2 |
| Changes in reserves from transactions under common control | 8 | – | 0 |
| Gains and losses directly recognised in equity (after taxes) | -22 | -23 | |
| Total comprehensive income | 43 | 20 | |
| Allocation of total comprehensive income | |||
| Total comprehensive income attributable to non-controlling interests | 9 | 9 | |
| Total comprehensive income attributable to shareholders of Aareal Bank AG | 34 | 11 |
| Quarter 2 | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | |
|---|---|---|---|---|---|
| 2011 | 2011 | 2010 | 2010 | 2010 | |
| € mn | |||||
| Interest income | 273 | 252 | 250 | 231 | 215 |
| Interest expense | 139 | 118 | 111 | 100 | 93 |
| Net interest income | 134 | 134 | 139 | 131 | 122 |
| Allowance for credit losses | 24 | 18 | 8 | 32 | 33 |
| Net interest income after allowance for credit losses | 110 | 116 | 131 | 99 | 89 |
| Commission income | 46 | 47 | 56 | 42 | 44 |
| Commission expenses | 15 | 17 | 19 | 18 | 12 |
| Net commission result | 31 | 30 | 37 | 24 | 32 |
| Net result on hedge accounting | 2 | -2 | -4 | -2 | 2 |
| Net trading income/expenses | 2 | -8 | 13 | 2 | -13 |
| Results from non-trading assets | 2 | 2 | -23 | -3 | 14 |
| Results from investments accounted for using the | |||||
| equity method | 1 | 0 | 0 | 0 | 5 |
| Results from investment properties | 2 | 2 | -17 | 0 | 0 |
| General administrative expenses | 96 | 91 | 95 | 88 | 92 |
| Net other operating income/expenses | -10 | -2 | -2 | 1 | -6 |
| Impairment of goodwill | 0 | – | 0 | – | 0 |
| Operating profit | 44 | 47 | 40 | 33 | 31 |
| Income taxes | 14 | 12 | 11 | 11 | 9 |
| Net income/loss | 30 | 35 | 29 | 22 | 22 |
| Allocation of results | |||||
| Net income/loss attributable to non-controlling interests | 4 | 5 | 4 | 5 | 4 |
| Net income/loss attributable to shareholders | |||||
| of Aareal Bank AG | 26 | 30 | 25 | 17 | 18 |
| Quarter 2 | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | |
|---|---|---|---|---|---|
| € mn | 2011 | 2011 | 2010 | 2010 | 2010 |
| Net income/loss | 30 | 35 | 29 | 22 | 22 |
| Changes in revaluation surplus | -10 | -12 | 8 | 19 | -43 |
| Changes in hedging reserves | – | – | – | – | 0 |
| Changes in currency translation reserves | 0 | 0 | 1 | -2 | 2 |
| Changes in reserves from transactions under common control | – | – | -1 | 0 | – |
| Gains and losses directly recognised in equity (after taxes) | -10 | -12 | 8 | 17 | -41 |
| Total comprehensive income | 20 | 23 | 37 | 39 | -19 |
| Allocation of total comprehensive income | |||||
| Total comprehensive income attributable to non-controlling interests | 4 | 5 | 4 | 5 | 4 |
| Total comprehensive income attributable to shareholders | |||||
| of Aareal Bank AG | 16 | 18 | 33 | 34 | -23 |
Segment Results
| Structured Property Financing |
Consulting/ Services |
Consolidation/ Reconciliation |
Group | Aareal Bank | ||||
|---|---|---|---|---|---|---|---|---|
| 1 Jan | 1 Jan | 1 Jan | 1 Jan | 1 Jan | 1 Jan | 1 Jan | 1 Jan | |
| 30 Jun 2011 | 30 Jun 2010 | 30 Jun 2011 | 30 Jun 2010 | 30 Jun 2011 | 30 Jun 2010 | 30 Jun 2011 | 30 Jun 2010 | |
| € mn | ||||||||
| Net interest income | 249 | 217 | 0 | 0 | 19 | 22 | 268 | 239 |
| Net loan loss provisions | 42 | 65 | 42 | 65 | ||||
| Net interest income | ||||||||
| after allowance for credit losses | 207 | 152 | 0 | 0 | 19 | 22 | 226 | 174 |
| Net commission result | -7 | -3 | 87 | 88 | -19 | -23 | 61 | 62 |
| Net result on hedge accounting | 0 | 4 | 0 | 4 | ||||
| Net trading income/expenses | -6 | -7 | -6 | -7 | ||||
| Results from non-trading assets | 4 | 14 | 0 | 4 | 14 | |||
| Results from investments accounted | ||||||||
| for using the equity method | 5 | 1 | 1 | 5 | ||||
| Results from investment properties | 4 | 0 | 4 | 0 | ||||
| General administrative expenses | 105 | 107 | 82 | 77 | 0 | -1 | 187 | 183 |
| Net other operating income/expenses | -13 | -9 | 1 | 1 | 0 | 0 | -12 | -8 |
| Impairment of goodwill | 0 | 0 | 0 | 0 | ||||
| Operating profit | 84 | 49 | 7 | 12 | 0 | 0 | 91 | 61 |
| Income taxes | 24 | 14 | 2 | 4 | 26 | 18 | ||
| Net income/loss | 60 | 35 | 5 | 8 | 0 | 0 | 65 | 43 |
| Allocation of results | ||||||||
| Net income/loss attributable to | ||||||||
| non-controlling interests | 8 | 8 | 1 | 1 | 9 | 9 | ||
| Net income/loss attributable to | ||||||||
| shareholders of Aareal Bank AG | 52 | 27 | 4 | 7 | 0 | 0 | 56 | 34 |
| Allocated equity | 1,406 | 1,478 | 76 | 73 | 484 | 401 | 1,966 | 1,952 |
| Cost/income ratio (%) | 45.5 | 48.2 | 92.6 | 86.5 | 58.5 | 59.0 | ||
| RoE before taxes (%) | 10.9 | 5.7 | 13.7 | 29.1 | 8.3 | 5.4 | ||
| Employees | 878 | 941 | 1,483 | 1,320 | 2,361 | 2,261 |
Segment Results (Quarterly Development)
| Structured Property Financing |
Consulting/ Services |
Consolidation/ Reconciliation |
Aareal Bank Group |
|||||
|---|---|---|---|---|---|---|---|---|
| Q2 2011 | Q2 2010 | Q2 2011 | Q2 2010 | Q2 2011 | Q2 2010 | Q2 2011 | Q2 2010 | |
| € mn | ||||||||
| Net interest income | 124 | 111 | 0 | 0 | 10 | 11 | 134 | 122 |
| Allowance for credit losses | 24 | 33 | 24 | 33 | ||||
| Net interest income after allowance | ||||||||
| for credit losses | 100 | 78 | 0 | 0 | 10 | 11 | 110 | 89 |
| Net commission result | -2 | 1 | 43 | 43 | -10 | -12 | 31 | 32 |
| Net result on hedge accounting | 2 | 2 | 2 | 2 | ||||
| Net trading income/expenses | 2 | -13 | 2 | -13 | ||||
| Results from non-trading assets | 2 | 14 | 0 | 2 | 14 | |||
| Results from investments accounted | ||||||||
| for using the equity method | 5 | 1 | 1 | 5 | ||||
| Results from investment properties | 2 | 0 | 2 | 0 | ||||
| General administrative expenses | 54 | 55 | 42 | 38 | 0 | -1 | 96 | 92 |
| Net other operating income/expenses | -11 | -7 | 1 | 1 | 0 | 0 | -10 | -6 |
| Impairment of goodwill | 0 | 0 | ||||||
| Operating profit | 41 | 25 | 3 | 6 | 0 | 0 | 44 | 31 |
| Income taxes | 13 | 7 | 1 | 2 | 14 | 9 | ||
| Net income/loss | 28 | 18 | 2 | 4 | 0 | 0 | 30 | 22 |
| Allocation of results | ||||||||
| Net income/loss attributable to | ||||||||
| non-controlling interests | 4 | 4 | 0 | 0 | 4 | 4 | ||
| Net income/loss attributable to | ||||||||
| shareholders of Aareal Bank AG | 24 | 14 | 2 | 4 | 0 | 0 | 26 | 18 |
| Allocated equity | 1,406 | 1,478 | 76 | 73 | 484 | 401 | 1,966 | 1,952 |
| Cost/income ratio (%) | 45.5 | 47.5 | 93.3 | 87.4 | 58.7 | 58.4 | ||
| RoE before taxes (in %) | 10.5 | 6.0 | 13.7 | 29.9 | 8.1 | 5.7 |
Consulting / Services Segment – Reconciliation of Income Statement
| Income statement classification – bank | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net interest income |
Net com mission result |
Results from non trading assets |
Results from investments accounted for using the equity method |
Admini strative expenses |
Net other operating income / expenses |
Impair ment of goodwill |
Operating profit |
Income taxes |
Segment result |
|||
| € mn | ||||||||||||
| Q2 2011 | 0 | 43 | 1 | 42 | 1 | 3 | 1 | 2 | ||||
| Q2 2010 | 0 | 43 | 0 | 38 | 1 | 6 | 2 | 4 | ||||
| Income statement classification – industrial enterprise |
||||||||||||
| Q2 2011 | 48 | 48 | ||||||||||
| Sales revenue | Q2 2010 | 48 | 48 | |||||||||
| Q2 2011 | 1 | 1 | ||||||||||
| Own work capitalised | Q2 2010 | 1 | 1 | |||||||||
| Q2 2011 | 0 | 0 | ||||||||||
| Changes in inventory | Q2 2010 | 0 | 0 | |||||||||
| Q2 2011 | 2 | 2 | ||||||||||
| Other operating income | Q2 2010 | 2 | 2 | |||||||||
| Cost of materials | Q2 2011 | 5 | 5 | |||||||||
| purchased | Q2 2010 | 5 | 5 | |||||||||
| Q2 2011 | 28 | 28 | ||||||||||
| Staff expenses | Q2 2010 | 25 | 25 | |||||||||
| Depreciation, amortisation | Q2 2011 | 3 | 3 | |||||||||
| and impairment losses | Q2 2010 | 4 | 4 | |||||||||
| Results from investments accounted for using the |
Q2 2011 | 1 | 1 | |||||||||
| equity method | Q2 2010 | |||||||||||
| Other operating | Q2 2011 | 13 | 12 | 1 | ||||||||
| expenses | Q2 2010 | 11 | 0 | 10 | 1 | |||||||
| Interest and similar | Q2 2011 | 0 | 0 | |||||||||
| income /expenses | Q2 2010 | 0 | 0 | |||||||||
| Operating profit | Q2 2011 | 3 | 0 | 43 | 1 | 42 | 1 | |||||
| Q2 2010 | 6 | 0 | 43 | 0 | 38 | 1 | ||||||
| Income taxes | Q2 2011 | 1 | 1 | |||||||||
| Q2 2010 | 2 | 2 | ||||||||||
| Segment result | Q2 2011 | 2 | ||||||||||
| Q2 2010 | 4 |
| € mn Assets Cash funds 543 922 Loans and advances to banks 9 3,925 2,034 Loans and advances to customers 10 23,750 24,661 Allowance for credit losses -322 -332 Positive market value of derivative hedging instruments 1,037 1,321 Trading assets 11 545 428 Non-trading assets 12 10,664 11,428 Investments accounted for using the equity method 2 3 Investment properties 214 220 Intangible assets 13 88 91 Property and equipment 14 97 95 Income tax assets 32 31 Deferred tax assets 89 69 Other assets 15 203 246 |
|---|
| Total 40,867 41,217 |
| Equity and liabilities |
| Liabilities to banks 16 3,556 5,168 |
| Liabilities to customers 17 24,048 22,846 |
| Certificated liabilities 18 8,131 7,619 |
| Negative market value of derivative hedging instruments 956 1,181 |
| Trading liabilities 19 344 675 |
| Provisions 20 210 237 |
| Income tax liabilities 12 30 |
| Deferred tax liabilities 28 27 |
| Other liabilities 21 152 181 |
| Subordinated equity 22 1,235 1,268 |
| Equity 23, 24 |
| Subscribed capital 180 128 |
| Capital reserves 721 511 |
| Retained earnings 881 836 |
| Other reserves -130 -108 |
| Silent participation by SoFFin 300 375 |
| Non-controlling interest 243 243 |
| Total equity 2,195 1,985 |
| Total 40,867 41,217 |
| Other reserves | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Sub scribed capital |
Capital reserves |
Retained earnings |
Revaluation surplus |
Currency translation reserves |
Silent partici pation by SoFFin |
Total | Non-con trolling interest |
Total equity |
|
| € mn | |||||||||
| Equity as at 1 January 2011 | 128 | 511 | 836 | -110 | 2 | 375 | 1,742 | 243 | 1,985 |
| Total comprehensive income | |||||||||
| for the period | 56 | -22 | 0 | 34 | 9 | 43 | |||
| Capital increase | 52 | 218 | 270 | 270 | |||||
| Costs of capital increase | -8 | -8 | -8 | ||||||
| Payments to non-controlling interests | -9 | -9 | |||||||
| Dividends | |||||||||
| Silent participation by SoFFin | -75 | -75 | -75 | ||||||
| Costs associated with the | |||||||||
| silent participation by SoFFin | -11 | -11 | -11 | ||||||
| Other changes | |||||||||
| Equity as at 30 June 2011 | 180 | 721 | 881 | -132 | 2 | 300 | 1,952 | 243 | 2,195 |
| Other reserves | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| € mn | Sub scribed capital |
Capital reserves |
Retained earnings |
Reserves from trans actions under com mon control |
Revaluation surplus |
Hedging reserves |
Currency translation reserves |
Silent partici pation by SoFFin |
Total | Non-con trolling interest |
Total equity |
| Equity as at 1 January 2010 | 128 | 511 | 780 | 1 | -112 | 0 | 1 | 525 | 1,834 | 243 | 2,077 |
| Total comprehensive income | |||||||||||
| for the period | 34 | 0 | -25 | 0 | 2 | 11 | 9 | 20 | |||
| Capital increase | |||||||||||
| Costs of capital increase | |||||||||||
| Payments to non-controlling interests | -9 | -9 | |||||||||
| Dividends | |||||||||||
| Silent participation by SoFFin | |||||||||||
| Costs associated with the | |||||||||||
| silent participation by SoFFin | -17 | -17 | -17 | ||||||||
| Other changes | -2 | -2 | -2 | ||||||||
| Equity as at 30 June 2010 | 128 | 511 | 795 | 1 | -137 | – | 3 | 525 | 1,826 | 243 | 2,069 |
| 2011 | 2010 | |
|---|---|---|
| € mn | ||
| Cash and cash equivalents as at 1 January | 922 | 990 |
| Cash flow from operating activities | -1,374 | 445 |
| Cash flow from investing activities | 767 | -810 |
| Cash flow from financing activities | 228 | 29 |
| Total cash flow | -379 | -336 |
| Effect of changes in exchange rates | 0 | 0 |
| Cash and cash equivalents as at 30 June | 543 | 654 |
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 2011 was prepared pursuant to the provisions of section 37w in conjunction with section 37y no. 2 of the German Securities Trading Act (Wertpapierhandelsgesetz – "WpHG"). It comprises the present interim condensed consolidated financial statements, as well as an interim group management report (see Group Management Report). The condensed consolidated financial statements were approved for publication by the Management Board on 4 August 2011.
Aareal Bank AG prepares its condensed interim consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) applicable within the European Union (EU) as at the reporting date, in connection with the provisions pursuant to section 315a (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 (€).
All subsidiaries of Aareal Bank AG have been consolidated. Joint ventures and associates have been accounted for using the equity method in the present interim consolidated financial statements.
There were no material changes to the scope of consolidation during the period under review.
Unless specifically indicated otherwise, the accounting policies applied in the preparation of the consolidated financial statements 2010 were also applied in the preparation of these condensed interim consolidated financial statements, including the calculation of comparative figures.
The following financial reporting standards (IAS/IFRS) and interpretations (SICs and IFRICs) were required to be applied for the first time in the reporting period:
The new and revised standards and interpretations do not have any material consequences for the consolidated financial statements of Aareal Bank Group.
| 1 Jan- 30 Jun 2011 | 1 Jan- 30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Interest income from | ||
| Property loans | 319 | 263 |
| Public-sector loans | 17 | 10 |
| Other lending and money market operations | 86 | 57 |
| Debt and other fixed-income securities | 102 | 91 |
| Current dividend income | 1 | 0 |
| Other interest income | – | 1 |
| Total interest income | 525 | 422 |
| Interest expenses for | ||
| Bonds issued | 60 | 43 |
| Registered mortgage Pfandbriefe | 33 | 19 |
| Promissory note loans borrowed | 75 | 54 |
| Subordinated equity | 16 | 13 |
| Term deposits | 53 | 39 |
| Payable on demand | 17 | 10 |
| Other banking transactions | 3 | 5 |
| Total interest expenses | 257 | 183 |
| Total | 268 | 239 |
The allowance for credit losses amounted to € 42 million during the first six months of the financial year 2011 (H1 2010: € 65 million).
| 1 Jan- 30 Jun 2011 | 1 Jan- 30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Commission income from | ||
| Consulting and other services | 73 | 72 |
| Trustee loans and administered loans | 1 | 2 |
| Securities transactions | 1 | 1 |
| Securitisation transactions | – | 1 |
| Other lending and money market operations | 14 | 8 |
| Other commission income | 4 | 5 |
| Total commission income | 93 | 89 |
| Commission expenses for | ||
| Consulting and other services | 10 | 10 |
| Securities transactions | 16 | 11 |
| Securitisation transactions | 0 | 2 |
| Other lending and money market transactions | 5 | 1 |
| Other commission expenses | 1 | 3 |
| Total commission expenses | 32 | 27 |
| Total | 61 | 62 |
Commission income from consulting and other services primarily include commissions for IT services.
Commission expenses for securities transactions include expenses of € 15 million (H1 2010: € 11 million) for the guarantee facility extended by the German Financial Markets Stabilisation Fund (SoFFin).
| 1 Jan- 30 Jun 2011 | 1 Jan- 30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Results from derivative financial instruments | -8 | -8 |
| Currency translation | 2 | 0 |
| Net income/expenses from other positions held for trading | – | 1 |
| Total | -6 | -7 |
Net trading income/expenses is primarily attributable to the measurement of derivatives used to hedge interest rate and currency risks, as well as from unrealised changes in value from the sale of hedges for selected EU sovereign countries.
| 1 Jan- 30 Jun 2011 | 1 Jan- 30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Result from debt securities and other fixed-income securities | 5 | 14 |
| of which: Loans and receivables | 5 | 3 |
| Available for sale | 0 | 11 |
| Result from equities and other non-fixed income securities | -1 | 1 |
| of which: Available for sale | 0 | 0 |
| Designated as at fair value through profit or loss | -1 | 1 |
| Results from equity investments (AfS) | 0 | -1 |
| Total | 4 | 14 |
Results of € 4 million from non-trading assets were mostly attributable to the disposal of fixed-income securities.
| 1 Jan- 30 Jun 2011 | 1 Jan- 30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Staff expenses | 114 | 110 |
| Other administrative expenses | 63 | 62 |
| Depreciation, amortisation and impairment of property | ||
| and equipment and intangible assets | 10 | 11 |
| Total | 187 | 183 |
| 1 Jan- 30 Jun 2011 | 1 Jan- 30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Income from properties | 3 | 4 |
| Income from the reversal of provisions | 0 | 6 |
| Income from goods and services | 2 | 2 |
| Miscellaneous | 6 | 6 |
| Total other operating income | 11 | 18 |
| Expenses for property | 11 | 8 |
| Expenses for services used | 0 | 0 |
| Write-downs of trade receivables | 0 | 0 |
| Expenses for other taxes | 1 | 1 |
| Miscellaneous | 11 | 17 |
| Total other operating expenses | 23 | 26 |
| Total | -12 | -8 |
| 1 Jan- 30 Jun 2011 | 1 Jan- 30 Jun 2010 | |
|---|---|---|
| € mn | ||
| Net income/loss | 65 | 43 |
| Changes in revaluation surplus, after tax | -22 | -25 |
| Gains and losses on remeasuring available-for-sale financial | ||
| instruments, before tax | -30 | -33 |
| Reclassifications to the income statement, before tax | 0 | 2 |
| Taxes | 8 | 6 |
| Changes in hedging reserves, after tax | – | 0 |
| Profit/loss from derivatives used to hedge future cash flows, | ||
| before taxes | – | 0 |
| Reclassifications to the income statement, before tax | – | – |
| Taxes | – | 0 |
| Changes in currency translation reserves, after tax | 0 | 2 |
| Profit/loss from translating foreign operations' financial statements, | ||
| before taxes | 0 | 2 |
| Reclassifications to the income statement, before tax | 0 | 0 |
| Taxes | – | – |
| Changes in reserves from transactions under common control, | ||
| after tax | – | – |
| Gains and losses from transactions under common control, | ||
| before tax | – | 0 |
| Reclassifications to the income statement, before tax | – | – |
| Taxes | – | – |
| Profit/loss directly recognised in equity, after taxes | -22 | -23 |
| Total comprehensive income | 43 | 20 |
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Term deposits and current account balances | 683 | 958 |
| Public-sector loans | 181 | 213 |
| Receivables from securities repurchase transactions | 2,978 | 811 |
| Other loans and advances | 83 | 52 |
| Total | 3,925 | 2,034 |
Loans and advances to banks are allocated to the measurement category "Loans and receivables" (LaR).
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Property loans | 21,743 | 22,392 |
| Public-sector loans | 1,526 | 1,641 |
| Other loans and advances | 481 | 628 |
| Total | 23,750 | 24,661 |
Loans and advances to customers are allocated to the measurement category "Loans and receivables" (LaR).
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Positive market value of trading derivatives | 545 | 428 |
| Total | 545 | 428 |
Trading assets are allocated to the measurement category "Held for trading" (HfT).
The trading derivatives reported are mainly used to hedge the economic market price risks.
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Debt and other fixed-income securities | 10,485 | 11,393 |
| of which: loans and receivables (LaR) | 5,966 | 6,463 |
| Held to maturity (HtM) | 233 | 557 |
| Available for sale (AfS) | 4,286 | 4,373 |
| Equities and other non-fixed-income securities | 178 | 34 |
| of which: available for sale (AfS) | 174 | 29 |
| Designated as at fair value through profit or loss (dFVtPL) | 4 | 5 |
| Interests in affiliated companies (AfS) | – | – |
| Other investments (AfS) | 1 | 1 |
| Total | 10,664 | 11,428 |
The item "Debt and other fixed-income securities" mainly consists of public-sector bonds as well as asset-covered bonds (Pfandbriefanleihen) and bank bonds.
In the wake of the financial markets and economic crisis, Aareal Bank Group made use of the possibility to reclassify financial assets into another measurement category. Specifically, securities with an aggregate volume of € 6.2 billion were reclassified from the IFRS measurement categories "Available for sale" (AfS) and "Held for trading" (HfT), to "Loans and receivables" (LaR) during 2008 and 2009. In all cases, we opted for reclassification since there was no longer an active market for the securities concerned (in spite of their good quality), and due to our intention to hold these issues for a longer term. Depending on prevailing market conditions, Aareal Bank Group may use this reclassification option again in the future.
The following table compares the carrying amounts of the reclassified assets to their fair values:
| Carrying amount | Fair value | Carrying amount | Fair value | |
|---|---|---|---|---|
| 30 Jun 2011 | 30 Jun 2011 | 31 Dec 2010 | 31 Dec 2010 | |
| € mn | ||||
| from AfS to LaR | 5,203 | 5,018 | 5,537 | 5,357 |
| Asset-backed securities | 29 | 28 | 31 | 30 |
| Bank bonds | 914 | 931 | 984 | 1,004 |
| Covered bonds | 617 | 588 | 683 | 652 |
| Public-sector issuer | 3,643 | 3,471 | 3,839 | 3,671 |
| from HfT to LaR | 340 | 314 | 388 | 347 |
| Asset-backed securities | 340 | 314 | 382 | 341 |
| Public-sector issuer | – | – | 6 | 6 |
| Total | 5,543 | 5,332 | 5,925 | 5,704 |
If the bank had not opted for reclassification, this would have resulted in a € 15 million profit (before tax) (H1 2010: € 9 million) for the first six months of the current financial year, and € 5 million (after tax) (H1 2010: € -120 million) would have been recognised in the revaluation surplus.
The following overview shows bonds of selected European countries included in non-trading assets of the measurement category "Loans and receivables" (LaR):
| Nominal | Carrying | Nominal | Carrying | |||
|---|---|---|---|---|---|---|
| amount | amount | Fair Value | amount | amount | Fair Value | |
| 30 Jun 2011 | 30 Jun 2011 | 30 Jun 2011 | 31 Dec 2010 | 31 Dec 2010 | 31 Dec 2010 | |
| € mn | ||||||
| LaR category | ||||||
| Greece | – | – | – | – | – | – |
| Italy | 914 | 960 | 880 | 914 | 979 | 896 |
| Ireland | – | – | – | – | – | – |
| Portugal | – | – | – | – | – | – |
| Spain | – | – | – | – | – | – |
| Total | 914 | 960 | 880 | 914 | 979 | 896 |
The revaluation surplus related to the above-mentioned government bonds of the LaR category amounted to € -73 million (before taxes) as at 30 June 2011 (31 December 2010: € -74 million). The revaluation surplus is attributable to government bonds which were reclassified in the years 2008 and 2009 from the measurement category "Available for sale" (AfS) to the measurement category "Loans and receivables" (LaR).
The following overview shows bonds of selected European countries included in non-trading assets of the measurement category "Available for sale" (AfS):
| Nominal | Carrying | Nominal | Carrying | |||
|---|---|---|---|---|---|---|
| amount | amount | Fair Value | amount | amount | Fair Value | |
| 30 Jun 2011 | 30 Jun 2011 | 30 Jun 2011 | 31 Dec 2010 | 31 Dec 2010 | 31 Dec 2010 | |
| € mn | ||||||
| AfS category | ||||||
| Greece | – | – | – | – | – | – |
| Italy | 410 | 402 | 402 | 410 | 401 | 401 |
| Ireland | – | – | – | – | – | – |
| Portugal | 100 | 64 | 64 | 100 | 88 | 88 |
| Spain | 300 | 286 | 286 | 225 | 211 | 211 |
| Total | 810 | 752 | 752 | 735 | 700 | 700 |
The revaluation surplus related to the above-mentioned government bonds of the AfS category amounted to € -66 million (before taxes) as at 30 June 2011 (31 December 2010: € -44 million).
The maturities of the bonds of selected European countries set out above are mainly within the longterm range.
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Goodwill | 50 | 50 |
| Proprietary software | 23 | 26 |
| Other intangible assets | 15 | 15 |
| Total | 88 | 91 |
| 30 Jun 2011 | 31 Dec 2010 |
|---|---|
| 79 | 79 |
| 18 | 16 |
| 97 | 95 |
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Property | 110 | 125 |
| Trade receivables (LaR) | 20 | 27 |
| Miscellaneous | 73 | 94 |
| Total | 203 | 246 |
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Payable on demand | 655 | 583 |
| Term deposits | 177 | 290 |
| Promissory note loans borrowed | 598 | 634 |
| Liabilities from securities repurchase transactions and | ||
| open-market operations | 1,791 | 3,336 |
| Registered mortgage Pfandbriefe | 98 | 94 |
| Registered public-sector Pfandbriefe | 141 | 147 |
| Miscellaneous | 96 | 84 |
| Total | 3,556 | 5,168 |
Liabilities to banks are allocated to the measurement category "Liabilities measured at amortised cost" (LaC).
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Payable on demand | 4,038 | 3,813 |
| Term deposits | 5,701 | 5,093 |
| Promissory note loans borrowed | 8,607 | 8,370 |
| Registered mortgage Pfandbriefe | 2,597 | 2,448 |
| Registered public-sector Pfandbriefe | 3,105 | 3,122 |
| Total | 24,048 | 22,846 |
Liabilities to customers are allocated to the measurement category "Liabilities measured at amortised cost" (LaC).
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Medium-term notes | 1,573 | 1,197 |
| Bearer mortgage Pfandbriefe | 4,241 | 4,058 |
| Bearer public-sector Pfandbriefe | 98 | 99 |
| Other debt securities | 2,219 | 2,265 |
| Total | 8,131 | 7,619 |
Certificated liabilities are allocated to the measurement category "Liabilities measured at amortised cost" (LaC).
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Negative market value from trading derivatives | 344 | 675 |
| Total | 344 | 675 |
Trading liabilities are allocated to the measurement category "Held for trading" (HfT).
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Provisions for pensions and similar obligations | 93 | 92 |
| Other provisions | 117 | 145 |
| Total | 210 | 237 |
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Liabilities from outstanding invoices | 7 | 8 |
| Prepaid expenses | 5 | 4 |
| Liabilities from other taxes | 24 | 29 |
| Trade payables (LaC) | 22 | 10 |
| Other liabilities (LaC) | 94 | 130 |
| Other liabilities | 152 | 181 |
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Subordinated liabilities | 530 | 560 |
| Profit-participation certificates | 482 | 480 |
| Contributions by silent partners1) | 223 | 228 |
| Total | 1,235 | 1,268 |
1) The silent participation by SoFFin is classified as equity in accordance with IFRSs; it is therefore not reported under contributions by silent partners, but as a separate item in equity (note 23).
Items of subordinated equity are allocated to the measurement category "Liabilities measured at amortised cost" (LaC).
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Subscribed capital | 180 | 128 |
| Capital reserves | 721 | 511 |
| Retained earnings | 881 | 836 |
| Other reserves | ||
| Revaluation surplus | -132 | -110 |
| Currency translation reserves | 2 | 2 |
| Silent participation by SoFFin | 300 | 375 |
| Non-controlling interest | 243 | 243 |
| Total | 2,195 | 1,985 |
On 14 April 2011, the Management Board of Aareal Bank AG resolved, with the approval of the Supervisory Board, to increase the Company's share capital in a rights issue against cash contributions. 17,102,062 new ordinary bearer shares with a proportionate share in the nominal share capital of € 3.00 per share were issued. As a result, the Company's share capital has increased from € 128 million to € 180 million. The gross proceeds generated amounted to € 270 million.
On 28 April, Aareal Bank AG made a second partial repayment, in the amount of € 75 million, related to the silent participation provided by the German Financial Markets Stabilisation Fund (SoFFin).
No treasury shares were held during the period under review.
| 30 Jun 2011 | 31 Dec 2010 | |
|---|---|---|
| € mn | ||
| Contingent liabilities on guarantees and indemnity agreements | 289 | 310 |
| Loan commitments | 1,728 | 1,697 |
| of which: irrevocable | 1,238 | 1,191 |
| 1 Jan-30 Jun 2011 | 1 Jan-31 Dec 2010 | |
|---|---|---|
| Salaried employees | 2,280 | 2,217 |
| Executives | 81 | 77 |
| Total | 2,361 | 2,294 |
| of which: Part-time employees | 436 | 376 |
The number of employees is calculated as the average number of staff as at the quarterly dates within the period under review.
No material transactions with related parties were entered into during the first six months of the 2011 financial year.
After the end of the interim reporting period, Aareal Bank made an offer to the investors of the remaining SoFFin-guaranteed bond to tender for early redemption the outstanding notes. The three-year bond had a volume of € 2 billion; its remaining term ends on 26 March 2012. The offer period ended on 11 July 2011. This offer was taken up with an aggregate volume of just under € 0.8 billion. Aareal Bank accepted and subsequently cancelled the notes tendered for repurchase. The repurchase price was set at 100.816 %.
There have been no further material events subsequent to the end of the interim reporting period under review that need to be disclosed at this point.
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, 4 August 2011
The Management Board
Dr Wolf Schumacher Dirk Große Wördemann Hermann J. Merkens Thomas Ortmanns
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 AG, Wiesbaden, for the period from 1 January 2011 to 30 June 2011 which are part of the halfyear financial report pursuant to § (Article) 37w 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 respon sibility 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). 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.
PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft
Roland Rausch ppa. Andreas Hülsen Wirtschaftsprüfer Wirtschaftsprüfer (German Public Auditor) (German Public Auditor)
Hans W. Reich 1) 2) 3) 4) 5), Kronberg Chairman of the Supervisory Board Chairman Public Sector Group, Citigroup Inc.
Erwin Flieger 1) 3) 4) 5), Geretsried Deputy Chairman of the Supervisory Board Chairman of the Supervisory Boards of Bayerische Beamten Versicherungsgruppe
York-Detlef Bülow 1) 2) 6), Messel Deputy Chairman of the Supervisory Board Aareal Bank AG
Christian Graf von Bassewitz 2) 3) 4), Dusseldorf Banker (ret'd.) Former Spokesman of the General Partners of Bankhaus Lampe KG
Manfred Behrens, Hannover Chairman of the Management Board AWD Holding AG
Thomas Hawel 6), Saulheim Aareon Deutschland GmbH
Dieter Kirsch 3) 6), Nackenheim Aareal Bank AG
Dr. Herbert Lohneiß 3) 4), Gräfelfing Former Chief Executive Officer of Siemens Financial Services GmbH (ret'd.)
Joachim Neupel 2) 3) 4), Meerbusch Chairman of the Accounts and Audit Committee German Chartered Accountant, tax consultant
Prof. Dr. Stephan Schüller 1) 2), Hamburg Spokesman of the General Partners of Bankhaus Lampe KG
Wolf R. Thiel 1), Stutensee President and Chairman of the Management Board of Versorgungsanstalt des Bundes und der Länder
Helmut Wagner 6), Hahnheim Aareon Deutschland GmbH
Dr Wolf Schumacher Chairman of the Management Board
Dirk Große Wördemann Member of the Management Board
Hermann Josef Merkens Member of the Management Board
Thomas Ortmanns Member of the Management Board
1) Member of the Executive Committee; 2) Member of the Accounts and Audit Committee; 3) Member of the Risk Committee;
4) Member of the Committee for Urgent Decisions; 5) Member of the Nomination Committee; 6) Employee representative
Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3480 Fax: +49 611 3482549
Byzantium Building Stadhouderskade 14e 1054 ES Amsterdam, The Netherlands Phone: +31 20 5898660 Fax: +31 20 5898666
Wallstrasse 9-13 10179 Berlin, Germany Phone: +49 30 88099100 Fax: +49 30 88099470
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St. Kirkestræde 1, 3 1073 Copenhagen K, Denmark Phone: +45 3369 1818 Fax: +45 70 109091
Pelzerstrasse 7 20095 Hamburg, Germany Phone: +49 40 33316536 Fax: +49 40 33316599
Aleksanterinkatu 44, 4th floor 00100 Helsinki, Finland Phone: +358 9 6961010 Fax: +358 9 69610111
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
38 Lombard Street London EC3V 9BS, United Kingdom Phone: +44 20 74569200 Fax: +44 20 79295055
Paseo de la Castellana, 60 - 4D 28046 Madrid, Spain Phone: +34 915 902420 Fax: +34 915 902436
Via Paolo Andreani, 6 20122 Milan, Italy Phone: +39 02 76419001 Fax: +39 02 764190211
Business Centre "Mokhovaya" 4/7 Vozdvizhenka Street Building 2 125009 Moscow, Russia Phone: +7 499 2729002 Fax: +7 499 2729016
Prinzregentenstrasse 22 80538 Munich, Germany Phone: +49 89 5127217 Fax: +49 89 51271220
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 42669794
Aareal Financial Service spol. s r.o. FORUM Building Václavské námestí 19 11000 Prague, Czech Republic Phone: +420 234656006 Fax: +420 234656011
Via Mercadante, 12/14 00198 Rome, Italy Phone: +39 06 83004200 Fax: +39 06 83004250
Suite 2902 · Tower 2 Plaza 66 No. 1266 Nanjing West Road Jing An District Shanghai 200040, P. R. of 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
Hamngatan 11 11147 Stockholm, Sweden Phone: +46 8 54642000 Fax: +46 8 54642001
RONDO 1 Rondo ONZ 1 00-124 Warsaw, Poland Phone: +48 22 5449060 Fax: +48 22 5449069
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 3482059 Fax: +49 611 3482640
Westendstrasse 24 60325 Frankfurt/Main, Germany Phone: +49 69 9714970 Fax: +49 69 971497510
Aareal Bank AG Institutional Housing Unit Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3482967 Fax: +49 611 3482499
Wallstrasse 9-13 10179 Berlin, Germany Phone: +49 30 88099444 Fax: +49 30 88099470
Huyssenallee 48 45128 Essen, Germany Phone: +49 201 81008100 Fax: +49 201 81008200
Pelzerstrasse 7 20095 Hamburg, Germany Phone: +49 40 33316850 Fax: +49 40 33316399
Neumarkt 2-4 04109 Leipzig, Germany Phone: +49 341 2272150 Fax: +49 341 2272101
Fax: +49 89 51271264
Institutional Housing Unit Rhine-Main Branch Paulinenstrasse 15 65189 Wiesbaden, Germany Hotline: +49 611 3482000 Fax: +49 611 3483002
Institutional Housing Unit Filiale Stuttgart Kriegerstrasse 3 70191 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
Aareal First Financial Solutions AG
Peter-Sander-Strasse 30 55252 Mainz-Kastel, Germany Phone: +49 6134 560119 Fax: +49 6134 560319
Grundstücks-Aktiengesellschaft Chlodwigplatz 1 53119 Bonn, Germany Phone: +49 228 5180 Fax: +49 228 518298
4 Custom House Plaza · IFSC Dublin 1, Ireland Phone: +353 1 6369220 Fax: +353 1 6702785
| Presentation of interim report as at 30 September 2011 |
|---|
| Annual General Meeting – Kurhaus, Wiesbaden |
Breugel, Stuttgart, Swansea, Toulouse | Deutsche Bau- und Grundstücks-AG: Berlin, Bonn, Moscow, Munich | Aareal First Financial Solutions AG: Wiesbaden | Innovative Banking Solutions AG: Wiesbaden
as at 30 June 2011
Wiesbaden | Aareal Estate AG: Berlin, Wiesbaden
Aareal Bank AG Investor Relations Paulinenstrasse 15 65189 Wiesbaden, Germany
Phone: +49 611 348 3009 Fax: +49 611 348 2637 E-mail: [email protected] www.aareal-bank.com
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