Sept
1 J A N U A R Y T O 3 0 S E P T E M B E R 2 0 0 5
INTERIM REPORT
AAREAL BANK GROUP
AS AT 30 SEPTEMBER 2005
K E Y G R O U P
2
SHAREHOLDER STRUCTURE
Imprint Contents: Aareal Bank AG Corporate Communications Cover picture:Architecture’s photography Barbara Staubach, Wiesbaden, Germany Design:
s/company, Fulda-Künzell, Germany Production:
Druckerei Chmielorz GmbH, Wiesbaden-Nordenstadt, Germany
as at 30 September 2005 Free float
65.43 %
Aareal Holding Verwaltungs-gesellschaft mbH34.57 %
KEY GROUP FIGURES
3
F I G U R E S
K E Y G R O U P F I G U R E S
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004 Change
Rating
Fitch Ratings, London
Long-term BBB+ A-Short-term F2 F2 30 Sep 2005 31 Dec 2004 Portfolio Data € mn € mn € mn % Property financing 22,876 23,244 -368 -2 of which: international 13,328 12,568 760 6 Property financing under management 25,710 26,500 -790 -3 of which: international 13,328 12,568 760 6 Shareholder’s equity 1,146 1,172 -26 -2 Total assets 40,481 38,762 1,719 4 Regulatory indicators % %
Core capital ratio (German Banking Act – %) 8.1 8.2
Total capital ratio (German Banking Act – %) 14.1 14.3
30 Sep 2005 31 Dec 2004 Change Change
1)
on an annualised basis
Consolidated Income Statement € mn € mn € mn
Operating profit -132 -182 50
Group net income / loss -69 -101 32
Indicators
Cost / income ratio (%) 80.3 65.0
Earnings per share (€) -2.16 -3.26
C O N T E N T
CONTENTS
C O N T E N T S
4
Shareholder Structure . . . 2
Key Group Figures – Overview . . . 3
Contents . . . 4
Letter to Shareholders . . . 6
Consolidated Income Statement of the Aareal Bank Group . . . 16
Consolidated Income Statement (Quarterly Development) . . . 17
Segment Reporting by operating unit . . . 18
Segment Reporting (Quarterly Development) by operating unit . . . 19
Consolidated Balance Sheet of the Aareal Bank Group . . . 20
Consolidated Statement of Changes in Shareholders’ Equity . . . 21
Consolidated Statement of Cash Flows . . . 21
Basis of Accounting . . . 22
Notes to the Consolidated Income Statement . . . 23
(1) Net interest income . . . 23
(2) Provision for loan losses . . . 23
(3) Net commission income . . . 24
(4) Net trading income . . . 24
(5) Results from non-trading assets . . . 24
(6) Administrative expenses . . . 25
(7) Net other operating income /expenses . . . 25
Notes to the Consolidated Balance Sheet . . . 26
(8) Loans and advances to banks . . . 26
(9) Loans and advances to customers . . . 26
5
S
(11) Non-trading assets . . . 27
(12) Intangible assets . . . 27
(13) Property and equipment . . . 28
(14) Other assets . . . 28 (15) Liabilities to banks . . . 28 (16) Liabilities to customers . . . 29 (17) Certificated liabilities . . . 29 (18) Trading liabilities . . . 29 (19) Provisions . . . 30 (20) Other liabilities . . . 30 (21) Subordinated equity . . . 30 (22) Treasury shares . . . 30 Other Notes . . . 31
(23) Property financing – Portfolio breakdown by country . . . 31
(24) Property financing – Portfolio breakdown by type of loan . . . 31
(25) New property financing commitments . . . 32
(26) Number of employees . . . 32
(27) Regulatory indicators . . . 32
Executive Bodies . . . 34
Our Offices . . . 36
Aareal Bank Group Locations . . . 39
L E T T E R T O S H A R
We will report on the core topics in detail below:
1. New business growth and
strengthening regional diversification
At € 5 billion, new commitments during the first nine months of the current financial year exceeded the strong figure achieved in the first three quarters of 2004 by 23.5 per cent. A rise of 59.8 per cent was posted over the third quarter of 2004 alone. The bank’s strategic German business gathered significant momentum during the period under review, and will be expanded further.
The opening of a representative office in Turkey emphasises the bank’s strategy of
further diversifying its international activities. Aareal Bank’s business in Turkey dates back to 1999 – the bank was one of the first foreign institutions to offer long-term pro-perty loans in the country. Current exposure to Turkey amounts to € 239 million. Leve-raging its flexible, medium-sized structure, Aareal Bank has adopted a pioneering role in other markets as well. An example is the Moscow property market in Russia, where we have entered into initial financing agree-ments. Furthermore, we have committed to providing our first financing in China. Aareal Bank now has an active presence in 14 European countries, as well as in the US and Singapore, and provides property finan-cing solutions in more than 20 countries.
2. Reducing the non-performing loan portfolio
Taking into account the results of an ex-tensive audit of our credit portfolios, nine-month provisions for loan losses total € 249 million. These additional risk pro-visioning requirements have a significant impact on our interim results.
The additional risk provisioning is the result of an audit of our credit portfolios, as an-nounced earlier this year, which will serve as a basis for the realignment of our Structured Property Financing division.
The in-depth audit covered more than 70 per cent of Aareal Bank’s overall credit portfolio.
LETTER TO SHAREHOLDERS
L E T T E R T O S H A R E H O L D E R S
6
Dear shareholders,
business associates and Aareal Bank employees,
For Aareal Bank Group, 2005 has been characterised by fundamental change. In recent months, we have made considerable progress in implementing our six-point programme for a strategic realignment, which the Group embarked upon at the be-ginning of the year.
In addition to the substantial expansion in our new business, our activities in the quarter under review focused on optimising our business organisation and process structure, in order to achieve a sustained enhancement of efficiency. It also involved subjecting our credit portfolios and participating interests to an extensive review. We have taken the results of these key issues into consideration in this interim report. The changed valuations, as recognised in the measurements for the third-quarter financial statements, are the basis from which we will enhance profitability in 2006 and beyond.
In addition to higher-risk exposures, all of which were scrutinised in detail, an exten-sive review of the bank’s remaining lending business was carried out. This involved reviewing more than 6,000 individual loans, plus approx. 3,300 retail exposures, with a scoring process used for the latter. Based on the results of the loan book re-view, we are in a position to swiftly carry out further disposals of NPL exposures. This brings us closer to achieving our objective of reducing our German NPL portfolio, within the scope of realigning the Group. After the first successful sale of non-per-forming loans in the current financial year, we have made considerable progress in our preparations for disposing of a second tranche.
These measures, which are reflected in seve-ral income statement items, will generate lasting positive effects for the performance of the Structured Property Financing division. We anticipate a considerable reduction in our risk costs as of the 2006 financial year, after which they should remain in a range between € 80 -90 million per annum.
3. Leveraging our mid-sized corporate structure
Leveraging our mid-sized corporate structure involves reduction of the Group’s complexity. We continuously review all our participating
interests, to ensure they are in line with Aareal Bank’s core business objectives. This review has already triggered various measures, which we have completed successfully. The most recent example is the sale of Aareal Hypotheken Vermittlungs GmbH, an innovative outsourcing provider for the distribution of private property loans, which was agreed upon a few days ago. The dispo-sal represents another important step in the process of focusing on our core business. Within the period under review, the bank’s property investment banking subsidiary, Via Capital Ltd. ceased operations. The decision to close this London-based consultancy reflected a changed market environment, and our determination to focus on our core Structured Property Financing business. A next step will involve the grouping of all activities related to the provision of financing solutions for the housing industry, and of all Property Asset Management activities. An executive board is currently reviewing the bank’s business potential vis-à-vis the housing industry. The review results will potentially affect not only Aareal Bank AG, but also directly our Aareon AG and Aareal First Financial Solutions AG subsidiaries. In line with the review of the bank’s activi-ties, we will analyse core business activities of the other segments, with regard to their profit potential.
7
E H O L D E R S
L E T T E R T O S H A R
To leverage the opportunities presented by the new German Pfandbrief Act, Aareal Bank has applied for a license to issue Pfand-briefe (German covered bonds). Once this license has been approved (which is expec-ted to happen in early 2006), we will merge Aareal Hyp AG onto its parent company, Aareal Bank AG. This will significantly ex-tend the bank's funding options.
The planned debut issue of a Jumbo Pfand-brief, for which we have completed prepa-rations, will enhance our refinancing range. In May of this year, our Pfandbriefe were awarded the top ‘AAA’ rating from Fitch Ra-tings.
4. Revision of our organisational structure
Following cutbacks affecting first-line man-agement at the beginning of the period under review, Aareal Bank’s entire organisa-tional structure has been realigned. In this context, Aareal Bank alone is set to reduce staff numbers by 253 (currently 1,249), by the end of 2008. A considerable reduction in the number of interfaces will lay the groundwork for more efficient processes in the future.
The grouping of our German locations, com-bined with a strict cost management regime, will also decrease administrative expenditure. The purpose of these measures is to achieve a sustained cost / income ratio of between
35 - 40 per cent in the Structured Property Financing division.
5. Emphasising a modern corporate culture
Focused training and support measures will enable our staff to assume a more active role in decision-making processes. The focus is on managing via company objectives, and strengthening individual responsibilities. Particular emphasis is placed on an inter-national trainee programme at the Aareal Academy, as well as in a training concept designed to promote growth in expertise amongst all of Aareal Bank’s employees.
6. Transparency in managing our business
We will join all forces throughout the Group, harmonising them for maximum support of our business model. This will reinforce the trust of both investors and staff, and assist in managing our public profile in a more professional manner. This also in-volves the willingness of the Management Board members to disclose their remune-ration on an individual level, as of the 2005 financial year.
9
E H O L D E R S
The income statement for the first nine months is dominated by the results of an internal review of the bank's credit portfolios. The negative impact of these results amoun-ted to € 5 million on net interest income, € 159 million on provisions for loan losses, and € 50 million on the valuation of pro-perties. With these measures, we have ex-tensively accounted for all identifiable risks in the Structured Property Financing division. Net interest income fell to € 307 million, down 5 per cent on the same period of the previous year. Reflecting their substance, we are now reporting results from cash flow and foreign exchange hedges entirely in net interest income. In the past, these results had been split between net interest income and net trading income. Figures for the pre-vious quarters were adjusted accordingly to facilitate comparison.
Total provisions for loan losses were € 249 million. Net commission income rose by € 12 million against the same period of the previous year, to € 119 million. Net trading income of € -13 million was largely attributable to the measurement of credit derivatives related to our outstanding synthetic securitisation transactions. This item also includes, to a lesser extent, hedge inefficiencies.
Profit from non-trading assets of € 26 mil-lion (2004: € 11 milmil-lion) was marked by the realisation of available-for-sale securities. Administrative expenditure increased by 9.8 per cent over the same period of the previous year, to € 292 million. Of this amount, staff costs and other administrative expenditure accounted for € 179 million and € 113 million respectively. These items include, amongst other things, ongoing investment in the course of the realignment of our activities (in particular in IT), and process optimisation costs.
Including net other operating income and expenditure of € -28 million (2004: € 8 million), operating loss before taxes amounted to € 132 million.
Claims to tax refunds of € 63 million were attributable mainly to the balance of income tax expense and deferred taxes, which were recognised as a result of the additional pro-visioning measures described above. Taking into account € 15 million in minority inte-rest income, consolidated net loss for the first nine months of 2005, after taxes and minority interest income, was € 84 million (2004: loss of € 115 million).
Nine-month consolidated net income, ex-cluding the results of the credit portfolio audit, would be € 45 million after taxes and minority interest income. Excluding the special risk provisioning, net interest income would amount to € 312 million, with
Aareal Bank Group
Administrative expenditure (up 9.6 per cent from the same period of the previous year, to € 149 million) was driven higher by in-vestments required for the expansion of our target activities, alongside salary increases agreed under a collective pay agreement. Net other operating income and expendi-ture of € -50 million (2004: € 3 million) included a € 50 million charge from the revaluation of property holdings.
With the opening of a representative office in Istanbul in October 2005, Aareal Bank has now established a presence in 16 coun-tries across three continents, thus high-lighting the continuous expansion of our international activities. Aareal Bank’s business in Turkey dates back to 1999 – the bank was one of the first foreign institutions to offer long-term property loans in the country.
New business
We have consistently expanded our new business in the first nine months of the 2005 financial year. New commitments amounted to € 5 billion, more than 85 per cent of which was accounted for by international property finance.
Existing exposures
As at 30 September 2005, the total volume of financings under management was
L E T T E R T O S H A R
€ 90 million in net loan loss provisions; net other operating income and expenditure would be positive, at € 22 million. On this basis, profit after taxes for the first nine months of the 2005 business year would be € 60 million.
Traditionally, the Structured Property Finan-cing division, which brings together all the property lending activities such as portfolio finance and structured commercial property finance, is at the core of Aareal Bank Group’s operations.
At € -60 million (2004: € -94 million), the segment result after taxes for the first nine months of 2005 is dominated in particular by the results of the loan book review. Net interest income decreased by 4.7 per cent, to € 280 million (2004: € 294 million). Provisions for loan losses were € 249 million compared with € 355 million for the same period of the previous year.
Net commission income remained un-changed, at € 11 million.
10
Segment result
Business development
Structured Property
Financing
€ 25.7 billion. We achieved a targeted decline in the German portfolio of over € 1.5 billion in the first nine months of 2005, whilst simul-taneously expanding the international port-folio by 6 per cent to € 13.3 billion. At the end of the third quarter, the German portfolio accounted for 48 per cent of the aggregate volume of property finance under manage-ment.
This division principally comprises our ad-visory and other services for the institutional property management business, as well as integrated payment services systems. Aareon AG is Europe’s leading international consultancy and IT systems house for the property sector. Aareal First Financial Solutions AG develops and maintains the account maintenance system that Aareal Bank uses for its business with the clients of the housing industry.
As a specialised outsourcing provider, Aareal Hypotheken-Management GmbH offers a processing service for housing loans to private customers.
At € -4 million, the result after taxes in this segment for the period under review
11
E H O L D E R S
improved on the € 5 million deficit for the same period of the previous year.
Net commission, the segment’s most impor-tant source of income, increased by 4.8 per cent, to € 131 million, whilst adminis-trative expenses rose by € 13 million, to € 138 million.
Integrated payment services and services for the institutional housing industry
Aareon AG made further progress in estab-lishing Blue Eagle, its property management system, on the market during the third quar-ter. Since the launch of Blue Eagle, around 80 companies – managing a total of approx. 430,000 residential and commercial units – have entered into agreements to use the software. We expect to close further agree-ments by the end of the year.
The development of Aareon Energy Man-agement is also particularly promising. This subsidiary offers fully-automated invoicing for heating and operating charges. The co-operation with ista Deutschland GmbH, which started in May 2005, has met with resounding support in the property manage-ment sector.
In the first nine months, we acquired a total of 60 new companies as clients, managing between them more than 210,000 residential
Segment result
Business development
L E T T E R T O S H A R
units, for BK 01®and BK XL®, the integrated
payment services offered by Aareal Bank. We envisage further constant growth in these services. The commercial clients acquired include a fund manager, plus HOCHTIEF’s facility management activities, thus acquiring rental payment flows for approx. 25,000 additional residential units.
ENTEGA, our pilot client in the utility and waste disposal sector, started to use our mass payment services on schedule in July 2005, following a test phase. Having achieved smooth and successful operation of the sys-tem, we have commenced activities to acquire additional mandates. We are confident that we will quickly win additional clients for the conversion to our BK 01® payments
proces-sing system.
Services for the private customer sector
Aareal Bank AG sold its subsidiary, Aareal Hypotheken Vermittlungs GmbH, to Planet-Home (part of the HVB Group) very recently. This process constitutes one of the steps in the bank’s six-point realignment programme – leveraging our mid-sized corporate struc-ture.
Aareal Hypotheken Vermittlung is an inno-vative outsourcing service provider for the distribution of retail property loans.
With a portfolio of 215,000 loans totalling a volume of € 13.6 billion, Aareal Hypotheken-Management GmbH remains Germany’s
12
leading third-party servicer in its field. The service range comprises the processing of all credit products, from new business to settlement. The company provides sellers and investors with a comprehensive service range for NPL transactions.
Aareal Hypotheken Management was granted DIN ISO 9001: 2000 certification in October, thus becoming the first German ‘loan factory’ to apply internationally-recognised standards to its operations.
In the Property Asset Management division, Aareal Bank Group offers institutional and private investors a broad range of open-ended and closed-end property funds, as well as an extensive property and trust asset management service.
Within the realignment of Aareal Bank, the Asset Management business will be spun off as a subsidiary of the bank in the medium-term.
The segment reported a slightly negative result after taxes for the first nine months of 2005.
Property Asset
Management
13
E H O L D E R S
Net commission income doubled to € 8 million compared with the previous year’s reference period. Administrative expenditure increased only slightly, by € 1 million to € 12 million.
As at 30 September 2005, Aareal Bank Group managed a total of € 6.7 billion in assets on behalf of third parties. Of this amount, roughly € 2.7 billion was accoun-ted for by open-ended and closed-end funds, and around € 4 billion by assets contri-buted into special investment funds and other property and trust assets.
We have meanwhile launched four closed-end property funds and one open-closed-ended property special fund in accordance with German investment laws (Spezialfonds) for our institutional investors:
• the Aareal Europe Fund No.1, which invests in retail and office properties in Southern Europe;
• the Aareal Italy Fund for office and retail properties in Italy;
• the Aareal EuroLogistics Fund for logistics properties in Europe;
• the Aareal Residential Fund for German residential properties; and
• the Aareal Nordic Fund, a special fund which focuses on properties in Scandi-navia and the Baltic states.
The Aareal Immobilien Kapitalanlage-gesellschaft mbH subsidiary, which launches the property special funds, has also launched a special fund for a German insurance group. The management of this fund has been provided by Deutsche Bau- und Grund-stücks AG (BauGrund) since July 2005. In the third quarter, it also acquired the mandate to manage property for the Aareal Residential Fund.
The performance of all property funds is in line with projections.
Reinforcing its position as a reliable capital market partner, Aareal Bank Group’s re-financing activities progressed successfully in the first nine months of the year. Aareal Bank, and its mortgage bank subsidiary Aareal Hyp, raised together over € 2.5 billion in long-term funds during the first three quarters of 2005. With a share of approx. € 2.2 billion, the majority of these funds was issued in the form of registered securi-ties, including promissory note loans and registered covered bonds. Additionally, approx. € 250 million in covered and un-covered bearer bonds were placed in the capital markets.
During the period under review, the capital base was strengthened by the issue of
Business development
Refinancing /
L E T T E R T O S H A R
€ 35 million in subordinated equity and € 6 million in profit-participation certificates. Aareal Bank Group increasingly uses Pfand-briefe to refinance its international loan port-folio. Leveraging the opportunities available under the new German Pfandbrief Act, Aareal Bank will increase the share of Pfandbriefe in its refinancing mix for property loans; from currently around 10 per cent, to 40 - 60 per cent in the medium term. As at 30 Septem-ber 2005, the cover assets pool of Aareal Bank mortgage bonds was very international and broadly diversified, including issues from 14 countries.
Pfandbrief issues are an important instrument for Aareal Bank Group in its endeavour to expand its investor base, and to reduce its refinancing costs. The issuing strategy is flexible and demand-oriented. Aareal Bank Group will be a regular issuer on the jumbo market in the future.
Aareal Bank Group’s liable capital in accor-dance with section 10a of the German Banking Act (KWG) amounted to € 2,335 million as at 30 September 2005 (2004: € 2,322 million), of which core capital accounted for € 1,336 million (2004: € 1,325 million) and supplementary capital for € 999 million (2004: € 997 million). The capital ratio according to the German Banking Act (Grundsatz I) is thus 8.1 per cent (2004: 8.2 per cent) for core capital, and 14.1 per cent (2004: 14.3 per cent) for
total capital. When measured according to BIS rules, the core capital ratio is unchanged from the previous year at 6.9 per cent, while the own funds ratio is 12.2 per cent (2004: 12.1 per cent).
The performance of the business year to date shows that Aareal Bank has success-fully mastered important initial stages of its realignment process.
The significant growth in new business, combined with broad international diversi-fication, reflects the solid position of our domestic and international distribution net-work in the property markets we cover. We will leverage our mid-sized corporate structure by streamlining the bank’s man-agement levels, reducing interfaces, and with a strict cost management regime.
The process of bringing our participating interests in line with the focus on core expertise – which we have just embarked upon – will result in a clear reduction of complexity throughout Aareal Bank Group. Further steps in this direction are currently in preparation.
The revaluation of exposures, as a result of the extensive loan book review, provides a solid foundation on which to re-position
14
Aareal Bank for the 2006 financial year and beyond.
Thus, the bank gains room to quickly dis-pose of non-performing loans. At the same time, the reduced level of risk provisioning (at around € 80 - 90 million p. a.) will sig-nificantly enhance future profitability.
The resolved ten per cent capital increase provides the necessary foundation for a clear improvement in results. Aareal Holding Verwaltungsgesellschaft mbH has expressed its support for Aareal Bank’s business model by subscribing to the capital increase (ex-cluding shareholders’ pre-emptive subscrip-tion rights), in full.
15
E H O L D E R S
Yours sincerely,
The Management Board
Dr. Wolf Schumacher Hermann J. Merkens Thomas Ortmanns Christof M. Schörnig (Chairman)
I N C O M E
S T
CONSOLIDATED INCOME STATEMENT
OF THE AAREAL BANK GROUP
16
€ mn € mn
Interest income 1,208 1,265
Interest paid1) 901 942
Net interest income1) 1 307 323
Provision for loan losses 2 249 355
Net interest income after net loan loss provisions1) 58 -32
Commission income 177 160
Commission expenditure 58 53
Net commission income 3 119 107
Net trading income / expenses1) 4 -13 -1
Results from non-trading assets 5 26 11
Results from companies accounted for at equity -2 -5
Administrative expenses 6 292 266
Net other operating income / expenses 7 -28 8
Amortisation of goodwill 0 4
Operating profit -132 -182
Income taxes -63 -81
Net income / loss -69 -101
Allocation of results € mn € mn
Minority interest gain / loss 15 14
Gains / losses attributable to shareholders of Aareal Bank AG -84 -115
€ €
Earnings per share -2.16 -3.26
Diluted earnings per share -2.16 -3.26
01 Jan - 30 Sep 2005 Note
01 Jan - 30 Sep 2004
Earnings per share are determined by dividing the earnings attributable to ordinary shareholders of Aareal Bank AG by the weighted average of ordinary shares outstanding in the financial year.
C O N S O L I D A T E D I N C O M E S T A T E M E N T
1)
17
A T E M E N T
CONSOLIDATED INCOME STATEMENT
(QUARTERLY DEVELOPMENT)
€ mn € mn € mn € mn € mn
Interest income 399 396 413 382 414
Interest paid1) 303 297 301 288 317
Net interest income1) 96 99 112 94 97
Provision for loan losses 189 30 30 55 255
Net interest income after
net loan loss provisions1) -93 69 82 39 -158
Commission income 57 63 57 66 49
Commission expenditure 16 21 21 16 17
Net commission income 41 42 36 50 32
Net trading income / expenses1) -6 -2 -5 5 -10
Results from non-trading assets 5 14 7 20 0
Results from companies accounted for at equity 0 -2 0 -9 -1
Administrative expenses 97 101 94 97 94
Net other operating income / expenses -39 5 6 -9 -6
Amortisation of goodwill 0 0 0 3 1
Operating profit -189 25 32 -4 -238
Income taxes -80 9 8 1 -101
Net income / loss -109 16 24 -5 -137
1)
Please refer to the explanations on page 23
01 Jul - 30 Sep 2005 01 Apr - 30 Jun 2005 01 Jan - 31 Mar 2005 01 Oct - 31 Dec 2004 01 Jul - 30 Sep 2004
S E G M E N T
S E G M E N T R E P O R T I N G
18
30 Sep 30 Sep 2005 2004 30 Sep 30 Sep 2005 2004 30 Sep 30 Sep 2005 2004 30 Sep 30 Sep 2005 2004 30 Sep 30 Sep 2005 2004 € mn € mn € mn € mn € mnNet interest income1) 280 294 1 0 -1 0 27 29 307 323
Provision for loan losses 249 355 249 355
Net interest income
after net loan loss provisions1) 31 -61 1 0 -1 0 27 29 58 -32
Net commission income 11 11 131 125 8 4 -31 -33 119 107
Net trading income / expenses1) -12 -1 -1 0 -13 -1
Results from non-trading assets 26 11 26 11
Results from companies accounted
for at equity 0 -4 -2 -1 -2 -5
Administrative expenses 149 136 138 125 12 11 -7 -6 292 266
Net other operating income / expenses -25 3 2 3 4 4 -9 -2 -28 8
Amortisation of goodwill 0 0 4 0 0 4
Operating profit -118 -177 -6 -2 -2 -3 -6 0 -132 -182
Income taxes -58 -83 -2 3 -1 -1 -2 -63 -81
Net income / loss -60 -94 -4 -5 -1 -2 -4 0 -69 -101
Allocated equity 713 786 103 100 27 33 316 260 1,159 1,179
Cost / income ratio (%) 68.0 49.7 102.7 97.5 119.2 116.3 80.3 65.0
RoE after taxes (%) -11.3 -15.9 -4.7 -6.2 -2.6 -9.8 -8.0 -11.4
SEGMENT REPORTING
BY OPERATING UNIT
Structured Property Financing Consulting / Services Property Asset Management Consolidation / Reconciliation / Other Aareal Bank Group 1)19
R E P O R T I N G
Quarter 3 Quarter 3 2005 2004 Quarter 3 Quarter 3 2005 2004 Quarter 3 Quarter 3 2005 2004 Quarter 3 Quarter 3 2005 2004 Quarter 3 Quarter 3 2005 2004 € mn € mn € mn € mn € mnNet interest income1) 88 89 0 0 -1 -1 9 9 96 97
Provision for loan losses 189 255 189 255
Net interest income
after net loan loss provisions1) -101 -166 0 0 -1 -1 9 9 -93 -158
Net commission income 5 0 43 41 3 2 -10 -11 41 32
Net trading income / expenses1) -6 -10 0 0 -6 -10
Results from non-trading assets 5 0 5 0
Results from companies accounted
for at equity 0 0 -1 0 0 -1
Administrative expenses 48 50 48 41 4 5 -3 -2 97 94
Net other operating income / expenses -41 -8 2 0 2 2 -2 0 -39 -6
Amortisation of goodwill 0 0 1 0 0 1
Operating profit -186 -234 -3 -2 0 -2 0 0 -189 -238
Income taxes -79 -101 -1 1 0 -1 0 -80 -101
Net income / loss -107 -133 -2 -3 0 -1 0 0 -109 -137
Allocated equity 713 786 103 100 27 33 316 260 1,159 1,179
Cost / income ratio (%) 103.0 75.9 105.6 99.8 106.9 136.7 104.2 85.9
RoE after taxes (%) -60.2 -67.5 -6.3 -11.0 2.4 -17.0 -37.6 -46.3
SEGMENT REPORTING (QUARTERLY DEVELOPMENT)
BY OPERATING UNIT
Structured Property Financing Consulting / Services Property Asset Management Consolidation / Reconciliation / Other Aareal Bank Group 1)20
B A L A N C E
S H
CONSOLIDATED BALANCE SHEET
OF THE AAREAL BANK GROUP
Assets € mn € mn
Cash funds 1,160 1,107
Loans and advances to banks 8 2,280 1,398
Loans and advances to customers 9 25,735 25,297
Provision for loan losses -1,267 -1,270
Trading assets 10 448 294
Financial assets 11 9,262 9,674
Interests in companies accounted for at equity 135 136
Intangible assets 12 78 77
Property and equipment 13 279 281
Income tax assets 221 139
Other assets 14 2,150 1,629
Total 40,481 38,762
Shareholders’ equity and liabilities € mn € mn
Liabilities to banks 15 8,048 8,257
Liabilities to customers 16 19,337 15,799
Certificated liabilities 17 8,271 10,061
Trading liabilities 18 163 117
Provisions 19 235 268
Income tax liabilities 91 96
Other liabilities 20 1,612 1,526 Subordinated equity 21 1,578 1,466 Shareholders’ equity 22 Subscribed capital 117 117 Capital reserves 422 422 Retained earnings 466 464
Reserves from transactions under common control -41 -39
Revaluation surplus 24 -34
Minority interest 242 242
Group retained income -84 0
Total shareholders’ equity 1,146 1,172
Total 40,481 38,762
Contingent liabilities and irrevocable loan commitments € mn € mn
Contingent liabilities on guarantees and indemnity agreements 685 879
Irrevocable loan commitments 2,459 2,427
30 Sep 2005
Note 31 Dec 2004
21
E E T
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
€ mn € mn
Consolidated shareholders’ equity as at 01 January 1,172 1,219
Subscribed capital
Capital increase 11
Capital reserves
Capital increase 74
Net change in retained earnings 2 -51
Net change in reserves from transactions under common control -2 -2
Revaluation surplus
Measurement of available-for-sale financial instruments 44 25
Measurement of derivatives used for cash flow hedges 14 -1
Currency translation adjustments 0 0
Net change in minority interest 0 -2
Gains attributable to shareholders of Aareal Bank AG -84 -115
Consolidated shareholders’ equity as at 30 September 1,146 1,158
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004
€ mn € mn
Cash and cash equivalents as at 01 January 1,107 1,260
Cash flow from operating activities -472 400
Cash flow from investing activities 413 10
Cash flow from financing activities 112 231
Total cash flow 53 641
Effect of changes in exchange rates 0
Cash and cash equivalents as at 30 September 1,160 1,901
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004
CONSOLIDATED STATEMENT OF CASH FLOWS
B A S I S
O F
A C C O
22
Declaration of Compliance
The consolidated financial statements of Aareal Bank Group have been prepared in accordance with International Financial Reporting Standards (IFRS).
The present interim financial statements comply with IAS 34 and the requirements of German Accounting Standard (GAS) No. 6 as laid down by the German Accoun-ting Standards Board (GASB) for interim reports.
The accounting policies applied in the preparation of the Consolidated Financial Statements 2004 were also applied for this interim report, including the calculation of comparative figures for the previous year, with the exceptions identified below: Certain changes in the past were related to the scope of applicable IFRS; most of these changes became effective as of 01 January 2005.
Aareal Bank Group exercised the option for an early application as of 01 January 2004 regarding IFRS 3 Business Combinations. The following revised standards were applied in preparing these interim financial statements:
IAS 1, IAS 8, IAS 10, IAS 16, IAS 17, IAS 21, IAS 24, IAS 27, IAS 28, IAS 31, IAS 33, IAS 36, IAS 38, IAS 40.
Changes due to the application of IAS 1 (revised) include the required breakdown of period results into ”gains and losses attri-butable to minority interest“ and ”gains and losses attributable to the parent company’s shareholders“.
In addition, minority interest must be shown as a separate line item under shareholders' equity.
The application of revised standards had no material consequences for the presentation of the financial position and performance of the Group.
Aareal Bank will apply IAS 32 (revised) and IAS 39 (revised) for the first time as at year-end 2005.
Two companies which had been fully con-solidated as at 31 December 2004 were no longer included in the consolidated group for the first nine months of 2005. Changes in the scope of consolidation had no material consequences for the presen-tation of the financial position and perfor-mance of the Group.
BASIS OF ACCOUNTING
Accounting policies
Scope of consolidation
23
U N T I N G
NOTES TO THE CONSOLIDATED
INCOME STATEMENT
(1) Net interest income
(2) Provision for loan losses
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004 € mn € mn
Interest income from financing business
and money market transactions 945 946
Interest income from fixed-income securities
and debt register claims 254 311
Other interest income 9 8
Total interest income 1,208 1,265 Total interest expenses 901 942
of which: interest expenses for hybrid capital 60 60
Total 307 323
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004 € mn € mn
Additions 259 358
Amounts released 14 5
Balance of direct write-offs and
recoveries on loans previously written-off 4 2
Total 249 355
Provisions for loan losses include the results of the credit portfolio audit concluded during the third quarter of 2005.
N O T E S
As at 30 September 2005, interest expenses from foreign exchange swaps entered into for refinancing purposes, as well as amounts accrued under cash flow hedges have been reported as interest expense; previously, these amounts were shown under net trading income. As a result of this reclassification, net trading income increased by a total amount of € 30 million (2004: € 17 million), whilst interest expenses grew by the same amount. We have adjusted the amounts shown in the consolidated income statement for the period under review, as well as for the comparison with the same quarter of the previous financial year.
N O T E S
24
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004 € mn € mn
Measurement of derivative financial instruments
and currency translation adjustments -16 -3
Inefficiencies from hedge accounting 3 1
Net income / expenses from other positions
held for trading 0 1
Total -13 -1
(4) Net trading income
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004 € mn € mn
Net commission income from banking transactions 16 16
Net commission income from non-banking
transactions 103 91
Total 119 107
(3) Net commission income
Net commission income from banking transactions includes current expenses incurred for securitisation transactions entered into by the Aareal Bank Group.
Please refer to the explanation under (1) regarding the reclassifications made as at 30 September 2005.
(5) Results from non-trading assets
The results from non-trading assets were predominantly achieved upon the disposal of fixed-income securities available-for-sale.
25
(6) Administrative expenses
(7) Net other operating income/expenses
Net other operating income and expenses was dominated by a € 50 million charge from the revaluation of property holdings conducted during the third quarter. The balance also includes € 7 million in restructuring expenses.
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004 € mn € mn
Staff expenses 179 165
of which: for pensions 10 7
Other general administrative expenses 94 81
Depreciation and amortisation of property
and equipment and intangible assets 19 20
N O T E S
26
30 Sep 2005 31 Dec 2004 € mn € mn
Property loans 22,876 23,244
Promissory note loans 1,456 1,181
Loans to the public sector 263 291
Other loans and advances 1,140 581
Total 25,735 25,297
Loans and advances to customers include € 830 million (31 December 2004: € 1,074 mil-lion) in loans catagorised as available-for-sale.
NOTES TO THE CONSOLIDATED
BALANCE SHEET
(8) Loans and advances to banks
30 Sep 2005 31 Dec 2004 € mn € mn
Term deposits and current account balances 1,256 898
Promissory note loans 410 467
Other loans and advances 614 33
Total 2,280 1,398
of which: payable on demand 1,183 746
Loans and advances to banks include € 249 million (31 December 2004: € 280 million) in loans catagorised as available-for-sale.
27
(12) Intangible assets (11) Non-trading assets
30 Sep 2005 31 Dec 2004 € mn € mn
Debt and other fixed-income securities 8,852 9,240
Equities and other non-fixed-income securities 355 381
Interests in affiliated companies 18 17
Other participations 37 36
Total 9,262 9,674
(10) Trading assets
30 Sep 2005 31 Dec 2004 € mn € mn
Debt and other fixed-income securities 221 10
Positive market value of derivative
financial instruments 227 257
Other assets held for trading 0 27
Total 448 294
Non-trading assets include € 1,730 million (31 December 2004: € 1,560 million) in originated bonds and other fixed-income securities.
30 Sep 2005 31 Dec 2004 € mn € mn
Goodwill 22 22
Proprietary software 46 40
Other intangible assets 10 15
N O T E S
28
(14) Other assets
(13) Property and equipment
30 Sep 2005 31 Dec 2004 € mn € mn
Land and buildings 79 83
Office furniture and equipment 21 21
Investment property 179 177
Total 279 281
30 Sep 2005 31 Dec 2004 € mn € mn
Positive market value of hedge derivatives 945 589
Interest deferral from hedge derivatives 387 382
Properties earmarked for sale 206 287
Trade receivables 102 110 Other 510 261 Total 2,150 1,629 (15) Liabilities to banks 30 Sep 2005 31 Dec 2004 € mn € mn Payable on demand 915 442 Term deposits 1,768 2,554
Promissory note loans borrowed 2,291 2,614
Liabilities from securites repurchase agreements 2,486 2,120
Registered mortgage bonds 247 175
Other 341 352
29
(16) Liabilities to customers
30 Sep 2005 31 Dec 2004 € mn € mn
Current account balances 4,279 3,701
Term deposits 5,462 4,401
Promissory note loans borrowed 5,628 4,427
Registered mortgage bonds 3,665 3,006
Savings deposits 2 2
Other 301 262
Total 19,337 15,799
(17) Certificated liabilities
New issues during the first nine months of 2005 totalled € 250 million (2004: € 1,166 million).
(18) Trading liabilities
Trading liabilities of € 163 million (31 December 2004: € 117 million) comprise exclusively negative market values of derivative financial instruments, including attributable interest components.
30 Sep 2005 31 Dec 2004 € mn € mn
Medium-term notes 3,611 4,177
Bearer mortgage bonds 401 236
Other debt securities 4,259 5,648
N O T E S
30
(19) Provisions
30 Sep 2005 31 Dec 2004 € mn € mn
Provisions for pensions and
similar obligations 96 92 Other provisions 139 176 Total 235 268 (20) Other liabilities 30 Sep 2005 31 Dec 2004 € mn € mn
Negative market value of hedge derivatives 1,065 845
Interest deferral from hedge derivatives 294 344
Other 253 337 Total 1,612 1,526 (21) Subordinated equity 30 Sep 2005 31 Dec 2004 € mn € mn Subordinated liabilities 736 680 Profit-participation certificates 608 552
Contributions by silent partners 234 234
Total 1,578 1,466
(22) Treasury shares
31
30 Sep 2005 31 Dec 2004 € mn € mn Germany 12,382 13,932 Italy 2,261 1,782 Sweden 1,671 1,985 United Kingdom 1,398 1,268 France 1,333 1,324 USA 1,099 1,114 Netherlands 1,030 1,231 Denmark 906 956 Belgium 731 751 Spain 716 497 Switzerland 621 582 Poland 507 355 Other 1,055 723 Total 25,710 26,500OTHER NOTES
(24) Property financing – Portfolio breakdown by type of loan1)
(financing under management)
30 Sep 2005 31 Dec 2004 € mn € mn
Commercial property financing 16,246 16,151
of which: international 11,955 11,149
Property financing for commercial housing 9,464 10,349
of which: international 1,373 1,419
Total 25,710 26,500
(23) Property financing – Portfolio breakdown by country1)
(financing under management)
1)
N O T E S
32
(25) New property financing commitments
01 Jan - 30 Sep 2005 01 Jan - 30 Sep 2004 € mn € mn
Commercial property financing 3,640 3,371
of which: international 3,363 2,742
Property financing for commercial housing 1,317 644
of which: international 860 524
Total 4,957 4,015
(26) Number of employees
01 Jan - 30 Sep 2005 01 Jan - 31 Dec 2004
Number of employees in the banking business 1,252 1,261
Number of employees in other businesses 1,985 1,896
Total 3,237 3,157
of which: part-time employees 377 357
(27) Regulatory indicators
30 Sep 2005 31 Dec 2004
% %
German Banking Act – KWG
Core capital ratio 8.1 8.2
Total capital ratio 14.1 14.3
BIS rules
Core capital ratio 6.9 6.9
E X E C U T I
E X E C U T I V E B O D I E S
34
EXECUTIVE BODIES
Supervisory Board
Hans W. Reich1) 3), Kronberg
Chairman
Spokesman of the Management Board of KfW
Christian Graf von Bassewitz1) 2) 3),
Düsseldorf Deputy Chairman
General Partner and Management Spokesman of the Board of Bankhaus Lampe KG
Manfred Behrens, Munich
Managing Director of Schweizerische Lebensversicherungs- und Rentenanstalt (Swiss Life), German branch office
York-Detlef Bülow1) 4), Katzenelnbogen
Deputy Chairman Aareal Bank AG
Tamara Birke4), Wiesbaden
Aareal Bank AG
Dr. Richard Brantner1) 2) 3), Schramberg
Prof. Dr. Johann Eekhoff, Bonn
Wolfgang Fauter, Hamburg
Chairman of the Management Boards of Deutsche Ring Versicherungen
Erwin Flieger1), Geretsried
Chairman of the Management Boards of Bayerische Beamten Lebensversicherung a.G., of BBV Holding AG and of Bayerische Beamten Versicherung AG
Lutz Freitag, Berlin
President of GdW, Bundesverband deutscher Wohnungsunternehmen e.V
Dr. Friedrich-Adolf Jahn, Münster
Ralf Kupka3) 4), Inning am Ammersee
Aareal Bank AG
Dr. Peter Lammerskitten2) 3), Königstein
Jacques Lebhar, Paris
Kurt Pfeiffelmann2) 4), Mainz
Aareal Bank AG
Klaus-Peter Sell3) 4), Burkardroth
35
V E B O D I E S
Wolf R. Thiel3), Marxzell-Schielberg
President and Chairman of the Management Board of Versorgungs-anstalt des Bundes und der Länder
Professor Dr. Dr. h.c. mult. Hans Tietmeyer, Königstein President of Deutsche Bundesbank (ret’d.)
Reiner Wahl3) 4), Wiesbaden
Aareal Bank AG (ret’d.)
Dr. Jürgen Westphal , Hamburg Barrister and Solicitor; Judge at the Hamburg Constitutional Court
Anja Wölbert4), Hadamar
Aareal First Financial Solutions AG
Management Board
Dr. Wolf Schumacher Chairman
Dr. Ralph Hill
Member of the Management Board (until 04 August 2005)
Hermann Josef Merkens
Member of the Management Board
Thomas Ortmann
Member of the Management Board (since 01 September 2005)
Christof M. Schörnig
Member of the Management Board
1)
Member of the Executive Committee
2)
Member of the Accounts and Audit Committee
3)
Member of the Credit and Market Risk Committee
4)
O U R O F F I
OUR OFFICES
36
Wiesbaden Head Office
Aareal Bank AG Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3480 Fax: +49 611 3482549
Structured Property
Financing
Amsterdam Kantoorgebouw Byzantium Stadhouderskade 14-E1054 ES Amsterdam, The Netherlands Phone: +31 20 5898660 Fax: +31 20 5898666 Berlin Kurfürstendamm 33 10719 Berlin, Germany Phone: +49 30 880990 Fax: +49 30 88099470 Brussels 7, rue Guimard 1040 Brussels, Belgium Phone: +32 2 5144090 Fax: +32 2 5144092 Copenhagen Frederiksgade 7 1265 Copenhagen, Denmark Phone: +45 70 109090 Fax: +45 70 109091 Istanbul
Maya Meridyen I ¸s Merkezi Ebulula Mardin Caddesi, Kat. 11 Akatlar / Istanbul
Phone: +49 611 3483640 Fax: +49 611 3482246
London
38 Lombard Street
London EC3V 9BS, United Kingdom Phone: +44 20 74569200 Fax: +44 20 79295055 Madrid Paseo de la Castellana, 60 - 4D 28046 Madrid, Spain Phone: +34 917 454160 Fax: +34 917 450775 Milan
Via Paolo Andreani, 6 20122 Milan, Italy Phone: +39 02 76419001 Fax: +39 02 764190211 Munich Richard-Strauss-Strasse 24 81677 Munich, Germany Phone: +49 89 51270 Fax: +49 89 5127211 New York
Aareal Financial Services USA, Inc. 410 Park Avenue · Suite 910 New York, NY 10022 · USA Phone: +1 212 5084080 Fax: +1 917 3220285
O U R O F F I C E S
37
C E S
Paris
Aareal Bank France S.A. 5, rue Scribe
75009 Paris, France Phone: +33 1 44516630 Fax: +33 1 42669794
Prague
Aareal Financial Service spol. s r. o. FORUM Building
Václavské námestí 19
11000 Prague 1, Czech Republic Phone: +420 234656001 Fax: +420 234656011 Rhein-Main Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3483166 Fax: +49 611 3482833 Rome Via Mercadante, 12/14 00198 Rome, Italy Phone: +39 06 83004200 Fax: +39 06 83004250 Singapore
Aareal Financial Services (Singapore) Pte. Ltd.
7 Temasek Boulevard, # 22-02A Suntec Tower One
Singapore 038987 Phone: +65 688 44136 Fax: +65 688 44041 Stockholm Hamngatan 11 11147 Stockholm, Sweden Phone: +46 8 54642000 Fax: +46 8 54642001 Warsaw
Aareal Financial Service Polska Sp. z o.o. Warsaw Financial Center
ul. Emilii Plater 53 00-113 Warsaw, Poland Phone: +48 22 5206090 Fax: +48 22 5206099 Zurich Rennweg 52 8001 Zurich, Switzerland Phone: +41 43 8887575 Fax: +41 43 8887576 Aareal Estate AG Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3482025 Fax: +49 611 3482775
Property Asset Management
Aareal Asset Management GmbH
P. O. Box 2125
65011 Wiesbaden, Germany Phone: +49 611 3483214 Fax: +49 611 3482210
38
Aareal Immobilien Kapitalanlage-gesellschaft mbH
P. O. Box 2125
65011 Wiesbaden, Germany Phone: +49 611 3482856 Fax: +49 611 3483559
Aareal Property Services B.V.
Entree II · De entree 260 1101 EE Amsterdam Z.O., The Netherlands
Phone: +31 20 3016560 Fax: +31 20 3016561
Deutsche Structured Finance GmbH
Westendstrasse 24
60325 Frankfurt / Main, Germany Phone: +49 69 9714970 Fax: +49 69 97149715
Consulting / Services
Aareon AG Im Münchfeld 1-5 55122 Mainz, Germany Phone: +49 6131 3010 Fax: +49 6131 301419Aareal First Financial Solutions AG
Peter-Sander-Strasse 30 55252 Mainz-Kastel, Germany Phone: +49 6134 560201 Fax: +49 6134 560401
Deutsche Bau- und
Grundstücks-Aktiengesellschaft1) Chlodwigplatz 1 53119 Bonn, Germany Phone: +49 228 5180 Fax: +49 228 518298
Deposit-taking
DublinDublin Exchange Facility Mayor Street · IFSC Dublin 1, Ireland
Phone: +353 1 6369220 Fax: +353 1 6702785
1)
also has income attributable to Property Asset Management due to the services provided
39
countries, which Aareal Bank is active in
T I O N S
London Paris Wiesbaden Frankfurt Stuttgart Flensburg Stockholm Madrid Leipzig Dublin Greater Moscow area Istanbul Brussels Milan Rome Copenhagen Zurich Prague Warsaw Berlin Munich Amsterdam Essen Hamburg New York Singapore 11 / 2005A A R E A L B A N K G R O U P L O C A T I O N S
March 2006 Presentation of annual report as at 31 December 2005 May 2006 Presentation of interim report as at 31 March 2006
23 May 2006 Annual General Meeting – Kurhaus, Wiesbaden
August 2006 Presentation of interim report as at 30 June 2006 November 2006 Presentation of interim report as at 30 September 2006
FINANCIAL CALENDAR
Aareal Bank AG
·Corporate Communications
Paulinenstrasse 15 · 65189 Wiesbaden, Germany Phone: +49 611 348 3009 · Fax: +49 611 348 2637 E-mail: aareal@aareal-bank.com · www.aareal-bank.com
