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Article Excerpt
OPERATOR: Good day, ladies and gentlemen, and welcome to the Aareal Bank analyst and investor conference call. For your information, today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Junginger. Please go ahead, sir.
JURGEN JUNGINGER, HEAD OF IR, AAREAL BANK AG: Hello everybody, welcome to our Q3 presentation. This presentation will be held by our CEO, Wolf Schumacher. Later, Wolf and our CFO, Hermann Merkens will be pleased to answer your questions.
So, Wolf, please let's start.
WOLF SCHUMACHER, CEO, AAREAL BANK AG: Thank you, Jurgen. I'd like to welcome everyone in the name of my colleague Mr. Merkens and my name, for the analyst conference call for the third quarter result this year.
And I'd like to start with the first page. I want to highlight what was specifically special in the third quarter of this year. And before I highlight the different topics, I want to give you some information that the third quarter was the most challenging quarter in every aspect in the landscape of banking industry for decades.
We had a real high hit after Lehman Brothers, and additional, you see the cooling down of the economies all over the world. Even if you keep in mind all these circumstances around us, Aareal Bank again, its business model proved itself successful once more.
We are making profits despite accelerating financial crisis, and I want to focus that in every quarter during the financial crisis, we had black figures. And we had black figures even without reclassification of securities.
We have an excellent good operating performance in both business segments, Structured Finance and Consulting and Services. Our core portfolio is growing, our capital base is adequate, and the funding position is solid.
And I'd like to go further to the business development, and I'd like to start with our segment Structured Property Financing on page number three. On the left side, at the top, you can see the development of the risk weighted assets. Our risk weighted assets increased by 6.4% to EUR23.4 billion.
We are doing still business on a very conservative, selective basis, and we achieved roughly about EUR5 billion within the first nine months this year. That means we achieved our goals for the complete year at the end of the third quarter.
On the left side at the bottom, you can see the development on a quarterly basis. And on the right side, you can see the business development and the new commitments, diversification by region. And there's no focusing on one or two regions, it is highly diversified.
The development of the new business margin is excellent. Business eligible for German mortgage bond [cover pool] is going up to about 80 up to 90 basis points to nearly 200 basis points over swap. Business not eligible for German mortgage fund refinancing is up by 70 up to 80 basis points to about more than 250 basis points over swap.
Going further, to our second segment, Consulting Services, which is described on page number four. Let's start with the customer deposits. These customer deposits, despite the financial crisis, are completely stable. That's a result of a very long term, high quality customer relationship and it shows the high reliability of Aareal Bank as a partner.
On average, we have EUR4.5 billion, and as I said, during the last quarters you can compare this deposit business with our virtual branch network. Other banks need a branch network to collect these deposits. We get it out of these customers. And for us, it's very essential, we are not depending purely on wholesale funding.
Concerning our IT Systems business coming from our subsidiary [Aarean], we are completely stable in the demand for consulting and services, we have stable earnings independent of the financial crisis, and with every product line we are complete in the budget.
To summarize the results, we achieved after the first nine months EUR33 million before tax. Our forecast for this year was EUR40 million up to EUR50 million, and I'm completely convinced we will achieve these goals at the year-end.
Let's go further, funding. That's page number five. The funding issues matching new commitments. You can see on this page that our funding is completely in line, and that we are most important focusing on the German mortgage bond. You can see or I can tell you that from the beginning of January this year up to now, our funding was about EUR2.3 billion, and we achieved EUR1.6 billion for issued German mortgage bonds with a maturity of 4.1 years and a spread of [4.0]. Concerning senior unsecured, we issued EUR700 million with an average maturity of 2.2 years and with a spread of [62.9]. Including the deposit business coming from the Consulting Services, you can see on this slide the very solid liquidity situation of Aareal Bank.
Let's go further to the financial performance. On page number seven, you can see the performance. That means the profit before tax and the special effects by quarter.
This system is very familiar for you. You can see we achieved in the third quarter EUR31 million pre-tax profits, which is in our opinion an extremely outstanding result, taking into account the current market environment. After adding back the net EUR10 million special effects, the clean operating results are EUR41 million.
Going further to the special effects. The special effects include EUR44 million impairments as well as realized losses on securities. However, against that loss stands a gain of EUR34 million from derivative instruments, which we entered into as an economic hedge against these securities. And that's very important, so the net effect of the financial crisis on our three quarter results is only minus EUR10 million.
The three quarter results include a provision for the restructuring of our German credit management, costing EUR8 million. We show this effect, but we don't show it as a one-off. This is specific demand for EUR8 million, and we said it and we started this project long ago, to redesign the whole German credit organization and that has nothing to do with effects or negative impact coming from the financial crisis.
By the way, the social plan affects roughly about 80 FTEs and we are completely in line with the German labor force, and every agreement and treaty with the German labor force are signed.
And you know and you can remember when we restructured the Bank that we exactly what we want to do, and we did it in the past very well and as I say, we will do it right now.
Going further to the performance, the net interest income and the allowance for credit losses, you can see on slide number eight.
You can see in both segments, in the third quarter, strong interest income. The Structured Property Financing reflects the risk weighted assets growth and the margin development. In comparison to the second quarter we had an increase of from EUR95 million to EUR99 million. And in the Consulting and Services segment, it reflects a stable deposit base and the favorable interest in environment.
If you look at the credit losses, you can see the stable net loan provision that shows that the quality of our portfolio is not yet affected by the financial crisis. But we do see that the environment is getting more challenging, but for the moment, our provisioning level is still very sound.
And as you can remember, in a lot of one-to-ones where we discussed this topic, we calculated all the time 35 basis points concerning risk weighted assets as risk costs and a lot of competitors had risk costs calculated between 12, up to 18, basis points. That means even in the time before the crisis, we had a very conservative look concerning credit costs.
Going further to the performance of the net commission income, you can see it on page number nine. In general, the commission income was stable, with EUR34 million in the third quarter this year. And the positive performance of the Consulting/Services balances out reduced commission income in the Structured Property Financing.
Let's go further to the admin expenses. We are quite happy that with EUR84 million...
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