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Article Excerpt
OPERATOR: Good day ladies and gentlemen and welcome to the Aareal Bank analyst call. Today's conference is being recorded. At this time I would like to turn the conference over to Dr. Schumacher. Please go ahead sir.
WOLF SCHUMACHER, CEO, AAREAL BANK AG: Okay. Thank you. Ladies and gentlemen, I would like to welcome you very early in German time. I would also like to ask your understanding for the very short notice, and the timing, of this conference call. This is due to the rules and regulations of the German Securities Trading Act.
Our Supervisory Board has yesterday approved the decision that has far reaching consequences for our Bank. Therefore, we were obliged to publish this decision immediately.
As you will probably already have noted in our press release, we would like to discuss two topics with you today. In our opinion, these two issues are closely related.
First, we have released our preliminary unaudited results for 2008 financial year. These results, once again, affirm what we have been stating since the outbreak of the financial market crisis. And it's very important Aareal Bank Group is a fundamentally sound and sustainably profitable company.
Our unrivalled business model has proven to be particularly sustainable during the current crisis. The Group went from strength to strength during 2008, even in light of the extremely difficult conditions of the entire financial sector. Aareal Bank Group was one of the few banks, both domestically and abroad, to post solid annual results for 2008. Against a backdrop of massive market distortions, it is fair to say that the results are, in fact very, very good.
We believe that a result of EUR117 million, before taxes, is quite respectable. What's more, adjusted for various one-off effects, we almost matched the excellent results posted in the previous year. We also succeeded in posting a reasonable profit for the fourth quarter of 2008, the most difficult quarter the financial sector has experienced in many decades.
This means that Aareal Bank Group has remained profitable through every quarter since the onset of the financial market crisis in Summer 2007, at a Group level, as well as in each of our two business segments; Structured Property Financing and Consulting and Services. As far as I am aware, there aren't that many banks, neither in Germany, nor abroad, who are in a position to say this.
This result is due to three factors in particular. Our conservative policy, which is geared towards sustainable profitability, balanced with manageable risk, the concentration on core competencies, which we implemented at an early stage, and our medium-size corporate structure, which allows us to respond to a changing market environment quickly and flexibly.
This is a skill which was required of banks, particularly over recent months. Our industry is going through a period of dramatic upheaval. The interbank market is no longer functioning, thereby creating massive funding problems for all banks. Securitization and syndication markets have virtually shutdown. And a dramatic loss of value across nearly all asset classes has eroded the substance of many firms. However, in these turbulent times, the market expects banks to maintain higher equity ratio as a safety buffer.
Our industry has undergone a radical change during the course of this crisis, affecting financial markets and the economy. So radical, in fact, that none of us would have expected it a year ago.
Numerous banks in Germany and abroad are facing problems that threaten their very existence. It was only through massive government support that they could be rescued, turning governments into shareholders of some of the world's largest financial institutions.
For us, at Aareal Bank, this has not made life any easier, in spite of our solid capital base, regardless of a risk situation that is definitely manageable, and notwithstanding our conservative funding policy. For example, obtaining funding at reasonable terms and conditions is getting harder for all other participants as banks that were shored up with government aid start pushing into the refinancing market with their guaranteed issues.
We are now facing a similar problem regarding the tightened capital requirements, which are fundamentally unjustified, as far as Aareal Bank is concerned. We are, in fact, unable to fulfill such requirements through the market simply because equity is currently not available in the market at economically reasonable terms. Furthermore, no one has, as yet, been able to predict how long the financial market crisis is going to last, or how pronounced the recession will turn out to be.
Never before have banks had so little planning security, while having to face so many uncertainties. Therefore, as a pre-caution, the Management Board of Aareal Bank has taken proactive measures at an early stage. The objective is to create stability for our solid bases during these turbulent times. We have, therefore, resolved to make use of a support program provided by the German government.
We have entered into an agreement with the German Financial Markets Stabilization Fund last weekend. In accordance with this agreement, SoFFin will make EUR525 million in capital available to Aareal Bank by way, and that's very important, of a silent participation. In addition, SoFFin will extend a guarantee facility with a total volume of up to EUR4 billion for new unsecured issues.
I would like to make it crystal clear that Aareal Bank has not resorted to seek SoFFin support as any sort of emergency measure. Quite the contrary. We have taken this step from a position of relative strength.
To this day, our Bank has a clean bill of health, and there is no indication of this changing in the foreseeable future. We do not need public funds to survive. In our view, the commitment by SoFFin serves only for a limited period of time as a protection against the uncertainties of the ongoing financial markets and economic crisis.
The additional capital and guarantee facility, thereby, function as some sort of a double insurance. We will obtain this protection at terms and conditions that are in line with the market, and that are definitely manageable for Aareal Bank.
This silent participation has no fixed maturity date, and will bear interest at 9% per annum. Considering the fact that we will reinvest the funds, the resulting annual burden amounts to approximately EUR16 million after tax, which is roughly in line with our most recent total dividend payout to our shareholders.
The silent participation is fully recognized as Tier 1 capital, bringing our pro forma Tier 1 ratio to above 10% as at December 31, 2008. Without SoFFin support, it would have been 8%, a ratio that would have been perfectly acceptable to us under normal conditions.
The silent participation will allow us to fulfill the current strict capital requirements, permitting us to achieve our goal of being amongst the best capitalized banks in Europe. This will also create a buffer to help see the Bank through the anticipated difficult market phase.
Furthermore, the strengthening of our capital base will preserve our ability to conduct our operating business at all times, even during the current crisis. In more concrete terms, we will continue to support our clients as a reliable partner.
The second component of the support measure, the guarantee facility extended by SoFFin, is a necessary addition in order to broaden the variety of our funding instruments. The guarantee facility will provide Aareal Bank with a solid base and more strategic flexibility for refinancing in funding conditions that continue to remain challenging.
We will, once again, be on a level playing field with those banks that have already been recapitalized while, at the same time, we will be safeguarding our ability to continue lending to our existing client base.
The costs of the guarantee facility are easily manageable. We will pay a commitment fee of 0.1% per annum on the undrawn portion of the facility. We believe EUR1 million per each EUR1 billion guaranteed to be a reasonable price for the additional protecting purchase. When drawing on the facility, we will pay 50 basis points for issues up to one year, and 94.8 basis points for longer dated issues. Again, we believe this to be reasonable.
Any decision as to whether, or when, the guarantee facility will be utilized will be made without any time pressure, and in accordance with the prevailing market conditions. SoFFin has not imposed, and that's very important, any conditions that go beyond the statutory provisions.
I would like to emphasize that there will be no changes. And it's very important for the whole Bank, to our corporate governance, and, in particular, that our business model will remain completely unchanged. This means that there will be no government representatives on our Supervisory Board.
The State will not interfere with our business policy or strategy. In fact, our business model has been affirmed through our agreement with SoFFin. We can continue pursuing our strategy as before. Following in-depth review of the Bank, its business model and management team over recent weeks, we consider this to be an expression of trust by SoFFin.
Aareal Holding has explicitly affirmed its commitment as an anchor shareholder with its current amount of shares. Aareal Holding has undertaken not to sell any shares during the term of the silent participation.
In the interests of further strengthening of our Bank, we will not distribute any dividends for the financial years 2008 and 2009. This will also enhance our options for a thrift repayment of the silent contribution. We are committed to achieving this. And I can assure you that Aareal Bank has both the profitability and the flexibility to achieve this.
I would ask for your understanding that it's too early for any more detailed statements in this respect.
Ladies and gentlemen, Aareal Bank Group is breaking new ground for itself as well as for the German financial sector. We have opted for...
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