Aareal Bank AG

Good morning, everybody. I'm pleased to welcome you to our today's conference call.

The agenda covers our results for the first 9 months of 2025 together with an outlook for the full year. I'm joined by our CEO, Dr.

Christian Ricken; and our CFO, Andy Halford. They will take you through our presentation, which will be followed by a question-and-answer session.

Now I'm pleased to hand over to Christian.

Yes. Many thanks, Jurgen.

Good morning to everyone, and thank you all for attending today's call. I'm very pleased to present our results for the first 9 months of 2025.

The good developments we reported for the first half continued in the third quarter. Adjusted operating profit for the first 9 months of 2025 is up by 15% compared to the same period last year.

Therefore, we are confirming the outlook for 2025. The economic and geopolitical environment remains challenging, but as always, we are, of course, taking a very conservative approach to risk.

I would like to highlight some key features in the good results we are reporting today. Net interest income is stabilizing and in line with expectations, reflecting lower market interest rates, while loan impairment charges are markedly down on last year's first 9 months.

In addition, admin expenses benefit from the ongoing tight controls that we have put in place. In the Structured Property Financing segment, we recorded good margins and conservative loan-to-value ratios on newly acquired business.

Overall, we achieved EUR 8.5 billion of new business in the first 9 months of the year, which is substantially ahead of the same period in 2024. Our capital and liquidity ratios are very robust, and the 2025 funding plan has already been executed.

We also strengthened housing industry deposits, which reached an average of EUR 14.2 billion in the third quarter. I will now hand over to Andy, who will provide further details on the results for the first 9 months of 2025.

Andy, over to you.

Thank you, Christian. Turning to Slide 5.

Aareal continued its good progress throughout the first 9 months of 2025, as Christian has just referred to. Whilst net interest income is down by 13% to EUR 691 million, this is entirely as we expected.

I'll say a bit more about net interest income when we turn to the next slide. Loan impairment charges are down by 34% to EUR 190 million.

This is a significant decrease when compared to 2024's first 9 months and reflects the work we have done and continue to do in carefully managing the loan portfolio. The cost measures, which we have put in place have led to a reduction of 8% in adjusted administrative expenses, which are down to EUR 229 million for the 9-month period.

The other components line includes a EUR 20 million positive one-off from Q2, which came from the successful restructuring of a former legacy nonperforming loan. So overall, adjusted operating profit of EUR 306 million is up by 15% over the same period last year.

The effective tax rate for the 9-month period was 27%. AT1 costs are up by EUR 8 million compared to the first 9 months of 2024, but most of this increase is because our new AT1 issue overlapped with the previous AT1 for about 3 months.

Taken together, the adjusted return on equity was 8% compared to 7.6% in the first 9 months of last year. In addition, our robust CET1 ratio fully phased increased to 15.5% at the end of September from 15.2% at the end of last year.

Now let's take a look at Slide 6 and at the key profit and loss account elements. Net interest income, as I mentioned, is down by 13%.

This is in line with expectations and reflects a significant decline in most European interest rates compared with the first 9 months of 2024. There are 2 other important contributing factors, namely the interest effects of proactively strengthening our Tier 2 and senior non-preferred funding positions over the last 12 months.

And secondly, foreign exchange rates with the euro strengthening against other currencies, notably the dollar in the second and third quarters of 2025. In the second chart on this slide, we've shown the stepped effects on the net interest income of the main factors driving change between this year's first 9 months and the comparable period in 2024.

An increase in our loan book margins added around EUR 16 million, whilst the effect of lower interest rates in our Banking & Digital Solutions segment reduced net interest income by EUR 23 million. Returns on treasury assets declined as a consequence of lower market interest rates and led to a reduction of EUR 68 million, whilst the strengthening of subordinated funding, which I've just mentioned, explains a further EUR 18 million reduction.

Turning to admin expenses on Slide 7. They continue to be tightly controlled, and we are benefiting from the efficiency measures that we have put in place.

Our adjusted administrative expenses are down 8%. This excludes one-off charges of EUR 25 million in the first 9 months compared to EUR 5 million in the same period in 2024.

Our cost-income ratio for the first 9 months of 2025 was 32%. Let's now turn to risk provisioning.

The loan impairment charge is down 34% to EUR 190 million. Impairment charges on non-U.S.

portfolio are running significantly below long-term averages. Provisions on the U.S.

office portfolio continue to be the majority of the charge. Management overlays stood at EUR 14 million at the end of September compared to EUR 17 million at the end of June.

The remaining management overlay relates to the U.S. office market.

I'd now like to hand back to Christian, who will talk about business developments in more detail.

Yes. Thank you, Andy.

Now let's turn to new business on Slide 9. We achieved a strong EUR 8.5 billion of new business in the first 9 months, and we are well on our way to meeting our outlook of EUR 9 billion to EUR 10 billion of new business this year.

Looking at the geographical distribution of new business in the first 9 months of 2025. 3/4, 74% was in Europe; 22% in North America, which includes Canada; and 4% in the Asia Pacific region.

Around 1/4 of the North American new business originates from Canada. As planned, we reduced activity in the U.S., concentrating on premium assets and long-standing trusted partners.

Our strategy on asset classes has also evolved. Hotel finance continues to be our largest area of new business; however, we are currently taking a more selective approach to new office financings while maintaining our increasing conservative financing of logistics and retail properties.

The average loan-to-value ratio for newly acquired business in the first 9 months was a conservative 56%, which provides a comfortable risk buffer. Margins were also good, averaging 245 basis points.

These figures continue to demonstrate that we are actively identifying attractive market opportunities. Let's now turn to the next slide, which shows our current portfolio.

The portfolio, as shown on Slide 10, totaled EUR 32.9 billion at the end of September, which is down when expressed in euros; however, a EUR 1.3 billion reduction, clearly more than the net decrease is explained by foreign exchange rate movements. As you can see from the 2 pie charts at the bottom of the slide, we are still broadly diversified both by region and property type.

We continue to have a clear focus on properties in the major metropolitan areas. We are not financing new construction and have exposure of only around 9% in Germany and no exposure at all to Russia, China or the Middle East.

Green loans stood at EUR 9.5 billion at the end of September. The next slide tracks 2 key performance indicators for our performing portfolio, loan-to-value and yield on debt.

Our conservative approach is reflected in the indicators shown on this slide, which are both at very healthy levels. The average loan-to-value ratio for our overall performing portfolio stands at very respectable 56%.

At 61%, the loan-to-value ratio for the office asset class continues to improve. I also like to highlight the development of yield on debt, i.e., the ratio of a property's net income to the amount of the loan.

This is a key indicator for assessing a property's profitability relative to the financing structure. Yield on debt for the entire performing portfolio is now at 9.8%, up from 9.6% at the end of 2024.

Hotels, shopping centers and logistics properties have particularly good yield on debt ratios. The ratio for offices is currently a little lower, but has improved over the last 9 months.

Residential with a yield on debt of around 8% is also in a satisfactory position. Let's now turn to nonperforming loans on Slide 12.

Our nonperforming loans stand at EUR 1.25 billion. This is down compared to the balance at the end of June and compared to the balance at the end of last year.

The coverage ratio remains at 28%. We are continuing very active management of nonperforming loans.

The U.S. office market remains challenging and continues to represent around 2/3 of total nonperforming loans.

Other asset classes and geographies are operating normally. The nonperforming exposure ratio according to the EBA's methodology stands at 3.5%.

Let's now turn to our Banking and Digital Solutions segment on Slide 13, where business with clients from the housing and energy industries have been very encouraging. First Financial Software, our joint venture with Aareon is also successfully attracting new clients.

The average deposit volume further strengthened to EUR 14.2 billion in the third quarter. Rental deposits and maintenance reserves have increased yet again, confirming 2 particularly granular and sticky components of the deposit structure.

To remind you, deposits come from around 4,000 clients managing more than 9 million units. BDS net interest income for the first 9 months of the year is down 11%, driven by lower market interest rates.

We expect net interest income to be around current levels for the rest of the year or better looking at deposit volume development. Now let me hand over to Andy for an update on our funding, liquidity and capital positions.

Thank you, Christian. Slide 15 shows our broadly diversified funding mix, solid liquidity ratios and capital markets activity.

Following a very active funding program, we have executed our full year funding plan and liability terms have been successfully extended. Deposits now total around EUR 18 billion, representing around 45% of our total funding volume.

The largest part comes from the housing industry and an additional EUR 3.2 billion is from retail deposits via platforms like [ Horizon. ] These retail deposits have an initial term of at least 2 years.

Our liquidity ratios are solid with the net stable funding ratio at 121% at the end of September and average liquidity coverage ratio at 237% for the third quarter. We are also pleased to report that Fitch recently upgraded our outlook to Positive from Stable, whilst affirming its senior preferred rating at BBB+.

As I said, our full year funding plan has been executed. We increased our AT1 capital by approximately EUR 100 million by replacing the former outstanding EUR 300 million issue with a new issue of USD 425 million earlier in the year, and we issued EUR 100 million of Tier 2 capital.

In addition, we placed Pfandbrief equivalent to around EUR 2.1 billion in total. This included both euro and Swedish krona issues.

This was Aareal's first Swedish currency issue since 2006. Next, let's look at our treasury portfolio, which is shown on Slide 16.

The treasury portfolio stood at EUR 9.6 billion at the end of September, up from EUR 8.2 billion at the end of 2024. In terms of asset classes, the portfolio comprises public sector borrowers, covered bonds and a very small portion of bank bonds.

It, therefore, has a strong liquidity profile. High credit quality requirements are reflected in the ratings breakdown.

100% of the portfolio has an investment-grade rating with 89% having a rating of AA or higher. Asset swap purchases ensure that there is low interest rate risk exposure.

The portfolio is almost exclusively in euros and has a well-balanced maturity profile. Turning now to capital on Slide 17.

First of all, I'd like to reemphasize that last quarter, we moved from phase-in numbers in the charts on this slide to fully phased Basel IV figures. Now looking at our ratios, they continue to be strong.

Our CET1 ratio was up at the end of September and stood at 15.5% on a Basel IV fully phased basis. The increase over the first 9 months of this year is mainly driven by a decrease in risk-weighted assets from the lower lending portfolio caused by foreign exchange rate movements.

Both the Tier 1 and total capital ratios were further supported by additions to AT1 and Tier 2 capital during the first 9 months of the year, as I have just mentioned. Our capital ratios are significantly above SREP requirements.

Positively, the Pillar 2 requirement for 2026 has been reduced by 25 basis points. And our leverage ratio of 7.1% at the end of September is also well above regulatory requirements.

The results of most recent ECB stress test were published in August and demonstrate the strength of our balance sheet. After the end of the third quarter, active management of our balance sheet has been extended to include our first significant risk transfer transaction.

Investors have assumed a portion of the credit risk attached to a high-quality EUR 2 billion portfolio of European commercial real estate loans in return for a risk premium. This transaction has strengthened our capital efficiency and freed up equity, which we can invest in attractive new business.

We were delighted that the offer was oversubscribed and that we were able to implement the SRT and introduce this efficient tool to our bank management. Now I'll hand back to Christian for an update on our outlook for the year.

Thank you, Andy. Now let's turn to the 2025 outlook.

Our results for the first 9 months of the year are in line with expectations and, therefore, we are confirming the 2025 outlook. We recognize the uncertainties evident in the economic and geopolitical environment and remain vigilant.

So let me summarize our outlook. In the Structured Property Financing segment, we aim to expand our credit portfolio to between EUR 34 million and EUR 35 million.

Recognizing foreign exchange movements over the course of the year, this might translate to EUR 33 billion and EUR 34 billion. We are targeting between EUR 9 billion and EUR 10 billion of new business.

In the Banking and Digital Solutions segment, our conservative estimate of deposits continues to be between EUR 13 billion and EUR 14 billion on an annual average. All in all, we are targeting an adjusted operating profit of between EUR 375 million to EUR 425 million for 2025, excluding expected one-off charges of around EUR 25 million.

I would like to thank you all very much for your attention, and Andy and I are now very happy to answer all questions you might have. Thank you very much.

I have 2. So firstly, on the NPLs this quarter, obviously, they've come down both in the U.S.

and Europe. Can you give us some color on what those sort of individual files look like?

And then a second more kind of broader question. I see that the new business has picked up in terms of your exposure to the U.S.

So what's the appetite to grow in the U.S. like?

Obviously, it's well flagged, but a competitor of yours is selling or trying to sort of exit the U.S. business.

What would Aareal's perspective on that be? And what's the appetite to grow there?

Yes. So let me just pick up on the NPLs.

As you've seen from the slides, we've got a further reduction in the overall NPL values during the quarter. It's been a big area of focus, as you know, over the last several quarters, and we are pleased to see the overall trend on that coming down further.

So we're now at about EUR 1.25 billion. We continue to lean into that.

And as quickly as we can economically resolve some of those situations, we will do so. Majority of the nonperforming loans, the vast majority of the nonperforming loans are in the U.S.

and particularly in the U.S. office space.

So a lot of the workout activity is actually happening in that area. And I think it's sort of worthy of note that actually, if you look at the rest of the world outside of the U.S., the nonperforming loan levels are very, very low and the provisioning, hence, very, very low as well.

So the key for us really is working down the U.S. office, particularly, which has come down quite significantly over the last 12 months, and we are continuing to focus heavily on further improving that over the coming quarters.

Yes. Thank you, Andy.

On the U.S., I can only repeat what I said last quarter. So we remain committed to the U.S., but we are significantly more selective as far as new business is concerned, which will result in a recalibration, let's say, of the portfolio size, but also in the portfolio composition as far as asset classes are concerned.

So we have a USP in hotel financing, as I have said, maybe that is also then the focus of new business in the U.S. going forward.

So no exit is being planned, but new business will be done in a much more selective fashion.

And would that sort of new business growth be obviously -- clearly, the prime focus is organic, but would you be open to inorganic growth in the U.S.?

Inorganic growth in the U.S., no.

Just on the new business side again, can you comment on what you're doing, if anything, in data center lending and maybe describe to us some of the sort of underwriting thought processes there? And then a couple of technical ones.

Your Pillar 2 reduced by 25 bps. Are there any other changes to the SREP this time around?

And then on the SRT that you were able to undertake, what has -- what pro forma impact does that had on RWAs and capital ratios? And then just a quick follow-up on the U.S.

asset quality. I think, not sure, if it was yourself or your competitor was talking about more weakness on the West Coast coming through.

Are you able to say anything about the geographic trends on asset quality in the U.S.?

Yes. Thank you very much.

I would take the first and the last one, and then you may comment on the SREP and the SRT impact. Data center, yes, is a new asset class.

We have done our first transaction. I think we published the respective press release.

So data center financing here in Germany. It's a new and exciting asset class.

That's a positive. And there's much more to come in terms of volume, which is also positive.

On the other hand, not everybody is jumping on it as it is new and interesting, and the development and construction phases are much shorter than with other property classes. Yes, but given the competition, you have to have a close look on the margin side still.

So that's why we have done 1 transaction so far, and we may do more of it, but it may not become a major new asset class in the coming years, but a nice addition. That's how I would phrase it.

Then on asset quality in the U.S., yes. So I think that's a common narrative that you have more weakness on the West Coast as compared to the East Coast.

If you look at the office sector, for example, in New York, there is a clear and a continuing tendency of people moving back into the offices, which is less pronounced at the West Coast. And also the economic dynamics are taking more place in the, let's say, Sun Belt areas, where you have more business supportive governments, regional governments as compared to the West Coast.

So -- and then that is telling you something that the U.S. market is extremely fragmented in terms of regional attractiveness of property class attractiveness.

So you really have to have trophy assets in major metropolitan areas with a good economic momentum. And that is the, let's say, art of also selecting new business.

And that also, of course, refers to hotel financing and other asset classes. So yes, so it's not 1 market.

It's a lot of different markets, which have the currency, the language and the legal system in common, but you have to understand the regional markets and you have to be very selective. On SREP and SRT, please, Andy?

Yes. I mean, the answer to those, I think, fairly straightforward.

There's no particular changes on capital requirement other than the SREP one. If there were, we would have read them out.

So that's the primary one. The SRT, we would expect the transaction was booked in Q4.

So obviously, the impact will be in Q4 numbers, not in Q3 numbers, but we'd expect roughly EUR 0.5 billion, maybe a fraction over reduction in the RWAs. If you work the math through, that probably gives us 40, 50 basis points uplift on the CET1, something in that range.

Are you able to actually say something on the margin that you're achieving on the data centers in Germany or in general?

Yes. As I said, margins are tighter than in other asset classes, but we have our very stringent risk return requirements.

So we are doing also these transactions selectively if our risk return requirements measured in RAROC are being met. And that is not the case for each and every transaction, and we would not enter into low-margin new business only because it's a new and fancy asset class.

Thank you a lot for joining this morning. As always, the IR team is happy to take up follow-up calls if you have further questions.

So have a good day, and thank you again for listening.