INTERIM REPORT AAREAL BANK GROUP AS AT 30 JUNE June 1 JANUARY TO 30 JUNE 2006

Transcription

1 June 1 JANUARY TO 30 JUNE 2006 INTERIM REPORT AAREAL BANK GROUP AS AT 30 JUNE 2006

2 SHAREHOLDER STRUCTURE KEY GROUP 2 SHAREHOLDER STRUCTURE Aareal Holding Verwaltungsgesellschaft mbh Free float Aareal Holding Verwaltungsgesellschaft mbh % % 8.94 % Bayerische Beamten- Lebensversicherung a.g % Schweizerische Lebensversicherungsund Rentenanstalt 6.68 % Versorgungsanstalt des Bundes und der Länder 6.06 % Bankhaus Lampe KG 5.25 % Deutscher Ring Gruppe 2.74 % AGF Holding S.A % Condor Lebensversicherungs-AG

3 KEY GROUP FIGURES FIGURES 3 KEY GROUP FIGURES 01 Jan- 30 Jun Jan- 30 Jun 2005 Change Consolidated Income Statement mn Operating profit Group net income after minority interest income Indicators Cost / income ratio (%) Earnings per share ( ) RoE after taxes (%) 1) Jun Dec 2005 Change Change Portfolio Data mn % Property financing 21,255 22, of which: international 13,161 13, Property financing under Management 23,629 24,698-1,069-4 of which: international 13,161 13, Shareholder s equity 1,289 1, Total assets 37,441 39,186-1,745-4 Regulatory indicators % % Core capital ratio (German Banking Act %) Total capital ratio (German Banking Act %) Jun Dec 2005 Rating Fitch Ratings, London Long-term BBB+ BBB+ Short-term F2 F2 1) on an annualised basis

4 CONTENTS CONTENT 4 CONTENTS Shareholder Structure Key Group Figures Overview Contents Letter to Shareholders Consolidated Income Statement of Aareal Bank Group Consolidated Income Statement (Quarterly Development) Segment Reporting by operating unit Segment Reporting (Quarterly Development) by operating unit Consolidated Balance Sheet of Aareal Bank Group Consolidated Statement of Changes in Shareholders Equity Consolidated Statement of Cash Flows Basis of Accounting Notes to the Consolidated Income Statement (1) Net interest income (2) Provision for loan losses (3) Net commission income (4) Net trading income (5) Results from non-trading assets (6) Administrative expenses (7) Net other operating income /expenses Notes to the Consolidated Balance Sheet (8) Loans and advances to banks (9) Loans and advances to customers (10) Trading assets (11) Non-trading assets

5 S 5 (12) Intangible assets (13) Property and equipment (14) Other assets (15) Liabilities to banks (16) Liabilities to customers (17) Certificated liabilities (18) Trading liabilities (19) Provisions (20) Subordinated equity (21) Treasury shares Other Notes (22) Property financing Portfolio breakdown by country (23) Property financing Portfolio breakdown by type of loan (24) New property financing (25) Number of employees (26) Regulatory indicators Executive Bodies Our Offices Financial Calendar/ Imprint Aareal Bank Group Locations

6 LETTER TO SHAREHOLDERS LETTER TO SHAR 6 LETTER TO SHAREHOLDERS Dear shareholders, business associates and Aareal Bank staff The current financial year is characterised by the continued implementation of our six-point programme, which we triggered within the framework of the bank s realignment. We are pleased to report that all milestones envisaged for the first half of 2006 were achieved. We will report in detail on four segments of the six-point programme below: 1. Continued new business growth Providing the basis for further sustained improvements in profitability, new business generated retained its importance as a key driver of value during the second quarter of New commitments during the first half of the year totalled 4.3 billion, up approx. 50 % on the previous year. On a pro-rata basis, we are ahead of our budgeted new business volume for 2006 as a whole. The figures as at the end of June demonstrate that we are continuing on the path of further growth in our core business. One of the focal points for the current financial year is the continuous and systematic broadening of our customer base. As part of our initiatives to reach this objective, we have embarked upon a targeted expansion into the Nordic region, going beyond political borders: to further expand our strong market position, we have united and further strengthened our sales activities in Scandinavia and the Baltic states. Our presence in Stockholm, the key financial centre within Scandinavia, has taken on the role of our Nordic hub. Our Stockholm office has thus assumed central responsibility for our business in Denmark, Finland, Norway, Sweden and in the Baltic states. Parallel to boosting our international sales activities, we have also expanded our position in our German core market. It is worth noting that, as at the end of the second quarter, we have almost reached our target level of new German business, i.e. 1 billion, for the current year. We will continue to focus our sales activities on Germany s key economic centres. We believe that the fluctuations in margins experienced over recent months in the property markets covered by us (resulting from sharp competition) have come to a standstill on a low level. We were thus able to slightly exceed our target average margin with the new business generated so far this year. 2. Reducing the non-performing loan (NPL) portfolio At 30 June 2006, total non-performing loans (NPLs) amounted to approx. 1.8 billion. We successfully sold three NPL portfolios through true-sale transactions with an aggregate volume in excess of 1.4 billion (including interest and fees) a total reduction of approx. 37 % within one year. We envisage being able to reduce the bank s NPL exposure to approx. 1 billion until publication of the annual report 2006.

7 EHOLDERS 7 The Annual General Meeting held on 23 May 2006 approved the spin-off and transfer of a portfolio comprising predominantly non-performing loans to Aartemis Credit Management GmbH, a wholly-owned subsidiary of Aareal Bank. The purpose of the proposed spin-off is to transfer a portfolio of non-performing loans, which are also no longer in line with the bank s strategy, to Aartemis Credit Management, by way of partial universal succession. This spin-off is planned in preparation for the intended disposal of the transferred portfolio, to one or more investors who are active in the German NPL market. The objective of spinning off and subsequently marketing this loan portfolio, is to release the capital tied up by these loans to date, thus making it available for investment in new business. 3. Leveraging our mid-sized corporate structure Profitability in our Institutional Housing Business which we consider an integral part of the Aareal Bank Group was not satisfactory over recent years. For this reason, we had already initiated a realignment process in the second half of 2005, with the purpose of coordinating the individual units Aareon AG, Aareal First Financial Solutions AG and the bank s Institutional Housing Business more closely, and to explore further growth opportunities in individual areas. The overall objective of this process is the strengthening of Aareal Bank s leading market position. In the meantime, the conceptional redesign has been completed for the two subsidiaries and the bank s Institutional Housing Business. Accordingly, implementation has started and is showing initial signs of success. Aareon optimised both its market presence specifically, its strategy vis-à-vis customers and products and its internal processes. At the same time, the company returned to a stronger focus on its core franchise. In this context, the strategic partnership entered into on 9 June 2006 with Techem, an energy services provider, clearly shows the way: within the framework of this cooperation, the Aareon Energy Management unit was exchanged against Techem IT Services GmbH. The transaction is subject to merger control clearance. The acquisition of Techem IT Services has allowed Aareon to expand its product portfolio in a targeted manner, and to further strengthen its core expertise as a consultancy and systems house. At the same time, it has won another strategic partner for its concept of integrating the settlement of charges. Project development measures to enhance the deposit-taking and payments businesses conducted by Aareal First Financial Solutions AG and the bank s Institutional Housing Business were expedited further, accompanied by increased sales efforts. This has boosted income from deposit-taking and commissions, which was above budget during the first half of 2006.

8 LETTER TO SHAR 8 Generally, income is to be boosted significantly, through increasing deposits and higher payment fees in the banking business, combined with higher commissions generated in IT services. At the same time, significant cost cuts are envisaged, through a strict focus on the bank s core business combined with further efficiency-enhancing measures. Specifically, these will include close to 200 job cuts in the Institutional Housing Business by The overall target for the Institutional Housing Business is to generate a significant contribution to the Group s pre-tax result by This evidences the strategic importance of the Institutional Housing Business for the Group, as it diversifies the bank's income mix. 4. Revision of the organisational structure Last year we conducted an overhaul of Aareal Bank AG s organisational structure. Related staff developments throughout the Group have been on schedule during the first half of Staff numbers at the parent company are set to be reduced by a total of 253 by We streamlined our German property finance business during the second quarter of 2006, as planned, with a stronger focus on sales. Our offices in Wiesbaden, Berlin, Hamburg and Munich are actively generating new business. Group profitability Aareal Bank Group recorded net income after taxes and minority interest of 51 million for the first six months of This is equivalent to a net return on equity of 9.9 %, and earnings per share of 1.19 for the first half-year. The overall result comprises the following components: Net interest income was up slightly during the second quarter, compared with the two previous quarters, to 102 million (Q1 2006: 98 million; Q4 2005: 97 million). The aggregate figure for the first six months of the current year was 200 billion, down 29 million from the same period last year. The reduction was largely attributable to the reduction in the bank s significant non-strategic German exposure, particularly in NPLs. Net loan loss provisions of 44 million for the first six months are in line with the 80 to 90 million range projected for the year 2006 as a whole. Net commission income of 80 million exceeded the previous year s figure by 2 million, in spite of the disposal of two subsidiaries in the Consulting /Services segment with a resulting loss of 10 million in commission income.

9 EHOLDERS 9 The result from hedging relationships ( 2 million; H1 2005: 1 million), net trading income ( 1 million; H1 2005: -7 million), and the result from nontrading assets ( 24 million; H1 2005: 21 million) were largely attributable to hedging inefficiencies, positive market values of stand-alone derivatives, and realised price gains on available-for-sale securities. All three items developed favourably. Administrative expenses were down by 7.6 % against the same period of the previous year, to 183 million. This was due among other things to the sale of former subsidiaries, Aareal Hypotheken Vermittlungs GmbH and Aareal Hypotheken-Management GmbH, which reduced expenditure by 10 million. Despite higher costs incurred as a result of the realingnment, however, this overall reduction also evidences initial successes from efficiency gains and cost-cutting measures. Net other operating income and expenses was negative, at 3 million. Taking the aggregate of all income items, less 18 million in taxes payable and 10 million in minority interest income, net income attributable to the shareholders of Aareal Bank AG was 51 million, compared with 45 million for the first half of Segment reporting Structured Property Financing This business segment brings together all the property lending activities of Aareal Bank. Segment result The segment result after taxes and minority interest income of 45 million equates to a net return on equity after taxes of 12.6 %. As a result of the disposal of nontarget business, net interest income dropped to 177 million, whilst net loan loss provisions of 44 million were below the 60 million figure for the same period of the previous year. Net commission income almost doubled to 11 million; administrative expenses were down 7.8 %, to 95 million. Business development New commitments and market developments With an aggregate volume of 4.3 billion generated during the first half of 2006, new business in our Structured Property Financing segment was around 50 % higher than for the first half of 2005, and also clearly ahead of the pro-rata projections for the current financial year as a whole.

10 LETTER TO SHAR 10 New business was very satisfactory in all of the various markets we cover. New commitments in Germany were close to 1 billion, whilst new international business totalled 3.3 billion during the first six months up by 36.8 % on the previous year. With our increased coverage of the German market, we benefit in particular from the rising attractiveness of the German property sector. The realignment and stronger focus of our distribution structure also contributed to our performance. We have established a presence in most European countries, including the accession countries of Poland, the Czech Republic, Slovakia, Hungary, Latvia, Estonia and Lithuania. In Turkey we leverage many years of experience. We continue to generate the lion s share of our new business within Europe, which accounted for 4.0 billion of the 4.3 billion overall figure for the first half of Property markets in Central and Eastern Europe continue to maintain their strong growth momentum as is reflected in over 0.5 billion in new business generated in Poland, the Czech Republic, Slovakia, and Russia. To further enhance the efficiency of our franchise in this region, we are currently in the process of realigning our sales structure, in line with the changes made in our Scandinavian business. At over 1.1 billion, new business generated in the Nordic region was particularly strong during the first six months of This reflected the solid economic performance of this region, but also vindicated the realignment of our distribution into Scandinavia and the Baltic region at an early stage. We were able to maintain our strong position in the Italian property market, despite competition from local and foreign banks. During the first half of 2006, we increased new business in this market which is both very attractive and important for us by one-third compared to the first half of 2005, to approx. 0.7 billion. Consulting /Services Our Consulting / Services segment offers a comprehensive range of services for managing residential property portfolios and processing payment flows for the institutional housing sector, together with other services. Segment result The segment result after taxes and minority interest income improved to 3 million, having turned around the 4 million loss recorded for the first half of Although the disposal of the Aareal Hypotheken-Management and Aareal Hypotheken Vermittlung subsidiaries diminished net commission income by 10 million, administrative expenditure was also reduced considerably. Besides income from our Institutional Hou-

11 EHOLDERS 11 sing Business, a figure of 3 million in dividends distributed by Immobilien Scout GmbH was also recognised within this segment. Business development Aareal Bank Group s Institutional Housing Business comprises the bank s business department plus the subsidiaries Aareon AG and Aareal First Financial Solutions AG. Aareon AG is Europe s leading international consultancy and IT systems house for the property sector. Aareon offers a range of key IT solutions that cover all administrative aspects of residential and commercial property particularly the development, maintenance and distribution of software for managing rental portfolios and commercial properties as well as related consulting, support, and other services. As the market leader for these activities in Germany, Aareon also operates successfully in a number of select European markets. Its software solutions are employed by around 2,000 clients (comprising almost 50,000 users) to manage some eight million residential and commercial properties throughout Europe. Aareal First Financial Solutions AG develops and maintains the account management software which Aareal Bank leverages to boost its business with the housing industry. The bank s Institutional Housing Business distributes this system, which makes Aareal Bank Group the market leader for providing payment services to property companies. Integrated into customers IT environment to a significant degree, the product range goes beyond payments, to cover deposit-taking and financing, as well as handling rental deposits and managing operating costs. Realignment of the Institutional Housing Business The future business plan for these three units was completed during the first half of 2006, and initial realignment measures have already been implemented. I) Aareon Aareon has achieved a sustained improvement of its strategic position and its future performance, through two key steps: by optimising its market focus and enhancing its efficiency. 1. Optimising market focus As a first step, Aareon responded to a changing market environment by restructuring its product portfolio, based on a multi-product strategy. Aareon now offers a product range that is differentiated by customer requirements: Blue Eagle as the premium solution for transparent business management, designed for customer groups with complex IT requirements;

12 LETTER TO SHAR 12 GES (offering a new term extension option) and WohnData, incorporating established processing standards for the housing industry; and a compact and less complex yet fully-integrated solution for mediumsized businesses. The new product strategy is being supported by the former mentioned cooperation with Techem. The extension of the product offer through wodis alone will increase Aareon s customer base by around 350 entities using the software to manage approx. 1.1 million residential units. The cooperation also envisages the joint development and marketing of additional products and services. 2. Enhancing efficiency During a second stage of the change process initiated, Aareon will reduce staff numbers by 150 over the next two years. It is important to note that customer focus and service quality will not be affected by these cuts. The intention is to handle internal process flows more efficiently, in order to reduce general administrative expenditure and production costs. The product portfolio will be streamlined to focus on successful and profitable products. II) Aareal First Financial Solutions and Aareal Bank s Institutional Housing Business developing and distributing payment systems Aareal First Financial Solutions and the bank s Institutional Housing Business are also expediting the realignment. For instance, Aareal First Financial Solutions envisages cost savings of around 10 % by the end of the year, through a stronger focus on its core systems alongside a customer-oriented review of services to be rendered without compromising quality. The Institutional Housing Business has further increased its sales activities, having redefined its interface to the back office. Accompanied by a 30 % reduction of the existing nominal staff capacity (involving 30 job cuts) by 2008, the unit plans to boost deposit volumes and double commission income. Property Asset Management Our Property Asset Management segment is the specialist segment within Aareal Bank Group which initiates, places and manages property funds (closed-end and openended) on behalf of institutional investors. Its funds are diversified across various countries and sectors.

13 EHOLDERS 13 Segment result In addition to current fund management fees charged and purchasing / selling fees, the segment result also includes approx. 8 million in commissions earned through advisory services. 2 million in administrative expenses were recognised in relation to these services. Overall, the result after taxes and minority interest income improved from the 1 million loss for the first half of the previous year, to a 3 million profit. Business development The funds we manage made distributions in excess of 6 % p. a., as planned, thus further bolstering the confidence of institutional investors in our asset management activities. The first half of 2006 was characterised by investing the funds raised during 2005: we acquired properties worth an aggregate 270 million in four countries on behalf of the funds managed during the first six months. This is impressive evidence of our ability to invest the funds acquired. The realignment of Aareal Bank s asset management activities, which had been initiated in 2005, formed the basis for this clear improvement in acquisition performance. As at 30 June 2006, Aareal Asset Management managed property holdings throughout Europe, worth approx. 1.9 billion, on behalf of institutional investors. A fund volume of approx. 3.0 billion is envisaged after completion of the investment phase. The Aareal Europe Fund No. 1 has successfully sold two Spanish shopping centres. The fund, which is in its holding /disposal phase, offers investors above-average returns generated from a well-diversified portfolio. The Aareal Italy Fund has concluded its investment phase. At present, the fund management is looking to optimise the portfolio by way of specific disposals and adjustments. The fund is developing in line with projections, generating attractive returns. The 800 million Aareal German Residential Fund, which focuses on residential property portfolios in Germany, was fully placed with international institutional investors. The due diligence process has commenced for initial portfolios, with a portfolio comprising approx. 1,400 residential units having been acquired in July. The fund plans to invest as much as 200 million by the end of this year. The acquisition phase for the Aareal Nordic Fund, a special property fund launched by Aareal Immobilien Kapitalanlagegesellschaft mbh, advanced another step, with the fund s largest property investment to date acquired during the second quarter of 2006: the Kamppi Center in Helsinki. The fund anticipates an aggregate investment volume of 250 million in properties throughout Scandinavia. The 600 million Aareal Euro Logistics Fund, which focuses on logistics properties

14 LETTER TO SHAR 14 in prime locations, acquired further properties in the Netherlands and in Germany during the period under review. The fund has grown into Europe s leading investor in logistics properties. Thanks to continued investor interest, we are currently preparing to increase the volume of the Aareal Euro Logistics Fund. Financial situation Total assets Consolidated total assets as at 30 June 2006 amounted to 37.4 billion, down from 39.2 billion as at 31 December Development of the property lending portfolio At the half-year point, the total volume of Aareal Bank s property finance under management amounted to 23.6 billion, down from 24.7 billion at year-end The 4.3 % decline was due in particular to the reduction of German business not in line with our strategy, for example, by way of the aforementioned NPL transactions. Accordingly, the German portfolio declined by 1.2 billion, to 10.5 billion during the period under review, whilst the international portfolio grew by 1.0 % during the first six months. German financings account for a 44 % share of our overall portfolio. The commercial property finance portfolio totalled 16.2 billion as at 30 June 2006, of which 12.3 billion was attributable to international business up by 5.0 % during the first six months. The German commercial property finance portfolio declined by 0.1 billion to 3.8 billion, in line with our plans. Accordingly, international commercial property financings (extended in more than 25 countries) now account for a 76 % share of the overall commercial property finance portfolio. This reflects Aareal Bank s international diversification strategy. Loans to the housing industry amounted to 7.5 billion at the half-year point, down from 9.0 billion at 31 December Here is a 1.5 billion reduction reflected, particularly in non-strategic German business. Portfolio management and exit strategies We use syndicated loans and synthetic securitisation to actively and continuously manage the bank s property financing portfolio; in future, we will also use true sale securitisations in this context. Non-performing loans (NPL) We are committed to reduce Aareal Bank Group s overall NPL portfolio to around 1 billion until publication of the annual report 2006.

15 EHOLDERS 15 Following the successful placement and transfer of a third NPL portfolio with an aggregate volume of 345 million during the first quarter of 2006, the Annual General Meeting held on 23 May 2006 approved the spin-off and transfer of a portfolio comprising predominantly non-performing loans to Aartemis Credit Management GmbH, a wholly-owned subsidiary of Aareal Bank. The purpose of the spin-off is to transfer a portfolio of non-performing loans, which are also no longer in line with the bank s strategy, to Aartemis Credit Management, by way of partial universal succession. The objective of spinning off this loan portfolio, in preparation for the subsequent marketing thereof, is to release the capital tied up by these loans to date, thus making it available for investment in new business. Refinancing and Shareholders Equity Issuance Aareal Bank successfully expanded its scope for refinancing on the capital markets, having expanded its investor base both nationally and internationally. Aareal Bank raised more than 2.5 billion in long-term funds during the first half of 2006 (including Aareal Bank s debut 1 billion Jumbo Pfandbrief). The majority of private placements (more than 1.3 million) were issued in the form of registered securities such as promissory note loans and registered mortgage bonds. Additionally, bearer bonds exceeding 200 million were placed on the capital markets. In view of rising short-term and long-term capital market yields since the beginning of the year, structured interest rate products were particularly popular, accounting for more than 600 million of private placements. In the context of these transactions, the bank succeeded to further reduce its funding costs. More than half of new issues placed during the first half of 2006 were Pfandbriefe. Thanks to the successful Jumbo Pfandbrief issue, Aareal Bank clearly increasing the international diversification of its investor base: more than 55 % of allocated orders were attributable to international investors from 13 countries. Equity capital and regulatory indicators On 30 June 2006, Aareal Bank Group s liable capital in accordance with section 10a of the German Banking Act totalled 2,363 million, of which core capital accounted for 1,369 million. The capital ratios according to the German Banking Act (Grundsatz I) stood at 8.2 % (31 December 2005: 8.4 %) for the core capital ratio and at 14.0 % (14.5 %) for the total capital ratio. Aareal Bank Group s riskweighted assets according to the German

16 LETTER TO SHAR 16 Banking Act amounted to 16,932 million. This figure includes 250 million in assets exposed to market risk. When measured according to BIS rules, the core capital ratio as at 30 June 2006 was 7.1 % (31 December 2005: 7.2 %) and the total capital ratio 12.2 % (12.6 %), based on core (tier 1) capital of 1,295 million, and risk-weighted assets of 18,553 million (in-cluding 250 million in assets exposed to market risk). Outlook After the strategic realignment in 2005, our focus in the current financial year is now on the operative implementation. We will concentrate on the continuous and systematic expansion of our client base, both in Germany and abroad, and on exploring new international markets. We will leverage the strengthened distribution network, through our offices in Wiesbaden, Berlin, Hamburg and Munich to generate new business in Germany. We plan to continue reducing the NPL portfolio, to approx. 1 billion thanks to the extended scope for action, following the resolution passed by the Annual General Meeting, we are now in a better position to achieve this objective during the current year. Given our projection of risk provisioning at a normalised level of between 80 and 90 million p. a., we anticipate profit before taxes to range between 130 and 150 million. Achieving these targets will restore Aareal Bank s ability to distribute dividends. Yours sincerely, The Management Board Dr. Wolf Schumacher Norbert Kickum Hermann J. Merkens Thomas Ortmanns Christof M. Schörnig

17 EHOLDERS 17

18 CONSOLIDATED INCOME STATEMENT INCOME ST 18 CONSOLIDATED INCOME STATEMENT OF AAREAL BANK GROUP Note 01 Jan - 30 Jun Jan - 30 Jun 2005 Interest income Interest expenses Net interest income Provision for loan losses Net interest income after net loan loss provisions Commission income Commission expenses Net commission income Net result on hedge accounting 2 1 Net trading income / expenses Results from non-trading assets Results from companies accounted for at equity 3-2 Results from investment properties -1 4 Administrative expenses Net other operating income / expenses Amortisation of goodwill 0 0 Operating profit Income taxes Consolidated net income / loss Allocation of results Consolidated net income / loss attributable to minority interests Consolidated net income / loss attributable to shareholders of Aareal Bank AG Earnings per share Diluted earnings per share 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.

19 ATEMENT 19 CONSOLIDATED INCOME STATEMENT (QUARTERLY DEVELOPMENT) 01 Apr- 30 Jun Jan - 31 Mar Oct - 31 Dec Jul - 30 Sep Apr- 30 Jun 2005 mn Interest income Interest expenses Net interest income Provision for loan losses Net interest income after net loan loss provisions Commission income Commission expenses Net commission income Net result on hedge accounting Net trading income / expenses Results from non-trading assets Results from companies accounted for at equity Results from investment properties Administrative expenses Net other operating income / expenses Amortisation of goodwill Operating profit Income taxes Consolidated net income / loss Allocation of results mn Consolidated net income / loss attributable to minority interests Consolidated net income / loss attributable to shareholders of Aareal Bank AG

20 SEGMENT REPORTING SEGMENT 20 SEGMENT REPORTING BY OPERATING UNIT Structured Property Financing Consulting / Services Property Asset Management Consolidation / Reconciliation / Other Aareal Bank Group mn 30 Jun 30 Jun Jun 30 Jun Jun 30 Jun Jun 30 Jun Jun 30 Jun Net interest income Provision for loan losses Net interest income after net loan loss provisions Net commission income Net result on hedge accounting Net trading income / expenses Results from non-trading assets Results from companies accounted for at equity Results from investment properties Administrative expenses Net other operating income / expenses Amortisation of goodwill Operating profit Income taxes Consolidated net income / loss Allocation of results Consolidated net income / loss attributable to minority interests Consolidated net income / loss attributable to shareholders of Aareal Bank AG Allocated equity , Cost / income ratio (%) RoE after taxes (%)

21 REPORTING 21 SEGMENT REPORTING (QUARTERLY DEVELOPMENT) BY OPERATING UNIT Structured Property Financing Consulting / Services Property Asset Management Consolidation / Reconciliation / Other Aareal Bank Group mn Quarter 2 Quarter Quarter 2 Quarter Quarter 2 Quarter Quarter 2 Quarter Quarter 2 Quarter Net interest income Provision for loan losses Net interest income after net loan loss provisions Net commission income Net result on hedge accounting Net trading income / expenses Results from non-trading assets Results from companies accounted for at equity Results from investment properties Administrative expenses Net other operating income / expenses Amortisation of goodwill Operating profit Income taxes Consolidated net income / loss Allocation of results Consolidated net income / loss attributable to minority interests Consolidated net income / loss attributable to shareholders of Aareal Bank AG Allocated equity , Cost / income ratio (%) RoE after taxes (%)

22 CONSOLIDATED BALANCE SHEET BALANCE SH 22 CONSOLIDATED BALANCE SHEET OF AAREAL BANK GROUP Note 30 Jun Dec 2005 Assets Cash funds 2,028 1,494 Loans and advances to banks 8 1,791 1,581 Loans and advances to customers 9 23,352 25,148 Provision for loan losses ,140 Positive market value of derivative hedging instruments 755 1,131 Trading assets Non-current assets and disposal groups held for sale Non-trading assets 11 8,572 9,115 Interests in companies accounted for at equity Investment properties Intangible assets Property and equipment Income tax assets Deferred tax assets Other assets Total 37,441 39,186 Shareholders equity and liabilities Liabilities to banks 15 4,107 7,855 Liabilities to customers 16 21,445 18,899 Certificated liabilities 17 7,398 7,549 Negative market value of derivative hedging instruments 925 1,183 Trading liabilities Obligations from disposal groups held for sale 4 19 Provisions Income tax liabilities Deferred tax liabilities Other liabilities Subordinated equity 20 1,423 1,560 Shareholders equity 21 Subscribed capital Capital reserves Retained earnings Reserves from transactions under common control Revaluation surplus Minority interest Group retained income 51 0 Total shareholders equity 1,289 1,241 Total 37,441 39,186

23 EET CONSOLIDATED STATEMENTS 23 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY 01 Jan - 30 Jun Jan - 30 Jun 2006 Consolidated shareholders equity as at 01 January 1,241 1,169 Net change in retained earnings Net change in reserves from transactions under common control 23-2 Net change in revaluation surplus Measurement of available-for-sale financial instruments Measurement of derivatives used for cash flow hedges 3 5 Currency translation adjustments -1 1 Net change in minority interest 1 0 Consolidated net income / loss attributable to shareholders of Aareal Bank AG Consolidated shareholders equity as at 30 June 1,289 1,238 CONSOLIDATED STATEMENT OF CASH FLOWS 01 Jan - 30 Jun Jan - 30 Jun 2006 Cash and cash equivalents as at 01 January 1,494 1,107 Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Total cash flow Effect of changes in exchange rates 0 0 Cash and cash equivalents as at 30 June 2,028 1,727

24 BASIS OF ACCOUNTING BASIS OF ACCO 24 BASIS OF ACCOUNTING Legal framework and reporting entity structure 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 Accounting Standards Board (GASB) for interim reports. All subsidiaries of Aareal Bank AG have been consolidated. Joint ventures are consolidated proportionally, whilst associates were accounted for at equity in the present interim financial statements. Aareal Bank AG has sold its shareholding in Aareal Hypotheken-Management GmbH, Mannheim, with effect from 20 January In addition, Aareal Bank AG s shareholding in Aareal Immobilien Management AG, Wiesbaden, was sold with effect from 30 June As a consequence of said disposals, the following subsidiaries of sold entities are no longer consolidated: Moreover, numerous legal mergers took place within Aareal Bank Group during the first half of This included the merger of Aareal Hyp AG into Aareal Bank AG. There were no other material changes to Aareal Bank Group s reporting entity structure during the first six months of the financial year 2006, compared to the reporting entity structure as at 31 December Changes in the scope of consolidation had no material consequences for the presentation of the financial position and performance of the Group. Accounting policies The accounting policies applied in the preparation of the Consolidated Financial Statements 2005 were also applied for this interim report, including the calculation of comparative figures. Aareal Immobilien Anlagen GmbH Aareal Immobilien Beteiligungs GmbH Aareal Immobilien Fonds GmbH Aareal HM Service GmbH Aareal HM Processing GmbH

25 UNTING NOTES 25 NOTES TO THE CONSOLIDATED INCOME STATEMENT (1) Net interest income 01 Jan-30 Jun Jan-30 Jun 2005 Interest income from financing business and money market transactions Interest income from fixed-income securities and debt register claims Other interest income 6 8 Total interest income Total interest expenses of which: interest expenses for hybrid capital Total (2) Provision for loan losses 01 Jan-30 Jun Jan-30 Jun 2005 Additions Amounts released Balance of direct write-offs and recoveries on loans previously written-off Total Risk provisioning is determined as a proportion of the amounts projected for the year as a whole.

26 NOTES 26 (3) Net commission income 01 Jan-30 Jun Jan-30 Jun 2005 Net commission income from banking transactions Net commission income from non-banking transactions Total Net commission income from banking transactions includes current expenses incurred for securitisation transactions entered into by Aareal Bank Group. (4) Net trading income 01 Jan-30 Jun Jan-30 Jun 2005 Measurement of derivative financial instruments 0-6 Currency translation 0-1 Net income / expenses from other positions held for trading 1 0 Total 1-7 (5) Results from non-trading assets 01 Jan-30 Jun Jan-30 Jun 2005 Results from securities sales Results from the measurement of securities 0 0 Results from the disposal of participating interests 5-1 Results from the measurement of participating interests 0-1 Total 24 21

27 27 (6) Administrative expenses 01 Jan-30 Jun Jan-30 Jun 2005 Staff expenses of which: for pensions 8 6 Other general administrative expenses Depreciation and amortisation of property and equipment and intangible assets Total (7) Net other operating income/expenses 01 Jan-30 Jun Jan-30 Jun 2005 Income from the sale of properties 4 0 Income from the release of provisions 3 9 Rental income 8 8 Income from goods and services 1 1 Other Total other operating income Expenses for foreclosed assets and other properties 19 3 Expenses for services used 0 0 Write-downs of trade receivables 2 2 Expenses for other taxes 1 1 Other Total other operating expenses Total -3 10

28 NOTES 28 NOTES TO THE CONSOLIDATED BALANCE SHEET (8) Loans and advances to banks 30 Jun Dec 2005 Term deposits and current account balances Promissory note loans Other loans and advances Total 1,791 1,581 (9) Loans and advances to customers 30 Jun Dec 2005 Property loans 21,255 22,025 Promissory note loans 1,296 1,437 Loans to the public sector Other loans and advances 520 1,441 Total 23,352 25,148 (10) Trading assets 30 Jun Dec 2005 Debt and other fixed-income securities Positive market value of derivative financial instruments Other assets held for trading 1 1 Total

29 29 (11) Non-trading assets 30 Jun Dec 2005 Debt and other fixed-income securities 8,149 8,758 Equities and other non-fixed-income securities Interests in affiliated companies Other participations 9 12 Total 8,572 9,115 (12) Intangible assets 30 Jun Dec 2005 Goodwill Proprietary software Other intangible assets 9 9 Total (13) Property and equipment 30 Jun Dec 2005 Land and buildings Office furniture and equipment Total 91 93

30 NOTES 30 (14) Other assets 30 Jun Dec 2005 Properties Trade receivables Other Total (15) Liabilities to banks 30 Jun Dec 2005 Payable on demand Term deposits 1,191 1,466 Promissory note loans borrowed 1,695 2,009 Liabilities from securities repurchase agreements 439 3,112 Registered mortgage bonds Other Total 4,107 7,855 (16) Liabilities to customers 30 Jun Dec 2005 Current account balances 5,371 4,635 Term deposits 5,592 4,199 Promissory note loans borrowed 6,775 6,271 Registered mortgage bonds 3,451 3,544 Other Total 21,445 18,899

31 31 (17) Certificated liabilities 30 Jun Dec 2005 Medium-term notes 2,436 3,200 Bearer mortgage bonds 1, Other debt securities 3,393 3,860 Total 7,398 7,549 (18) Trading liabilities 30 Jun Dec 2005 Negative market values of derivative financial instruments Other liabilities held for trading Total (19) Provisions 30 Jun Dec 2005 Provisions for pensions and similar obligations Other provisions Total

32 NOTES 32 (20) Subordinated equity 30 Jun Dec 2005 Subordinated liabilities Profit-participation certificates Contributions by silent partners Total 1,423 1,560 (21) Treasury shares No treasury shares were held during the period under review.

33 33 OTHER NOTES (22) Property financing Portfolio breakdown by country 1) 30 Jun Dec 2005 Germany 8,094 8,992 Italy 2,739 2,423 Sweden 1,917 1,793 France 1,304 1,263 Denmark Spain United Kingdom 768 1,240 Poland Netherlands Belgium Switzerland USA Other 1,558 1,147 Total 21,255 22,025 (23) Property financing Portfolio breakdown by type of loan 1) 30 Jun Dec 2005 Commercial property financing 15,695 15,195 of which: international 12,331 11,747 Property financing for commercial housing 5,560 6,830 of which: international 830 1,286 Total 21,255 22,025 1) including securitised receivables

34 NOTES 34 (24) New property financing 01 Jan-30 Jun Jan-30 Jun 2005 Commercial property financing 3,350 2,148 of which: international 3,005 1,959 Property financing for commercial housing of which: international Total 4,295 2,899 (25) Number of employees 01 Jan-30 Jun Jan-31 Dec 2005 Number of employees in the banking business 1,194 1,247 Number of employees in other businesses 1,596 2,000 Total 2,790 3,247 of which: part-time employees The number of employees is calculated as the average of staff numbers as at the quarterly dates within the period under review. (26) Regulatory indicators 30 Jun Dec 2005 % % 1) The ratios were calculated in accordance with the definitions by the Basel Committee. No agreement regarding the determination of the ratios has been met with the German Federal Financial Supervisory Authority (BaFin). German Banking Act KWG Core capital ratio Total capital ratio BIS rules 1) Core capital ratio Own funds ratio

35 EXECUTIVE BODIES 35 EXECUTIVE BODIES Supervisory Board Hans W. Reich 1) 2) 3), Kronberg Chairman of the Supervisory Board Spokesman of the Management Board of KfW York-Detlef Bülow 1) 2) 4), Katzenelnbogen Deputy Chairman of the Supervisory Board Aareal Bank AG Erwin Flieger 1) 3), Geretsried Deputy Chairman of the Supervisory Board Chairman of the Management Boards of Bayerische Beamten Lebensversicherung a.g., of BBV Holding AG and of Bayerische Beamten Versicherung AG Christian Graf von Bassewitz 2) 3), Düsseldorf Manfred Behrens, Munich Managing Director of Schweizerische Lebensversicherungs- und Rentenanstalt (Swiss Life), German branch office Tamara Birke 3) 4), Wiesbaden Aareal Bank AG Thomas Hawel 4), Saulheim Aareon Deutschland GmbH Prof. Dr. Stephan Schüller 1) 2), Hamburg Spokesman of the General Partners of Bankhaus Lampe KG (since 01 March 2006) Wolf R. Thiel 1), Marxzell-Schielberg President and Chairman of the Management Board of Versorgungsanstalt des Bundes und der Länder Helmut Wagner 4), Hahnheim Aareon Deutschland GmbH Management Board Dr. Wolf Schumacher Chairman Norbert Kickum Member of the Management Board Hermann Josef Merkens Member of the Management Board Thomas Ortmanns Member of the Management Board Christof M. Schörnig Member of the Management Board Joachim Neupel 2) 3), Meerbusch Member of the Management Board of IKB Dr. Claus Nolting 3), Munich Lawyer and Business Consultant 1) 2) 3) 4) Member of the Executive Committee Member of the Accounts and Audit Committee Member of the Credit and Market Risk Committee Employee representative

36 OUR OFFICES OUR OFFI 36 OUR OFFICES Wiesbaden Head Office Aareal Bank AG Paulinenstrasse Wiesbaden, Germany Phone: Fax: Structured Property Financing Amsterdam Kantoorgebouw Byzantium Stadhouderskade 14-E 1054 ES Amsterdam, The Netherlands Phone: Fax: Berlin Kurfürstendamm Berlin, Germany Phone: Fax: Brussels 7, rue Guimard 1040 Brussels, Belgium Phone: Fax: Copenhagen Frederiksgade Copenhagen, Denmark Phone: Fax: Hamburg Pelzerstrasse Hamburg, Germany Phone: Fax: Istanbul Ebulula Mardin Caddesi Maya Meridyen Iş Merkezi D:2 Blok Kat Akatlar-Istanbul, Turkey Phone: Fax: London 38 Lombard Street London EC3V 9BS, United Kingdom Phone: Fax: Madrid Paseo de la Castellana, 60-4D Madrid, Spain Phone: Fax: Milan Via Paolo Andreani, Milan, Italy Phone: Fax: Munich Richard-Strauss-Strasse Munich, Germany Phone: Fax: New York Aareal Financial Services USA, Inc. 410 Park Avenue Suite 910 New York, NY USA Phone: Fax: Paris Aareal Bank France S.A. 5, rue Scribe Paris, France Phone: Fax: Prague Aareal Financial Service spol. s r.o. FORUM Building Václavské námestí Prague 1, Czech Republic Phone: Fax: Rhine-Main-Ruhr Paulinenstrasse Wiesbaden, Germany Phone: Fax: Rome Via Mercadante, 12/ Rome, Italy Phone: Fax: Singapore Aareal Financial Services (Singapore) Pte. Ltd. 7 Temasek Boulevard, # 22-02A Suntec Tower One Singapore Phone: Fax: Stockholm Hamngatan Stockholm, Sweden Phone: Fax: Warsaw Aareal Financial Service Polska Sp. z o.o. Warsaw Financial Center ul. Emilii Plater Warsaw, Poland Phone: Fax: