INTERIM REPORT AAREAL BANK GROUP AS AT 30 SEPTEMBER 2006 Sept 1 JANUARY TO 30 SEPTEMBER 2006
SHAREHOLDER STRUCTURE KEY GROUP 2 SHAREHOLDER STRUCTURE Aareal Holding Verwaltungsgesellschaft mbh Free float Aareal Holding Verwaltungsgesellschaft mbh 62.77 % 37.23 % 8.94 % Bayerische Beamten- Lebensversicherung a.g. 8.94 % Schweizerische Lebensversicherungsund Rentenanstalt 6.68 % Versorgungsanstalt des Bundes und der Länder 6.06 % Bankhaus Lampe KG 5.25 % Deutscher Ring Gruppe 1.36 % Condor Lebensversicherungs-AG
KEY GROUP FIGURES FIGURES 3 KEY GROUP FIGURES 01 Jan- 30 Sep 2006 01 Jan- 30 Sep 2005 Change Consolidated Income Statement mn Operating profit 122-117 239 Group net income after minority interest income 73-75 148 Indicators Cost / income ratio (%) 64.7 74.2 Earnings per share ( ) 1.71-1.93 RoE after taxes (%) 1) 9.4-10.8 30 Sep 2006 31 Dec 2005 Change Change Portfolio Data mn % Property financing 19,968 22,025-2,057-9 of which: international 13,249 13,033 216 2 Property financing under management 22,228 24,698-2,470-10 of which: international 13,249 13,033 216 2 Shareholder s equity 1,330 1,241 89 7 Total assets 38,029 39,186-1,161-3 Regulatory indicators % % Core capital ratio (German Banking Act %) 8.0 8.4 Total capital ratio (German Banking Act %) 13.4 14.5 30 Sep 2006 31 Dec 2005 Rating Fitch Ratings, London Long-term 2) BBB+ BBB+ Short-term F2 F2 1) on an annualised basis, 2) since 07 November 2006: A-
CONTENTS CONTENT 4 CONTENTS Shareholder Structure.................................................... 2 Key Group Figures Overview............................................ 3 Contents.............................................................. 4 Letter to Shareholders.................................................... 6 Consolidated Income Statement of Aareal Bank Group....................... 18 Consolidated Income Statement (Quarterly Development)..................... 19 Segment Reporting by operating unit...................................... 20 Segment Reporting (Quarterly Development) by operating unit................ 21 Consolidated Balance Sheet of Aareal Bank Group........................... 22 Consolidated Statement of Changes in Shareholders Equity.................. 23 Consolidated Statement of Cash Flows..................................... 23 Basis of Accounting..................................................... 24 Notes to the Consolidated Income Statement............................... 25 (1) Net interest income................................................ 25 (2) Provision for loan losses........................................... 25 (3) Net commission income............................................ 26 (4) Net trading income................................................ 26 (5) Results from non-trading assets...................................... 26 (6) Administrative expenses............................................ 27 (7) Net other operating income /expenses................................. 27 Notes to the Consolidated Balance Sheet.................................. 28 (8) Loans and advances to banks....................................... 28 (9) Loans and advances to customers.................................... 28 (10) Trading assets.................................................... 28 (11) Non-trading assets................................................ 29
S 5 (12) Intangible assets.................................................. 29 (13) Property and equipment............................................ 29 (14) Other assets..................................................... 30 (15) Liabilities to banks................................................ 30 (16) Liabilities to customers............................................. 30 (17) Certificated liabilities............................................... 31 (18) Trading liabilities.................................................. 31 (19) Provisions....................................................... 31 (20) Subordinated equity............................................... 32 (21) Treasury shares................................................... 32 Other Notes............................................................ 33 (22) Property financing Portfolio breakdown by country..................... 33 (23) Property financing Portfolio breakdown by type of loan................. 33 (24) New property financing............................................. 34 (25) Number of employees.............................................. 34 (26) Regulatory indicators.............................................. 34 Executive Bodies........................................................ 35 Our Offices............................................................ 36 Financial Calendar/ Imprint............................................... 38 Aareal Bank Group Locations............................................. 39
LETTER TO SHAREHOLDERS LETTER TO SHAR 6 LETTER TO SHAREHOLDERS Dear shareholders, business associates and Aareal Bank staff Aareal Bank Group has already, during the first nine months of the 2006 financial year, successfully implemented the objectives of its strategic realignment as set out for the respective period in 2005 in a six-point programme. This interim report demonstrates our achievements in response to all six points, creating a solid basis from which to consolidate our long-term competitiveness. New international business New business Germany 1. Continued new business growth New business generated during the first nine months of the current year grew to 7.3 billion, up 2.4 billion or 47.5 %, on the same period in 2005 (see chart). This means that we have already reached our 2006 target of 7 billion with another three months of the year to go. 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 New business volume ( mn) +47.5 % 2005 (9m) 2006 (9m) In terms of new business in Germany, we have actually exceeded the target of between 800 million and 1 billion: at 1.4 billion, volume was up by 0.7 billion or 92.8 %. We were also able to continue to record significant growth in international property financing business: compared against the previous year, new business was up 39.7 %, from 4.2 billion to 5.9 billion. We have raised our target for the year as a whole to exceed 8 billion. 2. Reduction of the non-performing loan (NPL) portfolio Aareal Bank sold its fourth and to date largest portfolio of non-performing loans (NPLs) with an aggregate volume of approx. 1.4 billion, including interest and fees to Shinsei Bank Ltd on 21 September 2006. We have thus already achieved our target to reduce the NPLs to 1 billion by the end of 2006 in fact, exceeding it. As a result of the disposal, our NPL portfolio now accounts for approx. 3 % of our total property financing portfolio. 3. Leveraging the bank s mid-sized corporate structure A review of Aareal Bank Group s participating interests was initiated in the 2005 financial year, to assess how they fit the bank s strategy. The purpose of this exercise
EHOLDERS 7 was to make Aareal Bank Group a less complex entity, and to enhance profitability. We made good progress in this respect during the first nine months: a current example during the third quarter was the sale of BauGrund Stadtentwicklung GmbH to HSH N Real Estate AG in October, with retrospective effect from 01 January 2006. BauGrund Stadtentwicklung was an interest of our subsidiary Deutsche Bau- und Grundstücks AG (BauGrund). Another example is to be found in our Institutional Housing Business, which has further increased the focus on its core business, and is now being realigned on the basis of clearly formulated quantitative and qualitative targets. The target contribution by our institutional housing units between 40 million and 50 million before taxes by the 2008 financial year was substantiated further, with some milestones reached in 2006 already. 4. Revision of the organisational structure We have developed a new distribution concept for the German market over recent months: in particular, the appointment of key staff to strategically important positions significantly enhanced efficiency. Where appropriate, we have aggregated our sales resources across borders, thus extending the surface area covered by the network whilst at the same time simplifying its overall structure. Additionally, the reporting structures within the distribution network are no longer as complex. In the case of Northern Europe, Aareal Bank already established a Nordic Hub managed by the Stockholm office during the first half of 2006. Based on the same principle, we have now also begun to set up a hub for Central and Eastern Europe (CEE Hub), to be managed from the Warsaw Branch. In appointing a Head of Asia, we have additionally created an Asia / Pacific Hub in Singapore to bring together responsibility for our distribution activities in the Asian region. A Head of North America has also been in post since the third quarter and is responsible, together with this team at the North America Hub based in New York, for sales in North and Central America. 5. Emphasising a modern corporate culture As part of our initiative to implement a modern corporate culture, we devised and implemented a target agreement and assessment system, together with a new compensation scheme for all of our employees, over the past few months. As a leading international property financer we are interested, even just for reasons of
LETTER TO SHAR 8 competition, in enabling our employees to participate in innovative training measures. With this in mind, we took the opportunity during the third quarter to extend our cooperation with the European Business School (ebs) and, in the capacity of premium partner, support the newly founded Real Estate Management Institute (REMI), which focuses on finance, investment and banking themes in the property area. Our employees will be able to attend training at this establishment in future to supplement their practical experiences, with the aim of extending their international property know-how. Thus, our cooperation with the ebs is becoming an integral component of our HR development programme, further enhancing the attractiveness of a specialist career with Aareal Bank. 6. Transparency in managing our business We have established an internal communications concept during the first nine months of this year: this is designed to enhance the transparency of and hence, identification with business decisions. More than 300 meetings and intensive discussions with investors and analysts during the course of this year show that the milestones of our strategic realignment have been convincing in the external communication as well and are being appreciated. Group profitability Consolidated net profit for the first nine months, after taxes and minority interest income, of 73 million equates to a net return on equity after taxes of 9.4 %, and earnings per share of 1. 71. As reported at the time, the income statement of the same period in 2005 was burdened by the results of the extensive review of our credit portfolios and participating interests. The overall result comprises the following components: Net interest income was 97 million during the third quarter, and thus almost at the same level as in the previous quarters ( 102 million and 98 million, respectively), reaching an aggregate 297 million for the first nine months. The 25 million decline compared to the same period in 2005 was due predominantly to the reduction of our significant German exposure in non-strategic areas, in particular regarding NPLs. Net loan loss provisions of 66 million for the first nine months are in line with the 80 to 90 million range projected for the year 2006 as a whole. Net commission income of 118 million for the first nine months almost matched
EHOLDERS 9 the previous year s figure of 119 million, in spite of the disposal of two subsidiaries in the Consulting / Services segment with a resulting loss of 15 million in commission income. The result from hedging relationships and net trading income (at 6 million each) were attributable mainly to hedging inefficiencies, and to changes in the market value of stand-alone derivatives. Nine-month results from non-trading assets totalled 40 million; in addition to realised price gains, this item also included a 11 million in gains realised upon an exchange transaction concluded with Techem. At 276 million, administrative expenses were down 7.1% on the previous year s figure, reflecting the strategic realignment of the Aareal Bank Group. The 93 million figure for the third quarter includes 6 million of provisions for realigning Aareon AG. Net other operating income and expenses was negative, at 6 million, yielding an operating profit of 122 million. Taking the aggregate of all income items, less 35 million in taxes payable and 14 million in minority interest income, net income attributable to the shareholders of Aareal Bank AG was 73 million. Segment Reporting Structured Property Financing This business segment brings together all of the property lending activities of Aareal Bank. Segment result At 83 million, net interest income in the Structured Property Financing segment almost reached the level of the previous year s quarter ( 85 million). The aggregate for the first nine months was 260 million. As discussed above, the 35 million decline compared to the same period in 2005 was due predominantly to the reduction of our non-strategic German exposures. Net commission income for the first three quarters more than doubled, from 11 million to 23 million. Thanks to successful cost-cutting measures, we managed to reduce administrative expenses by 8.5 % compared to the same period in 2005, to 140 million. Business development New commitments and market developments During the first nine months of the current financial year, we grew new business by 47.5 % compared to the same period in 2005 to 7.3 billion.
LETTER TO SHAR 10 The way in which our activities in Germany have developed is particularly gratifying. Over the past twelve months we have completely restructured our sales system. By appointing a new Head of Sales for the German market, coupled with new appointments in our Berlin and Hamburg branches, we have been able to raise efficiency significantly, with a corresponding effect on the sales indicators. Our new business in Germany has almost doubled to approximately 1.4 billion. This means that we have achieved just under 20 % of all of our new business in the largest national economy in Europe. The highest volume of new business in absolute terms, however, was achieved in Scandinavia, at over 1.4 billion. The Nordic countries therefore remain an exceedingly attractive region to Aareal Bank. On the basis of the very successful business in Finland, which has been acquired for more than two years now out of the Stockholm office, a new representative office is due to be opened in Helsinki in a few months time. On the basis of what remains our particularly strong competitive position in Italy, this was another country in which we were able to achieve a high volume of new business, recording a good 1.1 billion. Meanwhile, the Central and Eastern European (CEE) countries also made an important contribution to our new business, accounting for just under 900 million. New business volume by region 01 Jan - 30 Sep 2006 Benelux 6 % UK 8 % North America 10 % CEE 12 % Other 10 % Italiy 16 % Scandinavia 19 % Germany 19 % In this region, we benefit particularly from the combined industry expertise of our specialist teams for logistics properties, hotels and shopping centres, and the regional expertise of our Prague and Warsaw offices. One of our major successes of late involved the financing of an office property in Warsaw which has gained a reputation as a landmark building throughout Eastern Europe. This deal underlines our strategy of focusing on attractive economic locations and firstrate properties when looking to grow new business. Our status as a mid-sized company makes us a powerful, flexible operator. We can therefore avoid dependencies on individual markets, looking instead to generating business with attractive margins and appropriate risk. We are consistently and systematically building and expanding our business in the
EHOLDERS 11 Asia / Pacific region, having appointed a new Head of Asia / Pacific. Our Singapore office will form a new regional hub, and will be converted into a merchant bank. Preparations for the opening of a representative office in Shanghai are progressing according to plan. We plan to establish our property finance business in Japan in cooperation with a local partner. Market entry strategies for other countries in the region are currently in preparation. 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. Segment result The segment result for the third quarter (and hence, for the first nine months), was influenced by the realignment of our Institutional Housing Business. Net commission income for the first three quarters was 120 million. The previous year s figure of 131 million still included 15 million in net commission income from two subsidiaries, Aareal Hypotheken Vermittlungs- GmbH and Aareal Hypotheken-Management GmbH, which were sold in the meantime. Results from non-trading assets include 11 million of gains realised upon the exchange transaction concluded with Techem. Administrative expenses of 127 million (9m 2005: 139 million) include restructuring charges for realigning Aareon AG. The segment result after taxes and minority interest income improved to 9 million, compared to a 7 million loss recorded for the same period of 2005. Business development Our institutional housing business segment comprises two sub-segments: IT services (Aareon AG); and payments and deposit-taking (Aareal First Financial Solutions AG and Institutional Housing Business at Aareal Bank AG). IT services Aareon AG, a wholly-owned subsidiary of Aareal Bank AG, is recognised as the leading consultancy and IT systems house for the property sector, with a market share of approximately 60%. Aareon has succeeded to reposition itself this year, with a differentiated product strategy: its range of products and services is now better suited to match sub-markets and customer requirements. The product mix comprises our premium product Blue Eagle, as a comprehensive, SAP-based IT solution for large clients;
LETTER TO SHAR 12 GES and WohnData, two well-established solutions for our existing customer base; and Wodis as a compact and less complex yet fully-integrated solution. Aareon acquired Wodis during the second quarter of 2006, under an exchange transaction with Techem, a provider of energy services. Aareon transferred its Aareon Energy Management unit within the scope of the exchange, which allowed Aareon to strengthen its core expertise as a consultancy and IT systems house for the property sector. In parallel to external strategic measures designed to improve market penetration, Aareon s internal processes are being optimized on an ongoing basis. The focus is on cost savings, through reducing complexity and by way of job cuts. Payments and deposit-taking Together with its subsidiary Aareal First Financial Solutions, the bank offers its commercial housing sector clients a highlyautomated mass payments system, which is integrated into our clients administrative processes. Having successfully concentrated upon our core systems, alongside the maintenance and development of our products, we also embarked on initiatives to better distribute these payments solutions. Our aim is to enhance the profit contributions made by this business line in the future. Initial successes are already visible, as we could acquire new residential units under management, and deposits are rising. 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. Segment result Overall, the result after taxes and minority interest income improved from the 1 million loss for the first nine months of the previous year, to a 3 million profit. In addition to current fund management fees charged and purchasing /selling fees, net commission income of 14 million (up 6 million) also includes approx. 8 million in commissions earned through advisory services. 2 million in administrative expenses was recognised in relation to these services. Business development During the quarter under review we successfully completed the restructuring of this business. All activities from the design and issuing of property funds for institutional investors through to their management were pooled in the form of Aareal Asset Manage-
EHOLDERS 13 ment GmbH. To improve efficiency, structures and process flows were brought into line with the changed circumstances and optimized. Special property funds governed by German investment law are to be issued via Aareal Immobilien Kapitalanlagegesellschaft mbh, a wholly owned subsidiary of Aareal Asset Management GmbH. The Aareal Europe Fund No. 1 continues to develop very positively. This fund has invested some 500 million in shopping centres and offices, primarily in the conurbations of South-West Europe, and is entirely placed with institutional investors. The Aareal Italy Fund has invested approximately 355 million (as at 30 September 2006) in office premises, logistics centres and shopping centres. Initial properties were already successfully disposed of during the fourth quarter. The fund has been fully placed and continues to develop positively. The high level of demand for the Aareal Euro Logistics Fund has prompted plans to increase the investment volume from its existing level in the region of 600 million to some 1 billion. This fund invests across Europe in logistics properties in prime locations. During the quarter under review further properties were acquired, project developments launched and negotiations on additional properties begun. The fund has been fully placed with institutional investors and is developing as projected. The Aareal German Residential Fund acquired its first residential portfolio comprising some 1,400 units during the third quarter. Negotiations are currently in progress with regard to further portfolios and are due to be concluded in the coming quarter. The fund has invested 800 million in German residential property and is placed exclusively with international institutional investors. Deutsche Bau- und Grundstücks- AG ( BauGrund ), a wholly owned subsidiary of Aareal Bank AG, was commissioned with the task of property management. Thanks to its many years of experience and far-reaching contacts, BauGrund has excellent market access to German residential property portfolios. Aareal Immobilien Kapitalanlagegesellschaft mbh continued as planned with the restructuring of the special property fund launched by it for a well-known German insurance group. The process of selling sub-portfolios and making adjustments was begun during the period under review. The Aareal Nordic Fund, a special property fund, also initiated by Aareal Immobilien Kapitalanlagegesellschaft mbh, has invested some 250 million in Scandinavia. The portfolio comprises office properties and shopping centres in conurbations. The fund has been placed almost exclusively with institutional investors and is developing as projected.
LETTER TO SHAR 14 Aareal Asset Management manages property portfolios across Europe with a volume of some 2.1 billion. Plans are currently being made for the launch of two additional funds. The aim is to grow assets under management to 3.5 billion by 2008. In contrast to the German portfolio, the international portfolio was increased slightly by 1.7 % to 13.2 billion, thereby creating a more diversified portfolio overall. Property finance under management by region (30 Sep 2006) Financial situation Total assets Consolidated total assets as at 30 September 2006 amounted to 38.0 billion, down from 39.2 billion as at 31 December 2005. North America 5% CEE 6 % France 6 % UK 4 % Benelux 6 % Spain 3 % Italy 12 % Other 4 % Germany 40 % Scandinavia 14 % Portfolio development Property finance During the period under review, the property financing portfolio under management fell by 10.0 % to 22.2 billion. This fall is a reflection of two contrasting factors described as follows. We are continuing to eliminate the part of our German portfolio that does not fit into our overall strategy, doing so in a targeted way. As can be seen from our volume of new business in Germany, however, we are in no way ignoring this market in our target area. Overall, compared with the 2005 year-end, we have cut our German portfolio by 23.0 % to 9.0 billion. Portfolio management and exit strategies We use syndicated loans and securitisation to actively and continuously manage the bank s property financing portfolio. During the quarter under review, we were able to report the successful sale of a portfolio primarily comprising NPLs with an aggregate residual carrying amount of some 1.0 billion. This means that we have brought our NPL portfolio to a current level of less than 0.7 billion and already outperformed our target for the year-end. Following this transaction, NPLs now only account for a mere 3 % of the total property
EHOLDERS 15 financing portfolio. This is a level that we believe to be normalised and satisfactory, albeit with potential for further improvement. 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 3.25 billion in long-term funds during the first nine months of 2006 (including Aareal Bank s debut 1 billion Jumbo Pfandbrief). The majority of private placements (more than 1.95 billion) was issued in the form of registered securities, including promissory note loans and registered mortgage bonds. Additionally, bearer bonds (largely mediumterm notes MTNs) in the order of approximately 300 million were placed on the capital markets. More than half of new issues placed during the first nine months of 2006 were Pfandbriefe, allowing us to further reduce our refinancing costs. The increasing degree of internationalisation in Aareal Bank Group s capital market activities is obvious: more than 55 % of allocated orders for the successful debut Jumbo Pfandbrief issue were attributable to international investors from 13 countries. We also target new investor groups through Pfandbrief issues denominated in the currencies of our cover assets pool, which is diversified internationally. Aareal Bank issued Pfandbriefe denominated in US dollars and Danish kronas within the scope of private placements during the third quarter. Following an extensive roadshow in Scandinavia, we successfully placed a debut Aareal Bank Pfandbrief in Swedish kronas. Equity capital and regulatory indicators On 30 September 2006, Aareal Bank Group s liable capital in accordance with section 10a of the German Banking Act totalled 2,368 million, of which core capital accounted for 1,393 million. The capital ratios according to the German Banking Act (Grundsatz I) stood at 8.0 % (31 December 2005: 8.4 %) for the core capital ratio and at 13.4 % (14.5 %) for the total capital ratio. Aareal Bank Group s riskweighted assets according to the German Banking Act amounted to 17,621 million. This figure includes 200 million in assets exposed to market risk. When measured according to Bank for International Settlements (BIS) rules, the core capital ratio as at the end of September of the current financial year was 7.0 % (31 December 2005: 7.2 %) and the total capital ratio 11.8 % (12.6 %), based on core (tier 1) capital of 1,319 million, and
LETTER TO SHAR 16 risk-weighted assets of 19,076 million (including 200 million in assets exposed to market risk). Outlook Based on the good performance during the first nine months, we raise our target for 2006 profit before taxes to exceed 150 million, which is equivalent to a minimum net return on equity of 8 %. Achieving these targets will also restore Aareal Bank AG s ability to distribute dividends. We will conclude implementing the key objectives of our six-point programme by the end of the financial year 2006. In parallel to resolving the final pending issues within the scope of the realignment, we will closely focus on further growing our credit portfolio, and thus envisage to boost the aggregate new business generated to clearly above 8 billion. We will substantiate our decision to incorporate our Institutional Housing Business as a key element of our company strategy with further implementation measures, particularly in our acquisition activities. Accordingly, the economic success expected in this business in 2007 will provide evidence of the value of the commercial housing sector to our business model. Yours sincerely, The Management Board Dr. Wolf Schumacher Norbert Kickum Hermann J. Merkens Thomas Ortmanns Christof M. Schörnig
EHOLDERS 17
CONSOLIDATED INCOME STATEMENT INCOME ST 18 CONSOLIDATED INCOME STATEMENT OF AAREAL BANK GROUP Note 01 Jan- 30 Sep 2006 01 Jan- 30 Sep 2005 Interest income 1,186 1,208 Interest expenses 889 886 Net interest income 1 297 322 Provision for loan losses 2 66 249 Net interest income after net loan loss provisions 231 73 Commission income 183 177 Commission expenses 65 58 Net commission income 3 118 119 Net result on hedge accounting 6 2 Net trading income / expenses 4 6-14 Results from non-trading assets 5 40 26 Results from companies accounted for at equity 4-2 Results from investment properties -1-11 Administrative expenses 6 276 297 Net other operating income / expenses 7-6 -13 Amortisation of goodwill 0 0 Operating profit 122-117 Income taxes 35-57 Consolidated net income / loss 87-60 Allocation of results Consolidated net income / loss attributable to minority interests 14 15 Consolidated net income / loss attributable to shareholders of Aareal Bank AG 73-75 Earnings per share 1.71-1.93 Diluted earnings per share 1.71-1.93 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.
ATEMENT 19 CONSOLIDATED INCOME STATEMENT (QUARTERLY DEVELOPMENT) 01 Jul - 30 Sep 2006 01 Apr- 30 Jun 2006 01 Jan - 31 Mar 2006 01 Oct - 31 Dec 2005 01 Jul - 30 Sep 2005 mn Interest income 403 399 384 379 399 Interest expenses 306 297 286 282 306 Net interest income 97 102 98 97 93 Provision for loan losses 22 22 22 24 189 Net interest income after net loan loss provisions 75 80 76 73-96 Commission income 58 67 58 73 57 Commission expenses 20 23 22 23 16 Net commission income 38 44 36 50 41 Net result on hedge accounting 4 3-1 0 1 Net trading income / expenses 5-4 5-11 -7 Results from non-trading assets 16 13 11 20 5 Results from companies accounted for at equity 1 0 3-8 0 Results from investment properties 0-1 0 3-15 Administrative expenses 93 94 89 105 99 Net other operating income / expenses -3-1 -2 7-23 Amortisation of goodwill 0 0 0 0 0 Operating profit 43 40 39 29-193 Income taxes 17 9 9 5-78 Consolidated net income / loss 26 31 30 24-115 Allocation of results mn Consolidated net income / loss attributable to minority interests 4 5 5 4 5 Consolidated net income / loss attributable to shareholders of Aareal Bank AG 22 26 25 20-120
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 Sep 30 Sep 2006 2005 30 Sep 30 Sep 2006 2005 30 Sep 30 Sep 2006 2005 30 Sep 30 Sep 2006 2005 30 Sep 30 Sep 2006 2005 Net interest income 260 295 0 1 2-1 35 27 297 322 Provision for loan losses 66 249 66 249 Net interest income after net loan loss provisions 194 46 0 1 2-1 35 27 231 73 Net commission income 23 11 120 131 14 8-39 -31 118 119 Net result on hedge accounting 6 2 6 2 Net trading income / expenses 5-13 1-1 6-14 Results from non-trading assets 23 26 16 1 40 26 Results from companies accounted for at equity 1 0 3-2 4-2 Results from investment properties -1-11 0-1 -11 Administrative expenses 140 153 127 139 14 12-5 -7 276 297 Net other operating income / expenses -11-11 4 2 2 5-1 -9-6 -13 Amortisation of goodwill 0 0 0 0 0 Operating profit 100-103 16-7 6-1 0-6 122-117 Income taxes 28-52 5-2 2-1 0-2 35-57 Consolidated net income / loss 72-51 11-5 4 0 0-4 87-60 Allocation of results Consolidated net income / loss attributable to minority interests 11 12 2 2 1 1 14 15 Consolidated net income / loss attributable to shareholders of Aareal Bank AG 61-63 9-7 3-1 0-4 73-75 Allocated equity 728 713 90 103 26 27 186 86 1,030 929 Cost / income ratio (%) 53.9 60.4 89.8 104.6 76.7 115.8 64.7 74.2 RoE after taxes (%) 11.1-11.9 13.2-8.5 16.7-4.4 9.4-10.8
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 3 Quarter 3 2006 2005 Quarter 3 Quarter 3 2006 2005 Quarter 3 Quarter 3 2006 2005 Quarter 3 Quarter 3 2006 2005 Quarter 3 Quarter 3 2006 2005 Net interest income 83 85 0 0 1-1 13 9 97 93 Provision for loan losses 22 189 22 189 Net interest income after net loan loss provisions 61-104 0 0 1-1 13 9 75-96 Net commission income 12 5 39 43 2 3-15 -10 38 41 Net result on hedge accounting 4 1 4 1 Net trading income / expenses 5-7 0 0 5-7 Results from non-trading assets 1 5 14 1 16 5 Results from companies accounted for at equity 1 0 0 1 0 Results from investment properties 0-15 0 0-15 Administrative expenses 45 50 46 48 4 4-2 -3 93 99 Net other operating income / expenses -9-25 5 1 1 3 0-2 -3-23 Amortisation of goodwill 0 0 0 0 0 Operating profit 30-190 12-4 1 1 0 0 43-193 Income taxes 12-77 5-1 0 0 0 0 17-78 Consolidated net income / loss 18-113 7-3 1 1 0 0 26-115 Allocation of results Consolidated net income / loss attributable to minority interests 2 4 1 0 1 1 4 5 Consolidated net income / loss attributable to shareholders of Aareal Bank AG 16-117 6-3 0 0 0 0 22-120 Allocated equity 728 713 90 103 26 27 186 86 1,030 929 Cost / income ratio (%) 58.7 101.3 81.7 107.1 87.7 101.2 66.4 103.3 RoE after taxes (%) 9.1-65.6 27.8-11.4 4.1 2.2 8.7-51.9
CONSOLIDATED BALANCE SHEET BALANCE SH 22 CONSOLIDATED BALANCE SHEET OF AAREAL BANK GROUP Note 30 Sep 2006 31 Dec 2005 Assets Cash funds 2,335 1,494 Loans and advances to banks 8 2,560 1,581 Loans and advances to customers 9 22,421 25,148 Provision for loan losses -340-1,140 Positive market value of derivative hedging instruments 914 1,131 Trading assets 10 662 616 Non-current assets and disposal groups held for sale 16 208 Non-trading assets 11 8,294 9,115 Interests in companies accounted for at equity 162 160 Investment properties 92 89 Intangible assets 12 70 70 Property and equipment 13 92 93 Income tax assets 22 11 Deferred tax assets 158 169 Other assets 14 571 441 Total 38,029 39,186 Shareholders equity and liabilities Liabilities to banks 15 4,806 7,855 Liabilities to customers 16 21,596 18,899 Certificated liabilities 17 7,062 7,549 Negative market value of derivative hedging instruments 914 1,183 Trading liabilities 18 144 207 Obligations from disposal groups held for sale 0 19 Provisions 19 260 274 Income tax liabilities 25 25 Deferred tax liabilities 77 74 Other liabilities 412 300 Subordinated equity 20 1,403 1,560 Shareholders equity 21 Subscribed capital 128 128 Capital reserves 511 511 Retained earnings 318 344 Reserves from transactions under common control -20-42 Revaluation surplus 75 56 Minority interest 245 244 Group retained income 73 0 Total shareholders equity 1,330 1,241 Total 38,029 39,186
EET CONSOLIDATED STATEMENTS 23 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY 01 Jan - 30 Sep 2006 01 Jan - 30 Sep 2005 Consolidated shareholders equity as at 01 January 1,241 1,169 Net change in retained earnings -26 2 Net change in reserves from transactions under common control 22-2 Net change in revaluation surplus Measurement of available-for-sale financial instruments 16 44 Measurement of derivatives used for cash flow hedges 3 14 Currency translation adjustments 0 0 Net change in minority interest 1 0 Consolidated net income / loss attributable to shareholders of Aareal Bank AG 73-75 Consolidated shareholders equity as at 30 September 1,330 1,152 CONSOLIDATED STATEMENT OF CASH FLOWS 01 Jan - 30 Sep 2006 01 Jan - 30 Sep 2005 Cash and cash equivalents as at 01 January 1,494 1,107 Cash flow from operating activities 176-472 Cash flow from investing activities 822 413 Cash flow from financing activities -157 112 Total cash flow 841 53 Effect of changes in exchange rates 0 0 Cash and cash equivalents as at 30 September 2,335 1,160
BASIS OF ACCOUNTING BASIS OF ACCO 24 BASIS OF ACCOUNTING Basis of accounting The present interim financial statements of Aareal Bank Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) applicable in the European Union, and also in accordance with additional provisions pursuant to section 315a (1) of the German Commercial Code (Handelsgesetzbuch HGB ). In particular, the 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. The accounting policies applied in the preparation of the consolidated financial statements 2005 were also applied for this interim report. Scope of consolidation 30 June 2006. As a consequence of said disposals, the following subsidiaries of sold entities are no longer consolidated: Aareal Immobilien Anlagen GmbH Aareal Immobilien Beteiligungs GmbH Aareal Immobilien Fonds GmbH Aareal HM Service GmbH Aareal HM Processing GmbH Moreover, numerous legal mergers took place within the Aareal Bank Group during the first nine months of 2006. 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, compared to the reporting entity structure as at 31 December 2005. Changes in the scope of consolidation had no material consequences for the presentation of the financial position and performance of the Group. 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 2006. In addition, Aareal Bank AG s shareholding in Aareal Immobilien Management AG, Wiesbaden, was sold with effect from
UNTING NOTES 25 NOTES TO THE CONSOLIDATED INCOME STATEMENT (1) Net interest income 01 Jan-30 Sep 2006 01 Jan-30 Sep 2005 Interest income from financing business and money market transactions 942 930 Interest income from fixed-income securities and debt register claims 237 254 Other interest income 7 24 Total interest income 1,186 1,208 Total interest expenses 889 886 of which: interest expenses for hybrid capital 59 60 Total 297 322 (2) Provision for loan losses 01 Jan-30 Sep 2006 01 Jan-30 Sep 2005 Additions 66 249 Amounts released Balance of direct write-offs and recoveries on loans previously written-off Total 66 249 Risk provisioning is determined as a proportion of the amounts projected for the year as a whole.
NOTES 26 (3) Net commission income 01 Jan-30 Sep 2006 01 Jan-30 Sep 2005 Net commission income from banking transactions 26 16 Net commission income from non-banking transactions 92 103 Total 118 119 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 Sep 2006 01 Jan-30 Sep 2005 Measurement of derivative financial instruments 3-11 Currency translation 1-3 Net income / expenses from other positions held for trading 2 0 Total 6-14 (5) Results from non-trading assets 01 Jan-30 Sep 2006 01 Jan-30 Sep 2005 Results from securities sales 21 28 Results from the measurement of securities 0 0 Results from the disposal of participating interests 20-1 Results from the measurement of participating interests -1-1 Total 40 26
27 (6) Administrative expenses 01 Jan-30 Sep 2006 01 Jan-30 Sep 2005 Staff expenses 171 179 of which: for pensions 11 10 Other general administrative expenses 89 99 Depreciation and amortisation of property and equipment and intangible assets 16 19 Total 276 297 (7) Net other operating income/expenses 01 Jan-30 Sep 2006 01 Jan-30 Sep 2005 Income from the sale of properties 37 0 Income from the release of provisions 5 7 Rental income 11 12 Income from goods and services 1 1 Other 8 48 Total other operating income 62 68 Expenses for foreclosed assets and other properties 28 56 Expenses for services used 1 1 Write-downs of trade receivables 2 2 Expenses for other taxes 2 2 Other 35 20 Total other operating expenses 68 81 Total -6-13
NOTES 28 NOTES TO THE CONSOLIDATED BALANCE SHEET (8) Loans and advances to banks 30 Sep 2006 31 Dec 2005 Term deposits and current account balances 1,251 826 Promissory note loans 356 422 Other loans and advances 953 333 Total 2,560 1,581 (9) Loans and advances to customers 30 Sep 2006 31 Dec 2005 Property loans 19,968 22,025 Promissory note loans 1,353 1,437 Loans to the public sector 205 245 Other loans and advances 895 1,441 Total 22,421 25,148 (10) Trading assets 30 Sep 2006 31 Dec 2005 Debt and other fixed-income securities 467 336 Positive market value of derivative financial instruments 193 279 Other assets held for trading 2 1 Total 662 616
29 (11) Non-trading assets 30 Sep 2006 31 Dec 2005 Debt and other fixed-income securities 7,857 8,758 Equities and other non-fixed-income securities 428 345 Interests in affiliated companies Other participations 9 12 Total 8,294 9,115 (12) Intangible assets 30 Sep 2006 31 Dec 2005 Goodwill 22 22 Proprietary software 39 39 Other intangible assets 9 9 Total 70 70 (13) Property and equipment 30 Sep 2006 31 Dec 2005 Land and buildings 74 74 Office furniture and equipment 18 19 Total 92 93
NOTES 30 (14) Other assets 30 Sep 2006 31 Dec 2005 Properties 136 180 Trade receivables 113 107 Other 322 154 Total 571 441 (15) Liabilties to banks 30 Sep 2006 31 Dec 2005 Payable on demand 497 653 Term deposits 829 1,466 Promissory note loans borrowed 1,802 2,009 Liabilities from securities repurchase agreements 974 3,112 Registered mortgage bonds 334 295 Other 370 320 Total 4,806 7,855 (16) Liabilities to customers 30 Sep 2006 31 Dec 2005 Current account balances 4,706 4,635 Term deposits 5,680 4,199 Promissory note loans borrowed 7,185 6,271 Registered mortgage bonds 3,727 3,544 Other 298 250 Total 21,596 18,899
31 (17) Certificated liabilities 30 Sep 2006 31 Dec 2005 Medium-term notes 2,438 3,200 Bearer mortgage bonds 1,635 489 Other debt securities 2,989 3,860 Total 7,062 7,549 (18) Trading liabilities 30 Sep 2006 31 Dec 2005 Negative market values of derivative financial instruments 144 207 Other liabilities held for trading Total 144 207 (19) Provisions 30 Sep 2006 31 Dec 2005 Provisions for pensions and similar obligations 101 96 Other provisions 159 178 Total 260 274
NOTES 32 (20) Subordinated equity 30 Sep 2006 31 Dec 2005 Subordinated liabilities 674 726 Profit-participation certificates 509 600 Contributions by silent partners 220 234 Total 1,403 1,560 (21) Treasury shares No treasury shares were held during the period under review.
33 OTHER NOTES (22) Property financing Portfolio breakdown by country 1) 30 Sep 2006 31 Dec 2005 Germany 6,719 8,992 Italy 2,707 2,423 Sweden 1,823 1,793 France 1,287 1,263 United Kingdom 932 1,240 Denmark 858 905 Netherlands 751 922 Spain 738 765 Poland 732 509 Belgium 628 716 USA 519 736 Other 2,274 1,761 Total 19,968 22,025 (23) Property financing Portfolio breakdown by type of loan 1) 30 Sep 2006 31 Dec 2005 Commercial property financing 15,187 15,195 of which: international 12,511 11,747 Property financing for commercial housing 4,781 6,830 of which: international 738 1,286 Total 19,968 22,025 1) including securitised receivables
NOTES 34 (24) New property financing 01 Jan-30 Sep 2006 01 Jan-30 Sep 2005 Commercial property financing 5,995 3,640 of which: international 5,398 3,363 Property financing for commercial housing 1,318 1,317 of which: international 501 860 Total 7,313 4,957 (25) Number of employees 01 Jan-30 Sep 2006 01 Jan-31 Dec 2005 Number of employees in the banking business 1,185 1,247 Number of employees in other businesses 1,553 2,000 Total 2,738 3,247 of which: part-time employees 395 375 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 Sep 2006 31 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 8,0 8,4 Total capital ratio 13,4 14,5 BIS rules 1) Core capital ratio 7,0 7,2 Own funds ratio 12,0 12,6
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 until 30 September 2006) 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 Dr. Claus Nolting 3), Munich Lawyer and Business Consultant (Member of the Supervisory Board until 21 August 2006) 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 Christian Graf von Bassewitz 2) 3), Düsseldorf Manfred Behrens, Munich Managing Director of Schweizerische Lebensversicherungs- und Rentenanstalt (Swiss Life), German branch office Management Board Dr. Wolf Schumacher Chairman Norbert Kickum Member of the Management Board Tamara Birke 3) 4), Wiesbaden Aareal Bank AG Hermann Josef Merkens 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) Employee representative Thomas Hawel 4), Saulheim Aareon Deutschland GmbH Joachim Neupel 2) 3), Meerbusch Member of the Management Board of IKB Thomas Ortmanns Member of the Management Board Christof M. Schörnig Member of the Management Board
OUR OFFICES OUR OFFI 36 OUR OFFICES 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-E 1054 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 Hamburg Pelzerstrasse 7 20095 Hamburg, Germany Phone: +49 40 33316546 Fax: +49 40 33316599 Istanbul Ebulula Mardin Caddesi Maya Meridyen Iş Merkezi D:2 Blok Kat. 11 34335 Akatlar-Istanbul, Turkey Phone: +90 212 3490200 Fax: +90 212 3490299 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 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 234656000 Fax: +420 234656011 Rhine-Main-Ruhr 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
CES 37 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 Aareal Valuation GmbH Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3482134 Fax: +49 611 3482640 Consulting / Services Aareal Bank AG Institutional Housing unit Paulinenstrasse 15 65189 Wiesbaden, Germany Phone: +49 611 3482967 Fax: +49 611 3482559 Institutional Housing Berlin Branch Kurfürstendamm 33 10719 Berlin, Germany Phone: +49 30 88099438 Fax: +49 30 88099470 Institutional Housing Essen Branch Huyssenallee 48 45128 Essen, Germany Phone: +49 201 81008561 Fax: +49 201 81008560 Institutional Housing Hamburg Branch Pelzerstrasse 7 20095 Hamburg, Germany Phone: +49 40 33316810 Fax: +49 40 33316399 Institutional Housing Leipzig Branch Neumarkt 2-4 04109 Leipzig, Germany Phone: +49 341 2272160 Fax: +49 341 2272101 Institutional Housing Munich Branch Richard-Strauss-Strasse 24 81677 Munich, Germany Phone: +49 89 5127272 Fax: +49 89 51271272 Institutional Housing Rhine-Main Branch Paulinenstrasse 15 65189 Wiesbaden, Germany Phone-Hotline: +49 611 3482000 Fax: +49 611 3483002 Institutional Housing Stuttgart Branch Kriegerstrasse 3 70191 Stuttgart, Germany Phone: +49 711 2236111 Fax: +49 711 2236160 Aareon AG Im Münchfeld 1-5 55122 Mainz, Germany Phone: +49 6131 3010 Fax: +49 6131 301419 Aareal First Financial Solutions AG Peter-Sander-Strasse 30 55252 Mainz-Kastel, Germany Phone: +49 6134 560201 Fax: +49 6134 560401 Deutsche Bau- und Grundstücks-Aktiengesellschaft Chlodwigplatz 1 53119 Bonn, Germany Phone: +49 228 5180 Fax: +49 228 518298 Property Asset Management Aareal Asset Management GmbH P. O. Box 2125 65011 Wiesbaden, Germany Phone: +49 611 3483214 Fax: +49 611 3482210 Aareal Immobilien Kapitalanlagegesellschaft mbh P. O. Box 2125 65011 Wiesbaden, Germany Phone: +49 611 3482856 Fax: +49 611 3483559 Deutsche Structured Finance GmbH Westendstrasse 24 60325 Frankfurt/Main, Germany Phone: +49 69 9714970 Fax: +49 69 97149715 Deposit-taking Dublin Dublin Exchange Facility Mayor Street IFSC Dublin 1, Ireland Phone: +353 1 6369220 Fax: +353 1 6702785