Aareal Bank 9M 2025 presentation: 15% profit growth amid strategic portfolio shift

Introduction & Market Context

Aareal Bank AG presented its financial results for the first nine months of 2025 on November 13, revealing a 15% increase in adjusted operating profit despite challenges in the interest rate environment. The German property lender demonstrated resilience through its strategic focus on premium assets and selective growth approach, particularly in reducing its exposure to the challenging US office market.

The bank's presentation, delivered by CEO Dr. Christian Ricken and CFO Andy Halford, highlighted Aareal's ability to navigate economic headwinds through disciplined cost management and conservative risk policies. While net interest income declined as expected due to lower interest rates, the bank successfully offset this through significant reductions in loan impairment charges and administrative expenses.

Quarterly Performance Highlights

Aareal Bank reported an adjusted operating profit of €306 million for the first nine months of 2025, representing a 15% increase from the €266 million recorded in the same period of 2024. This improvement came despite a 13% year-on-year decrease in net interest income to €691 million, reflecting the impact of a lower interest rate environment.

As shown in the following comprehensive financial performance breakdown, the bank's profitability was supported by a significant 34% reduction in loan impairment charges and an 8% decrease in administrative expenses:

The bank's adjusted return on equity improved to 8.0% from 7.6% in the comparable period of 2024, demonstrating enhanced capital efficiency. Net profit increased by 7% to €173 million, despite higher interest expenses on AT1 bonds.

The decline in net interest income was primarily attributed to the lower interest rate environment, with the European Short-Term Rate (ESTR) averaging 2.3% in the first nine months of 2025 compared to 3.8% in the same period of 2024. This 1.5 percentage point decrease, combined with proactive strengthening of subordinated funding and foreign exchange effects, contributed to the reduced interest income:

Strategic Initiatives & Portfolio Management

Aareal Bank continued to implement its strategic focus on premium assets and selective growth. The bank generated €8.5 billion in new business during the first nine months of 2025, with a strong focus on Europe West (46%) and North America (22%). By property type, hotel financings accounted for 38% of new business, followed by office (19%) and retail (18%).

The following chart illustrates the bank's new business generation by quarter, region, and property type:

The bank's real estate financing portfolio remained stable at €32.9 billion as of September 2025, compared to €33.5 billion at the end of 2024. The portfolio remains highly diversified by region and property type, with Europe West accounting for 41% of the portfolio and hotel properties representing 35%.

As shown in the portfolio breakdown below, Aareal Bank maintains a strong focus on major global metropolitan areas with limited exposure to Germany (9%) and no exposure to Russia, China, or the Middle East:

A notable strategic initiative is the bank's growing focus on green financing, with green loan volume increasing to €9.5 billion from €7.6 billion at the end of 2024. The bank reported that 41% of its commercial real estate financing portfolio is now classified as green property financings.

Risk Management & Asset Quality

Aareal Bank maintained its conservative risk profile with an average loan-to-value (LTV) ratio of 56% across its performing portfolio. The yield-on-debt (YoD) improved slightly to 9.8% as of September 2025, compared to 9.6% at the end of 2024.

The following chart illustrates the development of the bank's LTV and YoD metrics:

The bank actively reduced its non-performing loans through proactive management, particularly in the US office segment. Non-performing loans decreased to €1,247 million, with US office properties accounting for the majority of this exposure:

Dr. Ricken emphasized during the earnings call that while the bank remains committed to the US market, it has become "significantly more selective as far as new business is concerned." This strategic shift reflects the ongoing challenges in the US office market, which continues to face structural pressures.

Funding & Capital Position

Aareal Bank reported a very robust liquidity and capital position. The bank's liability structure remains well-diversified, with Pfandbriefe (covered bonds) accounting for 67% of its €40.3 billion funding base. The bank successfully executed its full-year funding plan, issuing €2.6 billion in Pfandbriefe, €0.4 billion in senior unsecured bonds, and €2.1 billion in AT1 capital during the first nine months of 2025.

The following chart provides a detailed breakdown of the bank's funding activities:

The bank's treasury portfolio increased to €9.6 billion as of September 2025, providing a comfortable liquidity buffer. The portfolio primarily consists of highly-rated securities, with 55% rated AAA and 34% rated AA:

Aareal Bank further strengthened its capital position, with the CET1 ratio improving to 15.5% as of September 2025, compared to 15.2% at the end of 2024. The Tier 1 ratio increased to 17.6% from 16.8%, reflecting the bank's focus on maintaining strong capital buffers:

Forward-Looking Statements

Aareal Bank confirmed its outlook for 2025, targeting an operating profit of €375-425 million and a return on equity of 7-8%. The bank expects its real estate financing portfolio to grow to €34-35 billion by the end of 2025, with new business projected at €9-10 billion.

As illustrated in the following outlook summary, the bank maintains a positive but measured view on its near-term performance:

Looking further ahead, Aareal Bank outlined its "AMBITION" program, targeting a return on equity of at least 13% by 2027. This strategic initiative focuses on accelerating the expansion of capital-light business, growing the commercial real estate loan book to approximately €37 billion on-balance and €9 billion off-balance, and maintaining a cost-income ratio below 30%.

The bank aims to achieve these targets while preserving its conservative risk appetite, with a targeted NPE ratio below 3% and a CET1 ratio of at least 13.5%:

Aareal Bank's Q3 2025 performance demonstrates its ability to execute on its strategic priorities while navigating a challenging market environment. The bank's focus on premium assets, cost efficiency, and strong capital position provides a solid foundation for sustainable growth, even as it adapts to structural changes in key markets like US office properties.

Full presentation:

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