Earnings call transcript: Ariel Bank’s Q1 2025 profit climbs 15%

Ariel Bank reported a robust start to 2025, with its Q1 adjusted operating profit rising by 15% year-over-year to €107 million. Despite a challenging market environment, the bank managed to achieve stable returns and maintain a strong capital position. The stock price remained unchanged in the latest session, reflecting investor confidence in the bank’s strategic direction and financial stability.

Key Takeaways

• Q1 2025 adjusted operating profit increased by 15% to €107 million.
• Net interest income declined by 7% to €249 million.
• Loan impairment charges decreased by 36% to €55 million.
• The bank maintained a strong capital position with a CET1 ratio of 20.6%.

Company Performance

Ariel Bank’s first-quarter performance demonstrates its resilience in a challenging market. The bank reported a significant increase in adjusted operating profit, driven by a reduction in loan impairment charges and a stable return on equity of 8.2%. The bank’s diversified property portfolio and minimal exposure to the German domestic market have positioned it well against market volatility.

Financial Highlights

• Adjusted operating profit: €107 million (up 15% YoY)
• Net interest income: €249 million (down 7% YoY)
• Loan impairment charges: €55 million (down 36% YoY)
• Cost-income ratio: 35%
• Adjusted return on equity: 8.2%

Outlook & Guidance

For the remainder of 2025, Ariel Bank has set ambitious targets, including a credit portfolio goal of €34-35 billion and a new business target of €9-10 billion. The bank aims for an operating profit between €375 million and €425 million, with a post-tax return on equity of 7-8%. Management remains cautious of potential market volatility but optimistic about achieving these goals.

Executive Commentary

CEO Christian Ricken expressed satisfaction with the bank’s performance, stating, "We had a really good start into 2025. We are extremely pleased about the results." CFO Andy Helfort added, "The economics of the business bit by bit are clearly improving," highlighting the bank’s strategic focus on enhancing business fundamentals.

Risks and Challenges

• Market volatility: The bank anticipates potential fluctuations in market conditions, which could impact its financial performance.
• U.S. market exposure: While minimal, Ariel Bank continues to monitor the U.S. office market closely for any adverse developments.
• Conservative lending approach: The bank’s cautious stance on new office financings may limit growth opportunities in certain sectors.

Q&A

During the earnings call, analysts inquired about the potential quarter-to-quarter volatility in nonperforming loans (NPLs). The management acknowledged this possibility but emphasized the strong funding and liquidity ratios that provide a buffer against such fluctuations. Additionally, there were questions about the impact of recent U.S. market volatility, to which the bank reported no significant effects.

Overall, Ariel Bank’s Q1 2025 results reflect its ability to navigate a challenging environment while maintaining strong financial metrics and a strategic focus on growth areas such as hotel sector financing and green loans.

Full transcript - Aareal Bank AG (ARLN) Q1 2025:

Hilli, Chorus Call Operator, Chorus Call: Ladies and gentlemen, welcome to the Ariel Bank Q1 twenty twenty five Investor and Analyst Conference Call. I am Hilli, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast.

At this time, it’s my pleasure to hand over to Jurgen Juminger. Please go ahead.

Jurgen Juminger, Conference Call Host, Ariel Bank: Good morning, everybody. I’m pleased to welcome you to today’s conference call. Today’s agenda covers our results for the first quarter of twenty twenty five together with the outlook for the full year. I’m joined by our CEO, Doctor. Christian Ricken and our CFO, Andy Helfort.

They will take you through our presentation, which will be followed by a question and answer session. Now I’m pleased to hand over to Christian.

Christian Ricken, CEO, Ariel Bank: Christian, the floor is yours. Yes. Many thanks, Jurgen. Good morning to everyone, and thank you for attending today’s call. I’m very pleased to present our results for the first quarter of twenty twenty five and to confirm our outlook for the full year.

We’ve made a good start to 2025 with adjusted operating profit 15% up on the first quarter of twenty twenty four. Net interest income continues to be strong and loan impairment charges are significantly lower. In the structured property financing segment, we recorded new business of €2,300,000,000 substantially ahead of the same period last year and ended the quarter with a commercial real estate loan portfolio of €32,800,000,000 This is slightly down on the end of twenty twenty four, but mainly as a result of changes in foreign exchange rates. We reduced nonperforming loans by 5% to €1,300,000,000 in the first quarter of twenty twenty five. I should note here that the market remains challenging, and we are continuing to monitor nonperforming loans very closely.

Our capital funding and liquidity position are all strong. Our capital CET1 ratio on a Basel IV fully phased basis stands at 15.3% or 20.6% on a Basel IV phased in basis. We have comfortable liquidity and 75%, three quarters of twenty twenty five’s planned funding is already in place. Overall, we are well prepared to manage the volatile markets that we now find ourselves in and that may be with us for some time. I will now hand over to Andy who will provide further detail on twenty twenty first quarter figures.

Andy, over to you.

Andy Helfort, CFO, Ariel Bank: Thank you, Christian. Let’s turn to Slide five. So Erobank is off to a good start in 2025. And as Christian has just noted, overall adjusted operating profit of €107,000,000 for the first quarter is up by 15% over the same period last year. Whilst net interest income is down by 7% to €249,000,000 this is as expected.

I’ll say a bit more on net interest income when we turn to the next slide. Loan impairment charges are down by 36% to €55,000,000 This is a significant decrease when compared with twenty twenty four’s first quarter and reflects the work we have already done and continue to do in carefully managing the loan portfolio. Admin expenses excluding non recurring items are up by 7% to €88,000,000 This increase arose from prioritizing specific change projects in the quarter. The effective tax rate for the quarter was 27%. You will see that although our adjusted operating profit is up by 15%, adjusted return on equity is stable at 8.2%.

There are two reasons for this. Firstly, AT1 costs are up by €5,000,000 compared to the first quarter of twenty twenty four. This is explained by the timing of our new AT1, which overlapped with the existing AT1 bond, which it was replacing. Secondly, we took the opportunity to further strengthen our equity position, and I’ll say more on this later. Now let’s take a look at the key profit and loss account elements on Slide six.

Net interest income, as I said, was down 7% to €249,000,000 but compared to past years, this is still a strong quarterly number. The decrease was mainly driven by two things, lower interest rate environment and by the effects of proactively strengthening our Tier two and senior non preferred funding positions over the last twelve months. Turning to admin expenses, past Excluding £7,000,000 of one off charges, our admin expenses were slightly up. However, expenses are in line with our budgets and continue to be tightly controlled. As mentioned a moment ago, the increase is primarily due to prioritizing specific change projects in the quarter.

Our costincome ratio for the first quarter was 35%. Now let’s turn to risk provisioning on Slide seven and look in a little more detail. Including fair value P and L items, the overall loan impairment charge amounts to €55,000,000 and mainly, again, relates to U. S. Office.

It includes an addition of €9,000,000 to our management overlay. In aggregate, the management overlay now stands at €94,000,000 which compares with €85,000,000 at the end of twenty twenty four. I’d now like to hand back to Christian, who will talk about business developments in more detail.

Christian Ricken, CEO, Ariel Bank: Thank you, Andy. Let’s move on to Page nine. Following a strong pickup in new business in the fourth quarter of last year, we achieved €2,300,000,000 of new business in the first quarter of twenty twenty five. We continue to target new business of 9,000,000,000 to €10,000,000,000 for the full year and have made a very good start towards this total. However, I would like to emphasize that we will continue to be selective and maintain very strict conservative risk standards.

The average loan to value ratio for the first quarter of twenty twenty five’s newly acquired business was 56%, which provides a comfortable risk buffer. Margins were also good, averaging two eighty one basis points. These figures show that we are actively identifying attractive market opportunities. We are currently taking a more cautious approach to new office financings. And in the first quarter of twenty twenty five, we increased our activity in the hotel sector.

One example was the refinancing of a €567,000,000 portfolio of seven hotels in four different European countries in March. Therefore, looking at the geographical distribution of the quarter’s new business, almost 80% was in Europe, just 16% in North America and five percent in the Asia Pacific region. As regards property types, the hotel segment, as you know, is a traditional strength for Ariel Bank and accounted for half of new business in the quarter. Sustainability has been and continues to be an integral part of lending decisions. In the first quarter of twenty twenty five, we again supported the green transformation of commercial properties with €700,000,000 of green loans included in our new business numbers.

Let’s now turn to the next slide, which shows the current portfolio. The portfolio totaled €33,000,000,000 at the March, which was down by €500,000,000 compared to the end of twenty twenty four. The reduction was caused mainly by foreign exchange rate movements. As you can see from the two pie charts at the bottom of the slide, we are still broadly diversified by property types and regions with a clear focus on properties in the major metropolitan areas. We intend to continue to be broadly diversified across Europe, North America and the Asia Pacific region in future, driven by new business and an increase in properties now meeting the criteria in our green finance framework, green loans reached €8,300,000,000 at the end of the first quarter.

The next Slide 11 tracks two performance two key performance indicators for our performing portfolio, loan to value and yield on debt. Our conservative approach is reflected in these indicators, which remain at healthy levels. The average loan to value ratio for our overall performing portfolio stands at a very respectable 57% and repeats the ratio at the end of twenty twenty four. At 64%, the loan to value ratios for the offered asset class are also still solid. I would also like to highlight the development on yield on debt, I.

E, the ratio of a property’s net income to the amount of the loan. This is a key indicator for gorging a property’s profitability relative to the financing structure. Yield on debt for our entire performing portfolio is now at 9.7%, up from 9.6% at the end of twenty twenty four and our highest level for years. Hotels, shopping centers and logistics properties have particularly good yield on debt ratios. While the ratio for offices is currently a little lower, we are confident that offices in top locations with good transport connections and high quality standards will remain attractive investments.

Let’s now turn to nonperforming loans on Page 12. Through active portfolio management, we significantly reduced nonperforming loans in 2024 and have continued to improve the total in the first quarter of this year. Nonperforming loans stood at €1,300,000,000 at the March, down from €1,400,000,000 at the end of last year and from €1,600,000,000 at the end of twenty twenty three. The coverage ratio in the first quarter of this year was 28%. I would like to highlight that we will continue very active management of nonperforming loans.

However, the markets continue to be challenging, and there may be more volatility in the aggregate nonperforming loan position during the year. Our NPE ratio continued to improve on the EBAs definition. The ratio stood at 2.6% compared to 2.8% at the end of twenty twenty four. Let’s now turn to our Banking and Digital Solutions segment on Page 13, where business with clients from the housing and energy industries has been very encouraging. First Financial Software, our joint venture with Aireon, is also successfully attracting new clients.

Net interest income is rate sensitive and consequently reduced by 10%, but remains strong in historic standards. At €13,400,000,000 the volume of deposits from housing industry clients remains at a high level and as planned is between 13,000,000 and €14,000,000 as set out in our outlook. Since the end of the quarter, during the month of April, the volume is even back at twenty twenty four levels. Rental deposits and maintenance reserves have increased yet again confirming two particularly granular and sticky components of our deposit structure. They come from around 4,000 clients managing more than 9,000,000 housing units.

Now let me hand over to Andy for an update on our funding, liquidity and capital positions.

Andy Helfort, CFO, Ariel Bank: Thank you, Christian. Slide 15 shows our broadly diversified funding mix, solid liquidity ratios and capital markets activity. Deposits now total around €17,000,000,000 representing around 43% of our total funding volume. The largest part comes from the housing industry and an additional €3,100,000,000 is from retail deposits via platforms like Raisin. Our deposits are in general very sticky.

Furthermore, 99% of the retail deposits have an original maturity of two years or more. We were particularly active in the capital markets during the first quarter of twenty twenty five, being cautious in the volatile environment. As already mentioned, we increased our AT1 capital by replacing our €300,000,000 AT1 with increased AT1 funding of $425,000,000 and completed a €100,000,000 Tier two issue. Including retained earnings of around €300,000,000 we increased our capital by €500,000,000 In addition, we placed bonds and foundries equivalent to €800,000,000 in total. This included both euro and Swedish krona issues.

This was Ariel’s first Swedish currency issue since 02/2006. With a further sound brief of €750,000,000 in April, Ariel has already achieved 75% of the twenty twenty five full year funding plan. The remaining balance of this year’s plan is expected to be met by further final brief and potentially senior non preferred issues. Next, our treasury portfolio on Slide 16. The treasury portfolio stood at €8,300,000,000 at the March, up from €8,200,000,000 at the end of twenty twenty four.

In terms of asset classes, the portfolio comprises public sector borrowers, covered bonds and a very small portion of bank bonds. It therefore has a strong liquidity profile. High credit quality requirements are reflected in the rating breakdown, 100% of the portfolio has an investment grade rating with 88% having a rating of AA or higher. Assets for purchases ensure that there is low interest rate risk exposure. The portfolio is almost exclusively in euros and has a well balanced maturity profile with an average duration of around five point five years.

Turning to capital on Slide 17, our ratios continue to be strong. Our CET1 ratio was up at the March and stood at 20.6 on a Basel IV phase in basis and at 15.3% on a Basel IV fully phased basis. The total capital ratio rose to 28.5%. The increase in our capital ratios came from the decrease in risk weighted assets caused by foreign exchange rate movements. In addition, Tier one ratio and capital ratio total capital ratio reflect the additional capital raised as I have just referred to.

Our capital ratios are significantly above SREP requirements and our leverage ratio was 7.3% at the March, which is also well above regulatory requirements. Now I’ll hand back to Christian for the outlook and closing remarks.

Christian Ricken, CEO, Ariel Bank: Thank you, Andy. Now let us turn to the 2025 outlook on Page 19. Our Q1 results are fully in line with expectations and therefore we are confirming the 2025 outlook. We certainly recognize that recently heightened uncertainties generating increased market volatility may have implications, but it will be some time before they become apparent. So let me summarize our outlook.

In the Structured Property Financing segment, we aim to expand our credit portfolio to between 34,000,000,000 and €35,000,000,000 excluding foreign exchange movements. We are targeting between 9,000,000,000 and €10,000,000,000 of new business. In the banking and digital solutions segment, we expect deposits from the housing industry to continue to be between 13,000,000,000 and €14,000,000,000 All in all, we are targeting operating profit of between €375,000,000 to €425,000,000 for 2025, excluding expected one off charges of between 20,000,000 and €25,000,000 We expect to achieve a post tax return on equity of between 78%, again, excluding the one off charges. So

Andy Helfort, CFO, Ariel Bank: I

Christian Ricken, CEO, Ariel Bank: would like to thank you all very much for your attention. Andy and I are now very happy to answer all of your questions. Thank you.

Hilli, Chorus Call Operator, Chorus Call: The The first question comes from the line of Sharara Patel from Citibank. Please go ahead.

Sharara Patel, Analyst, Citibank: Hi. Can you hear me alright?

Christian Ricken, CEO, Ariel Bank: Yes. We can.

Sharara Patel, Analyst, Citibank: So can I just get some color on the moving parts in the NPL just on the quarter? So, like, new additions versus redemptions. And then just some more detail on The US outlook. I know you’re saying it will probably take a while to see through into kind of asset quality or the maximum volatility that we’ve seen this quarter, but just a little bit maybe more detail there in terms of US NPLs. And then also on the cost outlook, you said sort of one off efficiency charges.

When do you expect them to kind of be borne out in the year and ultimately kind of end? And then just one final question on profitability and your expectation on new business margin and yield on debt going forward. Thank you.

Andy Helfort, CFO, Ariel Bank: Right. Okay. So sorry, there’s quite a number of questions within that. So the NPLs overall were down by GBP 100,000,000.0. By memory, we had a couple of hundred redemptions, a 100 more coming in or something of that sort of order was the profile of that.

On the expenses, as I said earlier, the overall expense is a little higher in the first quarter, not by a lot, but because we deliberately prioritized some of the change programs and hence we incurred a bit more of expense earlier on. But overall, the expense outlook for the full year remains unchanged. So that is more about phasing. Sorry, remind me which other bits of your question I didn’t answer.

Sharara Patel, Analyst, Citibank: So on the NPLs on The U. S, kind of the outlook there, what you’re seeing just within this quarter as a reaction to kind of the macro volatility and then on profitability expectations for new business margin and year on debt?

Andy Helfort, CFO, Ariel Bank: Yes. So I think we have not seen a lot of impact in recent weeks of volatility in The U. S. Market. Obviously, our business is fairly episodic.

So there are big expenditures that are made over periods of time. Obviously investors being thoughtful about what they’re doing. And I think everybody in part just sort of waiting to see how the when the clouds lift sort of quite what happens. But we’ve still got a good stream of inquiries coming through. We’re still involved in looking at a number of things, some of which predate the recent volatility, some of which have come up since.

And certainly in terms of NPLs, I wouldn’t say the events of last three or four weeks have particularly disturbed the NPL trend that’s just too recent. So it’s something which we watch, something which we keep an eye on. But at the moment, our sort of sense is that overall this will settle to a new pattern. As we said during the first quarter, we have swung more of our new business to Europe and hence there is slightly less in The U. S.

During that period. We have focused more on hotels and therefore swung a little bit less to offices. But again, it’s something we’re monitoring on a regular basis and as best we can. We will manage the portfolio as a collective so that we have got the spread of risk across different asset classes, across different geographies. And overall, we’re pretty comfortable with where we’re at at the moment.

As Christian said, nonperforming loan profiles obviously do fluctuate over time. So there may be some fluctuation in coming quarters. But generally speaking, we think things are behaving reasonably predictably. But obviously, as with most people, we are keeping a close eye on things and we’ll see how things progress over the coming weeks and months.

Sharara Patel, Analyst, Citibank: We now have a question from the line

Hilli, Chorus Call Operator, Chorus Call: of Corinne Cunningham. Please go ahead.

Corinne Cunningham, Analyst, Unknown: Good morning, everyone. A couple of questions from me, please. First one, just following up on NPLs. You say most of the new provision is for U. S.

Office. Is that new U. S. Office NPLs or topping up existing? And if it’s topping up for existing, is that because simply because real estate values are are falling away?

Is it increased duration? Maybe a bit of color on that. And and then the second one is on your funding. The EBA recently published something on dollar net stable funding ratios in Germany. It didn’t look particularly rosy in that analysis.

Can you say anything on your dollar net stable funding ratio, please?

Andy Helfort, CFO, Ariel Bank: So on the NPLs, as ever, it’s a bit of a mixture. There’s a little bit of top up. There’s some new that’s come in there. With the size of portfolio we have got, you would expect in any quarter that we will have some movement. I wouldn’t call out any particular trend or any particular pattern.

The way we provision, once we know that we have got the problem, we will look at various scenarios and we’ll do a sort of weighted assessment of what provision is appropriate. So it’s a variety of things, a little bit new, which you’ll get in any quarter and some is revision to previous estimates. On the NSFR, I mean, are in a pretty good space. I think on our funding ratios across the piece, we are pretty liquid. Our LCR ratios, NSFR ratios are significantly ahead of the minimum regulatory requirement.

And so our funding position, particularly with the top ups we’ve done both on the Tier two, the Tier one, the equity is as strong as it has been for a good period of time.

Corinne Cunningham, Analyst, Unknown: Thank you. But no no comment specifically on the dollar and net stable funding ratio?

Andy Helfort, CFO, Ariel Bank: No. No. It’s not, untypical. We swap a lot into euros, but, it’s, the NSFR is is in good shape.

Corinne Cunningham, Analyst, Unknown: Thank you.

Hilli, Chorus Call Operator, Chorus Call: The next question comes from the line of Jackie Aenegal from Spring Investments. Please go ahead.

Corinne Cunningham, Analyst, Unknown: Hello and good morning. Thanks for the call. Just a couple of questions. First of all, I noticed you’ve obviously had a number of questions on the NPLs. But in January, you actually gave some really good color in terms of what you’re expecting for restructurings.

I think you did target less than GBP 1,300,000,000.0 for NPLs in the first quarter. Obviously, you’re just marginally above that. But can you give us any figures? Because, obviously, you must be in the midst of a number of restructurings. Do you have similar figures that you gave in January for the next quarter?

And if you don’t, because I’ve not really heard many figures so far, is this a decision not to provide that kind of color anymore? That’s the first question. And the second question, just on on domestic financings in Germany. It’s clear the ECB has, in a ramped up pillar two requirements and also for the, you know, your your your Landersbank competitors, let’s say, there. Are you seeing an impact of that?

I mean, obviously, you know, the German domestic campus of office is going down as well. But are you seeing any kind of freeing up a little bit? It’s getting a little bit easier to compete domestically? Thank you.

Andy Helfort, CFO, Ariel Bank: Christian, do you want to take the Start with NPLs. Yes, I’ll start with NPLs and then maybe on that. I mean, on the NPLs, it obviously moves around by quarter and therefore trying to forecast accurately quarter by quarter is not always the easiest of things. As I said earlier, we’ve got in the first quarter about £100,000,000 of new defaults. We’ve got about 200,000,000 of settled situations from the previous and hence, probably come down by 1.3 over a period of time.

Obviously, we’d like the 1.3 to come down a little bit more, albeit in terms of regulatory ratios. As I said before, we’re comfortable on that front. I suspect there could be a bit of volatility on the NPLs, honestly, going forward. It has clearly been a period with some turbulence. So if we see a little bit of increase in the second quarter, it wouldn’t surprise me hugely.

But overall, the long term trend is on a downward path. We are fine with that. And of course, part of running our business is taking some risk. There will always be some positions that don’t quite work out. The key is making sure that we have got much more income coming in than we’re taking credit charges.

And you can see from the results in the first quarter that the fact we had the income slightly off, but nonetheless, a huge improvement on the loan impairment charges. The economics of the business bit by bit are clearly improving. And as we’ve said, the sort of target of getting to that 13% ROE over a period of time will be dependent on making sure loan impairment charges do continue generally on the downward trend year by year, not necessarily by quarter, but overall on a year by year basis.

Hilli, Chorus Call Operator, Chorus Call: Got it. Thank you.

Christian Ricken, CEO, Ariel Bank: Yes, I’ll take the question on the domestic financing. So as you know, we have only 7% of our exposure in Germany. We are not going actively after a single property financing in Germany. We are doing portfolio financings in the hotel space, in the retail, the shopping center space, on the logistics side. And sometimes those portfolio deals also include German properties.

But that’s not a focus of our business and this will remain so mainly driven, let’s say, by the margin considerations. And so we have very strict RAROC hurdles. And so in general, the German business due to the competitive situation, which is still intense, would not meet those requirements.

Corinne Cunningham, Analyst, Unknown: Okay. So that’s not lessened any in the first quarter, you didn’t notice any lessening comp?

Christian Ricken, CEO, Ariel Bank: No, not really. And in the first quarter, we did not have any newly acquired business in Germany.

Corinne Cunningham, Analyst, Unknown: Okay. Thank you.

Christian Ricken, CEO, Ariel Bank: You’re welcome.

Hilli, Chorus Call Operator, Chorus Call: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Christian Riecken for any closing remarks, please.

Christian Ricken, CEO, Ariel Bank: Yes. Thank you very much. So I can only reiterate what I said at the very beginning. I think there are two main messages. One is that we had a really good start into 2025.

We are extremely pleased about the results, which are confirming that we are on the right track in terms of strategy, in terms of execution on this strategy. So that is very encouraging. But nevertheless, we see, of course, the volatility in the markets. We see the continued geopolitical risks. So we will be on autos in order to monitor it and will remain our conservative approach as far as risk is concerned.

So these are the two messages I would like to make. So thanks for spending your time with us today and have a good day. Thank you so much.

Hilli, Chorus Call Operator, Chorus Call: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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