ANNUAL REPORT AAREAL BANK AG 2005

ANNUAL REPORT
AAREAL BANK AG
2005
2005
K E Y
KEY FIGURES
F I G U R E S
2
KEY FIGURES
Income Statement
Operating profit
Profit before taxes
Net income
2005
2004
Change
Change
€ mn
€ mn
€ mn
%
50
-46
-92
46
17
-168
185
-33
-162
129
80
€ mn
€ mn
€ mn
%
Property financing
19,087
21,761
-2,674
-12
of which international
10,747
11,553
-806
-7
Shareholders’ equity
1,185
1,118
67
6
37,396
36,285
1,111
3
31 Dec 2005
31 Dec 2004
%
%
Portfolio data (31 December)
Total assets
Regulatory indicators
1)
Core capital ratio (German Banking Act)
8.3
7.4
Total capital ratio (German Banking Act)
14.7
13.4
Long-term
BBB+
A-
Short-term
F2
F2
Rating
Fitch Ratings, London
1)
Based on the confirmed financial statements
CONTENTS
3
CONTENTS
Key Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Aareal Bank – Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Management Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
Financial Statements
....................................................
34
...................................................
34
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
Income Statement
Accounting and Valuation Principles
..................................
40
Notes to the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
Notes to the Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
Other Notes
.....................................................
57
Executive Bodies of Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
Offices held by Employees of Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . .
69
Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
Report of the Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
Aareal Bank Group Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79
AAREAL BANK – PROFILE
A A R E A L B A N K –
4
AAREAL BANK – PROFILE
hotel financing packages. This combination
of local market expertise and specific industry know-how enables us to offer the best
possible financing concepts, designed to
meet the specific requirements of our international clientele, in all of the markets in
which we operate.
We transfer selected credit risks onto the
capital market – by means of securitisations,
true sale placements and syndications,
which are conducted by our Credit Treasury unit. We have also started to establish
ourselves as a regular issuer of covered
bonds *, having issued our first jumbo Pfandbrief at the end of January 2006.
Based in Wiesbaden, Aareal Bank AG is the parent company of Aareal Bank Group,
one of the leading international property specialists. Building on a long-standing
track record in international commercial property finance, the Group has established
a strong presence in Europe and North America, and is selectively expanding into
emerging regional markets, such as Russia or Asia. Our strength lies in the broad
diversification of our portfolio, by region and by sector. We provide property financing
solutions in more than 20 countries. Our customer base includes top international
and domestic property investors.
* Aareal Hyp AG will be integrated into
Aareal Bank AG, with retrospective
effect from 01 January 2006.
Our business model comprises three core
business divisions, with Aareal Bank Group’s
business activities centred on Structured
Property Financing, which brings together
all of its property lending activities. Employing local experts is of great importance to
us. We also have at our disposal industry
specialists for logistics, shopping centre and
Our Consulting / Services division offers
a comprehensive range of services for managing residential property portfolios and
processing payment flows.
Property Asset Management, Aareal Bank’s
third business division, is the specialist
segment within Aareal Bank Group which
initiates, places and manages property funds
(closed-end and open-ended) on behalf of
institutional investors.
Our committed, highly qualified, and internationally focused team of employees –
combined with our flexible, mid-sized
corporate structure – provides us with the
ability to efficiently adjust to new market
conditions, and to consistently take advantage of market opportunities.
P R O F I L E
5
Aareal Bank and its major subsidiaries
and financial investments
AAREAL BANK AG
Structured Property
Financing
Consulting / Services
Property Asset
Management
Aareal Hyp AG
Wiesbaden
Aareon AG
Mainz
Aareal Asset Management
GmbH, Wiesbaden
Aareal Bank France S. A.
Paris
Aareal First Financial
Solutions AG, Wiesbaden
Aareal Immobilien Kapitalanlagegesellschaft, Wiesbaden
Aareal Estate AG
Wiesbaden
Deutsche Bau- und
Grundstücks AG, Berlin
Deutsche Structured
Finance GmbH, Frankfurt / M.
Aareal Financial Services
USA Inc., New York
Immobilien Scout GmbH
Berlin
Aareal Financial Service
spol. s r.o, Prague
Innovative Banking
Solutions AG, Wiesbaden
Aareal Financial Service
Polska Sp. z o.o., Warsaw
Aareal Financial Services
(Singapore) Pte. Ltd., Singapore
Aareal Valuation GmbH *
Wiesbaden
This overview is based on information as set out in the list of shareholdings,
which is available on the Internet, at www.aareal-bank.com.
1)
Spun off with effect from 01 January 2006.
A A R E A L B A N K –
6
STRUCTURED PROPERTY FINANCING
Entity / Unit
Activities
Products and Services
Aareal Bank,
Real Estate Structured
Finance unit
Aareal Bank’s core business activities
Optimum, tailor-made property financings for office,
logistics, retail, hotel, and residential properties in
selected markets covered:
• Structured Real Estate Finance
• Development Finance
• Construction Loans
Combined teams comprising market and sector experts
at 19 locations around the world
International Markets
• Client coverage in countries where Aareal Bank does
not maintain a local presence
• Coverage of international investors
Expert teams:
• First-class hotels in top locations
• Logistics properties
• Shopping centres, retail space
– Hotel Finance
– Logistics Finance
– Retail Finance
Aareal Hyp AG
Mortgage bank / covered bond issuer; integration and
merger into the parent company, Aareal Bank AG, to take
place during the first quarter of 2006, within the framework of the new German Pfandbrief Act (Pfandbriefgesetz)
• Lending: commercial properties and housing industry
• Funding: Jumbo issues, mortgage bonds and publicsector covered securities
Aareal Estate AG
Specialist entity for the marketing of troubled commercial
properties in Germany
• Marketing of properties
Aareal Valuation GmbH
Property surveyors covering all regions within the
German property market
•
•
•
•
Expert valuation of properties
Monitoring of construction properties
Consulting
Research
CONSULTING / SERVICES
Entity / Unit
Activities
Products and Services
Aareon AG
Europe’s leading consultancy and systems house
for the management of residential and commercial
property
Provider of IT services to the property management
sector
• GES • Blue Eagle • Mareon
Aareal Bank,
Institutional Housing
Business
Market leader in payment solutions for property
companies
IT services with a high degree of integration in
client’s environments
• Payments
• Deposit-taking
• Financing
• Handling of deposits / managing operating costs
P R O F I L E
7
Entity / Unit
Activities
Products and Services
Aareal First Financial
Solutions AG
Development and implementation of integrated payment
solutions for property companies
• BK 01 ®
• BK XL ®
Deutsche Bau- und
Grundstücks AG
Manager of extensive property and trust assets;
providing asset management and other services to
municipalities, Federal states and institutional players in
the German housing market
•
•
•
•
Immobilien Scout GmbH
Germany’s leading Internet property platform – held by
Aareal Bank as a financial investment
Online platform for property offers, including
• Residential and commercial property
• Land
Innovative Banking
Solutions AG
Leading developer of add-ons to the mySAP-Banking
software products from SAP AG – held by Aareal Bank
as a financial investment
•
•
•
•
Urban development
Municipal property
Property management
Property services
iBS-ALP Automatic Loan Processor
iBS-CYT Capital Yield Tax
iBS-MBS Mortgage Banking Solution
iBS-SRT Standard Reporting Tool, etc.
PROPERTY ASSET MANAGEMENT
Entity / Unit
Activities
Products and Services
Aareal Asset
Management GmbH
Holding company for asset management activities,
providing a broadly-diversified range of investments
in open-ended and closed-end property funds
to institutional investors
Closed-end funds including
• Aareal Europe Fund No. 1
• Aareal Italy Fund
• Aareal EuroLogistics Fund
• Aareal German Residential Fund
Aareal Immobilien
Kapitalanlagegesellschaft
GmbH
Initiator of special property funds under the German
Investment Act, investing in international properties which
are broadly diversified across different property types;
part of Aareal Asset Management GmbH
Special funds including
• Aareal Nordic Fund
Deutsche Structured
Finance GmbH
Specialist institution focused on arranging structured
finance packages and real property investments in enterprises operating in selected high-growth sectors
Mutual funds including
• Aviation / aircraft
• Renewable energies (wind parks)
• Special properties (logistics, technology parks, etc.)
C O R P O R AT E G O V E R N A N C E
C O R P O R AT E G O V
8
CORPORATE GOVERNANCE
AT AAREAL BANK AG
The effect of the German Corporate Governance Code, introduced in 2002, has been
to enhance the transparency of the rules
concerning the management and monitoring
of German listed companies. Containing
recognised standards for good and responsible governance, the purpose of the Code
is to strengthen the confidence of domestic
and international investors, shareholders,
clients, employees, and the public, in the
quality of German corporate governance.
As early as 1999, Aareal Bank AG was one
of the first banks in Germany to introduce
Principles of Corporate Governance. The
subsequent recommendations of the German
Corporate Governance Code have therefore
formed an integral part of our operational
practice now for several years. Given the particular importance of avoiding conflicts of
interest from a bank’s point of view, Aareal
Bank has adopted additional principles that
go beyond the recommendations of the
German Corporate Governance Code, which
it has stipulated in Chapter III of the Aareal
Bank AG Code.
These additional principles comprise in particular the inclusion of senior Group executives, the inclusion of conduct outside
the work environment, detailed rules on
business transactions by the Management
Board, and further rules on conflicts of interest. Aareal Bank AG has complied with the
recommendations of the German Corporate Governance Code (as amended on
02 June 2005), without exceptions, through-
out the financial year 2005. This annual
report includes the individual remuneration
of the Management and Supervisory Boards
for the period under review.
You will find the latest version of the Corporate Governance Code of Aareal Bank AG
on our website:
http://www.aareal-bank.com/en/profile/
corpgov/index.en.html
ERNANCE
9
Declaration of Compliance in accordance
with section 161 of the German Stock
Corporation Act (AktG)
The Management Board and Supervisory
Board of Aareal Bank AG declare, in accordance with section 161 of the AktG, that:
1. Aareal Bank AG has complied with the
recommendations of the Government
Commission ”German Corporate Governance Code“ (as amended on 21 May
2003 and, with effect from 02 June 2005,
as amended on that date) since the last
Declaration of Compliance was issued in
December 2004; in each case, except for
the recommendations on individualised
disclosure of remuneration for members
of the Management Board and Supervisory
Board. These latter recommendations
will be adopted for the first time in the
Company’s annual report for the financial
year 2005.
2. Aareal Bank AG will in future comply with
the recommendations of the German
Corporate Governance Code (as amended
on 02 June 2005) without exceptions.
Aareal Bank AG adopted its own Corporate
Governance Code as early as 1999. The
bank’s Code has been adapted to incorporate
amendments to the German Corporate Governance Code; it goes far beyond the recommendation of the Government Commission.
For further details on the Corporate Governance Principles of Aareal Bank AG, please
refer to our website: http://www.aarealbank.com/en/profile/corpgov/index.en.html
Wiesbaden, 01 December 2005
The Management Board
Dr. Schumacher
Kickum
Ortmanns
Schörnig
The Supervisory Board
Hans W. Reich (Chairman)
Merkens
MANAGEMENT REPORT
M A N A G E M E
10
MANAGEMENT REPORT
The appointment of Dr. Wolf Schumacher as the new Chairman of the Management
Board on 01 April 2005 heralded the beginning of Aareal Bank’s new strategic orientation. Our objective is to further enhance the bank’s position as a leading international property specialist. Overall, 2005 was defined by appropriate measures for
this objective, set out in a six-point programme – we have already achieved notable
success on all points.
Business
and environment
In the following section we will analyse market developments, and outline the re-orientation of Aareal Bank AG that we embarked
upon regardless of these developments.
International property
markets
Based on an ongoing careful assessment of
certain international property markets, we
continued to pursue our internationalisation
strategy during 2005, with a view to reducing dependency on individual property
cycles through regional and product-specific
diversification.
Although the German property market
remains challenging by comparison with
other European markets, the downward trend
was meanwhile checked. In the last two
years, we have identified a greater level of
interest from international investors, who
are expecting the property market to post
a long-term and sustained recovery in the
future. Investment has been high, above all
in major residential property portfolios, as
well as in logistics, retail and office property.
We have achieved a broad level of diversification in new commitments across the
various property types, and are now concentrating exclusively on selected addresses
in urban areas. Our target figure for new
German commitments for the current financial year lies between € 800 million and
€ 1 billion.
The extensive groundwork carried out in
Italy in recent years has paid off. The bank
attained a favourable position on the market, which we have succeeded in expanding
further. The Italian property market has
stabilised at a high level. Further price or
rental increases are not anticipated. Nevertheless, the ongoing rise in the number of
international investors provides for a liquid
market, and cities such as Rome, Milan
and Naples in particular, continue to attract
demand.
Scandinavia remains attractive for property
investors as well as for users. The investment markets reached an all-time high again
last year. In particular, momentum on the
Swedish market was greater than expected
– stimulated by the growth in the Swedish
economy.
Denmark was characterised by high housing
market demand in the greater Copenhagen
area, resulting in a considerable rise especially in residential property financings.
N T
R E P O R T
11
In the course of our ongoing Finnish business, we provided two large-volume residential and retail financings there.
We continue to regard the Scandinavian
economies as one of our core markets. After
Sweden, Denmark and Finland, we expect
to be offering financings in Norway and the
Baltic States in the future.
We also increased new commitments in the
UK. New investments continued to grow
strongly in the UK, compared with Continental Europe, as did the demand for floor
space. In line with standard investment
criteria, London is ranked first amongst global office locations. We are forecasting a
slightly positive development overall in UK
property markets.
We increased the volume of new commitments in the US, as planned. Due to the
size of the market, we will also continue to
adopt a selective approach – generating
sufficient financing possibilities to allow for
a modest and sustainable expansion of our
business there. We consider the Northeast
and the Southwest to be the most attractive
US markets at present.
Market development in Canada is very positive. We expanded our portfolio appreciably,
and provided – for the first time – a largevolume office property financing solution.
Intensive competition continues to define
the Belgian property market. We believe
that retail and logistics properties offer
potential for positive development. On the
other hand, the office market proves difficult.
Accordingly, the volume of new commitments in this market was down once again
on the previous year.
The property market in France has performed well, especially in the retail sector.
Against the background of a stable office
market, and despite the fall in rental income
in recent years, the Parisian office property
market (in particular) remains interesting
for investors and users alike. New commitments in France were therefore up on the
previous year’s level.
Business development on the Spanish property market has been similar to France.
Robust development in the retail sector, as
well as a stable office market, is reflected in
the increase in our new commitments.
Due to our cautious assessment of the
Dutch market, and the competitive pressure
that exists there, the volume of new commitments was down on the previous year.
Nonetheless, the recovery in the Netherlands that was evident in 2005 should
impact positively on the property market
there.
Once again, our investments in the Central
and Eastern European (CEE) property markets exceeded the levels of the same period
of the previous year. We have an active
local presence in the Czech Republic and
M A N A G E M E
12
in Poland. We also finance properties in
Slovakia, and – since 2005 – in Russia
(exclusively in the greater Moscow area).
Investors, especially from Austria, Germany
and Ireland, were active in these markets
during 2005. We plan to gradually increase
our exposure to the Moscow and St. Petersburg markets during 2006, with selected
new business designed exclusively for international investors.
The Swiss property market is characterised
by a high level of stability, whereby the
competition for property financing has increased significantly. Due to our unchanged
target returns, we therefore reduced the
volume of commitments there in 2005,
compared with the previous year.
We consider Turkey an attractive market:
we have been active there since 1999, and
opened a representative office in Istanbul
last year. International property investors
consider Turkey to be a very promising
investment location. Demand for property
investments and financing has increased
immensely and, in our opinion, will have
a particularly positive effect on investment
activity in the years ahead. The focus is
on the cities of Istanbul, Ankara, Antalya
and Izmir. Our expertise in hotel and shopping centre properties underlines the excellent position we command in this growth
market.
We conducted our first hotel financing project in Mexico, where we supported the
investment activities of a long-standing
customer in this country.
Our Singapore office, which we established
in 2004, is operating a successful advisory
service for hotel investors in the AsiaPacific region. We expanded our advisory
activities according to plan. As a consequence of our market entry in property
financing, for which we have been preparing since 2004, we participated in a hotel
financing project, and have given an initial
confirmation for a financing in the People’s
Republic of China.
Realignment programme
for Aareal Bank
(six-point programme)
The strategic realignment that we embarked
on in April 2005, and which is reflected in
a six-point programme, was significant for
the course of business last year.
1. New business growth and
strengthening regional diversification
On a Group level, we increased new business during the 2005 financial year by
25 %. The volume of new commitments
within Aareal Bank AG rose by 13.6 %. We
acquired our new business in more than
20 countries across three continents.
The opening of a representative office in
Turkey emphasises our strategy of further
N T
R E P O R T
13
diversifying our international activities. We
also underwrote initial financings in China,
and in Mexico during the period under
review.
We continue to offer selected financing
solutions to leading investors in the urban
areas of Germany, our country of origin,
and are enhancing this presence further.
On 14 November 2005, the bank appointed
Norbert Kickum as a new member of the
Management Board; he has assumed responsibility for all of Aareal Bank’s decentralised and central market units in the property financing business.
2. Reducing the non-performing loan
portfolio (NPL)
We carried out a very extensive audit of our
loan portfolios during the 2005 financial
year. This operation yielded additional writedowns on claims and provisioning requirements totalling € 272.2 million, which has
impacted significantly on the results in the
financial statements presented.
On this basis, we expect risk costs to return
to normal as of the current financial year.
The sale of two non-performing loan (NPL)
portfolios enabled us to substantially reduce
our NPL portfolio during the year under
review, by an aggregate € 1 billion, to
€ 2.085 billion.
3. Leveraging our mid-sized corporate
structure
During 2005, we started to review all of
Aareal Bank’s investments with regard to the
core business divisions of Structured Property Financing, Consulting / Services and
Property Asset Management. Our objective
is to reduce the complexity of the Aareal
Bank Group and of its investments, thus
leveraging our mid-sized corporate structure.
We have already implemented important
milestones in reducing Aareal Bank Group
investments. By disposing of our Aareal
Hypotheken Vermittlungs GmbH and Aareal
Hypotheken-Management GmbH subsidiaries, we have parted with our services
for private customers. We suspended the
operations of the Via Capital Ltd. property
investment banking subsidiary during the
period under review. Additionally, we are in
the process of combining all of our asset
management activities.
We embarked on a realignment process in
the housing sector in the second half of
2005, with the purpose of coordinating the
individual units – Aareon AG, Aareal First
Financial Solutions GmbH and the bank’s
institutional housing sector business – more
closely, and strengthening the bank’s market
leadership at the same time.
We have requested the granting of a licence
for Aareal Bank AG to issue Pfandbriefe
following the introduction of the new Ger-
M A N A G E M E
14
man Pfandbrief Act on 19 July 2005. It will
be granted, provided the mortgage bank
subsidiary Aareal Hyp AG is reintegrated
within the parent company. We will achieve
this during the first half of 2006, with the
integration to take retrospective effect from
01 January 2006.
A fifth new Management Board portfolio –
headed by Thomas Ortmanns, who was
appointed as a new member of the Management Board as at 01 September 2005 –
will assume responsibility for the further
optimisation of workflows and the bank’s
organisational structure.
This measure will considerably expand the
scope of Aareal Bank AG’s funding mix.
We want to establish our presence on the
market as a frequent issuer of jumbo mortgage bonds. Our medium-term objective is
to increase the share of mortgage bonds
relative to Aareal Bank’s entire volume of
property financing – from currently 10 % up
to between 40 % and 60 %.
5. Emphasising a modern corporate
culture
4. Upgrading the organisational structure
Aareal Bank’s entire organisational structure
has been realigned. In an initial step, a first
management level – with stronger operational responsibilities – was established, with
effect from 01 July 2005. This level will now
comprise only 27 managers, as opposed to
51 previously. Staff numbers at the parent
company are set to be reduced by a total
of 253 to 1,249 by the end of 2008. At the
same time, we will combine our German
locations for structured property financing,
offering the services in future from our
offices in Wiesbaden, Munich, Berlin and
Hamburg. Additionally, a considerable reduction in interfaces, and investment in the IT
infrastructure, will lay the groundwork for
more efficient procedures.
Focused training and support measures will
enable our staff to assume a more active
role in decision-making processes. The focus
is on managing via company objectives,
and strengthening individual responsibilities.
We are devoting special attention to the
international trainee programme at the Aareal
Academy, as well as providing a broadly
diversified training concept that is designed
to support all Aareal Bank employees.
6. Transparency in managing our
business
We are undertaking a series of measures with
a view to reinforcing the trust of investors
and staff, also aiming at a more professional
management of our public profile. This is
emphasised by the appointment of a new
Group Press Officer, and the strengthening
of capital market-oriented communication
through closer integration of information that
is relevant to the financial markets.
For the first time, this report will include the
individual remuneration of the Management
N T
R E P O R T
15
and Supervisory Boards for the period under
review. This measure, along with the resolution by the Supervisory Board to reduce
its membership from 21 to 12 members,
emphasises – amongst other things – the
commitment of the corporate executive
bodies to the principles of good corporate
governance.
Results
The strategic realignment of the bank and
specific market developments are both reflected in the results for the 2005 financial year.
At € 396.0 million, Aareal Bank AG’s net
interest income is down 9.4 % on the previous year’s figure of € 437.2 million. In the
2005 financial year, we transferred numerous
financings to the cover assets pool of our
Aareal Hyp subsidiary. These financings –
amongst other assets – are used to collateralise the jumbo Pfandbrief transaction issued
in January 2006. These transfers, and the
aforementioned NPL sales, explain the decline in the bank’s risk-weighted assets and
hence the development of net interest income.
Net commission income on the other hand,
was up 17.0 %, to € 46.2 million. This was
due to higher administration fees received.
The net result from financial operations
improved in the financial year under review,
from € -9.6 million to € -1.5 million.
Increased staff costs, as well as ongoing
investment in the course of the realignment
of our activities, drove up administrative
expenditure last year by € 26.7 million to
€ 223.7 million. Investment was mainly in
IT, as well as in consultancy costs incurred
within the scope of the NPL transactions.
Net other operating income / expenses of
€ -15.4 million also reflect the realignment
process. This figure includes largely restructuring costs.
At € 272.2 million, depreciation / amortisation and write-downs were significantly
higher than planned, and are characterised
in particular by the aforementioned audit
of our loan portfolios.
The result from the valuation of investments,
and profit and loss transfer agreements, is
defined especially by one-off effects. Owing
to the high burden on earnings as a result
of the audit of our loan portfolio, we carried out reclassifications within the Group,
thus realising undisclosed reserves of
€ 88.6 million.
This yielded a profit before taxes of
€ 17.1 million for the 2005 financial year,
compared with a € 167.8 million loss in 2004.
The tax expense was attributable mainly
to the creation of deferred tax liabilities of
€ 35.9 million, as well as to tax expenses
incurred within the scope of the activities
of our international branches.
M A N A G E M E
16
This resulted in a net loss after taxes of
€ 33.3 million, which the bank offset by
releasing reserves in the same amount.
Financial situation
Total assets
Total assets at year-end 2005 amounted to
€ 37.4 billion (2004: € 36.3 million).
Business development
We consistently pursued our internationalisation strategy throughout the 2005 financial
year. Having established a new representative office in Turkey, we now have a presence
in 13 other European countries outside of
Germany, as well as in the US and Asia,
and provide property financing solutions in
over 20 countries.
We operated a targeted buy & sell strategy,
which further optimised the regional diversification of our portfolio in the year under
review. For our German business, this meant
the sale of two portfolios of non-performing loans (NPL), which had the effect of
enhancing our portfolio structure and freeing
up capital for profitable new business.
New loan business
Aareal Bank AG granted € 6.4 billion
(€ 7.1 billion at a Group level) in new business during 2005. This equates to a yearon-year increase of 13.6 % (Group: 25 %).
New international business climbed 22.3 %
to € 5.5 billion. Overall, new loan commitments were especially strong during the
third and fourth quarters of the year. These
factors underline the success we have achieved in concentrating on our core business.
The broad diversification, by country and
types of property, is very much in line with
Aareal Bank’s business model.
Portfolio development
At the end of 2005, the total volume of
Aareal Bank AG’s property finance under
management amounted to € 19.1 billion
(2004: € 21.8 billion). This corresponds to
a decline of 12.3 %. The crucial factor here
was the transfer of numerous international
commitments to the cover assets pool of
Aareal Hyp. This reduced the volume of
international financings from € 11.6 billion
to € 10.8 billion, despite the above-average
level of new business on Aareal Bank AG’s
balance sheet. Another reason for the decline of our loan portfolio was the successful reduction in business not in line with
our strategy, such as for example, the aforementioned NPL transactions. This reduction
comprises a core component of our strategic
realignment.
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Within this context, we scaled back the
German portfolio in the period under review,
from € 10.2 billion to € 8.3 billion. Germany thus accounts for only 44 % of the
overall portfolio, down from 47 % at the end
of 2004.
Overall, this enabled us to achieve a more
balanced loan portfolio, with a high degree
of diversification.
Of the overall loan portfolio held by Aareal
Bank AG in 2005, € 13.1 billion was attributable to commercial property finance and
€ 6.0 billion to commercial housing finance.
The total decline of 11.1 % in commercial
property finance compared with the previous year is due to the 23.4 % reduction
in German commercial business that is not
in line with our strategy, and the previouslymentioned transfers to Aareal Hyp.
Portfolio management and exit strategies
Aareal Bank AG employs securitisation and
syndication as part of an active portfolio
management strategy, thus avoiding the formation of cluster risks. We have concentrated to date on synthetic securitisations and
syndications. As at 31 December 2005, we
had placed € 4.3 billion of our financings
on the market through synthetic securitisation transactions.
The significance of international syndications
has risen continuously in recent years.
Aareal Bank has also stepped up its activi-
ties here, syndicating lending volume in
excess of € 800 million in the period under
review. The bank’s emphasis is on crossborder transactions, which allow us to capitalise on the strong momentum in European
syndicated loan markets, and to explore
new applications for this technique.
Besides syndicated loans, we will also concentrate in future on true sale securitisations
as part of our portfolio management strategy.
Accordingly, we will sell loans – including
the corresponding collateral – to investors,
so that the bank does not retain any residual risk on its books.
We already successfully concluded two true
sale transactions of non-performing loans
(NPL) during the financial year under review,
within the scope of our exit strategy for
Aareal Bank AG’s NPL portfolio. In June
2005, we sold a portfolio comprising around
€ 690 million in loans (including € 107 million in interest and fees) to the US financial
investor Lone Star. Within the framework of
this transaction, Lone Star acquired a total
of 578 loans for 261 properties in Germany.
The sold portfolio comprises commercial
properties and commercial housing properties in equal proportions; two thirds of
the exposures relate to properties in West
Germany.
In December, we sold a second portfolio of
non-performing loans with a total volume
of € 388 million, including interest and fees
of € 63 million. The buyer was the Japanese
M A N A G E M E
18
Shinsei Bank, Limited, which purchased 142
loans for 157 properties in Germany within
the scope of the transaction. Likewise, this
portfolio comprised commercial property
and residential property finance for institutional customers, in equal proportions.
As at 31 December 2005, Aareal Bank’s
NPL portfolio amounted to € 2.085 billion
(31 December 2004: € 2.851 billion).
Additionally, we reduced individual exposures via our Workout unit, as well as via our
Aareal Estate AG subsidiary. The Workout
team consists of specialists who are proficient in the area of settling non-performing
loans. These activities are complemented by
the Aareal Estate subsidiary, which specialises
in marketing properties subject to non-performing loans. We considerably enhanced
the expertise within Aareal Estate AG, and
the number of marketing staff, during 2005.
The appointments of Günther Feldmeyer
to the Management Board, and of Jürgen
Schroeder as a Deputy Member of the Management Board, further increased our commitment to marketing these types of property.
Besides the settlement of non-performing
loans, we identified loans within Aareal Bank
AG’s overall portfolios that are not impaired,
but which no longer meet our strict criteria
regarding target customers, return or size.
This central loan management facility covers
a loan volume of around € 1.3 billion.
A specially-trained team, set up during the
course of the year, is responsible for the
direct management of the individual exposures, with the objective of achieving a
corresponding improvement in return.
Refinancing and
shareholders’ equity
Issuance
Aareal Bank AG raised € 2.4 billion in longterm funds on the capital market in the 2005
financial year. This includes € 33 million
in subordinated funds, and € 6 million in
profit-participation certificates.
Since mid-2002, the Group’s € 10 billion
MTN programme has provided it with an
internationally recognised issuing framework.
The MTN programme was updated in
October 2005. Using structured issues and
bonds in foreign currency denominations,
the Group responds quickly and flexibly to
the specific needs of different investor groups.
Moreover, Aareal Bank AG is a regular issuer
of floating-rate notes. The outstanding issue
size of its liquid FRNs (with maturities up
to 2010) totals just under € 4 billion.
Equity capital / Regulatory indicators
In November 2005, Aareal Bank AG strengthened its capital base by means of a 10 %
capital increase. The capital increase (which
was carried out excluding shareholders’ pre-
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emptive subscription rights) was fully subscribed to by the shareholders of Aareal
Holding Verwaltungsgesellschaft mbH, who
purchased 3,886,832 shares at a price of
€ 25.75 per share. Aareal Holding’s stake
is now 39.97 %; the remaining 60.03 % of
the shares are in free float.
Aareal Bank AG’s liable capital in accordance
with section 10a of the German Banking
Act, based on confirmation of the 2005
financial statements, amounted to € 2,196
million, of which core capital accounted for
€ 1,216 million. The capital ratios according
to the German Banking Act (Grundsatz I)
stand at 8.3 % for the core capital ratio and
at 14.7 % for the total capital ratio. Aareal
Bank AG’s risk-weighted assets according
to the German Banking Act amounted to
€ 14,733 million, based on confirmation of
the 2005 financial statements.
Report on material
events after the
reporting date
At the beginning of January 2006, Aareal
Bank AG hived off its property valuation
sector into a wholly-owned subsidiary, in
order to exploit its potential for offering services to a broader range of customers. The
newly-established Aareal Valuation GmbH,
with around 30 staff, has its head office in
Wiesbaden and other locations in Essen,
Berlin, Leipzig and Munich.
With effect from 20 January 2006, Aareal
Bank AG has disposed of its entire investment in the Mannheim-based loan servicing
subsidiary Aareal Hypotheken-Management GmbH, to VR Kreditwerk Hamburg –
Schwäbisch Hall AG.
Aareal Bank AG’s mortgage bank subsidiary,
Aareal Hyp AG, issued its first jumbo mortgage bond at the end of January 2006 –
a € 1 billion issue with a five-year benchmark maturity.
The reconciliation of interests that was
agreed between the Management Board and
the Works Council includes – amongst other
things – the measures that will be employed
to reduce staff numbers in 2006.
Outlook
Our unique business model, and the successful measures we have embarked on to
date to realign our activities, are fundamental to our positive earnings forecast for
2006. On this basis, we plan to be able to
distribute a dividend again in 2007, for the
2006 financial year. After the strategic realignment in 2005, our focus in the new
financial year will now be on the operative
implementation.
Having enjoyed a good volume of new
business in the 2005 financial year, we are
forecasting new loan commitments of up
M A N A G E M E
20
to € 7 billion at a Group level for 2006.
This is dependent on the general development of international property markets.
We will nonetheless continue to pursue our
stringent risk / return requirements. This
strategy will allow us to continuously improve
our refinancing structure, and to utilise the
opportunities presented by the new Pfandbrief Act.
Besides progressively enhancing the existing customer base, we will also focus on
expanding our activities in Scandinavia and
the Baltic Region. We plan to further develop our market activities in Russia and in
Asia beyond 2006. We will continue to
maintain a strong presence in our German
home market by focusing on selected new
business.
We have set ourselves ambitious targets
regarding the reduction of the non-performing loan portfolio; further individual and
portfolio transactions should reach a volume
of around € 1 billion by the end of 2006.
However, our activities are also dependant
on the development of the German property
market, which presents us with opportunities as well as risks. We are also working on
solutions that will allow an extensive scaling-back of our remaining non-performing
loan portfolio.
Further optimising the organisational structure of Aareal Bank AG is equally important.
We plan to implement the aforementioned
measures to update our organisational
structure in the period from 2006 to 2008.
This will involve, in particular, the reduction
of 253 in staff numbers.
We will continue to sharpen our group
structure in 2006. Aareal Hyp will be reintegrated and merged into the parent company during the first half of the year. Furthermore, we plan to further integrate Aareal
Bank AG’s investments, which we will
achieve by concentrating and realigning the
activities and subsidiaries in the Consulting /
Services and Property Asset Management
divisions.
Risk Report
The assumption of risk is an integral part
of banking business. In order to control risk
in a targeted manner and to put shareholder
capital to the best possible use, our operational decision-making process centres
around professional risk management.
Against this background, we have established a comprehensive system for the
measurement, limitation and control of risk,
which we continuously update and expand,
using considerable human and technical
resources.
Areas of responsibility for risk monitoring
In accordance with legal provisions, the overall responsibility for risk monitoring remains
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with the Management Board and the Supervisory Board of Aareal Bank. The following
diagram provides an overview of the responsibilities at the lower organisational levels.
Risk management at Aareal Bank
The measuring and limiting of risks is the
key element of operational risk policy, with
the establishment of an optimum relationship between risks and returns forming the
basis for a sustainably positive development
of the company value.
an economic perspective, we have established a limit system that is differentiated by
risk category. This system is based on the
strategy determined by the Management
Board and Aareal Bank’s risk-bearing capacity. We employ a limit system incorporating
two perspectives: on the one hand, limits
determined according to the value-at-risk
method limit the risk for the individual risk
categories. On the other hand, we use a
system of nominal limits in the lending
business (e. g. country limits, counterparty
limits, construction phase limits) and for
market risk (e. g. stress limits).
As an agreed risk limitation method is not
only necessary from a regulatory but also
Organisational responsibilities for risk monitoring
Areas of responsibility
for risk monitoring
Management Board and Supervisory Board of Aareal Bank AG
Market risks
Liquidity risks
Credit risks
Operational risks
Risk Controlling
Regulatory
reporting
Further
differentiation
Process owners;
Risk Controlling
Property
Finance
Transactions with
financial institutions
Country risks
Quantitative
modelling of risks
Credit Office,
Risk Controlling
Counterparty
Committee,
Risk Controlling
Country Limit
Committee,
Risk Controlling
Risk Controlling
M A N A G E M E
22
The following chapters of this Risk Report
offer a detailed explanation of the types
of risk that are relevant to Aareal Bank’s
business.
Every financing transaction is based on planning agreed upon in advance. The bank is
compensated for this imputed risk, measured
according to the planned financing structure,
with an appropriate pricing premium.
1. Credit risks
Risk management recognises and evaluates
negative deviations from the plan, allowing
it to minimise the potential risks by taking
appropriate countermeasures. The differentiated early warning systems and management tools employed by the bank are
specifically designed for the particular features of the commercial property lending
business.
1.1 Credit risks in the Property Finance
business
The credit risks in Aareal Bank’s Property
business are the product of a deterioration
in the borrower’s credit quality, or from a
loss in value of the collateral.
Credit risk materialises where a financing
partner’s economic situation deteriorates, or
where this partner cannot meet its contractual obligations fully or in time. Collateralisation risks result from the threat of a loss
in value of collateral, which can occur
through property-specific or market-induced
factors. The financed property can be subject
to risks arising during completion, renting
and /or sale.
Risk management on an individual
transaction level
Risk management in Aareal Bank’s lending
business analyses, monitors and manages
the risks involved during the completion
phase of the financed property, as well as
the medium- and long-term risks arising
from a deterioration in credit quality or loss
in collateral value.
Early warning systems and management
tools employed in the completion phase
of the financed property
The continuous monitoring of risks and
their quantification using rating procedures
are aimed at making risks transparent and
controllable. The rating is a key tool for
supporting the lending decision. During the
year under review, the bank commenced
the employment of a new rating procedure,
which is described in more detail in the
following section.
Disbursement is made after the agreed collateral is pledged, after fulfilment of further
conditions for payment, and according to
construction progress. For this purpose,
periodic disbursement checks are carried out
and the construction progress is checked.
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The risk of completion comprises all risks
that could arise during a property’s completion phase, such as exceeding the building
costs or missing the completion schedule.
Any deviations from the schedule and / or
general progress are made transparent by
the bank’s implemented reporting system
for developer and construction phase risks,
enabling the bank to take appropriate
measures to counteract any risk increase.
The corporate rating evaluates adequate
ratios (particularly regarding profitability and
financial situation) on the basis of the last
financial statements as well as qualitative
aspects regarding the company, such as its
internal structures, sales capability and the
quality of its management. The new rating
methodology also includes variations for
borrowers from property-specific industries
as well as for other companies.
The new rating procedure as an early
warning system and management tool
The impact of the property rating /corporate
rating on the final rating is always determined
on the basis of the share of the relevant
company’s investments financed by the bank,
and detailed information available on the
company’s assets. If available, the rating also
takes into account an assessment of the
group background and any special factors
reflecting certain specific features of the
company or the financing.
During the financial year under review, the
bank commenced the employment of a new
rating procedure, which is geared towards the
specific requirements of Basel II. This rating
procedure is intended to be further developed during the 2006 financial year, and to
undergo initial validation. The key elements
of the rating procedure are outlined below.
The property rating evaluates propertyspecific indicators and qualitative aspects.
As the fundamental basis of property rating,
the future ability to cover interest and principal payments is determined as part of cash
flow planning (identifying cash flow surpluses or shortfalls) and, if applicable, the risk
associated with the completion and / or
marketability of the properties financed. In
addition to these quantitative data, qualitative aspects are also taken into consideration, in particular the projection regarding
future cash flow developments.
In addition, the collateral provided has an
impact on the rating result, with the collateral being evaluated with regard to its individual value (and absence of impairment)
and estimated fluctuations in that value
(e. g. as a result of property cycles), using
different criteria (such as property location /
type).
Early warning systems and management
tools employed during the loan term
To monitor the credit quality of its financing
counterparties (such as borrowers, guarantors
and tenants), the bank employs standardised
M A N A G E M E
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tools such as periodic monitoring, ratings,
portfolio reporting, etc. during the entire
term of the loan. The results of these checks
are taken into account in the rating. If the
credit rating is downgraded, the bank routinely implements measures to either maintain risks at an acceptable level, or to reduce
them.
in regard to which a deterioration of the risk
indicators is still within a reasonable range
from a risk perspective, i. e. no sustained
risk exposure is foreseeable and the loans
remain under observation. The ”risk prevention“ category contains exposures having
a sustained risk that are subject to close
supervision.
Collateral is checked for impairment on a
regular basis, in line with applicable provisions, and the rating adjusted in the event
of significant changes.
In the event of a restructuring of loans, or in
the event of recovery procedures, any further
handling of the exposures in question is
transferred to the Workout unit. For all loans
identified as high risk, the monitoring frequency is tightened accordingly. The ITbased allocation enables continuous portfolio monitoring.
Lending exposure is also subject to a continuous IT-based monitoring process (depending on a classification in terms of risk and
size), which is conducted in regular intervals, and also illustrates any major changes
in risk during completion of the financed
property as well as afterwards. The rating is
also checked and adjusted if necessary on
an annual basis. A downgrade usually tightens and shortens the monitoring schedule.
In the event of major market fluctuations,
portfolios or sub-portfolios are monitored
independent of their individual risk content.
Collateralisation
In recent years, the volume-weighted loanto-value ratio for the entire property portfolio (performing loans) was between 77 %
and 79 % of the mortgage lending value for
German business, and between 70 % and
76 % for international business.
Risk provisioning
Handling of exposures identified as
subject to higher risk exposure by the
early warning system
Depending on their risk content, loans
identified by the bank’s early warning system
as being subject to higher risk exposures
are dealt with either as ”on watch“ or ”risk
prevention“. ”On watch“ exposures are loans
Using guidelines that are applicable to the
property finance business throughout the
Group, the bank calculates the potential
risk of default for individual cases and sets
aside appropriate specific loan loss provisions. Particular consideration is given to
the change in property prices in different
sub-markets and the market value adjusted
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to the current financial position. General
loan loss provisions are established in accordance with IASs / IFRSs.
For this purpose, the bank has subjected
significant parts of its loan portfolio to a
special credit portfolio audit. The in-depth
audit covered Aareal Bank’s entire credit
portfolio; in addition to higher risk exposures
which were audited in full, transactions currently in progress were subject to an extensive detailed review.
Following the split of the former DePfa Group,
DEPFA Deutsche Pfandbriefbank AG relinquished economic and legal responsibility
for the future performance of the property
finance business to Aareal Bank AG, which
granted indemnities in this respect. In cases
where Aareal Bank has not already assumed
liability for property loans, it is responsible for
the management thereof under the Agency
Agreement entered into.
Risk management from a portfolio
perspective
We understand credit risk management as
the identification, measurement and subsequent management of risks at a portfolio
level. In the last financial year, Aareal Bank
gradually enhanced the existing range of
tools it uses to manage credit risks.
Since 2001, one of the main tools for managing credit risk arising from the property
finance business has been the analytical
credit risk model used in the bank. Based on
this model, the bank’s decision-makers are
informed on a quarterly basis of the performance of individual sub-portfolios, and of
their risk content. Utilising this model means
we have already met most of the requirements of the Basel Committee on the identification, assessment, monitoring and management of credit risk concentrations.
As described above, the bank started to
employ a new rating procedure during the
past financial year, which will serve, among
other things, for the determination of probabilities of default (PD). In addition, a procedure to determine the ”loss given default“
(LGD) was implemented during the reporting period. Using these tools, we are, at
present, further developing the analysis of
portfolio risks on the basis of the credit
risk model.
The evaluation of portfolio risks on a valueat-risk basis differentiates between expected
and unexpected loss. Expected loss reflects
the average loss that is anticipated for a oneyear period on the basis of the historical
data. This loss should be accounted for
by the standard risk costs incorporated in
the credit pricing. Unexpected loss, which
is also referred to as credit value-at-risk
(”CVaR“) states the amount of economic
equity capital that must be available to cover
losses over and above the expected loss.
Besides the EAD (exposure at default),
LGD (loss given default) and PD (probability
M A N A G E M E
26
of default) parameters, correlation effects
within the sub-portfolios that arise from the
portfolio composition are also taken into
account through the introduction of socalled ”sectors“ when calculating the portfolio risk. Allocating financing solutions
to the same sector reflects joint economic
dependencies.
The ratio between unexpected and expected loss is used as a key variable for the risk
content of individual segments within the
portfolio. Individual segments can be compared on the basis of this variable. We use
confidence levels (confidence intervals) of
99.90 %, 99.95 % and 99.99 % to calculate
the CVaR.
The main risk contributors can be identified
by determining the extent to which each
individual financing transaction contributes
to the VaR of the portfolio under observation.
The impact of the main risk contributors
on the overall portfolio risks is determined
by analysing the concentration risk.
Further importance is attributed to the
assessment of the portfolio observed by the
types of property finance and by country,
which can identify risk concentrations in
individual markets. Additionally, the hypothetical elimination of the main risk contributors permits a simulation of their impact
on the portfolio as a whole.
The effects of a more volatile economy are
examined using a stress test. For this pur-
pose, the volatilities of the probabilities of
default are intensified and the loss ratios of
the financings are increased. During a further
stress test, the ratings of the financings contained in the portfolio are downgraded by
one class.
The changes to the portfolio structure and to
the VaR that arise during a given observation
period are illustrated in a separate analysis.
1.2 Counterparty risks of financial
institutions
We define counterparty risk in relation to
financial institutions as the potential losses
in value or foregone profit, which may occur
through unexpected default or deterioration
of the credit quality of trading counterparties
with whom the bank has entered into securities transactions, money market, interest
rate or currency derivatives, as well as securities repurchase transactions.
The credit exposure risk is monitored
through a limit system applicable throughout the bank, which was developed during
the past financial year and is directly linked
to the Treasury front office system. This
system provides real-time information on
limits and limit utilisation.
Together with the introduction of the new
”Aarline“ limit system, a new methodology
for the determination of upper limits for
banks has been developed. The upper limit,
which depends on the counterparty’s inter-
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nal rating, determines the overall limit that
may not be exceeded in relation to a counterparty. In addition to the overall limit,
separate sub-limits for replacement risks, the
risks associated with outstanding delivery,
covered bonds (Pfandbriefe) and guaranteed
as well as non-guaranteed securities exist
at counterparty level.
Existing netting master agreements and
collateral agreements are taken into account,
in order to reduce the credit risk exposure
related to derivatives. In this way, counterparty risk is adequately captured, whilst
reducing both the level of required capital
cover and the utilisation of the bank’s internal counterparty limits.
Limit compliance is monitored through the
Risk Controlling unit, which submits regular
reports on limit utilisation per counterparty
to the Management Board. Furthermore, a
multi-stage procedure of escalation ensures
that infringements of limits are reduced in
good time.
The individual credit quality assessment of
the bank’s counterparties is particularly
important to the approval, monitoring and
management process. An internal rating
process is therefore employed for financial
institution counterparties. This process,
which complies with the requirements set
out by the Basel II accord (IRB approach)
and was further modified during the past
financial year, allows all financial institutions
to be reliably classified in internal rating
classes, taking into consideration both quantitative and qualitative data.
The internal ratings can be compared with
those of the external agencies by means of
the default probability associated with the
rating classes.
The choice of counterparty in trading with
financial institutions remains geared towards
names with first-class ratings.
Counterparty risk in interbank trading at a
portfolio level is monitored and managed
using a credit risk model, from which both
the expected and unexpected loss is derived
(credit value at risk or ”CVaR“). This model
also incorporates concentration and diversification effects. Credit value-at-risk corresponds to the maximum amount by which
the actual loss can exceed the anticipated
loss for a given confidence interval.
Limits for CVaR are defined in line with the
analysis of the bank’s capability to carry
and sustain risk. The Risk Controlling unit
is responsible for monitoring compliance
with trading limits for financial institutions,
and for reporting regularly to the Management Board.
1.3 Country risks
When defining country risk, in addition to
the risk of sovereign default or default of
State entities, Aareal Bank also considers
the risk that a counterparty is unable to meet
M A N A G E M E
28
its payment obligations as a result of
Government action, despite being willing
to pay. These types of risks arise only if the
borrower is located in a different country
from the lender, or if the financed property
is located in another country.
The form in which country risk arises can
vary. We must differentiate here between the
relevant default risk of the respective country, and the conversion and transfer risk.
Given Aareal Bank’s business model and
focus on property finance, observation of
country risk is limited to the determination
and monitoring of transfer risks.
With the main focus of the property lending
business being on the member states of the
European Union and North America, exposure is concentrated in countries with very
low risk potential. Geographical diversification
and the avoidance of concentration risks
are therefore of greater importance to us,
from the bank’s overall perspective, than the
observation of transfer risks. The system for
managing country risk, utilised within the
overall management of the bank, was designed in such a way that it takes both criteria into consideration.
Country risk management is conducted by
various units within the bank. The Country
Limit Committee carries out a risk assessment of the relevant countries, grades them
in country risk groups, and conducts an
annual review in terms of country rating.
The limits are set by the Management Board.
The Risk Controlling unit is responsible for
the continuous monitoring of country limits
and for reporting on limit utilisation.
In addition to monitoring the bank’s international exposure, internal limit monitoring
reports utilisations for the bank’s domestic
business, broken down by Federal states
(Bundesländer).
2. Market risks
Market risk is defined as the negative change
in the value of the bank’s overall portfolio
as a result of price fluctuations or changes
in parameters influencing price. Market risk
is differentiated as to general and specific
market risk, or as individual types of risk,
such as interest rate, currency, equity price
and volatility risk.
Aareal Bank’s market risks are managed by
Treasury and monitored daily by the Risk
Controlling unit.
Market Risk Controlling uses the latest
methods and tools for the measurement and
analysis of market risks. Up-to-date reporting to management on the Group’s risk
profile provides decisive input for all short-,
medium- and long-term investment decisions.
The value-at-risk (VaR) concept has been
broadly accepted as a method for measuring
general market risk. This absolute figure, in
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the reporting currency (i. e. €) describes the
potential financial loss incurred on an asset
before countermeasures can take effect.
Since this is a statistical approach, the forecast for the potential loss that may be incurred within a specific period of time is for
a given confidence interval only.
The quality of forecasts made using this
statistical model is checked through socalled backtesting. To assess the quality of
the VaR model used by Aareal Bank, this
concept is applied weekly. Using a binomial
test, the daily present value fluctuations are
compared directly with the VaR indicated for
the previous day, given a one-day holding
period. In line with the selected confidence
level of 95 %, only a small number of events
are expected to break out of the VaR projection (< 5 for a 250-day period).
Although VaR has become a standard tool,
the concept may fail to adequately project
the actual risk in extreme situations – for
example, the 1997 crisis in Asia. Hence, the
VaR data is supplemented by so-called stress
scenarios which simulate potential losses
using historical or simulated extreme situations.
Due to Aareal Bank’s specific orientation
towards commercial property finance, interest rate sensitivity accounts for the bulk of
market risks. Given the ongoing expansion
of the international property finance business, interest rate risks in non-euro markets
(and the corresponding currency risks) are
also growing in importance. Being authorised
to maintain a trading book, Aareal Bank is
in a position to assign transactions to the
trading portfolio as defined for the purposes
of the capital ratio according to the German
Banking Act (Grundsatz I). Given the small
number of transactions and low volumes
concluded during 2005, trading book risks
played a negligible role in the overall risk
scenario.
A variance-covariance approach (delta-normal method) is used throughout the Group
to determine the VaR indicator. VaR is calculated on a daily basis, taking into consideration the correlations between the individual types of risk. Statistical parameters used
in the VaR model are calculated directly from
250-day historical data maintained within
the bank. The loss potential is determined
applying a 99 % confidence interval and a
ten-day holding period.
The limit set for the VaR figure is derived
from the analysis of the bank’s capability to
carry and sustain risk. This capability is then
allocated to individual units.
Regular backtesting checks the quality of the
statistical procedure used to measure risk on
a weekly basis; profits and losses from the
market position fluctuations are compared
daily with the upper projected loss limit
(VaR) forecast on the previous day (known
as ”clean backtesting“). In accordance with
the ”red-amber-green“ indicator system prescribed by Basel II, no more than five out-
M A N A G E M E
30
liers (based on the prescribed 99 % confidence interval) are permitted over a one-year
period. Only two negative outliers were
observed during 2005, thus confirming the
anticipated forecast quality of the VaR model
applied.
The daily value-at-risk calculation is supplemented by scenario analyses. Aareal Bank
calculates present value fluctuations both
on the basis of real extreme market movements over recent years (German reunification, Asian crisis, September 11, etc.), and
also using simulated market movements
(parallel shifts, structural changes, steepening
of the yield curve). This analysis requires
that all positions are revalued fully on the
basis of these market scenarios. Within the
scope of weekly and monthly reporting, the
resulting impact on present value is compared to a special stress limit. No breach of
set limits occurred during 2005.
The Management Board is informed daily
of the limit utilisation and development of
present values. In addition to a VaR breakdown by risk factor (currency, interest rate
per currency and maturity), the basis point
value (BPV) is also reported. This figure
provides important information on the sensitivity of market positions to interest rate
fluctuations for each maturity range. Further, the gap analysis per currency provides
information on all of the bank’s positions in
respect of which the interest rate has been
fixed. In addition to disclosing the net gap
positions in the respective maturity bucket,
this data allows for specific analyses concerning the risks and returns from the current portfolio.
During the 2005 financial year, the processes
employed proved to be able to quantify the
risks arising from market price fluctuations
in a timely and accurate manner. In addition,
new products were quickly and fully integrated into these processes. We will continue
to focus on expansions of the risk process
that become necessary as new products
and markets emerge.
3. Operational risks
The bank defines operational risk (OR), in
accordance with the Basel II accord, as the
threat of losses caused by inappropriate
internal procedures, human resources and
systems (or their failure), or through external events. This definition also includes
legal risks. In contrast, strategic, reputation
and systematic risks are not included.
It is the objective of the policy pursued by
Aareal Bank, which is geared towards
appropriate monitoring and control of operational risks, to achieve a risk-minimising
or loss-limiting effect at an early stage by
employing a pro-active approach.
Within this context, management will be
supported effectively by the installation and
maintenance of appropriate controlling of
the relevant operational risks, in line with
N T
R E P O R T
31
the type and extent of the legal regulations
as well as with the bank’s risk profile.
Preparations within the bank to implement
the requirements arising from both international and domestic developments continued
on schedule during 2005. In particular, the
OR system that was implemented for this
purpose was enhanced and adjusted to meet
current regulatory requirements as well as
being in line with industry standards. The
objective is to identify and assess operational risks efficiently and to document any
resulting losses.
By means of this system, decentralised data
capture as well as centralised and timely
compilation of relevant information are ensured. This information provides the basis
on which (among other things) measures
for preventing / reducing operational risks
are implemented. The responsibility for implementing these measures rests with the
operative divisions.
The OR system uses the following tools to
manage operational risks:
• Self assessments: analysis thereof can
provide management with indicators of
any potential risks within the organisational structure;
• Risk inventories that include a periodic
systematic identification and compilation
of all relevant risks;
• A loss database, in which relevant ope-
rational risk cases are reported, and in
which they can be monitored until they
are officially closed.
Further to these tools, the bank aims at
reviewing relevant individual scenarios, and
implementing any measures required, on
the basis of external data.
Taken together, these tools for managing
operational risks result in a control circuit
which leads to risk identification, evaluation,
and management – through to risk control.
4. Liquidity risks
Liquidity risk defines the threat that current
and future payment obligations may not be
met in full, or in good time.
Liquidity management is assigned to Treasury – the conduct of this function is based
on cash flow analyses, which are constantly
refined and further developed. To analyse
both the maturity structure and quality of
the individual money market and capital
market products, cash flows from the various refinancing sources are divided into
different liquidity classes.
The various properties, such as rollover
probability, collateralisation, or ability to
liquidate, are accounted for, thereby allowing
the possible liquidity risks to be selectively
quantified. The overall liquidity situation is
M A N A G E M E
32
broken down into several maturity ranges,
taking into account possible stress scenarios.
The bank’s portfolio comprises a broad
range of liquid and high-quality securities,
ensuring the ability for large-scale generation
of liquidity in the short-term, even in a tight
market environment or a crisis scenario.
The requirements of the liquidity principle
in accordance with section 11 of the
German Banking Act (Grundsatz II), which
is relevant to liquidity management, were
always complied with.
N T
R E P O R T
33
F I N A N C I A L S TAT E M E N T S
F I N A N C I A L
S TA
34
INCOME STATEMENT
OF AAREAL BANK AG FOR THE PERIOD FROM 01 JANUARY TO 31 DECEMBER 2005
EXPENSES
2005
2004
1,037.9
1,112.2
48.3
49.7
1.5
9.6
214.5
185.9
9.2
11.1
32.6
17.0
248.1
364.2
€ mn
Interest expenditure
Commission expenditure
Net expenditure on financial operations
General administrative expenses
a) Staff costs
aa) Wages and salaries
98.4
ab) Social security contributions, pensions
and other employee benefits
22.7
Including: pensions
121.1
10.3
b) Other administrative expenses
Depreciation / amortisation of,
and writedowns on intangible and fixed assets
Other operating expenses
Depreciation / amortisation of,
and writedowns on claims and certain securities,
additions to loan loss provisions
Depreciation of, and writedowns on
participating interests, interests in affiliated
companies and securities held as fixed assets
93.4
0.0
47.2
Expenditure for assumption of losses
26.9
44.5
Net income taxes
50.4
-5.4
Other taxes not reported
under ”Other operating expenses“
Total expenses
Net loss
Profit carried forward
0.0
0.1
1,669.4
1,836.1
-33.3
-162.4
0.0
0.0
0.0
0.0
33.3
162.4
0.0
0.0
0.0
0.0
Withdrawals from retained earnings
from the reserve for treasury shares
from other retained earnings
Transfer to retained earnings
Amounts transferred to the reserve for treasury shares
Amounts transferred to other retained earnings
Net retained profit
T E M E N T S
35
INCOME
2005
2004
1,380.4
1,502.3
53.6
47.2
Income from profit pools, profit transfer agreements
and partial profit transfer agreements
47.3
16.4
Commission income
94.4
89.2
Income from write-ups to participating interests,
shares in affiliated companies and securities held as fixed assets
43.2
Other operating income
17.2
€ mn
Interest income from
a) Lending and money market transactions
b) Fixed-income securities and book-entry securities
1,088.5
291.9
Current income from
a) Equities and other non-fixed income securities
b) Participating interests
c) Interests in affiliated companies
Net loss
Total income
32.1
3.3
18.2
18.6
33.3
162.4
1,669.4
1,836.1
F I N A N C I A L
S TA
36
BALANCE SHEET
OF AAREAL BANK AG AS AT 31 DECEMBER 2005
ASSETS
2005
2004
1,492.3
1,105.2
3,359.5
2,001.4
20,206.6
21,541.8
7,626.8
7,891.1
526.5
450.7
65.1
89.1
822.2
586.5
€ mn
Cash funds
a) Cash on hand
0.0
b) Balances with central banks
1,492.3
Including: with Deutsche Bundesbank
1,417.5
Loans and advances to banks
a) Payable on demand
1,943.5
b) Other loans and advances
1,416.0
Loans and advances to customers
Including: Secured by charges on real property
Loans to local authorities
8,095.2
1,379.5
Debt and other fixed-income securities
a) Money market instruments
0.0
b) Bonds and notes
ba) Public-sector issuers
4,243.2
Including: Securities eligible as
collateral with Deutsche Bundesbank
3,088.2
bb) Other issuers
2,264.1
6,507.3
Including: Securities eligible as
collateral with Deutsche Bundesbank 1,726.5
c) Own bonds
Nominal amount:
1,119.5
1,109.9
Equities and other
non-fixed income securities
Participating interests
Including: Interests in banks
0.8
Interests in financial services providers –
Interests in affiliated companies
Including: Interests in banks
360.9
Interests in financial services providers –
T E M E N T S
37
SHAREHOLDERS' EQUITY AND LIABILITIES
2005
2004
8,319.1
8,040.1
15,013.1
12,549.5
7,864.2
10,392.2
2,964.5
2,230.2
Other liabilities
85.5
125.5
Deferred items
138.7
112.1
267.0
210.7
Subordinated liabilities
936.8
890.6
Profit-participation certificates
564.4
557.4
€ mn
Liabilities to banks
a) Payable on demand
1,033.9
b) With an agreed maturity
or notice period
7,285.2
Liabilities to customers
a) Savings deposits
aa) With a notice period
of three months
0.0
ab) With an agreed notice period
of more than three months
2.3
2.3
b) Other liabilities
ba) Payable on demand
4,692.0
bb) With agreed maturity
or notice period
10,318.8
15,010.8
Certificated liabilities
a) Bonds issued
7,864.2
b) Other certificated liabilities
–
Trust liabilities
Including: Trustee loans
2,963.0
Provisions
a) Provisions for pensions and
similar obligations
60.0
b) Tax provisions
65.5
Including: Provisions for deferred taxes
c) Other provisions
Including: Maturing within two years
50.1
141.5
56.8
F I N A N C I A L
S TA
38
ASSETS
2005
2004
2,964.5
2,230.2
13.5
17.0
Fixed assets
9.7
9.5
Other assets
€ mn
Trust assets
Including: Trustee loans
Intangible assets
2,963.0
113.3
184.3
Deferred items
95.3
79.2
Deferred taxes
101.1
98.6
37,396.4
36,284.6
Total assets
T E M E N T S
39
SHAREHOLDERS' EQUITY AND LIABILITIES
2005
2004
58.0
58.0
1,185.1
1,118.3
37,396.4
36,284.6
555.7
793.4
3,020.5
2,989.0
€ mn
Fund for general banking risks
Shareholders’ equity
a) Subscribed capital
128.3
Contributions by silent partners
233.5
b) Capital reserve
509.5
c) Retained earnings
ca) Legal reserve
cb) Reserve for treasury shares
cc) Statutory reserves
cd) Other retained earnings
d) Net retained profit
4.5
–
–
309.3
313.8
0.0
Total shareholders’ equity and liabilities
Contingent liabilities (€ mn)
a) Contingent liabilities
from discounted forwarded bills
b) Liabilities from guarantees
and indemnity agreements
c) Liability from the pledging
of collateral for third-party liabilities
–
555.7
–
Other commitments (€ mn)
a) Repurchase obligations from
securities repurchase agreements
–
b) Placement and underwriting obligations
–
c) Irrevocable loan commitments
3,020.5
N O T E S T O T H E F I N A N C I A L S TAT E M E N T S
N O T E S
40
ACCOUNTING AND
VALUATION PRINCIPLES
The financial statements of Aareal Bank AG for the 2005 financial year were prepared
in accordance with the provisions of the German Commercial Code (Handelsgesetzbuch – ”HGB“) and the supplementary regulations of the German Stock Corporation
Act (Aktiengesetz – ”AktG“) and the German Accounting Directive for Banks and
Financial Services Providers (Verordnung über die Rechnungslegung der Kreditinstitute
und Finanzdienstleistungsinstitute – ”RechKredV“).
Receivables
Loans and advances to banks and customers
are carried at amortised cost, including deferred interest. Premiums and discounts are
shown under deferred items, in accordance
with section 340e (2) of the HGB. Credit
risks are accounted for by setting aside provisions in the amount of the expected loss,
using prudent estimates. Aareal Bank changed the calculation method for general loan
loss provisions in 2005, replacing the previous method (which was based on the principles defined by the German fiscal authorities) with a calculation based on standard
risk costs at a portfolio level. Under this
method, standard risk costs are determined
on the basis of actual risk provisioning
expenditure, and recalculated on a regular
basis (next in 2006). Amounts released as
a result of the change in methodology were
offset in equity, by additions to flat-rate
portfolio value adjustments.
write-down no longer apply, such securities
must be written up in accordance with section 280 of the HGB.
Participating interests, interests in
affiliated companies and fixed assets
Participating interests, interests in affiliated
companies and fixed assets are stated at
the cost of acquisition or manufacture, less
scheduled depreciation. Special write-downs
are required in the event of impairments in
value deemed to be other than temporary.
Where the reasons for the write-down no
longer apply, such participating interests or
interests in affiliated companies must be
written up in accordance with section 280
of the HGB. Where land and buildings were
acquired to salvage loans and have been in
the possession of the bank for more than
five years, these are reported under fixed
assets. Low-value commercial goods (”geringwertige Wirtschaftsgüter“) are written down
in full in the year of their acquisition, and
shown as additions or disposals in the list
of investments.
The option to disclose a net amount,
pursuant to section 340c (2) of the HGB
has been exercised.
Treasury shares
Securities
Bonds and other fixed-income securities, as
well as equities and other non-fixed income
securities, are measured strictly at the lower
of cost or market value, as prescribed for
current assets, taking into account hedging
instruments. Where the reasons for the
Treasury shares are capitalised at cost,
and the appropriate amount transferred to
the reserve for treasury shares. Treasury
shares are measured at the lower of cost or
market.
41
Liabilities
Liabilities are stated at their repayment
amount. The difference between the nominal value and the initial carrying amount of
liabilities is recognised under deferred items,
and amortised over the term of the liability.
Provisions
Provisions for pensions and similar obligations are formed using an interest rate of 6 %
using the cost method (”Teilwertverfahren“)
according to section 6 a of the German
Income Tax Act (Einkommensteuergesetz –
EStG). The update of the actuarial tables
used (to ”Richttafeln 2005 G“) was taken
into account when determining provisions
for pensions, and the results fully recognised
in income. Provisions for taxes and other
provisions have been set aside in the amount
of the expected liability, as required by prudent commercial judgement.
Currency translation
Aareal Bank has translated balance sheet
items and pending transactions in foreign
currency, in accordance with section 340 h
of the HGB and statement 3/1995 issued
by the Banking Committee of the German
Institute of Auditors (BFA). The bank has
classified all foreign exchange transactions
as ”specific cover“ in accordance with section 340 h (2) sentence 2. Hence, income
and expenses from currency translation
were recognised in the income statement, in
accordance with section 340h (2) sentences
1 and 2 of the HGB. As all pending foreign
currency exposures at the end of 2005 were
related to concurrent business operations,
no amounts needed to be disclosed separately under section 340h (2) sentence 4 of
the HGB.
The bank decomposes foreign exchange forward transactions into an agreed spot base
and the swap rate, recognising a deferred
liability (reported under other liabilities) equivalent to the net aggregate difference between
the spot base and the exchange rates prevailing on the reporting date. Forward premiums
or discounts are amortised in net interest
income over the term of the transaction. Currency translation income and expenses are
reported in net profit on financial operations.
Trading portfolio
Aareal Bank AG is authorised to operate a
trading book pursuant to section 1 (12) of
the KWG. Transactions in the trading book
are subject to institutionalised risk management, with a strict limitation of risk exposure
and daily risk reporting. Financial transactions
accounted for in the trading book are measured strictly at the lower of cost or market
in accordance with section 253 of the HGB.
This measurement is carried out on a portfolio basis, whereby positive and negative
measurement results within the same portfolio are set off; any net unrealised loss on
a portfolio basis is reported, while a net
unrealised profit is not. Interest on tradingbook securities is recognised as interest
components attributable to interest-rate
derivatives, as part of the results from ownaccount trading. The results of own-account
trading are reported in net profit on financial operations.
N O T E S
42
NOTES TO THE INCOME STATEMENT
Income by geographical segment
The aggregate of (i) interest income, (ii)
current income on equities and other nonfixed income securities, and on participating
interests and interests in affiliated companies,
(iii) commission income and (iv) other operating income is broken down by geographic region, in accordance with section 34
of the RechKredV.
Germany
Europe and America
Total
2005
€ mn
2004
€ mn
1,334.9
1,412.8
220.7
244.5
1,555.6
1,657.3
Administration and intermediation
services rendered to third parties
Administration and intermediation services
rendered to third parties concerned the
administration and intermediation of loans
and trust assets.
Other operating income and expenses
Other operating income in the amount of
€ 17.2 million includes € 7.3 million in
income under agency contracts for Group
subsidiaries; and € 2.8 million in income
attributable to the release of provisions which
were no longer needed.
Other operating expenses of € 32.6 million
include € 8.4 million in restructuring ex-
penses incurred in respect of the bank’s
strategic realignment; € 5.3 million in writedowns of other non-lending receivables;
€ 5.0 million in adjustments to book values
of loans and advances to customers; and
€ 4.6 million for the reimbursement of expenses to a US subsidiary.
Net income tax expense
Besides income taxes for the current year,
this item includes € 35.9 million in net
expenses from the recognition of deferred
tax liabilities, comprising € 3.0 million in
amounts capitalised (€ 2,9 million in assets
recognised and € 0.1 in assets derecognised)
and € 38.9 million in expenses from the
recognition of deferred tax liabilities.
43
NOTES TO THE BALANCE SHEET
Securities negotiable at a stock exchange
Analysis of securities negotiable at a stock exchange in the balance sheet line items shown
below:
Listed
31 Dec 2005
€ mn
Unlisted
31 Dec 2005
€ mn
6,495.6
999.1
31.5
84.1
Participating interests
–
–
Interests in affiliated companies
–
–
Debt and other fixed-income securities
(exluding pro-rata interest)
Equities and other non-fixed-income securities
Valuation units with hedging transactions have been created with respect to negotiable
securities in an aggregate amount of € 4,644.5 million. Equities and other non-fixed income
securities includes € 7.0 million of investment fund units which are exclusively reserved to
meet the Aareal Bank AG’s pension obligations vis-à-vis its active and retired employees
in Germany.
Subordinated assets
The following items comprise subordinated assets in the amount shown (excluding pro-rata
interest):
31 Dec 2005
€ mn
Loans and advances to banks
31 Dec 2004
€ mn
85.2
62.2
160.2
169.2
Bonds and other fixed-income securities
14.9
14.9
Equities and other non-fixed income
securities
15.6
13.4
–
–
Loans and advances to customers
Other assets
N O T E S
44
Movements in fixed assets
Cost
01 Jan 05 Additions
€ mn
€ mn
Intangible assets
Depreciation and writedowns
Reductions
€ mn
Accumulated
Transfers 31 Dec 04
€ mn
€ mn
Current
year
€ mn
Reductions
€ mn
Book values
Transfers 31 Dec 05 31 Dec 04
€ mn
€ mn
€ mn
38.1
2.3
0.1
–
21.1
5.8
0.1
–
13.5
17.1
8.6
0.0
1.3
–
2.6
0.5
0.2
–
4.4
2.5
49.9
1.2
2.3
–
42.9
2.9
2.3
–
5.3
7.0
Fixed assets
Land and buildings
Office furniture and equipment
Change
Participating interests
Interests in affiliated companies
Book value
31 Dec 2005
€ mn
Book value
31 Dec 2004
€ mn
65.1
89.1
822.2
586.5
Bonds and other fixed
income securities
–
–
Equities and other non-fixed
income securities
–
–
The option to aggregate non-trading assets, pursuant to section 34 (3) of the RechKredV,
has been exercised. The bank has rented the majority of business land and buildings used
for its business operations from one of its subsidiaries.
As part of the transfer of some of the business activities from DEPFA Deutsche Pfandbriefbank AG to Aareal Bank AG, goodwill has been capitalised and reported under intangible
assets; given the reverse materiality, this will be amortised over the expected useful life of
nine or ten years, respectively.
45
Other assets
Other assets include, in particular, € 31.5 million in distribution claims vis-à-vis special
funds (investment funds under German
investment law), and € 48.0 million in receivables from assumption of profits.
Deferred taxes
Deferred taxes were recognised in accordance
with section 274 (2) of the HGB during the
2005 financial year. At 31 December 2005,
€ 101.1 million in deferred tax assets and
€ 50.1 million in deferred tax liabilities were
reported. Deferrals are made in the amount
of the assumed tax burden or relief in coming financial years based on the respective
local tax rates.
Other liabilities
Other liabilities mainly include € 20.2 million in liabilities from the assumption of
losses; € 15.4 million in liabilities recognised
from currency translation; and € 7.5 million
in interest liabilities on silent partnership
contributions.
Subordinated liabilities
Subordinated funds raised in accordance
with section 10 (5a) of the KWG do not
provide for any early repayment obligation
for Aareal Bank AG. In the event of liquidation or insolvency, claims on interest and
principal from these liabilities are subordi-
nated to the claims of all other creditors of
Aareal Bank AG, which are not themselves
subordinated.
This also applies to those subordinated
funds raised that are not specified in detail.
Total interest expenses for subordinated
liabilities of € 49.3 million include
€ 12.5 million in deferred interest not yet
due.
In the 2002 financial year, Aareal Bank AG
raised € 227.0 million in subordinated
capital from Aareal Property Services B.V.,
Amsterdam, due on 31 December 2026, of
which € 23 million were provided to Aareal
Bank France S.A.. The bank has an initial
right to terminate on 31 December 2006;
the creditors do not have any early termination rights.
Aareal Capital Funding LLC, Wilmington /
USA, has assumed all obligations of Aareal
Property Services B.V. under subordinated
capital issues as at 31 December 2005.
Given the changed transaction structure, the
bank now has € 250 million in subordinated equity at its disposal, of which it, in
turn, made partial amounts available to
Aareal Bank France S.A. (€ 23 million) and
Aareal Hyp AG (€ 47 million). The bank’s
attributable share of € 180 million exceeds
10 % of the aggregate nominal value of all
subordinated liabilities.
N O T E S
46
Profit-participation certificates
The terms and conditions of the profit-participation certificates issued comply with the
requirements of section 10 (5) of the KWG. It comprises the following profit-participation
certificates issued by Aareal Bank AG (previously: Depfa Bank AG BauBoden):
Nominal amount
€ mn
Issue
currency
Interest rate
(% p. a.)
Maturity
Bearer profitparticipation certificates
38.4
DM
7.125
1993 – 2005
18.4
DM
6.500
1994 – 2005
150.0
€
6.750
2002 – 2011
100.0
€
6.375
2002 – 2011
60.0
€
6.125
2003 – 2013
366.8
Registered profitparticipation certificates
10.2
DM
6.800
1996 – 2007
5.0
€
7.010
2002 – 2012
10.0
€
7.010
2002 – 2012
5.0
€
7.010
2002 – 2012
10.0
€
7.010
2002 – 2012
5.0
€
7.100
2002 – 2012
10.0
€
7.150
2002 – 2012
5.0
€
7.030
2002 – 2012
5.0
€
7.220
2002 – 2016
5.0
€
7.220
2002 – 2016
5.0
€
6.080
2003 – 2013
20.0
€
6.120
2003 – 2013
5.0
€
6.310
2003 – 2017
25.0
€
5.750
2004 – 2014
2.0
€
5.470
2004 – 2014
5.0
€
5.480
2004 – 2014
5.0
€
5.380
2004 – 2016
20.0
€
5.950
2004 – 2016
6.0
€
5.830
2005 – 2017
163.2
47
Pursuant to the terms and conditions of issue,
holders of profit-participation certificates
have a claim on interest payments which
takes precedence over the profit entitlements
of shareholders. Where a distribution during
the term of the profit-participation certificates would cause a net loss, said interest
claim would be reduced, creating a claim
for backpayment during the term of the certificates at the same time.
Repayment takes place at the nominal
amount (subject to any loss sharing), on
the day after the Annual General Meeting
passing resolutions regarding the relevant
financial year. This took place for the 2005
financial year for the first time.
€ 35.3 million (2004: € 33.8 million) in
interest expenses were incurred with respect
to profit-participation certificates issued.
The profit-participation certificates evidence
creditors’ rights; they do not grant any share
in the liquidation proceeds. Profit-participation certificates meet the requirements
for liable equity capital pursuant to section
10 (5) of the KWG.
Purchase of treasury shares
The Company has been authorised by
the Annual General Meeting held on
15 June 2005 to purchase and sell own
shares, pursuant to section 71 (1) no. 7 of
the AktG, until 14 December 2006. The
volume of shares acquired for this purpose
must not exceed 5 % of the bank’s share
capital at the end of any day. The lowest
price at which a share may be acquired is
determined by the closing price of the shares
in Xetra (or a comparable successor system)
on the trading day prior to such purchase
less 10 %. The highest price shall not exceed such average closing price plus 10 %.
By virtue of the same resolution, the Company has been authorised by the Annual
General Meeting to purchase own shares
not exceeding 10 % of subscribed capital for
other purposes than securities trading until
14 December 2006. Shares may be acquired
via the stock exchange or by means of a
public offer to buy, directed at all shareholders. Neither the purchase price, excluding
ancillary costs, (if the acquisition takes place
via the stock market) nor the offering price,
excluding ancillary costs, (in case of a public offer to buy) may exceed or fall below
the average closing price of the Bank’s shares
in Xetra (or a comparable successor system)
during the three trading days prior to the
purchase or the commitment to purchase
by more than ten per cent (10 %).
Said authorities were not utilised. No treasury shares were held at the end of the year
under review.
N O T E S
48
Development of shareholders’ equity reported on the balance sheet
€ mn
€ mn
Subscribed Capital
Balance at 01 Jan 2005 (of which: € 233.5 million
Contributions by silent partners)
Additions due to capital increase
350.1
11.7
Balance at 31 Dec 2005 (of which: € 233.5 million
Contributions by silent partners)
361.8
Capital reserve
Balance at 01 Jan 2005
Additions due to capital increase
421.1
88.4
Balance at 31 Dec 2005
509.5
Retained earning
Legal reserve
Balance at 01 Jan 2005
4.5
Balance at 31 Dec 2005
4.5
Other retained earnings
Balance at 01 Jan 2005
Transfer from net retained profit 2004
Withdrawal from reserves to cover net loss
Balance at 31 Dec 2005
Shareholders’ equity as at 31 Dec 2005
342.6
0.0
-33.3
309.3
1,185.1
Subscribed capital is divided into 42,755,159 bearer unit shares (notional no-par value
shares).
The regulatory capital in accordance with the German Banking Act (KWG) totalled
€ 2,221.2 million. Based on the confirmation of Aareal Bank AG’s financial statements
2005, regulatory capital totalled € 2,171.0 million.
49
Authorised capital
The Annual General Meeting held on
15 June 2005 resolved to approve a new
authorised capital.
The Management Board is authorised to increase, on one or more occasions, the Company’s share capital by up to a maximum
total amount of € 58,300,000 (Authorised
Capital) by issuance of new bearer shares
for contribution in cash or in kind (where
such contribution in kind may represent the
full contribution, or part thereof), subject to
the approval of the Supervisory Board; this
authority will expire on 14 June 2010. The
shareholders shall be granted a subscription
right, unless the Management Board exercises its authority to exclude shareholder’s
pre-emptive subscription rights.
exercising said authorisation. Any shares
that were issued or sold during the term
and prior to the exercising of said authorisation, in direct or analogous application of section 186 (3) sentence 4 of the
AktG, shall count towards the above
threshold of ten per cent (10 %) of the
issued capital. Said ten-per-cent threshold
shall also include shares which were
issued (or the issuance of which is required) under the terms of debt securities
with embedded conversion or option
rights on shares issued pursuant to section 186 (4) sentence 4 of the Akt G,
which are outstanding at the time of
exercising said authorisation;
• for fractional amounts arising from the
determination of the applicable subscription ratio;
• where this is necessary to grant subscrip-
The Management Board may exclude
shareholders’ subscription rights, subject
to approval by the Supervisory Board and
the conditions set out below:
• in the event of a capital increase against
cash contributions, provided that the
issue price is not significantly below the
prevailing stock exchange price. However,
this authorisation shall be subject to the
proviso that the aggregate value of shares
issued to the exclusion of shareholders’
subscription rights, in accordance with
section 186 (3) sentence 4 of the AktG,
shall not exceed ten per cent (10 %) of
the issued share capital at the time of
tion rights to the holders of bonds with
warrants or convertible bonds issued (or
to be issued) by the Company or its affiliated companies, which subscription rights
are required to entitle these holders to
the same extent as they would have been
entitled upon exercising their conversion
or option rights or upon performance of
a conversion obligation, if any, thus protecting such holders against dilution;
• for an amount of up to € 4 million, to
offer employees (of the company or its affiliated companies) shares for subscription;
• where the new shares will be issued
against contributions in kind.
N O T E S
50
Exercising said authorisations, and with
the approval of the Supervisory Board, the
Management Board resolved on 06 November 2005 to increase the Company’s issued
share capital by € 11,660,496 (equivalent
to 10 % of the issued share capital prior to
the increase) to € 128,265,477, by issuing
3,886,832 bearer unit shares against cash
contributions, at an issue price of € 25.75.
Excluding shareholders’ pre-emptive subscription rights, Aareal Holding Verwaltungsgesellschaft mbH, Bayerische Beamtenversicherung and Neue Bayerische Beamten
Lebensversicherung AG were admitted to
subscribe and acquire the new shares. The
capital increase was carried out, and entered
in the Commercial Register on 21 November 2005.
Following this increase, the remaining authorised capital amounts to € 46,639,504. This
authorisation will expire on 14 June 2010.
tible profit-participation certificates with an
aggregate nominal amount of € 400 million,
which grant option and/ or conversion rights
to ordinary shares of the Company, equivalent to a share of the equity capital of up to
€ 20 million. In connection with this authorisation resolution, the convertible bonds
and / or bonds cum warrants may also be
issued by domestic or foreign subsidiaries
wholly owned by the Company. In this case,
the Management Board is authorised to
guarantee the conversion and / or option
rights granted on behalf of such sub diaries,
or to grant option rights or conversion rights
to new company shares to the holders of
any bonds issued by subsidiaries.
As an alternative to the issuance in euro, the
bonds may also be issued in any currency
which is the legal tender of an OECD member state (limited, however, by the equivalent
value in euro). The time to maturity of such
bonds may be up to 20 years.
Conditional capital
The share capital is subject to a conditional
capital increase of up to € 20 million. Such
conditional capital increase serves to enable
the company to service convertible bonds
and bonds with warrants, or convertible participation certificates, on the basis of the
authorisation resolution of the Annual General Meeting held on 29 April 2002. Said
resolution authorised the Management
Board to issue, on one or more occasions,
until 30 November 2006, convertible bonds
and /or bonds cum warrants and /or conver-
The conditional capital increase will be executed only to the extent that the holders of
convertible bonds and / or bonds cum warrants or warrants to be issued by 30 November 2006 exercise their conversion or option
rights.
The new shares will be entitled to a share in
the profits from the beginning of the financial year in which they come into existence.
No convertible bonds or warrants were in
issue as at the balance sheet date.
51
Contingent liabilities and other commitments
Contingent liabilities as at 31 December 2005 include € 193.1 million in maximum default
guarantees extended to DEPFA Deutsche Pfandbriefbank AG (within the scope of splitting
the former DePfa Group), for the purpose of providing cover against risks of default with
respect to the property loan portfolio held by DEPFA Deutsche Pfandbriefbank AG.
Irrevocable loan commitments are made up of credit and loan commitments. Of the total
amount, € 1,919.2 million relates to domestic borrowers and € 1,101.3 million to foreign
borrowers.
Remaining terms
31 Dec 2005
€ mn
Loans and advances to banks
3,359.5
payable on demand
1,943.5
up to 3 months
802.5
between 3 months and 1 year
58.4
between 1 year and 5 years
85.8
more than 5 years
75.8
pro rata interest
393.5
Loans and advances to customers
20,206.6
up to 3 months
10,289.7
between 3 months and 1 year
1,935.3
between 1 year and 5 years
5,473.4
more than 5 years
2,428.4
indefinite maturity
pro rata interest
Bonds and other fixed-income securities
maturing in the following year (nominal amount)
–
79.8
592.1
N O T E S
52
31 Dec 2005
€ mn
Liabilities to banks
8,319.1
payable on demand
1,033.9
up to 3 months
3,955.4
between 3 months and 1 year
between 1 year and 5 years
516.6
1,903.8
more than 5 years
550.9
pro rata interest
358.5
Savings deposits with agreed notice period
2.3
up to 3 months
0.0
between 3 months and 1 year
2.3
between 1 year and 5 years
0.0
pro rata interest
0.0
Other liabilities to customers
15,010.8
payable on demand
4,692.0
up to 3 months
3,928.1
between 3 months and 1 year
386.7
between 1 year and 5 years
730.3
more than 5 years
pro rata interest
Bonds issued maturing in the following year
(nominal amount)
Other certificated liabilities
5,141.8
131.9
2,054.0
–
Deferred items
Deferred items primarily include upfront payments as well as any premiums and discounts
on registered bonds, claims under promissory note loans and other loans, that have been
amortised over the relevant terms.
53
Deferred assets in the amount of € 95.3 million include € 23.4 million in premiums on
originated loans, in accordance with section 340e (2) sentence 3, as well as € 19.2 million
in discounts on bonds issued and borrowings pursuant to section 250 (3) of the HGB.
€ 68.9 million of deferred liabilities (total: € 138.7 million) are accounted for by discounts
on originated loans, in accordance with section 340e (2) sentence 2 of the HGB.
Trust business
Trust assets
31 Dec 2005
€ mn
Loans and advances
to banks
Loans and advances
to customers
Equities and other nonfixed-income securities
Total
–
2,963.0
Trust liabilities
31 Dec 2005
€ mn
Liabilities
to banks
2,696.2
Liabilities
to customers
268.3
1.5
2,964.5
Total
2,964.5
Notes on affiliated companies and enterprises with a participatory interest
Affiliated companies
31 Dec 2005
€ mn
Loans and advances to banks
Loans and advances to customers
Bonds and other
non-fixed income securities
Liabilities to banks
Liabilities to customers
Certificated liabilities
Subordinated liabilities
Related Enterprises
31 Dec 2005
€ mn
2,037.6
–
407.1
21.3
4.8
–
1,307.2
–
187.6
0.2
–
–
250.0
–
N O T E S
54
Interests held in large limited companies
Aareal Bank AG holds more than 5 % of the voting rights in the following large limited
companies: Aareal Hyp AG and Deutsche Structured Finance GmbH.
Shareholdings
The full list of shareholdings has been filed with the Commercial Register at the Wiesbaden
District Court, under registration number HRB 13184, and may also be obtained directly and
free of charge from Aareal Bank AG.
Assets pledged as collateral
Total assets pledged as collateral:
Loans and advances to banks
31 Dec 2005
€ mn
31 Dec 2004
€ mn
279.3
270.7
Loans and advances to customers
1,294.7
988.7
Bonds and other fixed-income
securities
3,645.1
3,262.9
Total
5,219.1
4,522.3
Repurchase agreements
The book value of bonds pledged under
repo agreements totalled € 910.9 million as
at 31 December 2005. In addition, outstanding open-market transactions totalled
€ 1,707.6 million.
German Banking Act (Grundsatz I), was
€ 8,291 million at the balance sheet date,
while liabilities totalled € 8,281 million.
Forward transactions
The following forward transactions had
been entered into as at 31 December 2005:
Assets and liabilities in foreign currencies
• Transactions based on interest rates
The aggregate equivalent amount of assets
denominated in foreign currencies, calculated
under the capital ratio according to the
Caps, floors, futures, swaptions, interest
rate swaps
55
• Transactions based on exchange rates
Spot and forward foreign exchange transactions, cross-currency interest rate swaps
• Other transactions
Credit default swaps, credit-linked notes
Interest-rate based transactions and crosscurrency interest rate swaps are primarily
used to hedge against interest rate and
exchange rate fluctuations. Spot and forward
* including € 2,744 million in
financial guarantees
foreign exchange transactions are almost
exclusively used for refinancing purposes.
Credit derivatives are used to hedge Aareal
Bank AG’s existing credit risk exposure.
Derivatives used to hedge interest or exchange rate risks are valued together with
the underlying transaction; no individual
valuation of underlying transaction and derivative is carried out.
Remaining terms and nominal amounts of derivatives are broken down in the following table:
Nominal amount
Nominal amount by remaining lifetime 31 Dec 2005
up to
3 months
€ mn
3 months
to 1 year
€ mn
1 to 5 years
€ mn
more than
5 years
€ mn
31 Dec 2005
€ mn
31 Dec 2004
€ mn
961
2,498
14,184
13,676
31,319
28,178
Interest rate instruments
Interest rate swaps
Swaptions
21
0
114
73
208
350
Caps, floors
110
394
2,887
993
4,384
3,426
Interest rate futures
185
100
100
0
385
697
1,277
2,992
17,285
14,742
36,296
32,651
4,977
6
4
4,987
6,474
0
607
2,914
343
3,864
609
4,977
613
2,918
343
8,851
7,083
4,113
4,113*
5,528
Total interest rate instruments
Currency-related instruments
Spot and forward foreign exchange
transactions
Interest rate / currency swaps
Total currency-related instruments
Other forward transactions
Credit default swaps
Credit-linked notes
Total other forward transactions
Total
1,014
1,014*
1,014
0
0
0
5,127
5,127
6,542
6,254
3,605
20,203
20,212
50,274
46,276
N O T E S
56
The following table shows positive and negative market values, aggregated by product level
(without taking into account collateral or netting agreements): Valuation of derivatives is
based on recognised methods such as cash flow analyses, or options pricing models.
Market values 31 Dec 2005
Market values 31 Dec 2004
positive
€ mn
negative
€ mn
positive
€ mn
negative
€ mn
640
738
503
724
Swaptions
0
1
Caps, floors
9
9
8
8
Interest rate futures
0
0
–
–
649
748
511
734
11
24
95
8
Interest rate instruments
OTC instruments
Interest rate swaps
Total interest rate instruments
2
Currency-related instruments
Spot and forward foreign exchange
transactions
Interest rate / currency swaps
Total currency-related instruments
89
68
32
26
100
92
127
34
41
–
59
–
–
11
–
15
41
11
59
15
790
851
697
783
Other forward transactions
Credit default swaps *
Credit-linked notes *
Total other forward transactions
Total
* excluding financial guarantees
Derivatives have been entered into with the following counterparties:
Market values 31 Dec 2005
Market values 31 Dec 2004
positive
€ mn
negative
€ mn
positive
€ mn
negative
€ mn
764
832
676
766
OECD public-sector authorities
OECD banks
Non-OECD banks
Companies and private individuals
Total
26
19
21
17
790
851
697
783
57
OTHER NOTES
Contingencies
Loans to executive bodies of Aareal Bank
By means of a letter of comfort, Aareal Bank
AG ensures that Deutsche Structured Finance
GmbH, Frankfurt, DSF Beteiligungsgesellschaft mbH, Frankfurt, and Aareal Bank Capital Funding LLC, Wilmington, are able to
fulfil their contractual obligations.
Loans granted to members of the Supervisory Board amounted to € 3.1 million as
at 31 December 2005 (31 December 2004:
€ 3.9 million). Loans and advances to
members of the Management Board totalled
€ 0.0 million (2004: € 0.08 million). The
loans were granted at conditions in line
with market terms.
Aareal Bank AG has issued to the Federal
Association of German Banks an indemnification as defined by section 5 (10) of the
articles of association for the deposit guaranty fund of this association on behalf of
Aareal Hyp AG.
Due to its participating interest in LiquiditätsKonsortialbank GmbH, Frankfurt / Main, in
the nominal amount of € 1 million, Aareal
Bank AG has call commitments of up to
€ 6 million. In addition, Aareal Bank AG
has a pro-rata principal liability in the event
of non-fulfilment of call commitments by
other co-shareholders, who hold aggregate
interests of € 63 million.
Consolidated financial statements
As the parent company of the Aareal Bank
Group, Aareal Bank AG, Wiesbaden, prepares
Consolidated Financial Statements incorporating the bank. The Consolidated Financial Statements have been deposited with
the Commercial Register at the Wiesbaden
District Court (Reg. No. HRB 13184), and
are available from Aareal Bank AG in Wiesbaden, Germany.
Remuneration of the Management Board
and Supervisory Board
The Human Resources Committee of the
Supervisory Board determines the structure
and amount of remuneration for members of
the Management Board of Aareal Bank AG.
The Committee sets salaries and other
remuneration components for members of
the Management Board.
Aareal Bank AG has entered into fixed-term
service contracts with the members of its
Management Board.
In addition to fixed salary components,
which are paid in twelve identical monthly
instalments, the members of the Management Board receive a variable remuneration.
The Human Resources Committee has adopted a target system to determine the variable
remuneration component, based on net operating income after taxes (of the Group) as
a key target figure, as well as on qualitative
targets, which are defined on an annual basis.
N O T E S
58
Pension provisions were recognised in an
amount of € 7,667,732.00.
The total amount recognised for fixed and
variable remuneration paid to members of
the Management Board in 2005 was
€ 3,562,381.93, broken down as shown
in the subsequent table.
In addition to the cash component, a
long-term compensation component in the
amount of € 520,000.00 was added to the
remuneration package for the Management
Board. This long-term component is paid
in the form of ”virtual shares“ in Aareal Bank
AG, which are granted at defined points in
time, at the then prevailing share price.
Following a three-year holding period, disposals are permitted within a further three
years after the holding period, on the date
on which such virtual shares were vested.
Payments to former Management Board
members of Aareal Bank AG and their surviving dependants totalled € 3,279,387.16.
The remuneration for the members of the
Supervisory Board for the 2005 financial
year amounted to € 771,407.00 (2004:
€ 0.8 million). The remuneration of each
Supervisory Board member is listed on the
following page.
Throughout the 2005 financial year, the bank
has reported purchases and sales subject
to reporting requirements under No. 6.6 of
the German Corporate Governance Code,
as well as under section 15a of the German
Securities Trading Act (WpHG) to BaFin, the
German financial services regulatory agency,
without delay, and also published such details
on its website. Furthermore, Aareal Bank AG
has undertaken in its Code to disclose,
without delay, each reported purchase or
sale by members of the Management Board
or the Supervisory Board on its website.
The distribution of remuneration as stated above amongst the members of the Management
Board who were active in 2005 is shown below:
1)
including expenses for ancillary services, within the usual scope
2)
Dr. Wolf Schumacher took up his
office as a member of the Management
Board on 01 April 2005, Mr. Norbert
Kickum on 14 November 2005,
and Mr. Thomas Ortmanns on 01 September 2005.
3)
including a compensation payment for
lost bonus payments from the previous
Management Board position
4)
Dr. Ralph Hill’s service contract ended
on 30 September 2005.
5)
plus a long-term component
Fixed 1)
remuneration
€
Dr. Wolf Schumacher 2)
Norbert Kickum
2)
Variable
remuneration
€
394,296.25
450,000.00
44,388.59
420,722.22
Total
€
844,296.25
3)
465,110.81
671,050.40
Hermann Josef Merkens
441,050.40
230,000.00 5)
Thomas Ortmanns
104,384.08
194,000.00
298,384.08
Christof Schörnig
321,565.44
290,000.00 5)
611,565.44
Dr. Ralph Hill 4)
236,974.95
435,000.00
2)
671,974.95
3,562,381.93
59
Remuneration of Supervisory Board members for the 2005 financial year:
Member of the
Supervisory Board
Fixed
remuneration
€
Remuneration for
committee work
€
Hans W. Reich
54,000.00
49,200.00
119,712.00
Christian Graf von Bassewitz
36,000.00
21,950.00
67,222.00
York-Detlef Bülow
36,000.00
10,800.00
54,288.00
Dr. Richard Brantner
18,000.00
40,200.00
67,512.00
Tamara Birke
18,000.00
0.00
20,880.00
11,310.00
9,750.00
0.00
Prof. Dr. Johann Eekhoff
18,000.00
0.00
20,880.00
Wolfgang Fauter
18,000.00
7,200.00
29,232.00
Erwin Flieger
18,000.00
10,800.00
33,408.00
Lutz Freitag
18,000.00
0.00
20,880.00
Manfred Behrens
1)
2)
from 15 June 2005
before deduction of 30 % withholding
tax for Supervisory Board members
(section 50 a (1) and 50 a (2) of the
German Income Tax Act) and 5.5 %
solidarity surcharge
3)
until 15 June 2005
* No variable remuneration was paid
in 2005.
Total *
(incl. VAT)
€
1)
Dr. Friedrich-Adolf Jahn
18,000.00
0.00
20,880.00
Ralf Kupka
18,000.00
7,200.00
29,232.00
Dr. Peter Lammerskitten
18,000.00
19,800.00
43,848.00
Jacques Lebhar
12,303.00
18,000.00
0.00
Kurt Pfeiffelmann
18,000.00
7,200.00
29,232.00
Klaus-Peter Sell
18,000.00
7,200.00
29,232.00
8,250.00
11,550.00
22,968.00
18,000.00
14,900.00
38,164.00
Jürgen Strauß
2)
3)
Wolf R. Thiel
Prof. Dr. Dr. h.c. mult. Hans Tietmeyer
18,000.00
0.00
20,880.00
Rainer Wahl
18,000.00
7,200.00
29,232.00
Dr. Jürgen Westphal
18.000,00
7,200.00
29,232.00
Anja Wölbert
18.000,00
0.00
Total
Employees
The average staffing level is shown in the
following table:
20,880.00
771,407.00
Full-time employees
Part-time employees
Vocational trainees
Total
2005
2004
1,060
1,075
141
133
5
9
1,206
1,217
N O T E S
60
Auditors’ fee
The following auditors’ fees were recognised
as expenses during the financial year:
Category
T€
sentence 8 of the AktG in conjunction with
section 21 (1) of the WpHG. According to
the notification, BNP Paribas S.A. held
0.88 % of voting rights in Aareal Bank AG
on 03 August 2004.
In February 2005, Aareal Bank AG published
that the stake held in the bank by BNP Paribas S.A., 16, boulevard des Italiens, 75009
Paris, France, had exceeded a threshold of
5 %, according to a notification received by
the bank on 21 February 2005, and in accordance with section 160 (1) sentence 8 of
the AktG in conjunction with section 21 (1)
of the WpHG. According to the notification,
BNP Paribas S.A. held 5.01 % of voting
rights in Aareal Bank AG on 30 July 2004.
In June 2005, Aareal Bank AG published
that the stake held in the bank by the Trustees of the BT Pension Scheme, Portsoken
Street, London E1 8HZ, United Kingdom,
had exceeded a threshold of 5 %, according
to a notification received by the bank on
15 June 2005, and in accordance with section 160 (1) sentence 8 of the AktG in conjunction with section 21 (1) of the WpHG.
According to the notification, 5.009 % of
voting rights in Aareal Bank AG were held
on 09 June 2005. 0.345 % in the voting
rights were directly attributable to the BT
Pension Scheme, whilst 4.665 % were held
by three UK Limited Partnerships managed
by Hermes Focus Asset Management Europe
Limited. These voting rights were attributable
to the BP Pension Scheme, due to its majority shareholding in Hermes Focus Asset
Management Europe Limited. The Trustees
of the BT Pension Scheme had instructed
Hermes Administration Services Limited to
act on their behalf.
Also in February 2005, Aareal Bank AG
published that the stake held in the bank by
BNP Paribas S.A., 16, boulevard des Italiens,
75009 Paris, France, had fallen below a
threshold of 5 %, according to a notification
received by the bank on 21 February 2005,
and in accordance with section 160 (1)
In July 2005, Aareal Bank AG published that
the stake held in the bank by Fidelity International Limited, P. O. Box HM 670, Hamilton
HMCX, Bermuda, had exceeded a threshold
of 5 %, according to a notification received
by the bank on 27 July 2005, and in accordance with section 160 (1) sentence 8 of
Audit
3,270.2
Other audit or
valuation services
66.0
Tax advisory services
62.9
Other services
19.7
Total
3,418.8
Notice pursuant to section 21 (1)
of the WpHG
61
the AktG in conjunction with section 21 (1)
of the WpHG. According to the notification,
Fidelity International held 5.81 % of voting
rights in Aareal Bank AG on 26 July 2005.
In August 2005, Aareal Bank AG published
that the stake held in the bank by Fidelity
International Limited, P. O. Box HM 670,
Hamilton HMCX, Bermuda, had fallen below
a threshold of 5 %, according to a notification
received by the bank on 17 August 2005,
and in accordance with section 160 (1)
sentence 8 of the AktG in conjunction with
section 21 (1) of the WpHG. According to
the notification, Fidelity International held
3.89 % of voting rights in Aareal Bank AG
on 15 August 2005.
In December 2005, Aareal Bank AG published that the stake held in the bank by The
Capital Research and Management Company, 333 South Hope Street, Los Angeles
CA 90071, USA, had fallen below a threshold
of 5 %, according to a notification received
by the bank on 01 December 2005, and in
accordance with section 160 (1) sentence 8
of the AktG in conjunction with section 21 (1)
of the WpHG. According to the notification,
Capital Research and Management held
4.283 % of voting rights in Aareal Bank AG
on 24 November 2005.
Also in December 2005, Aareal Bank AG
published that the stake held in the bank
by The Capital Group Companies, Inc., 333
South Hope Street, Los Angeles CA 90071,
USA, had exceeded a threshold of 5 %,
according to a notification received by the
bank on 06 December 2005, and in accordance with section 160 (1) sentence 8 of
the AktG in conjunction with section 21 (1)
of the WpHG. According to the notification,
The Capital Group held 5.223 % of voting
rights in Aareal Bank AG on 28 April 2004.
Also in December 2005, Aareal Bank AG
published that the stake held in the bank
by The Capital Group Companies, Inc., 333
South Hope Street, Los Angeles CA 90071,
USA, had fallen below a threshold of 5 %,
according to a notification received by the
bank on 06 December 2005, and in accordance with section 160 (1) sentence 8 of
the AktG in conjunction with section 21 (1)
of the WpHG. According to the notification,
The Capital Group held 4.939 % of voting
rights in Aareal Bank AG on 29 November 2005.
German Corporate Governance Code
The declaration regarding the German Corporate Governance Code, pursuant to section 161 of the AktG, has been published on
our website: http://www.aareal-bank.com/
en/investor/corpgov/index.en.html
Net loss for the year
The major charges due to additional risk
provisioning requirements have resulted in
a net € 33.3 million loss, which has been
offset by releasing other retained earnings.
N O T E S
62
EXECUTIVE BODIES OF AAREAL BANK AG
OFFICES HELD IN ACCORDANCE WITH § 285 No. 10 OF THE GERMAN COMMERCIAL CODE (HGB)
IN CONJUNCTION WITH § 125 (1) SENTENCE 3 OF THE GERMAN STOCK CORPORATION ACT (AktG)
Membership in other statutory Supervisory Boards and similar offices held in other governing bodies
Supervisory Board
Hans W. Reich, Chairman
Spokesman of the Management Board of Kreditanstalt für Wiederaufbau
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• DEPFA BANK plc . . . . . . . . . . . . . . . . . . . . . . . . non-executive Director
• Deutsche Post AG . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• Deutsche Telekom AG . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• HUK-COBURG Haftpflicht-Unterstützungskasse kraftfahrender Beamter Deutschlands a. G.
in Coburg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• HUK-COBURG-Holding AG . . . . . . . . . . . . . . . Member of the Supervisory Board
• IKB Deutsche Industriebank AG . . . . . . . . . . . . Member of the Supervisory Board
• RAG AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(until 03 February 2005)
• ThyssenKrupp Steel AG . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
Christian Graf von Bassewitz, Deputy Chairman
Spokesman of the General Partners of Bankhaus
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
• Condor /Optima-Versicherungen . . . . . . . . . . . .
• Optima Pensionskasse AG . . . . . . . . . . . . . . . . .
• Lampebank International S. A. . . . . . . . . . . . . . .
• DePfa Holding Verwaltungsgesellschaft mbH . .
• Bank für Sozialwirtschaft Aktiengesellschaft
• Deutscher Ring Krankenversicherungsverein a.G. . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Universal-Investment-Gesellschaft mbH . . .
• Delmora Bank GmbH . . . . . . . . . . . . . . . . . .
* Employee representative member
of the Supervisory Board
of Aareal Bank AG
...
...
...
...
York-Detlef Bülow, Deputy Chairman*
Aareal Bank AG
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
Lampe KG (until 28 February 2006)
Deputy Chairman of the Supervisory Board
Chairman of the Supervisory Boards
Chairman of the Supervisory Board
Chairman of the Board of Directors
Deputy Chairman of the Supervisory Board
(until 28 February 2006)
Member of the Supervisory Board
Member of the Supervisory Board
Member of the Supervisory Board
Member of the Shareholders’ Commitee
(until 21 June 2005)
Deputy Chairman of the Supervisory Board
63
Manfred Behrens
Managing Director of Schweizerische Lebensversicherungs- und Rentenanstalt
(Swiss Life), German branch office
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(since 15 June 2005)
• Swiss Life Partner AG . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• DePfa Holding Verwaltungsgesellschaft mbH . . Member of the Supervisory Board
(since 15 June 2005)
Tamara Birke *
Aareal Bank AG
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• SIRWIN AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(since 28 January 2005)
Dr. Richard Brantner
Chairman of the Accounts and Audit Committee of the Supervisory Board
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• DEPFA BANK plc . . . . . . . . . . . . . . . . . . . . . . . . non-executive Director
Prof. Dr. Johann Eekhoff
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
* Employee representative member
of the Supervisory Board
of Aareal Bank AG
Member of the Supervisory Board
Wolfgang Fauter
Chairman of the Management Boards of Deutsche Ring Versicherungen
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• Deutscher Ring Bausparkasse AG . . . . . . . . . . . Chairman of the Supervisory Board
• MONEYMAX Lebensversicheruns-AG . . . . . . . . Chairman of the Supervisory Board
(since 15 July 2005)
• OVB Holding AG . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• OVB Vermögensberatung AG . . . . . . . . . . . . . . Chairman of the Supervisory Board
• ZEUS Service AG . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
(since 14 April 2005)
• ZEUS Service AG . . . . . . . . . . . . . . . . . . . . . . . . Deputy Chairman of the Supervisory
(until 14 April 2005)
• ZEUS Vermittlungsgesellschaft mbH . . . . . . . . . Chairman of the Supervisory Board
(since 14 April 2005)
• ZEUS Vermittlungsgesellschaft mbH . . . . . . . . . Deputy Chairman of the Supervisory Board
(until 14 April 2005)
• Atlantic Union Insurance S. A. . . . . . . . . . . . . . . Deputy Chairman of the Board of
Directors
N O T E S
64
• DePfa Holding Verwaltungsgesellschaft mbH . .
• Roland Rechtsschutz-Versicherungs-AG . . . . . .
Member of the Supervisory Board
Member of the Supervisory Board
Erwin Flieger
Chairman of the Management Boards of Bayerische Beamten Lebensversicherung a.G.,
of BBV Holding AG and of Bayerische Beamten Versicherung AG
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• BBV Krankenversicherung AG . . . . . . . . . . . . . . Chairman of the Supervisory Board
• Neue Bayerische Beamten Lebensversicherung AG . . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• DePfa Holding Verwaltungsgesellschaft mbH . . Chairman of the Supervisory Board
(since 14 June 2005)
• DePfa Holding Verwaltungsgesellschaft mbH . . Member of the Supervisory Board
(until 14 June 2005)
Lutz Freitag
President of GdW, Bundesverband deutscher Wohnungsunternehmen e.V.
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• Europäisches Bildungszentrum . . . . . . . . . . . . . Chairman of the Board of Trustees
• Norddeutscher Rundfunk . . . . . . . . . . . . . . . . . . Deputy Chairman of the Board of Directors
(until 13 May 2005)
• Norddeutscher Rundfunk . . . . . . . . . . . . . . . . . . Member of the Board of Directors
(since 13 May 2005)
• Hammonia Verlag GmbH . . . . . . . . . . . . . . . . . . Member of the Board of Directors
* Employee representative member
of the Supervisory Board
of Aareal Bank AG
Dr. Friedrich-Adolf Jahn
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Ralf Kupka *
Aareal Bank AG
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Dr. Peter Lammerskitten
Former Chairman of Deutsche Bau- und Bodenbank Aktiengesellschaft
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• Aareon AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deputy Chairman of the Supervisory Board
• burgbad AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deputy Chairman of the Supervisory Board
• GWE Gesellschaft für Wohnen im Eigentum AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
65
Jacques Lebhar
Jacques Lebhar Finances S.A.S.
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
• ESL & Network Holding S. A. . . . . . . . . . . . . . . .
• Solving International S.A. . . . . . . . . . . . . . . . . . .
• ESL & Network (France) S. A. S. . . . . . . . . . . . . .
• GFI Informatique . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Member of the Supervisory Board
Member of the Supervisory Board
(since 13 January 2005)
Member of the Board of Directors
Member of the Board of Directors
Kurt Pfeiffelmann *
Aareal Bank AG
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Klaus-Peter Sell *
Aareal Bank AG
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Jürgen Strauß
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
• DePfa Holding Verwaltungsgesellschaft mbH . .
Member of the Supervisory Board
(until 15 June 2005)
Chairman of the Supervisory Board
(until 15 June 2005)
Wolf R. Thiel
President and Chairman of the Management Board of Versorgungsanstalt
des Bundes und der Länder
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• DePfa Holding Verwaltungsgesellschaft mbH . . Member of the Supervisory Board
Prof. Dr. Dr. h.c. mult. Hans Tietmeyer
President of Deutschen Bundesbank (ret’d.)
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
• Hauck & Aufhäuser Privatbankiers KGaA . . . . . .
• Bank für Internationalen Zahlungsausgleich
(BIZ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* Employee representative member
of the Supervisory Board
of Aareal Bank AG
• BDO Deutsche Warentreuhand AG . . . . . . . . . .
• DEPFA BANK plc . . . . . . . . . . . . . . . . . . . . . . . .
• DWS Investment GmbH . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Chairman of the Supervisory Board
Deputy Chairman of the Board of
Directors
Member of the Supervisory Board
non-executive Director
Member of the Supervisory Board
N O T E S
66
Reiner Wahl *
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Dr. Jürgen Westphal
Barrister and solicitor, Judge at the Hamburg Constitutional Court
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• Treugarant AG, Wirtschaftsprüfungsgesellschaft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
Anja Wölbert *
Aareal First Financial Solutions AG
• Aareal Bank AG . . . . . . . . . . . . . . . . . . . . . . . . .
Members of the
Management Board
* Employee representative member
of the Supervisory Board
of Aareal Bank AG
Member of the Supervisory Board
Dr. Wolf Schumacher, Chairman (since 01 April 2005)
• Aareon AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
(since 01 April 2005)
• Aareal Estate AG . . . . . . . . . . . . . . . . . . . . . . . . Deputy Chairman of the Supervisory Board
(since 20 April 2005)
• Aareal Asset Management GmbH . . . . . . . . . . . . Member of the Supervisory Board
(since 22 December 2005)
• Aareal Hypotheken-Management GmbH . . . . . Member of the Supervisory Board
(18 April 2005 until 01 February 2006)
• Aareal Hypotheken Vermittlungs GmbH . . . . . . Member of the Supervisory Board
(18 April 2005 until 30 December 2005)
• Aareal Valuation GmbH . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(since 05 December 2005)
• Deutsche Structured Finance GmbH . . . . . . . . . Member of the Advisory Board
(18 April 2005 until 30 December 2005)
Dr. Ralph Hill, Member of the Management Board (until 04 August 2005)
• Aareal Financial Service spol. s r. o. . . . . . . . . . . Chairman of the Supervisory Board
(until 30 September 2005)
• Aareal Financial Service Polska Sp. z o.o. . . . . . Chairman of the Supervisory Board
(until 30 September 2005)
• Aareal Financial Services USA, Inc. . . . . . . . . . . Chairman of the Board of Directors
(until 30 September 2005)
67
• Via Capital Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
• Aareal
• Aareal
• Aareal
• Aareal
• Aareal
Chairman of the Board of Directors
(until 30 September 2005)
Bank France S. A. . . . . . . . . . . . . . . . . . . . Chairman of the Board of Directors
(28 January 2005 until 30 September 2005)
Property Services B.V. . . . . . . . . . . . . . . . Deputy Chairman of the Supervisory Board
(until 30 September 2005)
Asset Management GmbH . . . . . . . . . . . Member of the Supervisory Board
(until 30 September 2005)
Estate AG . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(until 30 September 2005)
Immobilien Kapitalanlagegesellschaft mbH Member of the Supervisory Board
(until 30 September 2005)
Norbert Kickum, Member of the Management Board (since 14 November 2005)
• Aareal Financial Services USA, Inc. . . . . . . . . . . Chairman of the Board of Directors
(since 20 December 2005)
• Aareal Financial Service Polska Sp. z o.o. . . . . . Member of the Supervisory Board
(since 16 January 2006)
• Aareal Financial Service spol. s r.o. . . . . . . . . . . Member of the Supervisory Board
(since 22 December 2005)
• Deutsche Structured Finance GmbH . . . . . . . . . Member of the Advisory Board
(since 22 December 2005)
Hermann Josef Merkens, Member of the Management Board
• Aareal Asset Management GmbH . . . . . . . . . . . Chairman of the Supervisory Board
• Aareal Bau-, Verwaltung und Controlling GmbH
Chairman of the Advisory Board
(until 09 February 2005)
• Aareal Estate AG . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• Aareal Immobilien Kapitalanlagegesellschaft mbH Chairman of the Supervisory Board
• Aareal Immobilien Management AG . . . . . . . . . Chairman of the Supervisory Board
• Aareal Property Services B.V. . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• Deutsche Bau- und GrundstücksAktiengesellschaft . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• Aareal Hyp AG . . . . . . . . . . . . . . . . . . . . . . . . . . Deputy Chairman of the Supervisory Board
• Aareal Bank France S.A. . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(until 30 September 2005)
• Aareal First Financial Solutions AG . . . . . . . . . . Member of the Supervisory Board
• Aareal Valuation GmbH . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(since 05 December 2005)
N O T E S
68
• Aareon AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
• Deutsche Interhotel Holding GmbH & Co. KG .
• Deutsche Structured Finance GmbH . . . . . . . . .
Member of the Supervisory Board
Member of the Council of Shareholders
Member of the Advisory Board
Thomas Ortmanns, Member of the Management Board (since 01 September 2005)
• Aareal First Financial Solutions AG . . . . . . . . . . Member of the Supervisory Board
(since 01 November 2005)
• Aareon AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(since 24 November 2005)
• Innovative Banking Solutions AG . . . . . . . . . . . Member of the Supervisory Board
(since 10 November 2005)
Christof M. Schörnig, Member of the Management Board
• Aareal First Financial Solutions AG . . . . . . . . . . Chairman of the Supervisory Board
• Aareal Hyp AG . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Supervisory Board
• Aareal Hypotheken-Management GmbH . . . . . Chairman of the Supervisory Board
(31 January 2005 until 01 February 2006)
• Aareal Hypotheken Vermittlungs GmbH . . . . . . Chairman of the Supervisory Board
(31 January 2005 until 30 December 2005)
• Aareal Asset Management GmbH . . . . . . . . . . . Member of the Supervisory Board
(since 16 September 2005)
• Aareal Estate AG . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
(until 20 April 2005)
• Aareal Financial Services USA, Inc. . . . . . . . . . . Member of the Board of Directors
• Aareon AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• Innovative Banking Solutions AG . . . . . . . . . . . Member of the Supervisory Board
(until 10 November 2005)
• Mansart Conseil S. A. S. . . . . . . . . . . . . . . . . . . . Member of the Supervisory Board
• Via Capital Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . non-executive Director
(until 23 December 2005)
• Aareal Bank France S. A. . . . . . . . . . . . . . . . . . . . Member of the Board of Directors
69
OFFICES HELD BY EMPLOYEES OF AAREAL BANK AG
PURSUANT TO § 340 a (4 ) No. 1 OF THE HGB
Dr. Michael Beckers
Managing Director
• Aareal Financial Service Polska Sp. z o.o. . . . . .
• Aareal Financial Service spol. s r.o . . . . . . . . . .
Manfred Burkelc
Managing Director
• Terrain-Aktiengesellschaft Herzogpark . . . . . . . .
Hartmut Eisermann
Managing Director
• Terrain-Aktiengesellschaft Herzogpark . . . . . . . .
Dr. Christian Fahrner
Managing Director
• Aareal First Financial Solutions AG . . . . . . . . . .
Member of the Supervisory Board
(since 27 January 2005)
Member of the Supervisory Board
Member of the Supervisory Board
(until 14 March 2005)
Member of the Supervisory Board
(since 14 March 2005)
• Innovative Banking Solutions AG . . . . . . . . . . .
Member of the Supervisory Board
(until 31 October 2005)
Member of the Supervisory Board
Ralf Gandenberger
Managing Director
• Terrain-Aktiengesellschaft Herzogpark . . . . . . . .
• Deutsche Interhotel Holding GmbH & Co. KG .
Deputy Chairman of the Supervisory Board
Member of the Council of Shareholders
Dr. Hans Justen
• Aareal Bau-, Verwaltung und Controlling GmbH
Dagmar Knopek
Managing Director
• Aareal Financial Services USA, Inc. . . . . . . . . . .
Dr. Stefan Lange
Managing Director
• Terrain-Aktiengesellschaft Herzogpark . . . . . . . .
• Via Capital Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
• Aareal First Financial Solutions AG . . . . . . . . . .
Member of the Advisory Board
(until 09 February 2005)
Member of the Board of Directors
Chairman of the Supervisory Board
non-executive Director
Deputy Chairman of the Supervisory Board
(until 31 October 2005)
N O T E S
70
• Aareal Immobilien Management AG . . . . . . . . .
• Aareal Estate AG . . . . . . . . . . . . . . . . . . . . . . . .
• Aareal Hyp AG . . . . . . . . . . . . . . . . . . . . . . . . . .
• Deutsche Bau- und GrundstücksAktiengesellschaft . . . . . . . . . . . . . . . . . . . . . . . .
• Deutsche Bau- und GrundstücksAktiengesellschaft . . . . . . . . . . . . . . . . . . . . . . . .
• Immobilien Scout GmbH . . . . . . . . . . . . . . . . . .
• Aareal Bau-, Verwaltung und Controlling GmbH
Deputy Chairman of the Supervisory Board
Member of the Supervisory Board
(since 01 October 2005)
Member of the Supervisory Board
Deputy Chairman of the Supervisory Board
(since 11 November 2005)
Member of the Supervisory Board
(until 11 November 2005)
Member of the Supervisory Board
Member of the Advisory Board
(until 09 February 2005)
Peter Mehta
Managing Director
• Innovative Banking Solutions AG . . . . . . . . . . .
Member of the Supervisory Board
Charles Pridgeon
Managing Director
• Aareal Immobilien Kapitalanlagegesellschaft mbH . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Jörg Riepenhausen
Managing Director
• Deutsche Bau- und GrundstücksAktiengesellschaft . . . . . . . . . . . . . . . . . . . . . . . .
Member of the Supervisory Board
Dr. Peter Schaffner
Managing Director
• Aareal First Financial Solutions AG . . . . . . . . . .
• Aareal Partecipazioni S.p.A. . . . . . . . . . . . . . . . .
• IMMO Consulting S.p.A. . . . . . . . . . . . . . . . . . .
Member
(until 31
Member
Member
of the Supervisory Board
October 2005)
of the Supervisory Board
of the Board of Directors
Peter Schott
Managing Director
• Via Capital Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . .
non-executive Director
71
Christine Schulze Forsthövel
Managing Director
• Aareal Financial Service Polska Sp. z o.o. . . . . .
• Aareal Financial Service spol. s r.o . . . . . . . . . .
• Aareal Bank France S. A. . . . . . . . . . . . . . . . . . . .
• Aareal Bank France S. A. . . . . . . . . . . . . . . . . . . .
• Aareal Partecipazioni S.p.A. . . . . . . . . . . . . . . . .
• Mansart Conseil S. A. S . . . . . . . . . . . . . . . . . . . .
Martin Vest
• Aareal Bank France S. A. . . . . . . . . . . . . . . . . . . .
Chairman of the Supervisory Board
Chairman of the Supervisory Board
(since 26 July 2005)
Chairman of the Board of Directors
(since 30 September 2005)
Member of the Board of Directors
(until 30 September 2005)
Member of the Supervisory Board
Member of the Supervisory Board
Member of the Board of Directors
(since 30 September 2005)
Wiesbaden, 09 February 2006
The Management Board
Dr. Schumacher
Kickum
Ortmanns
Schörnig
Merkens
AUDITORS’ REPORT
A U D I T O R S ’
72
AUDITORS’ REPORT
Following the completion of our audit we have certified the financial statements on
20 February 2006 without qualification:
Auditors’ report
We have audited the annual financial statements, comprising the balance sheet, the
income statement and the notes to the
financial statements, together with the bookkeeping system, and the management report
of the Aareal Bank AG, Wiesbaden, for the
business year from 01 January to 31 December 2005. The maintenance of the books
and records and the preparation of the annual
financial statements and management report
in accordance with German commercial
law are the responsibility of the Company’s
Board of Managing Directors. Our responsibility is to express an opinion on the annual
financial statements, together with the
bookkeeping system, and the management
report based on our audit.
dance with (German) principles of proper
accounting and in the management report
are detected with reasonable assurance.
Knowledge of the business activities and
the economic and legal environment of the
Company and expectations as to possible
misstatements are taken into account in
the determination of audit procedures. The
effectiveness of the accounting-related
internal control system and the evidence
supporting the disclosures in the books and
records, the annual financial statements and
the management report are examined primarily on a test basis within the framework
of the audit. The audit includes assessing
the accounting principles used and significant estimates made by the Company’s
Board of Managing Directors, as well as
evaluating the overall presentation of the
annual financial statements and management report. We believe that our audit provides a reasonable basis for our opinion.
Our audit has not led to any reservations.
We conducted our audit of the annual
financial statements in accordance with
§ (Article) 317 HGB ("Handelsgesetzbuch“:
"German Commercial Code“) and German
generally accepted standards for the audit
of financial statements promulgated by the
Institut der Wirtschaftsprüfer (Institute of
Public Auditors in Germany) (IDW). Those
standards require that we plan and perform
the audit such that misstatements materially
affecting the presentation of the net assets,
financial position and results of operations
in the annual financial statements in accor-
In our opinion based on the findings of
our audit, the annual financial statements
comply with the legal requirements and
give a true and fair view of the net assets,
financial position and results of operations
of the Company in accordance with (German) principles of proper accounting. The
management report is consistent with the
annual financial statements and as a whole
provides a suitable view of the Company's
position and suitably presents the opportunities and risks of future development.
R E P O R T
73
Frankfurt / Main, 20 February 2006
PricewaterhouseCoopers
Aktiengesellschaft
Wirtschaftprüfungsgesellschaft
Rabeling
Wirtschaftsprüfer
(German Public
Auditor)
ppa. Hülsen
Wirtschaftsprüfer
(German Public
Auditor)
REPORT OF THE SUPERVISORY BOARD
REPORT SUPERVI
74
REPORT OF THE SUPERVISORY BOARD
OF AAREAL BANK AG, WIESBADEN
During the year under review, the Supervisory Board continually monitored the
management of the company, in accordance with the law, the Memorandum and
Articles of Association, the Internal Rules of Procedure for the Supervisory Board and
the bank’s Corporate Governance Code. The Supervisory Board was kept informed
by the Management Board in detail, both orally and in writing, regarding the company’s
business development and its overall situation, as well as on the business policies
contemplated by the Management Board, on corporate planning issues as well as on
significant transactions. The Supervisory Board also dealt with issues that required its
approval, pursuant to applicable statutes, the company’s Memoranda and Articles of
Association or the Internal Rules of Procedure for the Management Board.
to reach its set objectives, regularly reviews
compliance with the Corporate Governance
Code, and receives the Management Board’s
report on the results obtained during internal audits. In its four meetings, the Committee focused on the restructuring measures
proposed by the Management Board and
the plans submitted for the realigment of
Aareal Bank AG, discussed these issues in
detail and supported the implementation of
related measures.
A total of 23 meetings of the Supervisory
Board took place, including those meetings
of the Committees set up from amongst its
members, comprising the Executive Committee (Präsidialausschuss), the Accounts and
Audit Committee (Bilanz- und Prüfungsausschuss), the Human Resources Committee
(Personalausschuss), the Credit and Market
Risk Committee (Ausschuss für Kredit- und
Marktrisiken), the Committee for Urgent
Decisions (Eilausschuss), and the Equity
Adjustment Committee (Kapitalmaßnahmenausschuss). Discussions held in the course
of the seven Supervisory Board meetings
dealt with business developments, but in
particular with business policy and corporate planning issues, passing resolutions on
decisions related to these issues.
The primary task of the Accounts and Audit
Committee is to review accounting matters
and to look into method and execution of
company and Group audits. The Accounts
and Audit Committee met on three occasions
during the year. In particular, this Committee
is charged with the analysis of the audit
reports submitted by external auditors and
is required to report its findings on these
audit reports with regard to the future development of the company and the Group to
the Supervisory Board.
The Executive Committee advises the Management Board and prepares the resolutions
of the Supervisory Board. Furthermore, the
Executive Committee assesses the internal
condition of the Group with regard to its
operative strength, efficiency and potential
The Human Resources Committee, which
among other things prepares the Supervisory
Board’s staff decisions, decides on the
remuneration of the members of the Management Board, approves the granting of
loans to members of the company’s executive bodies and other transactions between
members of the company’s executive bodies
and the company or its Group subsidiaries,
held a total of five meetings. Focal issues
during these meetings were the retirement
of one member, and the appointment of
SORY BOARD
75
two new members of the Management
Board.
The Credit and Market Risk Committee
convened three times and dealt with the
granting of loans requiring approval. The
Committee also noted any loans subject to
reporting requirements and any other issues
requiring the Supervisory Board’s approval
pursuant to applicable statutes or the company’s Memorandum and Articles of Association. The Committee also discussed and
reviewed the bank’s credit risk strategy.
There were no meetings of the Committee
for Urgent Decisions; the Committee dealt
with loans requiring approval in writing.
The Equity Adjustment Committee, whose
duties include in particular the discussion
of equity adjustments envisaged, held one
meeting during the period under review.
During this meeting it passed a resolution
to increase the Company’s issued share
capital of € 116,604,981 by € 11,660,496
to € 128,265,477; by way of issuing
3,886,832 new bearer notional no-par
value shares (”unit shares“), each with a
notional share of € 3.00 in the Company’s
issued share capital and profit-sharing rights
from 01 January 2005; excluding shareholders’ pre-emptive subscription rights.
All meetings of the Supervisory Board were
attended by a minimum of 85 % of members. The Chairman of the Supervisory
Board gave a detailed account of the work
in the Supervisory Board Committees to the
plenary meetings. Outside the meetings of
the Supervisory Board and its Committees,
the Chairman of the Supervisory Board held
regular business discussions with the Management Board, during which all material
topics and issues were discussed.
During the period under review, the activities
of the Supervisory Board and its Comittees,
as set out above, focused on the realignment
of the bank in particular. The Management
Board has devised a six-point programme
for the realignment process, comprising the
expansion of new business in line with the
bank’s strategy, reducing the non-performing
loan portfolio, leveraging the bank’s midsized corporate structure, upgrading its organisational structure, enhancing the transparency of entrepreneurial actions, and creating
a modern corporate culture. The results of
the review of the bank’s loan portfolios,
together with the resulting additional risk
provisioning for 2005, were discussed in
detail, as a core part of the programme.
The Management Board has informed the
Supervisory Board regularly, without delay
and comprehensively, of all issues important
to the development of Aareal Bank AG and
the Aareal Bank Group. Furthermore, the
Management Board informed the Supervisory Board about property market developments in the bank’s target markets,
against the background of the growing share
of international exposure in Aareal Bank’s
business.
REPORT SUPERVI
76
The Supervisory Board and the Management
Board maintained an intensive dialogue
regarding the credit risk strategy, which is
required under the ”Minimum Requirements
for the Credit Business“ as set out by the
regulatory authorities, and on implementation of the Basel II framework.
The Supervisory Board placed particular
emphasis on implementing the bank’s Corporate Governance Principles. Aareal Bank
AG’s Corporate Governance Code requires
that the Supervisory Board examines the
efficiency of its own activities on a regular
basis. The results of a self-assessment carried out at the end of 2004 provided a status quo, showed potential areas for improvement in the work of the Supervisory Board,
and options for shareholder representatives
and the Works Council to voice requests
for future developments. These suggestions
were openly discussed during the year
under review, with initial positive achievements already made. The Supervisory Board
initiated the reduction in the number of
Supervisory Board members, from currently
21 to twelve (as announced during the last
Annual General Meeting on 15 June 2005),
within the framework of a very constructive
process. The Supervisory Board considered
such a reduction to be appropriate in the
interest of working more efficiently for the
Company and in respect of the current standards of good corporate governance.
The reduction in the number of Supervisory
Board members will be implemented by the
end of the General Meeting held in 2006,
when existing terms of office will expire.
No conflicts of interest of members of
the Management Board or the Supervisory
Board, as defined in No. 5.5.3 of Aareal
Bank AG’s Corporate Governance Code,
arose during the 2005 financial year.
The bank’s Financial Statements as at 31 December 2005, together with the accounting
records and the Management Report, as well
as the Consolidated Financial Statements
and the Group Management Report, have
been examined and certified without qualification by PwC Deutsche Revision Aktiengesellschaft Wirtschaftsprüfungsgesellschaft,
Frankfurt, the external auditors appointed
by the Supervisory Board. The corresponding reports prepared by the auditors were
made available to all members of the Supervisory Board in good time before the meeting to discuss the financial statements. The
results of the audit were fully endorsed by
the Supervisory Board.
The Supervisory Board has examined the
Financial Statements, the Management
Report, the Consolidated Financial Statements, and the Group Management Report.
The external auditors took part in the
Supervisory Board’s deliberations, explaining
the essential results of their audit, and providing any other information that was necessary or requested. Having completed the
examination, no objections were raised by
the Supervisory Board. The Supervisory
SORY BOARD
77
Board reviewed and endorsed the options
exercised in connection with the Financial
Statements and identified in the Notes.
Within the scope of its duties of monitoring
the management of the company, the Supervisory Board has not become aware of
any risks that have not been appropriately
accounted for in the Financial Statements.
The Supervisory Board has endorsed the
assessments made by the Management
Board in preparing the Management Report.
The Supervisory Board has approved the
Financial Statements, which are thus confirmed, and has assented the proposal for
the appropriation of net retained profit as
submitted by the Management Board. It has
also approved the Consolidated Financial
Statements.
At the same time, it would like to thank
the entire Management Board for the outstanding cooperation and contribution.
Mr. Jürgen Strauß retired from the Supervisory
Board at the end of the Annual General
Meeting on 15 June 2005. Mr. Manfred
Behrens, representing Swiss Life, was elected
as a replacement member. The Supervisory
Board would like to thank Mr. Strauß for
the many years of trusting cooperation.
The Supervisory Board wishes to express
its particular appreciation for the performance of all staff members of Aareal Bank
and its affiliated companies, particularly
during the realignment process, and thanks
them for their commitment and contribution.
Dr. Ralph Hill retired from the Management
Board of Aareal Bank AG with effect from
04 August 2005. The Supervisory Board
would like to thank Dr. Hill for the trusting
and constructive cooperation.
Mr. Thomas Ortmanns was appointed to
the Management Board during the Supervisory Board meeting held on 15 June 2005.
Mr. Norbert Kickum was appointed to the
Management Board during the Supervisory
Board meeting held on 04 August 2005.
Mr. Ortmanns joined Aareal Bank AG on
01 September 2005, and Mr. Kickum on
14 November 2005. The Supervisory Board
would like to express its best wishes to
Messrs. Ortmanns and Kickum.
Wiesbaden, March 2006
The Supervisory Board
Hans W. Reich (Chairman)
GROUP
78
Imprint
Design:
s/company, Fulda-Künzell, Germany
Production:
Druckerei Chmielorz GmbH,
Wiesbaden-Nordenstadt, Germany
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Aareal Bank AG · Corporate Communications
Paulinenstraße 15 · 65189 Wiesbaden, Germany
Phone: +49 611 348 3009 · Fax: +49 611 348 2637
E-mail: [email protected] · www.aareal-bank.com