Aareal Bank AG

Welcome to the Arial Bank AG full year 2025 investor and analyst conference. I'm Moritz, the call operator. I would like to remind you that all participants will be in the listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jürgen Junginger, Head of Debt IR. Please go ahead, sir.

Our agenda covers our results for 2025, our outlook for 2026, and an update on our strategic plan, our real ambition. I'm joined today by our Management Board, our CEO, Christian Ritten, Nina Babic, our CRO, CFO, Andy Halford, and Chief Market Officer, Christoph Winterbaum. Christian and Andy will take you through our presentation, which will be followed by a question and answer session. I'm pleased to hand over to Christian. Christian, the floor is yours.

Yes, thank you very much. Good morning to everyone. And thank you very much for attending today's call. Before turning to today's presentation, I would like to refer briefly to the recent events in the Middle East. There's no doubt that geopolitical uncertainties have increased. Tensions have escalated. There is heightened caution across most business areas. We are aware of that. As a result, investment activity in many sectors may slow or become less predictable for some time. So far, Areal has not been directly affected by the events of the last week, nor more broadly by geopolitical events over the last year. However, we are, of course, monitoring the situation very closely. Now let me turn to our results for 2025 and our outlook for 2026. And I will also provide you an update on our strategic plan ARIA ambition. Starting with slide three, first our results for 2025. And as you can imagine, this slide, this chart has become my actual favorite chart because It's a very well reflection of the delivery of the bank. We targeted adjusted profit for the year of over 375 million euros, which we comfortably achieved. On the basis of this good result, the management took action, incurring an additional charge of 55 million euros to support the repositioning of our U.S. business. The adjusted operating profit after the additional 55 million euro charge was 326 million euros, which is very similar to the equivalent profit in 2024. Turning to our two business segments, both achieved strong results for 2025. Banking and digital solutions made a significant contribution to group profits and Q4 average deposits including retail rose to 17.8 billion euros. New business and structured property financing reached 12.4 billion euros for the year, which was a record result. Much of this volume came from Europe and I will say more about our regional approach later. By the end of 2025, we had reduced non-performing loans to 1.1 billion euros. We are planning to bring this balance below 1 billion euros in the current year we are confident we can achieve this in the first half of the year. Our capital ratio continues to be solid with our CT1 fully phased ratio at 15.5% at the end of 2025. At this conference last year, we introduced our new strategic plan, Areal Ambition, and I'm pleased to report that we are well on track. As a result, We are well-placed to reach our target of around 13% adjusted post-tax return on equity in 2027 still. Our increased focus on banking and digital solutions and our repositioning in the U.S. in structured property financing underpin this progress. I will provide further comments on our Areal Ambition Plan later in this presentation. Before moving into the details of our results, I wanted to illustrate the importance of both of our business segments to the overall results. I'm on slide four now. As you can see, banking and digital solutions has contributed significantly to the group's operating profit in each of the last three years since the return of, as I would call it, normal interest rates. BDS deposits, including retail, rose to an average of 17.8 billion euros in the fourth quarter of 2025. The business has around 4,300 clients and currently executes payments transactions amounting to 167 billion euros every year. I would like to thank the staff in this business for their efforts in 2025 and their continued commitment. In structured property financing, The loan volume is over 34 billion euros spread across over more than 20 countries and five property types. I also would like to thank the staff in this business for their diligence and care as we have grown by taking a conservative approach to risk. I will now hand over to Andy who will provide further details on our results for 2025. Andy, over to you.

Thank you very much, Christian, and good morning to everybody. So slide six, let me just pick up some of the high-level numbers. So net interest income was down 12% to 934 million euros, which was mainly the expected impact of low interest rates. Loan impairment charges are down by 19% to 322 million euros. As Christian just mentioned, this includes the additional charge of 55 million euros to support the repositioning of US business, which includes a faster reduction in US office loans. Efficiency measures that we put in place led to a reduction of 8% in adjusted administrative expenses, which fell to 317 million euros. The cost income ratio for 2025 was therefore 33%. The other components line includes a 20 million euro positive one-off which arose in the second quarter from the successful restructuring of a former legacy non-performing loan. Overall, adjusted operating profit was 381 million euros excluding the additional 55 million charge and 326 million euros including the charge. Non-recurring items amounted to 30 million euros compared to 34 million the previous year, and related to efficiency measures, IT infrastructure investments, and other material non-recurring items. The effective tax rate for the year was higher, the 40%, which includes charges arising from the repositioning of the US business. 81 costs are up by 8 million euros compared to 2024. This is because our new 81 issue overlapped with the previous 81 for about three months. Taken together, the adjusted post-tax return on equity was 7.5% excluding the additional loan impairment and tax charges arising from the actions taken to support the repositioning of the U.S. business. Solid C to 1 ratio fully phased. increased to 15.5% at the end of the year compared to 15.2% at the end of the previous year. Now, let's move to slide eight and the key profit loss account items for banking and digital solutions. As Christian has highlighted, BDS continues to make a significant contribution to the bank's overall profitability. In 2025, BDS contributed an adjusted operating profit of €152 million, which is down by 7% compared to the previous year, though this is more than accounted for by the decrease in net interest income, which is down 9% to €246 million. The impact of lower rates is fully in line with our expectations. However, it was offset in part by the strong growth in the housing industry deposits. In BDS, the customer base and share of all this is constantly growing. Admin expenses are down by 4%, benefiting from tight controller costs, and non-recurring items reflects the investment in digitization that we are making to provide a seamless customer journey. On slide nine, we look further into banking digital solutions, net interest income, and admin expenses. Net interest income, although down compared with 2024, was above expectations. As I just explained, the impact of lower interest rates was as expected, but was partially offset by the growth in deposits. This growth was continuous during 2025, and therefore, net interest income increased throughout the year. I'll come back to deposits on the next slide. Admin expenses were tightly controlled with strict cost discipline maintained. Turning to slide 10, which focuses on deposits, our strong deposit franchise continues to reduce our dependence on the capital markets. As I've mentioned, deposits grew throughout the year. Housing industry and retail deposits in total rose to an average of 17.8 billion euros in the fourth quarter of 2025. This is an increase of 4% since the fourth quarter of 2024 and an increase of 7% since the first quarter of 2025. Retail deposits have structurally improved and now have an average initial lifetime of around four years. The steady increase in housing industry deposits in 2025 reflects our successful sales efforts. These deposit volumes have gradually increased in recent years and reached an average of 14.7 billion euros in the fourth quarter of 2025. Rental guarantee deposits and maintenance reserves have grown continuously. Sites and term deposits are largely stable. When interest rates returned in 2022, there was a shift from site to term deposits as depositors sought to capture income. This transition has now ceased, and today's site deposits only reflect clients operating cash and therefore are expected to be very sticky. Now, let's turn to structured property financing and to slide 11. Net interest income is down 13% reflecting the impact of lower interest rates and is in line with expectations. Loan impairment charges are significantly down, including the additional charges. Admin costs are down, benefiting from the efficiency measures that we have introduced. Overall, SPF contributed 174 million euros to the group's adjusted operating profit. As noted earlier, the other components line includes the positive one-off effects of the restructuring of the former legacy non-performing loan, and the tax charge includes charges arising from the repositioning of the US business. Turning to slide 12, let's look further at net interest income from SPF. As I've just said, net interest income was in line with expectations. The result was impacted by lower interest rates. For example, the Euro short-term rate decreased from 3.8% at the end of 2024 to 2.3% at the end of 2025, a significant reduction. Net interest income was also affected by proactive strengthening of our subordinated funding and by the weakness of the U.S. dollar. Those factors were partially offset by the growth of our loan book. Since slide 13 and to SPS admin and loan impairment charges, the efficiency measures adopted across the group are also reflected in the admin expenses of this business segment, which are down 9% to €222 million in 2025. Including the additional €55 million charge, loan impairment charges are significantly down by 19% compared to 2024. Excluding this charge, the decrease would be 33%. Loan impairment charges are heavily biased towards the U.S. and U.S. office loans in particular. Risk costs for the rest of the business are at or below normal levels. At this point in the cycle, we are therefore freeing up capacity primarily from the U.S. office to redeploy it into the European markets where the returns are presently very strong. I'd now like to hand back to Christian who will talk about business developments in more detail.

Thank you, Andy. Now let's turn to Structured Property Financing's new business on slide 14. We achieved record new business, as I already said, of 12.4 billion euros in 2025, which was well ahead of our target of nine to 10 billion euros for the year. Newly acquired business amounted to 8.1 billion euros, which was up 1.8 billion euros compared to 2024. The average loan to value ratio for newly acquired business was still a conservative 57%, which provides a comfortable risk profile. Gross margins were also good, averaging 234 basis points. Renewals were around similar levels to the previous year. Those figures continue to demonstrate that we are actively identifying attractive market opportunities. Sustainability has been and continues to be an integral part of lending decisions. In 2025, We again supported the green transformation of commercial properties with 5.1 billion euros of green loans included in our new business numbers. Looking at the geographical distribution of new business, 78% was in Europe, 15% in the US, 4% in Canada, and 3% was in the Asia-Pacific region. As planned, we have increased our focus on Europe and reduced activity in the U.S., concentrating on premium assets and longstanding trusted partners. Our strategy on asset classes has also evolved. Hotel finance continues to be our largest area of new business. However, we are currently taking a more selective approach to new office financing while maintaining our increasing conservative financing of logistics and residential, especially, alternative living properties. Let's now turn to the next slide which shows our current portfolio. We are at slide 15. The portfolio totalled 34.3 billion euros at the end of 2025. This is within the targeted range of 34 to 35 billion euros. As you can see from the two pie charts at the bottom of the slide, we are still highly diversified both by region and property type. We continue to have a clear focus on properties in the major metropolitan areas. We are not financing new construction, have exposure of only 10% in Germany, and no exposure at all to Russia, China, or the Middle East. In the U.S., we are focusing on our core strengths. For example, hospitality-related asset classes. We have significantly reduced the U.S. office portfolio, which is down by a third compared to the balance at the end of 2024. and want to reduce this portfolio further. Green loans stood at 11.3 billion euros at the end of 2025, representing around a third of our total loan book. These loans include the financing of refurbishments as we continue to support commercial properties green transition. Turning to slide 16 and to non-performing loans, we are continuing very active management non-performing loans and the balance stood at 1.1 billion euros at the end of 2025. This is down by 29% compared to the balance at the end of 2023. U.S. office non-performing loans are down by around 40% over the same period. The stage two coverage ratio stood at 3.1% with the ratio, sorry, with the stage three ratio at 29% at the end of 2025. The non-performing loan ratio stood at 3.2%. The U.S. office market remains challenging, and U.S. office loans continue to represent over a half of total non-performing loans. More than 25% of the U.S. office loans is non-performing compared to less than 2% for all other categories. Business outside the U.S. is performing significantly below our long-run average cost of risk. As we have explained, management has taken action to support the repositioning of US loans. We are therefore confident that we can reduce total non-performing loan balance below 1 billion euros during the first half of 2026 already. Now let me hand over back to Andy for an update on our funding liquidity and capital positions.

Thank you, Christian. So on to funding liquidity and capital. Slide 18 shows our broadly diversified funding mix Solid liquidity ratios and capital market activity. Following a very active year, liability terms have been successfully extended. Deposits represent around 45% of our total funding volume. The largest part comes from the housing industry with an additional 3 billion euros from retail deposits. As I mentioned earlier, these retail deposits now have an average initial lifetime of around four years. Our liquidity ratios are solid with the net stable funding ratio at 113% at the end of the year and the average liquidity coverage ratio at 209% for the fourth quarter. We're pleased to report that during the year, Fitch revised Arrow Bank's outlook to positive from stable and confirmed its senior preferred rating at BBB+. We demonstrated our full access to the capital markets during 2025 We increased our AP1 capacity by approximately 100 million euros by replacing the former outstanding 300 million euro issue with a new issue of 425 million U.S. dollars, and we issued 100 million euros of Tier 2 capital. In addition, we completed three benchmark transactions totaling 2 billion euros and private placements totaling 1.85 billion Swedish kronor. Those were Aurel's first Swedish currency issues since 2006. We also completed our first significant risk transfer or SRT transaction in the fourth quarter. Investors assumed a portion of the credit risk attached to a 2 billion euro portfolio of European commercial real estate loans in return for a risk premium. This transaction strengthened our capital efficiency. Next, let's look at the treasury portfolio, which is shown on slide 19. The treasury portfolio stood at 9 billion euros at the end of 2025, up from 8.2 billion euros the year previous. In terms of asset classes, the portfolio comprises public sector borrowers and covered bonds. It therefore has a strong liquidity profile. High credit quality requirements are reflected in the ratings breakdown. 100% of the portfolio has an investment grade rating, with 87% having a rating of AA or higher. Asset swap purchases ensure that there is low interest rate risk exposure. The portfolio is almost exclusively in euros and has a well-balanced maturity profile. Turning now to capital and slide 20, our ratios continue to be solid. Our C21 ratio was up from 15.2% a year ago to 15.5% at the end of 2025 on the Basel IV fully closed basis. Growth in the loan portfolio increased risk-weighted assets, but was overcompensated by the reduction in risk-weighted assets that came from our first SRT transaction that I just referred to. This transaction had a total positive C2 on effect of around 0.5 percentage points. Both the Tier 1 ratio at 17.6% and the total capital ratio at 21.1% were further strengthened by the additions to our 81 and Tier 2 capital during the year. Our leverage ratio at 7.2% at the end of the year is well above record for requirements. Now, I'll hand back to Christian, who will cover our outlook for 2026 and provide an update on our strategic plan aerial ambition.

Yeah, thank you, Andy. I'm turning now to the outlook on slide 22. Meta-economic and geopolitical uncertainty factors are, of course, difficult to predict, and we are monitoring developments closely. However, let me repeat that so far we have not been affected by current geopolitical events. We are successfully reducing our exposure to U.S. offices, and more broadly, we see a slight improvement in sentiment towards the entire commercial property sector. As a result, Arial has moved forward into 2026 with confidence. For 2026, we are targeting an adjusted operating profit approaching 400 million euros. This level of adjusted operating profit would result in an increased adjusted post-tax ROE approaching 8%. In the banking and digital solutions business segment, we expect total deposits to increase further to an annual average of around 17.5 billion euros. In structured property financing, we aim to keep the credit portfolio at around 34 billion euros and reduce non-performing loans below 1 billion euros in the first half of 2026. Now, moving on to slide 24, I will provide an update on our strategic plan, the Arial Ambition. We launched Arial Ambition very successfully in 2025. Let me briefly remind you of the targets we showed you last year. We have four strategic targets. They are, first, to strengthen our core businesses, second, to expand our activities, third, to enhance efficiency, and fourth, to maintain a disciplined approach. We are applying these targets across the group. This means that we are continuing to grow our structured property financing activities selectively in banking and digital solutions. We are targeting growth from existing housing market clients and by moving further to adjacent markets. for example, the Netherlands. We are also optimizing the scalability of our infrastructure and the risk, capital, and funding side. We are maintaining discipline over our capital and liquidity ratios. So let's now look at each of these objectives in a little bit more detail. Moving on to slide 25. The group is now positioned with two growth engines within one bank, and this is how we will move forward. In structured property financing, we are sharpening our focus and emphasizing our key areas of competitive strength. This means that we are mainly concentrating on Europe and on hospitality-related asset types. In the U.S., we are actively adjusting the mix and size of our business. In banking and digital solutions, we are accelerating growth. We are targeting an increase in deposit volumes by both nationally and internationally and introducing lending to the housing industry. I would better say reintroducing lending to the housing industry. In addition, we are building an integrated deposit management platform to serve both our corporate and retail clients. The risk capital and funding objective is strong capital generation and continuation of our solid capital ratios. We also intend to further reduce non-performing assets. Our infrastructure objectives center on AI and cloud-led technology to create a resilient, efficient, and modern platform for the group. In parallel, we will continue to execute our cost efficiency program. Turning to slide 26 on structured property financing, as I have said, we will grow our areas of competitive strength, and as always, we will continue to adopt a conservative approach to risk while seeking attractive returns. There will be greater emphasis on Europe and greater focus globally on hospitality-related asset types. In the US, business will continue to reduce office loans. As a result of these actions, we expect loan volumes to remain stable at around 34 billion euros. We are also continuously leveraging and broadening or off-balance sheet financing business. We expect to continue to have a portfolio of around 7 billion euros in these capital light activities. Moving on to slide 27 and to banking and digital solutions. We are accelerating deposit growth and expanding our product range. We are currently focused on housing industry customers in Germany. Our first objective is to add new customers, new markets, and new channels. We plan to add New groups, for example, small property managers. We plan to add new markets, for example, the Netherlands, France, and Spain. And we plan to add a new channel for retail deposits. We plan to have our own platform in addition to the existing option of platforms like Raisin. We also aim to add new ERP partners. Our second objective is to expand beyond the housing industry and into other B2B segments and to do so in Germany and internationally. And thirdly, we are introducing lending services to the housing industry where we have a strong relationship, knowledge, and expertise. To support these initiatives, we will continue to invest in digitized end-to-end bank processes and digital product offerings. As a result of these initiatives, we are now targeting combined housing industry and real deposit volume of more than 18 billion euros in 2027 compared to an annual average of around 17 billion euros in 2025. We will also be targeting lending to the housing industry of around 1 billion euros by 2027. Next risk funding and capital on slide 28. Here we continue to have two major KPIs. We are targeting Basel IV CT1 fully phased ratio of at least 13.5% unchanged on the objective which we introduced last year. We aim to reduce non-performing loans as a percentage of the loan portfolio to under 3%. To achieve this, we will continue with strong capital generation supported by capital management. We will also continue to optimize funding sources and the risk return from our treasury portfolio. We will, of course, maintain Arial's conservative approach to risk, proactive credit risk management, and our solid balance sheet. Turning now to slide 29 and to infrastructure. Our objective is an AI and cloud-led transformation along with continued execution of our efficiency program. We aim to create a state-of-the-art platform to support the group's business in the future. As I said, our objective is a modern, resilient, and efficient platform. We are also actively driving a technology and efficiency mindset across the bank while streamlining operations and digitizing processes as part of our efficiency program. Our new infrastructure-related KPIs are to achieve gross savings of an additional 40 million euros in total, and the cost-to-income ratio of around 30% by 2027. Moving on to slide 30, we confirm our 2027 target for the adjusted post-tax return on equity at around 13%. As we have shown on earlier slides, management took action incurring an additional charge of 55 million euros to support the repositioning of all U.S. business. Excluding the additional charge of the tax impact of repositioning in the U.S., the 2025 adjusted post-tax return on equity was 7.5%. Looking to the future, two main factors are expected to drive the increase in return. An improved risk profile will reduce our cost of risk on an ongoing basis. And secondly, as I have just described, we are accelerating growth in banking and digital solutions. Assuming a normalized CT1 ratio of 13.5%, this takes us to the targeted adjusted post-ex return on equity of around 13%. Turning to slide 31, let me highlight our ambitious 2027 targets. As I have just demonstrated, we aim for an adjusted post-tax return on equity of around 13%, a CFE1 fully phased ratio of at least 13.5%, a cost-income ratio of around 30%, and an NPL ratio of around 3%, a lot of threes, you know, but these are our targets. and we continue to be on track to meet those. Now moving to our closing slide, I will round up with a few key takeaways. Both our business segments achieved a strong operating performance in 2025. We have significantly reduced loan impairment charges and costs. Management was able to take action to support the repositioning of our U.S. business. We have successfully launched our strategic plan, Arial Ambition, And we are well on track. We are sharpening our focus in both businesses. And we are confirming our adjusted post-tax return on equity target of around 13% in 2027. Andy, I and the team will now be pleased to take your questions.

Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. One moment for the first question, please. And the first question comes from Corinne Cunningham from Autonomous. Please go ahead.

Good morning, everyone. Three from me, please. First one, if you can give us a bit more background on what's happening with margin development. You've told us what's happening for new. You said renewals. I think you said renewals for flat margins. So maybe just a bit more colour on what's happening there and guidance on NII going forward. On the SRT, Can you explain the interaction between what's going on in the background in capital? You had a positive impact from the SLT, but your capital ratio was flat. You made a loss, but any other moving parts in there with RWAs, please? And then last point, if you can give us a bit more background specifically on what the 55 million, you call it repositioning of the U.S. portfolio, but does that basically just mean additional provisioning to make assets easier to sell. If you could explain what that means in more detail, please. Thank you.

Okay, thank you very much. So, yeah, I would like to allocate the question to my dear colleague. So, Christoph will take the first one from the markets perspective, and then you would talk to the SIT, and Nina, you cover the 55 million. So, thank you.

Yes, also good morning from my side, everybody. So the question as to how the spread is between new versus existing business or prolongations, there are plus minus within the average number that we've given you. We don't really publish the individual numbers, but you can take plus minus and basis points from the published figure is where the range is for prolongations and new business for us.

Let me just pick up and then speak to you on the SRT question. So the simple math, 15.2% a year ago, the SRT gave us about a half percentage point benefit, 15.7. We ended the year at 15.5, so 0.2 reduction from sort of trading, if you like. That is just primarily the impact of the slightly bigger loan book that we had over the year, and hence the slightly higher RWA is.

um so that's the pretty simple composition of the movements of that number yeah good morning sorry i was just going to ask um q1q i was looking more q1q um is that literally the same it's a higher loan book or are there other things um specifically in q4 no it is exactly the same there is nothing thank you thanks

Okay, so good morning, Mr. Cunningham. I will take the question on the $55 million, the management action which we have taken. So what is behind that? So in the end, it's a support for us going forward with nothing on the year 2025. It's as an overlay for us giving us the support on the U.S. repositioning going forward. It's not allocated on any kind of non-performing loans, but gives us also a way forward to stay cautious, to follow up on our very cautious and conservative approach with regard especially to the U.S. As you have seen also here on the NPL book, the main part of it is allocated on U.S. office, so that's why we want to stay active here and progress on the targets as just described.

Thank you.

You're welcome. Ladies and gentlemen, this was already the last question, so I would now like to turn the conference back over to Jürgen Junginger for any closing remarks.

Thank you for joining us this morning. As always, our team is happy to take follow-up calls if you have further questions. So have a good day, and thank you again for listening. Thanks. Bye.

Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.