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
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34
...................................................
34
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
Income Statement
Accounting and Valuation Principles
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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.
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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
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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
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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 24
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
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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.
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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
A A R E A L B A N K G R O U P L O C AT I O N S
L O C AT I O N S
79
New York
Stockholm
Greater Moscow area Dublin Copenhagen
Flensburg London
Hamburg Berlin Leipzig Essen
Amsterdam Singapore
Brussels Mainz / Frankfurt Paris
Wiesbaden
Warsaw
Prague
Stuttgart Munich Zurich
Milan
Madrid
Rome
03 / 2006
Istanbul
locations – Structured Property Financing locations – Institutional Housing unit countries with lending operations
AMSTERDAM BERLIN BRUSSELS DUBLIN ESSEN FLENSBURG / COPENHAGEN HAMBURG ISTANBUL LEIPZIG LONDON MADRID MAINZ / FRANKFURT MUNICH NEW YORK PARIS PRAGUE ROME / MILAN SINGAPORE STOCKHOLM STUTTGART WARSAW WIESBADEN ZURICH Unser
Mission Statement und der strategische Ansatz
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
