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Improved dividend policy: payout ratio up to 80%.

  • 31 May 16

We have initiated coverage of the German Aareal Bank with a price target of €39 per share and an ADD recommendation. Aareal Bank is a mortgage bank with a business focus on commercial real estate and services to commercial real estate customers. Positive items are: The property market in Germany is booming. The vdp property price index in Germany has increased every year since 2010 for both residential properties and commercial properties. The index increased by 5.0% for FY2015. Aareal Bank seems to have no problems to fulfill future Basel 3 fully loaded CET1 targets. The opposite is the case. The bank therefore decided to enhance its dividend policy in February 2016. Aareal plans to continue to distribute an ordinary dividend of approximately 50% of the EPS for the financial years from 2016 onwards. For the financial years 2016 until 2018, it is planned to add a supplementary dividend, increasing from 10% (2016) to between 20% and 30% of EPS, respectively. The Consulting/Services segment is very special. This offers the housing and commercial property industries services and products for managing property portfolios and processing payment flows. It delivers over €8bn of highly-advantageous customer deposits from the housing industry which the real estate finance business can use. Additionally, the Consulting/Services segment is very valuable to Aareal Bank in terms of customer relationships and know-how regarding the financial situation of customers. The concerns are: The real estate finance business is cyclical. Aareal Bank was granted a silent participation of €525m and a guarantee facility of up to €4bn for unsecured issues from the German State in 2009 due to the uncertainties of the financial market turmoil. Aareal had paid back the silent participation to the German State by FY2014. Aareal Bank is targeting a pre-tax RoE of 11% for FY2016 and at least 12% over the long term (2020 plus). These are targets which universal banks promise after tax. But it is much better than what Deutsche Bank or Commerzbank delivered over the last few years. The higher RoE figures of Aareal Bank in 2014 and 2015 are based on one-off gains due to lucky buys.