Interview with Hermann J. Merkens
We have made our Group more powerful, but also more robust.
Mr Merkens, in January 2020 you unveiled “Aareal Next Level”, setting the strategic course for Aareal Bank Group’s further development in the coming years – and just a few weeks later, the situation in the markets was completely turned on its head by the coronavirus. What does the pandemic mean for Aareal Bank Group and its plans for the future?
Only the coming months will tell how serious the economic effects of the coronavirus pandemic will be – and what impact these could have on our Company. But one thing is already clear at this stage: if the crisis and particularly the retention of the necessary restrictions on social interaction and business continue for a long time, there will be a massive macroeconomic impact across the world.
What we do know, however, is that Aareal Bank is in very robust shape and is therefore in a good position to deal with this challenge as well. Primarily because, over the last few years, we have made the Group more powerful but also more robust than ever before with the successful implementation of our “Aareal 2020” programme.
Last but not least, we drastically scaled back our risk positions last year – particularly in Italy – and significantly reduced our NPL portfolio. That was an important step towards strengthening our resilience and ability to withstand crises – and from where we are standing today, we did this exactly at the right time.
Is the coronavirus crisis affecting your fundamental strategic considerations with regard to Aareal Bank Group’s further development in the coming years?
The coronavirus crisis is a massive exogenous shock, but one that the world will once again get over – hopefully sooner rather than later. The fundamental, long-term trends that we have identified for our business – and on which we have been basing our activities for a number of years now – will remain unaffected by this, as will the strategic conclusions that we have drawn from them.
You have already mentioned the “Aareal 2020” programme for the future, which will be coming to an end this year. What were the main advances that you achieved with this programme?
By implementing “Aareal 2020”, we have substantially increased the flexibility of our Structured Property Financing segment in terms of regions, asset classes, structures and exit channels, while simultaneously driving forward the expansion of our business along the value chain with our equity investment in Mount Street. Meanwhile, we have put our Consulting/Services segment on a clear course towards growth – both at the Bank and particularly in our software subsidiary Aareon. Over recent years, we have made Aareon’s international business much stronger in the course of “Aareal 2020”, including through acquisitions.
We have also created the foundation to grow our digital business significantly – across both segments of the Group. Last but not least, we have strengthened our power to innovate, and made our structures and processes much more efficient as well.
These are all things that we can build upon as we now enter the next phase of our development.
What are the core elements of “Aareal Next Level” and what are your objectives with this programme?
“Aareal Next Level” is our concept aimed at realising the full business potential of our Company in the coming years, having created the basis for this with “Aareal 2020”.
This is not about re-inventing ourselves all over again because we are maintaining our fundamental strategic orientation – comprising large-volume international commercial Structured Property Financing on the one hand plus our business with the housing and property industries in Europe and related sectors on the other.
With Aareal Next Level, we now intend to develop individual business activities further, in a targeted manner – in order to strengthen their respective independent profiles and accelerate the growth of the Group as a whole.
What does this mean specifically?
It is all about realising an evolutionary advancement based on our achievements so far. The strategic convictions that guided us when conceiving “Aareal 2020” remain viable, although some strategic refinements are envisaged.
In the Structured Property Financing segment – the backbone of the Group – we will secure both the successes achieved in past years and our ‘best-in-class’ position, even in an adverse environment, under the motto “Activate!”. We will chiefly do this by systematically leveraging the flexibility that we have created, expanding further along the value chain and becoming even more efficient.
In the Consulting/Services segment, we have identified various thrusts for the two activities summed up in this name – and will in future show the banking business and Aareon separately in our segment reporting for reasons of transparency. We will gradually reduce the various overlaps and cross-dependencies that still exist between the two today, and strengthen the individual positioning of the respective brands and business models in return – whilst safeguarding synergies.
For Aareal Bank as a leading provider of payment services to the German housing industry, this will specifically translate into a re-positioning – in addition to the focus on deposit-taking – towards becoming a provider of innovative products and services, which will include expanding into new, adjacent markets where there is a demand for specific expertise in payment transactions. The motto for these activities will be “Elevate!”.
Aareon, in turn, is expected to significantly increase its growth momentum (“Accelerate!”), developing a strong independent value proposition as a software company with a standalone market position. To achieve this, Aareon will consistently implement the programme that it unveiled in 2019, which is designed to double results over the medium term – predominantly through a further expansion of digital businesses. M&A activities are expected to generate additional growth as well.
Overall, what do you wish to achieve with “Aareal Next Level”?
Assuming a more positive environment again, the initiatives undertaken in the context of “Aareal Next Level” will allow us to generate a return on equity before taxes of around 12 per cent over the medium term.
The strategic boundaries have been set and the ambitions have been formulated, so now it is a matter of fleshing out “Aareal Next Level” further and driving forward Aareal Bank Group’s evolutionary strategic advancement with courage and spirit – even though this will not be easy in view of the coronavirus crisis.
We are clear about two things here: firstly, we will only achieve lasting success if we create success for our clients, and secondly, the volatility of our environment means that we must always be ready to adapt – and even strike out in completely new directions if the circumstances so require.
If, while following our “Aareal Next Level” concept, we succeed in gradually realising the available potential in the coming years, then we will create value even if the environment becomes more difficult – not just value for our shareholders but value for our employees, our clients and society too. This will enable us to keep writing Aareal Bank Group’s success story in the medium to long term – also beyond our anniversary year 2023, when our institution will celebrate its 100th anniversary.
The interview was conducted on 23 March 2020.