Aareal bags a bargain after biding time on WestImmo

Bank buys erstwhile rival after long pursuit, to grow in target markets, reports Lauren Parr

Aareal Bank’s announcement in February of its agreement to buy real estate lender WestImmo had been widely anticipated, with the consensus being a “thumbs up” on the deal, says one German-based adviser. “Analysts and market participants speak positively about the transaction, as Aareal got a good price and the footprint of both banks allows for high synergies,” he adds.

Aareal, headquartered in Wiesbaden, a handy 10 minutes across the Rhein from WestImmo, trumped private equity competitors, including Apollo Global Management, with a €350m offer. The vendor was bad bank Erste Abwicklungsanstalt, to which WestImmo was transferred by its parent company, West LB, in 2012.

The sale took over four years, which some spectators say reflects a political move to ensure German ownership. The first sale attempt, in 2011, failed partly because West LB was asked to provide large guarantees, making a bid from Apollo uneconomic.

The €350m Aareal paid reflects a discount to WestImmo’s €500m equity, and Aareal will be able to book the €150m difference as a one-off profit on the closing date. Aareal says it will still “significantly” exceed regulatory requirements on equity and liquidity after the deal, including its medium-term target of 10.75% for its tier 1 common equity.

The deal reflects Aareal’s strength as one of Germany’s most resilient banks in the financial crisis, also faring well in last year’s stress tests. It has repaid €300m of ‘silent participation’ capital provided by the German Financial Markets Stabilisation Fund in 2009 and resumed dividend payments.

A Fitch Rating note said Aareal’s ability to secure WestImmo at a big discount after a long sale process reflects “its strength in a peer group largely focused on necessary restructuring to restore adequate levels of internal capital generation”. Another positive is its high return on equity for a German mortgage bank: 11.1%, pre-tax, in 2014.

Creating shareholder value

Because WestImmo is profitable, the deal is earnings-per-share accretive, creating shareholder value from day one, says Aareal. It also expands the bank’s interest-earning asset base as competition among lenders intensifies. Following Aareal’s purchase of smaller, German lender Corealcredit Bank from Lone Star in March 2014, the deal will boost its exposure to both the domestic and international markets.

REC 04.15 - pie chart 2 - p 13A rival German banker says: “Size matters – this is why Aareal is going that way. In an increasingly regulatory world, banks have to have a substantial balance sheet, a strong equity position and a granular business base to buffer all these ratios you have to fill. Aareal didn’t have problems, but to grow a business, you have to grow its capital base.”

The banker says WestImmo’s real estate book has shrunk from around €17bn-18bn at its peak and balance sheet quality has deteriorated. “A lot of its good clients have gone in the past years,” he says. WestImmo stopped writing new business in 2012.

Its remaining €4.3bn commercial real estate portfolio consists of performing, low-risk loans, similar by geography to Aareal’s with only around one-third in Germany, and a greater exposure to offices . This will take Aareal’s CRE loan book, overseen by board member Dagmar Knopek, to €33.3bn.REC 04.15 - pie chart 1 - p 13

Aareal aims to integrate WestImmo as swiftly as possible and expects to complete the deal in the first half of this year. It plans to retain “a significant number” of WestImmo staff in the medium term, but one ex employee doubts more than 40 of the up to 200 staff in Germany and 10-15 in London will remain in two years’ time as there is “complete duplication”. Jane Simpson, head of WestImmo in London, is “babysitting the branch” and its remaining £750m book.

One source with knowledge of Aareal’s strategy says in the meantime, it is business as usual for the Aareal lending teams, to fulfil their stated 2015 new lending target of €6bn-7bn.