Aareal Bank’s headquarters may not be a “real palace”, as the activist investor Petrus Advisers writes. But the building is in a very central Wiesbaden location.
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(Photo: dpa)
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Frankfurt It is an unusually rough wind that the Wiesbaden real estate financier Aareal Bank has been striking for some time. First activist investors successfully urged the institute to sell parts of their software subsidiary Aareon, but now trouble is brewing again. The hedge fund Petrus Advisers, one of the institute’s top 10 shareholders, has sharply criticized the management’s course and published the letter sent on November 6th on its website on Tuesday.
Petrus founder Klaus Umek and his partner Till Hufnagel consider Aareal Bank to be too unprofitable. If you factor out the figures from the software subsidiary Aareon, the institute only generated a return on equity of 5.1 percent in 2019, according to the letter, which is dated November 6th. A bank must generate at least eight percent.
Umek and Hufnagel are convinced that “Aareal’s management and supervisory board must set the course for sustainable value creation NOW by acting consistently and quickly”. What follows are six suggestions for improvement – a mix of cost-cutting measures and ideas on how to increase earnings.
Not generally brushed on riot
Petrus Advisors is not a hedge fund that does not generally go on a course of confrontation with management. In the case of the partial sale of the software subsidiary Aareon, for example, the investor took a less radical stance than the Teleios hedge fund, which originally called for Aareon to be sold completely.
Petrus Advisers had not yet published any letters to Aareal management – unlike in the case of the Commerzbank-Daughter Comdirect. At the online broker Comdirect, Petrus Advisers denounced, among other things, high costs and negotiated better severance pay when Commerzbank took over Comdirect completely.
Now the London investor, who holds between eight and ten percent of the shares, has lost patience with Aareal Bank – and the broadside hits the institute at an inopportune time. On November 8th, two days after the Petrus letter, CEO Hermann J. Merkens had to call in sick for three to four months, since then CFO Marc Hess has represented him externally. A few days later, Hess received the profit forecast for 2020, due to the corona crisis, and posted a small loss in the third quarter. Petrus Advisers’ demands for more profitability have become even more topical.
It is not that Aareal Bank is completely inactive. The institute is already revising the medium-term strategy presented at the beginning of the year with the management consultancy McKinsey. But Petrus Advisers is not doing all this quickly enough.
Less cost-efficient than Pfandbriefbank
Aareal Bank has “very high costs compared to national and international banks, especially on the personnel side,” says the letter. “So far, there has been no understanding that uncompromising work has to be done on costs.”
If the software subsidiary Aareon is excluded from the Aareal Bank Group, the cost / income ratio of Aareal Bank was significantly higher than the cost / income ratio of Deutsche Pfandbriefbank (pbb), which pursues a similar business model. If Aareal Bank were to operate similarly efficiently in its banking business, according to a calculation by Petrus Advisers, around 30 to 50 million euros could be saved.
The comfortably high equity cover also arouses desires among investors. If it were to be reduced to the same level as at the Pfandbriefbank – always without the Aareal software subsidiary -, 418 million euros could be distributed to shareholders.
According to the investors, supervisory board chief Marija Korsch has already said that one could talk about 350 million euros as a dividend “as soon as the ECB allows this”. When that could happen is completely unclear. At the moment, the banking supervisors are more likely to insist that banks should refrain from any form of distribution to shareholders.
The suggestions for improving the business model are more vague. Petrus Advisers is fundamentally bothered by the fact that Aareal Bank earns most of its money in the lending business, which ties up a lot of equity. In addition, payment transactions play an important role, through which the real estate financier secures deposits from the housing industry – an important pillar for the stable refinancing of the institute, which is also expensive in times of negative interest rates.
Relocation to a “much more modest” property
Essentially, the hedge fund requires Aareal Bank to develop sources of money that tie up less of its equity. The hedge fund suggests that Aareal Bank syndicate more loans, i.e. bring co-lenders on board for financing. The bank that initiates and organizes such a syndicated loan always earns a little more than the free-riding banks. Aareal Bank is active in loan syndication, which does not mean that it cannot be expanded.
Another thorn in the side of Petrus Advisers are the “extremely high pension liabilities of Aareal”, which the investor would like to outsource. He demands that this be checked “quickly”. Even in front of the headquarters, the investor’s eagerness to save does not matter. Petrus Advisers speaks of a “real palace”. The property does not exude baroque splendor, but it is located in the very center of Wiesbaden’s city center – and in the eyes of the investor “dramatically oversized”. “We therefore demand an uncompromising examination of the sale of the property and the move to a more appropriate, significantly more modest property in the wider Rhine-Main area.”
More: Comdirect investor Petrus is targeting Aareal Bank
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