Germany's Aareal Bank Hit Hardest in ECB Risk Reality Check

(Bloomberg) -- German commercial real estate lender Aareal Bank AG took the hardest hit to date in a far-reaching European Central Bank investigation of how banks gauge risk.

Aareal’s key capital ratio dropped by at least 3.5 percentage points as a result of the review, the most among 18 publicly traded banks that have disclosed the impact in statements and conference calls. The narrower ratio reduces the lender’s scope to increase shareholder returns, and suggests that either Aareal was overly optimistic or the ECB’s approach is too blunt.

The probe of about 65 banks, which began in earnest in 2017, is a key plank in the ECB’s efforts to shore up the industry a decade after the financial crisis eroded trust. The ECB has said that the exercise, known as the targeted review of internal models, is designed to better align how banks calculate risk.

Aareal defended itself, with Chief Executive Officer Hermann Merkens saying its way of measuring risk is valid and that the bank’s business shouldn’t be compared directly with lenders that engage in riskier activities.

“We are now being compared with banks that do business we’ve never done,” Merkens told analysts in a conference call last week, when the company disclosed the effect of the review.

An ECB spokeswoman declined to comment.

Bloomberg compiled figures on the impact, which most of the banks disclosed in recent weeks in their quarterly earnings statements and on conference calls with analysts.

Aareal shares fell as much as 4.4 percent and were down 4.3 percent at 27.01 euros as of 10:29 a.m. in Frankfurt.

The ECB’s findings were in line with the bank’s expectations, Merkens said. They’re also far from being a threat to Aareal’s solvency. The bank exceeds its minimum capital requirements by a wider margin than almost all of the other 17 lenders, company filings show.

Several of the banks have yet to implement the ECB’s findings. The review is scheduled to conclude next year, meaning Aareal and other banks may face further erosion of their capital ratios.

--With assistance from Boris Groendahl.

To contact the reporter on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Keith Campbell

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