Will Aareal Bank AG exceed its targets again in 2007?

I just cannot stop mentioning it and thankfully, I am not the only one mentioning it: buy banks, buy banks, buy banks for 2007! After having covered Capitalia, Banco Pastor and ABN Amro, I think it is about time to give my opinion on some of Germany's banks. There are two banks that I particularly like: Aareal Bank AG and Commerzbank, for the simple reason that I am impressed with there EPS growth scenarios. I willl focus on Aareal Bank, which is a real estate bank that seems to be doing very well. After Aareal Bank achieved its full-year new business target of Eur 7 bio already in the first nine months of 2006, it decided to raise the target to Eur 8 bio for 2006, of which 89% comes from Europe. In order to diversify geographically, a new office is planned in Shanghai, which will open up the Asian market, in addition to its growing presence in USA. Its portfolio is well-spread and revenues are received from residential housing, offices, retail, hotels and logistics. Aareal Bank is certainly on the right track when it comes to Non-Performing Loans, with these NPLs being down from 10.7% of its portfolio in 2004 to an estimated 3.1% in 2006. With this impressive improvement, the company has gained a lot of credibility with investors. And when studying its other targets for 2006, whether talking about RoE, Operating Profit or loan loss provisions, all targets are destined to be met. Coming back to EPS growth, this is quite a story: whereas EPS is around 2.21 this year, the sale of property by Interhotel Gruppe (in which Aareal Bank owns a 33% stake) should boost EPS to over Eur 4.00 in 2007. For 2008, the EPS is expected to be Eur 3.00 - 3.50, which should justify a share price of around Eur 42 next year, but if targets are exceeded in 2007 as was done this year, there could be much more lying ahead of us. Aareal Bank is also a potential prey as the real estate industry becomes an increasingly hot target for M&A-mania, as seen in today's takeover of Realogy. To summarise, I believe that a target of 25% above today's Eur 35.50 is feasible in 2007.