Till Hufnagel explains why Petrus Advisers is seeking change at Aareal Bank

Petrus Advisers started a proxy fight last month at Germany’s Aareal Bank (ETR: ARL), seeking to replace three members of its supervisory board. The London-based activist hedge fund owns a little under 10% of the banking company.

On CNBC’s “Squawk Box”, Petrus Advisers’ head of activism, Till Hufnagel, acknowledged that the business has enormous potential both on the lending as well as the software side. He, however, was unsure if the team in place can realise that potential. Hufnagel said:

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“The history of the supervisory board is one where there’s been too much of a cosy relationship with the management team, and as a result, a remuneration and incentives scheme couldn’t place the historically rewarded managers significantly above benchmark but also very much disconnected from the profitability that the company has been achieving and has been quite unambitious in setting the right strategic targets.”

Aareal Bank says it has done what was necessary to improve performance

The three members that we have nominated to the supervisory board can contribute positively in bringing the required change at Aareal, he added.

According to the banking company, however, it has already done what it feels was necessary to achieve improved performance. Hufnagel also acknowledged that Aareal has indeed partially addressed the raised concerns but went on to comment:

“There are certain factors around costs, new business models, revenue streams on the lending side, and separation of the software business, where we think the progress is quite slow. These are the areas where there is a certain reluctance in the management team.”

Aareal Bank’s CEO stepped down after months of sick leave

Hufnagel quoted yesterday’s results and highlighted that the excessive paid to managers across the bank resulted in a threat to profitability. Aareal Bank’s CEO exited the role recently after more than four months of sick leave. Pointing out that another member of the management board is scheduled to retire, the Petrus Advisers’ partner said:

“Our position is that the supervisory board that has historically not done the right things and has failed to set the right incentives should be strengthened so that it chooses the right management board to drive the future of the company.”

Aareal Bank opened at £19.14 per share on Wednesday and closed at £19.55 per share. In comparison, it had started the year at £16.68 per share. At the time of writing, the German company has a market capitalisation of £1.14 billion.