Post-split payback
October 12, 2010
State-owned German bank Hypo Real Estate (HRE) is planning to return some 23.5 billion euros ($32.5 billion) in loan guarantees to the federal government, according to a report in the financial daily Handelsblatt.
The guarantees were part of a 142-billion-euro state support package the bank received along with 10 billion euros in cash to keep it from collapsing during the financial crisis.
HRE kept the guarantees in reserve to ensure the smooth division of its assets among two new entities earlier this month.
Some 173 billion euros of risky assets were transferred to a so-called "bad bank" named FMS Wertmanagement. The healthy parts of HRE’s balance sheet were consolidated to form the Deutsche Pfandbriefbank (pbb). Although this "good bank" still depends on substantial state guarantees to reassure creditors and obtain financing on favorable terms, it no longer requires the full volume of public funds placed at its disposal.
Divide to survive
"HRE doesn't exist anymore. It's just the Deutsche Pfandbriefbank and the bad bank," Konrad Becker, banking analyst for private banking company Merck Finck, told Deutsche Welle. "The name is still used in the media because it's well-known and infamous and doesn't need explaining, but the fact is it no longer exists."
"What we're witnessing is the attempt to make at least a part of HRE viable," Becker said.
"We saw a split between the assets that are no longer seen as strategically important – these all went to the bad bank – and those considered important, primarily the covered bonds and the mortgages that can be re-financed through bonds – these were put into the pbb Deutsche Pfandbriefbank, which is now expected to continue."
The division was part of a salvage plan set down over a year ago, but the ultimate goal of re-privatization is still a long way off, according to Becker.
"It's impossible to speculate when the bank can be re-privatized," he said. "There are no official figures yet, but I think the bank will have to show an operating profit first."
"People are really cautious. So many people have lost so much money with HRE, and everyone knows where Deutsche Pfandbriefbank came from. I think the bank will have to prove that it is profitable for two or three years, and at the end of these two or three years it will have to show a business model that can convince investors."
In order to meet these aims, HRE has been positioning itself more modestly as a property financier for Europe, and decided to stop taking on new business in Asia and the US.
Author: Ben Knight
Editor: Sam Edmonds