It is not the first time Hypo Real Estate’s future has been called into question since the property lender secured emergency funding from the German government last October. However, it is now conceivable that Hypo could be dissolved within the next 12 months.
The group is thought to be in talks to rid itself of Depfa Bank, the division blamed for its demise. Potential options include a takeover of Depfa by Germany’s financial stability fund or a merger with another public finance provider. Hypo Real Estate will not comment.
The Munich-based bank will reduce its cost base by €250m by 2013 in light of the global downturn. This will include a staff cut of 800, from 1,800. Two-thirds of the redundancies will be outside Germany, while a further 200 jobs will be axed by 2013. In total, this equates to more than 40% of Hypo’s workforce.
No new business is planned in infrastructure finance, while non-strategic activities could go up for sale, the company said in a statement. Hypo also confirmed that it was still in talks to extend government financial support to help secure the group’s “continued existence”.
“Hypo could be snapped up by someone this year,” says Olle van Alphen, a senior vice president of real estate at HSH Nordbank. “I don’t know if it has the skills and scope to survive as a standalone entity years from now.”
Last month, Hypo drew down a further €10bn from the state fund in order to shore up its balance sheet. This takes the total extended to the group through this facility to €30bn, on top of a €50bn package granted to Hypo in October.
A bailout plan arranged by other European lenders had earlier failed to restore confidence in the bank, prompting the government to step in.
Hypo had to be rescued when Depfa experienced difficulties securing short-term funding through the wholesale markets after Lehman’s demise. Ironically, Depfa, the public finance lender that it had acquired for €5.6bn in 2007 in a bid to broaden its balance sheet, turned out to be the root cause of Hypo’s problems.
“Hypo fell over because Depfa was running a mismatch, using the wholesale markets to finance long-term loans with short-term money,” says another real estate banker. This strategy fell apart when Lehman Brothers filed for chapter 11, further fuelling the liquidity crisis. “My bet is that the business will be split into two,” he adds. “Hypo won’t exist in 12 months from now.”
One possibility is for the public finance unit to be hived off into some form of bad bank. The property finance side of the business could then be wound up over the medium term, or even merged with another institution.
Although this scenario is unlikely, it would not be the first time it has happened. Germany’s banking system has a culture of solving problems through mergers. Landesbank Baden-Württemberg, LBBW, acquired Sachsen LB last year after the bank was hit by bad investments tied to US subprime mortgages. A possible tie up between Nord LB and HSH Nordbank has also become more likely in recent weeks in response to HSH’s financial problems.
“In the event that Hypo is split into separate entities, one of the bank’s current biggest problems would be solved. On the other hand, even the remaining commercial real estate operation will not be profitable because of rising risk provisions and rising funding costs,” says Merck Finck analyst Konrad Becker. However, a split would allow the bank to wind down its real estate activities faster.
Regardless of the way the bank is restructured, it is unlikely that Hypo will make a profit over the next two years. The reduction of business volumes will reduce its revenue base, higher risk provisions will burden its income and the cost of interest expenses will rise significantly because of the subsidies given by the state.
A change of strategies
Other German lenders have also revised their business strategies. HSH announced that its real estate lending operations will now focus on the domestic market, while its total assets will be reduced. The lender applied to the state fund for €30bn before setting up a bad bank for €50bn of risky positions.
Eurohypo has put all lending on hold and plans to shrink its loan book by up to 20%. The order came from its parent company, Commerzbank, which has seen its liquidity decrease because it is a contributor to the government’s €500bn bank bailout scheme.
