Eurohypo set to keep lending despite cuts in property book

Bank vows to lend at same rate as last year but to cut total asset volumes

Eurohypo will continue to lend at the same rate this year, despite needing to cut its property book by around €6bn a year in the next two years. Speaking at MIPIM this month, Dr Frank Pörschke, chairman of the board of managing directors, said: “We will continue to do new business, but at the same time we have to reduce our asset volume.”

A reduction of €6bn per year is twice last year’s rate, when the real estate book shrank from €75bn to €72bn. The bank must shrink its real estate assets to less than €60bn by the end of 2012 under the conditions of a government bail-out for parent Commerz-bank and in readiness for Eurohypo’s sale by 2014.

In its 2010 preliminary results, published at the end of February, the bank said it aims to repeat last year’s €5bn of new property lending. The bank also extended €6bn of loans last year. Some 26%, or €1.3bn, of  new lending was in the UK, which, unlike Germany, is now a profitable market for the bank again. Half, or €2.5bn, of new lending, was domestic business.

Pörschke said the cut would be made “through amortisation, loans maturing, repayments and trying to reduce more quickly in non-core markets than in target markets”. In 2009 the bank cut back the markets it lends in from 27 to 10.

Pörschke added that the other way to cut the property book “would be loan sales, which we haven’t done”. But the bank has sold loans in non-core markets; last year  it sold a €200m portfolio of Finnish loans to Nordea Bank. It also plans to cut its exposure in Spain, its second largest overseas market after the UK, by selling the €400m portfolio of Monteverde, which is in administration.

Pörschke said Eurohypo would still underwrite big deals and “syndicate where we can make some money on it”. In the UK, the bank has offloaded almost £150m of  debt since January through syndication deals with Axa (see February issue).

Sorting out the legacy portfolio and returning to  profit is taking longer than  the bank had hoped. Eurohypo posted a loss after tax of €857m in 2010, largely due to €1.3bn of provisions on real estate and the impact on earnings of selling public finance positions (see below).


Legacy loans drag down 2010 results

The €1.3bn of real estate provisions wiped out the positives for Eurohypo in 2010, which were a 3.9% rise in net interest income to €1.34bn and a 24% rise in net commission fees, driven by a “significant increase” in margins.

German lending showed a 9.4% return on equity. Net interest and commission was stable despite a fall in the size of the book, but profits fell from €185m to €107m as provisions rose from €93m to €154m.

Losses in international property lending were reduced, from €643m to €383m, and net interest and income increased from €478m to €537m and from €96m to €136m respectively. But international loan provisions rose slightly, from €760m to €775m.