Jan Wagner talks to Karsten von Köller, CEO of German real estate bank Eurohypo, about the prospects for the fledgling bank and breaking out of the German market.Even after the disastrous year that was 2002, it would be misleading to think that Germany’s big commercial banks have lost their ability to compete internationally. It is true that Hypovereinsbank (HVB), Dresdner and Commerzbank plunged into crisis amid huge losses last year. But they have since returned to profitability and, hence, remain a force to be reckoned with on the international scene.

HVB is still the leading foreign bank in central and eastern Europe via its ownership of Bank Austria-Creditanstalt. Dresdner, having been acquired by German insurance giant Allianz, is a large European bancassurance venture and retains an international investment bank. Commerzbank may be the most German-centric of all, but it is active in Europe and may at some point merge with HVB to create a European giant.

There are, however, two even better examples of how German commercial banks can compete successfully outside their borders: Deutsche Bank, which nearly everyone in international banking knows, and Eurohypo, a real estate bank which many in the industry do not know yet.

A banking vision

Eurohypo was created in November 2001 from the merger of the mortgage lending businesses of Deutsche, Dresdner and Commerzbank. In setting up Eurohypo, the banks displayed rare vision. They recognised that the German real estate finance market would, well into the future, be marked by low margins due to overcapacity on the one hand and stagnating volumes due to population decline on the other.

The banks therefore decided to pool their resources and create an institution powerful enough to win lucrative international business and maintain a lock on the German market. The product was Eurohypo, which has about €230bn in assets and 2000 employees. Deutsche, Dresdner and Commerzbank each own almost a third of the bank, with the remaining 2% of its shares traded on the Frankfurt Stock Exchange.

Positive start

Eurohypo has certainly made its parents proud since its birth. Despite the weak European economy of the past two years, its performance has been more than satisfactory. In the first half of 2003, for example, the bank had net profit of €160m, putting it well on track to exceed the €293.5m figure for all of last year.

Owing to the initial synergies resulting from the merger, Eurohypo has reduced its already low cost-to-income ratio – a key measure of a bank’s efficiency – to 35.2% on June 30 from 37% at the end of 2002. And that is only the beginning, because the €140m in annual cost and revenue benefits will not be fully realised until next year.

Another source of pride for its three shareholders is the bank’s enviable market position. In Germany alone, Eurohypo dominates the mortgage lending market with a 25% share. It is also the leader of Europe’s commercial real estate market, far ahead of Hypo Real Estate, recently spun off by HVB, and the Royal Bank of Scotland (RBS), which has a considerable real estate finance business.

“It could be that RBS or another local bank is ahead of us in a particular European country, but on a pan-European basis we are the clear leaders in commercial real estate finance,” says Karsten von Köller, Eurohypo chief executive.

“Following the integration of the real estate investment banking teams of Deutsche in the UK and Dresdner in the US, we are now also in a position to offer all financial services related to real estate,” he adds.

The wider market

Beyond Europe, Eurohypo has had a magnificent start in the US market, which is currently highly lucrative due to a housing bubble there. Since entering the US last January, the bank has already accumulated an impressive €1.1bn in new loan business there.

Understandably, Mr von Köller has made further expansion in the US his top priority. But he also hints that further expansion in Europe is imminent. “We haven’t made any decisions yet, but if you look at our annual report you will notice that that we still don’t have a presence in Greece, Copenhagen or the south of Sweden, all of which are part of Europe,” says Mr von Köller.

He hopes that the bank’s good track record so far will encourage investors to participate in Eurohypo’s second public offering planned for the end of 2004. As part of the offering, up to 25% of the bank’s shares will be sold. Long term, Eurohypo’s main shareholders intend to float up to 40%, which would reduce their holdings in the real estate bank to 20% each.

However, some bank analysts have voiced doubts about Eurohypo’s prospects. They point out that although the bank has improved its return on equity, the 8.5% figure is too far below that of other European banks for it to impress. Another problem is the bank’s capital base, which at around 7% is dangerously close to the legal minimum of 5% for German banks.

Konrad Becker, analyst at the Munich private bank Merck Finck & Co, says that Eurohypo’s attractiveness to investors will suffer unless it rids its balance sheet of numerous non-performing loans (NPLs), many of which were made in Germany.

However, Mr von Köller stresses that investors should not be overly concerned, as Eurohypo’s risk provisions to cover NPLs so far have not exceeded expectations. Moreover, he argues, the banks’ shareholders have provided further security. The three banks have promised to cover, until 2006, potential risks that have not yet been recognised. With these guarantees, the banks want to insure Eurohypo against potential risks from the existing system – independent of its own risk provisions for new business.

“We are confident that the story we will sell to investors at the end of 2004 is a success story,” says Mr von Köller.


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