Break-up looms for Eurohypo

German lender Commerzbank is gearing up to break up Eurohypo, its real estate lending arm, putting an end to months of uncertainty regarding the future of the troubled real estate lender, according to those who track the market.

Commerzbank is expected to intergrate part of Eurohypo's profitable business and will wind up the rest, sources close to the group say. The move signals that Commerzbank has shelved its previous plan of selling Eurohypo, either to the German state, or to a private buyer, as previously stipulated by the European Commission in return for handouts received during the financial crisis. The German state owns a 25% stake in Commerzbank via its stabilistaion fund
Soffin. Insurer Allianz also owns almost 5%. Spokespeople for Commerzbank, Eurohypo and Allianz declined to comment.

Speaking at a press conference in Frankfurt on 19 January, Commerzbank's chief executive Martin Blessing dodged questions regarding the future of Eurohypo, saying only 'you’ll get an official announcement when we've got something to announce'.

However, acording to Christian Ulbrich, head of EMEA at Jones Lang LaSalle, such a break-up is 'the only solution available to them': 'There is no refinancing available for mortgage banks like Eurohypo, so if you can’t do any new business or even refinance expiring CMBS, what do you do? It would be hard to sell Eurohypo because any possible buyer would have all these problems, too. This sends a message to the real estate industry about the serious problems surrounding debt financing today.'

In addition, Commerzbank needs to raise EUR 5.3 bn in new equity by the end of June this year, to meet the requirements of the European Banking Authority's, or EBA's, capital requirement, which is no mean task in the current debt-starved climate. At its press conference in Frankfurt yesterday (19 January), Commerzbank's chief financial office Eric Strutz said that the bank is implementing a number of measures to enable it to meet this deadline. These include reducing its risk weighted assets by EUR 22 bn by end-June 2012 to EUR 222 bn as part of a 'significant downsizing'. It will also sell further non-strategic assets, following the sale of Dresdner Bank's headquarters in Frankfurt - known as the 'Silver Tower' - to a consortium led by real estate manager IVG Immobilien for EUR 400 mln last November. As part of its downsizing drive, Commerzbank has slashed its balance sheet volume by 33% since December 2008 to EUR 700 bn as of end-December last year, Blessing said.

Commerzbank's shares rose almost 14% yesterday on the news that it expects to meet the requirements of the EBA's capital requirement without using additional public funds. However it has to close a hefty equity gap of EUR 3.3 bn in just six months to pull it off. The German bank also said it has the potential to further strengthen its Core Tier 1 capital ratio. However, the lender still holds EUR 1.4 bn in Greek government bonds, on which it will likely take a massive hit of around 70% in any 'haircut' agreement.

Eurohypo did around EUR 1 bn in new business in the first half of 2011, a sharp drop on the EUR 37 bn in new business generated in 2007. In November last year, Commerzbank put the brakes on new lending at Eurohypo, stating that the real estate arm would focus on loan rollovers in Germany and Poland.