Hypo launches two-track sale of Deutsche Pfandbriefbank

The sale of German lender Deutsche Pfandbriefbank has officially been launched with parent group Hypo Real Estate Holding (HRE) looking to divest its entire stake or exit through an initial public offering.

HRE said on Tuesday that it has hired Citigroup and Deutsche Bank as financial advisers for the sales process, adding that a potential IPO is also being prepared as an alternative option.

Pbb is 100% owned by HRE which, in turn, is fully owned by SoFFin, the Financial Market Stabilisation Fund set up by the German government following the collapse of Lehman Brothers in September 2008 to stabilise the German banking industry.

The German government nationalised Hypo Real Estate in the aftermath of Lehman Brothers' collapse and the real estate lender received a €10 bn capital injection as well as €145 bn in liquidity guarantees under the condition it would sell pbb at a future date.

Pbb is a major European provider of finance for commercial real estate and public-sector investments. It is the largest issuer of Pfandbriefe (German covered bonds) by volume, and originated a record €10 bn of new business in 2014 across its real estate finance and public investment finance division.

'We are embarking upon re-privatisation, against the background of a very positive performance over recent years, solid results for 2014, and an outstanding position on the credit and capital markets,' commented Andreas Arndt, pbb's co-CEO and chief financial officer.

Günther Bräunig, supervisory board chairman of HRE, added: 'Over the last years pbb has consistently laid the foundations allowing the pursuit of reprivatisation. We are confident that the project will be successfully concluded during the course of this year.'

Financial results
Pbb expects consolidated pre-tax profit of more than €170 mln for the 2014 financial year (based on preliminary results), a rise of over 20% compared to its full-year forecast of €140 mln.

Net interest income, pbb’s single most important source of income, 'rose markedly stronger in 2014 than other income components', the bank said, adding that loan loss provisions remained at a low level.

The bank's capital ratios already exceed regulatory requirements.

'We have done all the preparatory steps; in organisational and business model terms we are now in the shape we want to be in. The markets at the moment are quite attractive, much better than a few years ago. I also believe that we have one key advantage compared to past sales; we are fully funded and this makes a huge difference between us and some other players which went on sale in the past,' management board member Bernhard Scholz told PropertyEU last year.

The bank currently has a balance sheet of over €76 bn, of which about €24 bn in real estate finance. PBB’s five major lending markets in Europe are Germany; the UK; France; CEE; and the Nordic countries.

Putting a price tag on a lender is complicated because one of the key issues is ‘how to value the liabilities of the bank’, according to Marcus Lemli, CEO of Savills in Germany. ‘It’s very hard,’ he said.

‘Capital markets are strong,’ added Lemli. ‘Pbb has done its homework and shown the market that it is lending again. It could be a logical time for an IPO. They’re in good shape for it.’

Commenting on a potential sale on the stock market, Jörg Schürmann, head of debt advisory at JLL in Frankfurt, noted that some banks are still quoted below their equity book value. 'It’s a difficult play,' he said. 'Other than Aareal, there aren’t many listed real estate banks in Germany. That said, 29% of Aareal’s stock was just placed in the market, which suggests there is appetite out there for such stocks.'

Westimmo sale
Pbb is not the only bank on the block in Germany. Bad bank EAA is 'already at an advanced stage' with the disposal of WestImmo. EAA, which is tasked with winding down WestImmo's assets, ‘intends to sell WestImmo in its entirety, including its loan portfolio,’ to one bidder, a spokesperson said.

According to a Frankfurt-based analyst, mortgage bank Aareal Bank is believed to be the sole bidder left standing for WestImmo, the real estate lending arm of failed lender WestLB, with around €10.4 bn of loans on its balance sheet.

‘The advantage of buying WestImmo is that it is healthy with good assets left. I would expect the unit itself to sell at a discount of around 50% to book value,’ he said. The EAA put WestImmo’s equity capital at €575 mln as of June 2014. The agency is expected to make an announcement shortly regarding the sale.

The European Commission had originally asked for WestImmo to be sold by the end of 2011 as part of its conditions for parent company, WestLB's, bailout. The latest attempt to sell WestImmo comes more than three years after exclusive talks with private equity investor Apollo failed.

Aareal declined to comment.