Depfa is ‘structurally lossmaking’ agencies say ahead of sale

Dublin-based Depfa Bank’s weakness as a “structurally lossmaking” business has been highlighted by two debt-ratings firms as the German government pursues a second attempt to sell the company.

"Given that Depfa's recurring revenue is insufficient to cover its cost base, we believe that – without outside assistance – Depfa has limited scope to engineer a sustainable turnaround and will therefore likely remain lossmaking in the medium to long term, although there may be potential to reduce losses," Moody's said in a note published last week.

Standard & Poor’s (S&P) said that an attempt to sell Depfa might not succeed.

"The bank is structurally lossmaking, largely because it generates minimal net revenues. This stems from the bank's low-yielding exposures, located predominantly in Germany (66 per cent as of June 30th, 2019) and primarily in the public sector," S&P said.

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“Even if an acquirer can heavily reduce the associated costs, the investment return could be very low unless the acquisition is made at a heavy discount to book value. Also, a sale would need approval by the Irish regulator.”

Depfa was bought by Munich-based Hypo Real Estate in 2007, a year before the Irish bank ran into funding problems in the wake of the collapse of Lehman Brothers.

Restructuring plan

While Hypo Real Estate agreed to sell Depfa under a restructuring plan tied to its own bailout during the financial crisis, the German government pulled the sale in 2014 and transferred the business to state-owned bad bank FMS Wertmanagement (FMS-WM).

FMS-WM hired investment bankers in Barclays last October to manage a fresh attempt to sell Depfa in 2020. Reuters reported at the time that Depfa may appeal to German public-sector lender Helaba, which acquired municipal lender Dexia Kommunalbank in 2018.

Austrian infrastructure lender Kommunalkredit and private-equity firms may also look at the business.

A spokesman for FMS-WM declined to comment on the process when contacted by The Irish Times.

Depfa stopped writing new business in 2010, following Hypo Real Estate’s bailout during the financial crisis. The Irish-based bank, which had 104 employees at the end of last year, reported a €67 million net loss for the first half of 2019, following on from a €34 million loss for 2018 as a whole.

The size of its asset base had fallen to €14.4 billion at the end of last June from €48.5 million in 2014 when FMS-WM took over the bank.

S&P said it would likely downgrade its ratings on Depfa if Germany decided to sell the bank.

“We could revise the outlook to stable if FMS-WM decided against selling Depfa and continued with the accelerated wind-down of the entity with ongoing support from FMS-WM and ultimately the German government,” said S&P, which has an A- grade on the bank’s creditworthiness, six levels below its top-notch AAA rating.