Hypo Real Estate's Quarterly Loss Narrows as Bad-Loan Provisions Decline

Hypo Real Estate Holding AG, the only German lender that failed the European Union’s banking stress test last month, reported a smaller second-quarter loss as it set aside less money to cover bad loans.

The pretax loss narrowed to 395 million euros ($509 million) from 664 million euros a year earlier, the Munich-based lender said in an e-mailed statement today. Provisions for risky loans declined to 194 million euros from 881 million euros.

Hypo Real Estate, led by Chief Executive Officer Manuela Better, reiterated that it doesn’t expect to be profitable in 2010. The bank may provide guidance for 2011 toward the end of this year, once the planned transfer of non-strategic assets and risk positions to a so-called bad bank has been concluded.

In the second-quarter, “the lion’s share of the loan-loss provisions was recognized on real estate loans, reflecting the strained situation still present on real estate markets,” Hypo Real Estate said in today’s statement.

The lender said on July 8 that it received approval to establish a bad bank to transfer as much as 210 billion euros of investments, representing as much as 55 percent of Hypo Real Estate’s total assets at the end of June. The assets have to be moved to the new entity, named FMS Wertmanagement, before the end of the year.

Hypo Real Estate, fully owned by the government’s Soffin bank-rescue fund, failed the EU stress test in July while 13 other German banks passed. The rescue fund took over the lender in 2009 following a squeeze-out that forced minority investors, including U.S. investor J. Christopher Flowers, to sell their remaining shares.

Expenses for Soffin’s “liquidity support” totaled 120 million euros in the quarter, Hypo Real Estate said today.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

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