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Hypo Real Estate Said to Fail Europe-Wide Stress Test

Hypo Real Estate said to fail Europe-wide stress test
The Hypo Real Estate Holding AG company headquarters sits in Munich. Photographer: Guenter Schiffmann/Bloomberg

Hypo Real Estate Holding AG, the commercial-property lender rescued by the German government following the financial crisis, failed a Europe-wide banking stress test, two people familiar with the results said.

The state-owned bank didn’t pass a stress scenario on its capital that assumes an economic slowdown and sovereign-debt losses, said the people, who declined to be identified before an announcement on July 23. Hypo Real Estate, based in Munich, is probably the only German bank to fail the test, one person said.

European Union regulators are examining the strength of banks as they seek to reassure investors about the firms’ resilience to potential losses amid the region’s sovereign-debt crisis. The tests are being applied to 91 of Europe’s biggest banks, including 14 German institutions.

“We have to see that Hypo Real Estate is one of the biggest German lenders for public financing,” Konrad Becker, a financial analyst at Merck Finck & Co. in Munich, said in a Bloomberg Television interview today. “Other banks will not have the same difficulties.”

Banks may be required to have a Tier 1 capital ratio, a key measure of financial strength, of at least 6 percent under the EU stress tests, the same threshold U.S. lenders faced last year, said two people briefed on the talks.

Capital Ratio

Hypo Real Estate’s Tier 1 capital ratio was 7.7 percent at the end of March, according to a presentation on its website dated June 2010. The lender said in May that it holds 72.1 billion euros ($93.4 billion) of debt in Greece, Italy and Spain, among the highest held by a bank in Europe, according to data compiled by Bloomberg.

Germany’s Soffin bank-rescue fund had provided Hypo Real Estate with 7.87 billion euros in funds by the end of March. The bank has said it may require a total of 10 billion euros from the fund.

The lender said on July 8 that it received approval to establish a so-called bad bank to transfer as much as 210 billion euros of investments consisting of “non-strategic assets and risk positions.” The amount represents more than half of Hypo Real Estate’s total assets at the end of 2009.

The assets will be transferred in the second half of this year, according to the German Financial Markets Stabilization Agency, which manages the bank-rescue fund.

Government Rescue

Hypo Real Estate has said it doesn’t expect to return to profit before 2012. The lender needed a total of 103.5 billion euros in credit lines and debt guarantees from the state and financial institutions to save the company from collapse in 2008 after its Dublin-based Depfa Bank Plc unit couldn’t raise financing when the bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

Hypo Real Estate is fully owned by the government’s Soffin bank-rescue fund, which took over the lender in 2009 following a squeeze-out that forced remaining minority investors including U.S. investor J. Christopher Flowers to sell their shares.

A summary of results of the stress tests will be released on July 23 at 6 p.m. CET, the Committee of European Banking Supervisors said in a statement on its website yesterday.

“The association doesn’t expect any other banks, private and public, to have failed the test beyond Hypo,” said Stephan Rabe, Berlin-based spokesman for the Association of German Public Sector Banks, which represents 62 institutions including the state-owned Landesbanken. “We’re relaxed about Friday.”

‘Weaker Landesbanken’

German Finance Ministry spokesman Michael Offer yesterday said he doesn’t have any knowledge of the stress-test results.

According to CEBS, the other German lenders tested are Deutsche Bank AG, Commerzbank AG, Deutsche Postbank AG, Landesbank Baden-Wuerttemberg, Bayerische Landesbank, Norddeutsche Landesbank Girozentrale, WestLB AG, HSH Nordbank AG, Landesbank Hessen-Thueringen Girozentrale, Landesbank Berlin AG, DZ Bank AG, WGZ Bank AG and DekaBank Deutsche Girozentrale.

“I don’t think any of the listed banks will fail the stress test,” said Merck Finck’s Becker. “I can’t exclude that one of the weaker Landesbanken may not achieve passing the test, but I think it’s unlikely.”

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