Bundesbank Tells German Heta Creditors: Expect to Lose Half

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German banks should expect to lose at least half of their investments in bonds of Austrian bad bank Heta Asset Resolution AG and make the appropriate provisions, the Bundesbank director responsible for bank supervision said.

“I think this situation has to be taken seriously by the German banks,” Andreas Dombret, also a member of the board of the European Central Bank’s Single Supervisory Mechanism, said in an interview in Johannesburg on Friday. “It’s advisable and recommendable to take provisions on this, and if I were to put a number on this I would say it should be a minimum of a 50 percent provision for potential losses.”

German lenders and insurers have emerged as the biggest creditors of the bad bank set up after the collapse of Hypo Alpe-Adria-Bank International AG, with about 7.1 billion euros ($7.5 billion) at risk. Heta was taken over last month by Austrian regulators, who ordered a debt moratorium and said they will impose losses on creditors to fund the bank’s wind-down.

An ECB spokesman declined to comment on whether Dombret’s comments represent official SSM policy.

Bigger Writedowns

Bayerische Landesbank, a former owner of Hypo Alpe, has the biggest exposure among German banks, as around 2.4 billion euros of loans to the former subsidiary weren’t repaid. Commerzbank AG, Deutsche Pfandbriefbank AG, NordLB, and a German unit of Dexia SA all own Heta debt.

While BayernLB has said it will set aside provisions equal to about half of what Heta owes it, Dombret’s recommendation goes further than some of the disclosed provisions other banks have made. Deutsche Pfandbriefbank said it wrote down its 395 million-euro investment by 120 million euros, or 30 percent. Austria’s Hypo NOE Gruppe Bank said it provisioned its 225 million-euro holding by “about a quarter.”

HSH Nordbank, which was bailed out in 2009 and holds a guarantee on losses above 3.2 billion euros from the states of Hamburg and Schleswig-Holstein, said today that it may raise provisions on Heta bonds from the current level of 40 percent.

“We already took conservative provisions in the fiscal year of 2014,” spokesman Max Loebig said in response to questions by e-mail. “We are now examining whether to raise provisions to the discussed 50 percent of the total investment.”

The required writedown would also be bigger than that Heta’s bonds suffered in the secondary market. Its biggest and most liquid securities, the 4.25 percent 1.25 billion-euro bond due October 2016 and the 4.375 percent 2 billion-euro bond due January 2017, both trade at 57 cents on the euro, according to prices compiled by Bloomberg.

Duesseldorfer Hypothekenbank AG, a covered-bond issuer, was bailed out by Germany’s deposit-protection fund for a second time in March, as impending losses on Heta debt became clear.

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