DEPFA: The Newcomer with Street Smarts

While most German banks sink into a swamp of bad debts and losses, one has found the secret to success: hitch your wagon to the government. DEPFA Bank, a lender specializing in public-sector finance, racked up net profits of $250 million in 2002 on sales of $436.6 million, a 72% jump over the previous year. That gave it a return on equity of 22.3% -- a level other German banks only dream of.

DEPFA has been riding high by helping to finance the deficit spending of the German, French, and Italian governments, both municipal and federal, by lending money, and by selling bonds and other debt instruments. One of the bank's specialties is issuing Pfandbrief -- bonds that are backed by loans to or securities issued by the public sector. Although Pfandbrief originated in Germany, the market is now Europe-wide, and DEPFA has a big share of it.

But DEPFA's success isn't simply the result of attractive market conditions. Analysts say the bank, which does business all over Europe and in the U.S. and Japan, is also one of Germany's better-managed finance companies, a place where executives pay more attention to profits than to business volumes. "For us, sheer economies of scale were never the answer to the rapid change in markets," says CEO Gerhard E. Bruckermann. "We choose to emphasize quality above size." The bank has also been more willing than most to take radical cost-saving steps. Last year, it moved its headquarters to Dublin to take advantage of low corporate tax rates and escape the constraints of Germany's Mortgage Bank Law.

DEPFA, which is 40.8% owned by a group of eight German and Swiss banks and insurers, was formed only last year, when the former Deutsche Pfandbriefbank was split in two. The other half of the old DEPFA is called Aareal Bank and specializes in the property market. Things have gone well for the new DEPFA so far, but there may be trouble ahead. Despite its stature in the capital markets, German institutions such as the Landesbanken, which are controlled and partly owned by the states, are stepping up loans to the public sector. Meanwhile, after France, Spain, and other countries recently introduced Pfandbrief-type bonds, local banks got into the business. And the bond markets have become increasingly volatile. Last year, DEPFA lost $23 million trading bonds.

Still, Bruckermann notes that the bank's first quarter's performance was better than expected, and says that he can achieve an average return on equity of 20% for the foreseeable future. DEPFA's nimbleness should continue to serve it well. In February, it was the first to issue Pfandbrief-type bonds in Ireland. Demand for the securities was so strong that the bank hiked the size of the issue from $3.21 billion to $4.28 billion, and may increase it further, to $5.35 billion. That means millions more euros in DEPFA's coffers. Even in Germany, it seems, it is possible to run a profitable bank.

By David Fairlamb in Frankfurt

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