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Deutsche Pfandbriefbank, a Victim of Mortage Crisis, Resurfaces

Hypo Real Estate's former chairman, Georg Funke, faces possible criminal charges. Source: DPA
Hypo Real Estate's former chairman, Georg Funke, faces possible criminal charges.
  • Why it matters

    Why it matters

    The privatization of state-owned Deutsche Pfandbriefbank is politically tricky. The government poured billions into the bank and could be forced to sell it for less than its net worth.

  • Facts

    Facts

    • The bank has been making progress and is generating a profit, yet its return on investment pales in comparison to rival institutions.
    • Many analysts believe the bank should be sold at a discount, but there are political risks since its bailout was the most expensive in German history.
    • A lack of strong executive leadership is also hobbling efforts to find a buyer.
  • Audio

    Audio

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Despite unstable financial markets and increasingly strict banking regulations, the privatization of the nationalized Deutsche Pfandbriefbank (PBB) has begun under a European Commission mandate that requires the transition to be completed  by the end of 2015.

PBB was formed in June 2009 when the failed mortgage lending banks Home Real Estate Holdings AG, also known as HRE, and its Irish subsidiary, DEPFA, were merged and renamed in the most expensive bank bailout in German history. The government has owned the bank since October 2009.

“We began with the privatization about eight weeks ago,” said Andreas Arndt, PBB’s chief financial officer. He said the bank has created a steering committee with the Federal Finance Ministry and the Special Financial Market Stabilization Funds, a government program created in 2008 to restore confidence in Germany’s financial sector during the global economic meltdown. Still to be decided is whether the bank will be privatized through a sale of stock or by a sale to a strategic investor.

The process is politically tricky. The bailout cost German taxpayers dearly as the government poured €9.8 billion ($13.1 billion) into the troubled bank while disposing of a problematic portfolio, estimated at €174.1 billion ($233.1 billion), accumulated by FMS Wertmanagement, the so-called “bad bank” of HRE, for which market stabilization funds so far have paid out €9.3 billion ($12.5 billion) in compensation for losses.

Alexander Plenk, a financial analyst at Munich-based BayernLB, acknowledged the obstacles facing the sale of the bank, saying it will be an “extremely difficult undertaking.” PBB is a proper bank operating in stable markets, he said, “but its return on equity is comparatively low.” He believes the only way to sell PBB is at a price well below its “book value,” which is defined as the value of net assets. The problem for the bank, he said, is that it has an owner that “is looking for quite a high price.”

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