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Germany's IKB expected to post heavy economic loss amid subprime debacle

The German bank IKB which was caught up in the US high-risk mortgage debacle, expects to post a loss of up to 700 million euros (US$990 million) for this fiscal year, it said yesterday.

In its first quarter which ended June 30, the specialist in loans to small and medium sized businesses showed a net profit of 12 million euros, a fall of 66 percent on an annual basis.

But the effects of the US "subprime" crisis had not yet taken their full effect, IKB acknowledged in a statement.

It was saved from bankruptcy last month when the German bank KfW, the government's financial arm, provided IKB with a line of credit worth 8.1 billion euros and other German banks agreed to add another 3.5 billion if needed.

The distressed German bank now faces a wave of shareholder legal actions as a result of the losses, with 40 complaints filed this week against IKB and its former boss, Stefan Ortseifen, and another 40 possibly being prepared.

They charged that shareholders were not warned of problems linked to the US subprime market.

The prosecutors office in Duesseldorf, Germany, has also begun to investigate possible fraud and violations of business laws at the German bank.

But after refocusing on its core activity of business lending, IKB has also begun to attract suitors, with the newspaper Die Welt reporting that regional public banks WestLB and LBBW could be interested in a 38 percent stake now owned by KfW.

Meanwhile, UK banks do not face the prospect of a crisis like that seen in the US subprime mortgage market, analysts at ratings agency Moody's Investors Service said on Thursday. They told investors on a conference call that the UK mortgage lending sector has the ability to withstand a potential downturn in asset quality and it continued to have solid financial fundamentals.

"We ... do not believe that a US subprime-like crisis for the banks is about to happen in the UK," said Adel Satel, team managing director at Moody's for banking.

He said there were three key reasons for this.

Firstly, combined loan-to-value ratios for non-conforming loans in Britain last year were around 76 percent, while the same figure for US subprime mortgages was 85 percent, he said.

Secondly, "underwriting criteria for the recent vintages of non-conforming loans in the UK are much better than older vintages and significantly better than the underwriting criteria of US subprime mortgages," he said.

And thirdly, "while the UK may experience a softening of house prices, it is unlikely that house prices would drop significantly," Satel said.

However, "clearly we are entering a period of negative sentiment with regard to the UK mortgage market," he said, with lenders reporting growing levels of arrears and problem loans even before the turmoil of the summer.

"However this growth was and is from an exceptionally low level," Satel said. "We do not anticipate adjusting mortgage lenders' ratings merely because asset-quality figures are deteriorating."

In fact, mortgage lenders' non-performing loans would have to increase by more than 300 percent on average for their financial strength ratings to be downgraded by one notch, he said.

Satel said however that Moody's would monitor closely the degree to which lenders had become reliant on the wholesale market.

He said Northern Rock, the lender that had to seek emergency funding from the Bank of England in a move that led to depositors lining up to take their money out, was an outlier in terms of its reliance on wholesale funding.

"Most UK mortgage lenders including Alliance & Leicester and Bradford & Bingley have a far greater proportion of funding in the form of retail funds than Northern Rock, and are less aggressive in terms of aggressive mortgage growth," Satel said.
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