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Eurohypo finally emerges

Broader groupings among German mortgage banks, such as the long-awaited Eurohypo, look to be the best route out of a depressed market.

After seemingly interminable negotiations and extended deadlines, the new Eurohypo has emerged, another example of the consolidation that looks likely to be the German mortgage banks' best hope for a return to prosperity.

Although the merger is not due to be completed until mid-2003, the alliance of Deutsche Hyp, Rheinhyp and the original Eurohypo is ready to enter the market again. But its launch comes in the midst of a profound downturn in the covered bond market's fortunes. Eurohypo could find competition tough unless recovery comes. In response, it is trying to diversify its funding sources, and moving its underlying business to new, more profitable areas.

Eurohypo expects the merger to cut costs by e140 million. Most of this will come from 800 job cuts by the end of next year, and from combining computer systems. The merger cost e210 million, so it should pay for itself within a year and a half.

The bank has already provisioned for or written down several foreseeable risks, so it starts life with a well-diversified loan portfolio, as well as guarantees from its parents. Its core capital ratio stands at around 6%. Remaining credit exposures will be managed down, and big exposures removed from the balance sheet through securitization and syndication.

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