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Hypo/Depfa marriage met with scepticism

Hypo Real Estate’s €5.7 billion purchase of Depfa Bank, announced on July 23, has not been an instant hit. The deal unites one of Europe’s biggest commercial real estate financiers with the continent’s second-biggest public-sector lender. The managements of the two banks were keen to talk up the complementary nature of the new entity’s businesses but analysts have offered lukewarm assessments at best.

Georg Funke, Hypo Real Estate

Georg Funke, Hypo Real Estate: new emphasis on the predictable

Investors reacted accordingly, sending Hypo RE’s share price down almost 10% by the end of July. A steeper sell-off on August 3 – with investors apparently fretting about the widening sub-prime mortgage fallout – took Hypo RE’s shares down 6% on the day. The slide prompted the bank to rush out a press release reassuring investors that it had little sub-prime exposure and stating that its plans to acquire Depfa were unchanged.

Dieter Hein, a banking analyst with independent research firm fairesearch in Frankfurt, argues that the tie-up makes perfect sense for Depfa, which will get a stronger capital base and the ability to compete for bigger-ticket deals. But Hypo RE is buying a bank that has been something of a black box, he says. Because there is little if any default risk in lending to public-sector institutions, margins tend to be tiny, prompting banks to boost returns through leverage. According to Hein, Hypo RE chief executive Georg Funke admitted when presenting the deal that some of Depfa’s past profits had been "like a casino game".

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