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Commerzbank Is Latest Victim of Failed Austrian Lender Hypo - WSJ

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FRANKFURT?The fallout from the collapse of an Austrian bank is rippling across Europe, with a succession of banks warning that they face potentially large losses.

Commerzbank AG said Wednesday that it is bracing for losses on its ?400 million ($424 million) exposure to the remnants of failed Austrian lender Hypo-Alpe-Adria International Group AG. Several other German banks, as well as a now-defunct Belgian lender, said recently that they, too, were likely to incur losses.

The losses stem from Austria?s yearslong effort to clean up the mess caused by Hypo?s collapse and subsequent government bailout. Hypo, a small but fast-growing lender that expanded into southeastern Europe in the mid-2000s, had to be rescued by taxpayers in 2009. Austria is still struggling to untangle the bank?s finances, and its collapse is the subject of a criminal investigation.

The government earlier this month said that it would halt payments on bonds issued by Heta Asset Resolution AG, the nationalized unit that is trying to unwind Hypo?s soured assets. Heta?s losses were piling up and it is a facing a ?4.6 billion to ?7.6 billion capital shortfall.

The financial burden of the debts threatened to render insolvent the Austrian state of Carinthia, which had provided guarantees on about ?10 billion of Heta?s bonds, according to analysts. That prompted the government to halt debt repayments until May 2016 and to consider imposing losses on the bondholders.

It is the latest example of a government imposing losses on a bank?s creditors, an increasingly popular weapon among financial policy makers who are looking to get taxpayers off the hook for rescuing troubled banks.

Dexia SA, the remnant of what once was a giant Franco-Belgian lender that collapsed during the financial crisis, said recently that it holds ?395 million of Heta?s bonds. Dexia, now controlled by the Belgian government, said it is setting aside money to cover future losses.

Heta?s bonds were widely held by German banks. Germany?s central bank, the Bundesbank, estimates that German lenders are holding about ?5.5 billion of the bonds, Bundesbank board member Andreas Dombret told a conference in Germany on Wednesday. The decision to halt repayments from Heta ?unexpectedly and severely hit German banks,? he said.

Ratings firm Fitch said the ripple effects of Austria?s action could shave as much as 10% of this year?s profits at German banks.

The fallout is already visible. Germany?s association of private banks on Monday bailed out real-estate lender Duesseldorfer Hypothekenbank AG after it was hit by losses on Heta?s bonds.

Regionally owned lender NordLB said it has a total ?380 million of outstanding exposure to Heta. Bayerische Landesbank, known as BayernLB, has ?2.35 billion in unsecured credit lines to Heta?the largest known exposure of any German bank. Although those credit lines aren?t directly affected by the moratorium on bond payments, executives have warned that BayernLB will have to write down some of its exposure to Heta, denting last year?s results.

State-owned real-estate lender Deutsche Pfandbriefbank said earlier this month that it had to book ?120 million in provisions to cover potential losses from its exposure to Heta, reducing its 2014 pretax profit by about 70% to ?54 million.

Commerzbank, which is Germany?s second-largest bank and partially owned by the government, didn?t estimate the magnitude of its expected losses, beyond disclosing its ?400 million total exposure. Commerzbank added that the bonds it holds traded with a 50% to 60% discount earlier in March and that it is considering legal measures against Austria?s actions. It declined to comment further.

Deutsche Bank AG co-Chief Executive Anshu Jain told a conference Wednesday that he ?feels comfortable? about the giant lender?s exposure to Heta. He declined to provide further details.

Alongside with banks, German insurers and pension funds are exposed to Heta. Re-insurer Munich Re AG said it expects the moratorium will affect first-quarter results by more than ?10 million. European funds have a total of ?1.65 billion in exposure to Heta, according to Bloomberg data. Deutsche Bank mutual-fund arm DWS Investments and Allianz Global Investors, the smaller player in Allianz?s asset-management division, have also invested in Heta bonds on behalf of their clients.