Dieter Rampl took on one of the toughest jobs in European finance on Jan. 1. As the new chief executive of the giant German bank HVB Group, the 55-year-old Austrian must grapple with mounting losses, tumbling credit ratings, and a share price less than half what it was a year ago. What's more, he has to deal with a massive $460 billion loan portfolio riddled with bad debts. "I don't think I could sleep if I had [Rampl's] problems," says a managing board member of a rival bank. "The loan book alone would give me nightmares."
Rampl, a tall, slim man who laughs easily, says he sleeps fine, thank you, and is confident HVB can solve its problems. However, HVB's worried shareholders--especially reinsurance behemoth Munich Re Group, which owns 25%--will follow Rampl's progress keenly. What happens at HVB will reverberate far beyond its Munich base. The bank boasts more than $730 billion in assets, making it Germany's second-biggest after Deutsche Bank and 10th in the world. Its core holding is Bayerische Hypo-und Vereinsbank in Germany, but it also owns Bank Austria, the biggest in Austria, has the biggest presence of any bank in eastern Europe and is a major player in the Dutch property market. HVB has 8.5 million retail customers and is Europe's largest mortgage lender. It has a bigger loan book than any euro zone bank. And it is the leading lender to the Mittelstand--the small and midsize companies that form the backbone of the German economy.
Where did HVB go wrong? It goes back almost a decade. The group was formed by the merger of Bayerische Vereinsbank and Bayerische Hypothekenbank in 1998. In the early and mid-1990s, Hypothekenbank made real estate loans worth billions of dollars, especially in the former East Germany. But the eastern boom went bust, and property in the rest of Germany tanked along with the economy. HVB Group was left with a load of bad debt. Much of that has been paid off, but the rest still weighs on its balance sheet. On top of that, HVB made loans to a string of tottering and now-bankrupt German companies. First to fall were big corporations such as the construction outfit Phillip Holzmann, the Kirch media group, and engineering group Babcock Borsig. Then there was a spate of bankruptcies among the Mittelstand companies where HVB lends most of its money. "We all miscalculated a bit," says Rampl.
The result: The bank was forced to make new bad-debt provisions of $1.25 billion in the third quarter of 2002, more than double its operating profit of $545 million. Analysts now expect its loan losses to reach $3.75 billion for 2002, leading to a pretax loss of around $670 million. HVB says loan losses aren't likely to top $3.4 billion, but admits that's nothing to cheer about. Meanwhile, the group's paltry market capitalization--just $8.92 billion--could make it the victim of a takeover bid.
This year doesn't look any better, says Schroder Salomon Smith Barney analyst Kiri Vijayarajah. "Insolvencies are likely to continue rising in Germany, so the 2003 charge is likely to be heavier still." The painful losses mean the bank is being forced to use up capital that it ought to be investing in its businesses. The problem is aggravated by the erosion of the bank's own investment portfolio, which in the past helped underpin its share price. "The group could find itself locked in a vicious circle of continual attrition," says Marc Rubinstein, an analyst at Credit Suisse First Boston in London.
The circle is already looking pretty vicious. Standard & Poor's downgraded HVB from A to A- on Dec. 9, due to its "deteriorated asset quality, weakening profitability levels, [and] modest capital strength," as well as "the reduced level of unrealized gains on the bank's investment portfolio," says analyst Stefan Best. That will make it more expensive for the group to borrow money. "[It] represents a blow that cannot be overestimated," says Jörn Kissenkotter, an analyst who follows HVB for Hamburg private bank M.M. Warburg & Co.
Rampl and his predecessor, Albrecht Schmidt, who is now chairman of the supervisory board, say they are determined to put HVB right and win back investor trust. They have already unveiled a plan to save more than $500 million a year by shrinking the group's bloated 66,000-person workforce by 9,100 by the end of this year. They are also moving fast to reduce the size of the bank's loan book and free extra capital. On Nov. 6, for example, HVB launched its largest-ever securitization deal, packaging and selling to other banks and investors $5.1 billion worth of residential mortgages. HVB also has sold its 48% stake in the Banco BBA-Creditanstalt in Brazil and is rumored to be seeking a buyer for Norisbank, a small Nuremberg-headquartered bank that specializes in consumer credit. On Dec 30, HVB announced the sale of Selftrade, its non-German online brokerage business. Its German online bank, DAB, may also end up on the block.
Rampl says one important restructuring move may come after HVB's annual shareholder meeting in May. He will bundle all of HVB's mortgage subsidiaries, which are now scattered around Europe, into a new real estate financing group. The company, with assets of almost $170 billion, "will be spun off from the group and operate independently," Rampl says. "[That means it] will be fully able to capitalize on its strength."
Admirers say Rampl, who joined the former Vereinsbank in 1968 as a trainee and has spent all but 11 years of his career at the group, has the skills and personality needed to push through far-reaching change. They cite his success at restructuring the corporate division over the past year. But even if he fixes all of HVB's structural problems, he still faces intense competition in HVB's core German market from both rival commercial banks and a plethora of state-backed banks that can undercut their publicly traded adversaries.
Some say part of the solution might be for HVB to buy Commerzbank, its smaller but equally troubled competitor in Germany. That would generate big economies of scale, and Munich Re likes the idea. But Rampl says it "isn't very sensible at this stage" because fixing two hard-pressed banks is a lot trickier than patching up one. Either way, it's unlikely to happen in the near term: The last thing HVB needs is the cultural and managerial problems that would come with a big merger.
Besides, a merger would do nothing to solve HVB's most vexing issue. As Schmidt put it in an interview with a German newspaper on Dec. 16: "Our bank's problem is Germany." It's hard to imagine HVB climbing back into the black anytime soon, unless Rampl has a plan to fix Germany, too.
By David Fairlamb in Frankfurt
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