West LB’s bad bank records €1bn in losses

City A.M. Reporter
GERMANY’S first bad bank, WestLB’s EAA, posted risk provisions of €1.44bn (£1.2bn) for its 2010 fiscal year and expects more to come as its markets show little signs of recovery.

EAA (Erste Abwicklungsanstalt) posted a net loss of €1.05bn in its shortened fiscal year from December 2009 to June 2010, co-head Matthias Wargers said yesterday.

EAA expects to book provisions for possible credit losses of roughly €400m in its fiscal year 2011, which started in July, he added.

Wholesale lender WestLB, which last week put itself up for sale, shifted assets worth €77bn into EAA, which will wind down the holdings.

The move still needs approval from the European Union, which might have concerns the bad bank would stifle competition, and sources familiar with the situation have said Brussels could ask for hefty concessions.

WestLB’s bad bank is seen as a cornerstone in the mooted merger with peer BayernLB, as it relieves the lender of heavy burdens and allows the remaining core bank to focus on financial services for midsize German companies.

Landesbanks such as WestLB and BayernLB provide wholesale banking services to their local public savings banks. They lost billions of euros on risky investments in the financial crisis, forcing some to turn to the state for bailouts.

By selling off some assets, EAA has shrunk the portfolio by 12 per cent to €68bn from December to August, but Wargers said he expected slower progress in future. The most toxic of EAA’s assets are held in a special-purpose vehicle called Phoenix with a book value of €23bn.

It mainly consists of structured financial products related to subprime US mortgages.
EAA does not expect the assets to regain value quickly, but Wargers said he was under no time pressure to sell and would rather seek to maximise returns.

WestLB’s owners -- the regional state of North Rhine-Westphalia and savings banks -- have granted Phoenix guarantees worth €5bn.