Hypo Real Estate Warns Turmoil Threatens Profit


Germany's Hypo Real Estate warned investors on Thursday it faced writedowns and could miss its profit target amid market turmoil, but the shares jumped as investors feared the news could have been worse.

Hypo, which has been struggling to re-establish its credibility after springing unexpected subprime writedowns early this year, gave fresh details of its 5 billion euro plus exposure to structured debt products.

Hypo Real Estate Runs into More Trouble

It said the market for its 1 billion euro ($1.6 billion) portfolio of U.S. collateralised debt obligations (CDO) had deteriorated and that further writedowns were possible.

About a quarter of the portfolio is subprime.

It also said any slip in the value of 3.2 billion euros of real estate-linked investments it owns would hit its revaluation reserve.

Management said the worsening situation threatened its 2008 pretax profit goal of over 1 billion euros.

"In this crazy world, I don't feel comfortable giving any further outlook," Finance Chief Markus Fell told analysts.

But shareholders were relieved and the stock jumped 14 percent, but shares were still only half their level at the beginning of the year and about 70 percent lower than in May 2007.

Traders said Dresdner Kleinwort confirmed its "buy" rating with a 32 euro price target, noting the worst expectations about the quality of Hypo Real Estate's investments have not been confirmed.

"We are in a financial crisis," said Chief Executive Georg Funke. "But we will survive and master it."

Hypo has struggled to regain trust among investors and lenders since its January bombshell that it would write down 390 million euros on CDOs, close to the net profit it made in 2006.

The news, which came after repeated assurances from management that it had dodged the subprime bullet, lopped about 2 billion euros off its market value.

Ever since, shareholders have been on edge, fearing more surprises at the Munich-based investment bank.

Change Of Tone

On breaking the news of the writedowns earlier this year, Funke fended off questions from journalists as to whether he would quit over the matter, saying:

"The management has done a fantastic job. We have not made any mistakes."

On Thursday, Funke struck a more conciliatory tone, saying management had taken the criticism seriously.

It is now being sued by a group of shareholders who bought stock in the bank on the strength of its claim that it was not affected by subprime.

Financial watchdog Bafin is also probing the Munich financier over the matter.

Germany has been one of the countries worst hit by the global credit crisis, which was triggered when defaults began rising on less creditworthy U.S. mortgages.

It pushed company lender IKB and state bank SachsenLB to the brink of collapse before both were saved by last-minute rescues.

The tumult has also savaged the country's landesbanks such as BayernLB, regional lenders which are partly owned by local governments.