FRANKFURT — German industrial financier IKB Deutsche Industriebank AG Monday issued a profit warning and said its chief executive had stepped down, as the company said it has "felt the impact" of the U.S. subprime lending crisis.
IKB said it was no longer in a position to maintain its earnings forecast of EUR280 million for the 2007-08 financial year. "From today's perspective, results will be significantly lower," it said.
At 1141 GMT, the shares were down EUR3.89, or 18%, to EUR17.59, as brokers were quick to downgrade.
WestLB cut the stock to hold from buy, and the target price to EUR22 from EUR33, while HVB and LBBW said they were reviewing their current ratings.
Global financial markets are currently nervous over the extent of exposure various financial institutions may have to the U.S. subprime mortgage market. Many institutions have in the past bought securities backed by these low quality mortgages to earn higher returns.
"The main point is that due to the widened (credit) spreads, IKB may have had to provide liquidity support for its conduit Rhineland Funding, the investment vehicle that holds these (subprime) credit structures. This would have negatively impacted IKB," WestLB said.
As a result, WestLB said it has eliminated any assumption of contribution to profit from the securitization business, resulting in the cut target price.
Notably, IKB's largest shareholder, publicly owned German development bank KfW, said in a separate statement that it will cover IKB's financial obligations related to Rhineland Funding, an investment vehicle, with effect from July 30.
KfW said it had "analyzed the situation together with the German banking regulator (Bafin)" and "took immediate action." It said with its coverage of IKB's risks, it is "contributing substantially to a stabilization of the market."
A spokeswoman for Bafin said it welcomed KfW's move, saying "it ensures that this doesn't throw the market into turmoil or that it has negative repercussions for the German banking system."
In fact, had KfW not made this move, at least one other German bank would have been hit.
Deutsche Postbank AG Chief Financial Officer Marc Hess told a conference call on second-quarter results that "we have a normal exposure to IKB, as we have to other German banks but understand that this is now backed by state-owned triple-A rated KfW."
"Moreover, two of our conduits are funded via IKB's Rhineland Funding, and this is also secured by KfW funding," Hess said.
Deutsche Postbank's shares were lower EUR2.49, or 4.5%, at EUR53.22 after having reached a yearly low earlier Monday.
Deutsche Bank AG declined to comment. Earlier in July, Chief Risk Officer Hugo Baenziger said in an interview that the bank had predicted the subprime crisis as early as 2002, and had "acted accordingly." The bank's shares were down EUR1.65, or 1.7%, at EUR96.21.
Commerzbank AG hadn't returned calls requesting comment on whether the bank is exposed to subprime. The share was down EUR1.03, or 3.2%, at EUR30.68.
In an interview with Dow Jones Newswires last week, Allianz SE's Dresdner Bank AG Chief Risk Officer Otto Steinmetz said the bank has "maybe 1% subprime" on its loan book and that "this is managed well." Allianz's share was down EUR1.78, or 1.2%, at EUR151.11.
German commercial real estate financier Hypo Real Estate referred to a previous statement by CEO Georg Funke that "we are not active in building financing to private real-estate owners." The share was down EUR1.44, or 3.1%, at EUR44.86.
Meanwhile, Standard & Poor's analyst Stefan Best said that, in a recent survey among large German banks, that the rating agency had received no indications that subprime would have negative impacts here. He noted that IKB is not rated by S&P.
KfW declined to comment on how large the financial obligations are that it is covering, and couldn't respond to how financial obligations prior to July 30, if these exist, would be covered, referring further questions to IKB.
By early afternoon, IKB hadn't returned calls for comments.
On July 20, IKB reaffirmed, in an unscheduled statement, its fiscal-year operating profit target of EUR280 million, and pointedly announced that Moody's analysis of the U.S mortgage market "does not have an impact on IKB's investments," and that it is "in no respect affected by the most recent analysis carried out by Standard & Poor's with regard to the CDO market."
WestLB commented that "when all is said and done, this case confirms our view that KfW will back IKB in any kind of crisis." Therefore, the broker recommends sticking to current positions and not sell it, because it is "at least partly a one-off hit."
Barclays Capital, meanwhile, said in a note that the fact that KfW is stepping in, and that it has replaced IKB CEO Stefan Ortseifen with its own man, Guenther Braeunig, who is also board member of KfW, is comforting.
"From a credit standpoint, and given KfW's government ownership and guaranteed status, we see the support as more than offsetting the disappointing news on the exposure front," Barclays Capital said.
IKB's problems sprang from its Rhineland Funding investment vehicle's apparent inability to cover its funding needs due to exposure to U.S. subprime real estate loans, those made to borrowers with weak credit histories.
IKB said that while there to date haven't been many defaults, and "only some rating downgrades," IKB's creditworthiness has been questioned, and there was a risk that this confidence crisis could deteriorate further.
KfW, which owns 38% in IKB, "implemented measures to safeguard IKB's creditworthiness," it said.
KFW will also protect it against risks resulting from portfolio investments, to maintain the banks creditworthiness, in particular in its business with German midsize businesses.
