IKB Deutsche Industriebank (IKB) is feeling the backlash from the U.S. subprime mortgage market crisis. Panic-driven spread widening is affecting most European trades, ushering uncertainty among institutional investors.
As a result, IKB said that its conduit, Rhineland Funding, has faced difficulties in rolling over its funding. This has led to investor concerns about the valuations of U.S. subprime-related assets held in the conduit's portfolio.
IKB is a prolific user of the securitization market through the KfW sponsored Promise-I and other stand-alone programs. IKB liquidity facilities related to the conduit have not been drawn, as KfW - the main shareholder of IKB - has pledged to cover those risks at the bank. KfW also immediately assumed IKB financial obligations under the liquidity facilities while also committing to protect the bank against risks resulting from certain portfolio investments. "The bank has built up a large volume of structured credit investments, the majority of which carries very good ratings," said KfW in a press statement last week. "Up to now, there was some market value deterioration, but there were no mentionable losses."
IKB remains a highly rated banking institution nonetheless, in particular for German SMEs. Despite market discounts affecting valuations in its Rhineland conduit, there have been few loan defaults to date, with only a handful of rating downgrades affecting portfolio investments.
However, toward the end of last week, the creditworthiness of IKB was being questioned because of U.S. subprime exposures. There was a risk that this confidence crisis would deteriorate further, the bank said in a statement. Fitch Ratings then downgraded the bank to C' from B/C' following the profit warning from the bank stating that its operating profit for the financial year ending March 2008 will be significantly below its previous forecast of 280 million ($382 million).
Fitch added that the downgrade of the individual rating reflects significantly weaker-than-expected profitability, tight capitalization and a continuing high level of loan impairment charges. "Although KfW has removed some risks, IKB's financial profile has weakened," said Sabine Bauer, associate director of Fitch's financial institutions team. "KfW's liquidity support allowed IKB to avoid testing its liquidity reserves. It remains unclear whether IKB would have defaulted without KfW's backing."
Even if KfW were to take on additional risks from some of IKB's structured credit investments, KfW's ratings would not be affected because they are based on a guarantee from the Federal Republic of Germany, which is responsible for ensuring that the bank can meet its obligations at all times, Bauer said.
Following the profit warning, Stefan Ortseifen quit as speaker of the board of managing directors at IKB, and the supervisory board accepted his resignation. The new CEO is Gunther Brunig, who is a member of KfW's board of managing directors. Additionally, Dieter Gluder, a director of KfW, was appointed a new member of the IKB management board.
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