Commerzbank has reached agreement with EU competition watchdogs to restructure its struggling Eurohypo subsidiary rather than sell it.

The deal is likely to mean that Commerzbank, Germany’s second-largest bank by assets, winds down most of Eurohypo, once one of Europe’s biggest providers of commercial property loans.

Commerzbank struck a deal in 2009 with the EU’s competition commission that it would sell Eurohypo by 2015 as one of a series of measures to compensate for the market-distorting effects of state aid that Commerzbank received during the financial crisis. The bank was bailed out with more than €18bn of government funds after its takeover of Dresdner Bank in 2008 threatened its survival.

However the length of the financial crisis, and the funding difficulties faced by banks, have forced Commerzbank and the EU to acknowledge that selling Eurohypo would not be possible. Eurohypo was also one of the largest investors in eurozone sovereign debt – a position that led Commerzbank to book more than €2.2bn of writedowns on Greek bonds last year.

Commerzbank has already announced a freeze on new lending by Eurohypo as part of the bank’s attempts to husband its capital and pass European bank stress tests.

Joaquín Almunia, the EU’s competition commissioner, said on Wednesday: “We were discussing how to modify the commitment regarding Eurohypo and we have reached an agreement with Commerzbank and the German authorities. This is very positive.” A formal decision would be adopted on Friday, Mr Almunia said.

The revised measures agreed with Brussels are likely to include a further period during which Commerzbank cannot make acquisitions. This period was set to end this year under the terms of the 2009 state aid approval.

The bank is also likely to have to cut its balance sheet further to about €600bn in assets, from €662bn at the end of last year. The bank’s asset cuts have gone further than the 2009 agreement, which required a cut from €1.1tn to €900bn this year.

Commerzbank is expected to try to wind down most of Eurohypo’s business, retaining some of its commercial property lending. Commerzbank’s asset-based finance division, which is made up mainly of Eurohypo, made an operating loss of €3.9bn in 2011 on top of a €1.3bn loss in 2010.

The deal with Brussels means BayernLB, the public-sector lender owned by the state of Bavaria, is the only German bank still to cut a state aid deal with Brussels in the aftermath of the crisis.

At the centre of the negotiations are the burden to be borne by Bavarian savings banks, which previously cut back their ownership of BayernLB allowing the Bavarian government to take control.

The savings banks said on Wednesday they had agreed a compromise with Bavaria but Mr Almunia said: “We are not yet there, unfortunately.”

Get alerts on Commerzbank AG when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article