IKB concealed subprime risk from board, auditor says

Management at troubled German bank IKB did not disclose the bank's €1.6 billion exposure to US subprime loans to the IKB board, says a special report by PricewaterhouseCoopers.

The report said the bank's credit asset management division (IKB CAM), which managed IKB’s structured credit portfolio, was not adequately supervised. IKB CAM had made large investments in US subprime mortgage-backed securities - up to 52% of the €3.2 billion liabilities of its asset-backed commercial paper conduit, Rhineland Funding - without adequate controls.

In addition, the report said, IKB's credit risk reports to its supervisory board failed to mention the bank's subprime exposure. The board was only informed about portfolio investment risks and subprime exposure as the crisis broke on July 28-29. At the time, Moody's reported the bank had contingent credit commitments of €11.9 billion, representing five times the bank’s capital base, or a quarter of its total assets.

After the report’s delivery, two more management board members, Frank Braunsfeld and Markus Guthoff, left IKB. Winfried Reinke, managing director of IKB CAM, left the bank in August. Reinhard Grzesik, former chief financial officer at Depfa, will oversee the bank's restructuring as its newly appointed CFO.

Profits have also been restated, due to higher mark-to-market losses than anticipated. Last year's €263 million operating profit is likely to be reduced by €180 million this year, while the forecasted net loss for the current financial year will increase from €450 million to about €500 million.

The bank plans to abandon international securities portfolios and will focus instead on corporate clients, real estate financing and structured financing in Germany and abroad. Operating profits will fall to a “low three-digit million euro figure” in the medium term, said Günther Bräunig, chief executive of IKB, during a conference call yesterday.

Elsewhere in Europe, Italy’s UniCredit also announced net mark-to-market losses of €1 billion on derivatives transactions concluded with UniCredit Banca d’Impresa customers as at June 30.

See also: Subprime contagion
Italian unease
Leaking like a SIV