DEPFA BANK PLC

International House, 3 Harbourma
Dublin
Ireland
Telephone: +353 1 607 1600
Fax: +353 1 829 0213
Web site: http://www.depfa.com

Public Company
Incorporated: 1922 as Preussische Landespfandbriefanstalt
Employees: 319
Total Assets: $218.36 billion (2003)
Stock Exchanges: Pink Sheets Frankfurt
Ticker Symbols: DPFHF; DEPF
NAIC: 522110 Commercial Banking

DEPFA BANK PLC (Depfa) is one of the world's leading public sector financing banks. Depfa is the result of the 2002 breakup of the former Deutsche Pfandbriefanstalt, owned by the German state, into its two primary operating sectors, public sector finance and property finance—the latter business, focused on the German market, was renamed Aareal. Following the split Depfa refocused its operation—including its registration and headquarters—to the International Financial Services Centre in tax-friendly Dublin, Ireland. The move also has permitted Depfa to shift its operations away from its core Pfandbriefe (Germany's asset-covered securities, or ACS) market to become a heavyweight in the international ACS market. As such, Depfa provides a range of financial products for the public sector, including financing for infrastructure projects, budget financing, and government investment banking needs. Depfa's embrace of the international market has enabled the company to reduce its reliance on the German market. Indeed, the company's primary market is now the United Kingdom, at 45 percent of revenues; Europe continues to generate 70 percent of the bank's business. Since the mid-2000s, Depfa has targeted the United States for growth and expects its U.S. operations to reach the size of its European business before the end of the decade. Depfa is also active in Japan and Hong Kong. The bank operates branches in Paris, Rome, Tokyo, and London, and representative offices in Madrid, Copenhagen, New York, Chicago, and San Francisco. In 2004 the bank's total assets reached more than $218 billion.

Prussia's Mortgage Credit Institution in the 1920s

The German "Pfandbriefe" represented the earliest example of covered bonds—that is, bonds backed by long-term assets as collateral—in Europe. Invented in the late 18th century, the Pfandbriefe were traditionally used in two ways: on the one hand, for funding property development by securing loans with mortgages, and on the other, for financing loans to the public sector. Used in Prussia and the Austria-Hamburg empire and into present-day Germany, the Pfandbriefe were traditionally small loans confined within the domestic market. The arrival of so-called "Jumbo" Pfandbriefe, suitable for the international market and representing bonds valued at more than EUR 500 million, came only in 1995. The Pfandbriefe were especially popular with Germany's investments, especially prized for their relative safety. By the mid-2000s, the Pfandbriefe market had grown into one of the world's largest, representing some EUR 1.5 trillion in all.

The rise of the Pfandbriefe market, particularly after the passage of legislation in 1900 codifying their usage, encouraged the creation of generally state-owned bodies specializing in this financial product. The Pfandbriefe segment became particularly important in the early decades of the 20th century. The rapid rise of industrialized production techniques had in turn created a surge in the urban population, stimulating a need for new and affordable housing for the growing working class. The economic and political upheavals of the post-World War I era made the Pfandbriefe and their relative safety particularly attractive.

In Prussia, in the future East German states, the Prussian government moved to set up a dedicated body for producing Pfandbriefe. In 1922, the Prussian State Parliament passed legislation calling for the creation of a new bank dedicated to financing the region's residential property development needs. The Prussian ministries of Finance, Public Welfare, and Justice joined together to create a nonprofit credit institution invested with Pfandbriefe-issuing rights.

The Preussische Landespfandbriefanstalt, as the new body was called, opened its first office in Berlin in December 1922. Given the economic turmoil of the time, and the impossibility of fixing the value of the hyper-inflating Germany currency, the new bank started out by issuing Pfandbriefe backed by gold, rather than the crippled mark. Despite the difficulties of the era, the bank grew quickly, moving to new and larger headquarters in 1927. In that year, the bank began operating as a property developer as well. Despite the advent of the Great Depression, the Preussische Landespfandbriefanstalt emerged as one of Germany's largest Pfandbriefe banks.

The Nazi hostility to the Pfandbriefe market spelled an end to the bank's growth. By the outbreak of World War II, the Prussian body's operations had come, in large part, to a standstill. The bombing of Berlin toward the end of the war partly destroyed the Preussische Landespfandbriefanstalt's offices. The bank opened a temporary office near Munich, but returned to Berlin following the end of the war. Unable to return to its original offices, the bank opened a new office in West Berlin.

Yet with Germany under control of the Allied military authorities, the Preussische Landespfandbriefanstalt was restricted from operating. In addition, much of the bank's loan activities had been in eastern regions of Berlin and Germany, which were now under control of the Soviets. In this way, the bank lost control of more than half of its assets.

Postwar Growth

The bank now decided to leave Berlin, moving to Wiesbaden, in West Germany. After setting up its office there, the bank shut down its Berlin office. Yet the bank had to wait until 1949 before it received permission to resume operations, and the state-owned bank began accepting new business in 1950. By 1952, however, the bank had succeeded in settling into two buildings provided by the Wiesbaden municipal government.

In 1954, the bank's ownership was transferred to the West German federal government, and the bank now became a federal corporation under public law. The new ownership led to the bank's adopting a new name, Deutsche Pfandbriefanstalt, or Depfa. Under its new structure, Depfa operated on a mostly nonprofit basis, with a mandate to grant loans to the residential property market.

As a government-owned banking institution carrying out the government's housing policies, Depfa had remained a tax-free operation as well. This status was taken away in 1976, which allowed Depfa to begin developing a new for-profit business side. The bank now began lending to the commercial property development market, and also entered the fast-growing public sector market, starting with the provision of long-term budget funding bonds.

Depfa's expanding interests in the commercial property sector led it to acquire majority control of Deutsche Bauund Bodenbank AG in 1979. That Frankfurt-based bank had been founded in 1923 as Deutsche Wohnstättenbank AG (adopting its new name in 1926), a nonprofit provider of loans to the residential building sector. After lying dormant through World War II, Deutsche Bauund Boden began offering bridge loans for home mortgages in the 1950s, then added loan financing for large-scale construction projects in the 1960s.

At the end of the 1980s, the German government began deregulating and privatizing the country's banking sector ahead of the lowering of European trade barriers in the early 1990s and the creation of a single currency at the end of that decade. Depfa's turn came in 1989, when the bank's status was converted to that of a joint-stock company, renamed Deutsche Pfandbrief- und Hypothekenbank Aktiengesellschaft. The bank then began preparations for its public offering, which came in 1991, with a listing on the Frankfurt Stock Exchange. The privatization of Depfa was to prove a strong success—from an initial market capitalization of the equivalent of EUR 400 million, the company's value soared, reaching EUR 3 billion by the early 2000s.

International Finance Specialist in the 2000s

While the bulk of Depfa's business remained in the domestic German market through the 1990s, the bank began developing an interest in the international market as well. One of the group's first moves was to open an office in Ireland in 1993, where the Irish government had enacted special legislation, including low tax rates, in order to attract the international banking community.

Depfa's interests in the public sector financing market grew through the late 1990s, while it continued to pursue its property business. Yet the bank's growth in public sector finance was hampered by restrictions in Germany's legislation governing mortgage banks. In 1998, the company launched a restructuring in part to remedy this conflict. After renaming itself Depfa Deutsche Pfandbriefbank AG, the bank placed its entire property operations into its subsidiary Deutsche Bau- und Boden-bank AG, which was then renamed as Depfa Bank AG. At the same time, the company launched a second subsidiary, based in Dublin, called Depfa Investment Bank Ltd., which targeted the public sector financing markets in the former Soviet bloc countries, as well as the Southeast Asian market.

This move proved the first step toward a breakup of Depfa itself. At the end of 2001, Depfa split its operations into two separate and independent businesses, a process completed only in 2002. The bank spun off its Depfa Bank property operations as a new, Germany-based company, Aareal Bank. The remaining Depfa, now composed of its public sector financing arm, then transferred its headquarters and registration to Dublin, Ireland, changing its name to Depfa Bank PLC. The bank retained its listing on the Frankfurt Stock Exchange, however.

Company Perspectives:

DEPFA BANK is a leading provider of global financial services to public sector clients worldwide.

Depfa now emerged as one of the world's leading specialist providers of public sector financing, with a full range of products and services. While its German operations, conducted through subsidiary DEPFA Deutsche Pfandbriefbank AG, remained strong, Depfa surprised the banking community in 2004 with its announcement that it intended to sell off that unit and focus its future growth on the global asset-covered securities (ACS) market. As part of this effort, the bank launched an entry into the United States in 2004—with the expectation that its U.S. operation would equal its European business by the end of the decade. Depfa also stepped up its presence in the Asian market, where it already operated a branch in Tokyo, with the opening of a representative office in Tokyo. The new Depfa prepared to continue its history of banking success.

Principal Subsidiaries

DEPFA ACS BANK; DEPFA Capital Japan K.K.; DEPFA Deutsche Pfandbriefbank AG (Germany); DEPFA Investment Bank Ltd. (Cyprus); DEPFA UK Limited (U.K.); DEPFA-Finance N.V. (Netherlands).

Principal Competitors

Deutsche Bank AG; Dexia Group; IKB Deutsche Industriebank AG.

Key Dates:

1922:

Preussische Landespfandbriefanstalt is founded by the Prussian government.

1923:

Deutsche Wohnstättenbank Aktiengesellschaft is founded (renamed Deutsche Bau- und Bodenbank in 1926).

1949:

Preussische Landespfandbriefanstalt reopens in Wiesbaden after losing half its loan portfolio following World War II.

1954:

The bank is registered as a state-owned banking institution and it changes its name to Deutsche Pfandbriefanstalt (Depfa).

1976:

The loss of its tax-free status enables Depfa to enter the commercial property market.

1979:

Depfa acquires majority control in Deutsche Bauund Boden.

1989:

Depfa is privatized.

1991:

Depfa is listed on the Frankfurt stock exchange.

1993:

A representative office is opened in Dublin, Ireland.

1998:

Subsidiary Depfa Investment Bank is launched in Dublin; the property business is restructured into Depfa Bank AG.

2002:

Depfa hives off its property business (renamed as Aareal Bank) and transfers its public sector finance operations to Dublin, Ireland, as DEPFA BANK PLC.

2004:

Operations are launched in the United States; a representative office is opened in Hong Kong as part of the expansion of business in the Asian region.

Further Reading

Chang, Helen, "Dublin-Based DEPFA Eyes U.S. Municipal Insurance Market," Bond Buyer, February 18, 2004, p. 4.

Day, Neil, "Bold Steps Are Rewarded," Euroweek, September 12, 2003, p. S38.

"Depfa Achieves 10 Year Success and 79% International Distribution with Eu3bn ACS," Euroweek, July 16, 2004.

"Depfa Reaches 100% Freefloat As Core Owners Sell Eur 1.3bn," Euroweek, November 7, 2003, p. 27.

"Depfa to Sell Pfandbriefbank As Base Shifts to Ireland," Euroweek, March 5, 2004, p. 5.

Fairlamb, David, "DEPFA: The Newcomer with Street Smarts," Business Week, April 14, 2003.

Hofer-Neder, Wally, "DEPFA As a Public Sector Refinancing Engine," Euromoney, September 2003.

"Hybrid Growth—The Split That Formed Depfa Bank Also Halved Its Capital Base," Banker, February 1, 2004.

"Plenty of Action at the EU's Edge," Banker, June 1, 2004.

—M. L. Cohen