A small German bank is now thinking of moving into property lending in the UK. It has had a presence in the UK, based in London, for several years and has established a business in several areas, but it has never ventured into lending on property in any form. The senior management of the bank now wish to consider such a move.
The existing business of the bank in London was started in 1986 when it joined many banks in setting up a trading floor and this has been highly successful.
During the 1990s the bank started a move into lending, initially by taking portions of syndicates set up by the major German and American banks in London, but its exposure has been strictly limited to the non-property corporate sector. After 2000, it set up its own corporate lending team based in the City; this has enabled direct relationships to be created with corporate customers. It also bought into securitized issues in order to spread its risk profile, but this has now all be repaid.
Today the London business has a loan book of about £1.2, of which £1,000 million was self-generated, and £200 million is portions of syndicates raised by other banks and sold to this bank. The bank has never taken a write down or write off in London and wishes to retain its good record.
The bank has funded its loans in the UK £650 million using Pfandbrief sterling bonds issued in Germany and the balance using the London interbank market.
The bank is concerned that:
1. Its return on its existing loanbook seems unattractive compared with the returns achieved by some of its competitor banks in London that have entered property lending.
2. Its staff have no knowledge whatsoever of the property industry in the UK.
3. It does not know whether to lend on commercial property or residential.
4. It knows nothing about development but hears that margins and fees are high for this, so this sounds attractive.
5. Its current loan term profile is up to 7 years with an average term of just 3 years. It would like to see an increase in the average loan term of its whole book to 4 years with an ultimate goal of 5 years, although it accepts that this may be some years away.
6. It has heard rumors’ that some of its competitor banks have been heavily involved in lending to the property industry in the UK and have recently suffered write-down provisions.
The chief executive of the bank has ask

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