GERMANY’S second-largest bank, Hypovereinsbank (HVB), is spinning off its international property financing business into an independent ¤8 billion bank that will have its headquarters in Ireland.

HVB is currently negotiating with the Irish Central Bank for a licence and is expected to announce the move later this month.

The new bank, to be called Hypo Real Estate Group (HREG), will initially be listed on the Frankfurt stock exchange. A source close to the bank said it is also considering taking a separate listing on the Dublin stock exchange sometime next year.

HVB will initially transfer €57 billion in assets to the Irish bank, making it one of the largest players in the international property financing market from day one of operations. The German parent will also invest about €900m in the new operation.

According to one source, the new bank is expected to be valued at up to €8 billion. He said: “It’s going to be similar in size in terms of assets and capitalisation to Bank of Ireland. It will be at least €4 billion and is more likely to be closer to €8 billion.”

HREG will float in October when existing HVB shareholders will receive one share in the new bank for every four shares in HVB they currently hold.

As well as the Irish operations the new bank will open seven branches across Europe by the end of this year. They will be in Lisbon, London, Madrid, Milan, Munich and Stockholm. The company is also planning to open in, or close to, New York next year.

Dublin was chosen for the headquarters because of HVB’s experience with its corporate-lending subsidiary, which is based in the International Financial Services Centre. The subsidiary employs 40 people and has assets of about €4 billion.

A source close to the bank said Ireland’s low-tax environment played only a small part in HVB’s decision to locate in Dublin. He said: “Tax was not the reason. This is an international real-estate operation and it was felt that it should be in an English-speaking city. London is too expensive and Dublin has good links to Germany.”

Although the new bank will not avail of any inward-investment grants, HVB has made the taoiseach’s office aware of its plans.

As well as being the second-largest bank in Germany, HVB is also one of the five largest banks in Europe. Its decision to hive off its real-estate arm is part of a rationalisation programme announced earlier this year after the bank admitted it made a loss of €821m in 2002. The spin-off is aimed at increasing the bank’s Tier-1 capital ratio from 5.6% — one of the lowest in Europe — to 7%.

The rationalisation, which includes selling off part of HVB’s Austrian operations, will be put to shareholders at an AGM later this month. Analysts suggest that HVB should be able to reverse its fortunes and expect a profit of between €300m and €600m in 2003.

According to an HVB presentation given to analysts last March, HREG will be a “leading player in high-growth international markets” with a “ flexible operations structure”.

HVB expects that HREG’s future growth will be based on big-ticket international deals. These will be transaction- focused, which means they will be based on cash flow rather than loan-to-value ratios. Although the new bank will include a €35.6 billion exposure to the domestic German mortgage market, this is expected to be wound down. As part of the spin-off, HVB will guarantee up to €590m of this portfolio to soften HREG’s domestic German exposure.