Bloomberg reported yesterday that BAWAG is the front-runner to acquire Depfa Bank, the former Irish unit of Hypo Real Estate which had to be bailed out by the German government during the financial crisis. State investment agency FMS Wertmanagement re-launched the sale in July 2020. Beside BAWAG, Kommunalkredit Austria and German LBBW have also looked at the business, according to the article. Depfa is a run-off asset with €6.9bn of assets left by H1 2020, mostly derivatives with marginal customer business. The group also includes Depfa ACS Bank, a covered bond issuer. Depfa has been loss-making, as the assets have been gradually wound down, a roughly €60m annualized cost base with around 100 employees. BAWAG could probably reduce costs by integrating the back-office functions into its own German operation, the real attraction of this asset could be the capital uplift from a low deal valuation. Depfa is substantially overcapitalized with a 153% CET1 ratio as of H1 2020. The remaining assets carry low risk weights, taking over Depfa would therefore have negligible impact on BAWAG’s risk weighted assets (+2%). A 0.7x P/BV valuation for example would create about €180m capital surplus (€2 per BAWAG shares), through the creation of badwill. Such an amount could be distributed to shareholders once ECB regulations allow or recycled into further M&A.