MUNICH German public sector landesbank lender BayernLB BAYLB.UL will make use of Bavarian state guarantees this year to cap the financial damage from a 7 billion euro ($10 billion) loss-making portfolio of asset backed securities, it said on Wednesday.
Germany's second-biggest landesbank has been working to cut the size of the package of complex securities, whose value is linked to developments in the U.S. housing market, reducing it by two thirds since 2009.
But losses on the portfolio are likely to exceed 1.2 billion euros this year, BayernLB said.
Under the terms of a bailout agreement with its home state of Bavaria in 2008, BayernLB must absorb the first 1.2 billion euros of losses itself, while Bavaria would shoulder any further losses, up to a maximum of 4.8 billion euros.
"We will have to make use of the state guarantees for the first time in 2014 but only to a very small extent," BayernLB Chief Executive Gerd Haeusler told a news conference.
BayernLB has paid Bavaria 1.3 billion euros in fees for the guarantees so far, Haeusler said, adding that such payments may ultimately outweigh losses borne by the state government.
"Perhaps it will be good business for the state," he said.
Earlier on Wednesday, BayernLB said its net profit fell by 84 percent to 120 million euros in 2013, hurt by costs linked to its troubled Hungarian unit MKB as well as to job cuts.
MKB could be sold this year, Haeusler said.
BayernLB's Core Tier 1 regulatory capital ratio as defined by the European Banking Authority climbed 3.6 percentage points last year to 15.2 percent.
"The rising capital ratio means the new BayernLB is strong enough to absorb even unexpected hits," Haeusler said.
($1 = 0.7258 Euros)
(Writing by Jonathan Gould; Editing by Elaine Hardcastle)