Nationalized German lender Hypo Real Estate , which failed a pan-European stress test in July, expects to complete the planned move of around $270 billion of toxic assets into a bad bank during the fourth quarter.

The Munich-based real estate bank, which has been dogged by liquidity and capital problems, has been revamping its business model since the financial crisis, when it required a bailout of more than 100 billion euros.

In January, HRE submitted its application to the German Financial Market Stabilization Agency to shift about 210 billion euros ($270.5 billion) in assets into what would become Germany's biggest bad bank.

The bad bank allows banks to transfer problem assets off their balance sheets as part of a broader restructuring. So far Germany's WestLB is the only other German bank to make use of such a facility.

HRE's asset transfer hinges on approval by the European Union and the German financial stabilization agency. On Friday, the bank said it expects the transfer to take place in the fourth quarter, if the prerequisite approvals are granted.

The loss-making bank narrowed its pretax loss to 395 million euros in the second quarter, from a 664 million euro loss in the year-earlier period, and reiterated it did not expect to return to profitability before 2012.

HRE said it would review its guidance once assets have been transferred to the bad bank.

The real-estate lender continued to suffer from liquidity problems in the first half of the year as the euro weakened against the U.S. dollar and central banks cut refinancing facilities.

Furthermore, the euro zone sovereign debt crisis forced HRE to post additional collateral for euro zone sovereign debt. In July, Hypo Real Estate said it had 73 billion euros worth of exposure to Portugal, Ireland, Italy, Greece and Spain as of the end of March.

In addition to the liquidity shortfall, the German government rescue fund, SoFFin, has already stepped in to make up for an estimated 10 billion euros capital shortfall.

Since 2009 alone, HRE received capital injections worth 7.42 billion euros from SoFFin, in part to prop up its Depfa Bank unit. In addition, SoFFin has also promised to make available a further 450 million euros.

HRE said in November mounting losses on real estate loans would further erode its capital base, and probably require it to secure further capital injections to repair its balance sheet.

Separately on Friday, HRE also said its remuneration systems would have to be fundamentally revised to conform with new bonus rules in Germany. A new bonus system will be introduced in the second half of 2010, the company said in its quarterly report.

Axel Wieandt, the former chief executive who departed in March, received 375,000 euros for his performance between January and March. He received no severance pay, the company said.

The bank said its Tier 1 capital ratio stood at 8.4 percent at the end of the second quarter, but added the ratio did not include 664 million euros in losses during the first half of 2010.

Including the losses, the Tier 1 ratio would fall to around 7.6 percent, the bank said, adding that an accurate forecast was not possible given that HRE earnings were calculated using German accounting standard HGB, while the losses were booked according to international IFRS standards.

($1=.7762 Euro)

(Reporting by Edward Taylor; editing by Simon Jessop)

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