Germany's IKB said on Monday it would return to its small-company lending roots, and expects to lose nearly $1 billion this year after its U.S. subprime investments turned sour.

IKB, the first European victim of the credit market turmoil stemming from the U.S. market for risky mortgages, said the restructuring away from overseas investments put it on course for stable but significantly lower revenues in future.

The business strategy revamp nurtured expectations the bank could be sold.

If they are only going to do purely domestic lending business, with a big credit book that is not very diversified, then staying independent is not a good idea, said Kepler Equities analyst Dirk Becker.

IKB would probably not be able to gain a sufficiently good stand-alone rating from credit rating agencies, Becker said.

IKB's list of German small- and medium-sized corporate clients would be of interest to many larger banks, including Deutsche Bank, Commerzbank or HVB, analysts said.

German cooperative banks WGZ Bank and DZ Bank have also indicated they might be interested in IKB.

German Economy Minister Michael Glos said last month it would be sensible for IKB's biggest shareholder, state development bank KfW, to sell its 38 percent stake in IKB once the lender had been reorganised.

IKB's July profit warning, which came just 10 days after it had confirmed its full-year forecasts, prompted a 3.5 billion euro ($4.8 billion) rescue by other German banks.

Financial shares worldwide have been hit in recent weeks on investor fears similar problems could be lurking at other banks.

IKB has since lost half its market value. Its shares fell 2.9 percent to 13.60 euros by 1125 GMT, compared with a 0.6 percent rise in the German mid-cap MDAX index.

Germany's SachsenLB was also hit by the problems, forcing a rescue and sale of the regional state-backed lender.

BACK TO CORE BUSINESS

IKB said on Monday it would focus on its core businesses Domestic Corporate Financing, Leasing and Private Equity, Structured Financing and Real Estate Financing.

Innovative financing solutions will remain an integral part of the business model, while investments in international securities portfolios will not, the bank said in a statement.

IKB's new business model creates a suitable platform for generating stable future returns, although at a significantly lower level compared to the previous financial years.

IKB Chief Executive Guenther Braeunig, five weeks into the job, told an analysts' conference call on Monday the bank had about 1.3 billion euros in exposure to subprime investments.

Due to the realisation of hidden accounting losses and further restructuring measures designed to limit market price risks, IKB expects to post a consolidated net loss under IFRS of approximately 600-700 million euros in its fiscal 2007/08 year, which ends on March 31.

By comparison, the bank's profit after tax in the year ended March 2007 rose 7 percent to 180 million euros.

Despite continuing challenging conditions in the financial markets, the bank's liquidity position for the next six months is covered without raising new capital market funds, also taking into account new business activities, IKB said, adding it had a lot of new business in its pipeline.

IKB added that details of the restructuring and the results for the first quarter to end-June will be published when the results of the special audit by PricewaterhouseCoopers become available, expected at the end of September.

Kepler Equities cut its price target to 15 euros from 18 euros, maintaining a reduce recommendation.

Germany Investment Deutsche Bank