In an effort to bolster its capital position, Deutsche Bank AG DB has inked a deal to sell its entire stake in China-based Hua Xia Bank.
Notably, state-owned Chinese insurer – PICC Property and Casualty Company Limited – is taking over Deutsche Bank’s 19.99% stake in Hua Xia for 23.0–25.7 billion yuan (around €3.2–€3.7 billion). The transaction is currently subject to customary closing conditions and regulatory approvals.
In a statement, Deutsche Bank noted that the sale will have “positive financial impact” and, would have boosted its Common Equity Tier 1 capital ratio as of Sep 30, 2015, by around 30-40 basis points, on a pro-forma basis.
Present in China since 1872, Deutsche Bank had initially acquired a stake in Hua Xia in 2006 which was gradually raised to 19.99%. Deutsche Bank holds two seats on Hua Xia Bank’s board.
In the latest statement, Deutsche Bank’s co-chief executive (CEO) John Cryan mentioned, “China remains a key growth market for us.” Cryan also stated “We have been pleased with Hua Xia Bank’s development and performance. As we execute on Deutsche Bank’s strategic agenda, now is the right time for us to sell this investment.”
The latest move does not come as a surprise as in September the bank’s outgoing co-CEO Jurgen Fitschen had hinted about a possible offloading of the stake in Hua Xia. Banking rules in China prohibit foreign investors from holding more than 20% of a Chinese bank. In this context, Fitschen mentioned that while rules cannot be changed, it is about how such rules are dealt with.
Notably, during the third quarter (ended Sep 30, 2015), Deutsche Bank recorded an impairment charge of €649 million on the Hua Xia stake which contributed to the bank’s loss of €6 billion in the quarter. In its quarterly report, the bank revealed that the charge largely reflected that the Hua Xia stake was no longer a strategic one and the “general market pressure in China” also played spoilsport.
In recent years, a number of U.S. firms have reduced their ownership in Chinese holdings. In 2013, Bank of America Corporation BAC sold its remaining 1% stake in China Construction Bank Corp. while The Goldman Sachs Group, Inc. GS divested its remaining $1.1 billion worth of stake in Beijing-based Industrial and Commercial Bank of China Ltd.
Bottom line
The latest move by Deutsche Bank reflects yet another crucial step under the leadership of Cryan, who succeeded co-CEO Anshu Jain in June and inherited the task of executing the bank’s “Strategy 2020”. Cryan is expediting efforts to revamp the bank while remaining focused on simplifying the bank’s business model, reducing costs and pruning unprofitable businesses.
Strategy 2020 outlines several measures to boost the overall performance of the bank. As part of the strategy, the company intends to “rationalize” its global footprint by exiting some nations or trimming its presence and intends to focus and invest in core markets where it has a strong hold and long-term growth prospects.
We believe that the gradual execution of the restructuring moves should support the growth prospects of the bank. Nevertheless, the current stressed operating environment and ongoing litigation issues raise caution.
Deutsche Bank currently carries a Zacks Rank #4 (Sell). Grupo Financiero Galicia S.A. GGAL is a better-ranked stock in the foreign banks space sporting a Zacks Rank #1 (Strong Buy).
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