Deutsche Bank said on Monday that it has agreed to sell its entire 19.99% stake in Hua Xia Bank, at a time of more onerous capital rules on holding minority stakes in financial institutions and in the wake of a corruption scandal at the Chinese bank.
It is selling its stake in the Beijing-headquartered bank to Chinese state-controlled insurer PICC Property and Casualty Company, better known as PICC, for a price tag between Rmb23 billion to Rmb25.7 billion ($3.54 billion to $3.96) depending on exchange rates at the time of completion, a tidy profit on what it paid for the shares.
The sale follows an anti-corruption probe against the deputy chief of Hua Xia Bank for disciplinary infractions. The Beijing branch of the ruling Communist Party's anti-corruption body opened a case against Wang Yaoting in May.
The disposal is in line with a global trend of banks looking to preserve their capital.
Stricter capital rules in the wake of the global financial crisis have made it more expensive for banks to hold minority stakes in each other.
Several western institutions have sold out of Chinese banks, including Goldman out of ICBC, Bank of America Merrill Lynch out of China Construction Bank, and more recently Hang Seng out of Industrial Bank. Citigroup is in talks to sell its stake in Guangfa, according to sources.
On a pro-forma basis, the sale of Hua Xia Bank would have improved Deutsche Bank’s common equity tier 1 capital ratio as of September 30 by 30 to 40 basis points.
Most of these western banks have also made money on the sales. The price tag values Hua Xia at a lowly 1.0x to 1.1x 2015 estimated price to book, but it is still well over the sum it paid.
Deutsche Bank made its first equity investment in Hua Xia Bank in 2006. It upped its stake in 2008 by subscribing to Rmb3.9 billion ($550 million at the time) newly issued shares in Hua Xia Bank. It topped up its investment again in 2010. The total amount Deutsche invested to acquire its 19.9% stake was 1.3 billion euros and the carrying value of the shares as of September was 3 billion euros.
However profits were not on management’s mind back then.
Colin Grassie, CEO of Deutsche Bank Asia-Pacific at the time of the 2008 investments said: "Deutsche Bank's partnership with Hua Xia Bank is an important part of our strategy to secure direct participation in the development of China's financial services market."
In June 2007 Deutsche and Hua Xia launched a joint credit card business in China. Deutsche also provided technical support and assistance to Hua Xia to strengthen its existing franchise in areas such as risk management, treasury, retail and corporate banking.
Deutsche Bank is restructuring its retail businesses globally and focusing on its most profitable businesses. In October it laid the final version of its road map to meet its "2020 Strategy" goals including the exit of Hua Xia Bank, Postbank and 200 branches in Germany.
This updated plan showed Deutsche Bank’s determination to adapt to the new regulatory landscape.
Under the former management, the bank’s strategy was to grow its investment banking division across all sales and trading activities. Management was convinced that regulation post the 2008 Global Financial Crisis would soften but instead regulatory pressure has made its universal banking model expensive.
As an illustration of the root-and-branch nature of the restructuring Deutsche Bank said as part of its plan it intends to exit 10 countries in three years and has already said it is pulling out of Argentina and Mexico.
In its third-quarter results the bank included a 0.6 billion euro impairment charge for the carrying value of the Hua Xia Bank stake. It said in October that it no longer considered the stake in the bank to be strategic.
“As we execute on Deutsche Bank’s strategic agenda, now is the right time for us to sell this investment,” said John Cryan, co-chief executive officer of Deutsche Bank said in a statement on Monday.
Cryan added that China remains an important growth market for Deutsche. The German bank still has a securities joint venture, Zhong De on the mainland, a 33.3% stake in Harvest Asset Management and is locally incorporated.
Hua Xia Bank, which is listed on the Shanghai Stock Exchange, is the twelfth largest bank in China by asset size with 9,390 employees and a national banking license. As of December 31, 2007, it had 287 retail branches in 31 cities throughout China.
Hua Xia started business in Beijing in 1992 and became a nationwide joint stock commercial bank after restructuring in 1995. It went public in September 2003.
Hua Xia Bank has 38 tier-1 branches and 43 tier-2 branches with 638 business operation outlets in China. As of end-2014 it had a revenue of Rmb54.88 billion.
CICC acted as the financial adviser on the deal.
The completion of the transaction is subject to customary closing conditions and regulatory approvals, including that of the China Banking Regulatory Commission.