Deutsche Bank May Swell $14 Billion Selloff in China Bank Stakes

Deutsche Bank's $7 Billion Loss: The Breakdown
  • Foreign lenders cut their holdings to free up capital
  • China banks trade below book value as profit growth cools

Deutsche Bank AG’s signal that it may sell a $3.5 billion stake in Huaxia Bank Co. shows the fading appetite among global lenders for tie-ups with their Chinese counterparts.

That’s a turnaround from before the global financial crisis, when Deutsche Bank, Goldman Sachs Group Inc. and Bank of America Corp. were among those buying in, often ahead of firms’ listings.

Global banks’ sales of the stakes are being driven by their need to free up capital and the Chinese banks’ diminished prospects for earnings growth. China’s caps on foreign ownership are another concern, since they limit the potential for a shareholder to increase its sway.

"Global banks are cutting their non-essential holdings or those in which they don’t have much control to focus limited resources on their core businesses,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “It’s not a bad move to sell because they’ve reaped the best years of China banks."

Deutsche Bank announced Wednesday it will take charges on the carrying value of a 20 percent holding in Huaxia Bank as it “no longer considers this stake to be strategic.” Speculation that a sale was imminent led to questions from analysts as early as April.

Global lenders including Bank of America and Goldman Sachs Group have raised at least $14 billion divesting shares in Chinese lenders since the start of 2012, data compiled by Bloomberg show. Hang Seng Bank Ltd., controlled by HSBC Holdings Plc, is getting out of Industrial Bank Co., while Spain’s Banco Bilbao Vizcaya Argentaria SA is exiting from China Citic Bank Corp.

Earnings Slowdown

The diminished prospects for earnings come from a slowing economy and rising bad loans. In the most recent quarterly results, some of the nation’s biggest lenders reported zero profit growth. Chinese banks are trading at 0.89 times estimated book value for 2015, compared with an average 1.3 times for global banks, based on comparisons among those with a market value of more than $10 billion.

China currently limits foreign ownership in a Chinese bank at 25 percent, with a single foreign investor to hold no more than 20 percent. Rules that have required lenders to hold extra capital against such investments have added to global banks’ burdens.

Deutsche Bank and an affiliate bought 14 percent of Beijing-based Huaxia Bank, one of the smallest listed national lenders, in 2005 for 272 million euros ($329 million at the time). It boosted the holding in later years and at Thursday’s market price it was worth about $3.5 billion.

Sticking Around

Not every foreign bank is getting out.

HSBC has a strategic stake in a major listed Chinese lender, a holding of about 19 percent of Bank of Communications Co. That tie-up is unusual because of the depth of cooperation and seems to be “unbreakable,” said Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co. No comment was immediately available from HSBC.

Bank of Communications plans to let HSBC name a vice chairman to its board as the Chinese lender restructures its ownership to give private capital a bigger role, people with knowledge of the matter said in August.

In addition, Citigroup Inc. owns about 20 percent of the unlisted Guangfa Bank Co.

UBS Group AG is seeking to invest about $2.5 billion in Postal Savings Bank of China Co., ahead of a planned initial public offering, people familiar with the matter said last month. UBS may syndicate a significant portion of that stock to other investors, the people said.

— With assistance by Jun Luo

Before it's here, it's on the Bloomberg Terminal. LEARN MORE