Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Surprising as it may sound, a small Chinese bank saddled with higher-than-average soured debt could be the answer to some of Deutsche Bank's woes.

Late last year, the German lender agreed to sell its 20 percent stake in Huaxia Bank to PICC Property & Casualty for as much as 25.7 billion yuan ($3.9 billion). The transaction would give Deutsche Bank's ratio of equity to risk-weighted assets -- a key resilience measure -- a significant boost and could add about 40 basis points to its core Tier 1 capital ratio of 10.8 percent, Chief Financial Officer Marcus Schenck said on the company's second-quarter earnings call in July.

Equity Not Enough
Deutsche Bank's core equity Tier 1 ratio trailed its peers in the second quarter
Source: Bloomberg Intelligence

Schenck also said the bank was confident the deal would close in the second half, considering the clock began ticking June 24 on the maximum three-month approval period set by China's banking regulator. Problem is, it's Sept. 28 and people familiar with the matter now say the State Administration of Foreign Exchange has taken to reviewing applications to move large sums of money offshore on a case-by-case basis to help preserve currency stability.

It may be that Deutsche Bank remits the proceeds in batches rather than in one go. Regardless, the timing's bad, coming as questions are raised about whether the lender needs to find fresh capital to meet mounting legal costs, something Chief Executive Officer John Cryan says currently isn't an issue.

At first glance, Huaxia's attractiveness may not be clear. Its bad-debt ratio of 1.52 percent is above the average in China and its stock has been heading south.

Poor Performer
Shares in Huaxia Bank are down 17 percent this year
Source: Bloomberg

But for would-be buyer PICC, an insurer like most struggling to find returns in a low-rate environment, Huaxia represents a nice source of dividends. The Beijing-based bank's 3.77 percent expected payout ratio puts it ahead of peers like Bank of Nanjing at 3.12 percent, data compiled by Bloomberg show, and the purchase could help boost PICC's earnings by 13 percent, Morgan Stanley analysts said in a note this month.

Deutsche Bank itself needs the cash. The lender began building its stake in Huaxia in May 2006, when getting into bed with a mid-sized Chinese bank was viewed as a fast track to speedy growth. But this isn't the China of yesteryear and Beijing is taking an ever dimmer view of Western financial institutions that are seeking to offload domestic stakes amassed prior to the global financial crisis.

Under pressure to fortify its finances, and with shareholders clamoring for transparency, this is one more uncertainty Deutsche Bank could certainly do without.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The ratio of a bank's core equity capital to its total risk-weighted assets.

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