China, India

Deutsche Bank Begins Global Pullout

Farewell to China? Source: Bloomberg
Farewell to China?
  • Why it matters

    Why it matters

    Deutsche Bank’s exit from China and India mark one of the biggest signals yet that Germany’s largest bank will aggressively refocus its retail banking operations on Europe.

  • Facts

    Facts

    • Deutsche Bank owns nearly 19.9 percent of Hua Xia Bank, an investment currently valued at €3.3 billion, or $3.6 billion.
    • The Chinese investment is eating up too much of the bank’s capital, which regulators are pushing for major global banks to raise.
    • Pullbacks from other regions are being discussed. New co-chairman John Cryan will present his restructuring plans by the end of October.
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It was a momentary blip that hardly anyone noticed: Deutsche Bank’s Internet site in June briefly put its stake in China’s Hua Xia Bank under the purview of Stefan Krause, the German bank’s go-to guy for unloading unwanted assets.

By July, the Chinese bank had disappeared from the website as quickly as it had appeared. A spokesman said Mr. Krause had taken over responsibility for Hua Xia because Rainer Neske, head of Deutsche’s retail division, had left the bank. No one should infer anything about Hua Xia’s future, the bank insisted at the time.

Two informed sources, however, have now confirmed to Handelsblatt that Deutsche Bank does, in fact, plan to sell its nearly 20-percent share of Hua Xia, a stake that is currently valued at about €3.3 billion, or about $3.6 billion, and would bring in much-needed cash.

Another source told Handelsblatt that Deutsche also plans to wind down its retail operations in India, where it has 17 branches. However, final approval of both moves has not yet been officially given by the bank’s management board.

The exit from Asia is part of a return to European retail banking, one source said, and will include the withdrawal from up to 12 other small countries around the world.

The impending sales of the Chinese stake and the Indian market retreat are the most tangible signs so far that Deutsche Bank is reducing its ambitions to become a full-service global bank, which became increasingly untenable as profits declined and shareholders raised pressure following the 2008 global financial crisis.

An exit from Asia would be the first major decision taken since John Cryan, the bank’s new chief executive, took over in July from former CEO Anshu Jain, although speculation that the bank would sell its Hua Xia stake had been rife for months.

Investors are hopeful Mr. Cryan, a cost-cutter as chief financial officer at Swiss bank UBS, will be more aggressive than his predecessors in Frankfurt had been at cutting out loss-making operations, shoring up the bank’s capital base, resolving legal disputes and restoring profitability.

Deutsche Bank’s share price rose 0.3 percent on opening Wednesday morning in Germany, though it fell back later in the day and was down 0.77 percent at 11:30 Central European Time.

While the bank’s more lucrative investment banking and asset management operations will remain global, the bank has taken a clear decision to scale down its commercial banking operations. In April, it announced the sale of its German retail arm Postbank. Investors are now hoping this was just the first of many steps.

Capital is particularly tight at Deutsche Bank these days. Unloading the Chinese stake, however, could be a lucrative option.

In July, information leaked out that Deutsche was ready to pull back from Denmark, Finland, Malta, New Zealand, Norway and Peru. Sources told Handelsblatt that six other countries were also being discussed.

“Ukraine and Russia could also disappear,” said one bank source.

Deutsche Bank refused to comment on the information, indicating only that Mr. Cryan would present his own restructuring plans for the bank by the end of October.

The roadmap, known as “Strategy 2020,” was first announced by Mr. Cryan’s predecessors in April and is meant to trim down Germany’s leading financial institute and boost its efficiency, but the announcement was short on detail and largely panned by shareholders, who helped engineer the ousting of Mr. Jain and his co-chief executive Jürgen Fitschen just a few months later. Mr. Fitschen is due to stay on as co-CEO in a transitional phase until May 2016, after which Mr. Cryan will be the sole chief executive.

The moves out of China, India and other countries would help the bank focus on Germany and its other retail operations that remain the most lucrative. The only countries where Deutsche Bank is expected to keep retail branches in the rest of Europe are Belgium, Italy, Spain, Portugal and Poland.

The moves are largely designed to free up much-needed cash. To prevent another financial crisis, regulators have demanded that major global banks like Deutsche Bank maintain higher levels of capital – either by raising more funds or gutting capital-intensive businesses like retail banking.

“The European banks are on average less well capitalized than U.S. institutes. That’s why we have seen portfolio adjustments in Europe right now. Whatever is locking up a lot of capital and where there’s no success, is being reconsidered,” said Christian Edelmann, a partner at the consultancy firm Oliver Wyman.

The Frankfurt-based bank first bought into Hua Xia in 2006 before raising its stake to 19.99 percent – the maximum a foreign firm is allowed by China – in 2010.

The two banks cooperated on credit card business and advising wealthy Chinese clients. Before he left, Deutsche Bank’s retail chief Mr. Neske was a particular fan of the investment. But Anshu Jain, Deutsche’s former co-chief executive with a background in investment banking, was more critical of the cooperation.

China used to be a goldmine for western banks, but that has slowly changed since the global financial crisis. The financial expert Guo Tianyong at Beijing’s Central University of Finance and Economics said new capital requirements imposed by regulators have encouraged western banks to cash in their Chinese holdings rather than build up a presence in the country.

“Selling stakes in Chinese institutions is a good way to generate capital quickly,” he said.

And with the Chinese economy slowing down, there was no promise of easy growth anymore.

The Chinese bank’s earnings have improved in recent months, according to Deutsche Bank’s semi-annual report, though there were no exact figures mentioned. In the last business year, the Germans received a dividend from Hua Xia of €98 million, or $109 million, up from €78 million the year before.

But the cooperation apparently is still not worth the investment: “Minority holdings use up relatively more capital because they cannot be consolidated,” said Mr. Edelmann.

And capital is particularly tight at Deutsche Bank these days. Unloading the stake, however, could be a lucrative option. Deutsche paid €1.3 billion for its stake, which is currently worth €3.3 billion on the stock market.

But a sale won’t be particularly easy, according to banking sector sources. China has clamped down and imposed restrictions on sales in the wake of recent financial market turbulence.

Deutsche Bank’s operations in other Asian countries haven’t fared well. The bank has 17 branches in India and has tried to build its retail operations since 2005 in the country – without much success. Like many other countries, the lack of success has now led the bank to rethink the value of its role there.

Moves to cut operations in investment banking and asset management are also expected, though this has happened more slowly. Investment banking has long been one of the bank’s biggest earners, though also the area that has faced the biggest legal scrutiny. One step already taken: The bank has  sold its asset management business in Russia, just as its Moscow office is in the headlines for allegedly helping Russia clients with money laundering.

 

Laura de la Motte covers banks for Handelsblatt from Frankfurt. Christopher Cermak of the Handelsblatt Global Edition also contributed to this story. To contact the author: delamotte@handelsblatt.com

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