Deutsche to cut Hua Xia stake due to new valuation

A woman walks past a Hua Xia Bank branch in Shanghai. Deutsche Bank will take a 600-million-euro impairment on a stake in Hua Xia Bank and has earmarked this asset for disposal. [Photo/China Daily]

Deutsche Bank AG is considering cutting its holdings in a mid-sized Chinese commercial lender, after Germany's largest lender warned that it may incur a net loss of 6.2 billion euros ($7 billion) during the third quarter.

The bank said that it took a hit of 600 million euros in the value of its 19.99 percent stake in Hua Xia Bank Co Ltd.

"This reflects an updated valuation triggered by a change of the intent of the holding as Deutsche Bank no longer considers this stake to be strategic," the bank said in a statement posted on its website on Wednesday.

Deutsche Bank made its first equity investment in Hua Xia Bank in 2006 to enhance direct participation in China's retail and commercial banking market. Four years later, it signed a binding agreement to subscribe to newly issued shares in Hua Xia Bank for a total subscription price of up to 5.75 billion yuan ($906 million), and increased its equity stake in Hua Xia Bank from 17.12 percent to 19.99 percent.

Founded in 1992, Hua Xia Bank has 624 retail branches in 82 cities across China and has agent relations with more than 1,000 overseas banks. By the end of June this year, its total assets had reached 1.92 trillion yuan.

Zhao Junxue, secretary of the board of directors of the Beijing-based commercial lender, said on Thursday that the bank is transforming its business by offering innovative financial services for small and medium-sized enterprises.

"Our bank has been planning to become a financial service provider for SMEs since December 2012 as the old profit models reliant on net interest margins are no longer sustainable. It is prompting commercial lenders like us to change our business and client structure," he said.

Hua Xia Bank's net interest margin increased slightly by 2 basis points year-on-year to 2.63 percent during the first six months of this year. The growth in net profit attributed to shareholders of the bank was 6.84 percent, compared with 18.77 percent a year earlier.

Apart from the losses in its Hua Xia Bank investment, Deutsche Bank also expects to incur an impairment of all goodwill and certain intangibles in corporate banking and securities, as well as private and business clients, of approximately 5.8 billion euros. However, the bank said both impairments will have no significant impact on its regulatory capital ratios.

Another charge that will affect Deutsche Bank's third-quarter results is litigation provisions of 1.2 billion euros.