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Cryan sells out of China to boost Deutsche Bank capital levels

Deutsche Bank signage.
Patti Domm | CNBC
Deutsche Bank signage.

Deutsche Bank is to sell its stake in the Chinese lender Hua Xia for up to €3.7bn ($4 billion) as Germany's biggest bank steps up efforts to strengthen its balance sheet under John Cryan.

Regulators around the world have been pushing global banks like Deutsche to hold more capital to avoid a repeat of the 2008 financial crisis. The German bank historically operated with higher debt levels than most rivals.

Mr Cryan, who succeeded Anshu Jain as co-chief executive of Deutsche in July, has made bolstering the bank's capital position a vital part of his five-year turnaround plan. He has already said that Deutsche, which is on course to make a big loss this year, will pay no dividends for 2015 or 2016.

Deutsche said that the sale of Hua Xia to China's PICC Property and Casualty Company, for between €3.2bn-€3.6bn, would bolster its core tier one capital ratio — a key measure of financial strength — by 30 to 40 basis points.

At the end of September, Deutsche's ratio stood at 11.5 per cent, which is comfortably above regulators' minimum requirements. However, with tighter capital rules starting to bite, and a number of legal concerns hanging over the bank, some analysts fear the ratio could come under pressure.

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Mr Cryan said that "China remains a key growth market" for Deutsche but insisted that "now is the right time for us to sell this investment".

Deutsche first bought into Hua Xia in 2006, at a time when many western lenders were keen to get access to the growth potential of the Chinese market. In the following years, it built up a 19.99 per cent stake, as well as taking two seats on the Chinese lender's board, and setting up a credit card joint venture with the Chinese bank.

However, as Chinese regulators prevented foreign investors from owning more than 20 per cent in Chinese banks, the stake in Hua Xia came to be seen non-strategic by Deutsche's leadership.

Jürgen Fitschen, Mr Cryan's outgoing co-chief executive, hinted in September that a sale could be on the cards, saying that Deutsche would have to work out how to allocate its capital as efficiently as possible in the face of China's restrictions on foreign ownership. Deutsche subsequently wrote down the stake by €649m, in part to account for the possibility of a sale.

Deutsche's decision to offload its stake in Hua Xia follows a number of other western disposals in China. In January, the Spanish bank BBVA sold a €1.5bn stake in China Citic Bank.

A series of US lenders have also departed, including Bank of America, and Goldman Sachs, which sold out of China Construction Bank and Industrial and Commercial Bank of China, respectively in 2013.