Yuan less

Deutsche Bank beats sensible retreat from China

Deutsche Bank is joining peers cashing out of China. The German lender is selling a $3.8-billion, 19.9 per cent holding in Hua Xia Bank to local insurer PICC Property and Casualty. Like rivals such as Goldman Sachs and Bank of America Merrill Lynch before it, Deutsche is crystallising a solid return - while admitting that minority stakes on the mainland are of little use.

Given China's troubles, this is a less-than-ideal time to sell. The Shenzhen-listed retail bank's shares trades at just 6.5 times forward earnings, or 0.9 times book value, both roughly one-third below their 10-year average, StarMine data shows.

But the foray was still worth the effort. In total Deutsche invested about euro 1.3 billion between 2006 and 2011. The final sale price now will depend on how Hua Xia's shares trade. But at the mid-point of the stated range, euro 3.45 billion, plus euro 400 million or so of previous dividends, Deutsche will have nearly tripled its money on a gross basis.

That is not to be sniffed at, even if taxes on dividends and capital gains will presumably cut the net return significantly. Goldman Sachs made about 3.5 times its money investing in Industrial and Commercial Bank of China, albeit over a shorter timeframe.

Moreover, Deutsche gets a clear capital benefit: a 30 or 40-basis point uplift to its Common Equity Tier 1 ratio, currently at 11.5 per cent. Basel III rules make holding small stakes in other financial institutions an extra burden. The German bank is also now off the hook should Hua Xia need shareholders' help in shoring up its own balance sheet.

Shareholders will be heartened in other ways, too. Minority positions with little influence, and no prospect of future control, look badly out of place when banks are struggling to make sustainable returns. This holds doubly true, given China's slowdown.

The era of Western investment in Chinese banks is not quite over - HSBC is a notable holdout, firmly committed to its stake in Bank of Communications. But further retreats are likely, such as a sale by Standard Chartered of its holding in Agricultural Bank of China. The exodus will go on.