Deutsche Bank's discussions on buying a stake in Huaxia Bank have entered a key phase, a source close to the management of the Beijing-based lender told China Daily yesterday.

But he would not comment on market reports that the German financial giant would buy 5 percent of Huaxia Bank for US$110 million.

"No detailed information is available as the negotiation is at a very sensitive stage," the insider said.

But he disclosed that foreign investors including Deutsche Bank and French bank BNP Paribas had started due-diligence procedures.

If the price tag of US$110 million turns out to be true, the German bank giant would be paying 4.24 yuan (52.3 US cents) a share, a little lower than Huaxia's closing price on the Shanghai Stock Exchange yesterday of 4.31 yuan (53.2 US cents).

According to a report in Hong Kong-based Standard newspaper, Societe Generale, France's third- largest lender by assets, may also buy a stake in Huaxia Bank.

The newspaper cited unidentified people with knowledge about the transaction but it was not clear whether Societe Generale will buy a stake on its own or participate in a reported US$220 million purchase by Deutsche Bank of a 10 percent stake.

Huaxia said in April that it plans to sell a 25 percent stake; and disclosed that it was in talks with BNP Paribas SA, Sumitomo Mitsui Financial Group Inc and DBS Group Holdings Ltd as well as Deutsche Bank and Societe Generale.

"Huaxia is maybe not the best option for Deutshce Bank, but it has few choices left," Dong Chen, an analyst with China Securities, told China Daily.

As one of the listed joint-stock banks, Huaxia has total assets of some 320 billion yuan (US$39.5 billion). In the first half, income from its core business topped 6.4 billion yuan (US$790 million), up 28.04 percent on a yearly basis. Net profit rose 19.07 percent, hitting 640 million yuan (US$79 million).

"However, for a financial behemoth like Deutsche Bank with assets of over 849 billion euros (US$105.3 billion), Huaxia Bank is not enough to satisfy its appetite," Dong added.

Although the German bank has shown strong interest in China's market, it lost out to other foreign strategic investors for stakes in Bank of China and Beijing Bank.

However, it was chosen to be the financial consultant for Guangdong Development Bank (GDB), also a target for foreign strategic investors.

"The status will help Deutsche Bank be well informed about the true picture at GDB, thus giving it an upper hand in competing with other investors to buy a stake," Zhang Xuechun, a senior economist with the Asian Development Bank (China Representative), told China Daily.

Meanwhile, 289 million State shares in Huaxia Bank will be up for auction from Tuesday, raising more expectations that foreign investors could be interested.

(China Daily September 9, 2005)