ECB probes HNA and Qatar stakes in Deutsche Bank

Europe’s top banking regulator is considering an investigation into HNA’s purchase of a stake in Deutsche Bank that could further strain relations between the EU and Beijing.

The Single Supervision Mechanism, the banking watchdog that operates under the European Central Bank, is also considering a review of share purchases in Germany’s largest lender by Qatar’s royal family.

If it went ahead, the investigation, which was reported by Sueddeutsche Zeitung, would first consider whether HNA and Qatar could wield significant influence over the company as its largest shareholders, and whether they were fit to do so.

The preparatory work by the SSM into share purchases in Deutsche Bank comes amid deepening concern in Beijing that Germany and the EU are seeking to clamp down unfairly on Chinese purchases of companies in the region.

Germany last week announced plans to block takeovers of the country’s companies over fears over the scale of Chinese dealmaking in recent years, although those fears have in the past focused on high-tech companies.

EU rules require supervisors to carry out an investigation of an investor when it buys more than 10 per cent of a bank. The investigation involves ensuring investors have no links to terrorist financing, have a solid reputation, and offer sound medium- and long-term plans for their investment.

HNA’s stake, at 9.9 per cent, is just below the threshold and the Qatari investments are about 8 per cent. But the SSM and BaFin, Germany’s financial supervisor, are allowed to assess whether the shareholders have “significant influence” over management’s decision-making even if their stake is less than 10 per cent.

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An assessment on whether to launch an investigation is now under way, said one person briefed on the situation.

If the SSM and BaFin decide there is a possibility of the two shareholders having a significant influence, they will start a more formal investigation into the two investors. A decision is likely in the next few weeks, the person said.

Deutsche Bank and the ECB declined to comment. HNA and the Qatari government did not immediately respond to a request for comment.

This year, two new members joined Deutsche’s 20-person supervisory board to represent its biggest shareholders: Alexander Schuetz, head of C-Quadrat, which manages HNA’s stake in the bank, and Prof Stefan Simon, a Bonn-based lawyer who represents the Qatari royal family.

Their appointment has been one of the triggers for the ECB to start investigating whether the investors they represent were fit and proper owners of significant stakes in the bank, said the person informed on the work.

Often less than half of the representatives of voting rights are present at shareholders’ meetings, raising the prospect of the two having a significant influence on strategy and management decisions.

Since June 5, Qatar has been subject to an economic embargo by four of its Gulf neighbours, which have cut air, sea and land links with the gas-rich nation over allegations it has been funding extremist and terrorist organisations.

In May, HNA became Deutsche’s biggest shareholder, increasing its stake to 9.9 per cent after the German bank completed an €8bn rights issue to shore up its balance sheet.

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The Chinese group overtook Qatar’s royal family, which had been Deutsche’s biggest shareholder since investing in the bank’s 2014 share issue. Funds controlled by the royal family increased their overall stake in this year’s rights issue to just under 10 per cent of Deutsche Bank.

Geng Shuang of the Chinese Ministry of Foreign Affairs said on Friday there was concern over plans to tighten rules in Germany and elsewhere in the EU on purchases by foreign companies of businesses in strategically important sectors.

“We have said many times that the nature of the economic and trade co-operation with Germany and other countries is mutually beneficial and win-win,” Mr Geng said.

“We hope that, when introducing relevant measures, Germany and the EU can avoid being affected by protectionism and sending chaotic and negative messages to the outside world.”

HNA started out as a provincial airline founded by economic reformers who drew on World Bank support. But the parent of Hainan Airlines has grown into a sprawling, privately held international conglomerate.

Its assets include New Zealand’s largest financial services firm, a stake in Hilton Hotels and the world’s third-largest aircraft rental fleet. To fuel its growth, it has leveraged existing assets to fund the purchase of new ones — a process known in Chinese as a “snake swallowing an elephant”.

HNA is 76 per cent owned by 13 individuals, all but one of whom are current executives with the group, according to recent corporate filings.

Its largest single shareholder is also the most mysterious: Guan Jun, who bought almost 29 per cent of the company last year from Bharat Bhise, a businessman in Hong Kong. HNA declined to say how much the stake sold for and Mr Guan has declined to comment about his business interests.

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Additional reporting by Lucy Hornby in Beijing.