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Goldman Sachs has reaped about $12 billion in sales proceeds and dividends from its $2.58 billion investment in ICBC. Photo: AFP (AFP)
Goldman Sachs has reaped about $12 billion in sales proceeds and dividends from its $2.58 billion investment in ICBC. Photo: AFP
(AFP)

Goldman Sachs to exit from ICBC with $1.1 bn sale

Goldman Sachs sold 1.58 billion shares in ICBC at HK$5.50 each

Hong Kong/Shanghai: Goldman Sachs Group Inc. ended a seven-year investment in Industrial and Commercial Bank of China Ltd (ICBC) by selling a $1.1 billion stake in the world’s largest lender by market value, a person familiar with the matter said.

The US bank sold 1.58 billion shares in ICBC at HK$5.50 each, the person said, asking not to be identified as the information is private. That’s a 2.5% discount to ICBC’s closing price on Monday in Hong Kong trading. The Beijing-based bank closed down 1.95% at HK$5.53 on Tuesday, paring its gain for the past year to about 19%.

The Wall Street firm joins Citigroup Inc. and Bank of America Corp. in cutting holdings in China as new capital rules known as Basel III make it more expensive to hold minority stakes in banks. Goldman Sachs has reaped about $12 billion in sales proceeds and dividends from its $2.58 billion investment in ICBC, calculations by Macquarie Capital Securities Ltd show.

“Many foreign banks are facing capital shortages with the new Basel requirement, so I’m not surprised that they dumped holdings in Chinese banks on which they’ve already made massive returns," said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group. The exit strategy has been on the table for these foreign investors since the very beginning because they know these aren’t real strategic investments.

Goldman Sachs and client funds offloaded ICBC shares at least five times before the latest transaction after first investing in ICBC in 2006. Connie Ling, a spokeswoman for New York-based Goldman Sachs in Hong Kong, declined to comment on Tuesday on the latest sale.

Capital deductions

New rules set by the Basel Committee on Banking Supervision require punitive capital deductions for holding minority investments in other financial institutions.

Goldman Sachs’ Tier 1 common ratio was about 12.7% under Basel I and an estimated 9% under Basel III, chief financial officer Harvey Schwartz said last month.

Citigroup sold its entire stake in Shanghai Pudong Development Bank in March 2012, nine years after buying it, for an after-tax gain of $349 million. Bank of America sold 10.4 billion shares of China Construction Bank Corp. in November 2011 for a profit of about $1.8 billion, its fourth sale, leaving it with a 1% stake.

ICBC last month reported a 12% increase in first- quarter profit, defying a sluggish domestic economy to boost lending. The world’s most profitable lender extended 461 billion yuan ($75 billion) of new loans in the first quarter, 25% more than in the same period a year earlier.

Low valuations

The bank and its closest local rivals are trading near record-low valuations on concern that profit growth may slow as loans sour and the government deregulates interest rates. ICBC trades at about six times estimated 2013 earnings, down from a high of 21 times in early 2008, data compiled by Bloomberg show.

“It’s good timing for Goldman to sell its stake in ICBC," said Rainy Yuan, an analyst in Shanghai at Masterlink Securities Corp. Valuations of Chinese banks will remain low as China’s interest-rate liberalization is a long-term trend which will hurt lenders’ profits.

Credit-rating companies have also warned that China isn’t reducing risks from local-government debt and credit expansion fast enough. China’s shadow banking system—which includes private lending, trust loans, and credit from non-bank institutions—poses systemic risks to the nation’s financial industry after expanding by more than 67% over the past two years, Moody’s Investors Service said earlier this month.

Soured loans

Chinese banks’ non-performing loans increased for a sixth straight quarter, the longest streak in at least nine years, to 526.5 billion yuan as of 31 March, regulatory data show.

“We believe NPL figures greatly understate the potential scope of the problem of poor quality loans," Carson Block, the short seller who runs Muddy Waters Llc, said in an e-mailed reply to queries. “Our concerns implicate loans throughout the economy—both public and private sector."

Block said this month that he’s betting against the debt of Standard Chartered Plc., in part because an economic slowdown in China will lead to considerable stress at the UK lender that gets two-thirds of profit from Asia.

Global financial firms including Temasek Holdings Pte invested $33 billion in Chinese lenders from 2001 to 2009, according to the regulator. They still own at least $45 billion of stakes in local banks, data compiled by Bloomberg show.

Since acquiring the stake in ICBC in 2006, Goldman Sachs has recorded $3.47 billion in net gains on the position, according to company filings through the first quarter of 2013.

As of March, Goldman Sachs had a $1.11 billion position in ICBC on its own balance sheet, down from $2.08 billion at the end of December because of a sale in January, according to the firm’s 10-Q filing with the Securities and Exchange Commission. BLOOMBERG

Christine Harper in New York, Allen Wan in Shanghai and Stephanie Tong in Hong Kong contributed to this story.

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