Wall Street biggie – The Goldman Sachs Group Inc. (GS) is reducing its exposure to the Chinese economy. The company is selling nearly $1.1 billion worth of shares that it holds in Beijing-based Industrial & Commercial Bank of China Ltd. (:ICBC). With this, Goldman will complete its final stake sell in the company.
Goldman commenced the sale of 1.58 billion shares of ICBC at a price range of HK$5.47-5.50 (70-71 cents) per share for $1.1 billion. Notably, the shares were sold at a 2.5%–3.0% discount to the closing price of ICBC on May 20.
Reasons for Exiting Stake
Over the last few years, several banks have been selling their stakes in Chinese banks either to raise additional capital or to lower the volatility of the earnings.
To meet the requirements of new capital rules as per Basel III standards, banks have to boost their capital levels. These regulations will augment costs related to holding minority stakes in financial institutions.
Moreover, China's banking system is struggling due to slowdown in profit growth and the potential rise in bad loans. Therefore, Goldman joined hands with Citigroup Inc. (C), Bank of America Corp. (BAC) and UBS AG (UBS) in cutting holdings in China.
Prior to ICBC's initial public offering (:IPO), Goldman had invested in the company back in 2006. The company invested $2.6 billion to own 4.9% stake in ICBC. The investment was possible for Goldman as during that time the Chinese government permitted foreign banks to hold stake in state-owned banks even before their IPO.
Every quarter, Goldman reports profit or loss from its investment in ICBC separately as it has substantial investment in that firm. In first-quarter 2013, Goldman reported a $24 million gain from its investment in ICBC, following a gain of $408 million in 2012.
Notably, in the third quarter of 2011, Goldman reported a loss of $1.05 billion from the ICBC investment, due to deterioration in ICBC’s share price. This led to an overall loss of $517 million from the investment in 2011.
Interestingly, Goldman is slashing its stake in ICBC for the sixth time. Through these sale transactions, the company has raised about $10 billion. The latest sale ends the stake holding in ICBC for Goldman.
Prior to this sale, in Jan 2013, Goldman sold nearly $1.0 billion worth of shares in ICBC. The company sold 1.35 billion shares at HK$5.77 (74 cents) per share. Notably, the shares will be sold at a 3% discount to the closing price of ICBC on Jan 28.
Previously, in Apr 2012, Goldman sold nearly $2.5 billion worth of shares in ICBC. The company sold 3.55 billion shares at HK$5.05 (65 cents) per share to Singapore state investor, Temasek Holdings Pte for $2.3 billion. The remaining $200 million worth of shares were sold to other institutional investors.
Though it appears that Goldman has been selling its stake to reduce its non-core business exposure and to book profit, we believe that the increasing concerns regarding the asset quality of Chinese banks is one of the reasons for the stake sale. Moreover, regulatory pressure to strengthen its capital ratios is compelling the company to undertake such measures.
Goldman currently holds a Zacks Rank #2 (Buy).
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