Goldman Sachs ended a seven-year investment in the Industrial and Commercial Bank of China on Monday, selling its remaining $1.1 billion stake in the world’s largest bank by market value and most profitable lender for HK$5.50 per share—2.5% less than the market’s closing price.
ICBC reported a 12% increase in first quarter profit last month, and extended 25% more loans than in the same period in 2012. So why is Goldman selling?
More than a few coughs
Bad debts are becoming a big problem in China, particularly among local municipal authorities; a senior Chinese auditor recently called them “out of control” (paywall). Non-performing loans on balance sheets have increased, even as banks report higher than expected earnings.
When asked to explain a rise in ICBC’s non-performing loan ratio in March, the bank’s chairman, Jiang Jianqing, played down the figures, telling Reuters that “a single cough doesn’t mean you have a cold.” But Carson Block, founder of Muddy Waters, told Bloomberg on Tuesday: “we believe NPL figures greatly understate the potential scope of the problem of poor quality loans. Our concerns implicate loans throughout the economy—both public and private sector.”
Goldman’s initial 4.9% stake in ICBC, which it bought in 2006, was seen as a strategic move. Charles Geisst, a finance academic, told the Wall Street Journal that “American banks wanted to get a piece of Chinese banks because they knew the Chinese were quite capable of avoiding Wall Street to raise capital. This was a way of getting in.”
But in reality, it hasn’t panned out that way. Goldman’s fees in China for services such as underwriting have been lackluster at best, and it has been steadily selling off bits of its ICBC stake. It isn’t alone—UBS, Royal Bank of Scotland, Bank of America, Citigroup and HSBC have all divested stakes in Chinese banks recently.
The Financial Times reports that Goldman’s exit could have been in preparation of changes to Chinese regulations, which will make foreign ownership of Chinese banks more expensive.
Although Goldman has made almost triple its initial $2.58 billion investment in its six ICBC sell-offs, the investment has at times been volatile. In 2010, Goldman made $747 million on its ICBC stake and then lost $905 million in the following year.
Judging by Goldman’s final farewell to the ICBC, what was once a promising investment opportunity has become a volatile liability.
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