The Goldman Sachs Group Inc. (GS) is again lowering its exposure in the Chinese economy. The company is selling nearly $2.5 billion worth of shares that it holds in Beijing-based Industrial & Commercial Bank of China Ltd. (ICBC). This was reported by Bloomberg after communicating with people familiar with the matter.
Goldman sold 3.55 billion shares of ICBC 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.
Prior to ICBC’s initial public offering (IPO), Goldman had made investments in the company, back in 2006. The company invested $2.6 billion to own 4.9% stake in ICBC. This was possible for Goldman as, during that time Chinese government used to allow foreign banks to hold stake in state-owned banks even before their IPO.
Every quarter, Goldman reports its profit or loss from its investment in ICBC separately as it has substantial investment in that firm. In the third quarter of 2011, Goldman reported a loss of $1.05 billion from ICBC investment, due to deterioration in ICBC’s share price. This led to an overall loss of $517 million from the investment in 2011.
In 2011, Chinese bank stocks performed poorly, which reflected the slowing Chinese economy. However, the ICBC’s share prices have been showing an uptrend since the beginning of this year, indicating potential profits on its investments in the first quarter.
This is the fourth time that Goldman is slashing its stake in ICBC. Earlier, through three sales transactions, the company procured returns of about $5.26 billion. After the latest sale, the company will now be left with less than 2% stake in ICBC.
Over the last few years, several banks including Goldman and Bank of America Corp. (BAC) have been selling off their stakes in Chinese banks either to raise additional capital or to lower the volatility of the earnings.
Our Viewpoint
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 concern regarding the asset quality of Chinese banks is one of the reasons for the stake sale. Moreover, the regulatory pressure to strengthen its capital ratios is also forcing the company to undertake such measures.
Goldman currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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