Goldman’s Stock Bets Led to Asian Loss in 2011

Goldman Sachs Group Inc. (GS) lost money in Asia last year for the first time since 2008 as the Wall Street firm’s stock investments in the region, led by a holding in China’s biggest bank, backfired.

A 46 percent decline in Asia revenue compared with 2010 was driven by markdowns on the company’s stakes in public equities, the firm disclosed in its annual 10-K filing with the U.S. Securities and Exchange Commission. The bank lost $103 million in the region, compared with a $2.08 billion profit a year earlier, according to the New York-based company.

The figures illustrate how losses in Goldman Sachs’s Investing & Lending unit, which makes so-called principal investments with the company’s own money, can surpass the bank’s revenue from working with clients. Goldman Sachs bankers in Asia won first place among equity underwriters and takeover advisers last year, according to data compiled by Bloomberg.

“Last year was the perfect storm for Goldman in Asia as it was a brutal year for equities in the region,” said Sandy Mehta, chief executive officer of Hong Kong-based Value Investment Principals Ltd.

He said he expects a rebound this year: “The markets have gone up, so their equity positions would have rebounded strongly.”

David Wells, a spokesman for Goldman Sachs, declined to comment.

ICBC Stake

The holding that matters most is Goldman Sachs’s stake in Industrial & Commercial Bank of China Ltd., which generated a $517 million pretax loss in 2011 compared with a $747 million gain a year earlier, the firm disclosed on Jan. 18. Goldman Sachs, which acquired its ICBC stock in 2006, doesn’t report other stock investments in Asia in its annual filing.

ICBC, the world’s fifth-biggest company by market value and the biggest bank, climbed 14 percent in Hong Kong trading so far this year, leading analysts to predict big gains for Goldman Sachs this quarter.

“They’re going to get it all back in the first quarter,” said Christopher Wheeler, an analyst at Mediobanca SpA in London, who has a “neutral” rating on Goldman Sachs and who estimates the firm will have a $900 million gain on Beijing- based ICBC in the first quarter. He described the investment as “a bloody great prop trade.”

Goldman Sachs has held informal discussions about selling part of its ICBC stake to raise more than $1 billion, the South China Morning Post reported today, citing unidentified people familiar with the matter.

Feedback Sought

The company has sought views from institutional investors including BlackRock Inc. (BLK), the world’s biggest asset manager, and the money management unit of New York-based JPMorgan Chase & Co. (JPM), the report said. Feedback hasn’t been positive because some potential buyers expect ICBC stock to fall, according to the report.

Goldman Sachs is free to sell its shares because the lockup period has ended, ICBC President Yang Kaisheng said at a news conference in Beijing. He declined to say whether the U.S. firm is selling shares.

Wells, the Goldman Sachs spokesman, declined to comment, as did Darin Oduyoye, a spokesman for JPMorgan Asset Management, and Catherine Keary, a spokeswoman for BlackRock.

Goldman Sachs, the fifth-biggest U.S. bank by assets, has focused on building its Asia business for years. The firm hired people in China, India and Singapore, Goldman Sachs Chief Operating Officer Gary D. Cohn said in a June investor presentation.

Market Share

“If you look at our market share in China, it is quite high and we continuously are very, very well received in China,” Cohn said at the presentation on June 2. “We think there is just a huge growth potential in the area.”

Net revenues from Goldman Sachs’s business in Asia fell to $3.86 billion in 2011 from $7.15 billion a year earlier, according to the filing. The region lost $231 million before taxes, compared with a $2.93 billion pretax profit in 2010.

“The decline in net revenues in Asia compared with 2010 primarily reflects lower results in Investing & Lending, principally due to losses from public equities, reflecting a significant decline in equity markets in Asia during 2011,” according to a footnote in Goldman Sachs’s annual 10-K report to the SEC.

Asian Stocks Decline

Asian stocks fell in 2011, with the Nikkei 225 Index (NKY) dropping 17 percent, Hong Kong’s Hang Seng Index (HSI) tumbling 20 percent, and Australia’s S&P/ASX 200 Index (AS51) declining 15 percent. China’s Shanghai Stock Exchange Composite Index fell 22 percent last year. All those indexes have risen so far in 2012.

The MSCI Asia Pacific Index (MXAP) of shares has gained 10 percent this year. It slipped 1.2 percent at 4:55 p.m. in Hong Kong.

Yusuf A. Alireza, who ran Goldman Sachs’s trading in the region, left in November and has been succeeded by James R. Paradise and Eiji Ueda. Goldman Sachs’s Special Situations Group, a business that invests the firm’s own money and makes some loans, has been led since April by Hong Kong-based Jason Brown.

Investments with the company’s own money have historically been “one of the key drivers” of Asia earnings for Goldman Sachs, Alireza told Guy Moszkowski, an analyst with Bank of America Corp., according to an investor note that Moszkowski wrote almost a year ago. Alireza was named last month to become chief executive officer of Noble Group Ltd., Asia’s biggest commodity supplier.

Last year’s Asian stock price declines didn’t have a similar impact on some of Goldman Sachs’s competitors. London- based Standard Chartered Plc (STAN), which makes more than 70 percent of its pretax profit from Asia, last week reported its eighth annual record earnings and said it plans to hire as many as 2,600 employees. Standard Chartered makes most of its profit from corporate banking and trading, with less than one-quarter coming from consumer banking.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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