Goldman Sachs Group Inc. (GS)’s private equity funds are selling a stake in Industrial & Commercial Bank of China (601398) Ltd. to Temasek Holdings Pte (TMSK) in their largest divestment of stock in the world’s biggest bank by market value.
Funds affiliated with Goldman Sachs are selling $2.5 billion of shares at HK$5.05 each, according to a term sheet. Temasek, the Singapore state-owned investment group that is increasing stakes in China’s biggest banks, said it was buying 3.55 billion shares, or 4 percent of ICBC’s Hong Kong-traded shares. The holding would cost $2.3 billion, based on the per- share price and stake size.
Goldman Sachs, Royal Bank of Scotland Group Plc and Bank of America Corp. were among foreign banks that spent a combined $22 billion between 2004 and 2006 to purchase stakes in Chinese lenders ahead of their initial public offerings. Goldman Sachs, which owns ICBC stock directly and through private equity funds managed by the firm, has generated $3 billion in gains on ICBC since the fourth quarter of 2006, according to company filings.
“The ICBC stocks have done well for them,” Sandy Mehta, chief executive officer at Hong Kong-based Value Investment Principals Ltd., said by telephone today. “You’ll continue to see sales of Chinese bank stocks by these banks. It’s a continuation of the trend. It’s been happening now for a year.”
Shares of ICBC have rallied more than 40 percent since hitting a 2 1/2-year low in October as concern eased that Europe’s debt crisis would lead to a further economic slowdown in China. The MSCI China/Financials Index, which includes ICBC, has tripled in value in the past eight years.
The price of Goldman Sachs’ stake is a 3.1 percent discount from the HK$5.21 close of ICBC shares on April 13. The stock fell 9 percent from its Feb. 29 peak this year.
ICBC shares dropped 0.8 percent to HK$5.17 at the close of trading in Hong Kong, the first decline in three days. The stock trades at 6.4 times estimated earnings, down from a multiple of 9.9 a year earlier, according to data compiled by Bloomberg.
The sale is the fourth and biggest by value for New York- based Goldman Sachs. The U.S. securities firm raised $1.1 billion in November selling shares in ICBC at HK$4.88 each.
The deal represents about 40 percent of Goldman Sachs’ 8.78 billion shares of ICBC as of Dec. 31, according to data compiled by Bloomberg. As of Dec. 31, Goldman Sachs owned $4.71 billion of ICBC stock on its own balance sheet, down from $7.59 billion a year earlier, according to the New York-based company’s annual filing with the U.S. Securities and Exchange Commission.
Goldman Sachs and funds affiliated with Goldman Sachs remain ICBC’s second-biggest holder of H shares, based on the shareholding data of the Chinese lender’s Hong Kong-traded stock.
The company’s stake in Beijing-based ICBC 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 individual stock investments in Asia in its annual filing.
“Investment banks need a healthy profit,” said Mehta. “I don’t think Goldman needs the capital as much as others. It’s certainly not urgent to have a distressed sale on the part of Goldman, but it just reflects they need a healthy profit from this transaction.”
Temasek has been increasing holdings in China Construction Bank Corp. (939) and Bank of China Ltd. (3988) as global lenders divest. It bought 3.77 billion shares of China Construction Bank from Bank of America on Nov. 11, increasing its stake in the second- largest Chinese lender by value, and raised its investment in Bank of China, the nation’s fourth biggest, to 7.07 percent from 6.96 percent after buying 97.1 million shares in August.
“Temasek’s underlying strategy is investing in growth areas like China and key sectors like banks and this is essentially an opportunity that came up,” said Song Seng Wun, a regional economist at CIMB Research Pte in Singapore. “Asia is likely to lead the growth in the near-to-middle term, so all these deals are essentially to anchor that, and banks are basically the lifeline and heart of any economy.”
The Singapore investment fund, which managed S$193 billion ($154 billion) as of March 2011, said in a statement today that the purchase will give it a deemed interest of 5.3 percent in the Hong Kong-listed shares of ICBC, which includes stakes held by its units and associates.
ICBC widened its lead as the world’s most profitable lender last month after reporting a 17 percent increase in fourth- quarter net income. The percentage of financial services companies in Temasek’s holdings rose to 36 percent from 35 percent as of March 2011.
Citigroup Inc. (C) last month sold its entire stake in Shanghai Pudong Development Bank Co. nine years after the purchase for an after-tax gain of $349 million. Bank of America sold 10.4 billion shares of China Construction Bank in November for a profit of about $1.8 billion, leaving it with a 1 percent stake.
The overseas firms touted the strategic nature of their investments and pledged to work with their Chinese counterparts on everything from risk management to information systems.
Goldman Sachs will continue to reduce its stake in ICBC because of the capital required to be held against the investment, said Michael Werner, a senior banks analyst at Sanford C Bernstein & Co. in Hong Kong.
The bank “purchased its stake in ICBC when it was a broker-dealer,” said Werner. “Now that it is a bank holding company, which means higher capital requirements and subject to the Dodd-Frank rule, it is much less attractive to hold its stake in ICBC.”
Goldman Sachs converted to a bank holding company and accepted $10 billion in government rescue funds in 2008. The Dodd-Frank Act subjects the largest banks to higher capital requirements.