Goldman Said to Seek ICBC Exit With $1.1 Billion Sale

Goldman Sachs Group Inc. (GS) ended a seven-year investment in Industrial & Commercial Bank of China Ltd. by selling a $1.1 billion stake in the world’s largest lender by market value, a person familiar with the matter said.

The U.S. bank sold 1.58 billion shares in ICBC at HK$5.50 each, the person said, asking not to be identified as the information is private. That’s a 2.5 percent discount to ICBC’s closing price yesterday in Hong Kong trading. The Beijing-based bank fell 1.8 percent to HK$5.54 at 1:04 p.m., paring its gain for the past year to about 19 percent.

The Wall Street firm joins Citigroup Inc. (C) and Bank of America Corp. in cutting holdings in China as new capital rules known as Basel III make it more expensive to hold minority stakes in banks. Goldman Sachs has reaped about $12 billion in sales proceeds and dividends from its $2.58 billion investment in ICBC, calculations by Macquarie Capital Securities Ltd. show.

“Many foreign banks are facing capital shortages with the new Basel requirement, so I’m not surprised that they dumped holdings in Chinese banks on which they’ve already made massive returns,” said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group. “The exit strategy has been on the table for these foreign investors since the very beginning because they know these aren’t real strategic investments.”

Photographer: Tomohiro Ohsumi/Bloomberg

Goldman Sachs and client funds it manages first invested in ICBC in 2006, when they acquired a $2.58 billion stake in the Beijing-based bank. Close

Goldman Sachs and client funds it manages first invested in ICBC in 2006, when they... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Goldman Sachs and client funds it manages first invested in ICBC in 2006, when they acquired a $2.58 billion stake in the Beijing-based bank.

Goldman Sachs and client funds offloaded ICBC shares at least five times before the latest transaction after first investing in ICBC in 2006. Connie Ling, a spokeswoman for New York-based Goldman Sachs in Hong Kong, declined to comment today on the latest sale.

Capital Deductions

New rules set by the Basel Committee on Banking Supervision require punitive capital deductions for holding minority investments in other financial institutions.

Goldman Sachs’ Tier 1 common ratio was about 12.7 percent under Basel I and an estimated 9 percent under Basel III, Chief Financial Officer Harvey Schwartz said last month.

Citigroup sold its entire stake in Shanghai Pudong Development Bank (600000) in March 2012, nine years after buying it, for an after-tax gain of $349 million. Bank of America sold 10.4 billion shares of China Construction Bank Corp. in November 2011 for a profit of about $1.8 billion, its fourth sale, leaving it with a 1 percent stake.

ICBC last month reported a 12 percent increase in first-quarter profit, defying a sluggish domestic economy to boost lending. The world’s most profitable lender extended 461 billion yuan ($75 billion) of new loans in the first quarter, 25 percent more than in the same period a year earlier.

Low Valuations

The bank and its closest local rivals are trading near record-low valuations on concern that profit growth may slow as loans sour and the government deregulates interest rates. ICBC trades at about six times estimated 2013 earnings, down from a high of 21 times in early 2008, data compiled by Bloomberg show.

“It’s good timing for Goldman to sell its stake in ICBC,” said Rainy Yuan, an analyst in Shanghai at Masterlink Securities Corp. “Valuations of Chinese banks will remain low as China’s interest-rate liberalization is a long-term trend which will hurt lenders’ profits.”

Credit-rating companies have also warned that China isn’t reducing risks from local-government debt and credit expansion fast enough. China’s shadow banking system -- which includes private lending, trust loans, and credit from non-bank institutions -- poses systemic risks to the nation’s financial industry after expanding by more than 67 percent over the past two years, Moody’s Investors Service said earlier this month.

Soured Loans

Chinese banks’ nonperforming loans increased for a sixth straight quarter, the longest streak in at least nine years, to 526.5 billion yuan as of March 31, regulatory data show.

“We believe NPL figures greatly understate the potential scope of the problem of poor quality loans,” Carson Block, the short seller who runs Muddy Waters LLC, said in an e-mailed reply to queries. “Our concerns implicate loans throughout the economy -- both public and private sector.”

Block said this month that he’s betting against the debt of Standard Chartered Plc (STAN), in part because an economic slowdown in China will lead to “considerable stress” at the U.K. lender that gets two-thirds of profit from Asia.

Global financial firms including Temasek Holdings Pte invested $33 billion in Chinese lenders from 2001 to 2009, according to the regulator. They still own at least $45 billion of stakes in local banks, data compiled by Bloomberg show.

Since acquiring the stake in ICBC in 2006, Goldman Sachs has recorded $3.47 billion in net gains on the position, according to company filings through the first quarter of 2013.

As of March, Goldman Sachs had a $1.11 billion position in ICBC on its own balance sheet, down from $2.08 billion at the end of December because of a sale in January, according to the firm’s 10-Q filing with the Securities and Exchange Commission.

To contact Bloomberg News staff for this story: Jonathan Browning in Hong Kong at jbrowning9@bloomberg.net; Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net

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